Greater capitalism: How the pandemic is reshaping our economic system for the better

Robert Smith, the richest self-made African-American
Image:  Ricky Carioti / The Washington Post Via Getty Images

The surreal year 2020 produces a personal Groundhog Day effect. The clock moves at one-quarter speed as the time-numbing diversions and necessities of a century ago, from jigsaw puzzles to yeast, fly off the virtual shelves. Simultaneously, though, the world is transforming at a pace unlike any experienced since World War II. In a matter of weeks, seismic, permanent shifts have occurred in how we work, learn and transact. The most significant shift is taking place in our economic system itself.

Capitalism, the greatest engine for prosperity and innovation ever created, was already under strain before the coronavirus pandemic. Despite a decade of impressive economic growth and job creation, a plurality of Americans still reported feeling as though the system was rigged, that hard work and playing by the rules no longer ensured success. “It is scary when you had the lowest unemployment, the lowest African-American unemployment, the lowest Hispanic unemployment, the lowest women’s unemployment,” says Michael Milken, who has sat in the middle of several of these cycles, “and that’s how people felt.”

Those feelings have only accelerated this spring, particularly among the young. At the end of February, during the last week of the pre-Covid era, Forbes surveyed 1,000 American adults under age 30 about capitalism and socialism. Half approved of the former; 43 percent regarded the latter positively. Ten weeks, 80,000 deaths and 20 million unemployment claims later, we repeated the exercise, and those already dismal results had flipped: 47 percent now approve of socialism, 46 percent of capitalism. You can see those changing sentiments playing out in public, as ideas such as universal basic income, rent amnesties and job guarantees move rapidly from the fringe to the mainstream.

Amid the chaos and the disorienting paradigm shifts, though, something profound is also happening: The Invisible Hand is operating on itself with dispatch.

As one of the patron saints of capitalism, Joseph Schumpeter, could tell you, the creation of a new system requires the destruction of the old. So count Milton Friedman’s legacy as another coronavirus casualty. It was already on life support; even the fusty Business Roundtable declared last summer that Friedman’s shareholder-first dogma no longer held sway over its members. The funeral rites can now be witnessed at any grocery store or aboard any UPS truck, where the low-paid heroes previously termed “unskilled workers” are now known, with respect, as essential. Pity the CEO who argues for paying them as little as possible in order to protect the quarterly dividend.

The Too Big to Fail playbook from the last meltdown has proven archaic as well. From crowdfunding to cryptocurrency, the economic action became decidedly more bottom-up during the 2010s, and a pandemic taking particularly cruel aim at the entrepreneurs running businesses like restaurants and barbershops has many sharpening their pitchforks. Shake Shack founder Danny Meyer never embraced Milton Friedman—his customers, employees, neighbours and investors mostly worship him. But when his large, well-capitalised, publicly traded hamburger empire had the temerity to take a federal Paycheck Protection Program (PPP) loan, the public outcry could have melted chocolate custard, prompting Meyer to quickly return the check.

Finally, we’ve ended the era of economic incrementalism. Slow and slight improvements don’t cut it right now; “as good as” isn’t good enough. The times demand systemic solutions greater than what we had before. Greater Capitalism.

If Friedmanism worshiped profits above all, this Greater Capitalism measures return on investment in all facets. Yes, it incorporates a large dose of the stakeholder economy that has slowly made headway over the past few years. But its roots lie not in big companies but in small businesses and entrepreneurs who ask for little more than a fair chance and a level playing field. If practiced correctly, Greater Capitalism will encourage the kind of smart, long-term, accretive actions that create permanent solutions.

Three binary formulas, “greater thans” all, encapsulate what’s been emerging over the past few weeks. History is unspooling in real time.

PART I
Equal Opportunity > Equal Outcome
the virus has exposed larger fissures afflicting this country, as communities of colour have suffered disproportionate death, sickness and joblessness. Robert Smith, the richest self-made African-American, with a net worth of $5 billion, had already been focusing on creating more opportunity for young blacks, most famously by wiping out the student debt of Morehouse College’s class of 2019 in the commencement address heard ’round the world. Watching April’s clumsy PPP rollout—the first $350 billion tranche gobbled up within days by the bigger, better-connected companies that knew how to play the game—infuriated him.

In the three weeks leading up to the second tranche, Smith looked for a solution. The core problem: PPP money had been channelled through the Small Business Administration’s (SBA) electronic system—a system only the major banks could access. “Seventy percent of African-American neighbourhoods don’t have banks,” Smith says. Even if they did, Smith estimates that some 90 percent of African-American businesses are sole proprietorships lacking the clubby bank relationships that helped usher larger clients to the front of the line.

So Smith went where these small entrepreneurs access the financial system—credit unions, minority depository institutions and more than 1,000 community-development banks—and paired them with the larger institutions that had access to the SBA clearinghouse. The greatest software-industry dealmaker of his generation, Smith used one of his fintech companies, FinAstra, to create a patch, and then sent a personal plea to the 30,000 chapters of the National Council of Black Churches to let those previously shut out know they too had access to this lifeline. During the PPP’s second tranche in May, 90,000 loans were processed in this manner.

Not every barrier has an altruistic billionaire willing to ram through it, though, which helps explain why so many, especially millennials and those in Gen Z, have soured on capitalism’s 21st-century variant. If the current system doesn’t offer them equal opportunity to succeed, promises of more equal outcomes will carry the day. For younger generations to experience America as the land of opportunity, the root inequalities need to be ripped out—now.

That starts with the education system. Getting into college once offered a ticket out, a near-sure path to the upper middle class. Compare today’s debt-laden and rightfully cynical college graduates with the returning heroes of the Greatest Generation, America’s most upwardly mobile, largely courtesy of the GI Bill. Service-for-college proposals suddenly abound anew, most notably in Michigan, where Governor Gretchen Whitmer has put forward a “Futures for Front-Liners” initiative that will provide a tuition-free path to a college degree or technical certificate for those who performed essential services during the pandemic.

Even without government intervention, the Invisible Hand is doing its own work. For this entire century, colleges, serving a customer base that could tap endless wells of guaranteed loans, had little incentive to mind costs. With virtual education immediately made universal, the genie is out of the bottle. “A lot of issues can be changed here,” Milken observes. “Do you really need $50,000 a year to get a quality experience?”

Answer: No. For the first time in over a generation, higher education will be subject to market pressure—the need to provide a better product at a lower price. “The economic model for education was broken,” says former Babson College president Kerry Healey, who now oversees the Milken Institute’s Center for Advancing the American Dream. Healey predicts that one-quarter of smaller colleges will ultimately merge or cease to exist. That’s entirely healthy, and overdue. The survivors will have to provide that first rung on the ladder of the American Dream: A college degree with less debt, a clearer path to the jobs of the future and training opportunities for everyone, not just 18-year-olds.

The same dynamic is playing out in America’s other bloated behemoth, health care. Like online education, telehealth has moved from future theory to universal reality in a matter of weeks. Good experiences will translate into rapid adoption, and the results are almost preordained: Higher reach, lower costs. Should the paradigm not just shift but be broken, it will reduce another stress point for middle-class America.

The key as we emerge from the coronavirus nadir: Permanently baking these playing-field levellers into the system. That’s the focus for Smith as he joins forces with strange bedfellows, including Nancy Pelosi, Steve Mnuchin, Chuck Schumer and Ivanka Trump, in an effort to turn his software patch into a simple “lender in a box” infrastructure.

Smith envisions a system in which big banks, as a condition of participating in the SBA programmes, continue to act as a conduit for the financial institutions that serve the underbanked, whether urban or rural. A uniform software suite will render the process seamless, and by bundling these small loans—which traditionally default at lower than average rates—for secondary markets, the banks get a new business line, and the small borrowers get access to a massive amount of new capital. “The ROI on that is enormous,” Smith says. “You can jump-start the entire small- and medium-size business ecosystem.”

From there, Smith’s ambition is grander still: A new American Dream empowered by a “business in a box” software suite that for, say, $50 a month democratises entrepreneurship by offering payroll processing, payment systems, scheduling, withholding and similarly intimidating chores. Just as powerfully, such a product would automatically provide the kind of visibility that a bank would need to make a loan.

How long until the lender-in-a-box model could become a fully funded, permanent part of the financial system? “Nine months from right now,” Smith asserts.

And what would the timeline have been absent this crisis? Smith pauses, then laughs. “Who knows?”

PART II
Stakeholders > Shareholders
Ever since the pandemic sent New York workers home in March, Verizon CEO Hans Vestberg has convened a virtual war council at 8 am daily. “The cadence of decision making is virtually unheard of,” says Vestberg, who estimates that at least twice a day, he has to make a call that he’ll be judged against five years from now. From the beginning, his 10-person team decided to address every issue through a four-part prism with a specific hierarchy: Employees, then customers, then society, and then, last and least, shareholders.

“This time around, you have to have your compass clear,” he says.

So what does stakeholder capitalism look like at Verizon? Of his 145,000 employees, Vestberg laid exactly none off. Those in the field have gotten hazard-pay bumps; anyone in the company who contracts the virus gets 26 weeks of paid sick leave. The 120,000 staffers working from home, many hired for tasks that currently don’t exist, are dispatched to help on company-wide projects or Verizon’s volunteer efforts. The goal is more than a paycheck—it’s designed, at a challenging time, to provide purpose.

Vestberg treats his employees the way an elected official treats his constituents. He polls them every two weeks to gauge his performance and determine the issues he needs to focus on. And he’s transparent, holding the corporate version of Andrew Cuomo’s press briefing every day at noon. “We have nothing to hide, what we’re doing, our processes,” he says. He quickly expanded his audience beyond just his workers, airing his “briefing” live on Twitter so anyone—customers, vendors, Wall Street analysts—could jump in. More than 50,000 typically do.

As for its customers, Verizon has pledged not to end any contracts right now for those who can’t pay. It’s the right thing to do at a time when personal connectivity is as essential as electricity. And it’s the smart thing to do for a company traditionally valued by some multiple of customers. “If you cut them off, they never come back,” Vestberg says. For society, Verizon has provided every high school student in America with a New York Times subscription, handles connectivity and devices for kids at 350 schools and hosts free streaming “Pay It Forward” concerts every week, with performances from the likes of Billie Eilish and Chance the Rapper.

The shareholders? Wall Street seems to have accepted its place in Verizon’s pecking order. “So far, no one has pushed back,” Vestberg says. It should assuage the analyst crowd that on Forbes’s first-ever Top 25 Corporate Responders list, which leverages data generated by Just Capital across 22 different criteria of the moment, from customer protection to emergency dependent care, Verizon took first place.

Of course, it’s easier for a high-margin, technology-driven company like Verizon to do the right thing. But low-margin retailers like Dollar General, Walmart and Target also made the Corporate Responders list. Target, the runner-up to Verizon, gave its 300,000-plus front-line workers a $2 per hour raise; added paid sick leave, so employees don’t feel compelled to turn up at work with symptoms; provides backup child and elderly care; and expanded a fund to help workers with financial hardships.

If that sounds like a lot of employee focus right now, so be it. That’s what Americans want. As part of the Forbes Just 100 list, Forbes’s research partner, Just Capital, has surveyed more than 100,000 Americans about how they define a good corporate citizen. The overwhelming answer, every time: How they pay and treat their employees.

In this new Greater Capitalism, treating employees well doesn’t mean a conflict with business necessities. It just means giving them proper respect. A few weeks ago, Airbnb founder Brian Chesky did something historic: He laid off nearly 1,900 employees, or about 25 percent of his workforce—and was applauded for it. Yes, the packages were generous: a minimum of 14 weeks’ severance, accelerated equity vesting, an Apple laptop and 12 months of paid-for health care. But the key for Chesky: Compassion. He explained why he felt compelled to make such cuts, and then treated his ex-colleagues like friends rather than corporate detritus. Instead of recruiting, Chesky redeployed his human resources department to place laid-off workers and created a public alumni directory to showcase them. “I have endeavoured to make principled, versus business, decisions,” Chesky tells Forbes. “Business decisions maximise outcomes, whereas principled decisions are made regardless of the outcome.”

A similarly principled citizen’s mindset drives Albert Bourla, arguably the most important CEO in America right now. The Pfizer chief has pledged to have a vaccine ready for widespread distribution to vulnerable populations this year, defying the conventional 18-month projections.

Bourla risks two things. First, $1 billion on a product that’s surely a long shot for any single effort.

“Speed was of paramount importance—and it had nothing to do with return on investment or how much it would cost, because it all sounded like a rounding error,” Bourla says. “What is important is a solution for a vaccine.”

Second, he risks some face, since he’s more likely overpromising and under-delivering than vice-versa. “Our contributions to how we solve this crisis should drive all decisions,” he says with a shrug. He adds: “It is very important to have open communication right now in real time for everyone. Someone else making a vaccine maybe will learn something from us.”

Crises can go two ways: They can sow division or spur magnanimity. The Greece-born Bourla clearly aims for the latter. Pfizer’s vaccine moon shot is a collaboration with BioNTech, run by Uğur Şahin, a Turk. While their native countries famously despise each other, the CEOs have promised they’ll share raki together once the vaccine is developed. “There is only one enemy,” Bourla says. “The virus and time.”

Ray Dalio expects a revolution of one type or another
Image: Roy Rochlin / Getty Images

PART III
Solutions Today > Solutions Tomorrow
As the pandemic hit, ray dalio, whose Bridgewater Associates is both the largest and most hyper-rational hedge fund in the country, noticed something: As the kids of his native Connecticut were dispatched to attend school from home, the economically disadvantaged were doomed to fall further behind. Many were food-deprived, living amid density that both deprived them of private space and increased their likelihood of getting sick. And 22 percent did not have access to any home computer, much less one of their own, or reliable connectivity.

“I saw a real tragedy,” Dalio says. “And I saw a bunch of people pull together to say, ‘This must not happen’.”

Lubricated by an earlier $100 million pledge from Dalio, matched by the state of Connecticut, that “bunch of people”—including Bill Gates and Microsoft, Michael Dell and Dell Computer, and the legislative and educational leaders of the Nutmeg State—got 60,000 fully loaded computers delivered to low-income students.

For Dalio, who Forbes estimates is worth $18 billion, that decision was a no-brainer: A ROI-driven result at the heart of a Greater Capitalism. It’s also a harbinger of where philanthropy is going right now.

A subset of intellectuals have been railing against philanthropy of late, arguing for confiscatory tax rates to prevent the richest from having such societal influence. It’s lousy economic policy—while most billionaires have already girded for some kind of tax increase no matter who wins the 2020 election, Beatles-style rates would suppress growth more than generate revenue.

It’s also lousy public policy. Democracy is structurally poor at long-term outcomes. The cost of imprisoning a person—financially, much less socially—is many multiples of what it would have cost to educate and nurture him properly. But good luck persuading politicians to invest in 20-year outcomes when they’re simultaneously tempted by the sugar high of immediate action. Philanthropy can serve as risk capital for problems, proving concepts and making the mistakes that governments don’t dare.

But philanthropy, as currently practiced, has invited such scrutiny. Despite large subsidies in the form of upfront tax breaks, some $4 trillion mostly sits around perpetually waiting for the problems of tomorrow to arrive rather than systematically attacking the problems of today. By law, charitable foundations must put at least 5 percent of their assets to work every year—and for most of them, that 5 percent floor is also a ceiling. Meanwhile, the 730,000 trendy donor-advised fund accounts have managed to score the same tax breaks without any annual minimum outlay whatsoever.

The pandemic has highlighted this problem. At no point in our lifetimes has the public need been greater—and yet, because endowments have fallen in tandem with the market, the amount of philanthropic activity is likely decreasing.

And so key players are using this moment to morph philanthropy with an emphasis on transparency and a “give while you live” philosophy. Exhibit A: 43-year-old Twitter and Square co-founder Jack Dorsey, who made headlines for pledging $1 billion toward the coronavirus crisis and related problems—and has been logging his donations one by one in a public Google Doc.

In May, a group of more than 275 philanthropists and professionals, led by the $100 million Wallace Global Fund, formally called on Congress to double the minimum outlay for foundations and donor-advised funds, for the next three years, to 10 percent—a move that would put another $200 billion to work. “It’s not about being a financial headstone that forever marks your coffin,” says Abigail Disney, one of the signatories. “This should be about what the world needs, not how people remember you.”

Meanwhile, according to insiders, various signatories of the Giving Pledge have been holding discussions regarding whether to move past the group’s famous agnosticism about when and where to give (other than at least half their fortune before or when they die). Ideas include a pooled response fund to tackle Covid-related issues and efforts to encourage the give-while-you-live ethos. (No decisions have yet been made.)

The stakes right now couldn’t be higher. Economic tumult emboldens the fringes. During the Great Depression, communism, isolationism and nativism all surged—and that was before social media. Instead, a decade after the Depression, American businesses were the envy of the world, and American workers achieved a quality of life their parents and grandparents couldn’t have fathomed.

We’re at that same crossroads right now: Toward a Greater Capitalism, or a continued societal fraying, and the sobering alternative that this would all be for naught. “We will have a revolution of one type or another,” Dalio says. “Either it’s going to be bad. Or we can do this thoughtfully, together.”