During the recent G20 Summit in Osaka, Japan, President Donald Trump was asked what he thought about Vladimir Putin’s statement that “Western Liberalism” is becoming obsolete. Unfortunately, Trump didn’t know the difference between Classical Western Liberalism (the philosophy that created capitalism) and San Francisco liberals. 200 years later, Liberalism is still going strong, but cracks are showing in the foundation, and Capitalism and Democracy are being challenged. What do those challenges mean to a 21st Century citizen? Let’s dive in and see!
Before Liberal philosophy, we had Monarchies and rule by Kings. Monarchs controlled most (or all) of the nation’s political and economic power. Below the rulers were aristocrats, then military leaders, and other classes until we hit the “lower class”, peasants, serfs, slaves, etc. The class you were born into was the class you died in. Birth (and your subsequent class) determined your job, where you lived, if you went to school, who you would marry, and every other aspect of your life.
Liberalism said power comes from the people, not Kings. Citizens choose their leaders (Democracy) and choose where they put their money and labor (Capitalism). With Democracy and Capitalism as the new center of society, class systems began to fade away. Individuals would choose their own fate. In a “classless” society, education became universal instead of the privilege of just a few. Managers and Officers were no longer appointed based on birth, personal ability and ambition mattered!
Suddenly, individuals from the most humble background could rise up in society. Human capital became more valuable than land or Royal privilege. This didn’t happen all at once. It started with a series of writings that challenged the old order, which led to political movements, and eventually revolutions. Writings and politics started in Europe, but the first big revolution was here in America. America WAS the revolution!
Separated by an Ocean, English citizens (soon to be Americans) didn’t need a King. A decade later, France agreed and had its own revolution. How important was the American revolution? Over 50 nations have flags with three different color stripes, or a “Tri-Color”. France adopted the Tri-Color flag as a tribute to America’s “Red, White” & Blue” flag. For two centuries, America was literally the very model of Liberal philosophy.
The Age of Kings passed just a short time ago. We started World War I with a King in England, a Kaiser in Germany, the Tzar in Russia, an Emperor in Japan and scores of lesser monarchs. Just three decades later, after WW II, the Age of Monarchs was ending. Kings were retired to make room for the rights of the individual. Without Monarchs the world’s wealth exploded, life expectancy nearly doubled, and contagious diseases were eradicated. We even traveled to other planets! Strong evidence that humanity no longer needs Kings. Yet… there are those cracks in society.
Throughout the 20th century, Capitalism was an undeniable source of social good. Capitalism provided resources and economic drive to develop vaccines, to provide clean drinking water, build schools, and raise our standard of living enough to enjoy longer lives. But by the 21st century, Capitalism had changed.
Capitalism created outsourcing and automation, eliminating many higher paying “trades”. New technology is replacing high-paying jobs, like financial analysts and research professionals. Self-driving vehicles will take away well-paid jobs that do not require a college degree, while Artificial Intelligence will drain away employment from lawyers, doctors and MBA’s and other individuals with higher degrees.
The to Pew Research Center, one of America’s most prestigious sources of independent research, reports that U.S. compensation has been stuck since the mid-1960s. Capitalism once guaranteed growing prosperity. Now it is a zero-sum game, and it may soon only guarantee a jobless future.
More than the economy is at stake. We watched big corporations intentionally ignore the latest scientific evidence on global warming. Then we learned that scientists working for big oil companies made these same discoveries decades ago, and those corporations chose to keep the information secret, so as not to affect their stock valuations.
But big oil was not alone. Big pharma once sought to cure the ills of the world and is now responsible for 50,000 Americans a year dying from intentional over prescriptions of Opioids. Wall Street firms that once fueled the economic engines of the world placed profit in front of national or global good and collapsed the world economy. The #MeToo movement exposed how widely corporate America permits or even encourages sexual assault and rape, rather than confront powerful stakeholders and managers. For young Americans growing up today, they are in the age of Corrupt Capitalism.
A new generation of Capitalists imagines an improved Capitalism that makes the world better. Impact Investors have identified the problem. Corrupt Capitalism always tries to keep positive consequences (such as profits), while transferring negative consequences (pollution, social inequality, depletion of public resources) to the public, without any compensation. It’s cheaper to dump toxins in a river and let the people downstream deal with it than to reduce your pollution. Especially if you are never fined for damaging the world around you.
Formerly the poster child for the “evil corporation”, big oil is starting to reform. ExonnMobil has acknowledged that petroleum puts carbon into the air, and causes global warming. However, they still resist the idea that they should pay for the damage their products cause.
Impact Investors want to account for a corporation’s impact on the world, both good and bad. Corporations that improve the world, should be credited and have a higher value. Corporations that degrade the world, receive a penalty and are worthless. When the financial value of a corporation reflects their impact on the world, corporations are motivated to take more actions to improve the world. Not a bad concept!
Impact Investors represent over $300 billion of capital, just in the U.S. Another $18 trillion in investments are controlled by government pension funds that have agreed to the United Nations ESG (Environmental, Social and Governance) guidelines, which follows goals that are supported by Impact Investors.
Impact Investors and ESG principles have been supported by a new type of institution, the “B” Corporation. Corporations (for and non-profits) have been the instrumentality of Capitalism for the last two centuries. But lately has been an understanding that something else was needed, leading to the creation of the Benefit Corporation (or “B” Corp). The “B” is a social good… preserving the environment, developing low-income housing, inventing affordable medicines, improving social equality… above shareholder profits, normally the highest priority for corporations. B Corps require independent audits to confirm that they truly performing according to their “Benefit” goals.
B Corps and Impact Investors will be a force for good. But the B Corp is typically a For-Profit corporation. What about the Charities and Foundations that have driven so many good causes? The next stage in B Corps could be BRRM or the Balanced Risk Revenue Model. BRRM allows for-profits and Charities to work together while preserving the best aspects of both types of corporations. I could go on and on about BRRM, and I will, but in another blog.
Full disclosure… last year I started working with Nicky’s Gardens of Hope, a new Charity to care for Autistic and disabled adults, to develop their operations. While some incredibly good services for disabled adults exist, they are rare. For-profits are too often focused on shareholder profits and non-profits are often too dependent on government funding (which is unreliable at best). Instead of choosing one model or the other, we’re introducing BRRM as a third alternative, providing the best financial features of both worlds, while still keeping the needs of disabled adults foremost.
There are many other innovators out there, and many in the financial world that are converting from traditional investors to Impact Investors. Impact Investors are learning that when corporations intentionally generate bad outcomes (think tobacco, big oil, gun manufacturers), eventually negative value can wipe out earnings. Good investments in good people, doing good things… usually have few skeletons in their closets that can wipe out their value.
Capitalism has proven to be one of the greatest engines of change in human history. If we choose to use that power, America can change the world. Again. The tarnish on Capitalism and Democracy can be wiped away by new good deeds. A new generation of Capitalists wants to ready to return Capitalism to its origins, and possibly make the next decades the greatest in human history! I don’t know about you, but joining this American revolution is the best way I can think of to spend my 4th of July!
What do you think? Is it time for Capitalism 2.0? Tell us what you’re thinking!