Capitalism is under fire

Capitalism is under fire. If it does not work better for more people, or if it continues to spiral unabated towards a climate disaster, all bets are off. Evolution could give way to revolution. Government fiats could enjoin free markets. In the most extreme cases, many communities could be engulfed in flames or drowned by rising seas and devastating storms. 

These are not just my conclusions. These concerns are shared by a wide range of academic, scientific, and political experts, left to right. For example, Professors Rebecca Henderson of Harvard Business School and Raj Sisodia of Babson College have exhorted us to Reimagine Capitalism in a World on Fire and enact a more Conscious Capitalism Field Guide. The latter is a modern day “how-to” roadmap for transforming the global economy one corporation at a time. Another book, Completing Capitalism, written by leading executives of the confectionary giant Mars promises us a healed world if only business first heal themselves. Think “corporate exorcism in scale” in other words. A fourth highly influential voice is that of the brilliant and prolific professor Mariana Mazzucato. Her book Mission Economy advocates an ambitious “moonshot guide” for changing capitalism by massively restructuring the interrelated roles of governments, corporations, and society top to bottom. She compares our current situation to how man first successfully landed on the moon. Centralized government planning, massive investment, and the mobilization of our greatest scientific minds made the inconceivable reality: human footprints on the Mare Tranquillitatis. Even 800-year-old Cambridge University has weighed in. Their top-ranked press has published a series of handbooks on The Art of Stakeholder Theory, exhorting corporations to expand their priorities beyond quarterly earnings to care for more human hearts and cure more societal ills. 

Beyond academic halls and the corridors of corporate and political power, another powerful interest group is also calling for capitalism to chart a radical, new course: investors. 

Thousands of institutional asset owners like public pension plans, insurance companies and sovereign wealth funds, along with millions of individual investors are mobilizing trillions of dollars to change the trajectory of business so greener, cleaner, and fairer outcomes are more probable. The primary force behind this multi-trillion-dollar initiative is a phenomenon known as “ESG investing”, an unlikely acronym that stands for Environmental, Social and Governance priorities. The ESG investment movement was born out of the United Nation's Principles for Responsible Investing, which started more than fifteen years ago. Institutions that have pledged to follow the UN PRI’s creed now oversee more than $120 trillion in financial assets. If finance is going to play an optimal role in re-engineering capitalism towards greater sustainability, ESG investing needs to work.

But will it? Strong arguments are being made on both sides, for and against. For example, Professors Brad Cornell of UCLA and Aswath Damadoran of NYU have been especially critical of the movement. According to Professor Cornell, “the ESG concept has been overhyped and oversold. It is backed by weak to non-existent evidence of promised payoff for companies and investors and is fraught with internal inconsistencies that undercut its credibility.” On the other hand, it’s abundantly clear many public and private businesses are intentionally striving to earn the accolades of ESG investors and the financial rewards that axiomatically come with them. Inclusion in an ESG index or strategy often leads to higher valuations and lower funding costs, all else equal. Financially, it’s better to be in the ESG tent than outside it. Navigating between these two poles of pessimism and potential benefit will likely determine whether business and finance promote human flourishing optimally. 

It’s unclear where we’ll go from here. Discerning the best path forward requires an honest appreciation of the past. Revolutionary calls for change too often undervalue one fact: modern capitalism has been astonishingly successful at raising living standards and generating wealth. Over just the past five decades, Boomers have seen real GDP per capita grow by more than five times, Gen Xers by more than four times. By comparison, per capita income in the first one hundred years of U.S. history spanning four generations – from 1774 to 1860, to be precise – did not even double. An economic system that improves living standards twice as much in half the time versus prior historic periods deserves some praise. Contrary to common opinion, moreover, recorded gains have been especially impressive among the very poorest. From 1990 until COVID hit, 128,000 human souls were able to escape extreme poverty EVERY DAY. If there is one laudable statistic to consider before recasting modern capitalism, it is this: more than one thousand years were needed to raise the first billion human beings from abject poverty, but only the last twenty to liberate the most recent billion. For the first time in history, a world without abject poverty is not only possible, but probable with the right policies and actions.

Economic growth not only improves material living standards. Over the last fifty years, rising wealth has also vastly improved many qualitative aspects of human life as well. For example, global literacy rates have essentially doubled – from 48 percent to 90 percent – and global life expectancies have increased by more than 26 percent, from fifty-six to seventy-one years. IQ scores have also improved by three points per decade, driven largely by improved diets and better health conditions. Infant mortality has declined tenfold, and access to information via the internet, smartphones and mobile devices has gone from virtually zero to more than 80 percent of the planet. 

In short, socioeconomic progress over the past half century has been beyond anything our forebears a few generations back might have imagined. Any human soul brought into the world today faces better prospects for their health and well-being than every soul that entered before them.

But this is not to say all economic and social injustices have been eradicated, nor that our current environmental trajectory is sustainable. Indeed, despite our age of unsurpassed abundance, why is it that:

• Three in ten people still lack access to safe drinking water

• 650 million youth lack basic math and literacy skills

• Less than half the global population receives basic health services

• Eight hundred million students have no access to online learning

• Two billion adults are excluded from formal financial services

• 40 percent of countries have fewer than ten doctors per ten thousand people

Finally, the challenges of climate change and the unsustainable impact modern consumption patterns are having on our air, earth and water need to be addressed with the deadly seriousness they expressly portend. Left unabated, future carbon emissions are certain to raise temperatures over time: the only questions are by how much, and how fast. Combined with growing income disparities and declining levels of economic and social mobility in many societies, most especially the US, ubiquitous peace and prosperity are far from secure for generations to come.

These, dear friends, are the stakes. Absent an “all-hands-on-deck” effort involving business and finance, public policy and civic society, regulators and individual citizens, growing numbers of our brothers and sisters – soon to number ten billion – will be left behind or put unnecessarily in harm’s way.  

Nothing less than more inclusive, sustainable economic growth will provide for the emerging needs of future generations. And the best role investors can play in financing the future we need is to embrace the 1.6 percent solution.™

#Climate change #Economic and Social Mobility #Circular Economy #Economic Growth #Stakeholder Capitalism.