Reimagine capitalism with Rebecca Henderson

Hello, this is me, Erika Stahl von Holstein. And this is Luca de Bielse. Welcome to Reimagined Talks, the podcast that challenges the way we think. Today we're here to reimagine the concept of capitalism with Rebecca Henderson. Rebecca Henderson is a university professor at Harvard. Her research explores the degree to which the private sector can play a major role in building a more sustainable economy. Her most recent book is "Reimagining Capitalism in a Word on Fire," which was shortlisted for the F.T. MacKinsey 2020 Business Book of the Year Award. Perhaps we should start with the most fundamental question. What do we mean by capitalism, and why is it so important? Erika, thank you. It's a pleasure to be here, and that is a great question. Capitalism. What does it mean? It's a huge word that covers a whole variety of different kinds of social and economic arrangements. But I think at call, capitalism is the private ownership of productive assets. It means that individuals own the factories and the offices and the computers rather than the state. And to me, not all capitalism looks like this, but effective capitalism is also characterized by high levels of competition. So for capitalism to work in a way that's going to benefit all of us, it must be that firms are actively competing with each other. So those are the two elements. Firms and individuals own the economy, basically, and they compete like crazy with each other. Professor, what has gone wrong with capitalism, and why a reformed capitalism could amend the problems? Well, let's start by talking about what's gone right. I know this is not at all fashionable. I teach. My students are so angry and afraid and looking at this future and going, you know, this is all capitalism's fault, we should just tear the system down. But I don't think that's right. So I think capitalism has historically been of enormous benefit to the human race. If you look back over the last hundred years, GDP per head has more than quintupled. That's five times as much resources available for every single human being on the planet at the same time as the population of the world has more than tripled. So what capitalism has given us is unbelievable material abundance. This process of competition hooked up to modern science and technology, because of course that's been super important, too, has really shown us how to use resources efficiently. It's fantastic at generating 28 kinds of toothpaste and low-priced food. Ifs, ifs, capitalism is properly controlled. And that, to me, is the issue. So as we look out at the major problems of our time, and let me just pick a couple, we could spend the whole time just talking about what's going wrong, but let me say climate change and environmental degradation, and massive inequality, so let's see. We appear to be about to toast the planet, seems a little eccentric, and most of the new resources from the last 20 years is ending up in the hands of a very few people. So I say capitalism is fantastic, it's made us all rich, but right now it's not making us all rich, it's making few people very, very rich indeed, while there's still lots of people who struggle. So is that capitalism's fault, or is it how we're controlling capitalism? And I'm going to argue that capitalism is the fantastic sin of it, but a horrible must. That we have, and we so general, here I am, privileged white person. In the West, we've developed this form of capitalism that says, just let markets rip, they don't need controlling, let the, you know, I'm here in the US and this is particularly part of the ideology, just let firms do their thing, it will all work out fine in the end. It's not working out fine, and why not? Because if you let firms generate what's technically called externalities, think pollution, right? If firms are allowed to make as much money as they want, but they're not regulated in terms of how many greenhouse gases they emit, or how many chemicals they put into the river, or how they treat their workforce, and the big firms get together and they push wages down and they create these jobs, which are not really jobs. That is not what I think of as the best form of capitalism. That's an uncontrolled capitalism. And if you look at what happened in, notably, Europe after World War II, we had a real balance between democracy and capitalism. A real understanding that the goal of capitalism is not to make profits. The goal is to help us generate a rich and thriving society. That's what it's about. It's about the common good. We have let firms behave as if the sole goal of economic activity is making profits. Profits are a means to an end, not an end in themselves. And if they generate profits by pushing wages to the bottom and polluting our world so much that it looks as though we're going to destabilize the climate, that's not the capitalism we want. So I'm a reformist. I think capitalism is great, but I want to take it back to the kind of capitalism we had in the '50s, the '60s, the '70s when there was a real balance between government and the market. And we weren't afraid to say, no, we need minimum wages. No, you can't do that, because that's not good for the society as a whole. In your book, "Reimagining Capitalism," a word that crops up again and again is the word "belief." And the fact that one of the main problems of today is the way we think, and that we have all the sometimes erroneous mental models to guide us. How do you think that "reimagining capitalism" is also about "reimagining the way we think about capitalism"? Oh, Ericka, we need to change the way we think in so many ways. Still most obviously. We have to move away from thinking that "government is a dirty word" and "democracy" and understand how crucial "democracy" is, and, uh, and stop just being "consolers." I can't speak for Europe, but here in the U.S., so many people have just put their heads down and said, you know, I can make money and have a great life, and the system will be fine. And the system is not fine. When a few people have most of the money, they can actively corrupt the political process, and when a lot of people feel they're losing out, because the economy is geared against them, they get very, very angry, and you see the movements towards political polarization and authoritarianism we see. So one of the ways we need to change our thinking is to realize that, wait, we are the system. We have to stay engaged at an individual and at a cultural level. That's one of the things that needs to change. Secondly, I know far too many business people who mean well. They have good values, they love their children, they're great people, but they don't understand that just making profits in a world in which pollution is not charged for, and there is proper neighbor legislation, and the tax regime has been corrupted, in that world, making profits is not going to lead to a growing economy and a thriving world, so it's not in their best interest to keep doing this. So many business people are like, you know, and I understand, my mother was an entrepreneur, it's hard if you have to make payroll, if you have to run the firm. Now I'm asking business people to say, no, there's a real crisis here, you have to think about these larger issues, it's tempting to say like, no, please, not my job, but it is their job, it's everyone's job. And last but not least, the third thing that really has to change is we have to stop thinking that doing the right thing is going to be too expensive. And that idea is sort of deeply embedded. At the individual level, I know many business people who think that paying their people more and creating good jobs is too expensive and they can't afford it, or that moving to renewable energy or reducing the amount of energy they use by insulating the buildings or reimagining their production processes is too expensive. It's not. It was maybe 10, 15 years ago, it was a little bit pricey to reduce greenhouse gases, we now have a lot of research and I get through this at Harvard, where we cut our greenhouse gases by nearly 40%, all on a profitable basis. So we know that we can do much better and come out economically ahead. One of my favorite examples of this is a guy called Eric Osmondson, who agreed to become CEO of our waste business, a trash business in Norway called Norskes Genvinning. And he found out the first month on the job riding with the garbage trucks that the industry was corrupt. People were just throwing the garbage into holes in and around. And he was a very passionate person. He thought the building a circular economy using garbage as a source for raw materials was a way to really change the world. People around him thought he was a little bit eccentric to be frank. But the first thing he did is he said, we're not going to break the law, we're not going to throw the center holes in the ground, because the law wasn't being enforced for reasons we could talk about, I'm going to do the right thing. Everyone thought, you know, he's going to lose money, he's going to be out of business. Well, it turned out, if you focused on doing the right thing and generated the kind of innovation and creativity and commitment that he saw in his workforce when he decided to really build a business that would make a difference in the world, that not only could you cut costs and there was no need to cheat, but customers would come to you because they don't want to be associated with dirty behavior, that he could build a business model that gave him a very significant advantage in the market by going into recycling, being the first person to adopt that new technology developing economies of scale, he completely revolutionized the waste business in Norway. Now, his company is one of the largest recycling companies in Scandinavia. And I see that kind of example again and again, Toyota's shown us that treating people with dignity and respect, giving them decent wages, engaging them in their work, results in significant improvements in productivity and creativity. My colleague Zane Upton at MIT has shown that teaching, treating blue collar workers, people it's so tempting to treat like cogs in the machine and disposable people, which is a disaster socially and culturally, but it's not necessary. You can run businesses using what I call a high road mechanism and do perfectly well. And by the way, save the planet and the society. You know, that's the third kind of thing that that's a huge way of thinking that we really need to change. And can I have just one more, sorry you got me going on this. So much of our history over the last 40 years has sort of created a belief that humans are just fundamentally competitive and selfish. But don't get me wrong, humans are competitive and selfish and harnessing that competitiveness and that selfishness in competition is a great way to use resources efficiently and generate innovation. But it's not the hone of what humans are or who humans are. Humans are loving and cooperative and focused on the future. If you think of us as family members, as sports players, we are as cooperative as we are competitive. But our conversation has got so twisted by the dominance of the market that we we need to, I think, actively regain that balance. So not just the balance between democracy and capitalism, but also the balance between cooperation and competition. So that people in the boardroom can say, you know, it will cost us a little in the short term. But if we cooperate with everyone else in our industry to stop deforestation, we could make a huge difference to the future of our children. That should be a statement that absolutely people are making in the boardroom all the time. And to be fair, that is starting to happen. I think we're in such a difficult state that recognition is out there. But first of all, this is fantastic and the kind of examples are very inspiring. But are we fast enough? What is the solution to get this kind of change faster? No, we're not fast enough. And I spend a lot of my time working with businesses to try and implement these kinds of changes. I'm very much aware that business alone cannot move at the kind of speed and scale we're talking about and that many business people will say, well, that's nice, Rebecca, but you know, I'm too busy with someone else's job. So I focus on business as a part of the solution. I think it's an important part of the solution. I think having senior business leaders say, climate change is real. Climate change is urgent. We need to make these investments. Having senior business leaders say, we've let wages get too low. That's really hurting not only the people affected, the employees, but it's hurting us. I mean, we have in the US, the CEO of Walmart, the largest employer in the world after the American and Chinese armies. That still blows me away. He's actively raising wages. Now the first time he did it, his stock price dropped 20% because everyone was like, what? Why are you increasing labor costs? But he was able to show very significant increases in retention, productivity gains, who we could hire. So, you know, it's important and I think his example is having widespread effects right across the United States. So I think business can make a big difference. But it's clearly not in us. I think we need a massive cultural, social and political movement to insist that we hold firms to account, that we properly regulate greenhouse gas pollution, that we preserve the ecosystems of the world. You know, we're cutting down all the old gross forests. Some calculations suggest that the forests alone could take up as much as 30% to 40% of the emissions that we're emitting, that they're a huge part of the solution. And yet we're cutting them down for short-term gain, leaving the locals who live by the forest basically impoverished, you know, big corporation comes in, cuts it down, leaves. We should stop that. Like now. We shouldn't be burning coal. It kills millions of people every year. And we have solutions which now are cheaper than coal. When Bill Gates said we needed clean energy cheaper than coal, everyone thought he was, you know, crazy. Now that's what we have in many regions of the world. Renewable energy is cheaper. So we have to insist on this. We need a sense of urgency from all of us. So I sometimes think about this at three levels, personal, professional and political. So personally, what can you do? And I mean you. You need to start talking to your friends like what's going on? What are the problems? What are the solutions? Please consider making changes in your own life, flying less, eating less meat, walking when you can. I'm talking, I suspect, mostly to Europeans for whom this is like, well, yes, of course. But in the US, we've still got to understand this. I'll put some of the panels on your roof, insulate your house. You may think, well, these are just tiny things, but we know from the social psychology that people are hugely influenced by those around them. So if you start acting, you'll be amazed at the kind of effects you have on the people around you. So take personal action. And if this all sounds too much, just get informed. Talk to your kids. What's going on? What are the facts? The facts are scarier than you would believe possible. Climate change in particular is moving much faster than anyone expected. And we have the technology and the resources to address it. Let's get moving. So it's a personal. And then professional, where do you work? Is your firm or organization already committed to helping address the climate environmental crises? As I told you, at Harvard, we were able to cut our energy use by 40%. And still do that on a positive basis without spending any extra money. It takes time. It takes attention. It takes imagination. But it's eminently possible. If you work for a steel company or a cement company, that's a huge effect on the world. What can you do? Find a firm that shares your values. Push them hard. You know, we often think it's the CEOs or the leaders who drive the change, and not a politician, and not a CEO. But I've spoken to lots of CEOs that their primary impetus for change is the people who work for them or the people who buy from them insisted that they change. I knew one CEO who called me up and said, you know, Rebecca, you know, I think all the sustainability stuff is bullshit. And I said, yeah, I know that, Fred. Not his real name. I know that's how you feel. And he said, but everyone I'm trying to hire thinks it's really important. Would you come and talk to us about it? And now his company is completely values-based. And he can hire anyone he wants. And he's more profitable than growing cost. So make a fuss where you work in, of course, an appropriate, careful way. Think about how your company can make money. Markets they can serve, consumers who might care. So much change is driven by people at the bottom. At the bottom. Think of myself as the bottom, and these few people at the top. We are so important. What I talk about, we need an avalanche of change. And avalanches are driven by pebbles. That's what starts an avalanche. You need a lot of pebbles. We all need to be pebbles. Nobody knows which pebble triggers the avalanche. But some research suggests you get 20, 25% of a society really committed and it shifts. It doesn't have to be all of us. Just that critical mass really engaged. And last but not least, get, get political. We need political solutions. I could get more technical. I have a TED talk on why we need a price for carbon, why it's absolutely morally unacceptable that people could throw green house gases out the window for free. There are all kinds of ways to control a mission, but we need a sensible, well-designed regulatory regime. We need tight partnerships between the private sector and the public sector to address these issues working together. We cooperation between firms. That means, you know, really making sure that those aren't anti-competitive, that they're in the interests of citizens, not just the firms. There's so much that needs to be done politically. So get engaged. I have a friend who started a small group called Mothers Out Front, because she thought mothers were amongst the people who cared most about the long-term future of our society. And what she discovered is that 20 mothers showing up in the office of a politician week after week, and then at the hearings, and then at the county hearings, 20 people makes a huge difference, because we become a society where people aren't really engaged. And that, those kinds of visible eye care, and here are my 19 friends, oh you want 50, you want 100, we can do that too. So, personal, professional, political, business can't do it on its own, it's a huge part of the puzzle. Will this happen in time, Luca? I have no idea. But I'm hopeful. Humans are immensely inventive. In World War II, we changed our economies in ways no one thought possible. I understand that the terrible war in Ukraine has triggered a massive move to renewables far faster than the experts thought was likely. We can do this. Humans have the skills, and with fundamentally cooperative and care about our children at some deep level, we just need to get that going. This is all very inspiring, and I think the need for long-term in particular is so important. How do you incorporate that? But on the one, on the other hand, you also mentioned, you know, we needed a war in Ukraine to really drastically change the way we've done energy. Do you think it's possible to reimagine capitalism without having to have multiple other wars, just by wanting to? Erika, I do not know. Sometimes I fear we'll have to pile disaster on disaster to see real change. I don't know how much you follow American weather, but we have fires in California and Washington State, we have droughts, we have floods. It's moving the conversation a little bit. We passed the most important piece of legislation in 20 years, the Infrastructure Act or the Inflation Reduction Act, which is full of action on climate, and so we are seeing some shift. But I would suggest, Erika, we don't need to know the answer to your question to decide to act. What if I told you, well, no, we're going to be too late in the sense that there are going to be massive human suffering across the world. We can't snap our fingers and fix that. It's going to happen. Does that let us off the hook? Don't we need to do everything we can to make sure it's not even more suffering? To build a society that's more resilient and more focused on the common good that wants to include everyone in the economy? And remember, I think we can make money as we do this. I think there's a lot of evidence to suggest that acting will reduce costs, increase productivity, generate a much cleaner and more healthy society. So I think even if it's maybe too late, I think the science tells us that there's going to be serious damage. It's not too late. We could go completely over the edge into what's called hot house earth, where pretty much earth becomes Venus. That's a really bad idea. And the spectrum between that, we don't want to even start moving down it. So we have to do what we can. That's all we can do, but we have to do that. And do you believe, as a last question, do you believe that the power of companies will fundamentally, will be able to come and contribute to this, and that we can expect to see a change in how capitalism is thought of even in the boardrooms? I hope so. I see so many helpful signs. One of them is the fuss we're seeing here in the U.S. about woke capitalism, and ESG, Environmental Social and Governance Metrics. It turns out that changing the accounting system is absolutely fundamental to business playing a serious role in this agenda, because if you can't measure what business is doing, it's just empty words. And so if business is to play a significant role, we have to measure their environmental social and governance performance, unless we put in place immediately a massive regulatory regime. But in the short term, we need to be able to measure what they're doing. And so thousands of firms and the world's big banks and all the big accounting companies are moving in that direction, which is incredibly helpful and incredibly hopeful-making. And we've got a number of people pushing back. And I think that's fabulous, because it shows that there's a serious conversation going on about what the role of business should be. And I'm happy to get pushed back. I think you're known by the enemies you make. And if those who are pushing back can explain how we solve problems like climate change and inequality without having business actively engaged, I'd love to hear it. Because we have to mobilize the innovative capacity, the skills, the organizational umph of the private sector, if we're going to solve the problems that we face. But that has to be in balance with our democracy and our long-term goals. So yes, I think business is super important. Can it do it alone? Absolutely not. Well, thank you very much, Rebecca, for joining us here today, for sharing your exciting and inspiring experience, also seeing these changes and seeing companies and individuals that have been doing these changes, not only in the past 10 years, but in the past 20, 30, even before that. It gives us hope that there is a possibility to reimagine capitalism. And I think that you have a very strong argument for the urgency and the need to reimagine capitalism. So thank you very much for joining us here today. You're welcome. It's my pleasure. Thank you. Thank you.