Leading through change for an inclusive economy and fairer world
By thinking like economists, Professor Betsey Stevenson says business leaders can help steer their organisations through change to establish a more sustainable future
For capitalism to succeed as a viable economic model, the right incentives need to be in place. However, significant societal and economic inequalities around the world suggest the current system is not working. But, according to Professor Betsey Stevenson, a leading labour economist and veteran of the Obama administration, there’s still hope for a more sustainable and equitable economy.
The key is for leaders to think like economists – that is, to remember that every decision generates costs, benefits, winners and losers – and to create an inclusive business culture where diverse voices are heard at the problem-solving table. And that’s true more than ever today, with multiple global challenges requiring more sustainable solutions, according to Prof. Stevenson, who serves as Professor of Public Policy and Economics at the University of Michigan.
“When I think about capitalism, I think about a world in which, I believe deep in my soul, people respond to incentives. A competitive system with people responding to incentives can deliver a world that’s good for everybody,” said Prof. Stevenson, who recently delivered the keynote address at the 2024 AGSM Professional Forum: Sustainable Leadership in an Accelerating World.
She observed that, unfortunately, the system as it operates today is “not the capitalism that we write about in our introductory economics textbooks”. That’s because there are inherently incentives in the system that operate to exclude competitors and maximise profits,” she explained: “It’s not the world of perfect competition and zero profits, where you’re getting paid enough to do what you’re doing, but you’re not making absurd amounts of money. That’s what capitalism is supposed to look like; it’s not what it does look like.”
These are essential questions for leaders and organisations seeking to steer through change, rather than be paralysed by it. And with the rise of artificial intelligence (AI), she said that having the right culture for change is critical.
Transformative AI and unintended consequences
A fundamental step toward making economies work more fairly for everyone is to examine the costs and benefits of decisions, and whom they are likely to affect – especially in moments of profound change (such as the world is experiencing now).
Prof. Stevenson talked about an AI conference she recently attended, where she joked that “all the stakeholders were involved” – that is, tech developers, the billionaires funding them and economists to discuss transformative AI. However, she observed that some of the key stakeholders required for a more inclusive and truly diverse conversation were missing. That’s because the application of transformative AI and other technological advancements will have profound implications for work, so she said it’s important to think about what that world looks like for everyone.
In particular, Prof. Stevenson predicted that transformative AI will “shut down the doors for young people” in the world of work, as older generations in the workforce who are more established in their careers turn to technology to perform tasks normally completed by less experienced and often younger people. “AI is going to make it harder to get on the career ladder because the rungs are going to get higher up; how do you get the skills you need to get on that higher rung?” she asked.
This aspect of the AI story exemplifies the unintended consequences Prof. Stevenson urges her students to anticipate as they become decision-makers – even though she noted that some don’t like to hear about the cons of technologies such as AI. “But you have to talk about the downside of every decision before you make it; you have to consider who gets hurt, because people always get hurt,” she said. “Unintended consequences should never be unanticipated consequences.”
The 2024 AGSM Professional Forum: Sustainable Leadership in an Accelerating World
The reality of diversity, equity and inclusion
Fortunately, she said the skills that will set people apart in the world of work are also the hallmarks of humanity: skills like creativity, critical thinking and empathy. By bringing our moral compass to our work and decisions, we can counter the destructive incentives inherent in capitalism to make the system work better.
On an organisational level, she explained that embracing an inclusive corporate culture empowers businesses to recognise the costs and benefits of their decisions. How to do that is at the heart of diversity, equity and inclusion (DEI) efforts, which Prof. Stevenson said have been politicised as sacrificing quality for representation. In fact, the goal is to bring people with different perspectives together to see all sides of an issue.
“All knowledge is built on the scaffolding of old knowledge; you build on what you already know,” Prof. Stevenson said. Moreover, “the world changes quickly, so you have to stay open to people who disagree with you not only on things you’re just now learning about but maybe also on things you’ve accepted as gospel.”
It’s also important to recognise our biases; once we accept them, we can devise a solution, which involves inviting people we disagree with. “You need to be open to ideas that run counter to your intuition,” Prof. Stevenson said.
Getting the incentives right
Societies today face serious challenges, including rising global inequality, climate change and a “very rapidly arriving AI that is coming to replace a lot of the work that humans do”, Prof. Stevenson said.
“We also have ageing populations in advanced economies and a large young group of people in developing countries who want to improve their lives,” she explained. “This is causing a clash in a lot of countries over attitudes about immigration, with immigrants becoming the scapegoat for a lot of problems. At the same time, they’re actually the solution to an ageing population. That’s when I think about putting all these problems together.”
However, she pointed to incentives that exist in current systems that have created a world that is not good for everybody, evident in the fact that capitalism has occurred alongside colonialism, slavery and environmental degradation. “There’s nothing about capitalism that says we build a good world; there’s not even anything that says we stay competitive, because one of the incentives inherent in capitalism is to create a system that excludes competitors so that you can be a monopolist and have the most profits,” she said.
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At the same time, economic growth is not inherently wrong; rather, it’s why we are able to live lives of comfort today. But people often misunderstand what growth means. “It’s about squeezing more out of a given set of resources, not about consuming more resources,” Prof. Stevenson explained. “True economic growth comes when we figure out how to do more with less.”
Her advice for making good decisions around sustainable and fair capitalism is to recognise that not everything is always priced correctly. “When it’s not, you can’t rely on the incentives in the system; you have to rely on your own moral compass.”
For example, she explained that a 2021 law in California requires mattress companies to take back any used mattresses they’ve sold, putting the onus for disposing of them on suppliers instead of consumers. That then provides an incentive for suppliers to seek a better solution. “Don’t wait for the law to be passed,” Prof. Stevenson advised. “That’s what I mean when I say not everything is priced in: we can make capitalism work better if we’re always thinking about those costs and benefits.”
A fairer global rulebook
Adding to all these challenges is their potential scale in a globalising world, where systemic inequality and warped incentives mean there are now corporations with market caps that are larger than many countries’ GDP. “Because of our increasingly globalised system, we’re in a world where it’s hard for any country to enforce a set of fair norms, because they’re competing with other countries,” said Prof. Stevenson. “We’ve seen a global struggle to implement a minimum tax, but it’s absolutely necessary. And it will get worse with AI.”
Moreover, she said that countries can’t just spend their way out of inflation. Instead, they need to create the right incentives to drive innovation. “Productivity is the whole ballgame; we want higher productivity, but that doesn’t mean at any cost,” she said. For an example of “productivity gone awry”, she pointed to the restaurant business in the US, which has become very efficient but not very competitive “within a bad equilibrium of low-quality, high-calorie, mass-produced food.”
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According to Prof. Stevenson, governments can play a more significant role here by fostering competition through regulation. In the process, she said policymakers must create a set of fair rules that put healthier incentives into the system.
“I fundamentally believe that not only is government regulation not against capitalism, it’s actually the only thing that can save capitalism,” she said. “There needs to be a fair set of rules and societal expectations for people to follow in a way that means we take into account the costs and the benefits to everyone as we make good decisions.”