The Future of Capitalism

by Paul Collier

  So, from the genetic inheritance of our ‘passions’, we have a strong sense of belonging to place. But, as we saw in Chapter 2, the soft-wired values generated by narratives also matter. Narratives aid memory, enabling us to read our place not just as a snapshot of its current state, but as an evolution: our attachment to our city as it is now is deepened by our understanding of the layers of change by which it has become what it is. These memories are common knowledge to all those who grow up in the city, they reinforce our common identity.

  Yet, for decades, mainstream politicians have consciously avoided narratives of belonging. Indeed, they have actively denigrated them. Our politicians are at the hub of national social networks, they are our communicators-in-chief. By actively undermining a sense of shared belonging, they have accelerated the decay of the reciprocal obligations on which our well-being depends. Their ethical narratives have overwhelmingly been Utilitarian or Rawlsian, instead, and they have seen themselves as being at the apex of the paternalist state. The narratives of belonging to your country have been left, by default, to the nationalists who have hijacked them for their own divisive agenda, and in the process, the ethical state has withered away.

  In 2017 President Macron of France broke this pattern of negligence. He has pioneered a vocabulary to distinguish between two forms of nationwide identity: nationalism and patriotism, describing himself as a patriot but not a nationalist. Narratives of patriotism, defined as belonging to a common territory, can be used both to recapture belonging from the nationalists and to restore it as central to people’s identity. A new survey of the British population offers further supporting evidence for the viability of this strategy. The survey tested the associations of the word ‘patriotism’ across the population, comparing it with many other political concepts.10 The results are highly encouraging: the four top associations with ‘patriotism’ are ‘attractive’, ‘inspiring’, ‘satisfying’ and ‘appeals to the heart’. In this, it contrasts with all the ideologies tested in the survey. Most strikingly, ‘patriotism’ gets these favourable responses across all age groups, and across people clustered into their otherwise disquietingly divergent political and social preferences.

  Patriotism is also sharply distinguished from nationalism in how nations behave towards each other. The discourse used by nationalists, bragging about putting their country ‘first’, portrays international relations as a zero-sum game in which the winner is the one that is the most inflexible. Patriotism, as exemplified by President Macron, promotes a discourse of co-operation for mutual benefit. He is quite explicitly seeking to build new reciprocal commitments within Europe on economic matters, within NATO on the security of the Sahel, and globally on climate change. Yet Macron is working in the interests of France. When an Italian company tried to buy the nation’s most important shipyard, he intervened to ensure that French interests were protected: he is not a Utilitarian. But crucially, in contrast to nationalism, patriotism is not aggressive.

  As with all narratives, if actions are inconsistent with them, narratives of shared belonging to place will lack credibility. At the centre of the onion is the home: if our attachment to home is weak then the outer layers will also be enfeebled. One reason why younger people are losing a sense of belonging is that it has become far more difficult to buy a home. The share of home ownership among a population is a practical indicator of this inner core of belonging, and restoring home ownership requires intelligent public policy, as we will see later.

  While place is the psychological bedrock of a shared sense of belonging, it can be supplemented by purposive action. A country is the natural unit for much public policy, and so our shared identity follows from the common purpose underlying actions that enhance our mutual well-being. Narratives of purposive action can set out how, by accepting the shared identity that defines the domain of reciprocity, meeting our obligations to each other can gradually make us all better off. Listen to what politicians are saying about purposive action, and categorize their narratives into those that build shared identity and those that undermine it. Evidently, during wartime, narratives of purposive action overwhelmingly imply mutual benefit and so reinforce shared identity; during the miracle period of 1945–70, the public narratives were predominantly of this form. Currently, our politicians are carelessly pumping out narratives of purposive actions that provide rationales for thinking of our interests as being opposed to those of some other group. They have actively encouraged people to form oppositional identities, and such identities are socially toxic. Each narrative of opposed interests may be true in isolation, yet cumulatively they become so corrosive that collective well-being deteriorates.

  Politicians are, first and foremost, communicators. Building shared identity in a society with diverse cultures and diverse values is necessary for mutual well-being, but challenging: it is a primary duty of leadership. By shying away from narratives of shared belonging, whether of place or purpose, politicians have inadvertently compounded the erosion of the capacities of the paternalist states to meet their obligations. Fortunately, there is a lot of the future left.

  4

  The Ethical Firm

  In the Britain of my youth, the most respected company in the entire country was Imperial Chemical Industries. Combining scientific innovation and size it developed huge prestige, and to work for it was a matter of pride. This was reflected in its mission statement: ‘we aim to be the finest chemical company in the world.’ Yet in the 1990s ICI changed its mission statement. It became: ‘we aim to maximise shareholder value.’ What had happened, and why did it matter?

  Firms are at the core of capitalism. The mass contempt in which capitalism is held – as greedy, selfish, corrupt – is largely due to their deteriorating behaviour. Economists have not helped. Milton Friedman, Nobel Laureate, vociferously propounded the nostrum – first articulated in 1970 in the New York Times – that the sole purpose of a firm is to make profits. As Friedman’s ideas spread through the echelons of management this view gradually became standard in business schools, and so filtered into major companies such as ICI. This had consequences.

  If there is one feature of modern capitalism that people find most repellent, it is this obsession on making profits. Currently, when faced with the choice between ‘The primary purpose of business should be to make profit’ versus ‘Making a profit should be only one consideration among many’, the people who agree with Friedman are outnumbered three-to-one, a difference that is uniform across age groups and opinions about other matters.1

  Who is right: Friedman or public opinion? A clue comes from what happened at ICI. Did its new Friedman-inspired mission statement motivate the company’s workforce to new heights? Has any worker for any company ever got up in the morning, thinking ‘today I’m going to maximize shareholder value’? That change in mission statement reflected a change in focus by the company’s board. Previously, it had tried to be a world-class chemical company, which implied paying attention to its workforce, its customers and its future. Now it tried to please shareholders with dividends. If you are under the age of forty you are unlikely to have heard of ICI. This is because the change of focus proved disastrous: the company went into decline and was taken over.*

  Academic opinion now agrees with public opinion. In 2017 the British Academy launched ‘The Future of the Corporation’ as its flagship programme. Led by Colin Mayer, Professor of Finance at Oxford University and the former Dean of its business school, the programme’s central proposition is that the purpose of business is to meet its obligations to its customers and its workforce. Profitability is not the objective; it is a constraint that has to be satisfied in order to achieve these objectives on a sustainable basis. Why has business gone so wrong, and how can public policy put it right?

  THE ETHICAL FIRM OR THE VAMPIRE SQUID?

  A great firm does not have to behave like a vampire squid.* Think of a large firm, perhaps Unilever, Ford or Nestlé. What do you think the typical employee of such a firm w
ould tell you about its purpose? Do you imagine that they would say ‘to make money for the owners’? Few firms truly run themselves on such a philosophy. The people who work for Unilever are more likely to tell you that they are working to provide affordable foods and soap, often in societies where poverty and disease make their contribution more valuable than the self-promoting activities of NGOs. The people who work for Ford are more likely to tell you about the features of the cars they are making. On a trip to Indonesia, I came across a group of Nestlé workers. They were running a dairy that had transformed the opportunities for local farmers. During a time when public order had broken down in the region, the farmers came to town and surrounded the dairy so as to protect it from looters. Such purposes are achievements in which people can take pride: firms are creating jobs through which people can contribute to their society.

  But in some firms the workforce would indeed regard its purpose as to make money. One investment bank nakedly proclaimed this to its staff, displaying in the entrance lobby its mocking mission statement: ‘we make nothing but money.’ Encouraged by this wretched philosophy, its clever employees gradually evolved the logical refinement: ‘we make nothing but money for ourselves.’ This opened up possible strategies for the smartest employees that the company’s Friedman-trained management had lacked the wit to envisage. It transpired that there was a highly efficient way for employees to make money for themselves. This was to commit the company to transactions on which the employee received a bonus, but which exposed the company to the hidden risk of a future loss. This behaviour of its employees duly bankrupted the company. Its name was Bear Stearns, and its bankruptcy triggered the financial crisis of 2008–9 that inflicted global costs on a scale only matched by the world wars.* The cost to the USA alone is estimated to have been around $10 trillion.

  The fates of ICI and Bear Stearns illustrate a crucial point: a company needs a sense of purpose. CEOs can use their position to build that sense of shared purpose. It is indeed a core responsibility and competence of senior management. We’ve already seen it in action: Robert Wood Johnson building the Credo that articulated the purpose of Johnson & Johnson and proved vital decades later.

  Fifty years ago, the most successful company that had ever existed anywhere was General Motors. It was highly profitable and enormous. Yet by 2009 it was bankrupt. Since its inexorable decline was so significant, it has been analysed in great detail, both as it unfolded (with management consultants repeatedly brought in to diagnose what was going wrong), and in retrospect. What killed GM? Toyota.2

  As Toyotas started to penetrate the American car market, the initial assessment of GM’s top management was that it was a localized problem. Only people on the coasts were buying Toyotas; the heartland market was still solid. So, the phenomenon was entirely explicable: people on the coasts were a bit weird, but it would gradually pass. Unfortunately for GM, this complacent diagnosis proved to be wrong, and the contamination spread to the heartlands. The new diagnosis was technological: the Japanese had robots. Toyota was remarkably co-operative throughout and invited GM to inspect their factory in Japan. The instruction from the CEO of GM to the team that visited the factory was ‘photograph everything: if they’ve got robots, we’ll have robots’. Once this strategy was fully implemented, it decisively established that, whatever it was that Toyota was doing to make a difference, it was not the robots. In the next phase, Toyota was sufficiently generous to propose that they and GM run a joint venture in California, making the same car. As these identical cars came off the assembly line, alternate ones were badged as GM and Toyota and marketed accordingly. By this stage Toyota had built a very strong reputation for reliability: their cars were virtually fault-free. Indeed, upon our arrival in the USA in 1998 my wife and I bought one, and twenty years later we are still driving it. This reputation was paying dividends in the market: the identical cars rolling off that Californian production line were selling for a $3,000 premium if they had a Toyota badge on them. So, if it was a difference in quality, what explained it?

  Decades previously, Toyota had pioneered a new style of relationships with its workforce. Ordinary workers on the assembly line were organized into small teams called ‘quality circles’ and given the responsibility for quality control. (Ironically, the concept of quality circles had been devised in America. It was enthusiastically adopted in Japan, possibly because it chimed well with Japanese culture.) The key step was to ask each group to spot faults as soon as possible on its stretch of the line. The mantra promoted by management was ‘faults are treasures’. If a worker spotted a fault, what should he do about it? The most dramatic step taken by Toyota management was to install Andon cords, hanging down all along the assembly line. Any worker on the assembly line who spotted a fault was to pull the nearest cord, which would instantly halt the entire line. By its nature, assembly line production is so integrated that stopping the line is spectacularly costly. In the Toyota factory, it cost $10,000 per minute. A worker who stopped the line unnecessarily would in just a few minutes inflict costs on the company well in excess of his productive value over an entire year. So, this policy indicated that the management really trusted their workers to work for the company, not against it. In other words, it depended upon workers having a sense of purpose that was well aligned with that of the company. I rather doubt that they were thinking ‘I’m trying to maximize shareholder value.’

  This was utterly different from the approach to quality control used by GM, which was the conventional one of checking a sample of completed cars. Eventually, a new CEO understood the problem: the culture needed changing. Confrontation between GM management and the United Autoworkers Union would be superseded by mutual trust. ‘If they’ve got robots, we’ll have robots’ was replaced by ‘If they’ve got Andon cords, we’ll have Andon cords.’ On the orders of the CEO, the cords were installed all along the GM assembly lines. The CEO could announce a change of culture, but the humble assembly line managers, who better appreciated the attitudes of the ordinary workers, knew what would ensue. Over decades, antipathies had accumulated that could not be dissolved overnight. Given the chance to inflict ruinous damage on the company, a few workers would be sure to take it. Those Andon cords would be pulled for spurious reasons, productivity would collapse, and the line managers would be held responsible. Facing reality, they tied the Andon cords up on the ceiling.* The CEO’s attempt to change the culture ended in a highly visible demonstration that the management did not trust its workforce. Oppositional identities were intensified.

  There was an equivalent story in relation to suppliers. Over the years, Toyota built a co-operative relationship with its suppliers: they both faced the common challenge of making better quality parts that would improve the final product. This required a long-term perspective. Over the market cycle, sometimes Toyota would have the whip-hand in dealing with its suppliers, and sometimes power would shift to suppliers. If each party exploited its temporary advantage, in the long run they would both lose out. Gradually, they learned to trust each other. In contrast, GM had prided itself on being the tough guy, squeezing suppliers to the limit whenever it could. By the time GM realized it needed to change it was too late. As with its workforce, GM found itself skewered by the established belief system within which it operated.

  For many years, the workforce of Volkswagen, based in the city of Wolfsburg, would have told you that the purpose of their firm was to make really good cars. Oxford was once Britain’s Wolfsburg: the home of the British Motor Corporation. The contrast between the cultures of their workforces echoed that between Toyota and GM. I recall watching, stunned, as the crowd at an international football match played in a German stadium, proudly waved banners with ‘VW’ before the television cameras. An equivalent display by BMC workers would have been inconceivable, and strikes eventually bankrupted the British company. But in 2016 Volkswagen was hit by a major scandal. Its diesel cars had been fitted with a device that scammed the emissions tests conducted in the USA
. What had motivated the employees who had designed this device? Were they just thinking of a personal bonus? I doubt it. More likely, these employees had fully aligned with the purpose of the company, but had not accepted the purpose of the American legislation that had introduced the tests. Quite possibly, they regarded the legislation as a backdoor means of restricting American imports of German cars; or they simply approached passing the test as a tick-box exercise. Of course, they were utterly wrong to do so: they had failed to update their vision of ‘a good car’ to take pollution into account. Even in terms of their consequences for the company, their choices ended up being disastrous. But it is an insulting delusion of many people who, like me, have cushy jobs in the public sector to imagine that workers in the private sector are driven by greed and fear. The evidence suggests that job satisfaction is actually considerably higher in the private sector; for example, people are far less likely to use illness as a reason for not going to work.

  So, there is nothing intrinsically dirty about capitalism. Profit is the constraint that forces discipline on a firm, rather than defining its purpose. But the stories of Bear Stearns, ICI and GM indicate that something has gone seriously wrong. What is it?

  WHO CONTROLS THE FIRM?

  The answer is that the power of control has become lodged with the wrong people. Capitalism gets its name because ownership of the firm is assigned to the people who provide it with risk capital. The rationale is that those who are taking the risk have both the greatest need for control and the strongest incentive to scrutinize the managers. This rationale has, however, gradually diverged further and further from reality.