The Future of Capitalism

by Paul Collier

  But how, practically, do leaders use language strategically to build obligations? Here is Robert Wood Johnson, the chairman of Johnson & Johnson doing it in 1943. He set out the company’s moral principles, literally in stone: ‘Our Credo’. It begins, ‘We believe that our first responsibility is to the people who use our products.’ Note the words ‘we’ and ‘our’, not ‘I’ and ‘my’; this was to be the credo of everyone in the company. It went on to rank lesser responsibilities in descending order: to employees, to the local community and, lastly, to shareholders. The Credo has been sustained for three generations by the use of narratives: if you visit their website it is still organized around ‘stories’. Has it made a difference to behaviour?

  In 1982 Johnson & Johnson was hit by disaster. Seven people in Chicago died, their deaths being traced to poison that had been put into bottles of Tylenol, its best-selling product. What happened was sufficiently remarkable for it still to be used as a case study in business schools. Even before senior management had time to react, local branch managers had taken the initiative to remove all the Tylenol from supermarket shelves, promising the stores full recompense. This sounds less remarkable that it was because, since that episode, it has become standard practice across the business world. But until 1982 companies did not recall products; their practice had been to deny responsibility. Junior employees in Johnson & Johnson had the confidence to take this initiative, which committed the company to a liability of around $100 million, because they had understood from that Credo that their priority was to the users of Tylenol.26 Their prompt action, which was subsequently fully endorsed by top management, was not only moral: it transpired to be good business. Contrary to predictions, the company rapidly recovered its market share.*

  The sound bedrock of economics, accepted by Adam Smith, is the recognition that unreciprocated altruism is limited to duties of rescue: it is not an adequate counter to self-interest. Reciprocal obligations are vital, but they have to be built. This is what the narratives of belonging, obligation and purposive action do in combination.27 I have sketched this as a sequence – belonging, then obligations, then purposive action – but sequence is not material; if a common action would lead to a good outcome for many people, that may be the basis for both shared identity and a common obligation.

  Narratives are powerful, but there are limits to how far they can depart from reality: leaders are widely observed as well as widely heard, and so they cannot afford to contradict what they say by what they do. Their actions have to be consistent with their narratives; saying that you and I are all ‘we’ while favouring yourself over me gives the lie to the narrative of belonging. Saying that we all have a duty towards each other while behaving selfishly gives the lie to a narrative of obligation. The CEO of Johnson & Johnson could not have got people to take the responsibility for pulling Tylenol off the shelves on their own initiative if he had exploited them. Instead, his conduct was exemplary: he even received a Presidential Medal of Freedom, accepted on behalf of his workforce.

  Just as leaders can undermine a belief system with incompatible behaviour, they can reinforce it by crafting their actions strategically. Suppose that your audience suspects that you do not mean what you say: the Credo says ‘users before profits’, but is that just there to sound good to users? What can you do about this suspicion? Michael Spence won the Nobel Prize for solving that one with his Theory of Signalling. Evidently, it doesn’t help to say ‘I really mean it’, because you would say that even if you really didn’t. Nothing you say can help, but you can do something. Specifically, you need to do something that if you really meant ‘profits before users’ would be unacceptably costly. The only actions that work are likely to be painful, even though you mean what you say, but that is the price you must pay to establish credibility. Signals reinforce the credibility of a belief system, but they do not make the narratives redundant: signals bring credibility, but narratives bring precision. They are complementary.

  The transformation of power into authority is essential for building reciprocity across huge groups of people, such as everyone accepting the obligation to pay their taxes. Leaders are not engineers of human souls, but they can harness our emotions. The dangerous leaders are those who rely only on enforcement. The valuable ones are those who use their position as communicator-in-chief at the hub of their networked group – they achieve influence through crafting narratives and actions. All leaders add and refine the narratives that fit within the belief system of their group, but great leaders build an entire belief system.28

  The most recent exemplar of leadership using narratives within a network is ISIS. Its leaders recognized the power of social networks to transmit potent new narratives. Narratives of belonging bound together young people who had previously identified themselves as Swedes, Moroccans, Belgians, Tunisians, Australians and many others into a new common identity of the Faithful. Narratives of reciprocal obligation locked them into brutal behaviour by the pressure of peer esteem. New narrative propositions built a causal chain giving purpose to compliance by linking their horrific behaviour to the material objective of a ‘caliphate’. With ready supplies of cannon fodder, and Saudi money, ISIS rapidly became a significant player on the world stage, dismantled – as with fascism – only by overwhelming force. As a belief system, it is internally coherent, and so stable; each individual component viewed in isolation is so repellent that it creates a gulf between the group and everyone else, strengthening group identity.

  ISIS used narratives strategically to take societies back to the twelfth century. Our leaders could use them to better purpose.

  SOFTWIRED OBLIGATIONS

  We started with the moral deficit facing modern capitalism: a society can do without morality because self-interest will get us to the nirvana of mass prosperity. ‘Greed is good’ because the stronger the appetite, the harder will people work, and so the more prosperous we will all become. We have come a long way from that proposition. We are social beings, neither economic man, nor altruistic saints. We crave esteem and belonging, and these underpin our moral values. Around the world we hold six such values in common, none of which is generated by reason. Care and liberty may be evolutionarily primitive. Loyalty and sanctity may have evolved as norms that supported the group; members would have followed them as norms, and internalized them as values because they were rewarded with belonging. Similarly, norms of fairness and hierarchy may have evolved to keep order in the group, being rewarded with esteem.

  Our values matter because those actions required by them – our obligations – trump our wants. Remarkably, from this limited set of values we have learned how to generate obligations virtually without limit, by means of belief systems crafted by narratives and backed by signalling actions. These belief systems can be built consciously by leaders at the hub of networks: in families, firms and societies. Depending upon the specific content of the narratives, they can produce remarkably different group behaviour, each ultimately sustained by our common values and our common cravings.

  All this matters for the choices that currently face our societies. Ideologies beckon: each severs morality from our common values. Each prioritizes reason, privileging one value over the others. As a result, each inevitably collides with some of our values and the psychological foundations on which they rest. If the pursuit of their overarching objective undermines belonging, it is no matter; if it plunges some people into humiliation, so what: all ideologies accept ‘collateral damage’, or ‘broken eggs’. While they agree that reason is supreme, they disagree as to which reason it is. This guarantees that the path of ideology will lead to unresolvable social conflict. Ideologies are less likely to take us forward to their imagined utopias than back to lives that are nasty, brutish and short.

  Populists also compete for our adherence. They glory in our values and cravings, but discard the centuries of social learning reflected in our practical reasoning and our institutions, and ignore our capacity to build reciprocity. They too
would take us backwards.

  This book proposes a different path: an ethical capitalism that meets standards that are built on our values, honed by practical reasoning, and reproduced by the society itself. That deceptively simple sentence packs a lot of controversial complexity. Ideologues would baulk at ‘built on our values’; populists would baulk at ‘honed by practical reasoning’. And what is implied by that phrase ‘reproduced by the society itself’? I do not mean the timeless perfection of utopias, whether Plato’s Republic, Marxists’ paradise, or the triumphalism of ‘the end of history’ – they are ridiculous. By ‘reproduced’ I mean only that the norms of society should not inherently self-destruct. In the language of social science, we are looking for something that is locally stable. Periodically, society will be hit by shocks: a natural one like climate change, or an intellectual one like the emergence of a new religion. Such shocks can push society sufficiently far out of its local equilibrium that it heads off to completely different norms. But our norms should not collapse from the weight of their own contradictions.

  We now have a coherent picture that shows us how individual behaviour is shaped by obligations, why it matters, why it might go wrong, and how it might be put right. Shortly I am going to apply these insights to the three types of group that dominate our lives: families, firms and societies. I am going to show how the leaders of these groups could build reciprocal obligations that reconfigure capitalism to work with, rather than against, the grain of common values.

  My emphasis on reciprocal obligations contrasts with the prevailing political discourse, which has shrivelled morality to assertions of individual rights and entitlements; obligations have been shifted off to governments. Yet for one person to have a right, someone else must have an obligation. A new obligation forces a change in behaviour that enables a new right to be exercised: without some counterpart obligation, a new right is vacuous. Reciprocal obligations ensure this, each new right is married to its new obligation.

  Rights imply obligations, but obligations need not imply rights. The obligations of parents to our children go way beyond their legal rights. Nor do the duties of rescue need to be matched by rights: we respond to a child drowning in a pond because of her plight, not her rights. A society that succeeds in generating many obligations can be more generous and harmonious than one relying only on rights. Obligations are to rights what taxation is to public spending – the bit that is demanding. Western electorates have mostly learned that discussion of public spending must balance its benefits against how it would be financed. Otherwise, politicians promise higher spending during an election, and the post-election excess of spending over revenue is resolved by inflation.29 Just as new obligations are analogous to extra revenue, so the creation of rights is analogous to extra spending. The rights may well be appropriate, but this can only be determined by a public discussion of the corresponding obligations.

  Detached from such an assessment, the process of teasing new rights from old texts is like printing money: individual rights shower down like banknotes. Unless we create new obligations to match them, something is going to get squeezed out to meet the deficit. If people begrudge the burden of obligations that meet new legal rights, those obligations that are not matched to legal rights, such as conventions of reciprocity, and some duties of rescue, may be eroded.

  The focus on rights has privileged lawyers. Typically, lawyers start from some written text, such as a law or a treaty, and try to deduce from it what rights might be implied. Each decision then becomes a precedent for whether some other right might be implied. This process of specialist lawyers ‘discovering’ new rights implied by old texts has exposed societies to a creeping drift between what these lawyers ‘discover’ and what most people regard as morally reasonable. In a trivial current British example, a court has determined that schools may no longer use the words ‘mother’ and ‘father’, because this infringes the discovered right of a same-sex couple. Here, a new right created by a judge intended to benefit a handful of people destroyed fundamental narratives that assist millions of other families in rearing their children. In inflicting such widespread harm relative to benefit, the demand revealed the triumph of ideology over pragmatism; selfish assertions of right weaken mutual regard.

  As we recognize new obligations to others, we build societies better able to flourish; as we neglect them we do the opposite. Capitalist societies have suffered from a process of neglect, the key symptom being the decline of social trust. The leading indicator of how trust will evolve in the coming decades is how it has already changed in American youth: today’s youth will be tomorrow’s adults, and trends in America blow across to Europe. Among teenage Americans trust has collapsed by 40 per cent.* That decline has happened across all social classes, but is most pronounced among the poor. As Robert Putnam says, this reveals not mounting paranoia, ‘but the malevolent social realities within which they live’.30 Despite the promise of prosperity, what modern capitalism is currently delivering is aggression, humiliation and fear: the Rottweiler society. To achieve the promise, our sense of mutual regard has to be rebuilt. Pragmatism tells us that this process will need to be guided by context and evidence-based reasoning. That is where we are heading.

  3

  The Ethical State

  States that link ethical purpose to good ideas have achieved miracles. My generation grew up through such a period, between 1945 and 1970. We experienced the rapidly rising prosperity achieved by states that purposively harnessed capitalism for the benefit of society. It wasn’t always like that, and it isn’t now.

  As the child of parents who were young adults in the 1930s, I learned vicariously how badly the state had failed. Through their stories I grasped the tragedy of the collapse into mass unemployment. States, and the societies they reflected, had lacked the sense of ethical purpose to see full employment as their responsibility. They also lacked the ideas that would have shown them what to do about it. In consequence, they dramatically mismanaged capitalism. The ideologies of fascism and Marxism were waiting in the wings. Only in Germany and Italy did either of them manage to take hold, but that was enough to trigger a global cataclysm. Belatedly, shocked by the mass ruin of lives, states and societies found that sense of purpose. In the USA Roosevelt embraced the obligation of the state to provide jobs – his ‘New Deal’. He was elected, because people recognized the New Deal as ethical. New ideas arrived: Keynes’s General Theory of Employment, Interest, and Money provided the analysis to address mass unemployment. Governments were initially unreceptive, however; though the book came out in 1936, the escape from the Depression was because rearmament happened to boost demand. As Paul Krugman has wryly said, the Second World War was the largest economic stimulus package in history. But, post-war, Keynes’s analysis was used to maintain full employment, gradually becoming inadequate with the rise in inflation in the 1970s.

  States failed their people in the 1930s, and they are doing so again. Currently, the word ‘capitalism’ provokes widespread contempt. But behind the toxic word are the networks of markets, rules and firms that delivered both the miracle of 1945–70 and the tragedy of 1929–39. My generation missed the tragedy, lived through the miracle, and complacently imagined that continued miracle was inevitable. The present generation has learned that it was not. The new anxieties are rooted in economic divergence. There is a widening regional divide between the booming metropolis and decaying provincial cities; there is a widening class divide between those in prestigious and fulfilling jobs and those in dead-end jobs, or none at all.

  Capitalism has generated these new anxieties, just as it did in the Depression of the 1930s. States are needed to heal these social cleavages created by structural change. But, as in the 1930s, states, and the societies they reflect, have been slow to recognize their ethical obligations to address these new problems, and instead of being nipped in the bud they have been allowed to grow to crisis proportions. States cannot be more ethical than their people, though they ca
n reinforce reciprocal obligations, and they can gradually persuade us to adopt new ones. But if a state tries to impose a set of values different from those of its citizens it forfeits trust and its authority erodes. The ethical bounds of the state are set by the ethical bounds of its society. The current lack of ethical purpose in the state reflects a decline in ethical purpose across society: as our societies have become more divided, they have become less generously disposed to those on the other side of the divide.

  As in the 1930s, the lack of purpose has been compounded by a lack of practical new thinking. In Part Three, I try to fill the void of innovative thinking, presenting practical approaches to healing those damaging cleavages. But first we must come to grips with the ethical failings of the state, and its roots in the ethical changes in our societies.

  THE RISE OF THE ETHICAL STATE

  The heyday of the ethical state was the first two post-war decades. States created an unprecedented array of reciprocal obligations in a magnificent epoch of ethical purpose. The extraordinary new extent of obligations of citizens towards one another, to be administered by the state, was captured in the neat narratives of ‘cradle to grave’ and ‘New Deal’. From health care during pregnancy, to pensions in old age, by contributing to state-run national insurance people would protect each other: the guiding ethic of communitarian social democracy. It spanned the centre of the political spectrum. In America, it was the period of bipartisanship in Congress; in Germany, the ‘social market economy’. In Britain, the flagship National Health Service was designed by a Liberal in a coalition led by a Conservative, implemented by a Labour government, and sustained by Conservative governments. In both North America and Europe, beneath the noise and smoke of political contest, between 1945 and 1970 the political disagreements between the leaders of the mainstream parties were minimal.*