Restoring the Public Role of the Private Sector

When Adam Smith wrote the book on capitalism almost 250 years ago, he called it “The Wealth of Nations.” Not the wealth of individuals or corporations. His idea was simple: empowering the private sector was the best way to enrich society.

Nearly a century later, Abraham Lincoln practiced what Smith preached by turning over building the transpacific railway to the private sector. Within 5 years, New York and San Francisco were connected by rail, making possible the economic miracle that was 20th century America.

The robber barons were no angels, and they made a lot of money. But there is no denying the country was much better off.

But from the Depression to 2008, we learned a very different lesson about capitalism. Rather than enriching society, business has been seen more as the problem than the solution—requiring government to step in to remedy its excesses.

We may now be entering an era that will be very much “back to the future” where capitalism is concerned. Call it the expanding public role of the private sector.

Lincoln turned to the private sector to build the transpacific railway because he knew his government, exhausted and broke from fighting the civil war, could not do the job as quickly or effectively as the private sector.

Fast forward to today. Everywhere you look societal need is growing fast. But government is in no condition to rise to the challenge.

In the west, net public debt is close to 100% of GDP and destined to stay there for a long while. Responsible government today is about repairing the public balance sheet, not adding more red ink.

In emerging markets, public debt is a problem. But the bigger problem is the difficulty in increasing taxes. Raise rates and you only drive more economic activity into the informal economy that isn’t taxed.

The private sector must step in. Take two examples—infrastructure and retirement incomes.

The OECD estimates that the world will need to spend 3.5% of global economic output every year until 2030 to build the roads and railways, energy and telecommunications networks needed to lay the foundations for 21st century growth. There is just no way government can foot this bill.

In the US alone, there is about $25 trillion in retirement assets outside the social security system according to the Investment Company Institute. We all know our retirements will increasingly depend more on our private retirement accounts than on social security. The quality of our lives post retirement literally depends on how well investment professionals manage our money.

Business has been on the defensive since 2008. But going forward, the private sector will have to play a much more positive role. The goal for a school like Wharton is to help empower business to fulfill the great societal mission Adam Smith envisaged so long ago.

Geoffrey Garrett is Dean, Reliance Professor of Management and Private Enterprise, and Professor of Management at the Wharton School of the University of Pennsylvania. Follow Geoff on Twitter.