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CapitalismIt’s been five years since the U.S. recession was declared over, but Americans haven’t stopped asking: “When will things get better?” The Fed continues to feed more capital into the system – which, in theory, should work. But companies across the country are hoarding cash. It’s no wonder the economy is still sluggish. Capitalists, it seems, are uninterested in capitalism, says Harvard Business School Professor Clayton Christensen.

Companies are focusing on short-term gains – at the cost of jobs – without investing in the long-term, which should create jobs. They’re not investing in the right kind of innovation, asserts Christensen. The problem, he explains, is that investments in different types of innovation affect economies, and companies, in very different ways; but all are evaluated using the same flawed metrics (like RONA, IRR, ROIC, etc.) – measurements based on the outdated assumption that capital is scarce and must be conserved.

Though capital is no longer companies’ most limited resource, their investment decisions are still influenced by investor’s notions that doing the right thing for long-term prosperity is wrong. It’s the capitalist’s dilemma, a concept Christensen and his Harvard colleague Derek van Bever dissect in the June issue of Harvard Business Review. In their spotlight article, they define three different types of innovation – performance-improving, efficiency, and market-creating – which, in an ideal world, should be practiced simultaneously. In reality, however, companies tend to invest more heavily in efficiency, choosing to grow business incrementally rather than ambitiously – at the expense of the wider economy.

It’s the same defective doctrine of finance followed by Wall Street. After all, it’s much easier to deliver quick gains by cutting costs today than to plant the seeds needed to grow market share for tomorrow. Capitalism isn’t working, but Christensen believes it can be fixed. He proposes several approaches to reform, crowd sourced and culled from more than 150 Harvard Business School alumni in a new approach to research. Among them are:

  • Repurposing capital;
  • Rebalancing business schools;
  • Realigning strategy and resource allocation; and
  • Emancipating management.

“The policies that once were right are now wrong,” Christensen concludes. “Counterintuitive measures might actually work to turn our economies around.”

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