Why we need a more inclusive form of capitalism

In the 1970s, Nobel Prize-winning economist Milton Friedman said that the “only social responsibility of a business is to use its resources and engage in activities designed to increase its profits”.

Much has happened in the intervening decades since Friedman’s pronouncement.

The advent of “neo-liberalism” has seen the role of governments in the Western world shrink and many of the regulatory and legislative guard rails for business removed.

While this had the immediate effect of unshackling business activity and unleashing forces such as privatisation and globalisation, the more recent focus on the environment has brought the needle back the other way, and “social licence” has risen in importance.

The growing income disparity in affluent countries has played into this, creating a new momentum for so-called “inclusive capitalism”, the idea that business has significant responsibilities beyond simply making profits.

The implicit warning is that, if capitalism is not inclusive enough, it is doomed to fail, and we risk social and environmental chaos.

Leading the change

In the wake of the COVID-19 pandemic, commentators have been suggesting that a re-examination of economic priorities, with a new and bigger role for governments at its core, should be considered.

In the UK, for example, insurance company Legal & General has been a leader in this area, releasing a Sustainability and Inclusive Capitalism 2020-21 report, which maps out its vision in the three areas of environmental, social and governance (ESG) practice – achieving net zero emissions, making a meaningful social contribution and growing the business in a responsible and sustainable way.

Since the UK first went into lockdown, the company has invested £1.5 billion (A$2.8 billion) in UK towns and cities, supporting what it says is a “levelling up” through promoting a more even economic recovery from the pandemic.

In the US, Lynn Forester de Rothschild, part-owner of The Economist magazine, has been the driving force behind the creation of the Coalition for Inclusive Capitalism. She advocates for carbon taxes, a living wage and action to combat obesity, which she considers to be a byproduct of capitalism.

 

"My belief is that capitalism is a good thing, but it does need to reflect that one group cannot benefit at the expense of society and the environment. If we get to a point where this is widely recognised, that will be good for everyone."

 

In Australia, Sukhbir Sandhu has made inclusive capitalism a special area of research in her role as associate professor of sustainability and ethics at the University of South Australia.

She sees inclusive capitalism as a “ladder” that the business world is climbing, to reach an advanced position of leadership and responsibility.

Sandhu says Friedman understood that, if the unfettered pursuit of profit becomes a risk, then it should be moderated. After all, if poverty becomes too widespread, how will corporates sell the products they make at scale?

“Risk management is definitely a big part of it on the lower rungs of the ladder,” says Sandhu. “But some would argue that all these ideas about inclusive capitalism are just like putting lipstick on a pig, because if you are managing them as risks, then you are not moving us fast enough to where we need to go.”

From radical to mainstream

Another aspect of inclusive capitalism that needs to be considered carefully, Sandhu says, is regulatory compliance.

If businesses do only as much as they are required, compliance becomes a box-ticking exercise, indicating a lack of ethical commitment. On the opposite end of the scale are businesses that make a commitment to social and environmental issues as part of their corporate strategy, thereby transforming themselves from “poachers to gamekeepers”, Sandhu says.

Institutional theory says that, when society changes its expectations in a major way, some companies “break free from the herd” to become frontrunners and propel seemingly radical ideas into the mainstream.

Sandhu is sceptical that governments can drive change on a similar scale, due to typically short election cycles in democratic societies creating little commitment and too much policy uncertainty. Similarly, even though consumer sentiment can shape brand perceptions and shame corporates into positive action, consumers are not yet organised at a sufficient scale.

Mind the gap

While the greatest hope lies with activist stakeholders and ethical corporate leaders, Sandhu says “the magic happens when there is both a bottom up and top down processes acting together”.

“It’s not such a bad idea for the ‘social floor’ to be higher and the ‘ceiling’ to be lower, because we know when that gap is too high even the rich are unable to live in these societies because they become dangerous.”

In the long run, she says, income inequality does not work for any society that seeks to function effectively.

“My belief is that capitalism is a good thing, but it does need to reflect that one group cannot benefit at the expense of society and the environment,” says Sandhu.

“If we get to a point where this is widely recognised, that will be good for everyone.”