Capitalism under siege?

A fresh wind seems to be blowing through political economy circles.  It has even reached the cold climes of Davos, where the world’s capitalist elite are gathered to discuss the global economy.  But this is no warm, westerly breeze.  It is a harsh and stinging gale that brings talk of a ‘new reality’ where capitalism is “under siege”.  Klaus Schwab, founder and chairman of the World Economic Forum, even says that “collective sacrifices must be made to safeguard our future”.  

Can this be true?  Has the business community started to think it might be a good idea to consider the society in which it is a part, the customer to whom it is selling and the natural resources it uses in the process?  It seems some those most closely associated with driving the capitalist global economic model of the last 30 years are finding cause to question the orthodox assumptions of the theory of the firm and the macroeconomic system (e.g. as purported by Milton Friedman).   

As the business strategy expert Michael Porter says, capitalism is an “unparalleled vehicle for meeting human needs, improving efficiency and building wealth.”  But in the most recent edition of the Harvard Business Review Porter and his colleague, Mark Kramer, argue that the Friedman’s neoclassical model has run its course.

In viewing themselves as self-contained entities, firms have lost touch with society; “Conducting business as usual is sufficient social benefit…social or community issues fall outside its proper scope.”  Global outsourcing or offshoring in search of cheap labour has only fuelled focus on short-term profit.  Corporate responsibility (CSR) programmes are an attempt to improve the reputations of firms; they don’t come anywhere close to meeting longer term social and environmental costs. 

Porter and Kramer set out a redrawing of the boundaries of capitalism so that firms create ‘shared value’ by:

1. Recognising that harm caused by business activity poses an internal cost to the firm, not just an external spillover effect; and,
2. Realising that “societal needs, not just conventional economic needs, define markets” – in reconnecting business with societal improvement, it opens up new markets and prospects for innovation.

Value is shared because this is a win for society and the environment, and firms – who “serve new needs, gain efficiency, create differentiation, and expand markets” in the process.

Only by working together will we meet the complexity of today and tomorrow’s global challenges.  Government and/or civil society cannot do it alone.  Klaus Schwab’s rallying cry to business leaders is for them to step up to this new, global reality: “Humanity is now a crossroads.  We can either continue to work as lobbyists for our self-interests and keep doing the same things that got us into the crisis in the first place. Or we can act together as true global leaders, with the long-term global public interest in mind.”

Let’s just hope that if the wind has changed, it’ll stay like this. 

*** Listen to BBC Radio 4 ‘In Business’, featuring the ideas of Porter and Kramer’s ‘New Capitalism’ here.