Move over Forbes. There’s a new capitalist tool from authors Matthew Bishop, American business editor of The Economist, and Michael Green, a British writer and economist. The Road from Ruin: How to Revive Capitalism and Put America Back on Top takes a thoughtful look at the ethos of business leaders and how short-term decisions and exploitive behavior, including IBGYBG (“I’ll be gone, you’ll be gone”), can undermine the economy and society as a whole. The authors point to a controversial 2009 business code of ethics that about half the graduates of Harvard Business School signed. They show how companies that violate the public trust are beaten up in the press and held accountable by the customer. They mention Nike, Wal-Mart and General Electric as examples. The book was no doubt in galleys when the Toyota scandal broke.
Read our interview with the coauthor:
The Fiscal Times: You use the financial crisis of 2008 to kick-start a discussion about the future direction our country. Explain.
Matthew Bishop: To me the crisis of 2008 marked a turning point in capitalism, a point at which we needed to rethink the way the economy works. Our book is an attempt to understand how we got into the mess we did, and set out an agenda for reform so that we can have a less disaster-prone system than we currently have.
TFT: One of your reform ideas is "a revitalization of professionalism.” Which means what?
MB: The capitalist system has become obsessively short-term focused. Essentially people have been judged by how much they increased their short-term profits or their short-term share price. That increasingly became an excuse not to think long-term, and not to really look at their responsibilities to their shareholders and to society as a whole. One of the things we're looking for in business is a professional ethos, a good code of behavior to live by. It’s something we need to restore to the heart of our system, as part of a package of changes.
TFT: What does this professional ethos look like?
MB: One example is that business school students are now taking an oath upon graduation that they will seek to be good citizens in their new jobs. This happened at Harvard Business School last year. The concept of having a code for good behavior and peer review has worked in other professions, so it's about time we gave it a try in management. But it's not just in management that we're looking for this change -- it's across the board. We want to get away from the sort of behavior we saw on Wall Street, which was captured by the acronym IBGYBG -- "I'll be gone, you'll be gone." People simply did a deal without worrying whether it was a good deal or not. They knew they’d be in a new job by the time the chickens came home to roost. We've got to end that culture. We're trying to stimulate a debate about how we can reclaim capitalism for us. It's our money that Wall Street has been wasting, so how do we get Wall Street to work for us again? I think the pension funds and mutual funds are the places where we need to focus our attention.
TFT: You go so far as to say you’d like “a new soul of America.” Explain that if you would.
MB: We need to be confident that when capitalism is doing well, the country is doing well. And I think what happened in the first part of this century is that increasingly the people who were in charge of capitalism were doing very well, but the rest of us, including us, the savers, whose money they were supposed to be looking after and investing well, didn't do well at all. So we all need to be confident that we're benefiting. That's one of the strengths of this country. I think in the current environment, people are really questioning whether the American dream is still alive.
TFT: Can we keep that dream alive today for young people who are in debt over their heads and can’t find jobs?
MB: It’s going to be interesting to see how that generation comes out of this crisis. At the moment, some of them aren't being affected too badly. Some are actually on "fun employment." Some young kids from well-off families are actually taking a year off to live at home with mom and dad in their early 20s. It's quite a lot of fun. But for the majority of young people, they're excluded from the labor market, and I think this is going to potentially scar them for the rest of their lives. This may not be a terrible thing if it makes them more prudent in financial management, in a way that the previous generations weren't. On the other hand, it can be pretty devastating to their economic prospects. This is what happened in Japan in the 1990s and it's a scenario that might repeat itself in America.
TFT: Do you take a position on health care reform?
MB: We don’t focus on it, but what I find interesting is the toll the process in Washington takes. Big reform is extremely difficult to do. The compromises that have to be made to get reform through Congress often lead people to question whether the reform is worth having. In the book we propose big ideas for economic reform, including a massive reform of the regulatory system in finance, and what we're seeing coming out of Congress is woefully inadequate. And horribly conflicted. They often receive lots of money in campaign finance from the very companies they're supposed to be regulating. It makes me worried about the future of the country in the sense that if your politicians aren't able to lead us to the higher ground, we're not going to get there.
TFT: You say corporations must be aware of what kind of society they'll be contributing to in the future. How important is that to you?
MB: Very important. There are an interesting group of companies that have been beaten up in the press for years and have actually learned from that experience and have re-thought their role in society. Companies like Nike, Wal-Mart and General Electric spring to mind. All of them now understand that their long-term success depends on being on the right side of history, and that means understanding that society will get better over time, hopefully, and when it does, it's important that they're being seen as contributing to that role, to being one of the forces that helped it. So there is this hopeful sign that there are enlightened corporate leaders out there who get it, and hopefully they will be seen much more as a role model, not these short-term greedy people who were the heroes in the years before the financial crash.
TFT: Your thoughts on Bill Gates, who you reference throughout the book?
MB: I've interviewed Gates several times. He’s quite an interesting person, in the way that he has over time become more aware and mindful of how to play a role in solving society's problems. I think if you'd asked him 10 years ago he wouldn't have particularly understood that. But certainly as he's moved into philanthropy that has make him think harder about the role of business in a society is. He has this phrase creative capitalist that means we need to find a way to bring out the best and use those strengths to build a better society. And since we're very much looking at the world in the same way, I think I would go further than him. I would point to the failures of the pension fund and mutual fund system, and criticize the financial markets. He tends to just talk about positive things that can be done, but I think actually you've got to point out the negative as well in order to get improvements.
Read our excerpt from the book:
In the aftermath of the collapse of the financial system in September 2008, the populist line was that the mess was the result of greed gone wild, that everyone on Wall Street had been behaving like supercharged Gordon Gekkos, driven by the belief that “greed is good.” Wall Street helpfully provided plenty of circumstantial evidence to support this analysis, including villains straight out of central casting. The arrest of Bernie Madoff in December 2008 after he confessed to presiding over a maybe-$60 billion Ponzi scheme was the most shocking example.
Certainly, bubbles are times when dishonest behavior in the markets increases sharply, as John Kenneth Galbraith noted in his classic book The Great Crash of 1929. In good times, he noted, “people are relaxed, trusting and money is plentiful. [And] there are always people who need more.” Yet blaming everything on executive avarice is way too easy. The current crisis of capitalism is in part a morality tale. It owes at least as much to failures of design, especially too much reliance on short-term measures of success, as it does to ethical lapses.
If capitalism is to emerge from the current crisis in better shape than before, it must be refocused on the longer term. That will require new regulations and business strategies that do not hurt long-term profits by overemphasizing short-term profits. More fundamentally, it will need a deeper understanding, especially among business leaders, that capitalism does not exist in a vacuum. As well as generating profits, capitalism needs to give back by being part of the solution to society’s most pressing social and environmental problems.
The time has come for business leaders to stop offering up as excuse Milton Friedman’s famous argument that “the social responsibility of business is to maximize its profits.” That claim may make some sense when it is used against ill-considered government plans to impose social responsibilities on businesses (a renewed danger in these times of rapidly expanding government), but it does not justify an obsession with the short term and a myopic perspective on the role of business in society.
Business would not be business without the pursuit of profit. But a company that asks, “What do we need to do to succeed in ten or twenty years?” must also ask, “What sort of society will shape our customers in ten or twenty years?” The answer to the latter is, hopefully, a richer society, with a greater number of people concerned about the values of the firms from which they buy. This is likely to include everything from how they treat workers in their supply chain in poor countries to how they contribute to the fight against climate change. Rising incomes combined with the transparency brought by modern technology can only accelerate this trend. Like it or not, businesspeople had better respond positively.
Excerpted from The Road from Ruin by Matthew Bishop and Michael Green, © 2010 Matthew Bishop and Michael Green. Reprinted by permission of Crown Business, an imprint of the Crown Publishing Group.