Roy Swan leads the Ford Foundation’s Mission Investments team, advancing social justice and equality via impact investing.
As Martin Wolf’s book titled The Crisis of Democratic Capitalism succinctly and powerfully details, the survival of democratic freedoms is hanging by a thread. Conspiracies threaten to take global society back to 1930s extremist concentrations of power through destructive pathways to autocracy.
To sustain our way of life and protect ourselves from this steady lurch toward a real-life Handmaid’s Tale, we must change our way of thinking away from the theoretical and toward the realistic. Just like the world was once thought to be flat and now definitively is known to be round, we must reorient our view of capitalism toward reality.
Adam Smith’s original vision of capitalism was humane, but it has since been contorted by visible hands to become inhumane. As Naomi Oreskes and Erik M. Conway set forth in their deeply researched book, The Big Myth, corporate interests, extremist and influential figures, and academic groups helped adulterate Smith’s intended humane form of capitalism and, intentionally or not, propagandized a system that created more wealth for the wealthy and corporate interests.
How can we make humane capitalism a reality once again? By making optimization the new maximization.
A New Formula For Economic Prosperity
Now is the time for a new financial math that simplifies what should become our common goal: O=FR+(PE-NE), or “Optimization equals financial returns plus the difference between positive externalities and negative externalities.” This equation will optimize society’s ability to maximize sustainable economic prosperity, social stability and democratic freedoms.
Smith’s original vision of fairness, progressive taxation, strong regulation, care for workers and community, and moral bearings can be translated to optimization. The benefits of optimization mean everyone will be better off. Yes, the rich will still get richer. But so will everyone else.
Take the following example. Investments in affordable housing improve the quality of life for families by increasing disposable income they can spend with local businesses, use for vacations, invest or all of the above. It also reduces human stress and anxiety that lead to health problems and violence. More affordable housing can also reduce homelessness, crime, policing costs and healthcare costs; all positive externalities that benefit local communities and therefore the country.
On the other hand, new affordable housing developments might strain local infrastructure, such as public transportation and schools. However, those negative externalities can be mitigated through proper planning, and, in such cases, the benefits are likely to outweigh the costs.
In America, optimization means more tax revenues that can be reinvested in society. This can grant more Americans the opportunity to participate in a stronger, healthier economy, increasing prosperity for all.
Wall Street investments should be viewed in the same vein. In the investment world, optimization is another way to describe impact investing—to strive to do well financially while improving society. Investing in human capital, in a social safety net, in technological innovation and in many other arenas stands to yield massive returns while expanding access to capital and economic opportunity.
Boston Consulting Group’s reporting around workplace diversity, the Brookings Institution’s Hamilton Project about closing racial and ethnic disparities, the International Monetary Fund’s work on gender inclusion and other studies suggest that building a more inclusive economy catalyzes economic value.
The philanthropic sector may be steering the ship, but we cannot go about this journey alone. Wall Street must follow suit. The equation O=FR+(PE-NE) can help them do so.
The Benefits Of Patriotic Capitalism
This new math is, at its core, a form of patriotic capitalism: a form of investing that prioritizes the common good—protecting democracy, national security and economic prosperity—to the benefit of all. By investing with diverse investment fund managers, by investing in opportunities for historically overlooked and underserved groups, and by investing in society, Wall Street can help restore Smith’s intended version of humane capitalism. Doing so is in investors’ best interests.
Patriotic capitalism is the commonsense route to improve and protect America’s economic standing, helping thwart our current “crisis of democracy.” And optimization is the key to the formula for success.
While it may be bold, it’s not that complicated. Einstein’s E=MC2 had an uncanny ability to simplify the complex. Wall Street can leverage O=FR+(PE-NE) to do the same, creating a more inclusive, prosperous society that benefits all.
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