Capitalism has been embraced in the West for
generations, transforming how societies lived
and worked in the process.
But its time may be running out.
Democratic socialists like Bernie Sanders
and Alexandria Ocasio-Cortez have slammed
the economic system, and even billionaires
like Warren Buffett, Mark Benioff and
Ray Dalio admit the system is failing many.
The conversation about capitalism in its current
form has been so loud that leaders here at
the World Economic Forum in Davos, Switzerland
are questioning its relevance in the world
we live in today. So will we soon see
the end to capitalism as we know it?
Capitalism is defined as an economic, political
and social system in which property, business
and industry are privately owned by individuals
and companies, not the state.
This means capital assets – like land, machinery
and buildings – can be purchased by private
individuals or businesses. Companies get
you to work for them by offering wages.
And your investments in a business that’s
doing well can grow.
Capitalism began in 17th century Europe, during
a time when colonial powers including France,
England and Portugal had taken control of
84% of the world.
By the 20th century, the idea had spread through
most of the globe, often with detours and
violent societal upheavals along the way.
Even China, once a staunch communist country,
has adopted state capitalism.
This means private enterprise is a large and
dynamic part of the economy, but the government
still sets the agenda and owns
several strategic sectors.
The form of capitalism we're most familiar
with today is known as shareholder capitalism.
This concept has been embraced by the world’s
business leaders for decades.
The main idea?
Make money for your investors.
The theory originated from American economist
Milton Friedman in the 1970s.
He argued that maximizing profits for shareholders
should be a corporation’s only objective
– while still following the law of course.
Corporate boards overwhelmingly took on
the message. It made sense at the time.
American companies had become
bloated and unprofitable.
Shareholder activism became a movement, and
leaders like Ronald Reagan and Margaret Thatcher
stood behind it. The fall of the Soviet Union
solidified the message.
The mantra became: ”Greed is good.”
Many economists agree this form of capitalism
had its advantages.
Hundreds of millions of people benefited during
the following decades, as profit-seeking businesses
opened up new markets and created new jobs.
But now, more and more voices are saying we’ve
gone too far in the other direction.
Critics of shareholder capitalism argue the
system has had three major side effects.
They say it’s harmed the environment, driven
inequality and weakened economic growth.
Climate change has been a hot topic for decades,
but the rise of 17-year-old Greta Thunberg
forced world and business leaders to pay attention.
In August 2018, she skipped school and camped
outside the Swedish Parliament to signal that
more needed to be done to combat climate change.
Thunberg’s demonstration galvanized her
peers into action, setting off a wave of protests
outside parliaments and city halls worldwide.
Some environmentalists argue prioritizing
profit has encouraged risky short-term behavior,
like drilling for fossil fuels.
This has subsequently damaged the planet,
and the effects are becoming glaringly obvious.
Between 1993 and 2016, Greenland lost an average
of 286 billion tons of ice per year,
while Antartica lost 127 billion tons.
Then there’s increasing inequality.
Inequality between nations has actually decreased
as countries like India and China embraced
capitalism and free markets.
But inequality between the rich and poor within
nations has become much worse.
Boards used executive pay to align their CEOs’
decisions with shareholder interests,
and we’ve seen their earnings balloon as a result.
Since 1978, CEO compensation has grown 940%.
The typical worker, on the other hand, has
only seen their compensation grow by 12%.
Take Amazon for example.
Its founder Jeff Bezos is the
richest person in the world.
At the same time, the tech giant has faced
multiple accusations and reports of poor pay
and working conditions for its warehouse workers.
And it’s not just in the United States.
Globally, the bottom half of adults account
for less than 1% of the world’s wealth,
while the top 1% owns nearly half.
While many may argue this disparity is unfair,
some go further and say this obsession with
profit is actually slowing economic growth.
Even the chief executive of BlackRock, the
world’s biggest money manager, agrees.
In a letter sent to the CEOs of the world’s
biggest companies, Larry Fink said the pressure
to keep share prices high has led to executives
“underinvesting in innovation, skilled workforces
or essential capital expenditures.”  The bottom line?
He says businesses are sacrificing long-term
value for short-term financial gain.
And as the rich get richer, less money is
getting spent and spread throughout the economy.
In 2019, the rich cut down their spending
on everything from homes and art to jewelry
and retail, sparking fears of a trickle-down
recession from the top.
The average consumer, on the other hand, is
more likely to spend their earnings, and drive
economic growth as a result.
These factors are helping to fuel the backlash
against capitalism as we know it.
This poll in the U.S. found only about 1 in
5 of 18-34 year-olds have positive feelings
about capitalism, with most responding neutrally
or even negatively to the concept.
This change in sentiment may explain why even
some of the one percent are beginning to question
the traditional definition of capitalism.
Enter conscious capitalism, also known as
stakeholder capitalism or inclusive capitalism.
The buzzwords all convey something similar
– an economic system that aims to achieve
more than just shareholder profit.
It calls for corporations to also consider
how their decisions will affect other stakeholders,
including their staff, community, collaborators,
governments, consumers and suppliers.
For example, an oil company needs to also
acknowledge the finite nature of fossil fuels
and their impact on the environment.
Or a retail fashion brand should also be mindful
of its supply chain and workers toiling away in factories.
Here in the Swiss Alps, the World Economic
Forum has launched a new Davos Manifesto as
it celebrates its 50th anniversary.
It sets ethical principles it hopes will guide
companies moving forward.
WEF calls for businesses to tackle corruption,
prioritize human rights, advocate for a competitive
level playing field and pay their share of
taxes.
Apt as a Dutch historian scolding billionaires
for not paying their fair share was one of
the conference’s viral moments.
We've got to be talking about taxes.
That's it. Taxes taxes taxes.
CEOs in the private sector have already started
showing their support.
In August of 2019, the Business Roundtable,
comprising the Chief Executive Officers of
nearly 200 major U.S. companies, declared
maximizing shareholder value was no longer
the main focus of their corporations.
Wall Street is also embracing sustainable
investing, which takes environmental, social
and corporate governance factors into consideration.
According to the Global Sustainable Investment
Alliance, these investments grew to more than
$30 trillion in 2018.
And more and more enterprises focused on social
good are springing up by the day, including
Patagonia and TOMS Shoes.
But is this a load of talk and no action?
Skeptics say stakeholder capitalism is just
a big PR stunt, something the titans of industry,
tech and finance are doing to save themselves.
And shareholder capitalism’s advocates say
having too many objectives means there is
no true north for companies, meaning the system
will eventually fail.
So is capitalism dying?
If the conversation here at Davos it to be
believed, the answer is no.
It’s simply evolving.
But whether something like stakeholder capitalism
can truly take hold – remains to be seen.
