This week, Nick and Goldy talk to esteemed economist Colin Mayer, author of the book Capitalism and Crises: How to Fix Them, to explore the deep-seated issues plaguing modern capitalism, including rising inequality and environmental degradation. Mayer argues that the current profit-driven mindset of corporations often leads to societal harm, and he advocates for a paradigm shift towards a model where businesses profit by solving real human problems rather than creating them. Their conversation dissects the historical evolution of corporate responsibility, critiques neoliberal economics, and proposes solutions that redirect corporate focus toward societal benefit, and the urgent need for a more equitable economic structure that uplifts the middle class.
Colin Mayer is a distinguished academic in the field of finance and economics. He is the Peter Moores Professor of Management Studies at the Saïd Business School at the University of Oxford. With a background in economics and finance, Mayer has conducted extensive research on corporate finance, governance, and the role of business in society. His work has been widely published in academic journals, and he is the author of several books, including “Capitalism and Crises.”
Further reading: Capitalism and Crises: How to Fix Them
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Speaker 2:
It’s time to build our economy from the bottom up and from the middle out, not the top down.
Nick Hanauer:
Middle out economics is the answer.
Speaker 2:
Because Wall Street didn’t build this country, great middle class built this country.
Nick Hanauer:
The more the middle class thrives, the better the economy is for everyone, even rich people like me.
Speaker 6:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Nick Hanauer:
Goldy, a month or so ago I think, my colleague Eric Beinhocker at Oxford told me we absolutely had to talk to Colin Mayer, who had just finished writing this book called Capitalism and Crises. He thought it was a fantastic book and very much aligned with how we think about the problem. And in fact, very much aligned with the book that Eric and I are writing.
Colin is the Peter Moores Professor of Management Studies at Oxford and is one of the sort of leading experts in Europe on this kind of stuff. And the book is basically an analysis of the role that capitalism plays in generating broad crises in societies, inequality, environmental catastrophes, financial instability, all the things, all the things.
Goldy:
Yeah. It seems to be a theme recently on our podcast. It’s very weird for a podcast called Pitchfork Economics to be talking about crisis so much.
Nick Hanauer:
Yeah, exactly. But anyway, I mean, here’s the good news is that everybody is converging on a very similar answer. But anyway, I’ve never met Colin before, but I’m sure he is a really interesting guy. So why don’t we chat with him?
Colin Mayer:
My name is Colin Mayer. I’m a professor of management studies at the University of Oxford. I’m currently associated with both the Saïd Business School and the Blavatnik School of Government at Oxford University. I’m a financial economist by background, and I’ve over the last decade or so had a specific interest in the role of the corporation in contemporary society.
And this year, I’ve just published third book in a trilogy of books on that subject. This one’s entitled Capitalism and Crises: How to Fix Them.
Nick Hanauer:
Well, it’s a subject near and dear to our heart. Just provide a brief overview of the main thesis of the book. Take our listeners sort of through the main argument.
Colin Mayer:
Okay. So the main argument is that capitalism is one of the most powerful engines we’ve ever invented, and business is the most important component of it. It clothes, feeds, and houses us. It employs us and invests our savings. It’s the source of economic prosperity, the alleviation of poverty, and the growth of nations around the world.
But at the same time, it’s been a cause of increasing environmental degradation, biodiversity loss, inequality, social exclusion and mistrust. And in particular, over the last couple of decades, it’s been associated with a growing number of crises, the financial crisis, the environmental crisis, biodiversity crisis, the COVID pandemic, inflation crisis, energy crisis, et cetera, et cetera.
And crises are increasing in amplitude, frequency, and prevalence around the world. And they’re going to go on doing so until we fix the underlying problem. And I argue that the underlying problem that’s causing these crises is the fuel that powers capitalism. The fuel is profit. Profit is the resource that sources business and incentivizes it. Without any profit, there’s no capital in capitalism.
But at the same time, we’re fundamentally misconceiving the nature of what a profit is. Profit comes from the Latin, profiecere and profectus, to advance and progress. And that is exactly where profit should come from. And it often does, but too often it doesn’t. And because it can come from causing detriment as well as benefits, it’s misaligning the incentives and the resourcing of companies around the world. That’s what we need to fix.
Nick Hanauer:
One of the things you said was that the frequency and the amplitude of these crises is increasing. That’s the way it feels to me. But you must have analyzed that more deeply than just feeling. Can you comment on that?
Colin Mayer:
So first of all, let me just say that your perception is very much a shared perception. One of the things that I’ve done in analyzing this is to look at the frequency with which people refer to the word crises in written material around the world. And what one observes is that it basically came into the lexicon at the end of the 19th century. And it was during obviously the interwar period and the stock market crash that it began to be referred to more frequently. And then it grew in significance after the Second World War as we hit the oil price crises. And then we had various crises at the end of the 20th century as well.
But what is particularly interesting in terms of people’s perception of crises is when you link the word crisis together with capitalism and then what do you observe is a dramatic phenomenon that the association of crises with capitalism began to appear during the Great Depression. It became somewhat more intense during the oil price crisis, but it has exploded over the last few years.
And that notion of capitalism being associated with crises is really what I’m driving at when I talk about the increasing frequency, prevalence, and amplitude of the crises, that it’s that association that really seems to have become particularly worse over the last few years.
Goldy:
And when we’re talking about crises, we’re not just talking about the business cycle. It’s not simply referring to recessions and stock market downturns, et cetera.
Colin Mayer:
No. I mean the word crisis actually derives from the notion of action, taking action. It’s not just a fluctuation in the economy or society. It’s that there’s a need to address a serious underlying problem that has arisen, that has in many cases not been encountered before. And it’s that notion of having caused something that then requires us to act in a very dramatic way in terms of trying to reverse it. That is the notion of crisis that we’re picking up recently.
Nick Hanauer:
I mean, our podcast is substantially dedicated to the proposition that the existing economic system, capitalism or neoliberalism or whatever you want to call it, is tuned to generate incredible returns for a very small group of citizens and either exclude or damage effectively everybody else.
It’s our view that that wasn’t always the case. There was this intervening period when companies behaved better largely, that people more broadly benefited from corporate profits and the growth of the economy, that people who ran businesses took their social responsibility more seriously. But that sort of the beginning of the neoliberal period sort of began to end that.
And now we have a society where we have this notion that the only thing that matters is profits and return for shareholders. And if we’re getting that, then everything else should be fine. Do you agree with that proposition? Was it neoliberal economics that created this problem, or what do you think?
Colin Mayer:
Yes, your diagnosis is absolutely correct that this is a problem that has become particularly acute, especially over the last 60 years. And to provide some additional support to what I put in the book, Robert Putnam wrote the book Upswing, which really documented how a lot of the social and other problems that we were facing at the beginning of the 20th century, by the middle of the 20th century, had become much less acute because there was a growing level of social integration. And the problems that we’ve been encountering have really emerged over the last 60 years or so.
And the argument that I’m making in my book is that a fundamental contribution to that dramatic change from the beginning of the 20th century to the middle of the 20th century, and then that reversal from the middle of the 20th century to now is associated with a changing attitude to the nature of business. Because in the first half of the 20th century, there was a growing belief that it was the role of business, of course, to make money for its shareholders but to do so in a way that reflected broader social interest than just the interest of the investors and shareholders.
And it was really around the middle of the 20th century that the notion that that was not appropriate, that it had got out of line with the original intention of the firm, became more widely adopted. And in particular, Milton Friedman, the Nobel Prize winning Chicago economist, put forth the idea that there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in open and free competition.
And that notion that there is only one responsibility of business and that is to make money increasingly gain traction during the last part of the 20th century and accelerated into this century. And it is that notion that business is just there to make money come what may, that has really been the cause of the increasing problems that we have experienced and the dramatic impact it’s having on our boundary conditions and the sense of what the environment and nature and our societies can tolerate around the world.
Goldy:
And you reach back just like the neoliberals to Adam Smith, if we had Milton Friedman on this podcast, he would tell us that we should trust in the invisible hand, that it’s businesses pursuing their self-interest that creates the common good. But you’re suggesting we need to go and have a different reading of Adam Smith looking more at the theory of moral sentiments.
Colin Mayer:
Yes. So we’re misunderstanding what Adam Smith said. Of course, he promoted the notion that it’s not from the benevolence of the butcher, the brewer, the baker that we expect our dinner, but from their regard to their own interests. And that he believed that the markets in competition could align that self-interest with a broader interest in society at large.
But he was very clear in saying not only in the theory of moral sentiments that we conceive ourselves as acting in the presence of an impartial spectator who considers our conduct with the same indifference with which we regard that of other people. It wasn’t just that notion that we have a sense of consciousness about how we affect other people, but he argued in The Wealth of Nations that it was essential that there was a precondition that underpinned the operation of markets.
And that was the notion of justice, justness, justice and fairness. And that was critical, not just from a moral perspective in terms of what people ought to do or wanted to do, but was critical in terms of the functioning of markets. Why is that the case? Because if conditions of justice and fairness do not prevail, then it is extremely difficult for companies that want to act in a just and a fair way to do so because they’re outcompeted by other companies that are not doing that.
And so that instead of competition creating a run to the top in terms of promoting social good, it does exactly the opposite. It promotes a run to the bottom. And that is precisely what we’re experiencing where many companies want to address these issues but they find it extremely difficult to do so in competitive markets.
Nick Hanauer:
That’s right. That’s why standards are so important.
Colin Mayer:
Absolutely.
Nick Hanauer:
Yeah. Because it’s impossible for one company to pay, for example, $15 an hour if their direct competitor is paying seven and a half. It’s just not something that you can sustain. So whose fault is this? Where did we go wrong? Who went wrong? Not that we can do anything about it, but I’m just interested in your view. Who and where did we go wrong?
Colin Mayer:
Well, as with many problems in the world, one can’t really ascribe it to anyone or any particular thing because it’s a systems problem. That’s to say that we created a system that has had unintended consequences associated with it. And in this case, the component of the system that we created was the corporation, and in particular, freedom of incorporation during the 19th century. Before that, companies were licensed by governments and monarchs around the world, and they operated according to a public charter. And that limited the extent to which corporations could exploit other parties.
In the middle of the 19th century, it was concluded that that was unduly restrictive and was impeding the development of economies around the world. So one by one, countries began to adopt a principle of freedom of incorporation by which anyone could set up a company and basically provided that they just stated the fact that they would abide by a company law, they could then do whatever they liked. And that notion of freedom of incorporation very much picked up on the Adam Smith idea of the importance of markets and competition. And this was a way of trying to promote that.
And in many respects, it did work quite well initially because the companies that were incorporating were obviously relatively small, often family businesses that did operate in fairly competitive markets, and where the interests of the families were often tied up with the local communities in which they were operating and where they’ve had a strong sense of responsibility to their employees and to their communities. Problems began to emerge towards the end of the 19th century, most significantly in the US with the large corporations and the need then for antitrust legislation at the beginning of the 20th century.
But thereafter, as I was describing just now, the attitude of business was very much along the lines of there was a strong responsibility that business had to society at large. So the notion of the objective of the company was not directly opposed to that of the interests of others. And it was only gradually then that it became realized that there was a conflict between this notion of business being there to promote the interest of its shareholders and the way in which the company was developing in the first half of the 20th century.
And that’s what gave rise to the Milton Friedman notion that business should really get back to its knitting and solely focus on the notion of profit. So it emerged as part of this systemic development of the role, of the functioning of business in economies and societies that gave rise to the problems that we’re now encountering.
Goldy:
The primary function of business, you say, is to solve problems.
Colin Mayer:
Absolutely. This is a critical element of what I’m arguing that really the original rationale behind business and the way in which businesses conceive of what they’re doing is to solve problems. That’s how it was founded 2,000 years ago in ancient Rome as the societates publicanorum. It was there to solve a problem in ancient Rome of collecting taxes, minting coins, and looking after public buildings.
And for nearly all of its 2,000-year history, it has performed some sort of social and public function. It’s particularly relevant today as we’re encountering greater problems that business recognizes that its fundamental role is to solve problems, but to do so in a way, a particular way that is commercially viable and profitable because business is not charity, it’s not philanthropy. It’s about hard-nosed business of making money from what they’re doing. So they’re not there to solve problems in a form that’s not financially viable for their investors.
But the notion of profit that that then presents is that it derives from solving problems for others. The fundamental purpose of a business is not to make profit, but to profit from solving problems from others, and in particular, not profiting from creating problems for others.
Nick Hanauer:
Correct. Yeah.
Colin Mayer:
And that’s the thing that I emphasize in this book has been a particular problem that too often, profit does not derive from solving but rather from creating problems. And that is where many of the difficulties that we’re encountering arise.
Nick Hanauer:
So what should we do? How do you fix this?
Goldy:
Yeah, this is the fix, how to fix it part of the conversation.
Colin Mayer:
So the answer is it does not take a revolution to bring about the necessary changes. It is actually a very straightforward requirement, and that is that we simply recognize what a profit is, and in particular that companies should profit without harm.
Now we have the Hippocratic oath that applies to medicine about do no harm. We can’t apply a principle of do no harm to business because business does harm all the time. It has to make tough decisions. It has to make tough decisions about whether or not to raise prices to consumers to allow them to pay more to their employees or to shift production from one part of the US, from the Midwest to Asia where costs are lower and in the process cause communities to collapse in the Midwest, but so support communities elsewhere in the world.
Now, businesses is making hard decisions all of the time. And so one can’t have a notion of business should do no harm, but one can perfectly reasonably have a notion of business should not profit from harm, it should profit without harm. And all of the sense of grievance that has emerged over the last couple of decades is around the notion of business profiting at our expense.
That was what caused the outrage when people realized in the financial crisis that financial institutions, banks and investment banks were profiting from creating substantial detriments for their customers and for the societies within which they were operating. For example, in Britain at the moment, we’re outraged by the fact that water companies have been polluting our rivers, our lakes, our seashores, through dumping untreated sewage into our water supplies. And that notion of companies profiting from producing harm is something that quite reasonably creates a sense of grievance on the part of society.
And it comes as a real shock to people to realize that that is actually the basis on which much profit is earned by the private sector. So what’s required is simply a recognition that companies should profit without harm.
Nick Hanauer:
One of our favorite questions is the benevolent dictator question. If you were in charge of the UK, political considerations aside, what would you do to fix this?
Colin Mayer:
The most straightforward way of fixing this is to recognize it doesn’t even require a change in corporate law to bring this about. It simply requires a change by courts of law around the world in interpreting existing company in corporate law to recognize what do we mean by the success of a corporation. Nearly every company or corporate law talks in terms of the duties of the directors being to promote the success, or it’s sometimes put in terms of the interest of the company or the corporation.
That is absolutely fine, but one has to recognize what we mean by success. By success, what it’s currently understood is simply profiting the investors in the firm. And that’s in itself not wrong, but it has to be recognized that that profit cannot and should not derive from inflicting detriments on others. As soon as that is recognized, that has a transformational change on the way in which business evaluates its behavior, the way in which directors of companies will recognize they need to operate in terms of producing profits from benefiting, not harming others.
Goldy:
And this is not a radical proposal. I mean, this is what the law and economics movement did in the US in reinterpreting antitrust law.
Colin Mayer:
Absolutely right.
Goldy:
In a bad way, but they were very successful.
Colin Mayer:
Yes, absolutely right. This sort of reinterpretation of existing law is something that happens regularly, and so it is perfectly feasible. Indeed, British company law talks about the fact that the directors have to take into regard the interests of their employees, their suppliers, their communities, et cetera. So it is already basically there in the statute but it just needs the courts of law to interpret this in a way that society is really now demanding of the legal profession.
Nick Hanauer:
You don’t think we need to pass a new law? You think you just have to reinterpret old law?
Colin Mayer:
I mean, bringing clarity to the law obviously helps. What I’m saying is changing statute is often a very political difficult process. We don’t have to wait on that. We don’t have to wait years for legislation to be passed. We can begin to change the process.
There are lots of other, and my book is all about the ways in which one can bring about this change effectively. For example, governments through public procurement policies can immediately decide that they require companies that are providing public services and goods to have as a part of their basic principles that they’re following a notion of profiting from producing benefits, not detriment.
So there are lots of public policy tools that can be brought to bear. I’m just saying there’s one very straightforward one that involves interpretation of existing law.
Goldy:
I don’t know how it works in the UK, but in the US the bad guys have a 40-year headstart on us. And you see the rulings from the Trump appointed judges. We’re heading back to Lochner soon, where the 14th amendment guarantees the right of businesses to do whatever the hell they want.
Colin Mayer:
Yeah. I mean, we’re quite glad in Britain that we have a supreme court that is not simply appointed by the political system, and we’re appreciating some of the merits of that at the moment.
Nick Hanauer:
Yeah, I’ll bet. I’ll bet. And one final question, Colin, why do you do this work?
Colin Mayer:
Because I have devoted my career to understanding the way in which business operates. And I’ve only over the last 15 or so years really come to understand the extent to which the conventional way in which we teach and practice business has a serious adverse consequence associated with it. And I feel it’s incredibly important to address that.
Goldy:
Did this realization when you had it, did it come to you as a surprise? Was it upsetting, considering you’ve spent your whole career on this?
Colin Mayer:
Well, what prompted it was being dean of the Saïd Business School in Oxford during the financial crisis, and realizing that it was absolutely impossible despite what a lot of my colleagues wanted me to do to justify the way in which we were teaching business and economics in terms of the clear consequences it was having for individuals and societies. And at that point, it came as a real revelation to me that one needs to think in much more fundamental ways about how our economic system functions.
Nick Hanauer:
Yeah, that’s very interesting. Well, thank you so much for being with us. We emphatically agree with your argument, and we hope to be part of the general global movement to move the world in this direction.
Colin Mayer:
Thank you very much indeed for giving me the opportunity to participate in this.
Goldy:
Obviously, Nick, the most important takeaway here is the notion that we are misconceiving what profit is. It may sound esoteric to some that, “Oh, we know what profit is. It’s money, right?” You’ve made a lot of profit over the course of your life, Nick. But fundamental to the way we talk about the economy is that what markets do best is solve human problems.
And that the idea that Colin really goes back to the Latin root of the word to say that, no, it’s about progress, it’s about improving things, that’s where the word profit comes from. That when we profit from something in the purest sense of that word, it’s that we benefit from it, not that we make money from it.
Money is a way we count the profit in the business world, and that is a notion more of the past couple hundred years. But the idea that we broadly benefit from it, and that is why we have chartered corporations, and that the real solution to the crises that modern capitalism has created is to go back to the roots of that word and reconceptualize what we mean by profit beyond simply maximizing shareholder value.
Nick Hanauer:
Well, or said another way, the purpose of the corporation is not to make profit. The purpose of the corporation is to solve human problems. And the reward for that is some profit.
Goldy:
Right, because you need to be commercially viable, you need a return on your investment. But in fact, profit is more than just a financial return on investment. It’s about doing good. And I think anybody who has been involved in business, big or small, has that sense that you are doing something more than making money for yourself, that part of the return.
I mean, I had a small software business many years ago. We created the world’s first rhyming dictionary software. And it wasn’t a big financial success, but we lived off it for a few years, but it eventually shut down. But I took great satisfaction in the comments we would get from users, how much they enjoyed the product, or the number of successful songwriters on Broadway or in pop music or animated films who I knew were using our software. For me, that was more remunerative than the money ever could have been because I knew when my daughter was watching, for example, the Disney film Mulan and loving it, that the lyricist used my software to write that movie, and I was having this impact in the world.
And I’m sure you felt that way about a lot of the businesses you helped start. I mean, the difference is you also became a billionaire and I became somebody who works for a billionaire, but still, you have that same approach in the real world that you’re solving people’s problems. And I wouldn’t have felt so good about it if I had a business whose primary profit came from ripping off old people.
Nick Hanauer:
No, and I think that the thing that Colin said, I think, that really resonates is that you shouldn’t generate profit from doing harm. The idea that, for example, a private equity company can buy a company loaded up with debt, fire a whole ton of people, and bankrupt it, and still make a fortune in fees and selling it to a greater fool, that’s just capitalism run amok. There’s no reason to tolerate that. There’s no reason to reward that kind of behavior. I mean, that’s not making markets more efficient, it’s piracy. That’s it.
Goldy:
Yeah. I will say, Nick, I do have one nit to pick with his interpretation of how markets work and that it’s not particularly middle out. I mean, he started off by saying, I mean, his focus is on the role of businesses, corporations, that that’s what drives the economy. They provide the products and the employment and solve the problems, that that’s the way it should work, that they do these things. I think that’s a very supply-side approach to it and not a very middle out approach. I think we would argue that it’s people who are at the center of the economy and these…
Nick Hanauer:
Okay, I’m not sure. I think you’re quibbling there. I think that, look-
Goldy:
It’s a narrative quibble. I would not have phrased it that way.
Nick Hanauer:
Okay. But institutionally, he’s correct. I mean, capitalism is an institution, is the framing institution of most modern societies, some kind of market-based system. Now, people are the key ingredient of those institutions. And certainly in a better world, the welfare of people would be the focus of that institution or that set of institutions.
But I don’t think he mischaracterized that. I’m not sure I agree. I mean, I have my bias about how you change the world, and it definitely is a more hard-edged bias than Colin’s, which is, I work with these people. And if you want to get them to do the right thing, you have to make sure that if they don’t do the right thing, they go to prison. Because other than that-
Goldy:
And that must make you popular at a party.
Nick Hanauer:
Yeah. Because people like Elon Musk, they don’t care.
Goldy:
They clearly don’t care. Musk does it. In fact, Musk is like, look, if I can defy the law of a sovereign country, I’m going to do it because I have these satellites and make me. And by the way, that’s how he thinks the world should run.
Nick Hanauer:
Should work.
Goldy:
Yeah. He’s open about that. He thinks the really rich people should be running the world because obviously he made the brilliant decision to be born the heir of a South African emerald miner. And because of that decision of his, we should trust him to make all the right decisions in terms of how to run the world.
Nick Hanauer:
Yeah. Now, obviously, he’s a particularly egregious case of sociopathy and business, but for sure-
Goldy:
I think in orthodox economics, we would call him a piece of shit. Is that the… No, no. I’m thinking that’s more-
Nick Hanauer:
Anyway, I think that in order to make this turn towards a better world, it’s going to take, it will be a very political process because obviously the people at the top of the food chain have very much benefited from this arrangement, and they are unlikely to want it to change.
But I think it will be a very fraught political process and will involve changing laws in order to rein in the worst practices and to encourage better ones. But I used to do business all the time, and now I do mostly politics all the time, and that’s just my view.
Goldy:
Which is more sociopathic, Nick?
Nick Hanauer:
Well, we have sociopaths everywhere.
Goldy:
And that is our work, to battle sociopathy in business and politics.
Nick Hanauer:
The long arc of human progress is mostly a battle with sociopathy, right? That’s trying to get the worst people to be slightly better.
Goldy:
Anyway, if you want to read more from Colin Mayer, we will provide a link to his book in the show notes, Capitalism and Crises: How to Fix Them. You are free to buy that at the sociopathic online book monopoly or at your favorite local independent bookstore.
Speaker 5:
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