A Conversation Rebecca Henderson – Professor, Author and Authority on Reimagining Capitalism

Rebecca Henderson

Free market capitalism is one of humanity’s greatest inventions and the greatest source of prosperity the world has ever seen. But this success has been costly. Capitalism is on the verge of destroying the planet and destabilising society as wealth rushes to the top. The time for action is running short.

Rebecca Henderson is an economist, and one of the world’s most influential thinkers in economics, psychology, and organisational behaviour. She is the John & Natty McArthur University Professor at Harvard and for more than thirty years, has worked with some of the world’s largest organisations around purpose-driven capitalism and the role that business leaders at every level can play in reimagining our current system. In her seminal book, Reimagining Capitalism, she debunks the worldview that the only purpose of business is to make money and maximise shareholder value. She shows that we have failed to reimagine capitalism so that it is not only an engine of prosperity but also a system that is in harmony with environmental realities, striving for social justice, and the demands of truly democratic institutions.

In this exclusive interview, I spoke to Rebecca Henderson on whether our system of capitalism is broken and what can be done to re-imagine it for a better future.

Q:  What characterises capitalism?

[Rebecca M. Henderson]: There are two central elements in capitalism. The first is a reliance on markets to allocate and price resources, and the second is private ownership as the means of production. The Chinese of course have adapted their own model of state capitalism where the state owns the means of production, but they still use the market to allocate and price. When most people speak about capitalism, they are referring to the conventions of US capitalism.

Q:  Is capitalism broken, who can fix it?

[Rebecca M. Henderson]: Capitalism has been an unparalleled source of freedom and prosperity. It has generated growth and progress in ways that our grandparents could never have imagined- so I’m a huge fan. However, capitalism isn’t working for many people and has created horrible environmental problems. Climate change is of course the poster child, but we’re poisoning the oceans, poisoning our water supplies and soils, and depleting the limited resources of our planet.

In the last 20 years, the gains of our incredible productivity growth have been largely flowing to the top 10%, 1% and 0.1% of the population. We have millions of people right here in the USA who are very angry- they don’t think their children will have a better life than they do… they haven’t seen a real increase in their incomes in 20 years… it’s just not working, and that’s dangerous. When an entire economic system is no longer delivering as promised- its’ very legitimacy gets called into question, and that’s when then darker political currents emerge.

The easy way to answer these problems is to see them as public-goods problems that must be addressed through the political process. It’s not obvious to say ‘well, capitalism is broken, firms should do something…’ The obvious next step takes us to the realisation that that our political system is broken- the markets have too much primacy- we need to rebalance our system with a strong transparent democracy, capable government and a strong civil society. We focus so much on this dangerous desire for shareholder value, and it’s making our problems actively worse. If I tell you as a businessperson, that your moral duty is to increase profits and that to do anything else is to betray freedom and prosperity, what do you expect will happen? Imagine you’re the CEO of an energy company- you would actively fund climate denialism and those politicians who are willing to make sure we don’t have climate regulation. That may (20 years ago) have maximised your shareholder value, but it definitely wouldn’t increase your freedom or prosperity. Maximising profits only increases social welfare when markets are genuinely free and fair… when prices reflect real costs… when there is full information and when the rules of the game are set so that competition is free, there’s entry and exit, and that everyone can play.

Some of our markets are grossly distorted. $10 of coal-fired energy causes at least $8 of harm to human health. That’s billions of dollars of cost to the economy, and millions of deaths. Research shows that $10 of coal-fired power generates toxins, mercury, lead and particulates causing at least $8 of harm to human health and at least $8 of climate change. So, for $10 of energy, we are causing $16 of damage- when you have markets which these huge distortions, why should we believe that we could, or maximise, welfare.

The issues around shareholder-value and competition (monopolies, collusive oligopolies) are out of the public-eye, are highly technical, and yet- can have significant sway. When you can write the rules of the game to your own advantage, it’s not a free market.

I’m not a socialist- I’m a die-hard capitalist- and I want to reclaim capitalism because it’s the only solution to the problems we face. We need to generate millions of jobs because our population is growing, and industries are being dislocated. We need a thriving capitalist sector to create all those new jobs, to fix our environmental problems, and build a better world for all of us.

Q: What’s the business case for reimagining capitalism?

[Rebecca M. Henderson]: This is the killer question. Capitalism is broken, but if you run a firm- you’ll get fired by your investors or consumers if you don’t run an effective business, so what’s the economic case to reimagine capitalism?

Imagine for a second- that you owned every firm on the planet. Through some form of magic, you maintain competition, but you own everything. For someone like the Norwegian Sovereign Wealth Fund, or the Japanese Government Pension Investment Fund- GPIF (who own the equivalent of 1% of the world’s economic value)- it becomes your fiduciary duty to address the problems of climate change and inclusion- they are the biggest risks to the long-term economic health of our economies. In the case of GPIF, they have a duty to be paying pensions for the next 50-100 years, they can’t diversify climate and inequality risk out of their portfolio, and thus they have to address these questions. I was recently speaking to a group of businesspeople from Orange County, California. Around half the population is now Hispanic, and the educational system is failing many citizens of the area. These business owners realised that if they didn’t invest collectively to improve education locally, they’d have nobody to hire. They worked together to improve the local educational system in a concrete way through improving schools, providing apprenticeships, working with colleges and improving the talent pipeline. They have a collective interest- and whilst they could, in theory, free ride on the ‘other’ making investments- the reality is that they know it’s all of them, or none of them. These collective cases are everywhere once you start looking. For example, nearly all the food companies can see that they have to stop deforestation- it’s a fundamental threat to the long-term security of the food supply which threatens them all.

Many individual firms also find that there is a business case to making change. For most businesses, investing in reducing energy use by 30-40% gives a positive NPV. Walmart took an additional $1billion to the bottom line by improving the efficiency of their trucking fleet. We have lots of data to suggest that firms that run ‘high road’ employment systems (where you pay people more and treat them with more dignity and respect) improves business, and everybody benefits. Zeynep Ton at MIT runs the Good Jobs Initiative where she’s working with retail stores and discovered that you can pay people 50% more and run a business which is not just highly profitable, but which customers prefer.

Q:  How should government play a role in a well-functioning capitalist economy?

[Rebecca M. Henderson]: Markets thrive when we have a strong, transparent and capable government who are market friendly. That [government] form the ground-rails for the market.

Governments can also intervene to ensure pricing works. Imagine I am a clean-tech entrepreneur- here I am trying to build the next generation of solar or battery-storage. Wouldn’t it be useful if you couldn’t sell coal-fired electricity or $10 and- instead- had to sell it for $26 because of its’ real costs? Another example is in food… Agriculture accounts for around 10-12% of the world’s greenhouse gas emissions, and beef is a very large proportion of that. As an entrepreneur, you may be able to craft an amazing plant-substitute or lab-grown product, but yours will be more expensive because the agricultural sector is not paying for the environmental damage their beef product is creating.

You also see this in labour rights. One of the things we’ve discovered in the pandemic is that many essential workers- people we utterly rely on- do not have health insurance, do not have sick-pay and have not been able to save enough to even stay at home if they get sick. We need to create a level playing field.

Purpose driven firms are raising the ceiling and are exploring what they can do to make a difference but we need government to raise the floor so that bottom-feeders can’t make a bunch of money by behaving badly and causing damage. A really obvious fix is to set a carbon price, so that people can’t dump their garbage on the rest of us, for free.

I say we need a carbon price so people can’t dump their garbage on the rest of us and not pay for it.

We’ve been strip-mining the planet- putting the benefits in our bank account and leaving the damage to our children. We’ve been benefitting at huge human cost. Think about the opioid crisis- we have hundreds of thousands of people who have died. It’s not just the pharmaceutical companies who profited, but people who turned the other way as entire communities collapsed… apparently this crisis wasn’t their job, it wasn’t their business…

Q: Do we need to think differently about the timeframes and metrics we apply to our economy?

[Rebecca M. Henderson]: I’m not advocating against the focus on growth, efficiency or productivity. Those measures are important- but we need a portfolio of metrics. We can want growth, just not at any cost. Systemically we also need to measure more than GDP; countries are in the position of measuring only cash-flows, they’re looking at income statements as if they don’t have a balance sheet. When we cut down trees, underfund schools and healthcare, fail to repair infrastructure, we’re ignoring our balance sheet as a country.

Using a basket of measures is a net positive, it can trigger growth and innovation.

Our society has become very short-sighted, we’ve legitimised focusing on me and now – that’s how CEOs are paid! They have a massive interest in making firms profitable this quarter maybe up-to a year, and that makes them very rich. We are pushing to get firms to think long-term, out to 4 years! We humans have a discount rate of above 20%. If you take credit card debt on at 18%, the price of your future is hardly anything. Having a clean ocean or liveable planet 50 years from now isn’t worth anything because society wants everything now. This is really a question of what our discount rate is as a society- how do we think about the value of the future.

Most humans have an intuitive sense that it’s not OK to destroy the future for the benefit of now. Morally we understand that we must value the future, but we’ve got a world in which everything is pushing us to focus on next week, next month, next year.

Can you imagine Facebook thinking deeply about where we want to be as a society in 10-15 years rather than the sugar-high of short-term business growth? There’s also another important factor here. If you (as a business) are sufficiently large where you are extremely important, and competing with you is hard, there’s a public interest in how you are run. Healthy capitalism is free markets balanced by the public interest- and a firm like Facebook is very hard to compete with as switching costs are very high, network externalities are strong, and they have huge financing. That doesn’t feel like a free market anymore, and we’ve seen enough people leave Facebook writing memos saying ‘I think I just destabilised the government of X… I didn’t mean to do it, but I think that’s what we just did…’ I was recently talking to a very senior businessperson in the Philippines. He said, ‘do you know what’s gone wrong? Facebook has destroyed our democracy…

I sympathise with businesspeople; I have more than 25 years of experience on major public boards. I sympathise when they complain about regulation, about taxes, but you know what… it’s like going to the gym, it’s not fun but you have to do it. We need to look towards the formation of inclusive institutions that include everyone in the decision making and focus on the wellbeing of society. The alternative to inclusive institutions is extractive institutions which extract and concentrate power and resource in the hands of a small elite – we sometimes call it crony capitalism, sometimes call it right wing populism, sometimes left-wing populism… but they all share the idea that a small group controls power, and that has a terrible track record.

Q: What has the pandemic taught us about capitalism?

[Rebecca M. Henderson]: We were running society as if nothing could ever go wrong- and the pandemic has reminded us that things can go really, really wrong. If the pandemic was a pop quiz, climate change will be the final exam and there’s no vaccine for that.

The pandemic has also deeply reminded some CEOs of the level of responsibility they have to their employees- they are making literally life and death decisions right now, it’s no longer just words and value statements.

It has also shown us that we cannot run a society without a transparent democratically, accountable and capable government. You need government that is responsive, legitimate and rooted in society.

We have also seen a deep accentuation of privilege. As we speak, here in the USA we have over 290,000 people dead, more than 3,000 dying each day. Rates of death are much higher amongst communities of colour and those at the bottom of the income distribution. Meanwhile those of us with steady incomes and desk jobs are doing just fine – Here I am, for example, sitting in my lovely second home in New Hampshire where I get to work remotely, and life is okay! As all this is happening, larger companies are getting larger and so many small companies are having troubles.  There’s a serious risk we’ll come out with an even more distorted society.

Thought Economics

About the Author

Vikas Shah MBE DL is an entrepreneur, investor & philanthropist. He is CEO of Swiscot Group alongside being a venture-investor in a number of businesses internationally. He is a Non-Executive Board Member of the UK Government’s Department for Business, Energy & Industrial Strategy and a Non-Executive Director of the Solicitors Regulation Authority. Vikas was awarded an MBE for Services to Business and the Economy in Her Majesty the Queen’s 2018 New Year’s Honours List and in 2021 became a Deputy Lieutenant of the Greater Manchester Lieutenancy. He is an Honorary Professor of Business at The Alliance Business School, University of Manchester and Visiting Professors at the MIT Sloan Lisbon MBA.