"It's time to rethink capitalism"

Prof. Ilian Mihov

INSEAD Dean Prof. Ilian Mihov tells "Globes" that if there is not reform and problems of inequality are ignored, then there could be a major cataclysm.

"Business is a force for good in creating jobs and lifting people out of poverty," says Prof. Ilian Mihov, Dean of the INSEAD graduate business school in France. "And anyone who thinks that poverty can be reduced in another way is just wrong or delusional. The only way is for business creation and growth. But the problem that we have to recognize is that in this process of growth, in this process of value creation for companies, we also create a lot of externalities - unintended byproducts - for society, for the environment."

In recent years, Mihov adds, people have been becoming increasingly aware of the negative byproducts of the growth led by the business sector. "You see the increase in inequality in many countries around the world. And what happens when inequality increases, and populist politicians become more powerful because they promise things that they can't deliver? I think that we're ignoring problems that can actually generate a big, big cataclysm going forward, and that many people do blame business for this," he declares.

"Globes": And you say that there's actually some justification for what they say.

Mihov: "Yeah, well, I think that I think they do. I think that the way that we do business, we have to rethink right now." For example, Mihov explains that it is necessary to rethink the idea that the essence of a business company is to generate as much value as possible for its shareholders. "But it means that very often you'll ignore the effects that you have on society and on the environment, and in fact, these are the things that many people are not comfortable with anymore. Companies going around the world. And even though they’re doing everything legal in their own country. And it could be legal in the foreign country. But this legal thing in a foreign country may create environmental damages that we today we just don't account for, but tomorrow, we'll have to. So I think that there is a change. The new generation and - and I don't have to cite Greta Thunberg - there are a lot of other people. Well, the new generation, they realize there must be something more than just this."

There must be something beyond the profit line: Mihov is trying to deliver this message within the system itself. He is trying to promote it in his position as Dean of INSEAD, one of the world's leading business administration schools. INSEAD, whose original campus is in Fontainebleau, south of Paris (where Mihov lived until 2002), now also has campuses in Singapore (where Mihov has lived for the past 17 years) and Abu Dhabi, with an innovation center scheduled to open soon in San Francisco.

This is a global institution at a time when globalism has become a pejorative.

"To me, what is happening is just a reaction to what we were discussing earlier, this rise of inequality, this feeling that some people are being left out. To me, the big issue that is very difficult to figure out, is how to cope with the gap between educated and uneducated. And that's very difficult to close because it requires a huge systemic change. And I think that people who are well educated are becoming global citizens. If they don't like what's happening here, they can move to London, New York, or Singapore, while the non-educated or less educated are left behind.

Like you did.

"I'm from Bulgaria. I lived in New York. I lived in South Carolina and Princeton. I lived in Paris and in Singapore. This is extremely disturbing and annoying for people who actually don't have this mobility. Sometimes, I can hear people saying something which is completely wrong in my view: they say all you have to do is go and, explain to the general public how bad Brexit or the trade wars will be for them. Actually, people don't care about experts. Every expert they see on TV is more annoying than the previous one. So to me, these are the big issues. Now to answer your question, globalization indeed has left some people behind. We have not addressed the fact that there are winners and losers in this, and we need to do something about it."

Two unforgivable sins

"If I have learned anything in my 53 years of existence, it is that luck matters a lot," Mihov told "Globes" during his visit to Tel Aviv last month. "But you have to be willing to take chances." He was born and grew up in Bulgaria, today the poorest country in the European Union. When he lived there, it was part of the Eastern European communist bloc. "I was born in 1966, so I was 23 when the Iron Curtain fell. I participated in demonstrations and signed petitions," he says. After two years of service in the Bulgarian army, he studied economics for two years under the communist system.

"I studied in the highest institute of economics named, unsurprisingly, after Karl Marx. I read Das Kapital - the whole thing. You read Volume 1 in the first semester and Volumes 2 and 3 in the second semester, but I was interested in reading other things, so I did go to the National Library. I was reading Keynes and Friedman and other people - you could only find Hayek and all these people in the National Library. They would have one or two copies of all these people. Actually, you had to read it there. You couldn't check it out.

"We knew that things were going on. I think we did not expect them to change so abruptly. In Bulgaria, there weren't many demonstrations. The only organization that got anywhere was called Ecoglasnost, an ecological organization. We signed the petition, which was against building dams somewhere in the mountains, and we then delivered it to the parliament. It was not an environmental thing; it was against the government. It was quite scary, because protests were unusual in Bulgaria.

"Our first and only protest was on November 3, 1989. We walked 100 meters to deliver the petition with 10,000 signatures to parliament. It was very scary because you could see all these photographers, you know, standing around taking pictures. You were thinking, 'OK, so now after that, the next thing is that we'll be taken away from here, and nobody will ever see us again.'

"But we were just lucky. On November 3, we had a demonstration, and they obviously did not have time to organize themselves. And on November 9, when the wall came down, the government changed the following day." It was an overnight success.

Mihov continued his studies at the University of South Carolina, where he got a two-year scholarship.

"It was yet another shock, because the way that I imagined the US was basically like in Woody Allen movies, you know, Manhattan, and when you get there, it was very different. People were very nice towards us, but there were some really shocking things that I just did not expect at the time. I was driving to Georgia with my wife once, and stopped at some really old gas station and you could see that there was still, in 1991, "Men," Women," and "Colored People." It was erased, but you could still see the imprint.

My wife is a sociologist. She was taking a course in sociology, and she wrote a paper on anti-Semitism in South Carolina, which was fairly common. That was surprising, especially coming from Bulgaria, because there was no anti-Semitism, at least not visible at that time."

Mihov again emphasizes that he was treated well at the university, and got excellent advice from one of his lecturers, who sent him to concentrate on mathematics, thereby paving the way for him to do his PhD at Princeton. As a poor student from Bulgaria, he got a scholarship and was exempt from tuition. He also had an opportunity to go before studies began and earn a little money as a research assistant. "'If you want, you can come a month before the school starts and work as a research assistant for one month,' they told me. 'We'll pay you $2,000,' and I thought, 'That's a lot of money.' So I went there. I went to the Department of Economics on August 2, and they said, 'Well, this guy, Ben Bernanke needs a research assistant.' I'd never heard of him, but I thought, 'It’s money. I’ll work - do whatever needs to be done.'"

Mihov went on working for Bernanke during his studies ("he probably felt sorry for the poor Bulgarian," Mihov says), and in time, the two began writing articles and eating lunch together. "He's an amazing man, just amazing," Mihov says about Bernanke, who later became chairman of the US Federal Reserve Board during the financial crisis, and was the man who saved the US economy (and probably the entire global economy, according to Mihov). At Princeton, Mihov remembers, Bernanke was shy about lecturing to 20 PhD students. "He's a very shy person, very humble. He came into the room, which was maybe slightly bigger than this one. We were about 20 stinky doctoral students, and he was very nervous." As chairman of the Federal Reserve System, Mihov says, Bernanke did a "great job."

"When you study in a department of economics in the US, you can commit two mortal sins," Mihov says. "The first one is accept a job at a business school, and the second one is to leave the US. Going to INSEAD was both." Nevertheless, following a successful visit to INSEAD while looking for work after completing his degree, Mihov decided to accept the job offer and move to Fontainebleau. In 2002, after being stuck in traffic jams every evening on the way back to his home in Paris, Mihov moved to Singapore, where he lived in an apartment next to the campus. "My travel time dropped from three hours to five minutes on foot," Mihov says.

The influences that catalyzed industrialization

"In 2013, when I started as Dean, I was asked to create a vision for the school," Mihov says. "As an economist, I don’t even know what that means, but I said OK. I thought, 'If I want to create a vision for the school, I first have to understand what it's all about. What is the mission of the school?' So I started talking about business as a force for good, in the sense of creating jobs and lifting people out of poverty. As we were talking about these positive stories, however, we realized that trust in CEOs and executives has been going down. I decided to look into this, and realized that fundamentally the reason that this is happening is because there's some failure somewhere: either the market is not working properly, or we're creating these byproducts that we call externalities, or old social norms have to be replaced. Of course, there could be unethical behavior, as well.

"That's when we realized that we need to broaden this idea of business as a force for good - to have a different interpretation, in which we basically say that in the process of creating value for the company, you have to think about the value that you create for society and for the environment."

In practice, these questions led Mihov and his colleagues to found a Business and Society Center  at the school, plus a series of programs and initiatives dealing with questions such as sustainability, ethics, gender equality, and even income inequality.

"We need to rethink the way that we operate. We need to rethink our norms," says Mihov. "When you look at the history of the world in the last 2000 years, there was very little or no growth for the first eighteen centuries. The total increase in per capita GDP between year 1 and 1820 was only 50%. In just the past two centuries, per capita GDP increased fifteen-fold. Growth is something very recent that hasn't been with us for a very long time.

"Because this growth is obviously linked to technological progress, innovation, inventions, and so on, we think about its positive aspects, but we forget that there is also a negative side. Forget about the environment for a second, because the environmental damage is easier to see and record. But think about the social impact, the negative social impact, what it took to fuel the industrialization of European countries and the US. For example, the UK fought in 34 wars in one century in New Zealand, in South Africa, China, etc. to fuel its industrialization of the 19th century, because it needed the resources.

"Marx and Engels wrote The Communist Manifesto in 1848. Again, it didn't come out of nowhere; it came because they saw what was happening. I think that today, if we are not willing to rethink the way that capitalism works, we may end up with abrupt changes. We have to adapt smoothly. We have to recognize the difficulties and the problems, and change the system, instead of this instability. 

Mihov gives a number of examples of the projects that students at INSEAD are working on, such as clinics in South Africa and a school founded by a company providing satellite Internet to poor countries in Southeast Asia. He admits, however, that there is a long road ahead. "All of this is very inspiring, but it's not it. What I really want to see is the big companies, the big consulting companies, investment banks, and technology companies doing the right thing, and we're not there yet."

The competition between the leading business administration schools is fierce. Today it also includes the founding of sustainability centers, social initiatives, and an emphasis on changing the world. In addition, however, it still includes the bottom line: how much the school's graduates earn - the more, the better. This creates a certain tension, which is typical of both INSEAD and similar institutions around the world. It is possible to find an inequality research center in an institution that trains its graduates to fit into the global business elite, and to aim at the top 1% income bracket.

"OK, what should we do? Should we close down the business school, and so on? It's not going to solve the problem. In fact, I think that business creates a lot of value. The reason that we have the Center for Inequality is to understand what is driving this inequality; it's not a statement on whether it's good or bad. We think that there are fundamental systemic failures that feeling guilty or doing something to ourselves is not going to help. But there are systemic failures in terms of what the educational system doing - how we can actually ensure that people who lose their jobs are retrained? The whole issue is that there is a hollowing of the middle class in many of these countries.

"I understand what you're saying but I think that the answer is let's actually try to find solutions, policy solutions that are implementable."

Another INSEAD initiative is gender equality. In absolute numbers, the school's business administration program trains quite a few women graduates - more than 300 a year. The percentage is less impressive - only 34% of the students are women. "We don't have gender parity, which I think is an important objective," Mihov states. "We've looked into this a lot to understand why, and the answer is our geographical reach; it's not the composition of our class. Like the US schools, we also have 40-45% women from the US, and 60% women from China, but 12-20% women from Spain, Italy, and Germany. We want to be a global school. We have 94 nationalities, and there are still some markets where women don't do MBAs."

What about Israel? 20% of the Israeli students in 2019 were women, compared with 27% in 2018. That's three women students each year.

The government in incapable

Mihov is not the only one preoccupied with the future of capitalism and the role that the business sector should play in it. Today this subject is discussed in books, conferences, special issues, and panels at the World Economic Forum. The subject also occupies Mihov's colleagues, such as Harvard Business School Dean Prof. Nitin Nohria, who is talking about the challenge posed by the loss of faith in capitalism. He explains that the business sector has to help find a solution for today's urgent problems.

Not everyone buys into this. For example, Stanford University Prof. Anat Admati told "Globes" this summer that this way of thinking was actually part of the problem. "What are their solutions? Social initiatives, social investment, a course imagining a renewed capitalism, thinking about how businesses can help solve society's problems. The latent assumption of this way of thinking is that governments are unable and unwilling to solve these problems. I say that if the governments are weak and corrupt, why is this the case? Maybe you helped them get weaker." According to Admati, what is needed now is "civic minded leadership" in the business sector, one that empowers governments, instead of rejecting them.

"I couldn't disagree more," Mihov says when I present Admati's general argument to him. "First of all, the governments already have the power to do this, and we see the result. As an economist, I can tell you that when you've got a market failure or an externality, you have taxation, regulation, and subsidies, and you deal with these things. You may not get the best, but you can get the second best.

"First of all, we unfortunately cannot regulate everything. Secondly, regulation has side effects. Thirdly, regulation can be avoided. If you don't change the mindset of businesses, and that's what we're talking about, it doesn't matter how much regulation you have. Many people often evade taxes and lobby for subsidies. As far as I'm concerned, if we don't change business, there is no hope. I just don't think that governments can do what needs to be done.

"I have not even mentioned whether government officials are competent to do all these things, which is a completely different question. Some governments are competent at these things, but I think that there are many governments that are not. I think this is a utopian view of government. In fact, when you read books today about capitalism, the future of capitalism, and all these things written by economists, you see that they do talk about markets and governments. They talk about all these things, but the real decision-makers are business leaders."

Later, towards the end of the interview, Mihov asks to clarify. "Actually, I did not mean to sound this anti-government. I do believe that governments have a role to play - a very important one. There are situations where regulation is needed. For example, I am absolutely certain that without the carbon tax, we're not going to solve the carbon dioxide (global warming) problem. This carbon tax has to be implemented globally and we have to know all these things. My point was that we have overemphasized the government's role in doing this, that governments or NGOs will take care of people. As advocates, NGOs can raise awareness, and that's super-important. Governments can adjust regulation. But again, I think that we have to get businesses involved."

Almost trapped in Bulgaria

At the end of the interview, I asked Mihov about the global economic situation, and about the feeling that policymakers have exhausted the tools available to them. It turns out he has a lot to say. He offers a brief analysis of what he says is the real problem, "from which everything else is derived," which is the slower pace of innovation (or the growth in productivity) in the past 15 years. According to Mihov, this is the real deep development that slowed growth and reduced interest rates to near-zero levels, which no one has been able to explain. To this he adds a rather subversive analysis: in contrast to the prevailing narrative, not all of the money printed by the central banks went into the markets; a lot of it never reached them. After being stung by criticism of them during the financial crisis, the central banks simply forced the commercial banks to keep huge reserves in the central bank in order to avoid having to rescue them in a crisis.

What is clear is that Mihov still enjoys talking about economics, not just business. I ask him whether he has an urge to work at the European Central Bank, to be a minister of finance, or perhaps return to academic research. He makes it clear that he still has three years to go in his job, and then two sabbatical years. "I want to go back to writing articles and books, and not to talk about economics only at the end of the interview," he says. "To be candid, I have become very enthusiastic about the question of business and society in the past three years, and I can truly say that not enough consideration is being given to the role of business. He mentions the statement, from last August, by "The business round table" signed by the CEOs of the large companies in the US, in which they made it clear that maximizing shareholder value was not the company's exclusive goal. "Many people were asking, '"If it's not shareholder value, then what is it?', and we don't have the answer. It's an interesting answer to look for."

And anyway Mihov reminds me, he had a chance to serve in a senior government position. In 2010, Bulgarian Prime Minister Boyko Borissov announced that he was appointing Mihov as his deputy, an appointment that Mihov eventually turned down. "The prime minister announced this without telling me that he was nominating me as deputy prime minister," Mihov says.

You were in Singapore at the time?

"Yes, I came back for three days. I teach I teach macroeconomics and growth, and the recipe is not very difficult. There's some difficulty in implementing certain things, of course, but at the end of the day, it's not very difficult to understand what you need to do to make a poor country grow into a rich one. Then, all of a sudden, somebody comes and says, 'OK, here's a country. Let's see what you can do.' I went back, and I realized that it was a trap - that the system is so corrupt that it's just impossible to implement any real changes there. It's very sad. I really think that Bulgaria has the potential to grow rapidly."

We stand up, and I tell Mihov about a recent OECD report describing a yawning gap, which has opened in Israel between the achievements of Jewish and Arab students. "It's not good, because at some point, this will have consequences," Mihov says. "Inequality of opportunity is definitely the precursor of bigger calamities."

Published by Globes, Israel business news - en.globes.co.il - on December 31, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Prof. Ilian Mihov
Prof. Ilian Mihov
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