I met my friend Emma* at a Latino students event when we were eighteen years old. We bonded over being the children of Latino immigrants who came to the US in pursuit of the American Dream. She recently told me she is troubled that her large-scale, publicly traded employer in Southern California has enacted a policy requiring workers with less than 20.1 weekly hours to pay double for health insurance. While everyone on her team wants to work over 20.1 hours, management has the incentive to assign just under 20.1 hours to cut costs. With irregular assigned hours making it difficult to find a second job, these employees are now saddled with doubled health insurance fees and few options to increase their income.
I asked Emma if she has considered a new job. She explained there are few better options in her city. She has been traveling to another city for short stints for full-time work. That being said, she cannot leave because her husband is finishing his community college degree there, her parents are there, and the cost of living in metropolitan hubs is unaffordable.
She said she does not understand why the company leadership made this change while reporting record profits. I shared that at the GSB we discuss how publicly-traded companies operate under competitive pressures to maximize shareholder value. She responded, “I get it. It’s capitalism, but I’m in customer service. Every day, I’m contributing to our business. I’m working hard and we’re growing and making more money, yet I’m getting less. Why?”
Emma’s story is not new. These stories are increasingly covered in the media, alongside debates about our economic system. These debates are oftentimes incorrectly predicated on a binary between capitalism (the prioritization of free markets and competition) and socialism (the focus on public ownership and redistribution). Capitalism and socialism are not binary economic systems; rather, they are on a spectrum. The US has never been a “fully capitalist” country. For example, we have a public schooling system and a Food and Drug Administration. Rather than continuing this limiting binary debate, I want to debate today’s form of capitalism-Shareholder Capitalism- in which business earnings increasingly go to shareholders and are not distributed across the value chain. Nothing is inherently wrong with shareholders; however, Shareholder Capitalism is leaving many out and is not sustainable. We need to usher in a new era of capitalism that benefits more stakeholders.
In my undergrad economics class, I was taught that if the economy maintains GDP growth, everything else will take care of itself. This is simply not true. In the US, working age individuals in the bottom 60% income bracket have experienced zero income growth since 1980, despite tremendous national economic booms. The share of total wages accruing to the bottom 90% of income earners has declined by 8.9%, while increasing by 8.6% for the top 5%. Why? Firms pursue efficiencies to maximize shareholder returns by automating, suppressing wages, and avoiding expensive benefits. GDP gives us only part of the picture, hiding the realities of poverty, inequality and the marginalization of certain groups.
It was not always like this. Throughout US history, the economic system has shifted along the capitalist/socialist spectrum through cycles of reform. During the Progressive Era (1890s to 1920s), industrial capitalism’s GDP growth disproportionately went to the wealthiest. President Theodore Roosevelt dedicated much of his presidency to enacting workers’ protections, antitrust laws, and regulation. History shows that it is perfectly normal for us to again ask ourselves what kind of capitalism we desire as a society. What metrics should we value beyond GDP growth? What roles will policy, business, and civil society play in benefiting more stakeholders?
Political leaders are increasingly drawing attention to the need to address the consequences of Shareholder Capitalism. Senator Elizabeth Warren has worked on “saving capitalism” by addressing stunted wage growth and corporate malpractice. Presidential candidate Pete Buttigieg has called for policy reform, stating, “capitalism has let a lot of people down.” California Governor Gavin Newsom’s administration is pursuing an agenda of “inclusive capitalism”.
An increasing number of business leaders have seconded the need for change. Ray Dalio, Bridgewater Founder and CEO published “Why and How Capitalism Needs to be Reformed”, encouraging business leaders to think critically about these issues. Peter Georgescu, GSB alum and author of Capitalists, Arise!, stated that “capitalism has been slowly committing suicide. It’s going on in plain view, though few recognize what’s happening, because to most observers of the stock market, nothing looks amiss.”
How to support a new era of capitalism:
Normalize this conversation: It is a missed opportunity when a conversation about improving capitalism devolves into, “I hate socialism”. It is possible to support capitalist ideals while recognizing a need to address Shareholder Capitalism to benefit more of society.
Work at and invest in companies that are positive stewards: Supply can meet the demand. If we use our employment and investment dollars to demand companies be good stewards by taking their environmental, social, and governance measures (ESG) seriously, more will exist. Upset that a company violated your human rights standards? Do not work there, or if you are an employee, rally other employees to make their voices heard. Frustrated your capital supports poor labor practices? Move your investment dollars to another company that is a better steward.
Support relevant political leaders: There are many public sector leaders at the national, state, and local levels working on policies and programs to address these issues. Vote for them.
At the end of our conversation, Emma asked, “You’re at Stanford business school. What do you guys say about this? Do you think you have any responsibility?” A transformative way to change lives, change organizations, and change the world is to change systems. Let’s change the economic system by ushering in a new era of capitalism that is better for more lives, organizations, and the world.
*Name changed for the purpose of privacy.