2019 has been a remarkable year for those wanting social, economic, and environmental renewal. The level of protest remains high, the idealism as strong as ever, but the ferment is not generating progressive wins, is weakening democratic reflexiveness to challenge, and is weakening pan-national institutions.
It’s not that easy to get on the shelves here, but the book I’ve been wrestling with this year is Paul Collier’s The Future of Capitalism: Facing the New Anxieties. Most of his work is on understanding and alleviating global poverty, including his excellent The Bottom Billion which is still good at 12 years old.
Collier gets to the really tough problem. If you measure by things like GDP growth and lifespan, life is better for more people around the world and for much of New Zealand than it has ever been. Yet many questioning the capitalist system that produced those gains, loudly.
There’s an understandable sense that the system is in another crisis.
Why is this happening? Collier says we’re experiencing three big rifts:
Now, those aren’t the only things wrong with capitalism. But they are widening schisms that are making things a whole bunch worse.
(Collier can and does take things personally. He grew up in industrial Sheffield, England; now he makes his home in an upscale college town. Both of his parents left school when they were 12; he went to Oxford. He lives in a rich country, but because of his work he spends a lot of time in some of the poorest places in the world.)
As a result of the three trends, Collier says, capitalism is delivering for some people but more and more leaving the rest behind. What will feel familiar to anyone living in Gisborne, New York City, or my hometown of Auckland is that highly skilled workers have a big incentive to move to cities, where they can get high-paying jobs. When all those big earners cluster in one place, more businesses sprout up to support them. This large-scale movement into the city drives up the cost of land, making it less affordable for everyone else. A virtuous cycle for a lucky few and a vicious one for most.
So Collier has a compelling description of the problem. What should we do about it?
The central idea of his book is that we need to strengthen the reciprocal obligations that we have to each other. To me that pretty much rules out party-based politics as an answer to bridging any of the big divides, because they exist for intense non-cooperative competition. The essence of expressing the common good is expressed in this thing called public policy, but as he notes:
Public policy has gone wrong because of the trivialization generated by the strident rivalry of antiquated ideologies. The ideology of the right asserts faith in ‘the market’ and denigrates all policy intervention. Its solution is ‘get the government off the back of business: deregulate!’ The ideology of the left denigrates capitalism and condemns the managers of firms and funds as greedy. Its solution is state control of companies, and state ownership of the commanding heights of the economy. [B]etween them they have set the terms of public discussion, impeding productive thought.”
This staleness of thinking is pretty evident in Brian Easton’s 2019 column on The Future of New Zealand Capitalism. It was basically arguing with a few ill-defined labels and a few tired policy areas, and that was its limit.
We can start to evolve capitalism when we evolve our thinking, not wheeling out well-worn bromides and don’t face up hard to alleviating the big three schisms above.
What engaging in fresh public policy debate does do is help us talk. “As we recognize new obligations to others,” Collier writes, “we build societies better able to flourish; as we neglect them we do the opposite…. To achieve the promise [of prosperity], our sense of mutual regard has to be rebuilt.”
He looks at four areas where we can do this: the global level, the nation-state, the company, and the family.
I’m going to skip his themes on global institutional strength and rule-based orders. It’s a complete necessity for tiny states like us. I live in the tiny exception to entropy called New Zealand, within the same trade sweet-spot as Australia. We’re about as happy as we can be within our level of inequality, social mobility, and health.
At the corporate level, Collier criticizes the notion that a company’s only responsibility is to make money for its shareholders. This sole focus on the bottom line, he argues, means many companies no longer feel responsible to their employees or the communities where they operate. This has been a big driver, he says, of “the mass contempt in which capitalism is held as greedy, selfish, corrupt.”
I agree that companies need to take a long-run view of their interests and not just focus on short-term profits. It matters how businesses are viewed in their communities and by their employees. Our farmers are really starting to feel the shrinking borders of their social license.
Companies remain more dependent on the state in New Zealand because, while it’s footprint has been tracking over 40% of GDP for quite a while now, it is even more important because pretty much only the NZ state writes the big deals. Companies are always intersecting with public policy outcomes to get those massive deals.
I finished the book wondering if he thinks we can change the incentive structure so companies act differently. The state needs to develop more corporate instruments that allow massive and adventurous policy objectives which motivate corporations. You certainly see those interdependencies in the health, social welfare, and infrastructure industries – which is where tens of billions in deals are up for contest annually, and all with policy outcomes to express. Some of those are in Alliances and ECIs. Some in long term service contracts. Some of the PPPs fail and do so on a spectacular scale – most do fine. But we have to risk together, and risk more. Because if we don’t, our common purpose that remains will continue to weaken.
Collier’s world/nation/company/family argument is pretty easy to express around the word “community”. There are famous examples of New Zealand’s social cohesion expressed in times of crisis – which we get nearly annually. In New Zealand for 150 years it’s been mostly churches and church-originated NGOs that have underpinned much of that cohesive community. Since the 1990s Maori social institutions have also grown.
Collier is really good on the function of leadership within
capitalism, and it’s great to see this pulled out of MBA management tomes and into economics:
The transformation of power into authority is essential for building reciprocity across huge groups of people, such as everyone accepting the obligation to pay their taxes. Leaders are not engineers of human souls, but they can harness our emotions. The dangerous leaders are those who rely only on enforcement. The valuable ones are those who use their position as communicator-in-chief at the hub of their networked group – they achieve influence through crafting narratives and actions. All leaders add and refine the narratives that fit within the belief system of their group, but great leaders build an entire belief system.”
Voters in English-seaking democracies clearly get the necessity of charisma for authority within the political economy better than most political economists do.
But the peculiarity is family. There are good studies around on the utility of social cohesion for our new immigrants. But the role of family to provide meaning within capitalism is undercooked. Collins comments on this:
The distinguished psychologist Martin Seligman has conducted a sustained programme of research on the attainment of well-being. His conclusion is unambiguous: ‘If you want well-being, you will not get it if you only care about accomplishment . . . Close personal relationships are not everything in life, but they are central.”
Too few families broaden the shareholding of their business to be more than a couple working their asses off with the house as collateral. Successful genealogies are built around broad families who pull more related capital and more related skill into themselves. We are a nation of small businesses that stay small. But in the structure of family, there’s also a latent power to tilt capitalism. Family is still our strongest form of social cohesion and still provides most of us with the strongest meaning in our lives.
So a tax system that favoured relatives pooling capital to be carried forward (then getting taxed harder once very successful), would lead to capitalism evolving well here. The Future of Capitalism calls this kind of thinking “social materialism”.
He doesn’t talk enough about tax. Tax continues to be the strongest effective instrument to rebalance wealth and inequality, and needs to be deployed harder. Horizontal dispersals in capitalism occur only when governments make forceful tax moves.
Also he doesn’t talk much about the role of institutions such as weakening or strengthening rule of law and rights, regulation of banking, levels of corruption and gaming, public institutional responsiveness, or indeed the effects of colonialism. These all evolve capitalism.
Ultimately, Collier believes that “capitalism needs to be managed, not defeated.” We should do more to curb its excesses and minimize its negative aspects. No other system comes close to delivering the innovations and economic growth that capitalism has sparked around the world, and no alternatives are challenging its dominance. But we can make it evolve.