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gary-hamel's picture

Capitalism is Dead. Long Live Capitalism.

I’m a capitalist by conviction and profession. I believe the best economic system is one that rewards entrepreneurship and risk-taking, maximizes customer choice, uses markets to allocate scarce resources and minimizes the regulatory burden on business. If there’s a better recipe for creating prosperity I haven’t seen it.

So why do fewer than four out of ten consumers in the developed world believe that large corporations make a “somewhat” or “generally” positive contribution to society? (This according to a 2007 study by McKinsey & Company.) Why is it that only 19% of Americans tell pollsters they have “quite a lot” or a “great deal” of confidence in big business? (In the 2010 Gallup survey, only Congress scored worse.) It seems that a majority of us expect big companies to behave badly—to ravish the environment, exploit employees and mislead customers. When it comes to feckless irresponsibility, big business seems to be in the same league as Tiger Woods and Lindsay Lohan.

Some blame Wall Street for this state of affairs. In March 2009, the Financial Times claimed that the “credit crisis had destroyed faith in the free market ideology that has dominated Western thinking for a decade.” Around the world, hyperventilating pundits and grandstanding politicians argued that a new model of capitalism was needed—one that would make executives even more accountable to legislators and bureaucrats. Statists spied in the calamity a once-in-a-lifetime opportunity to enlarge their regulatory fiefdoms—and moved swiftly to do so.

While one should never underestimate the ability of risk-besotted financiers to wreak havoc, the real threat to capitalism isn’t unfettered financial cunning. It is, instead, the unwillingness of executives to confront the changing expectations of their stakeholders. In recent years, consumers and citizens have become increasingly disgruntled with the implicit contract that governs the rights and obligations of society’s most powerful economic actors—large corporations. To many, the bargain seems one-sided—it’s worked well for CEOs and shareholders, but not so well for everyone else.

You don’t have to read Adbusters to wonder whose interests big business really serves. When it comes to “free markets,” there’s plenty to be cynical about.

If individuals around the world have lost faith in business, it’s because business has, in many ways, abused that faith. In this sense, the threat to capitalism is both more prosaic and more profound than that posed by marauding bankers—more prosaic in that the danger comes not from the esoteric schemes of “rocket scientists” but from the slowly accreting frustrations and anxieties of “ordinary” folks; and more profound in that the problem is truly existential—it threatens to burden every large company with the sort of regulatory constraints that were once reserved for nuclear power plants. No amount of cuddly, “here’s how much we care” PR is going to avert this danger.

Some may bemoan the fact that capitalism (broadly defined) has no credible challengers, but it doesn’t. Like democracy, it’s the worst sort of system except for all the others—and that’s why each of us has a stake in making it better. If we fail to do so, the growing discontent with business will embolden all those who believe CEOs should answer first and last to civil servants—to those who are eager to replace invisible hand of the market with the iron hand of the state.

This is not an outcome most of us would welcome. While cinching the regulatory straitjacket even tighter would protect us from capitalism’s worst excesses, it would also rob us of its bounties. So we must hope that executives will face up to the fact that an irreversible revolution in expectations has occurred.

Millions of consumers and citizens are already convinced of a fact that many corporate chieftains are still reluctant to admit: the legacy model of economic production that has driven the “modern” economy over the last hundred years is on its last legs. Like a piece of clapped out engine, it’s held together with bailing wire and duct tape, frequently breaks down and befouls the air with noxious fumes.

While we’re grateful that someone invented this clattering, savage machine a century and more ago, we’ll also be happy when it’s finally carted off to the scrap yard and replaced with something a bit less menacing.

We know the future cannot be an extrapolation of the past. As the great grandchildren of the industrial revolution, we have learned, at last, that the heedless pursuit of more is unsustainable and, ultimately, unfulfilling. Our planet, our security, our sense of equanimity and our very souls demand something better, something different.

So we long for a kinder, gentler sort of capitalism—one that views us as more than mere “consumers,” one that understands the difference between maximizing consumption and maximizing happiness, one that doesn’t sacrifice the future for the present and regards our planet as sacred.

So what stands in the way of creating a conscientious, accountable and sustainable sort of capitalism—a system that in the long-term is actually habitable?

It is, I think, a matrix of deeply held beliefs about what business is for, whose interests it serves and how it creates value. Many of these beliefs are near canonical (at least among CEOs of a particular generation or ideological bent). They are also narcissistic and archaic. Among the most toxic . . .

1. The paramount objective of a business is to make money (rather than to enhance human well-being in economically efficient ways).

2. Corporate leaders can only be held accountable for the immediate effects of their actions (and not for the second and third order consequences of their single-minded pursuit of growth and profitability).

3. Executives should be evaluated and compensated on the basis of short-term earnings (rather than on the basis of long-term value creation, both financial and social).

4. The way to establish a business’ social credentials is through high-minded mission statements, green-tinged products and a fat CSR budget (rather than through an unshakeable and sacrificial commitment to doing the right thing).

5. The primary justification for “doing good” is that it helps a company to “do well.” (The implication: a company should do good when there’s an upside and something less when there’s not).

6. Customers care a lot more about value for money than they do about the values that were honored (or defiled) in the making and selling of a product.

7. A firm’s “customers” are the folks who buy its services (rather than all those whose lives are impacted by its actions).

8. It’s legitimate for a company to make money by exploiting customer ignorance, exaggerating product benefits and constraining customer choice.

9. Market power and political leverage are acceptable ways of countering a disruptive technology or thwarting an unconventional competitor.

10. Business is about advantage, focus, differentiation, superiority and excellence (and not about love, joy, honor, beauty and justice).

Perhaps these self-serving convictions were less objectionable 57 years ago when General Motors’ then–chairman, Charles Wilson, proclaimed that “what is good for GM is good for America.” But today, they are discordant and dangerous. It is no good pretending that perceptions haven’t changed or that capitalism’s critics are simply misguided. There is a growing consensus that rampant consumerism debases human values; that pell-mell growth imperils the planet; that unchecked corporate power subverts democracy; and that myopic, profit-besotted CEOs are as likely to destroy value as create it.

I am an ardent supporter of capitalism—but I also understand that while individuals have inalienable, God-given rights, corporations do not. Society can demand of corporations what it likes. That’s why self-serving beliefs are also, ultimately, self-limiting.

Of course, as consumers and citizens, we must be acknowledge that companies can’t remedy every social ill or deliver every social benefit. We must also face up to our own schizophrenia. We can’t expect companies to behave responsibly if we blithely abandon our own principles to save a buck.

As for executives: if you feel your industry is still too lightly regulated, if you secretly long for the regulatory fetters to be tightened even further, if you think that Sarbanes-Oxley, the Patient Protection and Affordable Care Act, the Restoring American Financial Stability Act and Basel III don’t go far enough—then just keep on doing what you’re doing. If, on the other hand, you’ve had enough of sanctimonious politicians and meddling bureaucrats, then you must face up to a simple fact: In the years to come, a company will be able to preserve its freedoms only if it embraces a new and more enlightened view of its responsibilities. Many CEOs have already resigned themselves to this new reality, and a handful have eagerly welcomed it. There are others, though, who still cling to the belief that a company is first and foremost an economic entity rather than a social one. Sooner or later, these holdouts will discover that they face the same hard choice that confronts every teenager—drive responsibly or lose your license. For the sake of capitalism, let’s hope it’s sooner.

So then, dear reader, two questions: Are there other beliefs you belief represent a threat to capitalism? And more generally, what do you think needs to be done to rehabilitate capitalism’s tarnished reputation?

And finally, a really important recommendation. If you’re eager to dig deeper into these issues, pre-order Umair Haque’s new book, “The New Capitalist Manifesto: Building a Disruptively Better Business,” to which I wrote a short foreword. Umair, who writes with uncommon wit and passion, draws a host of essential lessons from companies that have already embraced the challenge of reinventing capitalism. The New Capitalist Manifesto will be launched in January, and I expect it to become one of the most talked about books of 2011.

This post was originally published on Gary's Wall St. Journal blog.

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dan-oestreich's picture

A common theme in the ten beliefs that you’ve listed, Gary, seems to be unconsciousness. Maybe beliefs are always a little unconscious because by nature they are implicit, but these particular beliefs do seem especially driven by a sense of rights and entitlements.  Unthinking itself seems to be one of these rights. So what you are suggesting in examining and reflecting upon them is more than a mere evolution of capitalism. It represents a radical transformation. Conscious capitalism, given the old beliefs listed, would be no more than an oxymoron.  

I know there's a great deal of material out on the web these days about conscious capitalism (for example, this.)  But because these words are themselves now already somewhat of a fad and possess a wide range of meanings, I think its important to back up to consider what the word "conscious" might truly mean in the context of your post.

First and foremost, I would say, consciousness means seeing how the old rules have distorted our social and personal possibilities because they deny the value of reflective process itself.  Under the old rules awareness is useful as a form of cleverness but only if it actively serves corporate ends.   Awareness isn't  supposed to actually ever lead to questioning or challenging those ends -- or even at times the means to reach them. This is the essence of compliance.  Anything else ranks right up there with insubordination or too “touchy-feely," not a case for business as the art of war, and needs to be quickly squashed or dismissed.  Moreover, reflecting on the ends and actual outcomes is risky precisely because it means the leaders must also reflect on themselves, which in turn would suggest a value to their own inner worlds, not just their outer actions (as if the two actually could be divided).  And going further, this would mean that the leaders would have to stop treating themselves and everyone else as objects.  Instead of thing-to-thing, we would become intelligence-to-intelligence, as Ellen Weber’s response makes clear.  And once that is gone -- the fragmenting, blinding notion that business is impersonal and that people are things -- the old rules of unconscious capitalism completely crumble. They simply don’t work, and we have to start over. 

To do that, as you allude, means examining an organization’s true social value and purpose, embracing deeper values like love, beauty, shared equity and equality at the core of organizational design, and relying on awareness, choice, and self-knowledge as premier aspects of collaborative work. Honesty and integrity suddenly become a whole lot more than offering a class on ethics or revving up the lawyers to see how to avoid the lawsuits. We have a chance to liberate ourselves to be the better people we really are, precisely because we are paying attention not only to what’s outside us but what’s also within us.

No wonder there is resistance.  The old rules were so much easier – at least for some. You are asking us as people once conditioned to be unreflective to now learn how to reflect. And what a revolution that really is.

 I don’t know of any harder – or better – work.

elad-sherf's picture

Seth Godin wrote a while back: “And almost without exception, organizations are run by people who want to protect the old business, not develop the new one”. Larry Lessig has repeated this lesson many times: “1. Creativity and innovation always build on the past. 2. The past always tries to control the creativity that builds on it.  3. Free societies enable the future by limiting the past.  4. Ours is less and less a free society“ (See more on this issue here: http://tinyurl.com/3yr6wcd).

Gary is absolutely on the point. While Capitalism, in its current form, has done much good for society, we start to see its limitations as the world progresses. The problem is, like any faith or religion, Capitalism tries to protect itself by becoming more fundamentalist and more resistant to change. When religions start to behave like that, you know the end is near or you are approaching dark ages. Instead, Capitalism should be developing with the times. This is hasn’t been happening enough. This last crisis and other processes the world is going through is a great opportunity to start changing that and raising question marks regarding some of Capitalism’s assumptions and we can all make it better.

One example: Shareholder value. As I have written elsewhere (see: http://tinyurl.com/3xekuut), this concept needs a wide redefinition, aligned with some of the ideas Hamel is writing about here in this post. Unless we act and make sure that concepts and ideologies go through evolution and do not stagnate, we have nobody to complain to, but to ourselves.

Elad

maureen-kelsey's picture

Great article!  So refreshing when one can read that “the emperor has no clothes” when he actually has no clothes.  

 Kindly note, this is not intended to be an “intellectual” feedback or promotion of some book. Rather, this comes from the 20-year study and practice of the psychology of Carl Jung.  Thus, take what you like and leave the rest.

 This dear reader suggests briefly some key considerations:

 Are there other beliefs you believe represent a threat to capitalism?

 -  Business as usual* – CEOs, Wall Street, government........ just more of the same lack of integrity, ethics, trustworthiness, transparency, accountability, responsibility (which are, by the way included in competency)....which if continues as is, well... eventually one cannot get more blood out of stone, so to speak.

 -  The delusion that this is not a cultural problem. Failure to address these issues through culture—inclusive of ALL. It would be a system example like fixing a room(s) and leaving the house unimproved).

 -  Lack of Education and Awareness. Continued use of propaganda / spin (the powerful special interests) instead of facts that are readily available. (Just turn on a US Sunday morning political talk show and watch the masters spin.)

-  A continuance of the CEO type as described in your article and their absurd salaries while they continue to deliver “toxicity”, to use a word you mentioned *intended as it is  general sense but also to refer to all—CEOs, Wall Street, Government...

 

  *intended in the general sense of the expression and to represent all sectors.

And more generally, what do you think needs to be done to rehabilitate capitalism’s tarnished reputation?”

  “There is a growing consensus that rampant consumerism debases human values; that pell-mell growth imperils the planet; that unchecked corporate power subverts democracy; and that myopic, profit-besotted CEOs are as likely to destroy value as create it.”

 It is necessary to do this through culture /a cultural revolution: effective communication, education, effective change / transformation methodology, redefining cultural values and in consideration of our interdependence....

Rampant consumerism debases human values;  this is directly connected to psychological dysfunction. The aspect of wellness and incorporating this into culture is necessary. There is much available on this point.  If one wants to make an analogy with famous folks who are unwell and suffering because of this, then one ought to be prepared to recognized (awareness) and take action towards healthy.

Infusion of new blood as CEOs, Wall Street...... One could argue that they behave like the Cosa Nostra who seeks megalomaniacs. (I even have a LinkedIn contact who is a French researcher who wrote a blog about how today’s business and businessmen are like the mafia.)

 “When it comes to feckless irresponsibility, big business seems to be in the same league as Tiger Woods and Lindsay Lohan.”

 Yes, this is quite correct; it is what it is. You have made reference to folks who have serious psychological and/or addictive issues. Keeping a sense of humor, perhaps, they all could be sent to a rehab, preferably long-term treatment facility?

There needs to be real transparency and accountability, not faked through some legislation which will only drive finding loopholes to avoid. At this point, it is wholly reasonable to make real legislation and do all one can to close the loop holes. Still, this is not enough.

Sir, you have described them as unwell as Tiger Woods and Lindsay Lohan. What could one imagine they would do without any constraints?

 I will be happy to read this and can imagine that I have already intuited some of its content-- (The New Capitalist Manifesto: Building a Disruptively Better Business,” to which I wrote a short foreword. Umair, who writes with uncommon wit and passion, draws a host of essential lessons from companies that have already embraced the challenge of reinventing capitalism.)

With gratitude, I thank you for speaking out on these issues. Before there can be any change for the better, awareness is necessary as first step and then one has to take some action.

 I for one will be glad to see what we have, as you have so well described, CHANGE for something else because the prolific incompetence, imperialism, impotency and, yes, outright thievery of this “power elite” is really at a level of deep psychological unwellness, and I have long understood the risks.

There are people who are competent and are willing to sacrifice and work hard to do things better considering ALL, and they don’t seek outrageous compensation because they are NOT driven by how much Logos power they wield..

 

 

gunasekar-c-rajaratnam's picture
I don't think you and I can do much to change things more than remining sane and agile while the economy collapses around us.
The contradictions in the existing system would only grow till a paradigm shift happens.
It is obvious that we are going through a transition.
We can expect a lot of changes, experiments and developments some good and some not good would happen in the transition period.
 A number of Individuals entrepreneurs would aspire and only  a few would succeed in their innovative enterprises during the transition period. The big businesses that refuse to heed your warnings would collapse.  Some smart biggies would see the directions and take advantage and manage to stay afloat through the transition.
What is interesting is what would happen after a couple or more phases of transition. I am convinced that we would see a version of (C-I) Capitalisim minus Individualism. Common good would be valued as a part of the New Money.  Collaboration and Community Entrepreneurship would be the key. Community owned and run enterprises would come into existence. More and more communities would strive to be self sufficient and generate smart tradeable surpluses. A number of products would vanish from the list of Big Industries. Production would be more and more local. The smart Big companies would replace their consumer products by small scale technologies to manufacture these products (soap making machines/kits instead of soaps).
Parallel to these changes we would see a massive shift in Governance systems.  People would regroup into tribes, local and online communities. Decentralization, local democracy, autonomous communities .a-la M.K.Gandhi's prescriptions of autonomous self sufficient communities would finally become real. And knowledge would be free.
ellen-weber's picture

Gary and Alex– thanks for the sparks to new ideas and thanks for questions that open new possibilities!

To your questions 1). Are there other beliefs you believe represent a threat to capitalism? And more generally, what do you think needs to be done to rehabilitate capitalism’s tarnished reputation?

You infer here and I support the notion that we need a radical reconfiguration for money and mind

Consumer confidence is at an all time low. Few disagree, that the way we do money separates community and caring from real riches of mindfulness together.  It doesn’t have to be that way as your writing suggests.

It makes sense that money systems created by a few can only fit that few. Similarly structures that welcome multiple approaches arise from many minds, with a shared vision to increase wealth. On the other hand, it’s time to make the rules more transparent so that people can access prosperity.

In my next book (in progress) I’m encouraging folks to rethink money matters with brain more in mind, so that benefits will follow more people into gold. How so?

Socialism – that stops success from rewarding smarter financial adventures? Never!

Opportunities – for all in ways that stop greed and trump generosity for caring communities where no brain is left behind? Always!

Most would agree that renewal runs deeper than dollars – even financial renewal that increases wealth across differences! Few would disagree that certain common practices cause sluggish progress.

It’s a matter of  tossing more brainpower into money makeovers -  for a new runway of wealth and mental acumen. One  where transparency and trust become two oars to row prosperity forward. Could it happen first through teamwork, brainpower, and innovation here at the MIX?

alex-todd's picture
Thank you for pointing out the elephant in our economy.  Our economic system of choice, capitalism, is evolving.  It is my hope, as it is yours, that its evolution will see it mature toward more aspirational levels of Maslow's Hierarchy of Needs rather than slipping back toward its more primal origins.

I believe we need to engage boards of directors and institutional investors to revisit their understanding of the nature of the corporation and their respective roles in helping to create a desired future.  I wrote about this in a chapter (Chapter 4: Corporate Governance Best Practices) I contributed to the newly released Kolb Series in Finance textbook "Corporate Governance: A Synthesis of Theory, Research, and Practice", published by John Wiley & Sons.  I introduce the concept of aspirational corporate governance (ACG) to help governance committees of boards diagnose and design corporate governance structures and practices appropriate for the complexities of sustaining a self-regulating system of governance.  ACG allows organizations to adapt through innovation to create new possibilities for delivering value in a complex, uncertain world.