How to transition to a “new capitalism”?

We see four key points to the debate on the transition to a “new capitalism”: - Milton Friedman’s view of capitalism is far from simplistic, and it should not be over exaggerated. According to t his view of capitalism , companies maximise profits for shareholders, but government intervenes to provide education, a health care system and decent income redistribution. There is simply a division of tasks between government and companies, but government can tax, regulate and provide incentives for companies. The question is why this version of capitalism has failed. - The imbalances created by contemporary capitalism chiefly stem from the abnormally high required return on shareholders’ equity . It has resulted in offshoring, share buybacks, an income distribution tilted against wage earners, the use of cheap fossil fuels, tax competition, the resurgence of monopolies, etc. These developments are negative from a moral and ethical viewpoint, but also in terms of economic efficiency: destruction of manufacturing jobs and strategic industries in OECD countries, financial instability, deficient demand and fiscal deficits, climate change, unacceptable taxes, monopoly rents. - All these externalities (social, financial and economic, environmental ) generated by corporate behaviour must therefore now be internalised again. First, there is a role here for companies, for their governing bodies (boards of directors must ensure the social acceptability of companies) and for governments. Governments cannot delegate to companies all social, economic and environmental responsibilities, and must put in place the right incentives and policies, for example a CO 2 price, a bonus- penalty system for redundancies, an income policy, support for renewable energies, strategic industries, competition policy, etc. - The role of finance raises two questions: first, why is the targeted return on equity so high? Retail savers (households) need mainly long-term savings and do not require huge returns on their savings. But asset managers face short-term competition for market shares, which, at equilibrium, results in permanently high required returns. This requires change in the industrial economics of finance, for example by extending the duration of investments and making them less liquid. Second, finance will have to finance companies during the energy transition. Companies cannot be required to suddenly jump to a high ESG score; they will require support through this transition in the form of performance-related financing (progress towards environmental, social and governance goals). All things considered , there is a clear path ahead: all the externalities generated by companies must be internalised with a mix of regulation, incentives, companies’ free will, performance-related financing and reform of asset management products. After the coronavirus crisis, companies will be weakened. It is not certain that they will welcome new rules and constraints, and there may be some conflict between the desires of companies and those of public opinion and governments.