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One of The Economist's weekly cartoons showed a bazaar full of T-shirts, mugs, and banners emblazoned with the slogan "Capitalism Is Dead!" A stockbroker surveys the many customers buying this sentiment in its many forms and remarks, "I think I've found a growth market!"
That was in October of 2008. But recent volatility in the financial markets seems to have a renewed an appetite for the idea. So Nouriel Roubini's recent op-ed, "Is Capitalism Doomed?" isn't as late to the market as it first appears.
The question of capitalism's demise may be arresting, but it's not helpful, in part because if the answer were "yes" no one would know what to say. What would replace it? "Capitalism is dead, yes, and the future is all about populism/mercantilism/barter/Linden Dollars/computer-optimized central planning?" Maybe not.
Comments like Roubini's (and, for the record, we subscribe to the policy prescription he outlines in that post) imply that capitalism is some fixed set of rules and precepts that, never changing, will either work or collectively collapse. And the rules that Roubini and others identify did work brilliantly for a long time. They fear that the upheaval of the past few years will explode this stable — or frozen — way of doing the world's business.
Here's a different — and we think more useful — point of view: "How will capitalism evolve in its new environment?"
What happens when we think about capitalism as a system, a set of rules that govern the behavior of decision makers, individual or institutional? When rules work well, they become widely distributed; when they are harmful, they leave the system. For example, the rules governing limited liability corporations worked well to provide the capital needed for the industrial revolution with its large scale financing requirements, so debtors prisons died off. It's a mirror of biological selection, in which, for example, the gene for sickle cell anemia is present in populations where malaria is common, but dies out in cooler, drier climates.
Globalization has spread the rules of what we might call "advanced economy capitalism" (that Roubini & co. identify with) to places to which they are poorly adapted. Capitalism's home has moved from high-income, low-growth, aging societies where capital is so abundant banks use it to play games to the reverse: emerging markets with youthful populations, rapid growth, and low incomes, which need to invest capital in human and physical infrastructure. Societies with urgent agendas and abundant opportunities to improve the health, education, and welfare of their citizens will resist handing control of their economies to forces whose only interest is financial gain. So capitalism is bound to change.
An example of this shift occurred in the late 1990s, during the "Asian Contagion" of currency collapses, when Mahathir bin Muhammed, Prime Minister of Malaysia, suspended the conversion of the Malay currency. The IMF and other financial players were incensed at this crime against capitalism, because Malaysia closed their favorite blackjack game — the one where they both placed the bets and dealt the cards by selling so much of a currency that they ensured the collapse, almost risk-free. Mahathir stood his ground, preferring to protect the economic health of his country to defending principles of free trade at enormous civil cost. Two years later, as Malaysia boomed, the IMF apologized for criticizing Mahathir. Mahathir replaced one of the rules of advanced capitalism — prioritize the financial players over the population — with an alternative. As power flows from G7 countries to more Malay-minded countries, the mutation could become the norm.
So the question becomes not whether capitalism is doomed, but rather how it will evolve away from its current form toward one more fit for a global economy. Reform of the financial industry is a necessary step because, in Roubini's terms the "financial system run amok" is at the root of the problem and financial institutions and even regulators are not incented to fix it. Europe should continue pressing its banks to participate in writing down sovereign debt, as the US should push its banks to write down mortgages. But most importantly, the financial industry must not be allowed to inhibit the evolution of capitalism. As it moves from the swamp, the sickle cell anemia gene does more harm than good.
Have you ever wondered why perfectly sensible, rational, and intelligent colleagues resist or reject perfectly sensible, rational, and intelligent ideas? Obviously it's not because they are stupid. There is just something going on that we don't realize.
Here's a quick example: A large, over-crowded urban hospital was trying to free up beds by reducing unnecessarily long patient stays. To that end, an analysis showed that one particular floor never seemed to discharge patients over the weekend. When the nursing and administrative team was asked about this data, the head nurse insisted that she would not support any attempts to increase weekend discharges, saying only that it wasn't a good time for patients to leave the hospital. Clearly, on the surface, her position made no sense. Eventually, she shared the fact that several years earlier a few patients had lost valuables during weekend discharges. So, to insure their security, the head nurse made sure that patients' personal items could only be unlocked from the safe in her presence (she had the only key) — and she didn't work on weekends!
It's easy to laugh at a story like this one. But the reality is that the nurse was doing what she thought best, which made her appear irrational to others. Once the underlying history and motivation was revealed, her behavior made sense. It then prompted a review not only of the discharge procedures, but also of how best to secure personal property.
Irrational behavior is part of the human condition. There's a long list of things that we know we should avoid, but do them anyway; and an equally long list of things that we know are good for us but that we avoid. That's why people smoke cigarettes, drive after having a few cocktails, or don't floss their teeth. At some level, conscious or unconscious, each of us has a compelling reason — such as short-term gratification, peer acceptance, convenience, lifestyle, and many more — for doing the "wrong" thing.
Organizations of course are composed of people, all of whom act irrationally at various times and seemingly do the "wrong" things. So it's no wonder that we often run into a colleague, boss, or subordinate who just can't seem to consider a completely reasonable suggestion. If you find yourself in this situation, here are two simple and "rational" guidelines to keep in mind:
Don't try to fight irrationality with rationality. It will only make you more frustrated and the other person more defensive. No matter how many well-constructed arguments you offer, you won't make headway until you understand the underlying motivation that is driving the other person.
Focus on discovering, understanding, and embracing the other person's rationale. Even if your adversary is being driven by unconscious motivations, it's important to try to figure them out. Resistance to apparent logic always comes from somewhere, and you won't be able to breakthrough until you understand the reason. For example, sales people often resist logical and straightforward sales-model changes because they fear that compensation will be affected, or that customer relationships will be harmed. Until you understand and deal with those underlying issues it's difficult to make headway.
Years ago a senior executive told me that managing an organization would be a lot easier if there weren't any people involved. On the other hand, it wouldn't be nearly as interesting.
What's your experience with understanding — and embracing — irrationality in your organization?
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