Will COVID-19 shake up capitalism?

The Covid crisis both accelerated demands for changes to the economic system and demonstrated that governments can spend freely to help those in trouble when they wish. Will capitalism be changed as a result?

To answer the question, it is worth looking back a decade to the aftermath of the global financial crisis. Occupy Wall Street was the protest group du jour, and governments had just allocated trillions of dollars to rescue the financial system. Aside from bank reforms, capitalism (though not global trade) survived pretty much unscathed. This time might be different, because the past decade has prepared the ground for a shift to more interventionist government. The stunning shareholder returns of the past decade hang in the balance.

Dominic Barton, then head of management consultants McKinsey & Co. and now Canada’s ambassador to China, summed up the view shared by many of capitalism’s winners in a 2011 article in the Harvard Business Review: “Business leaders today face a choice: We can reform capitalism, or we can let capitalism be reformed for us.”

Dozens of think tanks were formed in the 2010s to allow the world’s elite to discuss how to fix capitalism, roping in the pope and Britain’s Prince Charles to speak to corporate leaders. Thousands of environmental, social and governance (ESG) funds were set up, and many old unsuccessful funds had the label slapped on them to make them more attractive.

Even the Business Roundtable, the main U.S. corporate lobbying group, signed up for stakeholder capitalism, the idea of paying more attention to the needs of workers, local communities and the environment.

The changes have been mostly cosmetic: more corporate disclosure, more women on boards and, most recently, more awareness of racism among the still overwhelmingly white corporate leaders.

“We’ve had a million conferences, but there’s still a long way to go,” says Sarah Keohane Williamson, a former fund manager who runs FCLTGlobal, a nonprofit organization set up with backing from McKinsey to push for longer-term thinking by executives. “There has been a lot of talk, and now it’s time for action.”

Indeed, not much has changed for the people who objected to capitalism’s rawer moments. More than 17 million Americans were thrown out of work when the pandemic hit, and unemployment remains above 10 million. Yet the rich got richer still as bond prices soared and stocks leapt to new highs after the March low.

Some of those who thought capitalism could adjust on its own now believe government needs to force companies to change.

Lynn Forester de Rothschild, part-owner of the Economist magazine and a director of Estée Lauder, set up the Coalition for Inclusive Capitalism after deciding in 2012 that she needed to bring together top executives to try to head off the threat. She thought the beneficiaries of capitalism were scared enough to act on their own. She has since changed her mind. “I’ve now become convinced that it’s not going to happen only by the good guys being good guys,” she says. “Government has to act.”

The areas she thinks need bigger government include carbon taxes, a living wage and action to tackle obesity. Each lobby and protest group has its own demands. But, at least economically, the broad thrust of what they want is that America should be more like Europe. This isn’t socialism, but it would mean more state involvement in how capital is directed, and less left over for shareholders.

History is full of examples of crises bringing in major changes to political economy. The response to the Great Depression was the New Deal and far bigger government. The British welfare state was a legacy of World War II. The backlash to the runaway inflation of the 1970s led to Thatcherism and Reaganomics, busting the unions and cutting taxes on the rich. When things have obviously gone too far one way, a crisis can be the trigger for a reset.

In the same vein, the aftermath of the Covid crisis could be much more government intervention. The intellectual groundwork for a government financial splurge was laid by a once-fringe economic school of thought known as modern monetary theory. Covid put it into practice—quite rightly, given the disastrous state of the economy. Central banks have turned from inflation hawks into advocates of more spending, and are willing to finance it. More spending brings with it the need to prevent abuse of the money, easing the politics of new regulations.

Executives who have been frantically greenwashing their companies to appeal to environmental and socially minded investors will find it harder to lobby against government restrictions designed to protect workers or combat climate change. It will be doubly hard if they were beneficiaries of government lockdown handouts.

Already the European Union has broken the German taboo on centralized borrowing to launch a massive spending program, as well as moving to define sustainable investing. Europe led the way on antitrust action against Big Tech, now under way in the U.S., too, although trust busting is something a free-marketeer (if not a self-interested shareholder in a monopoly) should support.

U.S. society isn’t overwhelmingly in favor of Big Government. Joe Biden didn’t win the presidency with the sort of landslide that allowed Franklin Delano Roosevelt to shake up capitalism. But polls show that the population is broadly in favor of more spending, and the modern Republican Party thought nothing of running record peacetime deficits, albeit to finance tax cuts.

The next 10 years could easily see the words of the past 10 years turned into action, both from governments becoming more interventionist and companies doing more to try to head off political involvement in their businesses. Shareholders should brace for change.