As inequality deepens, democratic institutions strain, and climate risk accelerates, it’s becoming impossible to ignore a basic question: What is capitalism actually for?
This week, we revisit our conversation with Harvard Business School professor Rebecca Henderson, who argues that today’s economic crises aren’t the result of isolated failures, but of an economic system designed around the wrong goal—maximizing shareholder value at any cost. Drawing from her book Reimagining Capitalism in a World on Fire, Henderson makes the case that markets built around cooperation, dignity, and shared prosperity don’t just serve the public good—they often outperform extractive, low-road models, while decades of trickle-down economics hollowed out institutions, rewarded cheating over value creation, and left businesses dependent on a society they are actively undermining. Together, they ask what it would take to build a new economic paradigm—one where firms exist to strengthen the communities, democracy, and planet they rely on to survive.
Rebecca Henderson is the John and Natty McArthur University Professor at Harvard Business School, where she teaches the acclaimed course Reimagining Capitalism and explores how business can help build a more just, sustainable economy. She is the author of Reimagining Capitalism in a World on Fire, and a research fellow at the National Bureau of Economic Research, a fellow of the British Academy and American Academy of Arts and Sciences, and has served on the boards of major public companies.
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Reimagining Capitalism in a World on Fire
TED Talk: To save the climate, we have to reimagine capitalism
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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.
Goldy:
The last five decades of trickle-down economics haven’t worked, but what’s the alternative? Middle out economics is the answer because the middle class is the source of growth, not its consequence.
Nick Hanauer:
That’s right.
Announcer:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Freddy:
Hey, Pitchfork listeners. I’m Freddy, producer at Pitchfork Economics. Capitalism isn’t broken because we didn’t try hard enough. It’s broken because we designed it around the wrong goals. Today, we’re revisiting Reimagining Capitalism, a conversation where economist Rebecca Henderson explains how markets can be built around cooperation, dignity, and shared prosperity, and why systems designed around those values would actually work better. This conversation opens the door to what comes next.
Nick Hanauer:
Well, Goldy, as you know, and all our listeners know, we’ve been up and down and over again and again on the purpose of the corporation and are pretty adamant that this idea that the only purpose is to enrich shareholders and executives is bogus.
Goldy:
Otherwise known as the world’s dumbest idea.
Nick Hanauer:
Idea. Yeah. But today we get to talk to a remarkable woman, the Harvard Business School professor and economist, Rebecca Henderson, about her new book, Reimagining Capitalism in a World On Fire, and hear from her about how she thinks we need to reimagine capitalism and the role that businesses should play in all of that.
Goldy:
Not just the role that businesses should play, Nick, but the role they can play. And I think interesting, the role that some corporations have played over the past decade or so in reimagining the way they run their own businesses in a sustainable way that actually puts the public interest ahead of the interest of shareholders and yet ends up benefiting shareholders at the same time.
Nick Hanauer:
That’s right. And we’ll go deeper on it, but I think she’s going to make a good case that the high road can be incredibly lucrative, and for purpose-driven companies, they often out compete parasites and scumbags. Goldy, one of my favorite parables is the scorpion and the frog. You know that one, right.
Goldy:
Mm-hmm.
Nick Hanauer:
But maybe our listeners don’t. It’s this old story about the scorpion and the frog, and the scorpion desperately needs to get from one side of the river to the other. And he comes down to the river bank, can’t swim, and there’s a frog, and he says to the frog, “Mr. Frog, will you please take me across the river to the other bank?” And the frog says, “You’re nuts. I’m a frog. You’re a scorpion. You’ll sting me. ” And the scorpion says, “Why would I do that? If I do that, we’ll both drown. That’s nuts.”
So the frog thinks about it for a little bit and the scorpion jumps on his back and off they go. And halfway across the river, scorpion stings the frog. And as they’re both sinking and drowning, the frog says, “Scorpion, why did you sting me? Now we’re both going to drown.” And the scorpion said, “I can’t tell you really. It’s just in my nature because I’m a scorpion.” And therein lies the rub with business people and encouraging good behavior is that there are some people who do the right thing, but there are a whole lot of folks out there for whom the low road is the easy road. And it’s very, very difficult to get them to do the right thing in the absence of throwing them in jail for not doing it.
Goldy:
Yeah. So there you have it, America, from a corporate boardroom insider. CEOs and boardrooms are filled with scorpions.
Nick Hanauer:
They are. A lot of scorpions out there. It’s very hard to get them to do the right thing in the absence of a requirement to do so.
Goldy:
Maybe Rebecca can help us reimagine a capitalism with fewer scorpions.
Nick Hanauer:
Great.
Rebecca Henderson:
My name is Rebecca Henderson. I’m a professor at the Harvard Business School, and I have recently published a book called Reimagining Capitalism in a World On Fire. That is, may I say, shortlisted by the Financial Times and McKinsey as one of the best business books of the year.
Nick Hanauer:
Well, first off, why don’t we start with the phrase reimagining capitalism. Tell us why you use that phrase.
Rebecca Henderson:
For two reasons. The first is we have to reimagine capitalism. It is not working for the vast majority of the people on the planet. And it is one of the major contributing factors to the climate crisis and to a whole range of environmental crisis. So the version we have now is not working. And secondly, I called it reimagining because so many people say to me, “Well, why reimagine? Why not just throw it out the window?” And so I wanted to signal that I thought we could reform it, that we can indeed build a capitalism that is just and sustainable. And in fact, that it’s absolutely critical we do so.
Goldy:
Could you define capitalism for me?
Rebecca Henderson:
Yes. The private, widely distributed ownership of the means of production. So it’s capitalism when individuals or non-state actors own the machines and the computers and the stuff that’s needed to make other stuff. So that for me is the basis of capitalism. Now then there are a million different forms. I’m a fan of what I like to call free and fair capitalism, where markets reflect real costs and there’s genuine competition between firms and full information, but that’s a particular variety of capitalism. Capitalism at its base is someone not the government owns the stuff.
Nick Hanauer:
So one of the central arguments in your book is that businesses should play an active role in addressing the problems of the world. Tell us more about that.
Rebecca Henderson:
Shall I start with how unlikely most people find this?
Nick Hanauer:
Yes, sure.
Rebecca Henderson:
When I was pitching this book, I took it to one of the largest publishers in New York, and I’ll always remember his sitting behind his desk and looking at me and raising an eyebrow. And he’s like, “Business saves the world, Rebecca. Do you read the papers?” So let me begin by saying, I understand it’s unlikely. The textbook answer to how we save the world is paradoxically that we fix government. What’s happened is we’ve let our systems get radically out of balance.
So we have elevated the free market and the power of competition so high that we’ve forgotten that historically really prosperous and thriving societies rested on three foundations, not one. Yes, the free market, but also a transparent, democratically accountable, capable government and strong civil society to hold both government and the market in check. And we’ve got to this horrible place that we’re in because for the last 50 years, we’ve been telling ourselves that we can drown government in the bathtub, That the 10 most dangerous words in the English language are, “I’m from the government and I’m here to help.” Which is such a disservice to humanity and to the world.
And so the textbook answer is we need better government. We need a massive political and social movement to bring back really effective, transparent, well-run government. Well, then you’re going to say to me, “Well, then why am I going on about business?” Two reasons. First, because there’s not much sign we’re going to get that social and political movement globally in the time we need. We really need it. We should do everything we can to push for it, but too many governments are moving in the other direction. The problems that our worship of the free market has created have led to populism of both the right and left varieties. The inequality and lack of growth and hopelessness that our over reliance on the market has created has led many people to be super angry and they are turning to that old-fashioned idea, the popular will, I want someone to fix it, put it back the way it was. And so government’s in trouble.
The second reason I think we need to focus on business is because there’s a very strong business case to act. I did a TED Talk yesterday, and the key line that everyone’s picked up out of that talk is “business is screwed if we don’t fix climate change,” which is true. And it’s also the case that business is screwed if we don’t address inequality or rebuild our institutions, that the world we are creating is not going to be a good world for business.
So the second reason I focus on business is I think there’s a business case, and I think there’s a lot of capacity that we won’t solve the problems we face without the full engagement of the private sector and indeed that the full engagement of the private sector would be super helpful in rebuilding our institutions and strengthening government.
Goldy:
In your book, you actually present a number of business cases, different corporations who have chosen to do the right thing, and it has turned out to be good for those businesses. In putting this book together, did you find any cases of the opposite where they tried to do the right thing and it put them out of business?
Rebecca Henderson:
You’re worried about what academics call sampling on the dependent variable. That is [inaudible 00:10:32].
Goldy:
Survivorship bias. Yeah.
Rebecca Henderson:
Yeah, you’re worried about survivorship bias. You’re worried I’ve only chosen the good stories.
Goldy:
I’m a propagandist and I’m worried about how the other people are going to fight back and tar you.
Rebecca Henderson:
For sure, for sure. So there are certainly companies that behave badly and make a great deal of money. So for sure that’s true. And it’s certainly the case, there’s no necessarily correlation between doing the right thing and making money. There are definitely firms that have embraced a purpose and said all the right things and no evidence they’ve made super extraordinary returns.
It’s fairly clear you can survive with a purpose, but I picked businesses that have done super well and are all businesses like that? No. Do I know of businesses that have embraced a purpose and then decided it was a huge mistake? I do not. People ask me this question a lot and I’ve really thought hard about it and there are firms that it doesn’t take them as far as they would like. I know firms where a new incoming CEO said, “Ah, I think all this purpose stuff is bullshit,” and has gone back to business as usual. But I don’t know of a firm that said, “Okay, we’re going to be purpose driven, that’s going to be the core of what we had,” and then there’s been a horrible crash.
With the exclusion, important asterisks, of some of the purpose-driven startups. I mean, one of the exciting things is that there are thousands of purpose-driven startups, entrepreneurs really trying to change the world and change how business is done in the industries they work in, and of course, many of them have failed. But we know most startups, alas, fail, so I don’t think that counts.
Nick Hanauer:
I know you know, and certainly all the people who are listening to this podcast know that one of the most corrosive ideas of the last 30 or 40 years has been this idea that the only purpose of the corporation is to enrich shareholders and management. I guess my big question is, what do we replace that with? It has to be more than purpose, right?
Rebecca Henderson:
Sure. So I will give you my candidate. I’m not sure it’s right. I think one of the exciting things about the moment we’re in is that many, many people are asking that question. But here’s my candidate answer. The purpose of the firm is not to maximize shareholder value. That was always a kind of approximation anyway. The purpose of the firm is to maximize the prosperity and health of the society in which it’s embedded. The reason Milton Friedman said “firms should just maximize shareholder value,” was he believed for some pretty good reasons that maximizing shareholder value would indeed do just that, that it would maximize prosperity and individual freedom.
Now there was a huge asterisk on his reasoning, which said, as long as we have a strong government that can set the right guardrails so that when people focus on making profits, they don’t wreck the planet and the society. But he said it for a reason, but what he really cared about is generating the innovation and the flow of goods and services that we need in a way that lets people be individually free and in a way that is in the long-term sustainable. Frederick Hayek was a fan of pricing environmental externalities. It’s not like a left wing idea.
So what do we need instead? I think we need to reclaim the idea that the purpose of the firm is the prosperity and health of the society in which it’s embedded. And what does that mean concretely? It means that firms have a positive duty not to destroy the institutions of the society. So I think just as we wouldn’t tolerate a firm that employs child labor, even if it’s highly profitable, we should not tolerate a company that is actively flooding the political system with money, that is actively trying to destabilize the democracy, that is trying to deny the reality of climate change. That it should be understood that firms have responsibility for the institutions that keep the society in balance. Within that, I envision a world in which every firm is, yes, returning decent returns to its investors, otherwise you don’t get to play or survive, but makes every choice through the lens of, in the words of our colleague and friend, Colin Meyer at Oxford University, “Solving public problems.”
What are the public problems? What are real needs that we can solve? Sometimes it’s making toothpaste. In many parts of the world, cheap, easily available toothpaste, hugely valuable. But firms should be about solving public problems, not creating them, so actions that create problems should be morally unacceptable. They should clearly be illegal, that’s why rebuilding our government is so important, but more broadly understood as that’s not the goal of the firm. The goal of the firm is public solutions profitably.
Goldy:
And what is the role of regulation in this? I look back at, for example, the airline industry, which used to be highly regulated and it was highly regulated in a way that protected the interests of smaller cities. And when we deregulated the industry amongst all the other things that happened, smaller cities stopped getting service, stopped getting direct service in some cases, little or no service at all or at a much higher price. Do you see a need for more regulation than we have right now?
Rebecca Henderson:
Oh, for sure. I’m a passionate tree hugger. I think the fact that you can emit greenhouse gases without paying for that is just completely unacceptable. I mean, when you generate coal-fired electricity, $10 worth of coal-fired electricity generates at least $8 worth of harm to human health and at least another $8 worth of climate damage. So coal-fired electricity is wildly mispriced. I mean, I just picked that because it’s the simplest and cleanest example, but we need decent … Here I am talking to this team. We need a minimum wage. We need decent workplace regulation. We need worker representation. We need much more regulation. But here’s the issue. We need good regulation. We need it to be transparent. We need it ideally developed in conjunction with firms that are thinking about the public good as they develop that regulation.
Now, I understand that sounds utopian. Some people have given up on it altogether. One of the roots of neoliberalism was the idea that you could never have that kind of regulation, so let’s just get rid of all regulation. Whoa, bad idea. So we need to find our way back to a world in which business sees itself as part of a broader system, is actively involved in shaping regulation in a transparent public way, balanced by a strong civil society, and mostly kept in check by strong democracy. Because we should have the regulations that the people want, right? The well-informed, engaged citizenry.
So I’m, for example, huge fan of mandatory voting. I think one of the reasons our societies become so polarized is there’s a huge group of people in the middle who are like, “What? Plague on both their houses.” And if every politician had to persuade the people in the middle to vote, people would have to say sensible things. How do we regulate airlines? How do we come to a central consensus? So that’s a long answer to your question, David, but do we need more regulation? For sure.
Goldy:
And there’s a business case for that?
Rebecca Henderson:
Yes. That’s one of the things I try and sketch out in my book is why, in fact, there’s a strong business case for arguing for more regulation. Again, in the case of climate change, that’s pretty clear. If we don’t have good regulation, we are going to destabilize the world’s climate. The big coastal cities will be underwater. We’ll have hundreds of millions of people migrating north as the harvests fail. This is not going to be a good world to do business in. So absolutely a strong business case for regulation.
I think there’s also a business case for better labor regulation. That we need people to sell our stuff to, that a world where people believe they have a future and make a living wage is a much better place to start a business and build a business. But business has a strong case to build the pie for everyone and that the only way to do that is through sensible regulation, not the only way, but an important component of that is through sensible regulation.
Nick Hanauer:
Yeah. And at the end of the day, successful economies, successful societies solve their collective action problems.
Rebecca Henderson:
Yes.
Nick Hanauer:
And the challenge politically is that, certainly our country today is dominated by parasites and cheaters who don’t want to solve those collective action problems and actually want a parasite off the goodwill of other folks. And so what I’m really interested in is how you think we solve that problem and the interrelationship between culture and norm change and law change.
Because we used to have a society where business people were much less rapacious than they are today and much more sensitive, for instance, to issues of inequality than they are today. And it wasn’t just the laws that required people to treat their workers fairly, there were just sort of social expectations that made that necessary. So how do we get back to that?
Rebecca Henderson:
Yeah. I have a story as to how that might happen, and the story starts with 20 or 30% of the companies in the world becoming purpose-driven, moving from an overwhelming focus on me right now to an understanding that both not only their self-interest, but the broader interest of the society requires them to focus on us and later. I think those firms can thrive, that they can show that there are ways to run businesses that mean you can do the right thing, think about the common good and get very rich.
And I think we’re seeing these fundamental transformations in industries like food, energy, transportation, infrastructure, I’ve given you more than half of the economy, where really responding to the enormous problems we face is generating all kinds of new business models. And in my story, these firms adopt what I call high road business models, high road employment systems, that is they treat people with dignity and respect, they pay them a living wage, give them decent benefits, and they give them the freedom and the autonomy they need to fulfill the meaning and purpose of the work they’re doing so that you give people the experience of being agents that can really make a difference at work and that are making a difference at work and that these 20, 30% of firms have a number of effects.
One is that they learn really quickly they can’t do it alone. That the only way to address these problems at scale in many cases is to come together, is to cooperate. So you’re seeing these purpose-driven firms in industry after industry pioneer cooperative efforts across the industry or within geographic regions saying… I ran into a group of firms in Orange County, for example, just a few weeks ago. They were all having horrendous time hiring people. Why? Because the local colleges and universities were not preparing people for the kinds of jobs these firms offered and in particular were not well serving the community of color in that region.
And so these firms committed together to strengthening the educational system and to really making sure that people of color had the skills that they needed to take the kinds of jobs these firms were providing. Or you see it in the food industry where the large food companies have realized that global supply chains need to fundamentally transform to generate less environmental damage and to make sure that there’s real justice in how the people in those supply chains are treated, but that has to be done collectively because no single firm can do it alone.
So we’re seeing these experiments in collective action. And here’s the striking thing, Nick, most of them don’t work terribly well because collective action is super hard, particularly if it’s completely voluntary and so people free ride. And they make progress, they discover metrics, they try and find a ways to enforce the cooperation, but it’s not really working. So you create this demand for an institution that will enforce cooperation.
So we have two big institutions that could enforce cooperation. One is the capital markets, and we could talk a bunch about that, about how rewiring finance, and if investors could really come to believe that cooperative action is in their best long-term interest. And I think there’s lots of evidence that that’s beginning to happen that’s very exciting. So maybe investors could enforce cooperation. And the second is government. So paradoxically, what I hope we’re seeing, think we’re seeing, is a group of firms that are coming to realize that no, we have to rediscover the importance of democracy in a strong civil society in rebuilding our institutions and our society.
And underneath all of this is the normative change, because I completely agree with you, Nick. My favorite cartoon is that great one by Tom Toro of the New Yorker, which shows a small group of ragged children sitting around a fire and in the background are the ruins of civilization. And a man in a business suit is saying, “Well, we did destroy the planet, but for a beautiful moment in time, we created a great deal of shareholder value.”
Nick Hanauer:
Yeah, exactly. It’s a classic.
Rebecca Henderson:
And that is so clearly wrong at such a fundamental level that I think having important elements of the private sector really engage in this conversation, really saying, “No, we have to think about justice, we have to think about inclusion,” is an important contributor to a fundamental shift in how we think ourselves as a world, which is, of course, yes, we must move away from me right now to us and later. I mean, all the great faith traditions have always said, it’s super unskillful to think that if you only think about yourself, that that will A, make yourself happy and B, lead to anything good in the world. So this is a fundamental moral shift as well as an economic and institutional shift as well.
Nick Hanauer:
Yeah. Interesting.
Goldy:
So why do you do this work?
Rebecca Henderson:
Why do I do this work? Because it makes me feel alive because I think all of us should do everything we can because we don’t have much time and we must change. And we have the technology and the resources to build a just and sustainable world. We must do it. We must all do whatever we can right now. So that’s why I do this work.
Nick Hanauer:
Rebecca, thank you so much for being with us. That was fantastic. And we hope every CEO in the world reads your book and does what you say.
Rebecca Henderson:
Nick, David, thank you. It was a great pleasure. I really enjoyed our conversation.
Goldy:
So Nick, it sounds like Rebecca is in a lot of agreement with us on how the economy works and the purpose of the corporation.
Nick Hanauer:
For sure. And I think she makes a really great case that business has a huge role to play in getting our society to be more on track. I think she makes also a terrific case that for companies that are purpose-driven, there’s a lot of money in it too, that being a company that isn’t simply driven by shareholder value maximization isn’t martyring yourself and your enterprise and your shareholders. Often it works out even better because at the end of the day, those companies tend to have happier employees, happier customers, and more profits and revenue.
I do have some experience with this. My family business, which was, we sold sadly a couple or three years ago, but was in the bed pillow and down comforter business, we ended up being one of the largest players in that industry by being a high road company. The thing about the pillow business is it’s insanely easy to cheat in because nobody knows what you put inside. And we were surrounded by competitors that cheated, that underfilled the products or put the wrong thing in them because the margins were so high in doing that. And we just, mostly because my dad just refused to do it, we just refused to cheat.
And by so doing, we sort of set a new standard for the industry and ended up putting most of the cheaters out of business. But took a long time, it was at great cost. And honestly, I mean, if I look back, it’s not clear that we personally made more money than the cheaters. We ended up with a better enterprise, but there’s a lot of money in cheating, and if you don’t make it illegal, it’s very hard to weed it out.
Goldy:
Is this why on bedding and furniture and stuff, mattresses, there’s those tags that say do not remove under penalty of law?
Nick Hanauer:
Yes, I guess so. Yeah. Because theoretically that tag is supposed to tell you what you’re actually getting. And sadly, sometimes what’s on the tag does not resemble what you’re getting. But in some industries, it’s just very hard for a consumer to know.
Goldy:
So yeah, so pillows sometimes filled with scorpions and it says down.
Nick Hanauer:
Yes, exactly. Exactly.
Goldy:
Right. Well, I’ll tell you, one of the things that I learned from the book is, because she goes through a number of anecdotes and we talked about one of them, how important corporate culture can be. And clearly, and you mentioned your dad, he didn’t want to cheat, and that was part of the corporate culture of the family business was no cheating. So corporate culture is, it’s meaningful.
Nick Hanauer:
Oh, it’s very meaningful.
Goldy:
It’s people.
Nick Hanauer:
It is people, but people are also influenced by laws. And you need good people, but you also need good laws, which I think is the moral of the story.
I’m really looking forward to our next episode with my old friend, former Labor Secretary, Robert Reich, where we’re talking about the real looting happening in the American economy.
Freddy:
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