Ensuring the Future of Democratic Capitalism

In my first post two weeks ago, A System out of Balance, I described the findings of the Persona Project, which revealed average Americans were perplexed about why the economy didn’t seem to working for them and sheepish about their disengagement from politics. In last week’s post, Concern for the Future of Democratic Capitalism, I explained what has led […]

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In my first post two weeks ago, A System out of Balance, I described the findings of the Persona Project, which revealed average Americans were perplexed about why the economy didn’t seem to working for them and sheepish about their disengagement from politics. In last week’s post, Concern for the Future of Democratic CapitalismI explained what has led them to feel that way, and how their discouragement represents a danger for the future of democratic capitalism. In this post, I lay out how our model needs to shift to ensure a bright future for democratic capitalism. 

In my new book, When More Is Not Better, I argue that the problem with American capitalism is rooted in a model of the economy that, over the past four-plus decades since America celebrated its bicentennial, has increasingly shaped how we think about and make collective decisions concerning the economy. This pattern of thinking and its resulting actions have produced progressively more problematic outcomes—systematically rising inequality and fragile systems among them—that are starting to fracture the once solid combination of democracy and capitalism. The model in question holds that the economy is really a machine, a machine that can be optimized by breaking it into its constituent parts, optimizing each, and adding them back together to make an optimally running whole. Further, the machine can be made ever more perfect by pursuing increasing levels of efficiency, by which the desired outputs are created with the least possible inputs, in each constituent part. Since the definition of efficiency is rather abstract, our model of the economy uses proxies to measure and thus pursue the goal of maximal efficiency.

That model of the perfectible machine, with the attendant goal of efficiency, with its progress measured using a set of proxies, was intended to produce a big bulge of economic outcomes in the middle, with a tapering on the upper and lower ends. For families, that means a large middle class and smaller groups of both richer and poorer families. Across that distribution, the theory goes, the families on the richer end should pay substantially higher taxes in order to mitigate hardship experienced by families on the poorer end. More important, as the economy grows, everybody’s income should grow, shifting the whole distribution in a favorable direction. That is, the poor families get less poor over time, the middle-class families get more prosperous, and the upper-end families get richer still. The same distribution, by the way, holds for companies. Most in an industry will experience average performance, with some big winners at the top end and some at the bottom end who struggle to stay in business.

In my book, I show how the evidence increasingly suggests that the output of our economic machine hasn’t been producing either the assumed distribution or the favorable movement, and that it hasn’t done so for some time. Instead, the bulge in the middle is slowly but surely shrinking and the prosperity of a vast majority of families is no longer moving smartly upward. Perhaps more worrisome, while government policies should be intended to serve the many for the long term, they are being gamed by interested parties to ensure that they serve the few in the short term, with damaging impact over the long term. The Persona Project respondents could feel this. To them, they were outsiders and others were playing the game to their own advantage, and to the respondents’ disadvantage.

These outcomes are systemic, and without a fundamental shift in how we manage the economy, they will get only more out of alignment with our hopes and assumptions. I believe that this shift needs to start with abandoning the perfectible-machine model of the economy. We should instead understand the economy in more natural terms, as a complex adaptive system—one that is too complex to be perfectible, one that continuously adapts in ways that will almost certainly frustrate any attempts to engineer it for perfection.

In addition, rather than striving singularly for ever more efficiency, we need to strive for balance between efficiency and a second feature: resilience. A system is resilient to the extent that over time it can adjust to its changing context in ways that allow it to continue functioning and delivering its desired benefits. In the depths of the Great Depression, American democratic capitalism was resilient. It shifted, adjusted, and adapted to the shocks to its core, but it maintained the combination of those two features: democracy and capitalism. In many other developed countries, democratic capitalism was not sufficiently resilient to survive and was replaced by fascism or communism. More recent inattention to the resilience of our democratic capitalist system—thanks to the singular and obsessive pursuit of efficiency—has jeopardized that combination.

In When More Is Not Better, I explain the critical role of models in shaping our actions, describe how the problematic changes in the functioning of democratic capitalism have resulted from our current model. I offer an alternative model, that of the economy as a natural system in which we need to balance the pursuit of efficiency with the achievement of resilience and recognize that the economy can never be perfected, only improved.

I then turn from problems to solutions, including a set of comprehensive design principles that should inform the solutions so that they all drive toward a comprehensive and consistent fix. I provide actionable and specific agendas for business executives, political leaders, educators, and citizens, respectively, who want to take small, medium, or big steps in doing their part to save American democratic capitalism. I present many examples of wonderful Americans who are already taking productive steps in the defense of the future of American democratic capitalism.

I have attempted to take a distinctive approach to solutions. First, the space I give to solutions—approximately 57 percent of my book—is unusual in the context of books on the political economy. Such books typically dedicate 80 percent of their space to documenting the problem and only 20 percent to solutions. Second, I restrict my suggested solutions to prescriptions that are already in place. They may come from a different context or jurisdiction. But they are not theoretical; they are actual. They aren’t speculative; they are demonstrably doable—because they have been done! I believe in the adage of science-fiction writer William Gibson: “The future is already here—it is just not evenly distributed.” The task is to get solutions that are already out there and that are working, to make them more evenly distributed. And that, essentially, is the call to arms of the book’s conclusion. Let me finish on a personal note. This book is not inspired by any sudden revelation. The findings of the Persona Project are just the confirmation of ideas about tensions at the heart of the American system that have been nagging at me in my nearly four decades working at the intersection of business strategy, economic policy, and business education.

The bicentennial, which more or less coincided with the beginning of a sustained reversal of democratic capitalism’s performance in America, took place during the summer between my freshman and sophomore years at Harvard College, where I was studying economics. I graduated in 1979 and journeyed across the Charles River to take an MBA at Harvard Business School. Within short order, I was working with a group of business-school colleagues to build a large global strategy firm that advised the CEOs of large companies in America and around the world—and I have advised CEOs on strategy ever since. One of those business-school colleagues was Professor Michael Porter, with whom I collaborated on his country-competitiveness work leading up to and following the publication, in 1989, of his magnum opus: The Competitive Advantage of Nations.

In 1998, I moved back to my Canadian home to become a business-school dean and served in that capacity until 2013. While doing so, I was asked by the leader of our government to serve as founding chair of a government-funded economic think tank, the Institute for Competitiveness & Prosperity, which I did from 2001 to 2013. Since stepping down as dean, I have chaired the Martin Prosperity Institute, a foundation-sponsored think tank working on the future of democratic capitalism. It has been during this period that the ideas presented in this book have come together to form what I suppose can be seen as our manifesto for what it will take to save democratic capitalism from itself. The marriage of democracy and capitalism has been arguably the greatest force for good in history, giving the creativity and enterprise of talented individuals the freedom to generate value in which all of us can share. History also shows, however, that its continued survival cannot be guaranteed, if we do not show the system our respect.

I hope my book will help save democratic capitalism from itself.

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