16 August

What Is Inclusive Capitalism—and Why Do We Need It?

From Leading Through Disruption: A Changemaker’s Guide to Twenty-First Century Leadership by Andrew Liveris

Corporate jargon, students at Liveris Academy probably think when they are first exposed to the term Inclusive Capitalism. It sounds necessary, overdue in fact, but maybe quixotic, too, short on specifics and as yet unsupported by any measurable steps or practices. If Inclusive Capitalism were less abstract and more real (so their thinking might go), then surely businesses and governments would already be building and investing in new and transformative institutions, programs, practices, and regulations, and to date most have not.

Younger generations would be right to infer that Inclusive Capitalism is a Rorschach test of sorts, whose meanings and definitions vary depending on who you’re talking to. Is Inclusive Capitalism the same thing as Moral Capitalism or Conscious Capitalism, to throw in two other, pot-muddying terms? Even more confusing, Inclusive Capitalism is sometimes used interchangeably with a related concept, Stakeholder Capitalism. They’re not the same. Stakeholder Capitalism refers to businesses that manage for all the individuals or entities that directly influence a company and play direct roles in ensuring the success of a business along its value chain—employees, customers, shareholders, local communities, and the planet—as opposed to managing exclusively for shareholders. Nor, despite some overlaps, is Inclusive Capitalism the same as adopting ESG metrics and practices. (Confusing Inclusive Capitalism with ESG, in fact, risks blurring and weakening the value and meaning of both.) So now that we have a better idea of what it’s not, what is Inclusive Capitalism?

Inclusive Capitalism starts with the notion that capitalism, and the business world in general, has for way too long been narrowly and selfishly focused on profits and the enrichment of a single entity, that is, the shareholder. In an era of widening inequality between the rich and everyone else, society is insisting that an enterprise’s license to operate means distributing wealth more equitably across all levels of society. Business is being asked to address the bigger role capitalism plays, redress past mistakes, and do better in serving all levels of society, so that capitalism works not just for the few but for the many. How and why we got to this point is another question.

The short answer is that capitalism and democracy aren’t coexisting as well as the ancient Greeks (and Milton Friedman) believed they would. The benefits of capitalism—growth, prosperity, improvements in standards of living all around the world—are well known and commonly acknowledged. Still, no one could have foreseen the level of inequality capitalism has ended up creating if they subscribed, as so many businesspeople did in the 1970s and 1980s, to the so-called Friedman Doctrine.

Milton Friedman was a popular University of Chicago economist who published a seminal, widely read article in the New York Times in 1970. Its title—“The Social Responsibility of Business Is to Increase Its Profits”— was pretty blunt. The role of business, Friedman wrote, is “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”3 In Friedman’s view, the free market was the ultimate authority and shaman. Business needn’t concern itself with society, social injustice, the environment, or anything else other than the relentless pursuit of profits. Anyone who believes “business has a ‘social conscience’ [emphasis Friedman’s] and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers . . . [is]—or would be if they or anyone else took them seriously—preaching pure and unadulterated socialism.”4

Fifty years later, the New York Times called Friedman’s article “the essay heard round the world,”5 and his philosophy “arguably the most consequential economic idea of the latter half of the 20th century.”6 The Friedman Doctrine, as it was known, was an open summons to corporate combat, one that, according to Salesforce’s Marc Benioff writing in the New York Times in 2020, “brainwashed a generation of CEOs who believed that the only business of business is business.”7 Benioff added that he had always disagreed with Friedman’s philosophy, adding, “And the decades since have only exposed his myopia. Just look at where the obsession with maximizing profits for shareholders has brought us: terrible economic, racial, and health inequities; the catastrophe of climate change.”8 Nonetheless, Friedman’s ideas helped usher in an era of spectacular wealth accumulation in the 1970s and especially the 1980s, when Wall Street’s Gordon Gekko—“Greed . . . is good”—was seen by audiences less as a villain than as an aspirational ideal.

In the early 1990s, with the end of the Cold War and the fall of the Berlin Wall, most of the world rightly celebrated the victory of capitalism over communism. At the same time, minus the reference point of Eastern Europe, capitalism had to confront its worst consequences, which it would do repeatedly over the next few decades.

Given that capitalism’s moments of self-reflection generally haven’t led to much, what makes today different? Capitalism is thriving, after all. A recent McKinsey study notes that while US GDP growth has slowed in this century, the US is still outperforming other G7 nations and leads the world in research and development.9 The study adds that “many of the breakthroughs fueling 21st century growth, from digitalization and artificial intelligence to innovations in the life sciences, have emerged from its ecosystem.”10 Moreover, US firms rank among the most widely known and the most profitable globally, comprising “38 percent of the top 10 percent of firms, and two-thirds of the top 1 percent of firms globally.”

But the world today finds itself at an inflection point. Society is demanding that capitalism take an honest look in the mirror. In the wake of globalization, the global financial crisis, and the COVID epidemic, it has become obvious, again, that capitalism as it exists serves to benefit the few, while leaving most people feeling dispossessed and excluded. It appears the top tiers of Maslow’s hierarchy of needs, beginning at the bottom with the physiological (food, water, sleep) and culminating at the top with self-actualization (achieving one’s full potential), are accessible only to the few. What happened to education, health care, and good jobs for everyone? Why is economic mobility stalling for the middle classes, who have seen their living standards drop and higher education become unaffordable? At the same time, millions of manufacturing jobs have disappeared overseas, leaving behind a generation of middle-aged workers who lack the skills and qualifications necessary for this century’s digital and tech-related jobs. Capitalism, it seems, is all about preserving the incumbency of those who already have access to capital, education, and health care, further stratifying social and economic class systems for which no developed country was ever designed.

Between 1970 and 2007 in the US alone, for example, the after-tax income of the top 1 percent of earners grew by 275 percent.12 CEOs have always been well compensated. But if the average CEO earned roughly 40 times more than the average American worker between 1970 and 1979, that same CEO in 2020 earned 351 times more.13

The pandemic worsened this trend, with vaccine access in Western democracies accelerating the already-wide divide between richer and poorer nations. In late 2021, the Wall Street Journal reported that “just 7 percent of people in Africa [were] fully vaccinated, compared with 42 percent of the global population.”14 Not only did COVID impede global economic growth, it pushed countless employees out of work. Lower-wage workers, disproportionately women and people of color, found themselves more likely to be laid off, find their hours reduced, or be at higher risk of contracting COVID. As for the already well-off, they did just fine. According to an Oxfam report, during the pandemic “the world’s ten richest men more than doubled their fortunes from $700 billion to $1.5 trillion—at a rate of $15,000 per second or $1.3 billion a day—during the first two years of a pandemic that has seen the incomes of 99 percent of humanity fall and over 160 million more people forced into poverty.”15 The Washington Post noted that 2021 was “the best time in history to be one of America’s 745 billionaires, whose cumulative wealth has grown by an estimated 70 percent since the beginning of the pandemic even as tens of millions of low-wage workers have lost their jobs or their homes,” adding, “Together, those 745 billionaires are now worth more than the bottom 60 percent of American households combined.”16 In the past five decades, the economic division between poor families and the top 0.1 percent has risen “more than tenfold,”17 with children today having only a “43 percent chance of out-earning their parents.”18 Democracy and capitalism are going through a divorce, a decoupling resulting from the failure of the capitalist model to distribute wealth more equitably, which has arguably led to the rise of autocracies around the globe.

But what’s the solution? Regulating an economy by raising taxes or enforcing egalitarianism is untenable. Countries need to grow and maintain capitalism by allowing entrepreneurs to access finance to create new goods, products, and services. But governments and businesses also need to provide access, latitude, and greater opportunity to citizens around the world who through no fault of their own were born into the bottom half of the social and economic ladder. If the Earth has any plan on hosting sustainable life in 2050, it’s very clear we need to pivot in how we distribute wealth.

Let me contradict Milton Friedman: Inclusive Capitalism isn’t a synonym for socialism. It’s a system for evening out a historically skewed playing field.

Hardcover and audiobook of Leading Through Disruption

Leading Through Disruption is a must-read guide for leaders in a rapidly changing world. Readers will learn how to overcome today’s problems in business, government, academia, and civic society—with an eye to creating a more equitable, sustainable future. Available as:

  1. Friedman, Milton. “The Social Responsibility of Business Is to Increase Its Profits.” New York Times, September 13, 1970.
  2. Ibid.
  3. Dealbook. “Greed Is Good. Except When It’s Bad.” New York Times, September 13, 2020. https://www.nytimes.com/2020/09/13/business/dealbook/milton-friedman -essay-anniversary.html.
  4. Ibid.
  5. Ibid.
  6. Ibid.
  7. “Rethinking the Future of Capitalism in America.” November 12, 2020. https://www .mckinsey.com/featured-insights/long-term-capitalism/rethinking-the-future-of-american-capitalism.
  8. Ibid.
  9. Ibid.
  10. Congressional Budget Office, October 25, 2011. https://www.cbo.gov/publication/42729.
  11. Hess, Abigail Johnson. “In 2020, Top CEOs Earned 351 Times More Than the Typical Worker.” CNBC Make It, September 15, 2021. https://www.cnbc.com/2021/09/15/in-2020-top-ceos-earned-351-times-more-than-the-typical-worker.html.
  12. Hinshaw, Drew. “Omicron Variant Highlights Risks of Low Vaccination Rates in Poor Countries.” Wall Street Journal, November 26, 2021. https://www.wsj.com /articles/omicron-variant-highlights-risks-of-low-vaccination-rates-in-poor-countries-11637960558.
  13. “Ten Richest Men Double Their Fortunes in Pandemic While Incomes of 99 Percent of Humanity Fall.” Oxfam, January 17, 2022. https://www.oxfam.org/en/press -releases/ten-richest-men-double-their-fortunes-pandemic-while-incomes-99-percent-humanity.
  14. Saslow, Eli. “The Moral Calculations of a Billionaire.” Washington Post, January 30, 2021. https://www.washingtonpost.com/nation/2022/01/30/moral-calculations-billionaire/.
  15. Ibid.