When we wrote the first edition of this book over ten years ago, we were interested in fueling a public conversation about how business could address what we and others then saw as potential threats to market capitalism. We hoped that calling attention to these problems would spur leaders in business and government in the United States and abroad to take action. Since that time, the problems we wrote about have worsened, new ones have emerged, and efforts to address them have fallen far short of what’s needed. Today, the very foundations of the global market system are under threat by an array of demographic, environmental, political, economic, social, and technological forces around the world.
In this new, expanded edition, we review these developments and share insights from the work we have done over the past decade to better understand what companies and business leaders can do to address these problems and put the market system on a more sustainable trajectory. We write with the hope that readers will share our sense of urgency and that more entrepreneurs and other business leaders will step up to the challenge before it is too late. The private sector has enormous potential to drive positive change—if its leaders commit to doing so—and leadership by business is crucial for solving the problems at hand. We urge business leaders everywhere to seize this opportunity to rebuild public confidence in capitalism and its ability to function in a way that generates inclusive and sustainable prosperity.
______________
The problems we wrote about in the first edition were defined initially through a series of conversations with business leaders from different parts of the world. In 2007 and early 2008, in preparation for the Harvard Business School’s centennial celebration, we held a series of forums with business leaders in Europe, Asia, Latin America, and North America to learn what issues were on their minds and how their concerns might inform our research and teaching over the next decades. The World Bank had recently published projections for the global economy out to 2030, and we were particularly interested in these leaders’ reactions to those projections and, more generally, in their own views on the future of the global market economy. How did they see it developing? What problems did they anticipate? What opportunities lay ahead?
It was a time of great optimism and limitless possibility—just before the financial crisis—and we expected the group as a whole to foresee a continuation of global growth and rising standards of living. We also expected them to deliver a (relatively) clean bill of health for a system that had lifted 450 million people out of poverty in the previous two decades—an achievement that many economists attributed to the spread of markets and open trade across the globe.
What we actually heard was different. Many of the participants, while applauding the achievements of markets and open trade, shared what they perceived to be looming problems that needed to be addressed for global growth to continue and for the market system to maintain its political and social legitimacy. They cautioned that continued progress was far from assured, and some worried that failure to address these problems would give rise to forces that could undermine or even destroy the system. That is why we called this book Capitalism at Risk.
As described in chapter 3, the business leaders identified several core problem areas and one overarching concern. The ten core areas are as follows:
The eleventh, and overarching, concern was the inadequacy of existing institutions of governance—corporate, national, and international—to deal with the other ten issues. Our leaders feared that without improvements in governance and management at all important levels of society, the ten underlying problems would only get worse. They worried that those worsening problems would, in turn, lead to economic stagnation, social unrest, political upheaval, natural collapse, military conflict, or other outcomes that would fatally weaken the market system and the social and political conditions necessary to sustain it. This dynamic is shown in figure 4-8. Because of the serious and far-reaching consequences of neglecting these eleven problems, we called them threats or potential disruptors.
As the participants in our forums discussed these disruptors and the interrelationships among them, we noted a recurring reaction. As one of the leaders put it, “We’ve thought about every one of these problems before—but we never thought about all of them on the same day before … and when you do that, you see not only that they are interconnected, but that they are reinforcing one another.”
We argued, as did many participants, that business needed to take a leadership role in addressing the threats both because governments alone could or would not solve them and because business had distinctive skills and capabilities that could help. We argued further that companies could do so in ways that made strategic sense and could enhance their own growth and future profitability.
In this revised edition, we develop this argument further and offer additional examples of private-sector leadership. Like the earlier examples, the new ones describe companies that are introducing new business models, driving industry collaboration, and mobilizing cross-sector coalitions to help mitigate various problems or otherwise strengthen the market system.
Our vision of business leadership has challenged received wisdom and conventional economic thinking about the role of business, and in the previous edition of the book and this one, we have addressed what we know to be the standard objections. We hope that the line of thinking we put forth here will draw more business leaders into the debate and encourage them to take up the challenge of transitioning to a more sustainable form of capitalism.
Over the past decade, we have continued to study the issues identified in our earlier work and to write case studies about business leaders’ and companies’ efforts to address them. Despite some noteworthy examples, however, these efforts in the aggregate have fallen dramatically short of what’s needed to right the system. The language of sustainability has become widespread, but the activities undertaken in its name have been modest at best. While the CEOs of leading institutional investors such as BlackRock and Vanguard have called on companies to pay more attention to the macrochallenges facing society, capital-market pressures to produce predictable quarterly returns have kept many boards and management teams focused on short-term financial results, crowding out discussion and planning for larger, longer-term issues.
At the same time, the global financial crisis of 2008–2010 and the struggles of nations, companies, and individuals to survive and recover from it served jointly as a distraction from—and sometimes as an excuse to avoid addressing—longer-term, deeper-seated threats. In a time of great economic, social, and political stress, voters in many democracies have responded by turning inward and away from broad problems whose causes and consequences cannot be dealt with in their own nations and regions.
At least partly as a consequence, many of the core problems identified in our earlier work remain unchanged or have worsened in the last decade. The wealth gap continues to widen in many countries, and advances in technology are threatening greater numbers of middle-skilled jobs. Carbon emissions are on the rise, and the world is falling further behind on meeting the climate goals set by the Paris Agreement.1 To be sure, bright spots and improvements can be seen in some areas and in some geographic locations. The financial system appears by some measures to be stronger than it was during the recovery from the financial crisis and its immediate aftermath, though threats to stability remain.2 And a number of developing countries have seen improvements in living standards and education. In some countries, wealth inequality has declined. But on the whole, the picture is no better than it was ten years ago, and in many ways, it is worse.
Indeed, to our original list of eleven threats, we now must add a twelfth: the cluster of problems associated with advances in digital technology—problems such as cyberattacks; the spread of misinformation through social media; and the displacement of workers through automation, robotics, and new uses of artificial intelligence.
The digital revolution had barely begun when we held our initial business leader forums. Cloud computing for business was a new idea, big data was a new term, the iPhone had just been released, and social media had not yet taken off. Facebook and Twitter were in their infancy, and entrepreneurs were just beginning to see the potential of social media for marketing and political communication. Since then, digital business has become ubiquitous and digital technologies have insinuated themselves into every aspect of life. Many of today’s largest companies were born digital, and all businesses everywhere—whatever their size—rely to some degree on the internet and digital technologies. The use of social media has soared. Facebook alone had nearly 2.5 billion users worldwide in the third quarter of 2019.3 Increases in computing power, an explosion in the quantities of available data, and the emergence of advanced algorithms have fueled the spread of deep-learning technology for a limitless set of applications for everything from facial recognition and fraud detection to diagnosing disease, predicting consumer behavior, and driving autonomous cars.
This transformation has brought enormous wealth and benefits to society, but it has also produced a new set of problems. The past few years have shown that social media are at least as good (and arguably far better) at spreading false information as they are at spreading the accurate variety, thanks to the anonymity enjoyed by users, the absence of any systematic form of editorial accountability, and a patchwork of ineffective governance and regulation. This state of affairs has allowed social media to be used to propagate all manner of false, misleading, inflammatory, and otherwise distorted information in ways that breed divisiveness and distrust and undermine the functioning of markets and democratic processes. Both of these core institutions depend on the wide availability and free flow of accurate and truthful information for their effectiveness and for their legitimacy. The enormous increase in corporate power enabled by massive amounts of data, high-powered computing, and artificial intelligence is also altering the nature of competition and the balance of power between companies and consumers in ways that challenge the basic premises of market capitalism.
Digitalization has spawned a number of unfamiliar threats. The adoption of digital technologies has made many businesses more efficient, but it has also made them more vulnerable to data breaches, network intrusions, and other forms of cyberattack. Malicious actors have embraced the new technologies no less than their targets have, and cyberattacks have increased steadily in both number and sophistication in recent years. The WannaCry ransomware attack of 2017 was unprecedented in scale, affecting computer systems in 150 countries, including those of the National Health Service in England and Scotland, as well as those of companies such as Renault, FedEx, Telefónica, and many others.4 Although many organizations successfully repelled the attack with little damage, others experienced serious business disruptions and had to undertake costly remedial work.
As hacking tools and techniques become ever more sophisticated and more widely accessible, the threat of large-scale theft and destruction to companies, governments, and critical systems mounts. In 2010, attacks by nation-states and state-affiliated actors barely registered, but by 2018, they accounted for an estimated 23 percent of breaches.5 Advances in technology have also given democracy’s opponents new tools of influence and attack. The past few years have seen an escalation in the level and scope of data- and social-media-driven efforts to undermine electoral processes in numerous democratic nations.6 Working for state and nonstate actors, the now-defunct political consulting firm Cambridge Analytica reportedly used a combination of hacking, data misappropriation, data profiling, and social media in its attempts to influence voters in as many as sixty-eight countries.7 It is not hard to imagine how an orchestrated cyberattack on critical infrastructure, major financial institutions, and key government agencies, perhaps coupled with a social media disinformation campaign, could do serious damage to the global market system. Indeed, the U.S. government’s Financial Stability Oversight Council counts cyberattacks as among the key risks to the financial system’s stability.8
In a sense, issues like cybercrime and social media disinformation campaigns can be seen as internet-related versions of other problems in the original list of eleven disruptors, such as weaknesses in the rule of law. We think it useful to call out these problems separately because they have emerged so recently and are so widespread. Whatever their benefits—and we are not questioning those—advances in technology have also had negative effects that will need to be reckoned with. If these effects—the growth of massive data centers with increasing needs for energy, the displacement of jobs and workers by automation, the propagation of false and misleading information, to name the most salient—are not well managed, they will only exacerbate preexisting problems.
Experts in artificial intelligence themselves worry about the effects of automation and artificial-intelligence applications on income inequality, for example. Nearly half the experts responding to a Pew Research Center survey in 2014 anticipated that these technologies would displace more jobs than they created.9 Almost surely, the jobs they displace will tend to be lower-skill, production-oriented tasks, while the jobs they create will often require higher-level skills—so that the people displaced will be in a poor position to apply for the new jobs that do arise. McKinsey Global Institute estimates that by 2030, up to 375 million workers worldwide may need to move out of their current occupational categories to find work.10 To the extent that this displacement develops, it will certainly increase income inequality.
The leaders we spoke with before the financial crisis worried that failure to address growing inequality, environmental degradation, financial system dysfunction, and the other problems they identified would strengthen social and political forces hostile to the global market system. Their worries now appear to have been prophetic.
The failure to deal with the problems identified in the book ten years ago has fed into a worldwide backlash against globalization and the free-market ideology that underpins it. The past decade has seen the rise of nationalist, populist, and antiglobalist forces in countries across the world: Donald Trump in the United States, Jair Bolsanaro in Brazil, Boris Johnson and Brexit in the United Kingdom, Matteo Salvini in Italy, the Yellow Vests (les Gilets jaunes) in France, Viktor Orbán in Hungary, and Rodrigo Duterte in the Philippines, to name a few of the most visible. The particular grievances fueling these movements vary from country to country, though anti-immigrant sentiment, identity politics, and felt inequity are common themes.
Whatever the specifics, the retreat from open borders and free trade is widespread, as is the embrace of authoritarian leaders who openly disdain international institutions. Many of these leaders brazenly flout the rule of law, use public office for private gain, walk away from what they regard as inconvenient agreements on a whim, and scorn scientific inquiry and even basic facts. Such behaviors directly contradict the norms needed for a free-market economy to function effectively and, by encouraging others to follow suit, undermine the requisite conditions for market capitalism.
Today, in early 2020, the prospect of continuing trade tensions between the United States and China looms large, and business leaders across the world predict further declines both in global trade and in their home country conditions.11 Worries about geopolitical instability are also running high, with potential conflicts over immigration, nuclear capabilities, trade, and natural disasters brewing at flash points across the world. The forces of fragmentation are making it harder still to deal with problems that cannot be confined within national borders such as climate change, cybercrime, contagious disease, and social-media-fueled disinformation campaigns. In early 2020, a coronavirus (COVID-19) pandemic that appears to have originated in Wuhan, China, became a global crisis threatening the health of populations as well as the economies of many nations, and social-media-amplified misinformation made it more difficult to manage from the outset.12 Once hailed as a channel for enabling a global citizenry to hold its leaders accountable, the internet has become just the opposite—a channel for leaders to divide and manipulate the citizenry. Even the internet is being fragmented into distinct territories, with Chinese, European, and American areas defined by firewalls and differing regulatory regimes.
Since the first edition of Capitalism at Risk was published, books and commentaries on the failings of capitalism have proliferated, especially in the past few years as the financial crisis has receded and other problems have become more salient. Many of these accounts were written not by anticapitalists wanting to destroy and replace the system but by authors who, like us, believe that market capitalism offers the best hope for global prosperity. They too are deeply worried that capitalism cannot survive if its foundations are not shored up and its flaws not attended to. The titles of these books, articles, blogs, and podcasts are telling. Here is a sample:13
Although these writers offer somewhat different diagnoses, they all treat rising inequality as the central problem and, together, offer a rich menu of proposals for change. Most of the proposals are directed to agencies of government, and most find solutions in law or public policy initiatives. They call, variously, on lawmakers, regulators, or policy makers—as the case may be—to strengthen antitrust enforcement, enact a more comprehensive safety net, or adopt a more progressive tax system. Others propose better coordination between monetary and fiscal policy or more investment in education, infrastructure, and basic research. Still others want lawmakers to provide tax incentives for corporate profit-sharing or to require companies to disclose their purpose or social and environmental impacts in their regulatory filings. The list goes on.
With a few exceptions, very little is said about what the private sector can do to address rising inequality or help effect a more equitable allocation of wealth and opportunity (other than, presumably, to follow the proposed new laws and regulations if they are enacted). A notable exception is Georgescu and Dorsey, who, in their Capitalists, Arise!, urge business leaders to invest more in their employees.
As is evident from the original edition of this book, we share with these authors a belief that the growing gulf between the haves and have-nots is a threat to capitalism and that corrective action is urgently needed. We also agree on the importance of changes in policy and regulation. But as we look at the current situation, we see a need for action on multiple fronts—recall the twelve threats—and by actors at multiple levels: individual, company, and industry, as well as government. Getting capitalism onto a more sustainable trajectory is simply not possible without the active involvement of—and, indeed, leadership from—the private sector.
Whatever policy changes may be enacted, this effort will take imagination, investment, and a willingness to innovate on the part of businesses in every domain of the economy. Companies will need to embrace new approaches to governance, step up investments in research and development (R&D), adopt new valuation techniques, develop new capabilities, and experiment with new technologies, strategies, and business models—all of which are, by their very nature, risky. They will also need to become more thoughtful about the positions they take on matters of regulation and public policy. Without leadership by executives and investors who believe in the need for change and are willing to act on that conviction, little progress can be made—even if, as seems unlikely in the current moment, a political consensus could be achieved to adopt some of the policy prescriptions mentioned above.
To be sure, business has limitations and individual companies can do only so much. As we discuss at length in the book, business leaders’ expertise may not match the problem at hand and they may lack the political legitimacy required to take certain actions. But there are many things companies can do—on their own or in collaboration with others—to help mitigate the disruptors and facilitate the shift to a more sustainable economic order. Even when legitimacy is an issue, it may be addressable through engagement and collaboration with governments, nonprofits, foundations, and other civic organizations.
Too little attention has been paid to the role of the private sector in the public discourse on reforming capitalism. Judging from the business response to date, many business leaders themselves have not yet grasped the significance of the threats and the implications for their companies and industries. The new statement on corporate purpose by the Business Roundtable, an association of U.S. CEOs, suggests that awareness is growing. Signed by 181 CEOs of leading U.S. companies and issued in August 2019, the statement and its preamble explicitly rejected the group’s 1997 embrace of shareholder primacy—the view that maximizing returns to shareholders is the principal objective of a corporation—in favor of a commitment to lead for the benefit of all stakeholders. Whether the statement is a harbinger of change in how companies allocate resources or just a PR gesture is hard to say, but commentary by some of the signers suggests that its practical effect is likely to be minimal. In any case, pushback from investor groups may limit its impact.
Despite such signs of growing awareness, which we discuss in Part Three, a real sense of urgency is lacking, and there is a large gap between rhetoric and reality. Troubled or not by the evidence of looming problems, and lofty statements aside, too many boards, managers, and investors are continuing to operate on a business-as-usual basis.
We have updated Capitalism at Risk in the hope of galvanizing more business leaders to take these problems seriously. In this new and expanded version, we have added three new chapters. In chapter 9, we expand on the eleven threats discussed in earlier chapters and show how the threats interact with one another and with the new forces of digital disruption to create even more complex and unwieldy problems. In chapter 10, we reiterate with heightened urgency our call for businesses to take a more active role in addressing the disruptors. We provide additional examples of companies that are implementing innovative strategies to do just that. In chapter 11, we summarize some of the lessons learned from early corporate efforts to mitigate the forces of disruption.
We reiterate even more strongly our overarching conclusion: Government alone cannot solve these problems. Business must step up to the challenge. Business leaders (individually and collectively) are in a better position to find practical solutions to the challenges they will face in their respective companies and industries than we are as academics. One of the great virtues of the market capitalist system is its encouragement of ingenuity and imagination and its ability to muster resources behind better answers. Business leaders—perhaps organized to enhance their collective capacity—are the most likely source of new ideas and approaches once they see the situation with the urgency we believe is appropriate to it. But we try to point in directions that are most likely to be productive, including the possibility of mounting a coordinated effort to show that capitalism can function in a way that preserves its own foundations and produces inclusive prosperity.
The earlier parts of the book are unchanged. Part One looks at threats to the global market system that were emerging even before the financial collapse of 2008. In chapter 1, we explain the origins of our project, define market capitalism, and describe the business leader forums that we held in 2007 and 2008, just before the financial crisis, to gather their views on the global market system’s future.
In chapters 2 and 3, we examine the prospects for the global economy as seen through two complementary sets of lenses. Chapter 2 relies mainly on aggregate data, drawing heavily from the World Bank’s economic projections at the time of our business leader forums. Chapter 3 fills out the picture through the experiences and perspectives of the business leaders who participated in our forums. Together these two chapters lay out the eleven threats that emerged from our study.
Chapter 4 introduces a framework for understanding market capitalism as a system embedded within a larger political and social ecosystem and for revealing how the threats relate to one another and to the system as a whole. The framework focuses on the free-market capitalist system’s necessary antecedents, or preconditions; its internal operating rules; its possible consequences both positive and negative; potential internal and external disruptors; and the feedback loops that reinforce or undermine how the market system functions. In its graphic form, the framework makes abundantly clear that the eleven threats should not be viewed in isolation and shows how they can evolve from mere problems to disruptors of the entire system if they are not effectively managed. Conversely, the framework also helps show what it takes for the system to function in a way that is effective and sustainable.
The chapters in Part Two examine the role of business in mitigating the threats and improving the system. In chapter 5, we discuss four possible responses by business and argue that companies can and should take a leadership role rather than, as conventional economic theory teaches, sitting on the sidelines and waiting for governments to act. Chapter 6 presents examples of companies that have made businesses out of tackling various disruptors. Chapter 7 explores the possibility of a more constructive relationship between business and government and offers examples of companies collaborating with industry or multisector groups to this end. Chapter 8 discusses some of the standard objections to our proposal that business should involve itself in what are conventionally defined as public-goods problems outside the private sector’s purview.
______________
Back in 2008, the world’s socioeconomic, geopolitical, and environmental situation was alarming. Today it is even more so. Some might say the situation is dire. Through this new, expanded edition, we hope to inspire more business leaders to take the disruptive problems seriously and to bring their own and their companies’ considerable talents and expertise to bear on solving them.
Capitalism triumphed in the Cold War because it promised a better life for the great majority of people around the world, and the improving conditions for many millions seemed to affirm its claim. But dramatically unequal access to capitalism’s benefits and mounting evidence of its collateral damage have cast doubt on that promise and provided grist for ideological naysayers to challenge its fundamental soundness as a basis for economic organization.
We believe that time to deliver on the core promise of free-market capitalism is running out. If market capitalism cannot be made to work for almost everyone, then it will eventually not be allowed to work at all. It will lose its legitimacy and collapse from within or fall prey to hostile forces from without.