Capitalism is broken – but big business could actually help fix it

Capitalism is broken. Inequality has reached levels not seen since the Gilded Age. Social mobility is falling. The novel coronavirus pandemic has highlighted the fact that far too many “essential” workers have no sick leave, no health care and no savings. Climate change remains a clear and present danger.
All too often these are seen as problems that only the government can fix. But my research suggests that the private sector can – and must – play a central role in driving the systemic change that is the only lasting answer.


Many firms believe that their only responsibility is to maximise profits “within the boundaries of the law and ethical custom”. But the bedrock values of modern capitalism are prosperity and freedom, not profitability for its own sake. Genuinely free and fair markets are one of the great inventions of the human race – an unparalleled driver of productivity, innovation and opportunity.
Yet, markets are only genuinely free and fair when externalities – such as pollution – are properly priced, when governments provide the public goods on which true equality of opportunity depends, and when firms can’t fix the rules of the game in their own favour. When the enormous social costs of burning fossil fuels remain unpriced, when those born in the wrong place to the wrong parents have less than half the chance of moving up the ladder than those lucky enough to be born elsewhere, and when the rich shape the rules of the game to their own advantage – then there is no guarantee that markets will generate either prosperity or freedom.
In these circumstances, it is essential that business play a role in rebalancing our institutions. There is a strong collective case for private sector action. It’s going to be hard to make money in a world in which the major cities are underwater, crops are failing, and millions of people are trying to move north. Rising inequality, and the political anger it creates, is destabilising political systems worldwide. Populism can be a powerful force for reform – but when it spills into the fantasy that one person can embody the will of the people and “get things done” it risks sanctioning tyranny. And tyranny has never been good for business.
Co-operating in the interests of the long-term common good is not natural for many firms. But it is eminently possible. A sizeable vanguard of purpose-driven firms is demonstrating that there are billion-dollar businesses to be built focused on solving our environmental and social problems: Tesla is now the most valuable automotive company in the world, Walmart increased its profits by roughly $1 billion a year by redesigning its trucking fleet to use less fuel, and Beyond Meat had one of the most successful IPOs of the last 20 years.


In industry after industry these firms are making the collective case for action. Agreement among the major buyers of beef and soy came close to halting deforestation in the Amazon – progress that is, alas, being reversed by the current Brazilian administration. Collective action by the major apparel buyers has led to some significant improvements in working conditions in many supply chains. In both cases the largest firms in the industry realised that doing the right thing was in their best interests – but that it was only possible if everyone in the industry agreed to do it. It can be hard to pay a little more for sustainably produced beef if one’s competitors are willing to look the other way.
Better indicators for material non-financial performance – so-called “ESG” (environmental, social, and corporate governance) metrics – could be another tool for supporting co-operation. The world’s largest asset owners are “universal investors” – investors who have so much money that they are effectively forced to hold the whole market. The Japanese Government Pension Fund, for example, has about $1.6 trillion under management and owns about one per cent of the world’s equities. The largest asset managers are even bigger: Blackrock has about $7 trillion under management, while Vanguard holds more than $6 trillion.
For universal investors, problems like climate change and inequality are not externalities, but significant threats to future returns. That is why large asset owners are already beginning to work together to push the firms they own for change. Climate Action 100+, for example, counts more than 450 investors among its members, who between them control more than $40 trillion in assets. Material, replicable, auditable ESG metrics could plausibly enable these kinds of investors to insist that every firm in their portfolio begin to make progress against the big problems – potentially solving the prisoner’s dilemma that otherwise holds so many firms back.
Could firms also help to address the political problems we face? Strengthening our democracy will require co-ordinated action – every individual firm has incentives to take advantage of our current weakness – but we already have the kinds of associations that might take a leadership role in partnering with civil society and push for reforms like pulling money out of politics, and actively moving against voter suppression.


I know how unlikely this seems. For far too many people, business is the problem, and the suggestion that the private sector should play a leading role in rebuilding our democracy sounds like an invitation to crony capitalism. But our situation is critical. We must find a better way forward – or we risk losing the whole game.
Rebecca Henderson is the John and Natty McArthur University Professor at Harvard University and the author of Reimagining Capitalism in a World on Fire
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