Harvard Business Online
The M-Shaped Recovery
Here's a short economic history of the USA, 1988-2008: Americans were fat, lazy, greedy consumers who lived beyond their means. Right? Wrong. That narrative can be read in many places, but it's as false as a liar loan. The economics reveal a very different truth.
Most Americans took on significant amounts of debt not just because they wanted to, but because they had to. The math is as cold, brutal, and simple. Wages have been stagnant for thirty years. The cost of goods and services—especially basic or durable goods and services, like cars, education, housing, and healthcare—has exploded. When your income isn't going up, but the price of a degree is, borrowing becomes the least bad option. The result is an economy where the middle class has been forced into effective penury. Americans had to borrow because they weren't part of a shared prosperity to begin with.
Under the rules of financial capitalism, corporations have become experts at extracting value—but not at creating it. Prosperity wasn't shared because 20th century organizations weren't built to share it. 20th century organizations were built to create value for shareholders, by acting "strategically" at anyone and everyone else's expense, by any means necessary: through lobbying, monopoly power, cost-shifting and hiding, or, most recently, trillions in bailouts.
Who is it that organizations have become experts at extracting value from? It's, well, the rest of us: society. Whether as employees, taxpayers, or consumers, the gains that accrue outside the boundaries of the organization are small indeed. Bailing out Wall Street has already cost every American household tens of thousands—and that's just for the latest crash. Capitalism 1.0—financial capitalism—impoverishes everyone who isn't a financial capitalist.
Our great challenge isn't "recovering" from a financial crisis. It is rehabilitating an economy. What we've really got to recover from isn't yesterday's financial crisis, but a century of toxic, self-destructive industrial-era business as usual. Without rehabilitation, tomorrow's crises will make today's look like a walk in the park.
Rehabilitation is defined as "the restoration of someone to a useful place in society." A meaningful recovery will only happen when we restore business and commerce to a useful place in society. Otherwise, the transfer of value from the poorest to the richest will simply continue—as has been happening for the last half-century and more.
That's why for America—and the world—the only kind of recovery that matters is M-shaped. An M-shaped recovery isn't just skin-deep. It is a full-blown rehabilitation: one built on a new set of industries where people and organizations do meaningful stuff that matters the most. Meaningful stuff is that which makes others authentically, durably better off.
Rehabilitation begins with the understanding that it's brain-dead to build an economy on Big Macs, SUVs, and McMansions. Why? They don't make others authentically, durably better off. In fact, their net economic effect is this: they simply transfer value from the poorest to the richest.
Re-read that last paragraph, because those economics are the "what" that we've got to recover from—not just in America, but across the globe. Financial capitalism is often seen as a panacea for the problems of the developing world. Yet, if financial capitalism cannot enrich the developed world, what can it do for the poor? The same dynamics of crushing inequality and chronic exploitation are already at work in China, India, and Africa. It isn't just America that needs an M-shaped recovery: Capitalism 1.0 itself needs a reboot.
Feeling depressed? Don't. The revolution's already here. I've discussed the new foundations—new institutions—of a more Constructive Capitalism at length in this talk.
Fire away in the comments with questions, criticisms, or thoughts.