Why blame capitalism?

There were at least three sessions dedicated to capitalism at the recent World Economic Forum Annual Meeting in Davos. Since then I have been thinking a lot about the issue. It is not that capitalism has failed, but it has been us as human beings who have failed in its implementation. If someone is to be blamed, it is us.

Capitalism is only an economic system composed of human beings that has its roots in freedom, property rights and welfare via economic growth. Capitalism is supposed to provide economic opportunity and a better future for all. Yes, capitalism is based on capital accumulation, but under capitalism, human capital can also be seen as an asset. In that line of thinking, investment in one’s personal abilities, such as through education, is also a way to create wealth.

Maybe if we look at the world as a family it will be useful to reflect on the concept of family wealth as described by James Hughes Jr in his book “Family”, where he states that the wealth of a family consists of the human and intellectual capital of its members, and that a family’s financial capital is a tool to support the growth of the family’s human and intellectual capital. There are many studies that demonstrate that capitalism and globalization have been effective in reducing poverty. The poverty rate has decreased tremendously in the last 30 years. Also in the last 30 years, life expectancy, the mortality rate, education, democracy, access to clean water – all indicators without exception – have improved.

Despite the improvements, we cannot ignore what Paul Polman, chief executive officer of Unilever, stated in Davos: “Today, 1 billion people are still going to bed hungry while 1 billion people are obese”. The question we need to ask ourselves is how efficient have we been managing our resources? Obviously, we are not putting in practice one of the key virtues of capitalism, which is allocating resources well and incentivizing their proper use.

From my standpoint, the global financial, economic and social crisis we are currently living through, and all its consequences, are not problems due to capitalism’s fundamentals as a system, but an output of the use – or misuse in this case – we are having on it. As financial analyst Mike Mayo said, “The problem with our economic system today is not a problem of capitalism. It is due to a lack of capitalism”.

Some experts attribute the crisis to the many improper interventions that governments have applied to the financial system, which is contrary to what a free system proposes. According to Raghuram Rajan in his article Too Big to Save?, the ideal free-enterprise system rewards entrepreneurs with the full value of what their products contribute to society if they succeed and punishes them to the full extent of the resources they have wasted if they fail. If no entity is imperishable, the free-enterprise system will work better and with more democracy legitimacy.

Perhaps, as John B. Taylor writes in his article Economics for the Long Run: “Government policies must adhere more closely to the principles of economic freedom… At their most basic level, these principles are that families, individuals and entrepreneurs must be free to decide what to produce, what to consume, what to buy and sell, and how to help others. Their decisions are to be made within a predictable government policy framework based on the rule of law, with strong incentives derived from the market system, and with a clearly limited role for government”.

Within this principle of freedom, I think we urgently need to show that capitalism can be operated with a new face. Capitalism needs to show that while pursuing economic growth it is also possible to create social and environmental value. That is the proposition of Harvard Business School professor Michael Porter with the creation of shared value. Capitalism also needs to demonstrate that there are also people who are willing to create social businesses, non-dividend businesses created to solve social problems, which is the proposition of Nobel Peace Prize winner Muhammad Yunus. Between these two models, there is a large array of possibilities where social entrepreneurs, individuals, corporations, institutions, NGOs and governments play a role.

I am sure that the majority of us will be able to find a way to contribute to society and help others. In my view, this is only possible in a system that operates under capitalism. In the long run, capitalism, as a system, will pay back to society. We need to have trust and be optimistic about the future, look around and be creative in finding solutions for a better world. I am sure that there are plenty of unsolved problems surrounding us. I invite you to pick one and solve it using the social innovation model of your choice and maybe, as French film maker Luc Besson said while receiving an award in Davos: “Together all the grains of sand can create the most beautiful beach in the world”.

 

 

Editors Note
Claudia Valladares, Executive Director, Banca Comunitaria Banesco, Venezuela; Social Entrepreneur of the Year, Venezuela, 2010.

Banca Comunitaria Banesco provides access to banking services, including savings accounts and micro-credit, to low-income individuals in Venezuela.