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Capitalism was unleashed from socialism by the Chicago School of economics, by Thatcher and Reagan, and the fall of communism along with the Soviet Union in 1991. The triumphant ideology became minimum government and maximum private enterprise (run on the principle that the business of business must be only business) supposedly to improve the world for everyone. It has not worked out that way.
Capitalism must be reformed to save humanity and the environment. The rich have got much richer. Inequalities of wealth and incomes have increased to vulgar levels within all countries, as Thomas Piketty and Oxfam have documented. Even during the pandemic, stock markets boomed, and the rich grew richer while millions lost jobs and scrambled for incomes. More worrying is the increasing power of the wealthiest people to fix the rules of the game, by lobbying, controlling the media, and financing elections.
Democracy must be re-injected into capitalism. Wealth must nourish the health of society
The engines of capitalism are private business corporations. Reform of capitalism requires their reform. One way is to demand that all corporations transparently account for the impacts of their products and their operations on the environment and society. However, this has not been adopted by many companies. The thrust of corporate governance remains responsibility to investors and compliance with stock-market regulations. When leaders of the Business Roundtable in the US, recently called upon large corporations to account for their performance to all stakeholders, even Dr. Raghuram Rajan at Chicago University advised them not to confuse themselves and stay focused on producing returns for investors.
Broadening the scope of business responsibility is difficult in practice. The limited liability business corporation is an artificial citizen created by law. It has all the rights of human citizens—the right to own property, to sue other citizens and governments, and freedom of speech. In addition, it has the privilege of limited liability for the consequences of its actions which ordinary citizens do not have. Corporations can own lands, forests, even humans (once upon a time, as slaves), and intellectual property.
The greatness of corporations is judged by the wealth they create for their investors from their properties, and their stock market valuations. The wealth of some corporations is larger than entire countries. Human citizens are no match for corporate citizens in scale and power.
Whereas governments of countries are expected to look after the needs of all citizens, especially the poorest, boards and managers of corporations are expected to focus on profits for investors. The greatness of corporations is judged by the wealth they create for their investors from their properties, and their stock market valuations. The wealth of some corporations is larger than entire countries. Human citizens are no match for corporate citizens in scale and power.
Many compassionate business leaders have tried but could not make substantial changes to the fundamentals of corporate governance. These leaders have good human genes. However, they are trapped within the DNA of corporate capitalism. Until the legal purpose and institutional structures of business corporations are changed, compassionate capitalism will remain a concept with limited impact on the condition of the world.
Fundamental changes are necessary. For one: all businesses must be legally required to report the impacts their products and operations have on societal well-being and the environment alongside their financial performance. Just as stock-market regulations are graded for different types and sizes of firms, these can be too. The firms’ abilities to report, and regulators’ abilities to apply new rules will improve with use. Complexity must no longer be an excuse. Time is running out to save the planet and people left behind while wealth is accumulating with wealth-creators.
The largest corporations and the wealthiest people now pay less taxes proportionally than small companies and poorer people
Two: the governance of all large corporations, to begin with, must include worker representatives on their boards. This has been a legal requirement in Germany and Sweden (in the latter, going down to small companies also), for over sixty years, and it has contributed significantly to the socially and environmentally sustainable practices of capitalist corporations in those countries. It has also made those corporations more resilient amidst economic turbulence. In addition to representatives of workers, other stakeholder representatives could be included too. They may perform the roles of ‘independent directors’ more effectively than so-called independent directors on corporate boards.
Three: workers must have the right to form associations. Indeed, they should be encouraged to form well-governed, large associations. Strong unions compelled the growth of egalitarian economic policies in the US and Europe from the earlier part of the last century to the 1970s. Standards of living (and wages) of people in the lower halves of economies improved. Economic pyramids of countries and corporations became broader at their bases. Unions were killed by Thatcher and Reagan. In India too, they are now considered an obstruction to the ease of doing business and as impediments to economic growth. Now, unicorns, thin and tall, shooting into the wealthy stratosphere, with little concrete improvement in the incomes of people on the ground, are being celebrated. Democracy must be re-injected into capitalism. More power must be restored to the people at the bottom. They are too small to be noticed when alone.
Businesses must be legally required to report the impacts their products and operations have on societal well-being and the environment alongside their financial performance
Four: the ownership structure of a business corporation can be reformed. Those who work can be the owners—the capitalists. Workers’, farmers’, and community-resource owners’ cooperatives turn the ownership pyramid around. The owners of an enterprise are not remote investors in it, but the people themselves. Financial surpluses generated by their work, and by application of their local knowledge, remain with them. Thus, wealth is not sent away to investors who accumulate it to invest in other ventures that may provide them higher financial returns to make themselves even wealthier.
The size of the ‘financial’ sector of economies has been growing much faster than the ‘real’ economy in which most people work. Moreover, purely financial wealth is very mobile. It can cross borders and can hide in tax-free havens. It becomes useless for providing public health, education, and social security, and creating jobs for improving the lives of people on the ground.
The fifth reform of capitalism must be to return to the progressivity of taxation of incomes and wealth. Tax rates were very progressive in all countries until the 1980s, after which hyper-capitalism began to spread. The largest corporations and the wealthiest people now pay less taxes proportionally than small companies and poorer people. This is not just. Capitalism must be reformed: wealth must nourish the health of society.
(The writer is a former member of the Planning Commission and author of “Transforming Capitalism: Leadership to Improve the World for Everyone”)