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‘Capitalism faces planetary & social risks today – it must be reimagined to strengthen itself’

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Economist Rebecca Henderson teaches at Harvard Business School. Henderson spoke to Srijana Mitra Das about the private sector’s role in building sustainable ecologies and societies — and a new idea of capitalism:

Your book ‘Reimagining Capitalism in a World on Fire’ argues we must re-envision capitalism itself — why?
Capitalism needs to be reimagined because of two intertwined issues. Firstly, it’s not been functioning well for a significant majority of the working population in many countries. Secondly, it is failing to deal with our major environmental problems, including, most prominently, climate change. With both a planetary risk and a large number of people feeling left out of the system, capitalism is in a precarious position.

Would you say Milton Friedman’s free market business doctrine is now effectively over?
When Milton Friedman said the social responsibility of a business was only to increase its profits, he was in a society where government was setting the rules of the game. If problems like climate change are being taken care of by measures like carbon dioxide being priced, so that a firm cannot throw it out of the window for free, if governments are strong and ensure that everyone has an opportunity to participate in the market equally, then perhaps it makes sense to say this.

But, without this, the free market is not really the free market — a free market can only maximise prosperity when prices reflect real costs. If we’re not pricing the damage climate change will cause, and the health damage fossil fuels are causing right now, then prices will not reflect real costs. That’s not a free market.

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Why do you say working for social purpose is actually beneficial for capitalism?
One reason is purely moral — when capitalism is broken in these ways, firms which believe in its basic moral commitment to freedom, transparency and fairness have a duty to try and build up the institutions which ensure these opportunities. But there is also a strong economic case — it’s extremely dangerous to the long-term health of our economies to leave climate change unchecked and confine people to the margins of societies where they cannot fully participate in capitalism. One is a risk. The other is an opportunity. If we let climate change go unchecked, the risks to the financial and real economy are enormous — it will be very hard to make money if our coastal cities are under water, there are major droughts and floods and agricultural systems experience enormous stress. That scenario is not good for business. On the other side, including the disadvantaged in the economic system is a huge impetus to growth.
There are also business opportunities in solving these problems — Elon Musk’s Tesla is one example, but many firms are building business models around mitigating climate change, including solar and wind energy businesses, plant-based diet ventures and water conservation groups. The private equity firm KKR puts experts into every firm it buys to reduce energy and water use. It believes these investments aren’t just good things to do — they yield a 16%-17% rate of return. Walmart dropped a billion dollars to its bottom line by improving the efficiency of its trucking fleet. Walmart has also been supporting its suppliers in taking a gigaton of carbon out of its supply chain on a profitable basis.

Also, as research shows, adopting a ‘high road’ employment system, where you pay people a living wage, give them decent benefits, treat them with respect and give them the autonomy and tools to work with purpose and mission, significantly increases the productivity of firms. This benefits not just knowledge-based, high-end white-collar firms, but also blue-collar jobs at the wage pyramid’s base.

So, there is a strong business case to address these problems.

Can firms doing so be evaluated?
There are three possible ways — the first is via other firms in the industry. We’re seeing this in food and textiles where there is no global body capable of monitoring worldwide supply chains. So, firms are attempting to monitor each other through NGOs. Third-party measures set by NGOs create the standards to which a firm subscribes, which are then audited.

Investors are another monitoring force — there is a collective case here as for asset owners holding very large portfolios, climate change and institutional collapse are not risks they can diversify away from. There is therefore an important group of very big investors who control an extremely large portion of the world’s financial assets pushing firms in their portfolios to address these problems. We’re thus seeing Climate Action 100+, the Task Force on Climate-Related Financial Disclosures and asset managers like BlackRock encouraging groups to make progress against climate change.

But the most reliable enforcer is a competent, transparent, democratic government that has broad legitimacy and is held to account by strong civil society. A carbon tax, a minimum wage and decent labour legislation are all essential measures to address the intertwined problems of climate change and social inequality.

A good government should be the arbiter of how firms perform on these.

Views expressed are personal

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