Capitalism Waiting for a Future

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent vice of socialism is the equal sharing of miseries.” – Winston Churchill

Just as there is a lot of talk about brand purpose these days, there is also a lot of discussion about capitalism and more importantly, what kind. Ever since the 2008 financial crisis, economists, historians, business people, policy makers and intellectuals have all been preoccupied with one question: What has gone so terribly wrong with capitalism and what can be done about it?

Economist and Professor of Economics and Public Policy at the Oxford Blavatnik School of Government, Paul Collier, has written a book, The Future of Capitalism, that is not only timely and relevant, it offers a slightly different perspective. It doesn’t ask the question as a philosophical, or economic, or even a rhetorical one. Instead, it poses the problems with capitalism as it has evolved today and attempts to offer solutions that might correct them. In that sense, it studies the problem with capitalism, not as an academic one but a pragmatic one, and offers an easy, thought-provoking read for the general reader.

An engaging, well-written and pragmatic look at capitalism

Paul Collier’s study of capitalism is different, because it views the economic system through the lens of ethics and values. And philosophical as these might be, his examination is through real, every day practical issues that affect our lives. For example, right at the start of the book, he compares his life with that of his cousin, who were both born as children of uneducated parents, but whose lives took completely different trajectories:

“I have lived the divide in skill and morale between families of hyper-success and families disintegrating into poverty. Aged fourteen, my cousin and I were in tandem: born on the same day, the children of uneducated parents who had won places at grammar schools. Her life was derailed by the early death of her father; shorn of that authority figure, she became a teenage mother, with its attendant failings and humiliations. Meanwhile, my life progressed through the stepping stones of transformation, from school to a scholarship at Oxford. From there, more steps led to chairs at Oxford, Harvard and Paris; lest this not be enough for my self-esteem, a Labour government offered me a CBE, a Conservative government a knighthood, and my colleagues in the British Academy awarded me its Presidential Medal. Once started, divergence has its own dynamic. By seventeen, the daughters of my cousin were themselves teenage mothers. My seventeen-year-old has a scholarship at one of the finest schools in the country.”

Paul Collier sets out the problems as the education divide, the geographic divide and the global divide which affects trade and immigration issues.

With this, he manages to frame the entire debate of increasing inequality, between the less educated and skilled and better-educated and skilled, between metropolitan regions and provincial cities – such as his hometown of Sheffield – that are fast falling into decline and decay. These are the live and burning issues around which capitalism itself is being called into question and discussed today. More specifically, he sets out the problems as the education divide, the geographic divide and the global divide which affects trade and immigration issues. Except for the part where he writes about the role of social media in deepening local divides while creating the connected world of global elites, I think he might have missed a trick in not identifying and calling out technology and modern finance as the chief drivers of these divides, something that Raghuram Rajan recognized as important factors in his 2005 paper, when he predicted the financial crisis.

Storm clouds gathering over inequalities caused by free market capitalism

“We are social beings, neither economic man, nor altruistic saints.”

Paul Collier

That said, by examining capitalism through the prism of ethics and values, Paul Collier steers it in the direction of human motivations and culture, in addition to taking a philosophical and pragmatic approach.  He rejects the purely Economic Man theories and arguments and leans more towards David Hume and Adam Smith’s (Theories of Moral Sentiments) ideas of pragmatism that revolve around man as a social being, around ideas of a communitarian spirit and social welfare and well-being. As he writes in the chapter on the Foundations of Morality:

“We started with the moral deficit facing modern capitalism: a society can do without morality because self-interest will get us to the nirvana of mass prosperity. “Greed is good”, because the stronger the appetite, the harder will people work and so the more prosperous we will all become. We have come a long way from that proposition. We are social beings, neither economic man, nor altruistic saints. “

Most of Paul’s suggestions are to do with using taxation as an instrument to drive behavioural change, as well as to redistribute the income earned towards improving education, skill development and healthcare for the less advantaged.

Therefore, while he takes his time – and asks readers to be patient – in building up his arguments to arrive at the problems facing capitalism today, as a reader you are more than willing to go along with his line of reasoning. That is largely because he writes and presents his case engagingly, with several examples from contemporary business and political life that we can all relate to. The book itself is divided into four parts: Crisis, Restoring Ethics, Restoring Inclusive Society and Restoring Inclusive Politics. I think we can all agree that in the times we live in, achieving the last is not only the most critical, but the most problematic and challenging.

The system of mutual obligations and social trust is fraying

It is only in the second half of the book, starting with Restoring Inclusive Society that we get to read about some of Paul’s ideas on how to solve these divides under capitalism. While he says that most solutions on offer to correct the wrongs of capitalism are redistributive in nature, the solutions he offers too fall mostly in the same category. Most of Paul’s suggestions are to do with using taxation as an instrument to drive behavioural change, as well as to redistribute the income earned towards improving education, skill development and healthcare for the less advantaged. I particularly like his idea of using taxation as a way to combat agglomeration, and rent-seeking behavior, when dealing with the subject of geographic divides. While globalization and industrial clusters have proved successful, they have also been problematic when the gains keep accruing to the same cities and metropolitan regions, thanks to agglomeration and is further exacerbated by differing laws across different states of the United States. Paul Collier suggests a federal tax to get around the problem of gains from agglomeration and any one state benefiting disproportionately from different taxation laws.

In many ways then, Paul Collier turns to concepts of social democracy as a way to reform capitalism.

In other words, he calls for greater government intervention, not less. There are things businesses can do as well to bridge the divides. For example, he talks of workers’ representation on company boards, something that Germany has had long experience with. And more investment in employee retraining that helps workers keep pace with technological and economic changes; here again he thinks it will work better if such company investment is a high-profile, coordinated effort, imposed through a government levy.

More investment in retraining will be required in the age of AI

He cites the policy of flexicurity that Denmark and Sweden have developed quite successfully, to deal with job shocks. In an era where we will only continue to see greater gains to capital, while labour loses its bargaining power, these suggestions are of vital importance if we are to maintain a balance and keep economies on an even keel. He cites a proposal by Luigi Zingales and Raghuram Rajan of Booth School of Business Chicago University, to ensure better retraining, and says that in May 2018, the French government introduced just such a policy:

“…most likely, even with better education, a wider endowment of prior skills and a big push to form a replacement cluster, redundant workers will hesitate to sink their newly needed savings into retraining. Two professors at Chicago’s Business School, Luigi Zingales and Raghuram Rajan , have proposed that all workers should be given a lifetime credit that they draw on, for retraining as needed.”

In a chapter titled The Ethical Firm, Paul Collier talks of the idea of maximizing shareholder value as having corrupted the capitalist system. He says:

“Firms are at the core of capitalism. The mass contempt in which capitalism is held – as greedy, selfish, corrupt – is largely due to their deteriorating behaviour. Economists have not helped. Milton Friedman, Nobel Laureate, vociferously propounded the nostrum – first articulated in the New York Times – that the sole purpose of a firm is to make profits. As Friedman’s ideas spread through the echelons of management this view gradually became standard in business schools, and so filtered into major companies such as ICI. This had consequences.”

Paul Collier does not refer to China’s “state capitalism” even once, nor does he examine capitalism in developing and emerging economies, where its harsher effects on people and societies are often more glaring.

The reference to ICI is in the context of the iconic British firm changing its mission statement in the 1990s from “We aim to be the finest chemical company in the world” to “We aim to maximise shareholder value”.  Paul believes that it was one of the main reasons for the company’s decline.

Wall Street needs to start delivering for Main Street

In many ways then, Paul Collier turns to concepts of social democracy as a way to reform capitalism. He does mention social democracy in the book in a chapter on The Ethical State, in which he writes about the system unravelling due to a decline in mutual obligations and social trust. While many of his ideas might sound “socialist” to a country like the United States, they are already being practiced in some form or the other in Europe and, to a lesser extent, in the UK. Indeed, the only flaw in The Future of Capitalism, if I had to pick one is that it deals with capitalism only in the Western (read US, UK and Europe) context. Paul Collier does not refer to China’s “state capitalism” even once, nor does he examine capitalism in developing and emerging economies, where its harsher effects on people and societies are often more glaring.

While capitalism as a system might have developed in the West, it has been almost globally accepted for several decades, to varying degrees, across countries. Who can tell how China will reinvent capitalism for this century. If the reaction of Chinese businesses to Trump’s trade war is any indication, it appears to be more of the same: saving on labour costs, while returning larger gains to shareholders.

It might be more accurate to say then, that capitalism is not looking for a future, but is still in search of a redeeming virtue.  

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