Researchers at Harvard Business School asked small groups of business and government leaders around the world about what they viewed to be main issues regarding the future of market capitalism. Nearly all of them noted that the long-term sustainability of global market capitalism was a primary concern. It was concluded that, to preserve market capitalism as we know it, both companies and their leaders must change by taking a more active role in protecting and improving the system. The Harvard Business Review article outlined forces of disruption in the global market system, as well as how businesses and its leaders can respond.
THE FORCES OF DISRUPTION
The article, which is authored by Joseph L. Bower, Herman B. Leonard, and Lynn S. Paine, summarized several important forces that could result in significant disruption to market capitalism:
- The fragility of the financial system. Trillions of dollars move around the world daily, at high velocities. If these flows are unmanaged and unregulated, transparency can be reduced and risk compounded.
- Breakdowns in global trade. The financial collapse of 2008 demonstrated that trade can break down precipitously and with far-reaching effects.
- Inequality and populism. Within countries and across regions, income and wealth disparities are increasing. The resulting populist politics could lead to harmful government interventions, such as overregulation of market transactions.
- Migration. Massive migration is often a consequence of inequality. Cross-border movements of people tend to trigger protectionism and anti-immigrant political reactions, which undermine potential solutions to labor needs in developed nations.
- Environmental degradation. The evidence is more than circumstantial that industrial growth is associated with climate change. The consequences could be seen in migration, the disruption of manufacturing and trade, and political instability.
- Failure of the rule of law. The rise of corruption, extortion, and expropriation in some parts of the world makes it difficult to operate a capitalist system that respects property and human rights and upholds contracts.
- The decline of public health and education. The size of the labor force depends in part on its health, and its productivity depends on its education as well as its health. In parts of the developed world, the quality of education is in decline, and health care costs have become unmanageable everywhere.
- The rise of state capitalism. Some developing nations are giants. To the extent that Russia, China, and India play by their own rules, they have the potential to disrupt market capitalism as it is practiced in the developed world.
- Radical movements, terrorism, and war. The increasing challenge of maintaining sufficient peace and security for capitalism to prosper threatens the system.
- Evolution and pandemics. The unwillingness of some governments to address pandemics and to engage in cooperative efforts to curb the spread of disease poses another threat.
- The inadequacy of institutions. Governmental and international institutions seem inadequate to deal with the scale and complexity of these varied challenges. Too often, international cooperation consists of ad hoc agreements, such as those meant to address climate change, trade, and migration. It is the systemic character of the challenges that makes them especially hard to address.
HOW BUSINESS LEADERS RESPONDED
- “Business as usual”- The business leaders who discussed global market issues generally fell into one of four groups. This first group did not dispute the disruptive forces but felt that their seriousness was overstated and that the capitalist market system was fundamentally sound. They believe that, over time, the issues would take care of themselves through the normal mechanisms of government, business, and other institutions.
- “Business as bystander”- This group felt that the best contribution they could make would be to run their companies as efficiently as possible, leaving government to address major threats.
- “Business as innovator”- These individuals saw business as better able than government to address serious challenges but thought that business would do through innovations in products, services, strategies, and business models.
- “Business as activist”- This group argued that business must become more engaged in shaping public policy, prompting government toward policies that would strengthen the market system.
HOW THE AUTHORS RESPONDED
- None of the above responses is adequate by itself.
- There is a need for “business as leader.” Business, as both an innovator and an activist, must lead the kind of pervasive change that could improve the functioning of market capitalism.
- This would produce a wide array of structural innovations. Innovations in strategies and business models are needed that explicitly seek to use disruptive forces as opportunities for growth and profitability.
- Also, business as leader would involve activism both at the level of local policies and at the level of the broader system Activism at this higher level often requires institutional innovation: the creation of entities that can organize large-scale collective action.
Visit the Harvard Business Review to view the full article.