BIDEN’S NEXT STEP: RESTORATIVE CAPITALISM
By Mark A. Pinsky & Keith Mestrich
The writers are co-authors of Organized Money.
Presidential Candidate Joe Biden’s plan to support stronger finances for Black and LatinX people is a major step forward founded on the leading edge of progressive practice and advocacy. It builds around the model of successful financial institutions that have disproven mainstream myths that people of color (as well as women, LGBTQ people, and other minority groups) have no place in mainstream finance.
Community development financial institutions, or CDFIs, which Biden spotlighted, exist to serve communities of color, women, and other underserved populations, and they have excelled for 40 years. Today this modest ($220 billion) financial sector is the financial front lines in those communities. Socially responsible banks are anchor institutions serving the communities that have formed around environmental and economic justice. The New Markets Tax Credit has proved efficient at targeting private investments into commercial real estate, in particular, that benefits people living and working in distressed communities.
The key to both—and to the other pillars of the Biden strategy—is that they rest on business models that are profitable but not profit-maximizing and they measure success by the social as well as the economic benefits they create. They meld faith-based investing, philanthropy, and market interventions to produce—and so to model—capitalism at its best.
The key is business models that are profitable but not profit-maximizing and thatmeasure success by the social as well as the economic benefits they create.
We call it “Restorative Capitalism” and it should be the guiding star for any business or policy agenda that seeks to address racism and other forms of injustice. Three principles anchor Restorative Capitalism:
- It generates both economic gains and social benefits but rejects profits at all (including human) costs.
- It embraces markets for their information content, efficiency, and accountability.
- It shares downside risk between the private and public sectors.
The form of capitalism most people take for granted today is rooted in the misguided ideas of Milton Friedman. Friedman, whose ideas took center stage with the election of Ronald Reagan 40 years ago, believed that the only purpose of a corporation is to maximize profits to its owners.
In just the last year Friedman’s model has been dis-owned by many, if not most, business groups, including the finance industry. Last August, for example, the Business Roundtable representing more than 180 global businesses based in the United States, rejected Friedman’s “stockholder capitalism” for a version of what it called “shareholder capitalism.” The basic idea is that all shareholders—community residents, employees, business partners, the public sector, and others should benefit as well as stockholders.
Most people do not know that most models of capitalism practiced in the United States before milton Friedman included at least a mention, and sometimes real commitment, to finance and banking as public-purpose institutions.
This is not a new idea. Most people do not know that most models of capitalism practiced in the United States before Friedman included at least a mention, and sometimes real commitment, to finance and banking as public-purpose institutions. Profit-at-all-costs capitalism is a bump in the long road of capitalism as a force for good.
In fact, almost no one knows that Adam Smith, the father of capitalism, championed capitalism as a moral force for good. So deeply has stockholder capitalism infected our thinking and so successfully did Friedman and his followers redefine capitalism we have come to assume “greed is good” was a founding American principle.
WHAT DID ADAM SMITH REALLY SAY?
Quite the opposite. Smith published his foundational masterpiece, The Wealth of Nations, in 1776 just months before the Continental Congress approved “The Declaration of Independence.” They both were products of the Scottish Enlightenment.
In his other opus, The Theory of Moral Sentiments, published first in 1759, he undercuts the “greed is good” approach. It begins:
How selfish soever man may be supposed there are evidently some principles in his nature which interest him in the fortune of others and render their happiness necessary to him, though he derives nothing from it except for the pleasure of seeing it.”
When you step past Friedman, capitalism looks a lot different.
RESTORATIVE CAPITALISM DEFINED
We describe the most promising alternative, “Restorative Capitalism,” in Organized Money:
- It goes beyond the enduring but racist perpetuation of the financial sector in which people of color receive incremental gains in benefits (such as access to capital) but gain no control over the very system (finance) that is working to limit their progress.
- It expands progressive power to change social, economic, cultural, and political norms away from the regressive forms that are intrinsic to the financial system today.
- It treats the financial system as a public asset as well as a private business. We want it to work for an inclusive prosperity built on one fair economy, not two separate and unequal economies.
That is Joe Biden’s goal, too, and we know how he can make it a reality.