The Future of Capitalism: Facing the New Anxieties

by Paul Collier

The cities of northern England pioneered the industrial revolution,

In a brilliant book, Jonathan Haidt has measured fundamental values around the world.

The Future of Socialism, by Anthony Crosland, gave intellectual coherence to social democracy in its heyday. It decisively parted company with Marxist ideology by recognizing that, far from being the barrier to mass prosperity, capitalism was essential for it.

The twentieth century’s catastrophes were wrought by political leaders who either passionately espoused an ideology – the men of principle – or who peddled populism – the men of charisma (and yes, they were usually men). In contrast to these ideologues and populists, the most successful leaders of the century were pragmatists.

From the rubble of genocide, Paul Kagame rebuilt Rwanda into a well-functioning society.

In The Fix, Jonathan Tepperman studied ten such leaders, searching for the formula by which they each remedied serious problems.

In a successful society people flourish, combining prosperity with a sense of belonging and esteem.

The Nobel Laureate Vernon Smith saw that The Wealth of Nations and The Theory of Moral Sentiments are built on a common idea: the mutual benefit from exchange. The arena for exchanging commodities is the market. The arena for exchanging obligations is the networked group, the subject of this chapter.

In what is already recognized as a major advance, in The Enigma of Reason Hugo Mercier and Dan Sperber show that reason itself has evolved for the strategic purpose of persuading others, not to improve our own decision-taking.

In all modern societies, political power depends upon very modest levels of coercion and a high degree of willing compliance. Willing compliance takes us back to the sense of obligation that turns power into authority. Without that sense of obligation, power faces only three options. One is to force people to comply by means of effective coercion – the North Korean option. The second is to attempt this option but to provoke reactive organized violence against the state – the Syrian option. The third is for power to recognize its limitations and retreat into theatre: power issues commands that it knows will be ignored, and those commanded find some means of avoiding compliance without causing too much offence. This has been the experience of the European Commission in trying to achieve compliance with its targets of fiscal discipline; only the Finns have never breached them.

Were political power to become concentrated at the global level, people would not willingly comply with its decisions: power would not turn into authority.

Academic opinion now agrees with public opinion. In 2017 the British Academy launched ‘The Future of the Corporation’ as its flagship programme. Led by Colin Mayer, Professor of Finance at Oxford University and the former Dean of its business school, the programme’s central proposition is that the purpose of business is to meet its obligations to its customers and its workforce. Profitability is not the objective; it is a constraint that has to be satisfied in order to achieve these objectives on a sustainable basis.

It transpired that there was a highly efficient way for employees to make money for themselves. This was to commit the company to transactions on which the employee received a bonus, but which exposed the company to the hidden risk of a future loss.

Capitalism gets its name because ownership of the firm is assigned to the people who provide it with risk capital. The rationale is that those who are taking the risk have both the greatest need for control and the strongest incentive to scrutinize the managers. This rationale has, however, gradually diverged further and further from reality.

Britain has been the guinea-pig for an economic ideology. Britain’s banks have steered well clear of involvement in company management. Founding families have shed their shares because of the design of taxation. Legal control of companies is exclusively in the hands of the shareholders, of whom 80 per cent are pension funds and insurance companies. They, in turn, adopt the mantra, ‘If you don’t like the company, sell the shares.’ Their decisions are now based primarily on algorithms within computers, making sophisticated inferences from recent movements in stock prices: around 60 per cent of the stock-market trades are automated. The superstars are the finest mathematical brains in society, devising algorithms of genius to detect patterns of price momentum. What is missing is any direct knowledge of the company, its management, its workforce, and its prospects such as can only be acquired through long involvement with the company.

Many people are rightly outraged that no banking executive went to gaol as a result of conduct during the financial crisis. This is because the behaviour that caused the crisis was not deliberately intended to ruin the company, but reckless. When a motorist kills someone through recklessness, we have a classification for it – manslaughter – which distinguishes it from the crime of murder, which is killing with intent. We need the equivalent crime for all systemically important companies: bankslaughter. The knowledge that, even once retired with a golden parachute, a former CEO could be dragged off the golf course and held responsible for past mistakes would likely concentrate the minds of those in positions of responsibility.

Extreme specialization only becomes productive if different specialists are near each other. So, greater specialization requires larger clusters of complementary specialists, and access to a correspondingly larger pool of potential customers.

A smart mega-firm seeking a new location will organize an auction in which cities bid against each other for the prize of getting the firm. The value of the prize is the gains from agglomeration that will accrue to the city from the new cluster. New research that compares cities that win these auctions with those that lose confirms that these gains are real.

Society after society has had rules, often draconian, designed to force men who fathered children to wed the mothers.’

If the mother has unstable relationships, by the age of nine her child’s telomeres have shortened by 40 per cent.3 To understand the sheer scale of this effect, doubling family income only increases telomere length by 5 per cent.

Forgoing marriage does not lead to maternal empowerment but to maternal enslavement, as women struggle solo to meet two necessary roles.

The main advantage of states over other forms of provision is in those activities that lend themselves to standardization and are more cheaply done at scale.