Absent a Visible Hand, Capitalism Can Make Matters Worse

by HBS Professor Bruce Scott

Unfettered capitalism exacerbates income inequality and can undermine capitalism or democracy, or both, asserts HBS professor Bruce Scott. "To put an egalitarian face on capitalism, it's often noted that more than 50 percent of Americans are shareholders," Scott observes. "But it's also true that 10 percent of Americans own about 80 percent of the stock. In Latin America, 2 or 3 percent could easily hold 90 percent. So when we talk about 'maximizing for the value of the shareholder,' we are talking about enriching the rich. In much of the world, and in Latin America in particular, thoughtful business leaders worry that capitalism, especially U.S.-style capitalism, threatens to destabilize their democracies."

At last fall's GPP seminar series and in his forthcoming book, Capitalism, Democracy, and Development, Scott argues that capitalism does not depend on democracy, freedom, or private enterprise. What it does require is physical security, and then a set of rules and regulations that are appropriately enforced by an accountable political authority. (Scott details these ideas in a chapter inBusiness Solutions for the Global Poorthat examines the success of the so-called Arizona Market, a spontaneously generated market in war-torn Bosnia that was nurtured by NATO troops. The local NATO commander was the crucial political authority in the market's formative period.) "Everything we do in the United States starts from the presumption that we are physically safe and that, for the most part, the rules are fair and fairly enforced," Scott says. "As a way to think in American terms about the issues surrounding inequality in developing countries, imagine trying to help poor people in the Jim Crow South while ignoring segregation. Much of the world is living under conditions that are comparably distorted."

To be a positive, effective force for development, Scott concludes, a capitalist system must be understood to be more than the "invisible hand" that is implicit in the pricing mechanism. "Capitalism also has a visible hand that is the expression of public policy through legislation and regulations administered by a bureaucracy," he says. "That visible hand creates, enforces, and modernizes all market frameworks. To ignore this reality is like ignoring segregation in the Old South."

Reprinted with permission from "The Plight of the Global Poor: Is It Any Business of Business?"

HBS Alumni Bulletin,Vol. 83, No. 1, March 2007.

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