“The role that business plays in society, and the expectations about the role it should play, has shifted dramatically…” (Tufano et al. 2016)
In a 2016 report “Pursuit of Inclusive Capitalism Business and Approaches to Systemic Change”, Professor Peter Tufano (Dean) Said Business School, and Tony Siesfild, Deloitte Consulting talk about the influential impacts of capitalism and how it has been diluted by misplaced priorities. They frame their thesis this way, “Called to a higher purpose, or sensing that externalities can only be ignored at their peril, many businesses are increasingly open to the notion that they have a responsibility for creating more inclusive economic systems” (Tufano et al. 2016).
This is not as much an attack on capitalism as it is framing a different point of view. The dominant economic theory is neoclassical economics. It assumes that economic agents are rational in their behaviour and that consumers look to maximise usefulness/utility and firms look to maximise profits. The contrasting objectives of consumers and businesses maximising utility and profits forms the basis of supply and demand theory.
Challenging Neoclassical Theory
In the past couple of decades, some of the basic assumptions of the neoclassical theory have begun to come apart. Behavioural economists have significant data with evidence showing that real humans do not behave rationally. Experimental economists have raised intriguing questions about the existence of utility. Empirical economists have identified incongruities suggesting that financial markets are not always efficient.
The macroeconomic model built on neoclassical ideas performed very poorly during the last financial crisis. This view holds that the economy is a structured and constantly evolving, interacting network of highly diverse households, businesses, banks, regulators, and other agents. It is however, a complex, dynamic, open, and nonlinear system that has more in common with an ecosystem than with the mechanistic systems of the neoclassical model.
Capitalism as Creativity
The implication of this emerging view of inclusive capitalism shifts the understanding of how and why markets work, from measuring their distributive efficiency to assessing their effectiveness in promoting creative solutions. As markets are evolutionary systems, the essential role of capitalism is not primarily allocation, but creativity.
Life for billions of people today has not changed dramatically from what it was in 1800 because we distributed the resources of the 19th and 20th century economy more efficiently. It is better because capitalism created the incentive for solving human problems and made those solutions widely available. It is solutions to human problems and not money that define prosperity. A reorientation toward seeing businesses as society’s problem solvers rather than simply as vehicles for creating shareholder returns would provide a better description of what businesses actually do.
Once we understand that the underpinning of capitalism is creative solutions, it becomes obvious that entrepreneurs and business leaders bear a major part of both the credit and the responsibility for creating societal prosperity. The idea of corporate social responsibility is not taking on a “do-gooder” attitude, it is a change in thinking and culture. It requires strategic thought about bi-directional market impact beginning at the top. Examining both what can be gained from a market along with how the market can be sustained and stabilized for the long term is just plain good business. This authentic corporate sustainability requires board leadership in which triple bottom line values become part of the company’s ethos and are thoughtfully integrated into corporate governance practices and strategy.
There are some tenets of connected leadership that can help revolutionise the way companies engage with society. The first is to know your environment. This means more than number projections and competitive market shares. It involves understanding the culture, society, and fundamentals of the economic system. To a point, it means being culturally sensitive. The second tenant is purpose and is the critical test of sustainability in business. This has to do with capital but not exclusively. Building trust in the local market can have tangible and intangible benefits that promote sustainability and profitability. Finally, concerns about social impact and the social nature of business need to be effectively entrenched within the corporate culture. The challenges and paradox of an interconnected “utopia” will become leaderships primary metric of success.