The Purpose of Capitalism

Economist Paul Collier explains what’s wrong with capitalism, and how to make it right.

By R. Teresa O’Connell

On November 9, 1989, the Berlin Wall came down. Along with the reunification of a long-divided city, the event marked the symbolic victory of an entire economic and political system: communism was perceived as the last thing standing in the way of capitalism’s definitive global affirmation.

Thirty years on, as the German capital prepared to celebrate this important anniversary (with events including an appearance by David Hasselhoff singing from a Trabant), a wave of mass protests broke out across the world, from France to Hong Kong, from Chile to, most recently, Colombia. The protestors share a deep frustration with the social inequalities, economic troubles, power abuses, and mismanagement caused by years of more or less free market rule. Capitalism has also, of course, brought with it important achievements: During the past 30 years over 1 billion people have been lifted out of extreme poverty, and access to healthcare and education have increased globally.

But the promises of trickle-down theory have largely failed to materialize: as the rich get richer, the rest are left behind. Growing economic inequality and social marginalization have fueled a simmering resentment; unbridled growth and de-regulated industry coupled with rampant consumerism are causing irreversible environmental damage. It's plain to see that the system is not working; what's less clear is what needs to be done about it.

In his book The Future of Capitalism, economist and academic Paul Collier, a speaker at the 2019 House of Beautiful Business in Lisbon, put forward some guidelines for getting capitalism back on track and healing the “deep rifts” that have opened in our societies. The problem, he believes, is not inherent in the system itself, but rather has to do with the way it has been allowed to develop over time.

"The purpose of capitalism should be to find profitable solutions to people's problems." Collier explained recently from his office at Oxford University. "Think of what the inventors were doing: the steam engine, the train, the plane. Those were all solutions to people's problems. But it has diverted from that core idea, and taken a narrow focus on maximizing shareholder value, which is a travesty."

As people across the globe call for radical change, and polls show trust in capitalism to be at a historic low, it seems brave to mount a defense of it. Collier, who comes from a working-class family in Sheffield in northern England, was able to ascend the social ladder thanks to the possibilities made available to bright students by the social-democratic policies of the British governments between the 1950s and 1970s. He passionately believes that capitalism holds the key to mass prosperity, and we should work to fix it.

"In all sorts of ways as you create shareholder value, you create problems for people, not solve them. And those are shameful abuses of capitalism, where the people involved have lost any sense of integrity and purpose in their lives beyond their own gain. We're not evolved to be that selfish. We are evolved to be a little bit selfish, but we're also evolved to work with others. "

As a result of the culture of individualism, social capital has eroded, and we've lost the ability to forge relationships with others - the very things that form the fabric of healthy societies.

"Mutualities are about feelings," Collier explains, "about a sense of belonging, of community, a team of people in a firm, around some common purpose, and ideas of loyalty, trust. The most important way in which we relate to others," he continues, "is through our feelings and not through our calculus of costs and benefits. That's our natural inclination."

"Economics has this awful travesty of humanity that is 'Economic Man,' who is greedy, lazy and selfish. We have such people in society; they're called psychopaths, and they're around three percent worldwide. They're a tiny minority. Most of us are naturally inclined to cooperate, to have feelings alongside self interest that reinforce each other. That was destroyed through a very specific set of financial and legal structures, which more or less forced the managers of firms to focus only on shareholder value."

Something appears to be moving that might change that. The Business Roundtable, a policy advocacy organization in the U.S. composed of CEOs of major corporations, issued a statement in August declaring that "shareholder value is no longer everything." Then last week the British Institute of Directors said "we need to restructure boards so that each member is legally responsible for all the potential interests of the people affected by the firm," according to Collier. Whether or not these statements are empty responses to rising public skepticism remains to be seen.

Either way, Collier believes companies have a huge role to play in whatever change emerges. "Firms are naturally structured so as to think reasonably and coherently about things," he explains, "so they are the best environment we’ve got for practical solutions to real problems, which a good leader inspires people in the firm to work towards, by saying: ‘this is our purpose.’ Because leaders have gotten diverted by this bullshit of maximizing shareholder value, they've dissipated this enormous potential of the firm."

Does he think that the people’s movements taking to the streets across the world might be examples of people forging new relationships to take the responsibility for change into their own hands? "My hunch," he replies, "Is that when things get too bad for people to tolerate, then they mutiny. We are seeing mutinies all over the world, like the Gilet Jaunes in France, Brexit - even support for Trump is one big mutiny. Those movements are powerful, but they don't come with solutions. They're more expressions of rage than structures for thinking through pragmatic solutions." The job of thinking through solutions requires leaders.

“We need a combination of thinkers and organizers, a sort of fusion of the social activists who know how to communicate with a wide group, and thinkers, who can come up with pragmatic solutions. And we haven’t seen enough of that yet. The thinkers are all focused on utopias. The doers are all focused on rage. But I don't believe in utopias. I believe there are periodic derailments of capitalism. Then we need to study the context as closely as we can and work out what's likely to work and try a few things and scale up what seems to work best, in the full knowledge that it won't work forever."

To reset capitalism on purpose is the struggle of our age," Collier said to the audience in Lisbon last month. And pragmatism, he believes is the way to go about it. "We need a pragmatic approach to figure out what went wrong and experiment how to put it right." But how can our dysfunctional political system achieve that?

"We need political leaders who reset the tone. Not by trying to preach some guidebook to utopia, but by emphasizing norms of mutuality, by pushing power down the system. Firms have got to have responsibility for things, families have got to have responsibility for things, communities, local government and local civil society have got to have responsibilities."

The ethical foundations of our societies must be restored, along with the sense that people and social institutions tied together by mutual obligations are equally important parts of a healthy capitalist society. A moral capitalism that supports esteem and belonging, alongside prosperity, is not an oxymoron," Collier writes in his book.

R. Teresa O’Connell is a freelance writer living in Berlin.


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