The Future of Capitalism

The Future of Capitalism Plot Summary

Introduction

A deep sense of unease has settled over many Western democracies since the global financial crisis of 2008. People who once felt confident about their future now experience profound anxiety. In cities like Sheffield, Detroit, and Lille, where manufacturing industries have collapsed, many face persistent unemployment and declining living standards. Meanwhile, metropolitan centers like London, New York, and Paris have boomed, creating stark geographic divides within nations. Equally troubling is the growing class divide between the highly educated, who find fulfilling and well-paying work, and those with less education who struggle with precarious employment and diminishing prospects. These new social divides have fueled political upheavals across Western democracies, from Brexit to the election of Donald Trump, and the rise of populist movements across Europe. At their core, these developments reflect the failure of capitalism, as currently structured, to deliver rising living standards for all. While capitalism remains essential for prosperity, it has drifted away from its ethical foundations. This exploration examines how capitalism has generated these divides, how they might be healed, and how ethical purpose can be restored to our economic system. It offers a vision of inclusive capitalism that works for everyone, not just the fortunate few.

Chapter 1: The Erosion of Social Democracy (1970s-1990s)

The period from 1945 to 1970 represented the golden age of social democracy in Western societies. Following the devastation of World War II, nations built welfare states offering healthcare, education, and social insurance from "cradle to grave." This era saw unprecedented prosperity that was widely shared. Political parties across the spectrum, from center-left to center-right, embraced social democratic principles. In Britain, the National Health Service was designed by a Liberal, implemented by Labour, and maintained by Conservatives. In America, Congress operated with remarkable bipartisanship. In Germany, the "social market economy" balanced free enterprise with social welfare. This social democratic consensus rested on a powerful sense of shared national identity forged through the common struggle of World War II. Citizens accepted high tax rates, military conscription, and other obligations to their fellow citizens because they felt part of a national community. The economy delivered rising living standards year after year, reinforcing the belief that the system worked for everyone. Capitalism had been effectively harnessed to serve society rather than dominate it. Beginning in the 1970s, this consensus began to unravel. The economic shocks of that decade - oil crises, stagflation, industrial competition from Japan - undermined faith in Keynesian economic management. More fundamentally, economic changes were creating a new class divide. The economy was becoming more complex, requiring more specialized skills and higher education. A new class of highly educated professionals began to emerge, with interests and outlooks increasingly different from those of traditional working-class communities. This structural change in the economy was accompanied by an intellectual shift. The original communitarian ethos of social democracy, with its roots in the cooperative movements of the nineteenth century, gave way to more technocratic approaches. On the left, Utilitarian economists and Rawlsian lawyers became increasingly influential, viewing society through the lens of abstract principles rather than lived community. On the right, libertarian thinkers like Robert Nozick emphasized individual freedom over collective obligation. Both trends undermined the sense of mutual obligation that had sustained social democracy. By the 1990s, the social democratic parties themselves had largely abandoned their communitarian roots. Tony Blair's "New Labour" in Britain and Bill Clinton's "New Democrats" in America embraced globalization and market liberalization while offering only modest compensation to those left behind. The intellectual center of gravity had shifted decisively toward market solutions and away from state intervention. Margaret Thatcher's famous declaration that "there is no such thing as society" symbolized this transformation in political thinking. The erosion of social democracy left a vacuum that would eventually be filled by the populist movements of the twenty-first century. As shared national identity weakened and mutual obligations faded, the stage was set for the geographic and class divides that would emerge with increasing force in subsequent decades.

Chapter 2: Rising Inequality and Geographic Polarization

From around 1980 onward, a profound geographic divergence began reshaping Western societies. For most of the twentieth century, regional economic differences had been narrowing. In America, poorer states had been catching up with richer ones at a rate of nearly 2 percent annually. In Britain, the industrial north had steadily converged with the more prosperous south. This pattern reversed dramatically after 1980. The metropolis began surging ahead of provincial areas, creating a widening gulf in economic opportunity, incomes, and house prices. This geographic divide reflected two coincident but distinct economic processes: the knowledge revolution and globalization. The knowledge economy, built on unprecedented expansion of education and research, required ever more specialized skills. Such specialization only becomes productive when different specialists work in close proximity, creating powerful economies of agglomeration in major cities. London, New York, Tokyo, and Paris became hubs where lawyers, bankers, designers, programmers, and other professionals clustered together, driving extraordinary productivity gains. Simultaneously, globalization exposed traditional manufacturing clusters to new competition. Cities like Sheffield, with its steel industry, or Detroit, with its auto plants, found their economic foundations undermined by producers in emerging economies. When these industrial clusters collapsed, they did not naturally regenerate into new economic specializations. Instead, they often filled with lower-productivity activities - warehouses, call centers, and struggling retail - creating a downward spiral that proved difficult to reverse. The market alone proved incapable of addressing this geographic divergence. The metropolitan boom generated enormous economic rents - returns far beyond what was needed to attract the workers, finance, and enterprise on which they depended. Much of this windfall accrued to landowners in city centers, but also to highly skilled workers who captured the productivity benefits of agglomeration. Meanwhile, in declining cities, trapped by negative equity in their homes and lacking the skills demanded in the metropolis, many found themselves increasingly excluded from prosperity. The political consequences of this geographic polarization became increasingly apparent. Metropolitan areas developed distinctive cultural and political attitudes that diverged sharply from those of provincial regions. The Brexit vote in Britain, the election of Donald Trump in America, and the rise of populist movements across Europe all reflected this geographic divide. The metropolis consistently voted against these insurgent campaigns, while declining industrial regions embraced them, creating a political geography of winners and losers. This geographic polarization was not just about economics but about dignity and belonging. As one commentator dismissively described it, metropolitan elites found themselves "shackled to a corpse" of declining regions. The resentful grievances of the provinces were met with disdainful confidence from the metropolis, further eroding any sense of shared national purpose. The social bonds that had sustained post-war social democracy were unraveling along geographic lines.

Chapter 3: The Fracturing of Shared Identity

The decades since 1970 have witnessed a profound transformation in how people identify themselves and their relationship to society. Previously, national identity provided a strong foundation for reciprocal obligations. Citizens accepted duties toward fellow nationals because they shared a sense of belonging to the same community. This shared identity enabled social democratic policies that redistributed resources and opportunities within national boundaries. It was the glue that held diverse societies together despite differences in wealth, education, and occupation. This shared national identity has been fractured by several powerful forces. Most significantly, the rise of a new educated class has created a cultural and social gulf. Those with advanced education and specialized skills increasingly identify primarily with their profession or skill group rather than their nationality. A corporate lawyer in London may feel more in common with counterparts in New York or Paris than with less-educated compatriots in northern England. This shift in "salient identity" - which aspect of oneself is considered most important - has profound implications for social cohesion. The evidence for this identity divergence appears in survey after survey. The educated have become less attached to national symbols and traditions, more cosmopolitan in outlook, and more likely to describe themselves as "citizens of the world." Meanwhile, those with less education have maintained stronger national identification. This is not merely a matter of personal preference but reflects genuine differences in economic interest. The highly educated benefit directly from globalization and the knowledge economy, while the less educated often experience these forces as threatening. This identity fracture has been reinforced by changes in media consumption and social interaction. Digital connectivity has created "echo chambers" where people increasingly interact only with others who share their views. The common public sphere where citizens once encountered diverse perspectives has fragmented. Metropolitan elites and provincial communities now inhabit different information worlds, further undermining any sense of shared experience or understanding. Perhaps most damaging, the educated have developed what psychologist Jonathan Haidt calls "WEIRD" values - Western, Educated, Industrial, Rich, and Democratic - that differ significantly from traditional moral intuitions. While most people value loyalty, fairness, liberty, hierarchy, care, and sanctity, the educated vanguard has shriveled its moral concerns to just two: care and equality. This moral divergence makes it increasingly difficult for different groups to even communicate meaningfully about ethical questions. The consequences have been severe. As identities have polarized, trust in elites has collapsed. Those with above-average incomes have become less willing to support redistributive taxation as the proportion of immigrants increases - evidence that the weakening of shared identity undermines generosity toward others. The reciprocal obligations that once underpinned social democracy have eroded, leaving many feeling abandoned by a system that no longer recognizes their belonging or contribution. Political leaders have failed to address this identity crisis. By avoiding narratives of shared belonging, they have accelerated the decay of reciprocal obligations. The language of patriotism and common purpose has been left to nationalists who have hijacked it for divisive ends. Yet without some sense of shared identity defined by place and purpose, societies lack the foundation for the mutual obligations that make collective action possible.

Chapter 4: Ethical Failures in Firms and Markets

The transformation of business ethics represents one of the most significant changes in capitalism since the 1970s. In the post-war decades, major corporations understood themselves as having broad social purposes beyond mere profit-making. Companies like Johnson & Johnson explicitly ranked their responsibilities in order of priority: first to customers, then to employees, then to communities, and only lastly to shareholders. This ethical framework helped build public trust in business and ensured that corporate decisions balanced multiple stakeholders' interests. This stakeholder approach gave way to a narrower view of corporate purpose, famously articulated by economist Milton Friedman in 1970: "the social responsibility of business is to increase its profits." As this idea spread through business schools and corporate boardrooms, companies increasingly focused on "maximizing shareholder value" above all else. Imperial Chemical Industries (ICI), once Britain's most respected company, changed its mission statement from "to be the finest chemical company in the world" to "maximize shareholder value." This shift proved disastrous - ICI went into decline and was eventually taken over. The problems with this shareholder-centric model became increasingly apparent. Companies faced relentless pressure to deliver quarterly profits, leading to underinvestment in research, training, and long-term capabilities. CEO pay skyrocketed - in Britain, from 30 times the average worker's pay to 150 times, while in America it reached 231 times - without corresponding improvements in performance. The financial sector became particularly problematic, with banks shifting from relationship-based lending to transaction-based trading, culminating in the 2008 financial crisis. The corporate focus on short-term profits damaged relationships with employees. Companies like General Motors struggled with workplace cultures where management and labor viewed each other with suspicion rather than as partners in a common enterprise. By contrast, Toyota built a system where workers were trusted to make decisions about quality, symbolized by the "Andon cords" that any worker could pull to stop the production line if they spotted a defect. GM attempted to copy this system but failed because the necessary trust was absent. Corporate globalization exacerbated these ethical failures. Multinational corporations morphed into legally complex networks that could avoid taxation through internal transfer pricing. In Britain, Starbucks paid virtually no tax for a decade despite billions in sales, legally shifting profits to zero-tax jurisdictions. In Tanzania, a gold mining company reported losses to tax authorities while distributing huge dividends to shareholders. The growth of shell companies and secrecy havens further enabled corrupt and criminal money to flow through the global financial system. The failure of corporate ethics reflects deeper structural problems. In the Anglo-Saxon economies, control of companies is vested exclusively in shareholders, who often have little knowledge of or commitment to the business itself. Eighty percent of shares in Britain are held by pension funds and insurance companies that adopt the mantra "if you don't like the company, sell the shares." This system provides inadequate oversight of management and encourages short-termism. In Germany, by contrast, banks play an active role in company governance, and workers have representation on boards, producing better long-term performance. Restoring ethical purpose to business requires rebalancing power. This means changing laws to require directors to consider public interest, not just shareholder returns; taxing excessive trading and speculative activities; and encouraging long-term ownership and stakeholder representation. Most fundamentally, it requires rebuilding the understanding that firms exist to meet obligations to customers and workers, with profitability as a constraint rather than the objective.

Chapter 5: The Global Divide and Migration Challenges

The decades since 1980 have witnessed unprecedented global economic integration, transforming relationships between nations and creating new forms of inequality. Trade volumes have exploded, capital flows have accelerated, and migration has increased substantially. While these processes are commonly grouped under the label "globalization," they represent distinct phenomena with different implications for prosperity and equity. Economists have generally advocated for these changes but have often failed to distinguish their varied effects. International trade has reshaped global economic geography, driving countries into different specializations. Europe, the United States, and Japan have specialized in knowledge industries; East Asia in manufacturing; South Asia in services; the Middle East in oil; and Africa in mining. This specialization has enabled spectacular convergence for many Asian economies, lifting hundreds of millions out of poverty. However, the benefits have been unevenly distributed both between and within countries. Within developed economies, trade liberalization has created both winners and losers. While consumers benefit from lower prices, workers in industries exposed to foreign competition often suffer devastating job losses and wage declines. Economic theory suggests that the gains to winners exceed the losses to losers, making compensation theoretically possible. Yet economists have been "vociferous advocates of trade" while keeping "very quiet about compensation." The result has been growing resentment against globalization in regions that have experienced industrial decline. Migration presents different challenges. Unlike trade, which is driven by comparative advantage, migration is driven by absolute advantage - the productivity differential between countries. This means that while migration may increase global efficiency, there is no guarantee it benefits both sending and receiving countries. Only migrants themselves are unambiguous beneficiaries. Migration can transfer economic rents from citizens to immigrants, particularly in metropolitan areas where skilled immigrants may displace nationals from high-productivity jobs. Immigration also affects social cohesion and welfare systems. Evidence shows that as the proportion of immigrants increases in European countries, support for redistributive taxation among higher-income citizens decreases. This suggests that immigration may undermine the willingness of the fortunate to support the less fortunate within their societies. The Brexit vote revealed these dynamics: Londoners from the educated class who benefited from skilled immigration were less likely to vote Leave, while less-educated Londoners who faced competition from low-skilled immigrants were more likely to support Brexit. Corporate globalization has created additional challenges. Multinational companies have developed complex structures that allow them to avoid taxation, shifting profits to low-tax jurisdictions regardless of where economic activity occurs. Shell companies and banking secrecy havens have facilitated corruption and criminal money flows. These practices undermine the fiscal capacity of states and public trust in the economic system. While international coordination mechanisms exist, they have often lacked the capacity or will to address these issues effectively. The global divide demands nuanced responses that recognize both the benefits and costs of different aspects of globalization. Trade and migration policies must include mechanisms to compensate losers and maintain social cohesion. Corporate taxation requires international coordination to prevent race-to-the-bottom competition. Most fundamentally, global integration must be managed to serve broader social purposes rather than narrow economic interests.

Chapter 6: Pragmatic Solutions to Restore Inclusive Society

The deep social divides that have opened in Western societies call for practical, evidence-based responses rather than ideological prescriptions. Neither market fundamentalism nor state socialism offers viable solutions. Instead, a pragmatic approach must address the specific mechanisms that have driven apart metropolis from province, educated from less educated, and global winners from those left behind. This requires policies tailored to each dimension of our current crisis. Narrowing the geographic divide demands a two-pronged strategy. First, the economic rents generated in booming metropolises must be taxed more effectively. The extraordinary productivity gains of agglomeration benefit metropolitan landowners and skilled workers far beyond what their individual contributions merit. Taxing these unearned gains through land value taxes and geographically differentiated income taxes could generate substantial revenue without discouraging productive activity. Second, this revenue should fund targeted investments in declining cities, supporting business zones, investment promotion agencies, and university-business partnerships that can seed new economic clusters. Addressing the class divide requires supporting families under stress while curbing predatory behaviors by elites. Social maternalism - intensive practical assistance for young families at risk - can prevent the family breakdown that often leads to children being taken into state care. High-quality pre-school education, mentoring programs, and vocational training provide crucial support for children from disadvantaged backgrounds. Meanwhile, excessive zero-sum activities in finance and law should be discouraged through taxation, redirecting talent toward innovation and productive enterprise that benefits society as a whole. The housing crisis demands particular attention. Across Western societies, home ownership has become increasingly unaffordable for young families, undermining their sense of having a stake in society. Policies that increase housing supply, restrict speculative buying, and facilitate affordable mortgages can help restore access to home ownership. In some cases, enabling tenants to purchase homes from landlords through discounted rights-to-buy schemes could rapidly increase ownership rates without destabilizing housing markets. Labor market reforms must balance flexibility with security. The "flexicurity" model developed in Denmark and Sweden provides robust retraining opportunities while maintaining strong social safety nets. As technological change continues to reshape work requirements, lifelong learning accounts could give workers resources to acquire new skills throughout their careers. Minimum wage laws and collective bargaining rights can prevent the spread of low-productivity business models that rely on cheap labor rather than innovation and skills development. Global challenges require rebuilding effective international cooperation. The expansion of international organizations to near-global membership has weakened their effectiveness as coordination mechanisms. New purpose-specific "clubs" with limited membership but strong reciprocal obligations could better address issues like climate change, tax avoidance, and refugee resettlement. Within these frameworks, rich countries should fulfill their duties of rescue toward refugees and those in extreme poverty, while poor countries need productive investment rather than aid conditionality. Most fundamentally, restoring inclusive societies requires rebuilding a sense of shared identity and common purpose. Patriotism based on place and purpose, rather than ethnicity or oppositional values, can provide the foundation for reciprocal obligations across diverse communities. Political leaders must once again communicate narratives of belonging that emphasize what citizens share rather than what divides them. Without this ethical foundation, technical policy solutions will struggle to gain the public support needed for implementation.

Summary

The crisis of contemporary capitalism stems from its failure to balance economic dynamism with social inclusion. Since the 1980s, the economic system has generated unprecedented wealth but distributed it in ways that have torn apart the social fabric. Geographic divides between booming metropolises and declining provincial cities, class divides between the educated and less educated, and global divides between winners and losers from international integration have undermined the sense of shared identity and mutual obligation that once sustained social democracy. The result has been not just economic inequality but a profound crisis of belonging, purpose, and trust. The path forward requires neither abandoning capitalism nor accepting its current form as inevitable. Rather, we must restore ethical purpose to our economic institutions while developing pragmatic policies that address each dimension of our social divides. This means taxing economic rents generated in metropolises to fund revival of provincial cities; supporting families under stress while curbing predatory financial activities; making housing affordable for young families; providing workers with security and retraining opportunities amid technological change; and rebuilding international cooperation around limited but effective "clubs" of nations. Most fundamentally, it requires reviving narratives of patriotism based on place and purpose that can sustain the reciprocal obligations on which inclusive societies depend. By combining ethical purpose with practical reasoning, we can develop a capitalism that works for everyone, not just the fortunate few.

About Author

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Paul Collier

Paul Collier, CBE is a Professor of Economics, Director for the Centre for the Study of African Economies at the University of Oxford and Fellow of St Antony's College. He is the author of The Plundered Planet; Wars, Guns, and Votes; and The Bottom Billion, winner of Estoril Distinguished Book Prize, the Arthur Ross Book Award, and the Lionel Gelber Prize.

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