In a nutshell

In this book published on April 14, 2020, Rebecca Henderson, a business economist at Harvard University, defends free markets and argues that the issue is not free markets but rather “Unchecked “ and “uncontrolled free markets”. The author believes that markets can save the world provided the right public policies are in place. She proposes a five-step framework that rebalances the relationship between the market and public institutions by rethinking the theory of the firm and empowering governments. One of the critiques of this book is its blurry definition of capitalism. Surprisingly, Henderson does not clearly identify the key concept that she seeks to reimagine!

The starting point: The world is on fire !

The author points out to three main systemic issues:

  • Environmental degradation
  • Economic inequality
  • Institutional collapse

I will not spend much time on this because there is a consensus on the fact that markets have led to a misallocation of resources and to suboptimal social outcomes. More on this could be found in my previous book reviews of Thomas Picketty, Muhammed Yunus, Jeffery Sachs and Rutger Bregman.

Correcting markets’ failure supposes striking the right balance between public goods and entrepreneurial dynamics, which can be achieved through:

  • Rethinking the purpose of the firm by moving beyond profit maximizing 
  • Rebuilding institutions
  • Bringing markets and governments back on balance

A reimagined capitalism: The framework

Rebecca Henderson’s framework in built around five pillars, none of them sufficient on its own but each building on the other and each a vital part of a reinforcing whole.

  • 1) The business case for “Shared value

First coined by Mark Kramer and Micheal Porter,  “Shared value” seeks to solve societal challenges through business solutions and help companies fulfill a purpose beyond profits alone.

Changing the firm’s paradigm through shared value supposes building a successful business case that aligns profit and sustainability motives.  If the business case for shared value is appealing, then the firm needs to build a purpose driven organization.

  • 2) Building a purpose driven organization

Purpose driven orientation has to cascade across all the organization. It has to be clarified, aligned to the firm’s mission, linked to strategy, embraced by employees and integrated into day to day business operations.

However, building a purpose driven organization supposes:

  • Long term investments
  • Understanding and measuring the value of purpose
  • 3) Rewiring finance

Investors’ short-termism is an issue to raise money for purpose driven organizations.

The author proposes three routes to rewiring finance:

  • Providing better data for investors and the development of reliable, standardized metrics that have not historically been included in the financial accounts (governance, reputation, staff well-being…).  Well designed, material, auditable and replicable ESG metrics (which is not the case today) can play an important role in matching purpose driven firms with long term investors
  • Relying on impact investors who are by essence purpose driven. In addition, the author discusses the possibility for purpose driven organization to raise funds from employees and customers.
  • Changing the rules that govern corporations to shelter managers from investors’ pressure and adopt a more balanced stakeholders approach

However, many problems we are facing today are public goods problems that can only be fixed through:

  • Business cooperative actions (collective shared value)
  • Effective governmental policies
  • 4) Businesses creating collective shared value

Self-regulation is a powerful way of creating collective shared value and can strongly contribute to frame appropriate policies.

Rebecca Henderson cites many examples of industry wide cooperation as in Palm Oil. However, she recognizes that cooperation is fragile and ultimately requires government support.

  • 5) Effective government(s) policies

While many problems we are facing today require global solutions, national institutions are under stress and global institutions are weak. Thereby, strengthening institutions is key.

To correct market failures and get things done the way they should be, governments have two options:

  • Economic incentives
  • Regulations

“We need governments to provide either the economic incentives that will move firms to action, or the regulations that will force everyone to do the right thing”

Six steps to make a difference

Rebecca Henderson closes her book with recommendations on how to make the world a better place, these are :

  • Discover your own purpose
  • Do something now
  • Bring your values to work
  • Work in government
  • Get political
  • Take care of yourself and remember to find joy

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