Capitalism Is Evolving, But Into What?

This is an excerpt from Standing on the Sun: How the Explosion of Capitalism Abroad Will Change Business Everywhere, published this month by Harvard Business Review Press.

Like any "ism," capitalism is a social construct; capitalism is only a term for what capitalists tend to believe and do. Beyond a few fundamentals-that it puts faith in markets as the best way to allocate resources, that it depends on private ownership of property, that it features mechanisms for accumulating capital to fund endeavors larger than individuals can undertake alone-very little about it is set in stone. This is why we often hear phrases suggesting different styles of capitalism: "capitalism with Chinese characteristics," for example, or "Northern European social capitalism." No surprise, then, that capitalism is subject to change.

And what's behind that change? Again, at the theoretical level, it's easy to surmise. Like any adaptive system, capitalism is nested in an environment, so any substantial change in that environment alters what it takes to thrive. It's the same basic phenomenon as in nature: when the insect population of the Galapagos moves on to new flowers with a different shape, the beaks of the finches evolve in turn.

That the environment of global commerce is undergoing major change is no secret. Advancing technology, for one thing, constantly reinvents the context in which commerce operates. Demographics, too, have an effect, as the generations raised with new technological capabilities begin to fill positions of power. Most strikingly, the very geography of capitalism is shifting. With each passing year, emerging economies account for a larger proportion of global GDP; from 2004 to 2009, they accounted for almost all of the world's GDP growth. Patterns of consumption are being upended as global standards of liv­ing rise; India's middle class is now bigger than the entire U.S. popula­tion. Americans and others in the developed world have long fretted about job losses and other social implications of this huge and ongo­ing shift. But the impact of emerging economies will go beyond what anyone is talking about. It isn't simply that capitalism will increasingly happen elsewhere. It's that, taking root in different soil, capitalism itself will grow into something new.

Capitalism doesn't evolve only in theory. The most cursory review of economic history shows how much it has changed in practice. The rules shift constantly. For example, when Great Britain was the epicen­ter of industrial capitalism, it was understood that a business founder who borrowed capital and then went belly-up should be shipped off to debtor's prison-or worse, Texas (before air-conditioning). But U.S. capitalists more disposed to second chances later rewrote those rules, creating bankruptcy laws that encouraged entrepreneurial risk taking. The system morphed again with the introduction of limited liability, which allowed firms to shoulder the risk of large-scale manu­facturing and, in doing so, gave rise to monopolies (an eventuality no one had worried about before). Even rock-solid assumptions-such as the assumption that currencies must be backed by precious metals-have been tossed aside as trade marches on. These are only a few, top-of-mind examples of ideas that cropped up locally, took hold, and changed capitalism globally.

At a more fundamental level, when production shifted from agri­culture to industrial production, the theories of economics changed profoundly, because financial capital gradually overtook land in impor­tance. As information-inherently not a scarce resource-becomes the most productive resource, economics will change again.

We're convinced therefore that we're on firm ground with our thesis: capitalism evolves, and even now it is evolving into something new. The question is, Into what?

To know that, it's necessary to question some seemingly central capitalist aims-because it was the old environment that gave rise to them-and look at things from a new vantage point. That is why we call our book "standing on the sun"-a reference to taking a new perspective. The phrase comes courtesy of Richard Morley, an MIT physicist who has made so many original contributions that a prize awarded by the Society of Manufacturing Engineers has been named for him. Once in a conversation about how innovation happens, Morley said to Chris, "In order to see the solar system as it is, Copernicus had to be standing on the sun."

Morley meant to underscore how hard it is reexamine a model in which you are situated and one that you believe to be working quite well. Standing on Earth, it was easy for pre-Renaissance scholars to believe they occupied the center of the universe and to persist in believing so even as evidence mounted that should have compelled them to rethink that position. As the instruments used to study the night sky became more and more powerful and as astronomers began to communicate across larger distances and share their observations, that central assumption forced their calculations into contortions. Planets showed themselves to be capable of anomalous retrograde movements, frequently deviating from the paths that mathemati­cians had plotted. But rather than question the basic model, astrono­mers added layers of complexity to it, positing epicycles and deferents within orbits-whatever it took to give their geocentric model the power to predict the movement of heavenly bodies.

Then came Copernicus' hypothesis, and workings that had seemed impossibly complicated suddenly became elegant.

By analogy, today's capitalists look around them, see anomalies, and struggle to incorporate them into the model they have embraced as true. What are some of the messy parts being shoehorned into this Ptolemaic version of capitalism? The value of corporate social respon­sibility (CSR), for one thing, is an idea few can bring themselves to deny but one that clashes uncomfortably with theories of capital mar­kets. Open source initiatives, for another, seem to flout all the phys­ics of economic motivation but continue to gain force. Still another anomaly: venture philanthropy, which can't be reconciled with the laws of profit pursuit. Nonetheless, happening.

Our argument is that, with a shift in perspective, such phenomena cease to seem aberrant and instead align with the logic of the system. It requires only a belief that capitalism can evolve and center on new pursuits. Imagine, for example, that something most people con­sider to be the core of capitalism-competition-is actually not so central. Shift your vantage point so that innovation holds that pride of place, and suddenly initiatives like Wikipedia don't seem so unlikely. Competition, still very much part of the system but unseated from its central point, moves over to allow for collaboration. Likewise, what if the pursuit of financial gain is not really the heart, much less the soul, of capitalism? What if it's really centered on the pursuit of value?

That's a formulation that, again, does not reject financial profitability but allows it to sit easily beside the pursuit of other kinds of gains.

By Christopher Meyer and Julia Kirby