One Last Chance to Fix Capitalism

Roughly two-thirds of the way through Reimagining Capitalism in a World on Fire, Rebecca Henderson’s prescription for reversing some of the damage business has done in the past half-century, the Harvard Business School professor rates the chances that environmentally iffy industries might effectively self-regulate. “This is a story of hope followed by despair,” she says, “followed by the glimmerings of renewed hope.” That pretty much sums up the sweep of emotion I felt recently as I curled up with some sobering, often damning nonfiction on the current state of capitalism and finance. In my head, the working title of this article went from the chirpy “Fixing Capitalism” to the slightly panicked “Can Capitalism Be Fixed?” to the downright baroque “Capitalism Sure as Heck Better Fix Itself, Because No One Else Can, So Here Are Some Last-Ditch Ideas.” For anyone still unsure that big, important things are now broken, several new titles paint a convincing portrait of grossly unsustainable inequality, corrupt political processes, and a looming crisis—much of it stemming from a financial system that for 40 years or so has prioritized short-term profit over all else and systematically removed any checks on its own worst impulses in pursuit of that goal. How Money Became Dangerous reminds us that the financial sector was once a quaint service industry, humbly facilitating the greater economy’s stability and growth. The banker Christopher Varelas, who began a long career at Salomon Brothers as a summer intern in 1989, takes us on an autobiographical, picaresque tour of modern finance’s original sins (written with Dan Stone), showing, for example, how the shift from private partnerships to public corporations irresistibly tempted banks to make bigger and bigger bets with what was now other people’s money. “Should we be expected to be good,” Varelas asks early on, “if no longer constrained by the threat of losing one’s own capital?” His answer is yes, but he and his fellow bankers wrestle with exactly how to be good in a system that incentivizes greed. After all, in less-scrupulous hands this dynamic has led directly, if unsurprisingly, to some very bad behavior. In Sabotage: The Hidden Nature of Finance, the political economists Anastasia Nesvetailova and Ronen Palan of City, University of London point out that a truly efficient, fair, and competitive market would provide little opportunity for profits beyond operating costs; therefore companies—or, more precisely, their leaders—strive to win by bending, breaking, or changing the rules. These authors offer some delectably vile case studies, from the Royal Bank of Scotland’s swindling of its own customers to Bear Stearns’s demise at the hands of unethical rivals, to illustrate the point: “[I]f you want to make money—real money—in finance, you need to find ways of sabotaging either your clients, your competitors or the government.” The highest achievers here manage to sabotage all three of them at once. To return to Varelas’s adjective, this type of market manipulation is dangerous, and most immediately so to the people it exploits. While those at the very top of the finance superstructure have enjoyed huge gains, inordinate amounts of risk and loss have been offloaded onto middle- and lower-class workers. High-interest credit cards, mortgages, and car loans are the least-exotic examples of how finance, in the words of the sociologists Ken-Hou Lin and Megan Tobias Neely, “nips income away from consumers and revenue away from the producers and merchants.” In Divested: Inequality in the Age of Finance, Lin and Neely argue that today “the sole purpose of money is to make more money,” as opposed to creating something of value. Meanwhile, “spider webs” of personal debt have replaced the social safety net, leaving a great many of us in a more-precarious financial position. Outsize profits, salaries, and bonuses “are not driven by this sector’s contributions to the economy,” the authors add, “but by the concentration of market power, political entanglement, and the private intermediation of public policies.” So the average consumers of financial products are, in effect, paying a lot more for a lot less—the exact opposite of what free markets are thought to deliver. The overall picture that emerges is one in which wealth is being redistributed—from the poor and the middle class to corporations and the superrich, who use the spoils to further cement their advantage. Historically, this process has not reversed on its own. Looking to the past for guidance, we can find good news and bad news. The good news: Throughout history, inequality and economic dysfunction have swelled to crisis points, and we’ve usually managed to reform. The bad news: That has generally happened after a violent rupture. In Capital and Ideology, Thomas Piketty’s magisterial survey of the central role that ideas and discourse have played in alternately justifying and questioning societies’ inequities, we are reminded that political uprisings, financial collapses, and wars—think the French Revolution, the Great Depression, and World War II—are what drive change. To address extreme inequality, Piketty says, “societies need institutions capable of periodically redefining and redistributing property rights.” If those are lacking, or fail, it “only increases the likelihood of more violent but less effective remedies.” So, about those glimmerings of renewed hope? All the economists and historians mentioned here agree that the single most important step is re-empowering governments, though they diverge on whether that means more-effective regulation, progressive taxation, wealth taxes, or other measures. “In a nutshell, markets require adult supervision,” Henderson writes. But unless political paralysis and regulatory capture somehow magically disappear, it will be up to future-minded business leaders to start putting out the inferno. Henderson offers inspiring case studies (counterpoints to those in Sabotage ) of purpose-driven executives who manage to create value for multiple stakeholders (including, yes, shareholders) without rapacious extraction, exploitation, or environmental damage. And this is the heart of her fix for capitalism. She wants managers to have better tools for measuring businesses’ true (too often hidden) costs and more-nuanced, inclusive metrics for describing success. The message is clear: It will take good, determined individuals to force the system to recalibrate before an upheaval. Private-sector leaders—especially those who have profited from the market’s decades of inefficient value creation and wealth distribution—should be leading the charge.

One Last Chance to Fix Capitalism

Partner Center