The Future of Market Capitalism

  • Conversation Summary

Faculty Response (19 February 2008)

For the foreseeable future, there will be billions of unskilled living in the developing world. An inevitable consequence will be migration from poor regions towards richer ones. Business leaders are more or less comfortable with free flows of goods, technology, and capital. Should there be free flows of labor? If your answer is "yes," how should those populations be integrated into the society of their new homeland? If your answer is "no," how will the need for labor be met in the developed countries with low birthrates? In the U.S. for example, there is a net need for half a million workers.

A number of discussants observed that capitalism will not operate successfully (and generate value for workers, owners, and society) in a vacuum — it has to be embedded in a political governance system (and, most would hope, in a democratic political system). What does this imply about the role that business leaders should play — as individuals, as leaders of their companies, or as groups of leaders within their societies — in supporting, improving, or reforming local, national, and international political institutions? Can they play an active and effective role — and should they? Or would they just be seen as self-interested?

Original Questions

In the Future of Market Capitalism HBS Centennial project, we have been exploring the evolution of capitalism—the value it has generated, and the threats that may be arising that could impede its future value creation. We have interviewed business leaders around the world to get their sense of what some of the potential threats are—and what to do about them. We would now like to get your thoughts on these issues.

In many countries, the gap between the rich and the poor has grown and will continue to widen. Some say growing inequality may be an unfortunate consequence of economic growth, but isn't a real problem as long as everyone's income is improving. Others say the growing inequality will undermine the foundations of our democracies and hence our economies. What is your opinion?

There has been a great deal of discussion recently about environmental degradation, and particularly about global climate change. Some believe that capitalism, by its nature, will seek to reduce or avoid environmental regulation, exacerbating environmental damage and endangering the future health of the planet. Others see for-profit firms as increasingly recognizing the importance of environmental issues, and as working to minimize their negative impacts on the environment and to invent new technologies that will make business more sustainable. How do you see it? Is market capitalism the problem - or the solution?

Your Comments

  • Anonymous
    Alumnus/a

    My views are based on the experience of living in the largest democracy in the world which is today experiencing a huge shift towards capitalism: YES the divide between the rich and poor has increased but the quality of life for both sections has improved. What we're experiencing today is what the west experienced back in the 1950's, in my opinion capitalism will flourish in emerging economies.

  • Cheng Ghee Hoe
    Chief Consulting Officer
    Perspectiv Technologies Pte Ltd

    The future of capitalism lies in the ethics and values of Leaders, both business and public sector.

    Today we witnessed weakness lining up companies and these cracks are undermining the value created in growth and innovation.

    Technology will determine how a world which is more flat will have a better distribution of economic and social power that assist capitalism growth of sectors/countries.

    Back to fundamentals!

  • Jose Ramos
    Alumnus 1979
    CEO
    Only One Globe Corporation

    Capitalism formed in the late 19th century with its need for capital. These were the robber baron days of the Railroads and of of the Oil. Today thee is a fringe of economic development that no longer needs access to vast capital, nor its shareholders; this is the Internet Service Industry. Witness the recent startups in Social Networking, YouTube, MySpace, Facebook. One could argue that as the Internet nervous system continues to expand, more of the same will come. There will be more innovation, needing less capital. This will have serious consequences for capitalism as innovation and wall street go separate ways.

  • Steve Kloeblen
    Alumnus TGMP 2006
    Vice President Business Development - New Growth Platforms
    IBM Corporation

    It is undeniable that the growth of globalization facilitated by the lowering or barriers to trade, openness, standards and technological advances has resulted in significant wealth creation and an increased interdepence of economies.However, It is a mistake to conclude that "every individuals Boat has risen with this tide".

    Today two thirds of the world population (some 4 billion people) survive on less than $5/day (purchase parity adjusted). 70% of these very poor people live in Asia. Despite the very real increases in the Economies of China, India and South Asia, only a small minority have shared in the new wealth and disparity of wealth significantly causing huge population shifts and dislocation. Just as there has been ten's of thousands of new millionaires created (in the developed and the developing market) the poorest of the poor have been largely left behind. The monetary inflation associated with growth can equally eliminate real disposable income.

    The bottom of the social economic pyramid represents 4 billion people, two thirds of the worlds population, with an aggregate $5trillion purchasing power. However, the population of the Southern Hemisphere is projecte to increase by 1.5 billion people over the next 15 to 20 years while the population of the developed countries is flat or declining. Without any market shifts the global poor could represent 85% of the worlds population in the next 15 years. Should any CEO or Board be comfortable with this as a foundation for their business?

    Of course there are very real environmental consequences as well. The two are inextricably linked, and there is already not adequate supplies of safe water, or air for the poorer people especially in cities.

    Despite all this gloom, I reject the pessimistic arguement offered by Thomas Malthus who in 1798 predicted that the worlds population growth would outstrip our supply of food and eventually be limited by famine, war and pestilance would limit the population of Europe to the levels of the time.

    I beieve Dr Stuart Hart has it right when he points to "Capitalism at a Crossroads". Companies need to realize that Governments and Philathropy are ill prepared, and in some case un-willing to address this looming enterprise risk. I believe that with the right level of innovation and colaboration, for profit companies have to join the others on the stage and develop as one expert calls "Enterprise Solutions to Poverty" - Profit can be earned while helping to address poverty and in a real way the innovation that fuels that profit can create break through disruptive plays that may be brought back to more establised markets.

  • Anonymous
    Alumnus/a

    Capitalism is the solution to climate change. Look at what GE has done with the ecomagination effort. People had been talking about climate change and energy independence in this country for 30 years. Energy prices have been high before. But when a hard-nosed, investor-driven, profit-oriented company like GE said GREEN IS GREEN, we started so see some societal change. Now you can't open up a business magazine now without hearing about some company embarking on their own GREEN journey. Wal-Mart sold 100 million energy-efficient CFL's last year. It's capitalism at its best.

  • Eric Ginsburg
    College Student
    Guilford College

    Capitalism is inherently opposed to the interests of the majority of people. The commodification of our ecosystems -including basic necessities such as water- is an example of how the profit motive and the hierarchical nature of capitalism are responsible for our dire situation. Centrally planned economies have not proved to be a viable alternative either. While it may be difficult for many to imagine an alternative to capitalism, it is critical that we do so if we are to actually address our current situation. Market solutions and small scale projects ignore capitalism's basic reliance on a lack of ethics and morals in favor of guarding the bottom line. Capitalist solutions to problems spurred by other capitalist projects, such as carbon off-setting, are only bailing water out of a sinking ship.

  • Guillermo Arosemena Arosemena
    Alumnus AMP83
    Management consultant
    Arosemena &Co.

    The desire to improve human standard of living based on private initiative and freedom will never vanished, it is human nature.

    Capitalism is reinventing itself in dveloping a more human face, we see it in the green movement, importance paid to corporate social responsibility and the evergrowing interest of private sector to help the developing work.A case in point is the 100 dollars computer project of MIT Negroponte.

    As more people become integrated in the economy and standard of living improves worldwide, capitalism will become less of a scapegoat.

  • John Grant

    I am delighted to see Profs. Bower & Leonard guiding a discussion of this most important topic. Capitalism has too long avoid adequate inclusion of various "externalities," so now the Carbon Disclosure Project is helping to fill that void. Micro-finance is helping repair some "market failures" in the global capital markets, so there are reasons to be optimistic.

  • Waju T. Ogunleye
    Chief Ideas Officer
    Nth Sense Consulting Group

    I agree Dr Hart WAS correct when he addressed the issue of "capitalism at crossroads". However, i think that was yesterday. Capitalism has now taken the plunge and headed for where it belongs- the abyss. Last week i began putting my thoughts together on a piece i call "Death of the market share capitalists". I will share a few of those thoughts. We seem to be talking from both sides of the mouth when we pursue capitalization whilst advocating innovation. Capitalization is a topic of the past which today's leader clings to as an excuse for lack of creativity.

    Tomorrow's business leader must have a sworn allegiance to "brain sweat" (i.e Innovation) by creating new markets at "bacterial" speed.

    Consider with me the Peoples Republic of China; I constantly feel pained to observe the obvious distinctness of paradigms when we compare her to the western world. A simple illustration is to compare the depth of commitment to R&D...it is said that a foreign-owned R&D laboratory is opened in China every ... 43 hours! Such a Nation cannot be capitalization-minded.

    The irony of this scenario is that businesses that commit unwaveringly to Innovation will rule the world in the next few years. Perhaps then,we can rightly call it "seeking first the kingdom" . One thing is evident: the problems that we all face in today's world have only persisted in the era of capitalization.

  • Konishi, Ryuji, Mr
    Executive Education Participant AMP105
    Professor, Graduate School of Economics
    Kyushu University

    Naive? confidence or trust in capitalism & market-mechanism, and thereby in for-profit firms' behavior, cannot be a perfect solution against widening gap between the poor and the rich, nor against threats from the growing natural environmental changes Having so-said, however, reality is that there could be no better alternative for the current social and economic system as we are to cope with that can bring us relatively better tomorrow and future After all, persistent, resilient and never-give-up education and enlightening activities for all classes ,for all generations and over the world could be the answers Advancement to lead to human beings evolution in knowledge and wisdom which should be brought by self and taught education, I believe, is the answer for quest for brighter future

    jan.30,2008

  • Duan Qi
    freeman
    univercity

    The giant should not continue his journey with a scar bleeding, he has to sit down, think calmly about himself and the new environment which he seldom notices. He wants to go alone? Or take the hands of others then together run towards the same direction?

  • Anonymous
    Alumnus/a MBA 2004

    Let's first make sure that the capitalist activity doesn't destroy the planet, and then think about the rest. We have surpassed the capacity of the planet to regenerate back in 2002 (or may be even before that) scientists say - so the faster the capitalist race for growth - the worse for everyone. Enough shortsignted capitalist thinking only for the profits of the quarter and fat bonuses for the top management, it's time to think about the future.

  • Daniel T C Lee
    Director Finance & Operations
    Family Office Trust Pte. Ltd.

    Having lived in the New York City in the early 90s, I was mugged on my second day upon my arrival. I was lucky - I survived. Back home in Singapore, a contrasting picture of the living environment existed.

    "Growing inequality may be an unfortunate consequence of economic growth, but isn't a real problem as long as everyone's income is improving."

    The widening gap between the haves and 'have-nots' will definitely create a problem.

    The concept of risk and returns Clearly crime rates are a result of the large perceived differential between the 'haves' and 'have-nots'. Like most decisions, if the returns outweigh the risks, and the risks are acceptable to the bearer, action will be taken. If going to jail for a month with free food and shelter is the outcome of being caught, it is better than freezing in the Winter streets. The outcome of not being caught of course is the bounty, enough at leas to buy a hot meal. This was a logical answer when I asked some of the homeless hanging out in the back alleys in New York then.

    This logic explains also why crime rate is extensive in the undeveloped and struggling countries, including tribal and civil wars.

    In the more developed countries, without a widening gap, there is less incentive to do the unthinkable. Singapore is a country where people are reasonably comfortable, with their house, their livable lives and political apathy. The gap has been less perceivable. As long as the gap does not widen too extensively, the crime from within will be marginalized. The previous Government leaders have done an excellent job in ensuring that Singaporeans are gainfully employed and skilled, thus managing that gap. However, when that gap increases, income improvements will not be perceived anymore as real improvements, thus creating potential problems.

    Linking to the issues of widening gap and income inequality, it is unfortunate that the current world focuses on materiality. Persuasive advertising has exacerbated the situation. Environmental degradation is the result of high wastage, a product of materiality and greed. The issue is not market capitalism. If there is no excessive demand, there will be reduced supply. While much blame has been put on countries like China and Indonesia as contributors to envirnmental degradation and pollution, the results of Factory production and deforestation, the real underlying issues have not been addressed. China's exports are on the increase, that is to say, the demand from outside has contributed much to the production pollution. Trade surplus continued to increase to $262b in 2007, especially with the US and EU, although deficit with the rest of Asia continued to widen. Foreign reserves reached US$1.53 trillion at the end of 2007, up by 43% from the previous year.

    Indonesia's deforestation happens to be at the 'wrong' time, when the developed nations have already cleared more than their share of the forestry for development. Compounding the issues arising from deforestation, the slash and burn clearance method used caused extensive pollution and health hazards, not only to the villages in the area, but also the neighboring countries of Singapore and Malaysia. The rationale is simple, the decision makers see more to gain themselves by pursuing this cause of action than to think of others. Similar arguments have been made in the crops versus fuel debates.

    The global environment is shared. Global warming affects all countries in one way or another. Is market capitalism the problem or the solution? Neither, market capitalism is just a mechanism. We ourselves as people are the problems and solutions. It is also the availability of a level playing field. More opportunities present themselves first to the rich. History favors the rich and victorious. Greed and selfishness, and short term gains will lead to long term disasters. But capitalism is not the problem, nor the solution. Education, persuasion and shared actions are.

  • John Mauriel
    Alumnus MBA61, DBA64
    Emeritus Professor
    U of Minnesota, Carlson Sch of Mgt

    As Professor Grant noted, it is heartening "to see Profs. Bower & Leonard guiding a discussion of this most important topic". As educators, they must be willing to critically examine the strengths and limitations of any economic system, even our successful brand of capitalism, and objectively look at alternative approaches or system adjustments that might improve human existence on this planet over the long run. Our current success in achieving global growth, creating wealth, and reducing poverty (most of the recent poverty reduction, according to UN statistics, has occurred in China under a closely controlled from of regulated capitalism) has led us to worship, sometimes uncritically, market forces and growth for growth's sake. This can lead us to the misconception that an unregulated market system where GDP per capita is the only way we measure progress, can solve all our economic problems, and it has prevented u s from looking at the full long term costs (and negative impacts) it creates. We fear that if we consider the environment, sustainability, human health and happiness and other costs, we might impede growth.

    An economic system must work for people, not vice versa, and it must make our global existence better - and better for the vast majority. Capitalism can stand up to objective scrutiny, but we must be willing to examine our goals and how we measure them, and more importantly we must be willing to examine what regulations and rules of the game have to be imposed to keep the playing field as level as possible and not support a system that only benefits those who have (or whose ancestors had) accumulated capital (financial and intellectual). Yes, there is hope in the recent successes of Microfinance and the fact that in many countries educational capital is growing. We must make sure that these opportunities continue to be available to as many people as possible on a merit basis.

    In the US, however, we have come to a point where a large segment of the population does not have access to an education that the middle and upper classes have, and thus access to living wage jobs and an opportunity to accumulate capital is almost non-existent to them in our market economy. Capitalism, socialism or any economic system, carries within it the seeds of its own destruction, as it eventually becomes unresponsive to the common good, so it must be regularly examined and adjusted and be exposed to critical analysis, and thus I, too, am pleased we are having this discussion.

  • Wilfred Oliver Segovia
    Manager, Consumer & Market Knowledge
    The Procter & Gamble Company

    As someone who was born and raised in the Philippines and now work in Singapore, I have a cautious view of capitalism's future in solving global problems. Economic inequality will always persist as long as competitive forces remain present; what can be addressed is the inequality of opportunity. This, I believe, is not the job of capitalism to address, but that of democratic institutions and proper modes of governance. I cringe whenever I hear talk of how new technologies, the internet economy, and innovation can transform capitalism in the developing world, when most people don't even have access to basis health care, primary school education, or even property rights - key ingredients to put every one on a 'level playing field'. The first step in making capitalism work for the poor is fixing these basic structures.

  • Anonymous

    Growing inequality will only undermine our societies and economies if the opinion makers continue to try to use those differences to build alienation among those whos lives are improving, but not as fast as others. Focusing on the US, we hear repeatedly of the increasing spread between rich and poor. Yet those divisions in part reflect the benefits of greater equity in our society, and in part derive from statistical anomoalies.

    Policies that opened professional education and employment among women eventually led to a new class of two-income households that begin with twice the income single earner households. When those households include two professional incomes, the gap between these affluent households and those of others becomes quite marked. The circumatance is not only a testament to social progress, but also a net benefit to the society; we are more fully utilizing the capabilities of that half of our most talented citizens who happen to be female. At the other extreme, households led by single, less-educated parents have fewer opportunities in a society with a declining number of highly paid, unskilled manufacturing jobs. These circumstances result from a social acceptance in recent decades of divorce and unwed-parenthood that have nothing to do with capitalism, and everything to do with a preference for self-determination and tolerance. Yet the gap is blamed on capitalist failures.

    One statistical anomaly is that both dual-professional-income and singel-earner households are counted as a single household income that does not reflect the vastly different circumstances and life decisions that led to the gap between the "rich" and "poor" households. Is the gap a reflection of a failure of capitalism, a failure of individuals to take better advantage of the opportuities of capitalism to improve one's lot, or the failure of society to more evenly equip its citizens with the tools and culture needed to provide for themselves? I contend it is more the latter two than the former.

    The other statistical anomaly is that the poorest quintile is overrepresented by retirees (who are no longer earning) and young people (who have not reached their peak earning years). As such, a large fraction of this quintile is transitional. The balance, the long-term underclass, is grossly disadvantaged by poor education and social support systems that have nothing to do with capitalism. Yet the possible solution--capitalism--is often blamed for the problem.

    Capitalism is the only economic system which has proven capable of enlarging the pie, and a larger pie is the only way to enrich the lives of the poor without seizing the fruits of others' labor. The only alternative--one that seems preferred by some political leaders--is to deny the rewards of effort and education to those willing to work for those rewards. Doing so eliminates the incentive to work to improve our collective lives, as communist societies have demonstrated. The inevitable result is a world that is more equal in its poverty. Most people of modest means dream of bettering their lot, or their children's lot, a dream that is made realistic by rewarding education, discipline, effort and vision with success via capitalist processes. That such a dream exists is illustrated by the waves of immigrants still arriving at our borders. Those who would strive to improve their lives and those of their children do not want to be deprived of the prospect of the rewards of that effort.

    If political leaders spent less time on stimulating resentments and class division, and more time trying to give those at the lower economic end of society the tools to participate in our economy, they would do us all a service.

  • T. Yasuda
    Founder, thecapitalclinic and former Group Managing Director

    The growing gap between rich and poor, if not ameliorated, will become an abyss that undermines liberal democracy premised on majority rule and protection of minority interest. I, thus, argue that our preeminent B Schools such as HBS, as well as our more accessible "night schools for entrepreneurs," should change the pedagogic framing exercise to generate Masters of Business Reality [MBRs] rather than Masters of Business Administration [MBAs] to close the gap between the haves and have-nots in a digital environment.

    I list below the core business principles common to both the MBR and the MBA and, thereafter, some important differences. My bias is evident. I never earned an MBA but received a law degree at HLS before leaving law and entering business and the University of Hard Knocks. I leave it to your readers to decide which curriculum is more valuable in a web-based world.

    I. Points in common in having an MBR and an MBA. Business is all about accumulating capital [read: things of value]. The notion of capital is generally divided for convenience into two categories, financial capital [being the score-keeping system for creating, storing, and exchanging, largely, tangible values] and everything else that is not financial capital but that also "might" reflect value. For convenience, we call this second category of "everything else" of possible value, social capital* [which is a default bucket and largely intangible].

    The MBA proclaims to the world that you know something about "financial capital" [i.e., how to make "a small pile of money into a bigger pile of money."] The MBR teaches you that your knowledge about financial capital [which is just a given starting point in the life of business] must have a broader base in the non-financial world of reality [which is the business of life.]

    Note that both MBA's and MBR's focus upon matters of "value" - without value in business or life, what's the point?

    A. Financial Capital: Returns vs. Cost. If your Return on Capital does not consistently exceed your Cost of Capital you "destroy Capital." Of course, at one level this is a mathematical truism, and in economic terms this is the essence of what you will learn (a) in painful detail over two years at B School or (b) as the common sense, but equally painful, lesson in "how not to go broke" at the University of Hard Knocks.

    B. Financial Capital: Velocity. When you're actually running a business rather than just studying about it, you quickly realize that, in calculating Return on Capital, theVelocity of your Working Capital is more important than your Gross Margins. That is to say, the turnover of your liquid [immediately realizable] assets is what counts**. And there is no better price than "free" to increase the velocity of your "capital" [although loss leaders lead to Loss in the fullness of time].

    Moving beyond what you learn getting your MBA in the life of business, I argue that the following sums up how you earn your MBR in the business of life.

    II. Things you generally don't learn about at B School. In "social capital", the same immutable principles apply: that is, return on capital must exceed cost of capital - lest you just run around in circles or bankrupt society. However, and the two key take-aways to earn an MBR are: (1) The net positive return of capital over cost of capital is easier to achieve in the context of "social capital" [as opposed to "financial capital"] and (2) the accumulation of such intangible values can be monetized efficiently.*.

    The advent of a web-based environment of instant "communications for free" [some call this "digital capital" and at thecapitalclinic we call this "virtual capital"] has changed the cost vs. return calculus and the value pendulum is now swinging back from "financial capital" [which is increasingly becoming the domain of the privileged few] towards "social capital" to provide the best way to enhance values by and for the benefit of a broader base of participating nodes. We briefly discuss the premises of this conclusion below:

    A. Social Capital: Return vs Cost. The cost of your "social capital" is a function of your labor [energy expended] rather than your property. Thus, establishing the cost basis of your capital is not dependent upon what you own, but rather the level of your commitment to communicate. Moreover, the return on your "social capital" is a function of the number of direct [one-to-one] connections that you establish, then its scalability [one-to-many] and thereafter and importantly, the indirect [many-to-many] connections that follow in an environment of "communications for free". You control your destiny by controlling the level of your energy [labor] and your communications rather than the quantum of your fixed assets.

    B. Social Capital: Velocity. In earning your MBR at the University of Hard Knocks, the best way to optimize the return on capital is not to sit on your Assets and Liabilities waiting for good things to happen to you in episodic random lumps, but rather to place yourself in the center of a dynamic spigot where the sheer velocity of capital permits you to take a small slice of all the energy that is flowing around you working in tandem with web-based "intermediaries."**

    *The term, social capital, could in turn be sub-divided by descriptive genre into such compelling topics as "natural capital", "cultural capital", or even "education". While conceptually it must be remembered that the term is a catch-all default metaphor [i.e., anything of value that is not "financial capital"], its importance lies in (i) the contradistinction between the value of property and the value of connectivity; and (ii) the premise that networks matter in enhancing returns on capital. Needless to say, the literature on this subject is extensive and growing, particularly with the rise of web-based social networks.

    ** I still marvel every time I go up to Victoria Peak in Hong Kong and look at the breath-taking panorama of thousands of container ships, ferries, junks, water taxi's of all sizes and shapes criss-crossing the harbor that is a narrow window into the vast hinterland of China. This is still the most dynamic intersection of commerce in the world and the velocity of capital that moves through this narrow spigot is so concentrated in its value-creating ferocity that it forgives all commercial miscalculations and rewards everyone who is willing to place one's risk-taking spirit at its center.

    * Of course, the key lies in the final, and some would argue conclusory, qualifier of optimal efficiency. In many ways, this raises the age-old debate of the virtues of "socialism" over "capitalism" which we have seen, of late, has resulted in the rise of the latter over the former because the method of valuation of social capital (how to create, store, and exchange non-financial values) is "sloppy" when compared to placing a value on "financial capital." But, we argue, no longer does this condition of imprecision have to obtain as we study and understand networks and value.

    **The new "intermediaries" with value-added insight understand that, for now [but not much longer], the notion of "social capital" is largely a default metaphor rather than an measurable instrument of precision. The current condition of ambiguity in the context of an inevitable one-way transition to value in a web-based world is the entrepreneur's dream.

  • Walter P. Blass
    Visiting Professor of Management
    Grenoble Graduate School of Business, Grenoble, France

    It is a sad comment that many of the comments see Market Capitalism as only the American pattern. Were some Germans, French, Swiss or Scandinavians or Japanese to comment, they would point out that each of their representative companies approach this topic with less unalloyed Friedmanesque "the only goal is profits", and more of a socially determined set of goals, parameters, constraints. I've been teaching and consulting in Strategic Planning for the past 35 years and that discipline attempts to spell out clearly for its practioners what are the Vision, Mission, Goals, Business Environments, Strategies that make for a unique corporate culture and satisfaction for all the stakeholders. When you compare a Johnson & Johnson under James Burke (see the excellent case studies in HBS) and the re-written "Credo" that puts patients, doctors and clients first, but also recognizes that without profits, a corporation cannot long survive, with a "profits above all" culture like some investment banks, hedge funds, etc., you quickly recognize that capitalism comes in many forms. Having lived in Europe, Asia and the United States, and now teaching all over the world, I am struck how each company and each national culture evolves a different form of capitalism. We need more concrete research, more normative judgments that can be tested in the real world to learn how Adam Smith's "Invisible Hand" and Albert Hirschmann's "Hidden Hand" can benefit not just a tiny minority but the vast majority, and preserve our planet.

  • Moderator

    Moderator Note: Comments below are in response to new questions posed by faculty on February 19, 2008.

  • Daniel C. Wagniere MBA 63

    The growing gap between rich and poor is not just a consequence of economic growth. It is a result of momentous change where the nimble adapt more easily than the inept. Democracy requires a measure of equality. Equality of opportunity is an essential ingredient of capitalism. Equality of income for equality's sake is a recipe for decline.

    The growing problem of scarce environmental resources is also a result of change.Governments can obstruct markets by interfering in all processes with negative spillover effects and restrict forms of change; or they can promote capitalism and encourage adaptation to change by creating new forms of private property (such as intellectual property and rights to the use of scarce common resources)and new global markets.

  • Anonymous

    The gap between the rich and the poor is widening. And nowhere is that more evident than in the United States.

  • Brian Scott
    Alumnus MBA1977 DBA1979
    chief executive
    Oxfam Ireland

    Capitalism is only one of the societal institutions necessary to preserve citizens' rights, responsibilities, and liberties. And it must be embedded alongwith our other institutions, such as the law and government regulations, for it to succeed. Profound, life-threatening poverty affects 40%plus of the global population. While it is diminishing in several Asian and Latin American countries, especially in China and India, it is increasing in sub-Saharan Africa, much of which remains outside any meaningful modern economic system.

    The nation state provides a barrier of sorts against uncontrolled migration by the poor, but it leaks a lot. A better solution is to address poverty where it is mainly located - in poor countries. For this, capitalism is essential. For the first time in human history we have the resources and the technologies to abolish poverty. Ours could be the first generation to put to rest the biblical statement: "The poor are always with us." But so far, we lack the political will.

    Slavery was abolished in much of the world 1-200 years ago. We look back now with incredulity that our ancestors tolerated such an affront to our values. What will our children's children say of us if we ignore absolute poverty?

  • Harlyn Sianturi
    Manger Risk & Assets
    PT Kaltim Prima Coal

    Market capitalism has historically proved not to be either one, never been the cure nor the damaging. It is neutral and it is the persons who are in charge of taking market capitalism to actions that make the difference. It is however quite sad to see that the ideal market capitalism in itself has stimulated more damaging people all along.

  • Fazly Marikar
    Manager
    Amana

    For developing countries, I believe, the pure form of capitalism may be the way to go. For countries like Sri Lanka, where I live, this could drive economic development. This may lead to growing inequality; but does it matter when everybody is experiencing the fruits of economic growth?

    Hong Kong is an evidence of pure capitalism in action; from a "dirt-poor island" to a major success, as Friedman calls it. I believe that market capitalism is the solution, albeit with its share of "level 2" problems.

  • Ajay
    Partner
    4SPOTS

    Labor, just like technology or capital is a resource. And capitalism is about the nature of flow of resources. It is a system in which resources are allocated to the venture that would generate the highest percentage profit. That was and is a pretty effective way of allocation by the market. No one person or group of persons in their infinite wisdom is allowed to decide which resource is allocated where, and how much. Reason is because the market is always right. The market corrects itself cause of the feedback loop built into it.

    Labor as with any other resource will operate just like that. We live in an increasingly borderless world and this flow of labor is but the logical consequence of the market dynamics. Labor is being put to use in the venture that creates the most profit. Doesn't matter if the venture is in US and the labor in India or vice versa.

    By this definition the integration of this displaced labor in the new social setup will work on the same lines. The labor is displaced only if the venture is profitable. The labor is displaced only if the net output of value creation is positive. If the value creation output is positive, that points towards an economy that had benefited from the displaced labor. This will continue as long as the net output is positive and the rate of displacement will be directly proportional to the percentage positive ouput.

    The labor demands of those parts of the world with net need in labor will be satisfied by those parts of the world with a net excess in labor. Beyond a point it will not even be about scarcity and excess. It will be about which part of the world needs the labor most. In a capitalistic, non regulated market, labor will freely flow to those parts of the world where the need is greatest.

    However care needs to be taken to see that the profits earned by the allocation of labor is reinvested in the local market economy of where the venture operates. If the proceeds from the labor is channeled into a different economy or the home economy of the displaced labor then there will be a mismatch and the feedback loop of the market will not be completed.

  • Kenneth Du

    Market capitalism needs to be localized in order to meet specific historic and cultural tridition, ethnic and demographic conditions, and religious belief in one particular country.

    Universal capitalism doesn't really exit in real world. The capitalism in Europe is a bit different from those in US and Asia. Different regions ih the world are in different historical stage. Some are developed countries with systemic institutions which ensure the effectiveness of market capitalism. Some are still in agricultural age with no political, economic soil for capitalism.

    Therefore, I don't think market capitalism will prevail all the world over in the next fifty years. Some countries requires quite a long time to prepare for the implementation of capitalism combined with the rule of law and the spirit of democracy.

  • Henry Maigurira

    Joseph Bower makes a very important observation of existence of economic income inequality between classes of people in many countries. The reason attributed to this is refered to as the "unfortunate consequence of economic growth". This attributes Capitalism as the sole cause of deepening income inequality. The rewards system of individual households in most countries is based on merit and labour productivity.

    The phenomena seems to be shifting on the global scale as more transparent initiatives by world bodies to foster gretaer cooperation between emerging markets and industrial capitalist nations. This has to do with better terms of trade, development of information technology and knowledge sharing. The need to drive equity in the resources and sustainable enviromental practices gives the future of capitalism hope for the people. Lower class income will improve if intergrated financial systems are directed to the poor at lower costs, living standards improve and trading volume of huge consumer goods in the lower income group becomes available at free market prices. The belief that wealth will trickle down to the poor take its root in financial intergration, access to finance, self-employement uplifts, public health, education infrastructure services delievery giving individuals fair competition and greater chances and access to the markets.

    Rise in the labour skills and literacy rates will consolidate participatory and other forms of democracy, introduction of E- governance will make leadership accountable to all citizens on demand with an inherent system power drive making marketing manager for democracy a phenomena of neccessity in independent and impartial existence. The more people get educated the less HIPCs and developing nations become trapped in poverty and closing the income inequality gap. Dutch Leonard brings a perspective "Some believe that capitalism, by its nature, will seek to reduce or avoid environmental regulation, exacerbating environmental damage and endangering the future health of the planet." The way we live is the future of generations. Trillions of money is being spent on Environment and sustainability. virtue of the Market Capitalism is extractive primacy on raw materials to process and satisfy human wants and needs. Enviromental degradation is paramount concern and human activity is in control of the destiny of our enviroment and relationship to the climate. Capitalism has the solutions Natural resource management, Oil and gas, Forestry, Land reform, Agricultural policy, Research and development and required programs of actions to restorative logging.

  • Anonymous

    Your question about the extent and manner in which business leaders can, should and need to become involved in the world of politics and government is spot on. Unfortunately (and I say this as someone who has spent a career involved in both areas), HBS doesn't prepare you too well for this. While the Kennedy School provides a solid grounding in the philosophy of democracy, HBS does not provide a similarly solid understanding of the philosophy of capitalism, much less a theoretical basis for understanding how it should relate to the world of politics.

    The results of this failure on the part of B Schools (it isn't just HBS) is on display all around us. Too many business leaders I've known have focused on campaign and other contributions and lobbying that egender a lot of cynicism among people on the other side and those who observe the system but can't as easily buy access to its levers of power. Too many business people are singularly unable to understand how public policy issues evolve, much less converse with government officials and politicians on this level, and undertstand the needs of these clients.

    Of course, it is equally true that too many public sector types are equally clueless about the world of business, and make the problem only worse by hiding their ignorance behind a veil of moral superiority and a disdain (feigned or otherwise) for business and the capitalist system.

    We live at a time when OECD governments face substantial long term funding challenges, when most critical uncertainties depend in some way on what happens in China, and when a globalized world is putting great pressure on the middle class and inducing a growing migration of labor, legal and otherwise. At such a time, the costs associated with this mutual ignorance, inability to communicate across the business/politics divide, and lack of a joint defense of our system of democratic capitalism in the face of major challenges to it are very large indeed. I wonder sometimes if this isn't 1910 all over again.

    Time will tell. But in the meantime, it would be good to see HBS trying to raise its game in this area.

  • Francois Glemet
    Alumnus MBA 1974
    Director Emeritus
    McKinsey & Company

    Our generation has been "at the helm" during the last 30 to 40 years and some of us are still there, shaping the world that we live in.

    Are we leaving the next generations a "better world" than the one we received from our predecessors?

    Economic development has certainly been achieved; famines and many diseases have been eradicated. But are we happy with the level of stress, insecurity (social, political, environmental, etc.) and short-term focus that our "developed world" is now famous for?

    Did we go wrong somewhere? Why and How? What are the "key learnings" for the next generation?

  • Farrukh Taara

    Dear sir,

    I would like to add one thing of the most prime importance that world powers often forget the reality principals and do not look deep into the foundations of capitalism and democracy. Capitalism is the survival of the fittest, what one individual can do for dollars in the west does the same with more vigor and assertiveness in pakistan or india. So who will be able to compete? Obviously the fittest. Which one would like or not is the one getting lesser for doing the same.

    Secondly, democracy is not a system built on the basis of interest but a rule of the people, by the people and for the people. Not to cater to interests of any world power. The west has often understimated the openness of new vistas of information in the developing countries especially the poorest ones. Both of these and the ever rising standards of education in the poor countries in the lesser privileged world are also posing a threat. How can a company deny someone with the same level of knowledge and expertise, paying eventually lesser than its counter part in the west.

    Mobility of labor is also becoming more liquid as time passes. Especially call centers and the I.T sector have benefitted most from outsourcing. I wonder how the developed world will bear the challenges posed by capitalism mainly and subsequently by the dose of democracy given to the poor for the last 3 quarters of the 20th century.

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