Reimagining Capitalism - The Soblem Prolver Book Summary
This is a great book. It summarises a lot of the problems we are facing in society, explores what’s causing them and makes some great suggestions on how we can fix them. It helped me understand a lot more about the root causes of these problems and has given me a framework for thinking about how we can solve them.
I devoured this book in just few days when I was on holidays and would highly recommend it.
Here’s my summary.
TLDR;
A fixed version of capitalism is the best way to solve the big problems we face. To create this fixed version of capitalism, we need to;
create “purpose” driven organisations
fix finance to focus on the long term and to price in all externalities
cooperate more across organisations and nations
strengthen our institutions.
What are the problem’s we’re facing?
Henderson starts off this book by clearly defining the problems we’re facing as a global society. She lists three;
Environmental degradation; including climate change, pollution and the destruction of natural habitats and species.
Economic inequality; the increasing difference between the wealthy and the poor.
Institutional collapse; the fall of all institutions from national governments, to local governments, all the way down to local churches and communities.
I full agree with problems (1) and (2). These are big issues. To me, (3) feels more like the cause of a problem, as opposed to a problem in itself. For example, the collapse of local communities is causing increased isolation and loneliness, but in itself, I don’t see why it is a problem that impacts people’s lives.
Henderson says (3) is a problem because it is reducing our ability to successfully run a free market economy - more on this later. On a governmental level, I can see her point.
As an aside, if you want to understand why institutions are collapsing, read The Revolt of The Public by Martin Gurri (or watch this video with him) - both are great!
What is causing these problems?
Henderson doesn’t spend much of the book discussing the symptoms of the problem which is something I love! Instead, she jumps straight into the causes of the problems (my kind of author!). She highlights two primary causes:
Businesses are focused solely on maximising shareholder returns
The free market model is failing
On (1), Henderson explores the the concept of businesses’ being solely focused on maximising shareholder returns. She explains how this concept comes from Milton Friedman’s ideas post World War II. Friedman ideas were based around encouraging free markets and said that if businesses focused on maximising shareholder returns it would have a whole host of benefits for society.
He argued that it would result in more effective allocation of our resources, would allow for more individual freedom and that it would align investors and manager’s incentives. Even though Friedman introduced these ideas post World War II, they only started to gain traction in the 1970s.
In the decades after 1970s, free markets were efficient (more on what this means later) and they worked really, really well for creating positive social impact.
Businesses were focusing on shareholder returns, but, at the same time, institutions were strong. Government and non-government institutions (like trade unions) had the power to reign in businesses if they believed they were not acting in the best interest of the public. There was balance in the force.
Fast forward 50 years and neither of these things are true. Free markets are not working properly anymore and institutions are now much weaker. There is no longer balance in the force. Businesses have a license (both culturally and legally) to do whatever it takes to maximise shareholder returns.
Henderson explains the three things needed for free markets to operate well;
Prices must reflect all available information
Genuine freedom of opportunity must exist (e.g., you can easily leave your job for another better one if it exists)
The rules of the game must support genuine competition
Henderson shows how all three of these requirements are now failing.
On prices, the impact of all businesses activities are not properly included in the price of what they sell.
For example, let’s take 1kwh of coal-fired electricity. If you calculate the cost this will have on public health and the climate, it comes out at 8c.
But, this kwh of electricity can be sold by an energy company in the free market for just 5c.
Right now, the government and broader society has to foot the bill for the 8c worth of damage caused by this, whilst the energy company can take in their money without having to worry about these costs.
If the externalities were priced in properly, the energy company would have to try and sell that same kwh of electricity for 13c (5c of their original price + 8c of externalities).
On freedom of opportunity, Henderson notes how people do not currently have the skills required for freedom of opportunity. Social mobility is decreasing and workers have less bargaining power because industries are becoming more and more concentrated.
This reinforces an belief I’ve had for quite a while, that reskilling of workers is a crucial problem to solve - more on that in another post.
Finally, Henderson believes the rules of the game are now fixed. And they’re fixed in the favour of businesses. She explains how much money is now spent on lobbying each year. She shows how this lobbying money often has some of the highest ROI of any company’s invesmtents - crazy right?! She also references a political science study that proved that “the views of the average citizen on a piece of law have no impact on whether or not it becomes law” - that fact scared me a lot!
How do we solve these problems?
Henderson explains the 5 ways we can solve these problems;
We need to develop the business case for change to show organisations why it makes sense to change what we are doing. This can be in the form of increasing revenues, decreasing costs or reducing risk. To get people to change, we need to show them how it will benefit them. This is a crucial first step.
We need to create more purpose driven organisations and move away from our obsession with shareholder value
We need to rewire finance and accounting to focus more on long term impact and to properly price in the impact of business activity - I am very interested in the work of Eric Ries in creating the Long Term Stock Exchange as a way to do this.
We need to develop high levels of cooperation across organizations and nations in order to create solutions
We need to strengthen our institutions to better support capitalism and ensure organisations act in the best interest of society
What can YOU do?
Henderson makes a good point about how change actually happens. She explains how the stories of past changes often focus on a few key events and people. But this focus reflects the structure of our minds and the nature of modern communication, not the way in which change actually happens. We need stories about these people and events to make sense of the noisy, messy, complicated world we live in. But, the way change actually happens, is through a vast number of individuals, like me and you, taking action, every single day.
Here are the 6 ways Henderson says you can make a difference to these problems;
Discover your own purpose. Find what you value above all else and make sure the work you do aligns with it.
Do something now. Even if it is a small action like cycling to work instead of driving. Your actions will persuade others to change.
Bring your values to work. Most people are kind, caring people who know what’s right and what’s wrong. But, we often leave these at values at home when we go to work. Don’t! In work, stand up for your values and for what you know is right. it’s not easy, but (not to be overly dramatic) you’re life kinda depends on it.
Work in government. I wholeheartedly agree with this. Pretty much every problem I investigate is going to need a lot of help from government to solve it. We will need the best and brightest people in government and in public roles. If you have the opportunity to consider a role in public service, please give it some strong consideration!
Get political. We need new policies. And we get the policies we vote for. This may mean voting in new politicians who will create these policies - which you should do. But, we can also get existing politicians to vote for these good new policies. I love this quote from Milton Friedman; “It’s nice to elect the right people, but that isn’t the way you solve things. The way you solve things is by making it politically profitable for the wrong people to do the right things”. We’ll never have all the “right” people in government, so the next best thing is to make sure it is in the best interest of the the “wrong” to still make good policy decisions.
Take care of yourself and remember to find joy. I guess there’s not much point in us solving all these problems if we are all dead from stress or too grumpy to enjoy it!
My reflections:
This is a great book and you should read it. It’s well researched and well written. It combines a thorough evaluation of problems, with lots of new ideas for how to solve them (my favourite!). It gets right to the core of these problems by assessing the underlying system on which most modern economies are built - free market capitalism - and shows us how we can redesign capitalism to deal with our current problems.
Setting up the system our economy runs on is all about setting the right incentives. Henderson explains how the incentives are currently wrong and provides a path for how we can fix them. If we can create a free market system, with the right incentives, that discourage harm to society, and encourage the kind of innovation and positive impact we need to see, it will have a lasting impact for decades to come.