Reimagining

Capitalism

Rebecca Henderson
What is capitalism? Is it the
Harvard University
greatest source of prosperity

C
and freedom the world has apitalism is one of the great inventions of the human
race: an unparalleled engine of prosperity, innovation,
ever seen or a menace on and individual freedom that has lifted billions of peo-
ple out of poverty. In 1910 1.75 billion people lived in
the verge of destroying the extreme poverty – now, though the world’s population has
more than tripled, only about 0.7 billion do. In the 1950s half
planet and our society? of the population lived on less than $2 a day. Now it’s only
13 percent. In 1820, 43 percent of the global population died
Rebecca Henderson argues before the age of five. Only 4 percent do now.
But in many places inequality has climbed to levels not
that capitalism is the only seen since the 1920s. In the US and the UK those at the bottom
of the income distribution have not had a significant pay raise
solution to the massive in the last twenty years. Social mobility has fallen dramati-
cally: the odds that children born today will make more than
problems that we face and their parents is now less than fifty percent. Across the world,
minority populations continue to be largely excluded from
explores the ways in which the economic mainstream. In the US, for example, the average
median household income for Hispanic people is 70 percent
the private sector can help to that of whites, while for Black people it is less than 50 percent.
At the same time, the planet is warming. Left unchecked,
reimagine capitalism so that global warming threatens to destabilize the climate, squeeze
the world’s food supply, flood many of the great coastal
it works for everyone. cities and force millions of people to migrate. One million of
the world’s eight million species are faced with extinction,
while the burning of fossil fuels continues to cause enormous

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damage to human health every year. high quality development. Schol- behind them is straightforward.
Emissions have fallen (slightly) in ars came to distinguish between They first suggested that the effi-
the face of the COVID-19 pandemic “inclusive” and “extractive” societ- ciency of free markets makes them a
but they are poised to bounce back ies. Extractive regimes concentrate spectacular driver of economic pros-
hard and fast. both political and economic power perity. In truly competitive markets
in the hands of an elite few. Healthy booming demand triggers the kind
inclusive societies, by contrast, rest of innovation and entrepreneurship
We have allowed our on three foundations: a free market; that produced smartphones and
societies to get radically a strong civil society; and a demo- Airbnb, while competition forces
cratically elected, transparent, down their prices. Second, Fried-
out of balance. capable, and responsive govern- man and his colleagues argued that
ment. Together these three institu- by opening up economic opportu-
tions hold each other accountable, nity to anyone, regardless of family,
What happened? balancing the power of the free color, or creed, free markets allow
The problems we face have many market with the need to provide people to control their own destiny,
causes, but one of them is that we public goods and the need to ensure building political power. In their
have allowed our societies to get that the market remains both free view building a functioning democ-
radically out of balance. In the 1970s and fair. racy in a state that controls who
and 80s, economic development In the US, in the 60s and 70s, you work for and how much you’re
was guided largely by the Washing- this balance was broadly under- paid is difficult, if not impossible.
ton Consensus, a view that focused stood. Businesses saw themselves Third, the Chicago economists held
overwhelmingly on the power of free as partners in generating prosper- that managers work for their inves-
markets to drive growth. Because ity that benefited everyone. But by tors and not for themselves. Since
of the Consensus, influential bod- the early 80s, managers in much of investors generally want to make as
ies such as the World Bank and the the developed world had begun to much money as possible, managers
IMF pushed developing countries to believe that their sole responsibility who did anything other than maxi-
embrace far-reaching deregulation was to increase profits, even if that mize returns were therefore indulg-
and privatization, and to open their meant dumping greenhouse gases ing themselves at their investors’
domestic markets to global trade into the atmosphere, driving wages expense and betraying their inves-
and free capital flows as routes to so low that employees were forced tors’ trust.
development, without explicit atten- to depend on government support, Collectively, these arguments
tion to the health of local political and lobbying for rules and regula- implied that doing anything other
or social institutions. Beginning in tions that favored only themselves. than maximizing profits – - to charge
the 1990s, however, this strategy This belief in profits alone arose less than the market will bear for a
was increasingly challenged on both from a transformation in economic lifesaving drug, for example, – was
empirical and theoretical grounds. thinking pioneered by Milton Fried- not only to abandon your duties as
Many states that adhered to the man and his colleagues at the Univer- your investors’ agent but also to
Consensus failed to do as well as sity of Chicago following World War make society poorer and less free.
expected. In post-Soviet Russia in II. While many of their arguments Initially, this approach appeared
particular, the rapid liberalization of were highly technical, the intuition to be a way of organizing society
markets was followed by a descent
into crony capitalism. Meanwhile, Figure 1. The three pillars of a strong society.
the so called “Asian tigers”—espe-
cially Taiwan, Singapore, and South Rule of Law
Korea—succeeded economically by Free Press Good
Free Respect for Minority Rights Government
pairing market development with Markets A Voice for Labor Free Politics
heavy government intervention.
It became increasingly clear
that the rule of law, well-designed
corporate governance, anti-corrup-
tion safeguards, democratic govern-
ment, a free media, and appropriate
financial regulations are critical to
enabling free markets to stimulate

MBR | Winter 2021 | Volume 01 | Issue 01 19

that delivered all that it promised. and health, “doing the decent thing,” are destabilizing the climate and
In Asia, Eastern Europe and South and celebrating democracy seemed poisoning the sea.
America, for example, many nations natural. Under these conditions, it Our fixation on maximizing
that adopted free market thinking was not unreasonable to believe shareholder value is actively making
saw explosive economic growth and that “unleashing” the market by tell- things worse. As long as the private
increased political freedom. China’s ing managers their only job was to sector’s untrammeled pursuit of
embrace of free markets brought increase shareholder returns would, profit at any cost took place within
more than a billion people out of in turn, maximize both economic strong, well governed societies, it
poverty. Successful managers and growth and individual freedom. created enormous value. But left
entrepreneurs like Bill Gates, Steve But in the last seventy years the unchecked, markets are subject to
Jobs, and Mark Zuckerberg became world has changed almost beyond powerful incentives to destroy the
cultural heroes. recognition. Institutions that have natural and social worlds around
historically constrained the market them.
are under attack across the board. As a result, the responsibilities
It became increasingly In many countries people no longer of firms have changed dramatically.
clear that markets require feel a sense of common identity. The deepest moral commitments of
Instead we are increasingly divided capitalism require that they help to
adult supervision. by racial, ethnic or religious loyalties sustain the health of the institutions
and by basic worldviews. Govern- on which the free market relies. If
But as the economy flour- ments everywhere are increasingly firms exist to maximize prosperity
ished, the world around it did not. unable, or unwilling, to focus on the and social welfare, they have a moral
It became increasingly clear that long term or on the well-being of duty to act as if there were a price
markets require adult supervision. the entire community. In the devel- for carbon, for example, even when
Markets only lead to prosperity and oped world, politics is increasingly there is no price in place. If firms
freedom when they are genuinely deadlocked, fragmented, and angry. exist to maximize freedom of oppor-
free and fair. Intuitively, if firms can Meanwhile many governments in tunity, they have a responsibility to
dump toxic waste into rivers, lie to the developing world are corrupt. invest in health care and education,
their consumers, and form alliances And although our problems are or to persuade the government to do
to fix prices, there is no guarantee global, we have few effective global so. The first step towards reimagin-
that maximizing profits will increase institutions. ing capitalism is thus not to aban-
either aggregate wealth or individ- don shareholder value but rather
ual freedom. to embrace the idea that firms also
It’s also important to remember Left unchecked, markets have a duty to support the health of
that Friedman and his colleagues are subject to powerful the natural, social, and institutional
first formulated their ideas in the systems on which capitalism relies.
aftermath of the Second World incentives to destroy the
War. At the time, there appeared to natural and social worlds What can be done?
be a serious risk that a reliance on around them. Without rebuilding our governments
the market would be replaced by and our societies, we will not solve
centralized planning. Government the problems we face. We need to
– after conquering depression and In short, global capitalism looks mobilize people around the world
war – was popular and powerful. less and less like the textbook model in a massive political and cultural
Capitalism, in contrast, was not. of free and fair markets enabled movement that demands that we
In the developed world at least, and controlled by civil society and stop heating the planet and destroy-
the state could be relied upon to democratic government on which ing the ecosystems we depend upon,
ensure that markets were reason- the injunction to focus solely on that insists on the widespread pro-
ably competitive, that externalities profit maximization was based. It’s vision of education and health care,
such as pollution were appropri- not surprising, then, that we are a genuine voice for labor, real racial
ately priced or regulated, and that increasingly neither prosperous inclusion, and the kind of redistribu-
(nearly) everyone had the necessary nor free. The U.S remains the rich- tive taxation that would ameliorate
skills to participate in the market. est nation on the planet, but the the worst effects of inequality.
Moreover the experience of fighting income and wealth of most of the But business also has a central
the war had created immense social population hasn’t increased in over role in building a just and more
cohesion. Investing in education twenty years. At the same time, we sustainable world. Governments

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are national, while our problems that the private sector as a whole
are global. Politicians tend to focus is much better off in more open Walmart saved about $1bn
on the short term, while we need and more equal societies. a year by redesigning its
to focus on the long. Waiting for Countries governed by corrupt trucking fleet to reduce
governments to act is ever more oligarchs can grow very fast and
clearly a recipe for disaster. Busi- within them, individual compa- energy use.
ness is arguably the most powerful nies can do very well. In Nigeria,
institution on the planet. Only firms for example, between 2006 and It seems likely that the current
can drive the innovation we need at 2015, an extractive government move towards shared value, or
a scale that can solve today’s envi- that catered to oil interests (and towards the simultaneous creation
ronmental problems and generate received massive kickbacks from of private profit and public benefit,
the jobs upon which decent lives are their operations) saw its GDP is a critical first step. The evidence
built. grow at an average of 7.6 percent that there are broad opportunities
per year. Likewise Turkmenistan, to create shared value is extensive.
which harshly repressed religious Walmart saved about $1bn a year
Business has a compelling and political freedom, grew at by redesigning its trucking fleet to
economic reason for 11 percent. In a weak economy, reduce energy use. An alternative
small reforms can unleash signif- meat company recently became the
solving the big problems. icant potential, but growth under most successful $200m+ IPO of the
crony regimes is highly unstable last twenty years. And Tesla is well
The good news is that business and often stalls once the economy on its way to becoming the world’s
has a compelling economic reason approaches the global produc- most valuable automobile company.
for solving the big problems. It will tion possibility frontier. Genuinely Firms that adopt high road employ-
be much easier to make money in a open markets, well established ment strategies, which create jobs
world in which the climate is rela- property rights, and a free media that pay well, treat employees with
tively stable, in which the coasts provide a much stronger founda- dignity and respect, grant them
are not underwater and in which tion for new entrants and for the significant discretion to shape their
agricultural collapse is not routinely kind of creative destruction that own work, and build a collective
triggering the migration of hostile, generates substantial value. Wide- sense of purpose, have repeatedly
hungry populations. Moreover spread access to education and found that the strategy creates
the private sector benefits from a health care accelerates this virtu- significant economic value.
world with significantly less poverty ous circle by creating deep pools Although such actions are
and inequality. Societies that have of talent and strong domestic sometimes derided as greenwash-
reduced inequality and poverty demand. In states with inclusive ing or dismissed as too small or
have generally increased access to institutions, GDP per capita has local to have any real impact, they
education and capital and, through historically been much higher than often drive broader change. In the
some combination of minimum in states with extractive institu- first place, they act as demonstra-
wage laws, lowered entry barriers, tions, and the gap has broadened tion projects: proving that a private
and organized labor representation, over time. business can solve a public problem,
maintained relatively high wages The economic case for solving driving the technology along the
while using tax revenues to ensure big problems is therefore reason- learning curve, demonstrating that
that no one is left too far behind. ably straightforward. It is nonethe- new business models are feasible,
Throughout history, many less a collective case and operates and helping to develop a network
firms have opposed these kinds of at the most basic level. It may there- that new entrants can use. Solar and
measures. The East India Company fore seem unlikely that any but the wind power have both become multi-
was a legally entrenched monop- most visionary and confident busi- billion-dollar businesses and, in
olist and fought tooth and nail ness leaders would attempt to act many parts of the world, renewable
to maintain its position, corrupt- on it. So what are some practical energy is now cheaper than conven-
ing English politics for nearly a ways in which the private sector can tional fossil fuels. Although we still
hundred years. Very few firms respond to these incentives and, in face significant barriers to decar-
have actively campaigned for so doing, both make a difference and bonizing the world’s energy system,
higher taxes, stronger unions, or meet their responsibilities to their it now appears that it can be done
increased social spending. But investors? Could these actions in at reasonable cost, given the right
there is overwhelming evidence turn add up to real change? regulatory environment. Ten years

MBR | Winter 2021 | Volume 01 | Issue 01 21

ago that was not at all clear, and much better off in the long term than roughly 1 percent of the world’s
without the enthusiastic and active those who cannot. Indeed, right now, equity markets. Hiro Mizuno, who
participation of the private sector, nearly half the world’s fisheries are was its chief investment officer until
we could not have advanced so far. governed by some form of self-reg- early 2020, came to believe that
In agriculture, firms at the leading ulatory arrangement. Cooperative solving problems like social inclu-
edge are demonstrating how much arrangements to tackle the twin sion and climate change was central
more profitable sustainable farm- problems of sustainability and unac- to his fiduciary duty because they
ing can be than more conventional ceptable labor practices have also posed severe risks to his long-term
techniques. For example, when emerged in cocoa, palm oil, beef, returns.
Unilever committed itself to make timber, and soy, while similar agree- The emergence of ESG metrics
100% of its branded tea sustainable, ments are underway in the textile (Environmental, Social, and Gover-
demonstrating as it did so that the and IT industries and in mining and nance) could give investors the
yields from sustainable produc- minerals. means to insist that firms tackle
tion were often significantly higher In some cases, these voluntary environmental and social problems,
than those of conventional produc- self-regulatory arrangements have and to track their performance as
tion, every other major branded tea been extremely successful. The they do. More and more, investors
company followed suit, tipping the International Chamber of Commerce, are working together to push the
entire industry towards sustainable for example, is an entirely volun- firms they own to address both
production. Innovations of this kind tary body that regulates the world’s social and environmental risks. For
often strongly affect consumer atti- trade, while cooperative arrange- example, more than 450 investors,
tudes as well, increasing demand for ments significantly reduced defor- representing $40 trillion in assets,
more sustainable products. estation in the Brazilian Amazon have banded together to form
In the second place, firms can for many years. But these efforts Climate Action 100+, a group devoted
drive change through coordinated are often unstable. Without any to pushing the world’s 100 largest
action. While there are many oppor- real penalty for failing to cooperate, emitters to set concrete targets for
tunities for firms to make money firms are often tempted to renege reducing carbon emissions and tran-
and address social or environmen- on their commitments and revert to sitioning to a carbon free economy.
tal problems at the same time, there business as usual. The second institution that
are also many opportunities that might force firms to do the right
can only be exploited if firms act thing is, of course, government. If
together. The move to preserve the A very large fraction of the governments worldwide regulated
world’s fisheries is a prime example. world’s financial assets or priced carbon emissions, for
While every firm will benefit if every- example, it would be in every firm’s
one reduces their catch, no single are controlled by roughly economic interest to solve climate
firm can profit from doing so alone. twelve firms. change. If governments strength-
ened labor regulations, making it
illegal to pay any worker less than
Many fisheries could Who – or what - might be capable a living wage, if they invested heav-
be almost completely of enforcing cooperation between ily in education and health, actively
firms, essentially forcing them all to supported employee organization
regenerated within a do the right thing and leaving no one and aggressively taxed the wealthy,
couple of years. at a competitive disadvantage if they inequality would fall. If it were illegal
do? There are two possibilities. The for corporations to flood the political
first is investors. A very large frac- system with money and if anti-trust
In principle, an industry in such tion of the world’s financial assets regulations were routinely enforced,
a position can both increase its prof- are controlled by roughly twelve the largest and most powerful firms
its and generate significant social firms. These firms are so large that would be much less able to shape
benefits by choosing to self-regu- they cannot diversify away from the the rules of the game in their own
late. Many fisheries can be almost threat of catastrophic risks such as favor.
completely restored if they are climate change. Some of the world’s
given a couple of years to recover. wealthiest owners are similarly Could it happen?
Fisherpeople who can jointly agree exposed. The Japanese government Could business actually help to
to restrain themselves in the short pension fund, for example, is worth rebuild our institutions? Busi-
term will usually find themselves more than $1.6 trillion and owns nesspeople are already coming

22 Volume 01 | Issue 01 | Winter 2021 | MBR

together to lobby in favor of car- Germany’s current institutions,
For Further Reading
bon regulation and against mon- working collaboratively with orga-
ey in politics. We Are Still In, for nized labor to develop a system If you enjoyed this article you might enjoy
example, brings more than 2,000 of apprenticeship training that is Professor Henderson’s recently released book:
firms together with NGOs, faith often cited as one of the central Reimagining Capitalism in a World on Fire
communities, and city and state determinants of the country’s low published by Hachette/Public Affairs, 2020
governments to lobby for pollu- inequality and high productivity.
tion reduction targets which will And an expanding body of research
allow the US to comply with the suggests that in South America
Paris climate agreement. In cities the private sector has sometimes Rebecca Henderson
across America, local firms are played a positive role in supporting is one of Harvard’s
working with civil society and democratic transitions, while the twenty-five Universi-
city governments to improve the struggle to dismantle apartheid was ty Professors. She is
health of their communities. strengthened by British commercial a research fellow at
In the current environment concerns about the system. the National Bureau
it may be difficult to imagine the Could it happen again? Could of Economic Re-
business community lobbying for a the private sector play a central role search, and a fellow of both the
wholesale rebuilding of the institu- in rebuilding our democracies? British Academy and of the Ameri-
tions of an inclusive society, but it Should it? It might seem an unlikely can Academy of Arts and Scienc-
has happened before. In the English idea. But ask yourself – what is the es. She is an expert on innovation
Civil War of 1642-1649 and the alternative? If business stays silent, and organizational change. Her
Glorious Revolution of 1688-1689, a focused on profit alone, what will most recent book is “Reimagining
substantial middle and upper class happen? The COVID-19 pandemic Capitalism in a World on Fire”
bourgeoisie worked to usher in has given us a profound opportunity (Hachette/Public Affairs, April
democratic reforms. More recently to rethink our society and our insti- 2020). She was named one of three
Germany’s private sector played tutions. We must seize the chance to Outstanding Directors of 2019 by
an important role in developing reimagine capitalism. the Financial Times.

MBR | Winter 2021 | Volume 01 | Issue 01 23