The Rising Frugal Economy

To build new industry value chains that benefit people, society, and the planet, we need a new economic operating system.

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In 2020, the world is grappling with COVID-19 along with several other major crises. The International Monetary Fund predicts that the world could experience the worst recession since the 1930s this year, with the global economy contracting by 3% as advanced economies shrink by 6.1%. The World Trade Organization expects global trade to fall by as much as 32% in 2020. The Organisation for Economic Co-operation and Development reports that inequality in the world’s most developed economies is at its highest level in 50 years. The World Meteorological Organization recently warned that over the next five years, annual global temperatures could potentially rise more than 1.5 degrees Celsius above preindustrial levels, leading to catastrophic climate change.

There is much talk now about “rebooting” the economy, akin to rebooting a computer. But the operating system that runs most economies in the world, namely capitalism, has become obsolete, for four main reasons. First, capitalism extols the virtues of private ownership, individualism, and competition, which drives companies to accumulate and hoard assets and compete with one another in a zero-sum game. Second, it seeks economies of scale through mass production and global supply chains, which are heavily polluting and resource-hungry, and lack the flexibility to deal with cataclysmic disruptions like COVID-19. Third, it incentivizes companies to maximize short-term profits solely for shareholders rather than create long-term value for all stakeholders. Fourth, capitalism neglects to hold businesses accountable for the negative consequences of their activities, such as social inequality and ecological degradation.

Given these deep systemic flaws, it makes no sense to reboot a dysfunctional capitalist economy. Instead, we need to upgrade and reinvent it to make it more efficient and agile, socially inclusive, and ecologically beneficial. Even before COVID-19, the discussion around “stakeholder capitalism” and “eco-capitalism” had been underway for quite some time. But while these concepts address some of the flaws of capitalism mentioned above, they don’t tackle all of them. Although these concepts have enabled individual companies to boost the impact of their corporate social responsibility programs, they haven’t created breakthrough multicompany business models that fundamentally reshape the structures and dynamics of entire industries.

It’s time to think bigger and bolder.

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Comments (3)
Elizabeth Hamblin
SMR has been publishing opinion and commentary pieces since at least 2002. https://sloanreview.mit.edu/article/the-critical-role-of-trusted-agents-2/
Erik Dybeck
When did the management review start taking in opinion pieces?
David Withee
This article would receive a failing grade in any reputable university.  Some of the "new" opportunities you present have been around for decades.  Every time you state people "earn more", you don't describe how they do so.  Crop rotation has been around forever.  No-till farming has, also, with great ecological benefits.  Large companies, such as in pharma, have been funding research, for instance, to small entities such as start-ups and universities for years, rather than investing in large capital projects to do the research themselves.  That's pretty ecological.  On the other hand, are many, many small factories truly more eco-friendly than fewer small factories?  There can be a long debate on that subject, with good points on all sides.  What you describe as evidence of the "frugal" economy I call natural evolution of capitalism to respond to consumer needs/desires.  As for small companies acting in co-op fashion, for example, small marketing companies with individual strengths who bid for projects against large integrated firms were written about in Inc. magazine decades ago.  As for ecological benefits, I wrote a paper in the 1980's describing the lack of appropriate logistical and manufacturing infrastructure as the biggest challenge in recycling plastics.  Here is something you have left out: convince large research institutions like my alma mater, MIT's Sloan school, to focus on research to quickly transition new technologies to small entities who can be more agile and compete better, rather than their normal focus on large entity use of new technology.  This can then support the creativity of small organizations, which is locked up in large organizations.  3-D printing is great - but it took small companies to make it work.  By the way - many large companies turned on a dime to react to the needs generated by Covid 19.  There is much to argue about the current state of capitalism [such as the seeming focus on quarterly reports to Wall Street], but there can be no denying the benefits capitalism brings to small economies world-wide.