Professor Herman Daems' Actions to Achieve Inclusive Capitalism

Professor Herman Daems
Chairman of the Board, KU Leuven, The University of Leuven
Chairman, BNP Paribas Fortis

Capitalism is not an ideology, at least not for me. I see capitalism as a system to create and distribute wealth.

Capitalism certainly does not work perfectly and it has many shortcomings. But economic history suggests that per capita income levels in countries where capitalism is the dominant economic system are higher, and grow faster over a longer period of time, than in countries that have tried other systems. Our aim should be to acknowledge the shortcomings of capitalism and to look for ways to improve it.

Capitalism has at least four major shortcomings.
• First, capitalism leads to inequalities. It is also not clear that under capitalism income equality and economic growth go hand in hand, although capitalism can certainly improve average income levels.
• Second, the capitalist system can be very unstable. The many financial crises over the past two centuries illustrate this instability.
• Third, left on its own, capitalism handles ecological issues and sustainability imperfectly. It is not a surprise that short-termism has become a characteristic of modern capitalism and that there are many appeals for sustainability.
• Fourth - which is the theme of this conference and this short statement - many individuals, families and communities do not participate in the capitalist system and are consequently excluded from the wealth creation process. This exclusion happens within countries, as poverty and unemployment levels show, and between countries, as demonstrated by huge global economic inequality.

I believe such exclusion does not take place by design but is, rather, the consequence of how the capitalist system works. The call for measures to make capitalism more inclusive is therefore more than justified.

I see two big avenues for improvements: make capitalism more accessible and improve the role of governments with fairer tax systems.

1. Make capitalism more accessible
There are fundamental barriers that prevent individuals, families and communities in countries and across countries from participating in the capitalist system. This means that capitalism has insiders - those who participate in the wealth creation process - and outsiders, those who do not.

In order to be able to participate and to be an insider, at least five elements are needed.
• First, in order to understand the way the system functions, some basic talents are required. Though they may be basic, not everyone has these talents or is capable of acquiring them. As the capitalist system becomes more complex, so the talents required increase.
• Second, potential insiders need to have a marketable resource, be it labor, knowledge, or capital to participate in the system. Again, not everyone has such a marketable resource or can acquire one at zero or very low cost.
• Third, one needs capabilities, a combination of resources and skills, to contribute to the system and to earn the right to an income.
• Fourth, potential participants need to believe and trust in the fairness of the system in order to take part in the wealth creation process. Who wants to participate in a game if the game is seen as unfair or rigged?
• Finally, potential insiders need to be allowed to access the system. Discrimination and poor reputation can shut people out. It is often believed that education and life-long learning will be sufficient to overcome the barriers to participation in the capitalist system. I do not think these are sufficient. If capitalism is to become inclusive, much more will need to be done to help outsiders overcome the barriers to becoming insiders. As a starting point, the barriers need to be discussed.

2. The role of government and the tax system
I strongly believe that capitalism cannot function without government intervention. Such intervention is necessary for at least four reasons: to create more equality of incomes, wealth and opportunities; to deal with essential uncertainties through solidarity; to provide collective goods that cannot be provided by capitalism and the market system; and to stabilize the system.

The capitalist system cannot hope to receive the support of society if governments do not intervene. The problem with today's public intervention is that governments are not perceived as being up to the job. We need a new theory and a new practice of government intervention that focuses much more on fairness, democracy, effectiveness and efficiency. Governments today are seen as running behind managerially and technologically rather than being at the forefront of developments, where they belong.

More effective government will need to go hand in hand with a fundamental revision of the tax system which is, worldwide, too complex and therefore facilitates evasion.

Governments should no longer aim to make policies through complex tax exemptions or stimuli. Taxes should be simple and collectable. This will make them fairer and more credible, thus increasing the willingness of citizens to contribute fairly to the collective effort. Unfortunately, fixing this problem is extremely challenging as it is likely to require worldwide collaboration so that tax evasion becomes less attractive and less worthwhile everywhere.