New York: PublicAffairs, 2020
322 pp. $28.00 (hardcover)
As the world navigates yet another economic crisis, pundits have once again let loose a barrage of shopworn arguments about how “capitalism” has outlived its usefulness and must be resigned to the dustbin of history. Many are calling for a variety of new regulations, for a Green New Deal, and for outright adoption of socialism. A new book purporting to demonstrate how business leaders and a reinvigorated defense of capitalism could solve the world’s problems would be a welcome respite—if it delivered on that promise.
Rebecca Henderson’s Reimagining Capitalism In a World on Fire sets out to demonstrate how businesses, acting voluntarily, can fix the world by rethinking the purpose of business and its role in society. At the outset, she explains that she hopes to make a case for coordinated action by businessmen so that “the rules of the game” (that is, government regulations) would not have to change—so that we can leverage our “technology and resources to build a just and sustainable world,” which, she adds, would be “in the private sector’s interest” (11).
Henderson’s credentials for undertaking this project are impressive. She is a business economist at Harvard Business School and previously has taught business strategy and sustainability at MIT’s Sloan School of Management. Alongside her prolific academic career, she has worked directly with industry as a consultant at McKinsey and Company and now sits on the boards of two multinational corporations. The United States Justice Department, during the “remedy” phase of its antitrust case against Microsoft, retained Henderson for her expertise on technology strategy. Throughout the book, she marshals her extensive experience in business—conveyed with anecdotes and narratives—as a kind of case study for her project of prescribing solutions to what she regards as the biggest problems facing the world today.
Any book claiming to show how capitalism can (or cannot) solve the world’s problems must, of course, identify what capitalism is. Although Henderson does openly pose the question “what is capitalism?” at the outset, she fails to provide a single coherent answer. Instead, she lays out political developments over the past eighty years and posits a variety of “forms” of capitalism such as “unconstrained,” “modern,” “free market,” “crony,” and “sustainable.”
Henderson’s lack of a clear definition undermines her project of “reimagining capitalism” and muddies the reader’s understanding of another crucial question: Do we have a system of capitalism now? The simple answer to that question is no, the United States currently has a mixed economy—and has for a long time. Capitalism is the system wherein the government’s sole purpose is to protect its citizens’ rights to life, liberty, property, and the pursuit of happiness, and wherein people are left free to act on their own judgment, so long as they do not violate the rights of others to do the same. The myriad regulations on business, private associations, and property; the encroachments on free speech; the ballooning entitlement and health care spending; the massive role of government in the economy and in our private lives—these are all evidence of the fact that we do not have a system of capitalism.
The closest that Henderson comes to identifying capitalism is when discussing a “beautiful idea” that she attributes to Milton Friedman and the Chicago School economists. The first part of this idea, she says, is that “truly competitive markets allocate resources much more effectively and much more efficiently than anything else.” The second part “rests on the normative primacy of individual freedoms, or the idea that personal, individual freedom is—or should be—the primary goal of society” (16).
Is this the system that she believes needs to be reimagined? Unfortunately, her analysis quickly makes clear that the answer is yes. “These ideas are,” she argues, “the product of a specific time and place, and of a particular set of institutional conditions. Given the realities of today’s world, they are dangerously mistaken” (17).
Henderson contends that the foremost challenges facing society today are “massive environmental degradation, economic inequality, and institutional collapse” (8). Not only does she maintain that free markets cannot solve these alleged problems, but she lays the blame for all of them squarely on the “beautiful” but supposedly “mistaken” ideas that she attributes to Milton Friedman and the Chicago School.1 “In the majority of our boardrooms and our MBA classrooms,” Henderson claims, students are taught that “the first mission of the firm is to maximize profits” (9). This “moral duty to maximize profits,” Henderson claims, has led managers and executives to focus solely on short-term revenue without regard to long-term growth or impact. She refers to CEO Martin Shkreli—who became known as “the most hated man in America” after his pharmaceutical company raised the price of a drug by a factor of fifty-six—as the utmost embodiment of this approach—that is, the pursuit of immediate monetary gains even if it means harming customers, the public, and one’s own long-term interest. Asserting that much of the economy operates on this premise, Henderson laments that, despite decades of increasing GDP and rising average worker pay, this short-termism has led to nasty consequences—a “world on fire” with climate change and stark inequality.
She even blames the “broken” institutions of education and health care on the “market failure” of “capitalism”—even though education has long been dominated by government-controlled schools, and even though health care is one of the most highly regulated industries, funded largely by government entitlement spending. Throughout the book, she continually blames nonexistent free markets for problems created by government interventions and restrictions on those observably unfree markets. She documents how some businesses behave (some for good and some for ill, in her estimate), but does so without a systematic investigation of the conditions—the laws, regulations, and ultimately the politico-economic system—in which they make these decisions.
“In today’s world,” Henderson observes, “many prices are wildly out of whack, freedom of opportunity is increasingly confined to the well connected, and firms are rewriting the rules of the game in ways that maximize their own profits while simultaneously distorting the market” (19). Later, she indicates that “it has also become significantly harder for entrepreneurial firms to succeed” (23). In neither case does she explain why these things have happened—that the system of freedom and individual rights has been worn away by decades of onerous regulations and government-mandated distortions of the price system. Instead, she blames “capitalism” and “profit seeking,” perhaps assuming that readers will not look too closely at whether these really caused the problems.
This view amounts to: “Profit-seeking is capitalist, so anyone pursuing profits is working under some form of capitalism.” Such treatment of “capitalism” as a loose collection of contemporary business behaviors is similar to the package deal that enables other scholars to smear it by including in the concept “capitalist” everyone from immigrant entrepreneurs and legitimate business leaders to “profit-maximizing” slaveholders in the antebellum South and scheming Soviet steel oligarchs with connections in the Politburo.
Much like other such critics of capitalism, Henderson reveals that she does not fundamentally believe in a system that guarantees individual rights and freedom. In a telling passage that deserves some unpacking, she asserts that “the problem is not free markets. The problem is uncontrolled free markets, or the idea that we can do without government, and without shared social and moral commitments to the health of the entire society on which effective government depends” (27, emphasis in original). This is a straw man. Advocates of capitalism are not anarchists who disregard the rights and value of other people, as Henderson implies. A rights-protecting government—one that acts swiftly and objectively to resolve disputes between citizens, protects them from criminals and foreign enemies, and provides a system of objective adjudication in the courts—is essential to capitalism.
In the end, despite her stated intention of inspiring business leaders to act voluntarily and use “capitalism” to save “a world on fire,” Henderson prescribes compulsion and increased government intervention. “We need governments,” she argues, “to provide either the economic incentives that will move firms to action, or the regulations that will force everyone to do the right thing” (203, emphasis added). Further, she alleges that “the education and health care [that every child] needs . . . can only be effectively provided by the state” (203). In her view, “only government can address the structural factors that drive inequality [and climate change]” (204).
Although Henderson never explicitly states the moral approach behind her prescriptions, it is altruism—the view that it is immoral to act in one’s own self-interest and that people should sacrifice for others. This leads her to the notion that those who don’t voluntarily choose to sacrifice must be forced to in the name of the “public good”—that is, it leads her to the same collectivism that undergirded every tyrannical regime of the 20th century.
Thus, although Henderson promises to demonstrate how a “reimagined capitalism” might “rescue a world on fire,” her book does not correctly identify capitalism, never mind reimagine it. Instead, she attacks its very foundations.
If we truly want to reimagine how capitalism can improve our world, we first need to get clear on what it is and why it’s a moral and political ideal. If voters and politicians did this en masse, we’d be in a much better position to extinguish the fire burning down the world.
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1. Of course, Milton Friedman and the Chicago School economists did not originate or fully defend the truly beautiful ideas at the basis of capitalism. Although Henderson casually notes that some of these ideas are “deeply rooted in the post-Enlightenment, classical-liberal tradition,” she completely fails to engage with those ideas or those of any other modern defenders of capitalism such as Ludwig von Mises or Ayn Rand. Given that she dismisses them as being “of a specific time and place,” perhaps she is convinced, wrongly, that no modern advocates continue to uphold the philosophic tradition of John Locke and the American Founding.