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Can Capitalism Be Fixed?

In his new book, The Future of Capitalism, Oxford economist Paul Collier lays out a path to restore the ethical foundations of the free-market system in the U.S. and Europe.

A version of this article appeared in the Summer 2019 issue of strategy+business.

The Future of Capitalism: Facing the New Anxieties

by Paul Collier, Allen Lane, 2019

Here’s a strange paradox. The U.S. economy is on the verge of its longest expansion ever, and unemployment sits at a half-century low. Yet public discontent remains high. More than 60 percent of Americans think the country is on the wrong track, according to a recent Economist/Yougov poll. Similar disaffection is evident in Europe, which is enjoying a less robust expansion. The United Kingdom is struggling to cut ties with the European Union, and French President Emmanuel Macron is battling the “yellow vests” uprising. A decade after the worst financial crisis since the 1930s, capitalism is under assault from both the progressive left and populist-nationalist right.

It could be because the fruits of these expansions aren’t being widely shared. The typical American household earns little more than it did 20 years ago while the top 1 percent reaps wildly disproportionate gains. And CEOs often seem to prioritize stock buybacks and dividends over investing in employees and their communities. Or, as economist Paul Collier concludes in The Future of Capitalism: Facing the New Anxieties, “Capitalism is not working.”

But to Collier, the problem is as much an ethical and political one as it is an economic one. A professor of economics and public policy at Oxford University, Collier depicts contemporary Europe and the U.S. as riven with geographic, educational, and moral ruptures that have eroded a sense of common destiny. Economic gains, he argues, are increasingly monopolized by degree-carrying urbanites whose distinctive morality privileges minorities while less educated rural dwellers languish.

Collier diagnoses a disconnect between ethics and economics that he says has left societies torn between “charlatan extremes.” For a quarter century after the end of World War II, a period that coincided with the Cold War, social democracy in Europe and a bipartisan consensus on New Deal social insurance in the U.S. delivered economic gains that were widely shared. During this period, an implicit bargain undergirded Western societies: Citizens were part of “a narrative” of common national identity with shared rights and obligations that bound them in their families and firms.

But gradually, ideologies of the left and right supplanted the pragmatism at the core of postwar success. Cooperative social democracy splintered into competing camps of “middle-class intellectuals” with varying concepts of morality. On one side were what Collier calls “Utilitarian” economists who believed a society moral if it maximized the welfare of individuals motivated by rational assessments of their own self-interest. The Utilitarians’ weapon of choice was the redistributive tax code. On the other side of the struggle to influence social democracy were “Rawlsian” lawyers, animated by a desire to make society moral by bringing disadvantaged groups, including African-Americans and women of all races, into full citizenship. The ties that bound individual citizens frayed as traditional two-parent households declined and corporations embraced the cult of shareholder value. Amid an ethos of ruthless individualism — which Collier labels the “Rottweiler society” — capitalism’s performance deteriorated, leaving millions of average citizens little reason to anticipate better days ahead or to support state spending designed to ease their fellow citizens’ burdens. “We are living a tragedy,” he writes.

The Future of Capitalism is Collier’s attempt to restore the lost ethical foundations of the family, firm, and state. Unlike socialists, Collier sees inequality and political polarization not as inherent capitalist flaws but as evidence of a “damaging malfunction” of policy that can be corrected. To fix these malfunctions, he offers several proposals that he describes as pragmatic, including an ambitious overhaul of tax policy, generous state support for troubled families, and public representation on corporate boards.

Collier sees inequality and political polarization not as inherent capitalist flaws but as evidence of a “damaging malfunction” of policy that can be corrected.

Of course, one person’s pragmatism is another’s ivory tower foolishness. U.S. Representative Alexandria Ocasio-Cortez sees a 70 percent marginal tax rate on incomes above US$10 million as a pragmatic response to growing income inequality. The people whose incomes would tend to be taxed under such a measure, of course, oppose it on the pragmatic grounds that it might cripple American growth.

And some of Collier’s ideas strike me as more pragmatic than others. His calls for greater vocational training and universal kindergarten seem eminently reasonable. His proposal to reduce the gap between rich cities and poorer towns by taxing more heavily residents of the former to support tax breaks for their provincial cousins along with generous subsidies to encourage employers to relocate seems an exercise in overreach. In addition, he consistently assumes a capacity for effective government action that seems at odds with recent performance in many countries, not just the United States.

As he seeks to navigate between the poles of overweening government and excessive deference to the market, Collier advocates a sort of “Goldilocks” state — one big enough to repair the damage from several decades of misbegotten economics yet small enough to avoid becoming an administrative Leviathan. “We need an active state, but we need one that accepts a more modest role; we need the market, but harnessed by a sense of purpose securely grounded in ethics,” Collier writes.

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A native of Sheffield, a steel-making city in the U.K., Collier relies upon his own observations of industrial decline when he concedes that orthodox free-market economists erred in promoting globalization without qualification. The conventional wisdom held that expanded trade would ultimately leave everyone better off, so long as a society’s losers were compensated by those who profited. That academic understanding, however, rarely translated into policies. When it comes to immigration, Collier writes that rational behavior for individuals does not guarantee collective gain. Yes, global economic output rises if a Sudanese doctor moves to London to drive a taxi, but the move nonetheless wastes scarce skills, he argues.

In this thoughtful book, Collier occasionally veers into unsupported optimism. Without proof, he observes that “social media can be used to spread good ideas as well as bad ones.” But unlike many critics of the contemporary global system, Collier is at least trying to light a candle in addition to cursing the darkness. Collier concludes that “shared belonging and...benign patriotism” can rally disaffected publics behind a restoration of the communitarian vision that prevailed when capitalism last truly worked. “We can do better; we once did so,” Collier writes. “And, we can do it again.” We shall see.

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