Reimagining capitalism

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Sitting in a modest room in New York’s ­immodest Peninsula Hotel, the richest person in the world for most of the past 20 years ponders an existential question suddenly in vogue among the left’s confiscatory set: Should he even exist? “It is fascinating,” says Bill Gates, “that for the first time in my life, people are saying, ‘Okay, should you have billionaires?’ ”

Dispassionately, he begins to unpack that thesis. “I’m afraid if you really implemented something like that, that the amount you would gain would be much less than the amount you would lose. Now, that sounds self-interested, so who’s the neutral witness on this one? … We need somebody who’s not wealthy to say that in some cases allowing people to be wealthy is okay.”

Allow me to raise my hand. For the past year, I’ve had one-on-one discussions with no fewer than two dozen billionaires, including face-to-face meetings with the three richest people in the world—Jeff Bezos, Gates and Warren Buffett—touching on various aspects of capitalism’s future. It comes at an urgent moment: You’d have to go back to the 1960s, or maybe even the 1930s, to find a time when the primacy of the free market system was so widely questioned.

Just 56 percent of Americans say they have a positive image of capitalism, according to a Gallup poll last summer, compared with 37 percent who said the same thing about socialism. In a Fox News poll during the same period, 36 percent of adults approved of a shift in the US “away from capitalism and more toward socialism”—a huge increase from 2012, when just 20 percent said so.

Among Millennials and Gen Z, free market scepticism is actually the majority view. In Gallup’s poll, 51 percent of those 18 to 29 had a positive view of socialism—albeit the largely fuzzy Scandinavian/Bernie Sanders version rather than the Soviet/Berlin Wall hard stuff—compared with 45 percent for capitalism. That finding was echoed by a Harvard survey of young adults in which 51 percent said they did not support capitalism and only 19 percent said they “identify as a capitalist”. These sentiments come amid an economy that by all traditional measures is booming, with full employment and 3 percent growth.

So far, 2019 has offered only reinforcement of these views, as tech companies have continued to bleed credibility, Howard Schultz turned himself into a cartoon and a slew of tax-the-very-rich proposals garnered surprisingly high support. “This has been brewing for years, accelerating in the last few months and again in the last few weeks,” says Steve Case, the AOL founder who now runs an investment firm, Revolution. The hedge fund titan Paul Tudor Jones adds: “I think we need to acknowledge that we’re at a crossroads, with massive social fissures.”

And those were just some of the billionaires willing to speak on the record. Virtually everyone I talked to acknowledged the need for change. Some incremental and many systemic; some spoke in whispers, many in full-throated pleas for “reform” or “a reboot”. The rock star Bono had perhaps the most poetic suggestion: A reimagination.

If such a term conjures Steve Jobs or Walt Disney, two of capitalism’s visionary saints, so be it. Entrepreneurial capitalism remains, objectively, the best system ever invented to create and distribute prosperity, and if you look at the billion-plus people in China, India and elsewhere who were lifted from extreme poverty in the past two decades, it remains easy to sing its praises. The dynamism remains true in the US, too. Of The Forbes 400 list of richest Americans, 67 percent are self-made and 11 percent are immigrants. “America works, and it works now better than it ever worked,” Buffett says.

Since too many Americans don’t feel that way, the time is ripe to reimagine a system that addresses them. Pick the brains of some of the greatest-ever manifestations of the American Dream, and an AAA-version of capitalism emerges, one more authentic, accessible and accountable—and perhaps, in an age of uncertainty, one that’s built to last. The stakes couldn’t be higher, as forces gather to threaten the greatest prosperity engine ever built.

Reimagining Capitalism as...Authentic
The French nobleman Alexis de Tocqueville’s travels across America in the 1830s coincided with the emergence of socialist theory back in Europe, a movement he presciently and stridently criticised. For Tocqueville, the balanced capitalism he witnessed compared favourably to the options back home, such as ceding power to the government or a more feudal system “managed by a few rich and powerful individuals”. “The inhabitants of the United States almost always manage to combine their own advantage with that of their fellow citizens,” he observed. Tocqueville’s musings inspired Friedrich Hayek’s Road to Serfdom and filtered into the very first issue of Forbes, printed during Russia’s Revolution, when the magazine’s founder, BC Forbes, famously declared that “business was originated to produce happiness, not to pile up millions.”

Milton Friedman was another 20th-century admirer of Tocqueville, particularly for his focus on political equality as a driver of prosperity. But Friedman famously held that among all the constituents of business—the customer, the employees, the community—just one ultimately mattered, the shareholder. The only social responsibility of business, he declared, was to maximise profits. If shareholders wanted to spend their profits on altruistic projects, great, but that was at their sole discretion, with the assumption they were buying something of value—perhaps social approbation or the assuaging of guilt.

This maxim gave us LBOs, private equity deals and employee buyouts. And to many of the world’s most successful capitalists, it also created many of the current ills. “How wrong I was about Milton Friedman—most of us were,” says Jones, who built a $5 billion fortune exploiting market opportunities, including shorting the 1987 market crash. “It came at great cost to other corporate stakeholders and eroded the trust on which companies, and civil society, depends.”

In an era when consumers crave authenticity, the Tocque­ville version, which sees profits as a by-product of business rather than its singular mission, offers a natural strain of capitalism that’s already hugely popular, especially among younger Americans. For Millennials, according to a massive Deloitte survey in 2018, the bottom three priorities for a business should be profits, efficiency and sales. The top three? Generating jobs, improving society and innovation.

Authenticity explains why Americans, while disliking Wall Street and big business, continue to love entrepreneurs (87 percent approval, per Gallup) and small business (96 percent). And why purpose-driven companies like Patagonia and Warby Parker are wreathed in halos, no matter what they’re selling or how rich the founders get. 

“When we’re acquiring companies, one of the things I look at very closely is ‘Are the founders of a company missionaries or mercenaries?’” Jeff Bezos told me several months ago, before revealing the answer with his famous braying laugh. “It’s actually very easy to tell—missionaries make better products and ser­vices.” They also engender the one authentic trait that’s ultimately the most profitable: Trust. That word, says Bezos, “is what allows you to expand the business.”

Of course, trust is a double-edged sword. As Facebook treats user data as a chit rather than a covenant, the company’s reputation—and Zuckerberg’s—has tanked. (In the realm of extremely unlikely outcomes, it’s now easier to envision him in the Big House than in the White House.) It’s also why Wall Street remains about as popular as big tobacco.

But even in finance, roots of authenticity shoot up. Impact investing, long dismissed as a niche for do-gooders, has emerged as a growth area, with some $35 billion committed in 2018 to fund businesses that carry societal benefits without sacrificing returns. “We’re talking about solving problems using innovation and entrepreneurship,” says Nancy Pfund, who founded DBL Partners and has raised $625 million in three venture funds. Her flagship, with investments in Tesla and SolarCity, has ranked in the top performance quartile across this decade. “When you just look at the super-short-term shareholder, you’re not taking advantage of innovation—and you’re cheating the future.”

The numbers are getting larger: Breakthrough Energy Ventures, backed by a consortium of billionaires such as Gates, Bezos, Michael Bloomberg, Richard Branson and Jack Ma, has pledged $1 billion for startups that promise radical solutions to carbon emissions. A similarly platinum-plated tycoon cohort, including Bono, Laurene Powell Jobs and Jeff Skoll, has backed the Rise Fund, an arm of private equity giant TPG that has deployed $1.8 billion in 25 investments they think will have significant impact on society. “People are rightfully asking, ‘Is the system working?’” says Bill McGlashan, the CEO of the Rise Fund. “We believe that capitalism is a better servant than master.”

Reimagining Capitalism as...Accessible
For those who rightly still believe in America as the land of opportunity, a Fox News survey from just a few weeks ago should offer pause: 42 percent of Americans do not think “the way capitalism works in the U.S. these days” gives them “a fair shot.” Even more troubling: In a country that has always held true to the premise that you could make it through hard work—or at least your children could—18 percent thought that the American Dream is out of reach for their family. 

And there are ample stats to back up the sentiment. In the US the top 1 percent of workers, collectively, earn vastly more than the bottom 50 percent. “The market system as it gets more specialised pushes more money to the top,” Buffett explains. “The natural function of a more specialised market economy is to divert more and more of the rewards to the top. That’s something I don’t think we’ve fully addressed in this country.”

But the situation is actually far worse than yawning income disparity. Americans have historically viewed the superrich as heroes, not villains, for a simple reason: “We all thought we could be like them,” Jones says. It’s the accelerating lack of upward mobility that’s fueling much of this populist anger. For all the anecdotal success stories, if you’re born in the wrong Zip code, to the wrong parents, the road to The Forbes 400 has never looked longer or narrower.

Take venture capital (VC), the clearest starting point to a billion-dollar fortune over the past 20 years—a door the vast majority of Americans have no way of opening. Just 15 percent of VC money goes to women founders, 1 percent to black entrepreneurs and less than a quarter to anyone who lives outside California, New York and Massachusetts. Yes, a far more global, diverse pool now has access to those funding meccas, but that’s little comfort to a parent whose kid goes to a so-so public school in a city or region that’s been left behind.

“It needs to be a national priority to level the playing field,” says Case, who for the past few years has conducted a Rise of the Rest bus tour, traveling the country and putting millions into more than 100 companies that aren’t in Boston, New York or the San Francisco Bay Area. To Case, it’s both civic duty and opportunity, as brilliant minds lie fallow in low-cost areas desperate for high-growth hope.

Pfund actually counts women leaders before investing in a firm—almost two thirds of the companies in her funds have a woman at the CFO level or higher. She also pushes her portfolio to spread the opportunity, through profit-sharing plans, living-wage commitments and encouragement to hire in underserved areas.

All these efforts are on the margin, short of a commitment to create educational opportunities for those with ambition and then a track for them going forward. “We will have the resources,” Buffett says. “The question is, will we in effect pull everybody in who’s able-bodied and willing to work 40 hours a week so they can make a decent living, raise a family?”

Reimagining Capitalism as...Accountable
Something unusual happened a few hours after my sit-down with Bill Gates. Fresh off pondering the future of billionaires, he went on Stephen Colbert’s eponymous show with his wife, Melinda, to a crescendo of cheers. In accepting his new role as the world’s second-richest person, he quipped, “We’re trying to give it away faster”—and the audience swooned. From their call for higher taxes on the superrich to the obligations of the successful to the empowerment of women, the applause kept coming. By the end, Colbert was playfully goading the Gateses to run for political office.

Compare that with the Bronx cheer that echoed through New York later that week, when Amazon announced it was pulling out from its HQ2 plan in Queens. The math-challenged politicians who killed the deal took justifiable heat from pretty much everyone except their base. But Bezos was bloodied just as badly. He’s worth over $130 billion (at least until his divorce settles), and Amazon is worth $800 billion. Why extract a measly $3 billion in corporate welfare from New York? In the truest Friedman sense: Because he has shareholders—and he could.

The dueling reactions underscore an American truth as timeless as Astor and Cooper and Rockefeller: Americans expect their meritocratic royalty to remain accountable to the public that helped create them.

Traditionally, that means philanthropy, an aspect of extreme success (there are now 137 deca-billionaires in the world) that no longer feels optional, albeit one that still engenders cynicism. Says Gates: “The attack that ‘Why should you even have a say in setting the agenda?’ That has a certain resonance to it.”

For Gates, who within our lifetime will likely be regarded as the greatest philanthropist ever, accountability starts with framing the role: “Picking novel ideas” or “off-the-wall theories”, as he says, and then proving that the concepts work, or don’t, taking the kinds of risks that no taxpayer-funded government—or shareholder-dependent corporation—could justify.

But in this era, Gates also recognises that motives will be questioned. “If we come and improve math class,” Gates says, “then people are like, ‘Hey, you didn’t do the band.’” For this reason, Gates tries to hold himself publicly accountable through transparency, including a public letter from the foundation that he and Melinda write each year. It’s also the driving reason for the Giving Pledge, in which 189 of the world’s wealthiest people have affirmed, for all to see, that they will give away at least half of their fortunes, most much more.

A Giving Pledge signatory, Salesforce Founder Marc Ben­i­off has similarly shifted from anonymous giving to putting his name on two hospitals, in part to be a role model for emerging tech billionaires and in part because “it sent a message that we’re supporting the community in a tangible way”. And he does the same thing with his company, which pioneered a “1, 1, 1” model that placed 1 percent of the company’s equity in a trust, along with a pledge to donate 1 percent of profits and 1 percent of his 35,000 employees’ time to volunteer work. It’s a combination that’s generated $280 million in grants and 3.8 million hours for civic causes.

Rather than rely on such voluntary munificence, Jones, who cut his philanthropic teeth founding the innovative Robin Hood Foundation in New York, has focussed for the past several years on holding corporate America directly accountable for better capitalism. He founded Just Capital, which has surveyed more than 80,000 Americans in order to get a precisely calibrated take on what makes a good corporate citizen. America’s older workers, it turns out, aren’t so different from its youngest, desiring companies to pay and treat their employees well, put out good products that have integrity, and care about the environment and the community.

Just Capital ranks every major public company across its 36 criteria, from best to worst, proffering a Good Housekeeping-like seal to the top companies, in order to spur better corporate citizenry. (Disclosure: I’m on the Just Capital board, and Forbes publishes the annual Just 100 list each fall.) “You can’t manage what you can’t measure,” says Jones, who also helped Just launch a $200 million ETF in June 2018 that has so far outperformed the S&P 500.

Measurement has also been driving McGlashan at the Rise Fund, which has a hard time justifying billions in investments in social good when no one can define what “good” is. To that end, Rise incubated and then recently spun out Y Analytics, a firm devoted to measuring this impact—a key step in making capitalism still more solutions-oriented.

Such remedies are urgent. “Unless we find a market-based solution to the exponential growth in inequality, we will end up with populist legislation that creates a hammer to go after every nail,” Jones says. He’s right. Alexandria Ocasio-­Cortez’s much-touted 70 percent income tax bracket displays a stark lack of understanding how fortunes in this country are built—through ownership, not earnings. Elizabeth Warren’s wealth surcharge would require an army of appraisers. “Here’s the problem with all of those,” says the venture capitalist Vinod Khosla. “There is international mobility.” 

Virtually every billionaire I spoke with acknowledged that higher taxes on the billionaire set are inevitable; most even saw them as beneficial, if correctly applied. According to Gates, Buffett, Khosla and others, the correct way to levy taxes on the superrich is at a transaction point. Either an estate tax without the loopholes that currently render it useless or a higher capital gains tax applied only on extreme fortunes, to avoid suppressing growth.

And better yet, the tax code can be refined to encourage growth and spread it around more evenly. The launch of opportunity zones, engineered by the Facebook and Spotify billionaire Sean Parker, has already been put in motion, offering tantalising tax breaks in needy areas of all 50 states. Adjusting corporate tax rates based on jobs created—more jobs, lower taxes—is another worthy idea.

The eternal beauty of the free market is its ability to evolve. Leave it to the most admired capitalist in the world, Warren Buffett, who has lived through more than one third of this country’s history and who bought his first stock in 1942, at a moment when it was conceivable the US could lose World War II, to make a prediction: “The luckiest person that will ever be born in the world to date will be a baby being born in the United States today.” Bet against Buffett, and capitalism, at your peril.