We need a revolution of capitalism – Peter Bakker, President, WBCSD

Capitalism needs a revolution

In the next few weeks, I will be critically reflecting on the current state of business thinking and the emerging business models by methodically referencing to past and present works that I have been researching for quite some time.The question to tackle is this - can we as a collective, reinvent capitalism as a sustainable model for the 21st century?

I will start off with why capitalism needs a revolution, and possibly try to look at the questions such as what's wrong with capitalism, is sustainable consumption - production possible, is decoupling growth with environmental degradation possible, is happiness related to wealth, and then we'll look at about 10 different business models or emerging trends in the world and finally conclude with what is required to achieve the revolution.

For the second time in the history of the world, capitalism is facing a fork in the road. Global capitalism is at crossroads (Hart, 2005) and stands where it stood in 1914 when it was faced with challenges of world war, depression, fascism and communism. It was on the verge of a collapse. Hart believes the challenges capitalism is facing today are that of international terrorism, backlash, poverty, rich poor divide and environmental change.

The idea is not to discard capitalism but to fix it (Barnes, 2006). Capitalism was the right solution when it was invented because that time there was abundance of natural resources available and capital was scarce. Also, labour was in short supply hence to increase the return on capital employed(ROCE) labour saving machinery was used as the prime efficient model. Today the world has abundant capital, though disproportionately distributed (see graphs below) and scarcity of nature’s resources with huge rise in population.

Source: Oxfam International, 2015

Josep Stiglitz supports Thomas Piketty’s view in his new book “Capital in the 21st century”, in that even though the overall wealth has  been on the rise, the  rise in inequality has been also keeping pace in most nations of the world. To put it in perspective, in 2011, Apple’s quarterly profit of US$13.06 billion equalled the combined salaries of 300,000 workers at Foxconn’s assembly line over 11 years (Nair, 2012). Is it fair and just? Or to look at it from another viewpoint, can it be said that Apple was able to provide 300,000 jobs to Chinese people and lifted them out of poverty. And  we are all very well aware of the working conditions at the factory.

Whatever outcome we may wish to derive, clearly, what started as a perfect solution for its time has turned into the central problem of modern world today (Barnes, 2006). E.F Schumacher (1973) in his book ‘Small is beautiful’ resonates the same thinking that capitalism is out of synch with both nature and human psyche. Or is it that capitalism is not a problem at all, it is the way we use the capital (Brainard, WEF, 2012).

This is not an enquiry into various types of capitalism, namely American or German, Swedish or Japanese style. Capitalism as an overarching engine for economic growth is what is what is under question. The system that has lifted millions from poverty relies on endless and infinite linear growth may not be sustainable in the long run. But before we delve any further, let’s take a step back in time and see very briefly the look at its origins.

Early Capitalism

Early capitalist theorists like Locke (17th century) stated that there has to be a legitimate withdrawal from the world’s common property as “leaving enough, and as good”. Fast forward 300 years and Brundtland Commission report defines sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. Both seem to be  pointing to the same common goal. What went wrong along the way? What we see is a direct contrast by way of over-exploited natural capital and unaccounted externalities.

Adam Smith (1776) in ‘The Wealth of Nations’ argued that man in driven by primarily by self-interest and will look after itself and uplift the society as a whole,  given a free market economy (invisible hand) with limited government intervention. But, it must be noted that when Smith wrote this landmark book, partnerships in America were the major type of business and handful of people known to each other formed those partnerships and operated the business. Corporations (publicly traded) were almost non-existent.

If we view Smith’s theory from this viewpoint of partnerships, then capitalism is perhaps the best model available for universal prosperity. But we see a different world today. The graph below shows that sales from publicly traded corporations outnumber by a factor of more than 5 and are the dominant form, enveloping millions of small partnerships. In 2005, sales of top Fortune 500 firms equal the two-third of the US GDP (Barnes, 2006) 

So, what does that tell us? This tells us that the world has vastly changed since Adam Smith and we are still operating under the industrial age principles of economic growth in today's age of changing and ever evolving business models. Stiglitz says that the problem is not with the markets, but with the political system and the way the rules have been defined. So, capitalism is not the cause, it is the way it has been put to use by the state, which has caused the problems.

So, can we rely on capitalism? It depends on what we want to do with it (Elkington, 1997). Just like profits which are not bad per se, but what we do with those profits can be. After all, free market is the most dominant development model in most countries of the world and has provided for better opportunities of business, jobs, prosperity, education, skills, and has enabled people to live basic lifestyles. Going back to the Stone Age is out of question. So, what are the possibilities? But first, we really need to understand the inherent lack of capitalism, which will be the subject of the next post, which I hope to put it in the next 10 days.