Article written by Paula Newton an Maria Fonseca
Throughout history capitalism has been criticized and challenged, and now once again, many are becoming vociferous about this. Capitalism has some fundamental flaws that do not work, argue these critics of the current system. Many have suggestions for change and improvement. This is not new either; after all, Karl Marx sought to eradicate capitalism with communism. Yet the arguments seem to be increasing in intensity from all angles, and this is perhaps not so surprising given the tremendous disparity that can be seen between rich and poor. As Eric Beinhocker and Nick Hanauer (20104) writing for McKinsey explain, it is clear that something is wrong with society. They point out that the inequality that we see around us is:
“Challenging some of our most deeply held beliefs about how a fair and well-functioning society should be organized.”
Beinhocker and Hanauer start their article stating the controversial sentence that “capitalism is under attack”. They explain that while we are right to think that capitalism has built prosperity so far, we are wrong about how and why it worked. They opine that we are misguided about the workings of capitalism and we need to replace our current mind-set on this with more up to date and modern theories that will extend our understanding in order to allow us to improve the capitalist structure of society in a supposedly more beneficial way.
According to Beinhocker and Hanauer there have been some very interesting and engaging theories and models put forwards by economists that do go some way to explaining the way the system works, but in reality the system does not work quite in that way. That is because the economy is continually changing and evolving and has a lot of different actors such as companies, banks and regulators that influence this. This continual change is likened somewhat to an ecosystem rather than “the mechanistic system” that was used in the past by economists to explain the system, through theories of supply and demand and so on. Indeed, it is argued by Beinhocker and Hanauer that we are not allocating resources any better than we were in the past. Rather we have better life saving antibiotics, good and fresh water supplies and more information and innovations that have improved lives. Capitalism, it is argued, has created incentives to fix these problems and it provides these solutions. It is these solutions that are important and not the money itself.
Additionally, as Beinhocker and Hanauer explain, it is not possible to define prosperity in terms of money. Monetary measures fall short. This point is explained like this: if a person in the UK earns £20,000 per year they might be doing OK depending on where they live. Generally though they would not feel rich at all. However, if a nomad living in the Sahara had this same sum, they would be extremely wealthy. However, the Brit would have access to antibiotics and a fresh water supply but the Saharan dweller may well not. This is a critical factor in prosperity as well that Beinhocker and Hanauer believe is often overlooked.
GDP is yet another problem with the way we define capitalism currently according to Beinhocker and Hanauer. Specifically GDP is supposed to indicate development and that we have better lives. However, Beinhocker and Hanauer explain that while GDP has tripled in the USA in the last three decades, this does not explain everything. For example, GDP cannot determine whether people have lives that are better or worse. Rather, it is looking at whether human problems have been solved and whether solutions are available to address these problems which is more important. Indeed, it is explained that growth might better be looked at as understanding that going from worrying about dying from a minor infection one day to having antibiotics that allow the issue to be completely treated the next day is progress, while having more money is not.
According to the authors, it is in this looking at the solutions that capitalism creates where prosperity can really be seen, not in looking at monetary measures and who has more money. Profits and shareholder values are clearly poor indicators. Turning around our ideas of what capitalism does can have a definite impact on how we view it and the value it really adds. Solutions to problems are something many of us can celebrate.
Will Semantics Save Capitalism ?
What is strange about the article though, is that the authors seem to think that just by redefining what capitalism is, through a strategy that replaces old economic theories with new ones, capitalism still can be seen as the system “that has been the major source of historical growth and prosperity.” In their report, the authors state that “prosperity in a society is the accumulation of solutions to human problems.” If one would then follow this definition, capitalism could actually be said to have failed to bring that prosperity, or if it has brought it, it was at an immense cost, particularly to our environment.
The question is that just changing the language and mind set, as a strategy to define capitalism in new terms, doesn’t solve the real problems faced by the world and that truly shows us that the system as it is, is still more focused in share holders profits, then in real prosperity to all of us. The perception that top CEO’s of companies and corporations are flourishing at the expense of the broader community, is based on facts of the quotidian reality of many of us, particularly in the western world, that even though better educated than the previous generations, have seen lesser job opportunities, and poorer living standards.
Fostering shared value in businesses
A more accurate analysis that really looks at the source of why “capitalism is under attack” is needed if one wants to find attractive solutions for society in general. In an article written by Michael Porter and Mark Kramer for the Harvard Business Review, the authors tries to identify the reasons that led society to distrust businesses and large corporations. They point out that:
“the real issue is that companies remain trapped in an outdated approach to value creation, continuing to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs.”
The authors introduce an interesting concept, shared value, as a principle that proportionates economic value in a way that brings as well value for society by responding and solving its needs and challenges. In an interview Michael Porter reminds us that instead of thinking that what is good for businesses is good for society, we should now think the other way around: what is good for society is good for businesses. To illustrate his concept, he gives the example of a company that was able to bridge these two items: the incredibly successful supermarket chain of natural and organic foods, whole foods.
What the authors propose is that “Businesses must reconnect company success with social progress.” These are precisely the values of a social business.
Paula Newton is a business writer, editor and management consultant with extensive experience writing and consulting for both start-ups and long established companies. She has ten years management and leadership experience gained at BSkyB in London and Viva Travel Guides in Quito, Ecuador, giving her a depth of insight into innovation in international business. With an MBA from the University of Hull and many years of experience running her own business consultancy, Paula’s background allows her to connect with a diverse range of clients, including cutting edge technology and web-based start-ups but also multinationals in need of assistance. Paula has played a defining role in shaping organizational strategy for a wide range of different organizations, including for-profit, NGOs and charities. Paula has also served on the Board of Directors for the South American Explorers Club in Quito, Ecuador.