By: Kate Shaw
Capitalism, as we currently understand it, is failing and has been failing for some time. Just as we adapted our wings, we need to adapt our understanding of capitalism and the framework within which it functions. First we assume that the last several decades have viewed capitalism as it is defined by the Oxford Dictionary: “An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.”
There are three primary and interrelated flaws in our current view of capitalism: the time frame under consideration, our definition of profit, and a lack of state intervention by means of regulation. By acknowledging these flaws and reworking capitalism to be in accord with the principles that govern our natural systems, capitalism can succeed.
Capitalism in the past has sought short term and inherently unsustainable profits. Roger Martin outlines this issue in his article “The Age of Customer Capitalism” stating that the primary goal of firms to maximize shareholder value is neither an efficient nor sustainable endeavour. As shareholder value is a function of expectations, managers spend most of their time managing expectations rather than the firm to maintain shareholder value; however, expectations can only be managed to such an extent that eventually they are out of your control.
The article also suggests that this objective of maximizing value for shareholders has, in fact, not benefitted the shareholder at all. From 1977, the beginning of the era of capitalism focused on maximizing shareholder wealth, to the end of 2008, shareholders of the S&P 500 earned considerably less real returns compared to decades before. The point is that focusing on short term gains for shareholders hasn’t benefitted society.
We need a new model that looks at long term gains for all. Martin suggests that by focusing efforts on serving customers better is the road to long term success, while this may not be the whole story, Martin certainly makes a strong case that shareholder wealth maximization in the short term should not be the end all be all.
In terms of profit, capitalism has succeeded in providing short term ‘gains’ to certain individuals and organizations, no arguments there. But the realities of climate change and the pressures on our social systems today suggest that maybe we need to rethink what really qualifies as a ‘gain.’ Profits or gains should be looked at from the sense of creating real value, not simply redistributing it. To date, most profits are being achieved through the exploitation of, or at the expense of, other individuals, organizations, or the planet itself.
For example, lets charge people money (gain for a few) to consume non renewable fossil fuels (loss for the planet), which will also result in emissions that lead to climate change and lost biodiversity (loss for everyone)- in this very blunt and simplified situation, we’ve taken actual value from the planet, monetized it, and then redistributed it to the pockets of a few different individuals. In the book Climate Capitalism, Boyd Cohen & L. Hunter Lovins address the topic of honest accounting which looks at the concept of firms internalizing social and environmental costs and suggests that our current economic measures of success are a little misaligned as to what value truly is. We need to look at gains from a collective and holistic perspective, what Noreena Hertz calls ‘Coop Capitalism’, and no, I’m not referring to socialism.
As Climate Capitalism points out, there are real opportunities to create value for a collective by using those fundamental principles of our planet and Natural Capitalism in the way we used the laws of aerodynamics to fly. As an example, the Calera company produces cement (something of value to a few) in a way that actually sequesters Carbon (also of value, but to many) by using waste from one area (something of no value to anyone) and mimicking the way coral reefs are formed. We can still produce the things we want to produce, but in a whole new way that actually creates value for the collective rather than just redistributing it.
Finally, Milton Friedman would argue that true capitalism implies no government intervention. By that definition, capitalism has truly failed, the economic collapse proved how necessary government intervention truly is. As we move forward, private companies can still control trade and industry for individual and collective gains, in the sense that we discussed gains above, but to truly succeed, it needs to be within a regulatory framework that recognizes and respects the limits of our natural systems.
Unfortunately, as a general population, we have demonstrated our incapacity to acknowledge these limits and it is only now, with the proverbially ground coming faster and faster, that some companies are making a shift. But the invisible hand is not pushing fast or hard enough. There need to be mechanisms in place that ensure everyone is on the same playing field and understands the rules (again I am not referring to socialism); we’ve got accounting principles to protect shareholders, we’ve got laws to protect human rights, it is certainly time to introduce laws that protect the interests of the human race and all the other species we have a responsibility to on this planet.
It’s taken a long time and some very frightening realities to recognize that we’ve been going about capitalism all wrong and living at odds with the world. Capitalism has a place in the future, but now is the time to use the failures of the past and our understanding of the principles that govern our economic, social, and environmental systems as a platform for success. Rather than trying to defy gravity, we can use those principles to rework our understanding of capitalism and ultimately live in accord with the world.
Kate Shaw is a student of Climate Capitalism at the University of Victoria (UVIC) on Vancouver Island.