Opinion

The Great Debate

Capitalism is evolving, but into what?

By Christopher Meyer and Julia Kirby
February 15, 2012

This is an excerpt from Standing on the Sun: How the Explosion of Capitalism Abroad Will Change Business Everywhere, published this month by Harvard Business Review Press.

Like any “ism,” capitalism is a social construct; capitalism is only a term for what capitalists tend to believe and do. Beyond a few fundamentals—that it puts faith in markets as the best way to allocate resources, that it depends on private ownership of property, that it features mechanisms for accumulating capital to fund endeavors larger than individuals can undertake alone—very little about it is set in stone. This is why we often hear phrases suggesting different styles of capitalism: “capitalism with Chinese characteristics,” for example, or “Northern European social capitalism.” No surprise, then, that capitalism is subject to change.

And what’s behind that change? Again, at the theoretical level, it’s easy to surmise. Like any adaptive system, capitalism is nested in an environment, so any substantial change in that environment alters what it takes to thrive. It’s the same basic phenomenon as in nature: when the insect population of the Galapagos moves on to new flowers with a different shape, the beaks of the finches evolve in turn.

That the environment of global commerce is undergoing major change is no secret. Advancing technology, for one thing, constantly reinvents the context in which commerce operates. Demographics, too, have an effect, as the generations raised with new technological capabilities begin to fill positions of power. Most strikingly, the very geography of capitalism is shifting. With each passing year, emerging economies account for a larger proportion of global GDP; from 2004 to 2009, they accounted for almost all of the world’s GDP growth. Patterns of consumption are being upended as global standards of liv­ing rise; India’s middle class is now bigger than the entire U.S. popula­tion. Americans and others in the developed world have long fretted about job losses and other social implications of this huge and ongo­ing shift. But the impact of emerging economies will go beyond what anyone is talking about. It isn’t simply that capitalism will increasingly happen elsewhere. It’s that, taking root in different soil, capitalism itself will grow into something new.

Capitalism doesn’t evolve only in theory. The most cursory review of economic history shows how much it has changed in practice. The rules shift constantly. For example, when Great Britain was the epicen­ter of industrial capitalism, it was understood that a business founder who borrowed capital and then went belly-up should be shipped off to debtor’s prison—or worse, Texas (before air-conditioning). But U.S. capitalists more disposed to second chances later rewrote those rules, creating bankruptcy laws that encouraged entrepreneurial risk taking. The system morphed again with the introduction of limited liability, which allowed firms to shoulder the risk of large-scale manu­facturing and, in doing so, gave rise to monopolies (an eventuality no one had worried about before). Even rock-solid assumptions—such as the assumption that currencies must be backed by precious metals—have been tossed aside as trade marches on. These are only a few, top-of-mind examples of ideas that cropped up locally, took hold, and changed capitalism globally.

At a more fundamental level, when production shifted from agri­culture to industrial production, the theories of economics changed profoundly, because financial capital gradually overtook land in impor­tance. As information—inherently not a scarce resource—becomes the most productive resource, economics will change again.

We’re convinced therefore that we’re on firm ground with our thesis: capitalism evolves, and even now it is evolving into something new. The question is, Into what?

To know that, it’s necessary to question some seemingly central capitalist aims—because it was the old environment that gave rise to them—and look at things from a new vantage point. That is why we call our book “standing on the sun”—a reference to taking a new perspective. The phrase comes courtesy of Richard Morley, an MIT physicist who has made so many original contributions that a prize awarded by the Society of Manufacturing Engineers has been named for him. Once in a conversation about how innovation happens, Morley said to Chris, “In order to see the solar system as it is, Copernicus had to be standing on the sun.”

Morley meant to underscore how hard it is reexamine a model in which you are situated and one that you believe to be working quite well. Standing on Earth, it was easy for pre-Renaissance scholars to believe they occupied the center of the universe and to persist in believing so even as evidence mounted that should have compelled them to rethink that position. As the instruments used to study the night sky became more and more powerful and as astronomers began to communicate across larger distances and share their observations, that central assumption forced their calculations into contortions. Planets showed themselves to be capable of anomalous retrograde movements, frequently deviating from the paths that mathemati­cians had plotted. But rather than question the basic model, astrono­mers added layers of complexity to it, positing epicycles and deferents within orbits—whatever it took to give their geocentric model the power to predict the movement of heavenly bodies.

Then came Copernicus’ hypothesis, and workings that had seemed impossibly complicated suddenly became elegant.

By analogy, today’s capitalists look around them, see anomalies, and struggle to incorporate them into the model they have embraced as true. What are some of the messy parts being shoehorned into this Ptolemaic version of capitalism? The value of corporate social respon­sibility (CSR), for one thing, is an idea few can bring themselves to deny but one that clashes uncomfortably with theories of capital mar­kets. Open source initiatives, for another, seem to flout all the phys­ics of economic motivation but continue to gain force. Still another anomaly: venture philanthropy, which can’t be reconciled with the laws of profit pursuit. Nonetheless, happening.

Our argument is that, with a shift in perspective, such phenomena cease to seem aberrant and instead align with the logic of the system. It requires only a belief that capitalism can evolve and center on new pursuits. Imagine, for example, that something most people con­sider to be the core of capitalism—competition—is actually not so central. Shift your vantage point so that innovation holds that pride of place, and suddenly initiatives like Wikipedia don’t seem so unlikely. Competition, still very much part of the system but unseated from its central point, moves over to allow for collaboration. Likewise, what if the pursuit of financial gain is not really the heart, much less the soul, of capitalism? What if it’s really centered on the pursuit of value?

That’s a formulation that, again, does not reject financial profitability but allows it to sit easily beside the pursuit of other kinds of gains.

Comments
10 comments so far | RSS Comments RSS

Capitalism is changing considerably less than the USA is changing.

Capitalism is still about markets, is still about creating and controlling businesses and cash flow, is still essentially the beast it has been for the thousands of years of its existence.

America is apparently not going to be the ethnically and racially egalitarian society it presumed it would be. The USA is divided less than Austria-Hungary once was, but it is still very divided and becoming more so. No matter what those in power in Washington desire, each ethnic and racial group in the country is developing its own rules about capitalism, with different rules for members of their group and for outsiders. Increasingly, being a shareholder in a corporation means less than being a member of the group managing the corporation.

How this will all work out, and at what rate, is difficult to predict. But it seems clear that mostly uniform ethnic and racial groups will cluster around particular “capitalist” organizations which have specific ethnic or racial identities. Shareholder capitalism as envisioned by stock holding and stock exchanges is fading and becoming more meaningless.

Posted by txgadfly | Report as abusive
 

Capital will continue to be important from now until kingdom come. Capitalism, the belief that capital is the single most important thing in business (my definition) will have to grow a conscience. It will be forced to recognise a new force – the force of individual, in the same way one-man-one vote does. They need to learn to work together – then we will have a better society.

Posted by BidnisMan | Report as abusive
 

What assumptions do the various models of capitalism make about human nature?
Is human nature different throughout the world and does it really evolve?

Posted by Alistair2 | Report as abusive
 

Monopolies, ‘that no one was worried about?’ I would call the writings concerning the effects of monopolies upon modern industrial life of Karl Marx/ Fredrick Engels worisome. Authors don’t usually offer ‘manifestos’and inspire continents to rise up against all they have ever known. Pior to Marx, the growing influence of capital cartels effected kings as well as peasants and workers and was the subject of the day. Early 1800′s, European Utopian writers offered their early concerns and solutions regarding monopolies. They were a subject not far from anyone’s mind or daily routine.

Posted by Kingsago | Report as abusive
 

@tsgadfly

Do you elaborate somewhere on those very interesting ideas, or have references? Thanks.

Posted by xcanada2 | Report as abusive
 

What a wonderful insight into today’s apparent chaos! In one page this excerpt accomplishes intellectual miracles!

In a world that has painfully experimented wildly and painfully over many generations with economic systems based on tribes/groups, monarchs/feudalism, democracy, imperialism, communism, socialism and capitalism, the sole constant is the strengths and weaknesses of human character. As Walt Kelly’s Pogo once said: “We has met the enemy and he is us!”

Capitalism has provided the most predictable and reliable means with which to focus and harness the latent energy of individual intelligence, hopes and dreams to improve the standard of living for whole societies. Like knowledge, as “capitalism” adopted by more and more societies, it may well look different; and yet still offer it’s limitless bounty to those who have necessary understanding and persistence.

On the most fundamental level, Capital is the necessary energy of any advanced society. The shift from an agri­cultural society to an industrial one was harsh and widespread because the location and skills of human resources were so fundamentally different.

The “driving force” did not change and human resources did not change, but the increasing efficiency possible by an economic tsunami raised far more boats than it sunk. The lives of average citizens are today far more than the earlier “standard” of mere subsistence and procreation of prior history.

It is not yet widely perceived that our present transition from an industrial-based society to an information-based society is the source of our apparent economic chaos. “Standing on the sun” is only possible for those with the foresight to first make some asbestos shoes.

Our “movers and shakers” DO “…look around them, see anomalies, and…” adapt, much as does the chameleon. This ability is essential to their survival in their environment.

We are at a unique point of history where monopolies, for the most part, have been rejected. “Vulture capitalism” will continue to give way to “corporate social respon­sibility (CSR)”, “open source initiatives”, “venture philanthropy” as “value” replaces “financial gain as our fundamental human motivation.

We live in interesting times, and I shall read this book!

Posted by OneOfTheSheep | Report as abusive
 

Capitalism – in fact all economic systems – seem to need to “buy cheap and sell dear” and they weren’t/aren’t shy about using people as merchandise. The Afghans are still selling girls and bonding boys. I US influence is really only teaching them to get rich quick and to get their cash and themselves out as fast as they can.

They will have a problem, as noted by the authors, of doing that with information. It tends to become dated very quickly. And the upper strata of society always has a way of making it seem they know so much more than the average man. They can be bamboozled just as easily as the poor man (Madoff, Corzine etc.) but they need to hide their mistakes, especially from each other. Sun Gods don’t like to look human. It’s bad for business.

Investor information always seems to be something that one must subscribe to to see, and the man or woman who wants to succeed over all others will not stint at excluding as many as possible from the information.

I received a flyer from the Columbia School of Architecture and Planning recently advertising a discussion panel. in order to participate on the panel the school wants from $1000 to $15000 from participants. They are not asking for merit but for money. That is a big change from the old days. They sued to ask for the participation of known practitioners but now that the building industry is in a slump, they need the cash?

In a few years the difference between capitalism and the old regime of feudal privileges could be a matter of semantics only. I also suspect that the up and coming capitalist middle classes of China and India are going to be ruthless. Why wouldn’t they? We were. They may not be at all polite or self controlled and will become the “ugly Americans” of the 21st century. The middle class I grew up in wasn’t particularly kind to each other and least of all to anyone they didn’t recognize as human, like the East Asian during the Vietnam era. Perhaps they are more forgiving.

For once, I hope OOTS is right that the world will reject Vulture capitalism for more humane and responsible forms of economic activity. It would be a frightening world with billions of very nationalistic Vultures. It’s a pity the last ten years was such a lesson in double-talking and fraudulent militarism in the name of US interests.

BTW – there is no man made material I know of that one could make shoes of, sufficient to withstand the temperatures of the surface of the sun. I think even asbestos eventually melts. But I’ve never tried. Anyone know anyone who keeps a 10,000 to 15,000 degree fire lit anywhere?

Posted by paintcan | Report as abusive
 

Capitalism will evolve as according to previous historic trends. Innovation has always been central to capitalism. Innovation is fueled by the competition of individuals to have control over creativity, uninhibited self expression/individuality, property ownership, privilege or even power. Wikipedia is Britannica on-line or an on-line encyclopedia that can be accessed at one’s personal leisure either at home or at a library. Capitalism does not evolve when goods and services are repackaged creatively. However, Warren Johnson’s book, Muddling Towards Frugality, lends some insight regarding how scarcity and over population, the pressure of an ecosystem, forces an economic system to actually change. Agricultural societies faced competition by hunters who frowned upon the work of farming. However, the hunters way of living changed thus laying the foundation for capitalism to be born.

In 2050 the demographics of America is predicted to change. Will the foundation of a new economic system be layed?

Posted by houseofvespucci | Report as abusive
 

INNOVATION! VALUE! Yes, that is the future of capitalism.

Already happening. APPLE is the largest publicly traded company measured by market cap in the U.S. Not a bank nor a commodities trading house. Rather, an innovative company that brings value to it’s clients.

Capitalism, or the “free market”, HAS ALREADY CHANGED, EVOLVED AND ADAPTED. Just, some people are not aware of that fact.

There is no doubt that the most profitable ventures of the future will be client-oriented, innovative, value-driven companies to their core.

Posted by YESSSSS | Report as abusive
 

Copernicus was standing on shoulders of Aristarchus of Samos, whose seminal on work heliocentrism work he noted. It seems Richard Morley needs a decent education.

Morley to Chris, “In order to see the solar system as it is, Copernicus had to be standing on the sun.”

Posted by maltadefender | Report as abusive
 

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