“We are not here to merely earn a living and to create value for our shareholders. We are here to enrich the world and make it a finer place to live. We will impoverish ourselves if we fail to do so.”  ~ Woodrow Wilson

Adam Smith, a pioneer of modern economics and author of Wealth of Nations (one of the foremost books on free market economics), wrote another book before that. The Theory of Moral Sentiments was based on the idea that intentional virtue and goodwill are the foundation of both an economic system of free enterprise and a political system of a representative democracy. He acknowledged that if individual virtue deteriorated, neither the free market nor a democracy could ultimately survive.

Capitalism refers to an economic and social system in which the means of production are predominantly privately owned and operated for profit. Besides, all aspects of an enterprise are determined through the operation of a market economy. It is usually considered to involve the right of individuals and corporations to freely trade in good and services, labor and land.

Some of the defining features of capitalism are: high focus on individual (ownership and advancement), pursuit of profit (or wealth creation) and efficiency (determined by competition and free market dynamics). While this system has delivered enormous progress for the better part of last century, I believe it needs to evolve to better respond to the social challenges of our time. Here’s why.

Focus on individual progress

The sharp focus on individual economic progress, as one of the core elements of the system, has led to an all too familiar approach of ‘winner takes all’ – with disproportionate and instant rewards for individual success. According to a report published by AFL-CIO, an American labor organization, the top executives in America earned on average 354 times as much as the average worker. The similar figures for Denmark, Norway and Japan are 48, 58 and 67 times respectively. While this approach has produced some of the highest achievers in diverse fields, from science to sports, it has also created numerous social challenges.

The stress created in personal and family lives of individuals, by the pressure to ‘win’ and the fear of being a ‘loser’, has resulted in enormous social costs of health-care, broken families and teenage crimes. According to Stanford business professors Jeffrey Pfeffer and Stefanos Zenios, the economic impact of stress in the US amounts of upwards of S$125 billion a year. The greed of greater wealth accumulation has also led to corporate scandals that seem to breakout with uncanny regularity. Further, the focus on individual success has resulted in poor distribution of prosperity. According to the OECD, the US, the poster child of capitalism, is the most unequal society of all industrial nations.

Profit motive

The capitalist system’s overarching goal of profit and wealth creation is presenting similar challenges. GDP as the primary indicator of a country’s progress is rightfully beginning to be questioned. While it well captures the economic progress of the country, it does not fully reflect the impact of the economic policies on the quality of life at large. Despite higher per capita income in the US, the standard of living in many parts of Western Europe is higher in terms of life expectancy, healthcare, financial security, vacation time, quality of public schools and support for the arts.

The UN in 1990 created the Human Development Index (HDI), an alternate measure that captures a more complete picture of social development. Interestingly, the US and the UK stand out among many of the developed nations as countries whose rank on HDI is noticeably lower than their per capita income rank. As against that, for many of the European nations, particularly the Scandinavian countries, and Japan, it’s the opposite.

Limitation of efficiency approach

While efficiency has been an important mantra to optimise resources, what we need today is a drive towards effectiveness. There’s a subtle but important distinction between the two. Efficiency emphasises doing things right – doing them well. Effectiveness prioritises doing the right things – making choices about what’s most important in the first place. Pursuit of effectiveness relies on taking a wholistic view of the economic systems in the context of the biggest social needs of the time.

We thus need a system that goes beyond the limiting pursuit of profit to serving a broader social purpose; one that rewards employment of its principles towards solving bigger social issues – of poverty, wealth distribution, climate change, human development and sustenance; that can judge when growth and wealth is enough, so we can slow down accumulating and accelerate sharing; a system that can balance raising economic standards with greater stability and equality; that acknowledges that relentless pursuit of profit and size, like cancer, is dangerous for the survival of the whole.

Connecting with the human goodness

We need capitalism with a soul. A system that connects with the goodness of human race and, like Adam Smith highlighted, builds on the right intent and virtue. Such capitalism would not only engage the entrepreneurs and employees in meaningful pursuits, it will also contribute to creating a more balanced and sustainable social structure.

At a macro level, socialistic democracies like the Scandinavian countries seem to have something to offer in this direction. At a micro level, over the past decade, it’s promising to note signs of some of these ideas gaining traction. Social enterprises are a great example. They operate with a clear intent to serve society while employing the efficient mechanisms of modern economic institutions to ensure enterprise viability. One of out every four new enterprises in EU now is a social enterprise.

Further, the growing embracement of ideas like the ‘Triple Bottom Line’ that urges businesses to include measurement of social (people) and environmental (planet) responsibilities to their financial results (profit) is encouraging. Likewise, a more conscious capitalism being adapted by some of the new generation start-ups is a positive trend.

Do leave a comment of your perspective on this. Also, would love to hear what you or your institution might be doing towards addressing these challenges.