Before exploring how business has and will continue to transform society, I will start by stating I believe business, and more specifically capitalism, has been the greatest force for lifting millions out of poverty over the past centuries and will continue to. It’s most successful practitioners should be praised and we should be encouraging young individuals to pursue entrepreneurship and wealth creation because it has the greatest potential for impact. What I appreciate about this dialogue forum is the conversation about how capitalism can be even more inclusive than it already is. There is always room for improvement as we continue to learn and grow as a global community.
When thinking about transformation over time at a societal level, there are many different approaches to defining and analyzing transformation. Transformation can be defined as lifting people from poverty, creating employment opportunities, access to education, healthcare and food, increased security, longevity and much more. Rather than getting too specific at first, I will approach it holistically from 30,000 feet looking down.
When thinking about transformation from a high-level, it is apparent that much of the advancements the developed country’s enjoy with healthcare, education, food and comfort is a direct result of business and capitalism. Over the last 190 years, the real per person income level in the US has increased from $1,200 to $31,000 and the amount that can bought with that is remarkable. Starting with some recent developments. The smartphone has provided the power of a $5m super computer in 1975 into the hands of over a billion people for $400. The smartphone technology has not only been amazing for access to information that was once only available for the wealthy, it has provided secure mobile payment systems to third-world countries for small businesses. Looking ahead with the smartphone, technology is being developed that will allow a smartphone to perform tests for infectious diseases in a matter of minutes that were once only available to people with access to doctors. The potential is for smartphones to reach an additional 4 billion individuals, providing opportunities for education through online education platforms, secure banking, access to healthcare and so much more.
Energy has been another remarkable advancement. Over the past century, access to fossil fuels has provided significant advancements for transportation, agriculture and healthcare to name but a few. While there are negative side effects from a climate perspective, business has been critical in creating clean alternatives to replace fossil fuels. Solar energy has seen an 85% drop in the cost per watt of solar photovoltaic cell form 2000-2013 and will continue to become a viable alternative. In third-world countries with an abundance of sunlight, this has provided energy to people who never had it before, creating an abundance of new opportunities (The focus of Bill Gate’s most recent annual letter).
One final example is in the biotech space. The cost of sequencing the human genome has dropped dramatically to the point where it soon will be 1 hour and $100. This will provide new abilities to cure previously incurable diseases and improve the quality / longevity of life from a health perspective.
While I don’t want to ignore the negative side-effects capitalism can have, I want to be sure they are addressed in light of the bigger picture. I constantly read how business needs to be reformed so it can be a force for good. Even without reform it is a remarkable force for good! I hope we can have discussion about the areas for improvement while always remembering the good things too.
I think you point out some great points in terms of the ability for a capitalist economy to distribute resources and knowledge in a way that raises the standard of living of many. I also think some of your examples (including energy and fossil fuels) point to the fact that as some problems are solved through economic development, new problems emerge (i.e. as an electric power grid brings electricity to all, powering home heating, cooling, lighting etc., carbon emissions from non-renewable sources of energy creation affect climate change). I live in New York City where there are many homeless on the street begging for money. It dawned on me that because of large franchises like McDonalds or Taco Bell, it is pretty much impossible for someone to starve to death in the city. I actually recently read the McDonald’s menu is the cheapest calorie per $ in the history of mankind. Because of the organization of a multi-national profit-seeking corporation, things like famine have been eradicated every location where there is a McDonald’s. But then we have the rise of obesity. I don’t mean to be pessimistic, but I think it is important to realize progress for the sake of progress often creates just as many problems as it solves. We, as business leaders, ought to be conscious of the second order effects of our decisions and try to minimize the negative consequences of solving other problems. Any other examples of what I am saying that you can think of?
Yes, Toms is a great company and they should be recognized and praised for their commitment to community impact through their shoe donation program wherein they donate a pair of shoes to a third-world citizen for every pair they sell commercially, but let’s see if we can’t get off the beaten path as we think of ways to contribute to the common good.
Let’s think about Caitlin. Caitlin was born the youngest of 5, daughter to a plumber and stay-at-home mother. She went to public school, played varsity soccer and was an honor student. She was accepted to a top 20 engineering school, but didn’t receive any financial aid. Without much financial support from her parents she applied for government student loans, but still needed to take out private student loans to pay her tuition bills. At college she continued her academic success while staying involved in different extracurriculars and graduated cum laude as president of the undergraduate engineering club. She got a job at a large engineering firm in Chicago and starting working right after graduation. She began dating a friend who also had gone to the same school as she did and who was also an engineer. Within 3 years, they were married. After 2 years of renting an apartment in the city and with a baby on the way, she and her husband decided they were ready for the suburban lifestyle, back yard and all. They took out a mortgage and bought a minivan. Two more children and 7 years later, Caitlin and her husband decided to start their own small engineering firm focused on local clients. They took out a small business loan, leased a few hundred square feet at a local strip mall and designed their own logo. By the time their first child was applying to college, they had 12 employees and each of their kids had healthy 529 college savings accounts. Their kids all graduated without student debt and became a nurse, an artist and an engineer that would later take over the family business.
Clearly, Caitlin has had a very successful life fueled by hard work and perseverance, but what else contributed to her success over time? Surely, she was lucky to have been born to a supportive family in a school district that provided her with the resources to succeed, in a part of the world where women have the ability to choose to work in the career of their choice, but what else? How about the student lender that enabled her to attend her dream college where she met her future husband when government loans weren’t enough to make ends meet? How about the regional bank that approved her and her husband’s 90% loan-to-value mortgage? How about the auto loan company that allowed her to finance the minivan, that took the kids to piano lessons and soccer practice, over 5 years instead of having to pay up front? How about the loan officer that approved their small business loan that would later provide a living to 12 other families and which would ensure a comfortable retirement? Not to mention the fact that the kids received debt-free educations that allowed them to follow their true passions.
Caitlin’s life is just as much a story about the virtues of global capital markets as it is about determination and the benefits that come to those to work hard. From the academic perspective, banks (and capital markets in general) are mechanisms through which savers are connected with spenders. In exchange for giving up consumption today, savers require a return such that their consumption tomorrow will be even greater than if they would have simply put their money under their mattresses. But at the heart of it, when someone or some institution makes a loan they are saying they believe in the person that is receiving it and that that individual will be able to be productive with that capital and grow it through applying the capital to some aspect of their life. When you make a loan to someone you are telling them that their future is brighter than their present and that is a powerful thing.
For example, let’s forget that we know anything about Caitlin and instead think about Pranav. Pranav lives outside of New Delhi and is the oldest of 5 brothers and sisters. His father is a mason and the entire family lives in a 2 room semi-permanent structure that lacks any form of temperature control other than a fireplace that is also used for cooking. Pranav happens to love cooking and wants to go to culinary school after he finishes high school, but had to drop out to join his father as a mason in order to help feed the family. After a few years, his siblings also start working and he is able to start saving a small amount each month, but he gets paid in cash and doesn’t have a bank account so he keeps a locked toolbox under his bed with all his savings. A marriage is eventually arranged to a woman of similar social status and as much as they would both like to move into a home of their own, they don’t have access to a mortgage and would have to pay 100% cash (many, many toolboxes) so Pranav and his extended family build another room onto the family structure for him and his new bride. As time progresses, Pranav continues to build up his cash reserves in hopes of one day renting enough space to start a local eatery and fulfill his passion for cooking. Unfortunately, his father, now 60 gets injured at work and can no longer work as a mason. Without a 401k (likely no health or disability insurance) and only his toolbox of savings, Pranav becomes responsible for both of his parents, in addition to his kids, and finally gives up on his culinary aspirations.
There are numerous issues the world is currently facing that warrant the attention of the best and brightest minds society has to offer – cancer, sustainable energy, clean water etc. but let’s not overlook the underpinnings of the modern western world that many go without. If Pranav, his father and the billions of others like them could simply have access to a savings account that isn’t susceptible to mold and which could grow at a non-zero rate, how much better would they be able to sleep at night? What dreams could they have if someone would take a chance on them and didn’t force them to pay for everything with cash up front?
How much different would your life be if you couldn’t swipe a piece of plastic or type in a 16 digit number every time you needed to fill up your gas tank, or wanted to go on vacation or needed to pay rent. How much do we take for granted the ability to pay for everything at the end of the month or over the course of years? How much more would you have had to worry about making it to the 15th and 30th of the month? Would you have been able to get your degree? Would you ever be able to live in a home that you could call your own?