Capitalism has been prominent in driving global economic growth.
By involving a strong personal incentive, in the form of wealth creation, it has proved more productive than government-controlled socialist economies.
But while capitalism is a powerful system that has driven tremendous economic and technological progress, it has not significantly enhanced social parity.
The gap between rich and poor has increased: according to the World Bank, the average income of the world's top 20% is now 150 times that of the lowest 20%.
Intra-country income disparities have also widened. In the US, between 1979 and 2003, the income of the richest 1% of the population grew by 111%, while the income of the lowest 20% grew by 5%. The urban-rural income disparity in China has grown from 2.5 times in 1978 to more than seven times today. India has seen rapid economic growth in the past decade, yet 260 million people live below the poverty line.
These inequalities have alienated capitalism from millions of people.
Inflated CEO compensation across corporations is just one indicator of a flawed, inequitable system. For example, in the US in 2004 the ratio of CEO compensation to that of the average production worker was 431:1; in 1982, it was 42:1. Such greed has strengthened public conviction that free markets are merely a means for the rich to get richer. This rising disenchantment threatens capitalism's very future, as economist Joseph Schumpeter predicted in 1942 in Capitalism, Socialism and Democracy: "Capitalism will be killed by its economic successes, not by its failures, if these successes contribute to an inequitable social and political climate".
Sustainable economic growth is driven by the many entrepreneurs who create wealth, innovate, experiment and produce. To achieve this, we must reinvent capitalism as an effective model for equitable growth and for the emancipation of people everywhere. We have to restore the faith of people in a system that believes in the sanctity of private property, the freedom of contract, the power of free trade and the rule of law, and that allows unfettered opportunities for individuals to prosper and create wealth.
Compassionate capitalism is about using the power of capitalism to benefit the masses and ensure fairness, integrity and a focus on the public good in business. A prime example is the model of Sweden, Norway and Denmark.
It has combined private ownership of the means of production with a fair and efficient welfare system, resulting in a cooperative environment between workers, entrepreneurs and government, and economic growth without sacrificing equitable development. As a result, these countries rank in the top 20 in the WEF Global Competitiveness Index and the Human Development Index (see Northern Stars, p62).
Capitalism is still in its infancy in most develping countries. We, the business leaders of such countries, must be the evangelists of capitalism and sell its benefits to the masses. For this, we must gain the trust of society, which is where compassionate capitalism becomes crucial. We must focus on wealth creation that is legal, ethical, environmentally sound and sustainable. Developing countries have little confidence in big corporations, which they view as exploiters. Leaders must consider the interests of society in every decision they take.
As evangelists of capitalism, we must adopt value-based leadership in our transactions with the community. The best test of this in a poor country is moderation in managerial compensation. The same norms of fairness, transparency and accountability must be applied to determine compensation at every level. If we seek respect in every action, we will do the right thing by every stakeholder, creating goodwill for corporates and, consequently, for capitalism. At the global level, we must institute awards for good corporate behaviour and create an international ranking for responsible, ethical corporations.
As corporates expand globally, they should not exploit the legal and institutional weaknesses of developing countries. By promoting business practices that go beyond the minimum legal requirement, they can drive positive change and promote greater economic inclusiveness. The aspirations of people around the world cannot be translated into reality unless they are matched by the will of leaders to create opportunity and enable change.
I believe the real power of wealth is the power to give it away.
Anita Roddick says: "We need a new language in business - one that encompasses the idea of compassion and of moral responsibility." I agree. Once we recognise and embrace compassionate capitalism as a force for positive change, we will achieve the goals of eliminating poverty, hunger and disease.
NR Narayana Murthy is chairman of the board at Infosys Technologies, Bangalore, India