Capitalism’s shortcomings

Introduction and welcome

I am proud to introduce ECGI’s new blog which has as its first theme: Responsible Capitalism. This will be an important theme for ECGI research in the years ahead. The issues of sustainability, inequality and exclusion create new challenges for capitalism and corporate governance. Stimulating capitalism to act more responsibly is an effective way to make markets, companies and governments respond to today’s ESG challenges while safeguarding creativity, innovation, and climate-compatible growth. ECGI’s global network of top-level academics, influential policymakers and concerned business leaders is ideally composed and exceptionally capable of discussing the fundamental challenges facing global capitalism today and tomorrow. A collection of blog submissions are an ideal format to begin to diagnose these fundamental issues and to suggest avenues of research along with remedies and policies to design governance systems that make capitalism behave more responsibly.

Our aim should be to acknowledge the shortcomings and failures of capitalism and to look for ways to improve it

Capitalism is a system for the creation and distribution of wealth. Like any human product, capitalism certainly does not work perfectly. It has many shortcomings. But economic history suggests that per capita income levels in countries were capitalism is the dominant system are higher and grow faster over a longer period than in countries that have tried other systems. Other systems, certainly large ones, have not fared better on ecological measures. Our aim should be to acknowledge the shortcomings and failures of capitalism and to look for ways to improve it.

Capitalism has at least four major shortcomings.

• First, capitalism leads to inequalities. Although it is probably the case that capitalism improves economic growth and raises average income levels it is certainly not clear that under capitalism income inequality declines and that every citizen benefits from increased growth.
• Second, the capitalist system can be unstable. The many financial crises over the past two centuries illustrate this instability.
• Third, left on its own, capitalism handles ecological issues and sustainability imperfectly. It is not a surprise that short-termism has become a characteristic of modern capitalism and that there are many appeals for sustainability.
• Fourth, many individuals, families and communities do not participate in the capitalist system and are consequently excluded from the wealth creation process. This exclusion happens within countries, as poverty and unemployment levels show, and between countries, as demonstrated by the huge levels of global economic inequality. I believe such exclusion does not take place by design but is, rather, the consequence of how the capitalist system works. The call for measures to make capitalism more inclusive is therefore more than justified.

Making capitalism more responsible means that the capitalistic system must take responsibility for its shortcomings and must develop practices, policies and regulations that correct them. Much of this will be the topics of blog articles and research papers written by scholars, policymakers and business people in the coming months and years. I cannot try to speculate about the ideas that will come forward. But personally, I see two big tracks for capitalism to take greater responsibility for its shortcomings. Other contributions will advocate different tracks.  

Business can take us a long way towards responsible capitalism if it changes its behavior

1. Business must act more responsibly

Business is probably the largest participant of the capitalistic system. It must assume greater responsibility for the shortcomings of capitalism. Business cannot correct all shortcomings. But by changing its behavior it can do a lot for making capitalism more sustainable and improving its inclusiveness. Over the last decades business has started to change its behavior from a reckless profit motive to being concerned about its effect on sustainability and inclusiveness. It has done so by changing products, processes and value chains and by providing training such that more people can participate in the economic process and are no longer excluded. I strongly believe that business can take us a long way towards responsible capitalism if it changes its behavior. Those corporations that have developed a purpose, that are working on the United Nations Strategic Development Goals and that have implemented programs to be ESG-compliant demonstrate that corporate behavioral change is possible. Fortunately, corporations have found support from the many asset managers who have created ESG-compliant funds . This is a first track to make capitalism more responsible.

Regulation will be necessary to deal with the systemic instability of capitalism and sustainability.

2. Smart regulation and taxation.

It would be naïve to solely rely on changes in corporate behavior for making capitalism more responsible. There are too many prisoner dilemmas involved. Further regulation will be necessary in all fields. Regulations are seldom perfect, and they often carry a high cost. But they will be unavoidable because changes in behavior alone will not be enough to make capitalism responsible. The big challenge is to make regulations smart. Smart means that regulations must be effective, i.e., they must reach their goals, and must create value, i.e., the benefits obtained must be larger than the costs they create. Regulation will be necessary to deal with the systemic instability of capitalism and sustainability. To deal with inequality a fair tax code will be necessary.

By underlining this critical research theme with the support of a new blog platform, ECGI is acknowledging that responsible capitalism is feasible and needed. It is taking important steps to move the concept forward for meaningful change.

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Herman Daems is Chair of ECGI and Chair of the board of directors of BNP Paribas Fortis. For similar thoughts see his contribution to Inclusive Capitalism. The Pathway to Action. London June 26, 2015, Coalition for Inclusive Capitalism.

This article reflects solely the views and opinions of the author(s). The ECGI does not, consistent with its constitutional purpose, have a view or opinion.  If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.