September 3, 2020

Markets & Free Enterprise

Reimagining Capitalism vs. Clarifying Capitalism

By: Meg Tuszynski

Capitalism has been one of the greatest engines of economic success the world has ever seen. For most of human history, most people around the world have been very poor. But starting around 1800, economic growth took off like a rocket in countries that embraced the capitalist system. 

Yet no success is without its complications. In a new book, Reimagining Capitalism in a World on Fire, Harvard economist Rebecca Henderson argues that our current capitalist system is threatened by three major problems: (1) social instability caused by inequality, (2) a multitude of environmental and economic problems caused by climate change, and (3) broken government institutions. But, she argues, there are ways in which we can reimagine capitalism which would allow us to have more humane institutions, while still maintaining those forces which have contributed to the Great Enrichment.

Henderson suggests that businesses could lead the charge in correcting some of these problematic aspects of capitalism by rethinking the way they maximize shareholder value. Currently, she says, businesses are much more interested in short term profit maximization than long term sustainability. She argues that businesses themselves can contribute to a more just and sustainable system by focusing on stakeholders rather than shareholders. She refers to companies like Aetna and Unilever Tea (the makers of Lipton), who have been able to rethink their business models to be more just and sustainable, while simultaneously continuing to yield profits for their shareholders. Businesses, she argues, can do well while also doing good. 

The companies Henderson profiles in her book are undoubtedly working hard to make the world a better place, and their commitment to improving the world while continuing to make a profit is laudable. Yet her suggestion that we should encourage all — or at least, more — companies to pursue these sorts of initiatives is somewhat troubling for two reasons: (1) it puts CEOs in the position of making decisions that are far outside their expertise, and (2) the money for these initiatives must come from somewhere, which could mean lower returns to shareholders, fewer employees, or more expensive products for consumers. 

As a middle class American consumer (though wildly wealthy by world standards), I might be willing to pay more for products that are sustainably produced, or that are produced by companies with broader social goals, but many people may not have the luxury of paying more for these types of products. Yet this isn’t really that problematic. Sure, companies like Patagonia might be doing great things for the environment, but companies like Walmart and Costco are allowing consumers to access a broader array of goods than has ever before been possible. It’s not a stretch to say that companies like Walmart are helping more people achieve the good life than companies like Patagonia are. I like both companies, and I am glad that both exist. But I don’t think we should encourage companies like Walmart to think more like companies like Patagonia. 

Indeed, the whole concept of “reimagining capitalism” presumes that there is something broken in the capitalist system. While there are undoubtedly major problems in the world, pinpointing them as being problems inherent in the capitalist system is tricky. By Henderson’s own admission, a lot of the problems that we diagnose as being problems of capitalism are really problems of crony capitalism. That is to say, problems of governments making cozy deals with businesses, allowing some businesses to profit without providing the best possible products to consumers at the lowest possible cost.  

Perhaps instead of reimagining capitalism, we should instead focus on clarifying what is true capitalism and what is not. When people become rich through government-granted privilege, this gives capitalism a bad name. When people become rich because they have produced a good or service that people value, or have found a way to produce a better or cheaper product, this benefits both producers and consumers and should be lauded. When governments become active players in the capitalist system, this creates a multitude of problems. It seems that capitalism itself needs no reimagining, but rather we should reimagine government’s role in the capitalist system.