Creative Capitalism in Context

By Nancy Koehn

Gates has earned our ear (and for many of us, our respect) largely because he succeeded so convincingly playing the game of market capitalism that first emerged in the late nineteenth century and grew to great influence during the twentieth century. This game or system has been dominated in many industries by large, multinational corporations that compete intensively—usually with a small number of rivals—for market power. (Indeed, at the Harvard Business School where I have taught business history to thousands of MBAs, students often compare the early growth of Standard Oil to that of Microsoft one hundred years later. They also compare John Rockefeller to Gates, arguing that both entrepreneurs saw the outlines of competition in their respective industries before other players and could thus act quickly to create and control what become the standards of rivalry in each young market). The economic spoils of this system have been valued and distributed in different ways—through employment patterns, market share, business investment, and most prominently, stock market performance

Given Gates’ achievements, it is interesting that he is throwing down a gauntlet to have global capitalism directs itself toward social contribution as well as financial gain. It is also important. Viewed through the lens of history, there are five powerful forces working on the system of global capitalism in this moment, propelling it along the broad path that Gates sketched out at Davos.

The first is the issue of resources. Who has what to deal with the pressing challenges today? If we think solely about resources—people, innovation, traction, money, and execution—business is the most powerful force for change on the global stage right now. No other set of institutions—not religious organizations, not the nation-state, not individual NGOs—has the resources or the breadth and on-the-ground depth of business to deal with what is front of us today. Yes, all these other players matter, in some cases a great deal. But not as much as business—in the form of both large, global corporations and small-scale entrepreneurial enterprises—matters. This is not philosophy or politics, but the ineluctable reality of our moment.

A second force affecting the speed and direction of global capitalism comes from the demand side. There are millions—soon to be billions—of consumers, voters, and other actors, most obviously “millenials,” who want something new and different from business, who conceive of business and the “flywheel” of global capitalism in ways distinctive from their counterparts have in past (and indeed in ways different from many boomers today). These actors will exert great power in the next two decades.

At the same time, the corporate form is changing very fast. New networks of companies and organizations are emerging, new ways of competing and collaborating are becoming more important. Old boundaries are withering. The traditional widget-making company maximizing its own profit in a nationally defined space is evolving into something more complex and much more integrated into a broad, often global, web of relationships.

A fourth catalyst is transparency. Leaders and organizations of all kinds are increasingly operating in glass houses. The explosion in transparency wrought by a global media, great leaps in connectivity, a generation of global citizens who demand novel commitments from business are creating new standards of conduct for even those actors least willing to change.

Finally, though less obviously, there is a palpable thirst among people around the world for leadership that is not for sale, for individuals and organizations that are not solely defined by the transactional rhythms and white-hot speed of the marketplace. (My graduating MBA students talk of this concern frequently as they discuss job choices and sketch out their own career plans). We can see this in the enduring popularity of entrepreneurial leaders such as Warren Buffett and Oprah Winfrey, individuals who have thrived in their respective industries partly because they consistently pursued something more then the next market-dictated score.

All of these forces are gaining strength now, and helping lay the pavement along which global capitalism will travel. This is evident in the success of large companies such as Costco, Jordan’s Furniture, Southwest Airlines, Google and even Starbucks, businesses that meet the needs of a broader set of stakeholders than shareholders. (A recent study of 30 such firms, by Rajendra Sisodia, David Wolfe, and Jag Sheth and published by the Wharton School, demonstrated that the public companies in this group returned 1,026 percent for investors over the 10 years ending June 20, 2006 while the S&P 500 returned 122 percent).

The importance of these five forces is also evident in the young enterprises that are now beginning to exert themselves. Entrepreneurs and their creations have always been the sinews of capitalism. So we can look to organizations like RED, founded by Bono and Bobby Shriver, or Kiva -- the online microlender created by two Stanford MBAs, Matt and Jessica Jackley Flannery -- as important examples of where global capitalism is going. RED integrates the power of big business, new customer priorities, and the interconnected agents of social change, in the form of the Global Fund to Fight AIDS, Tuberculosis and Malaria. The animating mission of RED is to harness two of the most potent forces operating today, business and consumer spending, in service to eradicating deadly disease in Africa. Kiva connects small lenders—many of who lend $50 or less—with promising entrepreneurs, mostly in developing countries. Three years after its founding, Kiva has helped fund more than 18,000 entrepreneurs in places like Samoa and Equador. This is creative; this is capitalism; and this is the future, right here on our doorstep.

Comments

[FilipeAlvesFerreira]

We must resolve the triple dilemma of the Classic Economy. So I'm proposing the money datevaluation like an investment's substitute for getting webcashmatic plusvalues in cash phase.
Regards/FilipeAlvesFerreira#4(1942)

I'd like to point out a factual inaccuracy in the post: Matt Flannery is not a recent Stanford MBA. He has a BS in Symbolic Systems (an interdisciplinary major consisting of cognitive science, philosophy, and computer science) and a MA in Philosophy.

On a more philosophical point: does the traditional profit maximizing paradigm as the key to unlocking positive transformative change in society still hold? I think I'm a millenial - and I'm interested in change - but the ultimate question for me and many others is: if I have a choice in starting an organization, what kind should it be? A nonprofit? A traditional for-profit? A profit sacrificing creative capitalist firm? Which one will ultimately have the most positive impact?

[Tracy W]

How dull, what a bunch of cliches in this post.
" There are millions—soon to be billions—of consumers, voters, and other actors, most obviously “millenials,” who want something new and different from business, who conceive of business and the “flywheel” of global capitalism in ways distinctive from their counterparts have in past (and indeed in ways different from many boomers today). "

This sort of thing has been said in the 1960s, the 1970s, the 1980s and the 1990s and with the dawn of the 21st century. To quote the song "This is the dawning of the Age of Aquarius"

"At the same time, the corporate form is changing very fast. New networks of companies and organizations are emerging, new ways of competing and collaborating are becoming more important. Old boundaries are withering. "

This sort of cliche has been around far longer than the previous one. Check out 19th century comments about the dizzying state of change, in, for example Jerome K Jerome's Three Men in a Boat.

The telegraph, the telephone, the postal service, the automobile, the railway, the canal boat, the aeroplane, the clippher ship, the university, the limited liability company, created new ways of competing and collaborating and old boundaries withered.

"Finally, though less obviously, there is a palpable thirst among people around the world for leadership that is not for sale, for individuals and organizations that are not solely defined by the transactional rhythms and white-hot speed of the marketplace. "

As opposed to previous generations, who had no high ideals about leadership (as seen by the historic tendecy of oaths taken by politicians on taking office to have phrases like "I promise to grab as much as I can"), and never ever did anything like retreat from the sinful outside world to a religious order.

"All of these forces are gaining strength now, and helping lay the pavement along which global capitalism will travel. "

At least four of these forces are the same as they have been in the past.
The only thing that is possibly new is increased transparency. Though I'd like to see some empirical data on that.

And one thing that is certainly not new - people laying out mindless cliches like all their ancestors have before them.

[Tracy W]

if I have a choice in starting an organization, what kind should it be? A nonprofit? A traditional for-profit? A profit sacrificing creative capitalist firm? Which one will ultimately have the most positive impact?

A traditional for-profit. Assuming, of course, that you actually manage to increase profits.

With all due respect for charities, they're fringe activities in an economy. What is important for prosperity is the great mass of resources created in terms of food, housing, transport, heating, cooling, light, clean water, etc. All this depends on people doing boring stuff for pay.

[chiori emmanuel cole]

i want to say a very big thank you for everyone who has made harvard university a success. not because of how you are setting
a higher standard for your student alone but because of the information that is coming from you which are changing our world.
please, keep me informed with new happenings or discovery.
God bless you real good.

from nigeria

[chiori emmanuel cole]

i want to say a big thank to every who has made harvard university a success. not because of how you are setting a higher standard for your students alone, but because of the informations that are coming from you are changing our world and iq. please, send me news letters, new happenings and discoveries.
God bless you.
from nigeria

[Guillermo Del Moral]

I agree that traditional capitalism is important for prosperity, creates extreme poverty. I agree that charities are fringe activities in an economy, but charity is not creative. Not only for profit organizations have an impact in society. There are successful social entrepreneurs that have made an impact (like RED and Kiva).

The kind of company you can start depends on a lot of things: experience, personal goals, commitment, life style, perseverance, costs and rewards, etc. You must know how things can work in those kinds of businesses.

I hope that this creative capitalism can create models that help social entrepreneurs in every stage, like the venture capitalism industry does. I think that great philanthropists, can finance very carefully, social entrepreneurs that can work near the people that need it. I think there is a higher need of people working in social change, than money. For example, people teaching how to work to poor people.

[Tony Wang]

Guillermo, Kiva is a nonprofit - a creative one, but a nonprofit nonetheless. So when you say charities are a fringe activity, I consider that statement to include Kiva as well.

[Tracy W]

I agree that traditional capitalism is important for prosperity, creates extreme poverty.

Did you in fact intend to say this, or were you trying to say that traditional capitalism reduces extreme poverty?

For example, Chile has an economic freedom rating from the Economic Freedom Index of 79.79, making it the 8th most econocially-free country in the world. It has 5.6% of its population living on less than $2 a day (US PPP real, 1990 I believe), and is the first country in the ratings to have a number at all. Estonia, the next one at 12 in the ratings of economic freedom, has 7.5% of its population at this level. Go down the ratings and you get countries like Burunid, 145th in the world in terms of economic freedom, 87.6% of its population living below $2 a day or Lesotho, 132 in the world, 56.1% of its population living below $2 a day. The one exception is the Ukraine, 133th in the world in terms of economic freedom, 4.9% of its population living below $2 a day. At the other end we have Botswana, 36th in the world in terms of economic freedom, 55.5% of its population living below $2 a day.

The general rule is that economic freedom, aka traditional capitalism, goes along with fewer people in poverty. The direction of causality is not clear, and examples like the Ukraine and Botswana show that whatever the causality is, it is complex. But there's no reason to believe that capitalism causes extreme poverty.

[Guillermo Del Moral]

I’m not against capitalism. History has demonstrated that it is better than socialism and communism. You are comparing countries that have different ratings of economic freedom, and of course there is more poverty in those that have less economic freedom.
I was trying to say that, over time, poverty is increasing, even with capitalism. Companies are trying to optimize profits, and they reduce employment, either downsizing or increasing technology. I am not against that, because that generates progress.
But that is also the beginning of social problems, because most of that people does not have a good education. Without a job, sometimes they start consuming drugs and then start domestic violence. Sometimes the children leave their homes and start living in streets. In the best scenario they finish in a foundation that avoids boys and girls leaving in streets or retrieving them. When children live in streets, they also take drugs. Girls get pregnant very young and sometimes they abandon their children because they born with defects or illnesses. And then are other foundations that receive abandoned children, others that fight against drugs, against abortion, and against aids. And companies optimizing profits helps foundations because they want to attract consumers (good image).
No matter what the reason is, of course that help is welcomed. And I am not proposing companies to give jobs to avoid those problems, because they will finish like the bureaucracy government.
But there would be a way to make capitalism better. I am always trying to imagine how people without a job can be helped. I would ask you and other economists, how we can teach them to be little entrepreneurs and maybe learn a motion. Maybe create little communities self dependent (like farms). And the question is, even in that case, how can they fight against capitalism that competes with them? Because even if the poor people that makes handcrafts, fights against the system of capitalism. When you are a tourist you find handcrafts very cheap. But you can find those handcrafts in malls in a very high price. At the end, progress don’t arrive to poor people.
I agree with Bill Gates that creative capitalism should start developing human capital. I think foundations and corporate social responsibility should finance good education, not only give scholarships. And find microeconomic models to help poor people to survive. And help social entrepreneurs. I know it is also hard. There are poor countries that are difficult to help because there are problems like the teachers union or politics. But I think this blog is trying to find that solutions. I think that is why there are people trying to be creative.

Finally I have one question for Tracy. Could you tell me where is Mexico in economic freedom statistics?

[Tracy W]

I was trying to say that, over time, poverty is increasing, even with capitalism.

Can you please provide some evidence to support this statement? My understanding was that, with the exception of the current food crisis, poverty has been falling. See http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTPA/0,,contentMDK:20153855~menuPK:435040~pagePK:148956~piPK:216618~theSitePK:430367,00.html

The food crisis will be responded to by people growing more food. At least, if capitalism is allowed to work, it will be.

Companies are trying to optimize profits, and they reduce employment, either downsizing or increasing technology. I am not against that, because that generates progress.
I am not against that, because that generates progress.
But that is also the beginning of social problems, because most of that people does not have a good education.

It's not the beginning of social problems. All the social problems you exist have long been in operation.

I would ask you and other economists, how we can teach them to be little entrepreneurs and maybe learn a motion.

If there's one thing that the history of economic aid teaches us, it's that individual people in their own country know far more about local opportunities than any economist in a completely different country. My solution is to allow them to be entrepreneurs, they'll do the rest.

Maybe create little communities self dependent (like farms).

Sounds dangerous. Humanity is better off when we are interdependent.

And certainly farms in rich countries are not self-dependent.

And the question is, even in that case, how can they fight against capitalism that competes with them?

Capitalism is an economic system. It can't compete with them. Other people can compete with poor people.

When you are a tourist you find handcrafts very cheap. But you can find those handcrafts in malls in a very high price.

At the mall you are paying the costs of the mall shop, its labour, and the transportation system (and probably a bunch of other things I can't think of). And of course in a rich country the wage paid to the shopworkers has to be competitive with the wages they could earn elsewhere.

At the end, progress don’t arrive to poor people.

If it doesn't then why has the number of people living on less than $1 a day fallen from 28 percent of the world's population in 1990 to 21 percent in 2001? (From the World Bank link I provided earlier).

I agree with Bill Gates that creative capitalism should start developing human capital. I think foundations and corporate social responsibility should finance good education, not only give scholarships. And find microeconomic models to help poor people to survive. And help social entrepreneurs.

And your evidence that firms can do all these things better than focused charitable organisations is?

But I think this blog is trying to find that solutions.

I don't think it is. Supporters of CC make all sorts of comments about it, but they never address the primary question of whether CC firms actually improve social outcomes more than having separate organisations, ones that focus on profit-maximising and ones that focus on other social goals. Too many supporters talk as if it's enough to intend to do good, and never consider the question of "are we actually doing good"?

Could you tell me where is Mexico in economic freedom statistics?
Mexico is 44th in the world, with a combined score of 66.4.
http://www.heritage.org/Index/countries.cfm?sortby=country

[Rebecca]

I have to agree that this notion of creative capitalism is vague. Vague or not, however, it continues to fuel my curiousity as to why as a capitalist society we in the US continue to tolerate and often prop up market inefficiencies that impede what one might term creative capitalism. Our country's energy situation particularly in terms of transportation is the biggest example I have of this. All the stakeholders in this situation continue to support an infrastructure that is not durable. And the lack of thought leadership in this is mind boggling.

The more I think about it, big deal that Starbucks or Target are making customers happy. That still is only about customers and profits. They aren't changing the world, only building more big boxes to drive our gas guzzlers to, only pretty soon, we aren't going to be able to afford to drive there and then our roads are going to fall apart because governments won't be able to collect the taxes from gas sales to pay for paving the roads. Meanwhile, Target gets many of its goods from China with its less than stellar human rights record.

I will give Toyota credit for sticking with the Prius. Toyota sticking to their guns on the Prius was one of the greater acts of "doing well by doing good" that I can think of. As far as RED,isn't this a knock off of Working Assets except its Bono? If this is the model you are suggesting of creative capitalism, I suggest renaming it "Directed Donations through Commerce" or something similar. I think you could also put affinity cards in that basket.

Lets face it, just because Bill Gates says something, it doesn't mean it's right. He didn't even finish college! :)

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