Why capitalism must adapt to a new era

In new Chicago Booth event series, economists discuss how capitalism can be more equitable

Just over a half-century ago, Nobel Prize-winning economist Milton Friedman, whose work inspired the “Chicago School” of economics, wrote in a famous essay in the New York Times: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”

That idea defined the age of shareholder capitalism that followed. However, the world is in a new era now. Capitalism faces doubts about its ability to meet people’s needs, distribute resources more equitably, and even coexist with democracy. Economic experts discussed these issues during the kickoff event for the new series The Future of Capitalism—hosted by the University of Chicago Booth School of Business—which explores the ways in which our economic systems are evolving as expectations about the role of business in society keep changing.

Prof. Randall S. Kroszner, Chicago Booth’s deputy dean for executive programs, moderated the Sept. 30 event, which featured Baroness Minouche Shafik. Shafik is director of the London School of Economics and Political Science and the author of What We Owe Each Other: A New Social Contract for a Better Society, a look at how our social contract has broken down and how we might fix it.

The expert panel also featured Raghuram G. Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance, and author of The Third Pillar: How Markets and the State Leave the Community Behind, a rethinking of the relationship between the market and civil society.

In a hybrid format with both virtual and in-person attendees at Booth’s new campus near St. Paul’s Cathedral in London, the wide-ranging conversation touched on the erosion of the social contract, ways to make capitalism work better, China’s alternative model to Western free enterprise and more.

An eroding social contract

Shafik began with a discussion of the unwritten social contract she called “an essential underpinning to capitalism.”

“You had a predominantly male breadwinner in most households. Women were available to care for the young and the old for free,” she said. “Most people ... would work for two or three employers over the course of their life. When they retired, they would live just a couple of years. And during those years, if they needed care, that would be provided by their family.”

But technology, globalization, and the shareholder capitalism Friedman championed eroded that contract as women entered the workforce en masse and corporations reduced benefits and cut full-time employees, she suggested. Governments have stepped in to fill the gap, to varying degrees.

“Through the 20th century, we had an increasing role of the state in doing some of this,” said Rajan, who also served as governor of the Reserve Bank of India from 2013 to 2016. “Some of it was brought about simply because the family or the community was unable to cope.”

He cited the New Deal and social security in the United States as examples of government efforts to knit together a basic safety net. And yet, he pointed out, neither the state nor the private economy can solve every problem. “We’ve seen in the pandemic gaps spring up where neither the government is present nor the market,” Rajan said. “Society has to step up every time the formal structure breaks down and fill the holes.”

But how? “We’re getting to a place now where workers need portable benefit schemes and less of their social-insurance needs should be bound up with their employer,” Shafik said. “And frankly, we should mandate that employers provide benefits to all workers regardless of their employment contract.”

How to make capitalism work

Rajan said that in cases where the private sector’s actions are insufficient, we may need public action, but an even larger question is that of equity and equal opportunity.

“I think one way to make capitalism work is you need a certain level of equity within society,” he explained. “And that doesn’t mean socialism, but it does mean that when you’re thinking about capabilities, you have to have more equity in generating those capabilities.”

The family you’re born into and where you’re born have huge consequences for your career outcomes, Shafik noted. For example, she said, being born into a wealthy family makes you significantly more likely to have a patent as an adult; if you’re born in Silicon Valley, you’re much more likely to get a technology patent, and if you’re born in Minnesota, you’re much more likely to have a medical patent. Shafik asked, “How do you invest in those people [born to less fortuitous circumstances] earlier on and give them equal life chances so that capitalism’s promise of opportunity is actually realized?”

Kroszner, the Norman R. Bobins Professor of Economics at Chicago Booth, asked whether the democracies that go hand in hand with capitalism can survive without addressing growing disparities in income and wealth. Both panelists pointed to capitalism’s historic adaptability.

“There are many flavors of capitalism. Capitalism in Denmark looks very different than capitalism in the United States,” said Shafik. “I think we’re at a moment when capitalism has to evolve dramatically in order to sustain public support.”

While some advocate a universal basic income to protect people with limited opportunities in the labor market, both panelists were wary of this approach. “Rather than see them as collateral damage, we have to figure out, how do we bring them back into the workforce?” said Rajan. “Work has become such a big part of having meaning in life.”

Shafik concurred. “In every society in the world, part of the social contract is that if you’re an able-bodied adult, you’re expected to contribute in exchange for being cared for when you’re young and you’re old.” Instead of a universal basic income, she suggests an earned income tax credit and removing barriers to contributing to the labor market. Specifically, she said good childcare policies would help relieve the extra burden on women and allow them to participate fully in the workplace.

Capitalism, democracy and China

China’s competition with the West also came up, amid signs of growing authoritarianism and intervention by the ruling Communist Party in what had been one of the world’s most vibrant economies. 

Shafik said China does pose a challenge to Western liberal democracies that presume capitalism and democracy are married to each other. 

“I think China is developing a model where you do have market forces in some areas but you don’t have a democracy,” she continued. “You don't have an electorate; you have a ‘selectorate’—a small group who select the leaders through an internal mechanism.” 

Rajan warned against glorifying China’s leadership’s ability to act decisively without constraint, especially compared with the messy partisan bickering in Washington. “There are no checks and balances. That to my mind is the problem with the Chinese system,” he said. Both agreed that the best response to China is to make democracy work better so it can deliver a better form of capitalism to its citizens. 

The promises and challenges of technology

Finally, the panelists discussed technology—both the future of cryptocurrency and the threat of automation to jobs.

Rajan noted that cryptocurrencies such as Bitcoin and the Ripple network present promising possibilities—for example, helping facilitate cross-border transactions. Yet, he has concerns about a central bank digital currency threatening innovation in the private sector and limiting consumer choices. “Think of having your accounts with the Federal Reserve—how much customer service are you going to get? You may not get a lot of redress if they make mistakes or something happens,” he suggested. “Central banks have to think carefully about that.”

On the threat of automation, the panelists struck a more optimistic note. “Man plus machine or woman plus machine is much better than machine alone or human alone. We need to figure out how to aid humans in doing better jobs,” said Rajan. “We can do so much with technology. But we have to guide it. We have to work with it. It won’t happen naturally.” 

“You need to invest in the people, not just in the technology, so that you get the best outcome,” Shafik agreed.

—This story was first published by the Booth School of Business. The Future of Capitalism series will continue Oct. 27, featuring Prof. Lars Peter Hansen for a discussion on climate change and the economy.