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Introduction

The center of capitalism?

In the central market in Phnom Penh, the smell of sweet pork sausages on street vendors' grills hangs in the humid air, and the sound of merchants and motorbikes is a constant buzz. Inside the huge, domed bazaar and surrounding awning-covered stalls, it's easy to lose your bearings; around the next corner you might find silver jewelry, vibrant silks, $20 knockoffs of vintage Movados with movements made in Russia. On a recent visit, Chris, traveling with family, edged past an eight-foot pile of hoodies and was confronted by a table of Hollywood films at roughly 50 cents per DVD.

He wasn't surprised; it's what one has come to expect in a country that is not itself a significant producer of intellectual property. Chris thought of the usual prediction: that as such nations' economies mature, they begin to see the light and devote the resources to protect intellectual property rights. As grown-up capitalists, surely they'll live by grown-up capitalist rules. But in the midst of that buzzing Cambodian hive of capitalism, it was hard to hold fast to the belief. He had to wonder, Would emerging economies really adopt a two-hundred-year-old approach to intellectual property? Or would their rapid ascendance give them the chance for a do-over so that they might concoct a new way of conducting business more aligned to the realities of the digital age? And then, as they gradually overtook the first world in vitality and sheer size, would a new global norm take shape around their practice?

A few months later, we started researching this book. Its thesis, in a nutshell, is that capitalism itself is a system and that as the environment that hosts capitalism changes—in particular, as the better part of global economic growth begins to occur outside the mature economies of the West—the capitalist system will evolve.

This is a high-level argument—and a tough one to counter. Like any “ism,” capitalism is a social construct; capitalism is only a term for what capitalists tend to believe and do. Beyond a few fundamentals—that it puts faith in markets as the best way to allocate resources, that it depends on private ownership of property, that it features mechanisms for accumulating capital to fund endeavors larger than individuals can undertake alone—very little about it is set in stone. This is why we often hear phrases suggesting different styles of capitalism: “capitalism with Chinese characteristics,” for example, or “Northern European social capitalism.” No surprise, then, that capitalism is subject to change.

And what's behind that change? Again, at the theoretical level, it's easy to surmise. Like any adaptive system, capitalism is nested in an environment, so any substantial change in that environment alters what it takes to thrive. It's the same basic phenomenon as in nature: when the insect population of the Galapagos moves on to new flowers with a different shape, the beaks of the finches evolve in turn.

That the environment of global commerce is undergoing major change is no secret. Advancing technology, for one thing, constantly reinvents the context in which commerce operates. Demographics, too, have an effect, as the generations raised with new technological capabilities begin to fill positions of power. Most strikingly, the very geography of capitalism is shifting. With each passing year, emerging economies account for a larger proportion of global GDP; from 2004 to 2009, they accounted for almost all of the world's GDP growth. Patterns of consumption are being upended as global standards of living rise; India's middle class is now bigger than the entire U.S. population. Americans and others in the developed world have long fretted about job losses and other social implications of this huge and ongoing shift. But the impact of emerging economies will go beyond what anyone is talking about. It isn't simply that capitalism will increasingly happen elsewhere. It's that, taking root in different soil, capitalism itself will grow into something new.

Capitalism doesn't evolve only in theory. The most cursory review of economic history shows how much it has changed in practice. The rules shift constantly. For example, when Great Britain was the epicenter of industrial capitalism, it was understood that a business founder who borrowed capital and then went belly-up should be shipped off to debtor's prison—or worse, Texas (before air-conditioning). But U.S. capitalists more disposed to second chances later rewrote those rules, creating bankruptcy laws that encouraged entrepreneurial risk taking. The system morphed again with the introduction of limited liability, which allowed firms to shoulder the risk of large-scale manufacturing and, in doing so, gave rise to monopolies (an eventuality no one had worried about before). Even rock-solid assumptions—such as the assumption that currencies must be backed by precious metals—have been tossed aside as trade marches on. These are only a few, top-of-mind examples of ideas that cropped up locally, took hold, and changed capitalism globally.

At a more fundamental level, when production shifted from agriculture to industrial production, the theories of economics changed profoundly, because financial capital gradually overtook land in importance. As information—inherently not a scarce resource—becomes the most productive resource, economics will change again.

We're convinced therefore that we're on firm ground with our thesis: capitalism evolves, and even now it is evolving into something new. The question is, Into what?

To know that, it's necessary to question some seemingly central capitalist aims—because it was the old environment that gave rise to them—and look at things from a new vantage point. That is what we hope to provide in this book and why we chose the title for it that we did: “standing on the sun” is a reference to taking a new perspective. The phrase comes courtesy of Richard Morley, an MIT physicist who has made so many original contributions that a prize awarded by the Society of Manufacturing Engineers has been named for him. Once in a conversation about how innovation happens, Morley said to Chris, “In order to see the solar system as it is, Copernicus had to be standing on the sun.”

Morley meant to underscore how hard it is reexamine a model in which you are situated and one that you believe to be working quite well. Standing on Earth, it was easy for pre-Renaissance scholars to believe they occupied the center of the universe and to persist in believing so even as evidence mounted that should have compelled them to rethink that position. As the instruments used to study the night sky became more and more powerful and as astronomers began to communicate across larger distances and share their observations, that central assumption forced their calculations into contortions. Planets showed themselves to be capable of anomalous retrograde movements, frequently deviating from the paths that mathematicians had plotted. But rather than question the basic model, astronomers added layers of complexity to it, positing epicycles and deferents within orbits—whatever it took to give their geocentric model the power to predict the movement of heavenly bodies.

Then came Copernicus' hypothesis, and workings that had seemed impossibly complicated suddenly became elegant.

By analogy, today's capitalists look around them, see anomalies, and struggle to incorporate them into the model they have embraced as true. What are some of the messy parts being shoehorned into this Ptolemaic version of capitalism? The value of corporate social responsibility (CSR), for one thing, is an idea few can bring themselves to deny but one that clashes uncomfortably with theories of capital markets. Open source initiatives, for another, seem to flout all the physics of economic motivation but continue to gain force. Still another anomaly: venture philanthropy, which can't be reconciled with the laws of profit pursuit. Nonetheless, happening.

Our argument is that, with a shift in perspective, such phenomena cease to seem aberrant and instead align with the logic of the system. It requires only a belief that capitalism can evolve and center on new pursuits. Imagine, for example, that something most people consider to be the core of capitalism—competition—is actually not so central. Shift your vantage point so that innovation holds that pride of place, and suddenly initiatives like Wikipedia don't seem so unlikely. Competition, still very much part of the system but unseated from its central point, moves over to allow for collaboration. Likewise, what if the pursuit of financial gain is not really the heart, much less the soul, of capitalism? What if it's really centered on the pursuit of value? That's a formulation that, again, does not reject financial profitability but allows it to sit easily beside the pursuit of other kinds of gains.

We're hoping to provide a vantage point that not only does not have to resort to epicycles to explain the recent past but also provides a better basis for predicting what comes next. It might challenge many capitalists' allegiance to the “planet” on which they happen to stand, but, in providing a logic more hospitable to emerging reality, it might also strike them as a more comfortable home.

We're speaking in abstract terms here about what stands at the center of capitalism and what is peripheral to it. Now let's return to the concrete sense of geography. As a new version of capitalism begins to emerge based on the commercial environment of the twenty-first century, we see it taking hold first in the economies least invested in the status quo. It has been mainly in our travels to places like Dhaka, Dubai, Mysore, Shanghai, São Paulo, and Tel Aviv that we've seen businesspeople going about their work in surprising but effective ways. As we study the actions of today's frontier capitalists, we ask, Why is their new way succeeding? And does that mean it is likely to spread?

We learned, for example, about a curiously structured firm created to provide 9-1-1–style ambulance service in India. It consists of a for-profit dispatching service yoked to a charitable concern that receives donations of ambulance vehicles. Setting it up wasn't easy. Sweta Mangal, who cofounded Dial 1298 for Ambulance, joked with us, “In India, all the rules are there to make sure you cannot start a business.” But the enterprise she and her colleagues cobbled together is doing so well that it suggests that the bright line capitalists traditionally draw between profit seekers and social benefit providers will get murkier.

In Brazil, we saw aircraft manufacturer Embraer taking on a responsibility that no Friedmanesque (Milton, that is, not Tom) capitalist would embrace: improving public education. Embraer reportedly spends $3.6 million a year on the secondary school it runs near its San Jose dos Campos facility. That's not only an investment in its own future workforce or a retention strategy for the parents it employs. Embraer considers it a pilot for developing better teaching methods and materials that can then be transferred to São Paulo's public school system. That might sound awfully altruistic to managers in the United States, where the burden of improving public education falls primarily on public servants. But there's little consensus around the world on how business and government should between them serve the public. (In the United States, for example, the burden of health insurance coverage has been borne by employers.) Why should the arrangements set up by yesterday's superpowers go unquestioned?

Meanwhile, in China, capitalism is flourishing but with a heavy cost to the environment. When Walmart arrived with a plan to build eco-friendly, LEED-certified facilities relying on local contractors, the idea was met with great enthusiasm. As it became clear that those subcontractors lacked the engineering knowledge to deliver, however, Walmart didn't trim its ambitions; instead, it devoted resources to teaching the Chinese construction companies what they needed to know at its own expense. Under old-school capitalism, firms don't work this hard to keep from polluting unless the law forces them to. Environmental impact is what economists call an externality, and not something that must be factored in to one's own profit-maximizing equations. But we think that many more capitalists, sometimes because they're forced to but sometimes because they want to, will start internalizing the costs of externalities.

Let's underscore the theme here: we're seeing much of this rule-breaking and rule-reshaping activity (though not all of it) outside the world's most mature economies. Like the Americans who redefined capitalism in the nineteenth century, emerging-economy capitalists have the advantage of designing enterprises on a cleaner slate. They are building institutions to take full advantage of today's capabilities and conditions, unimpeded by any vested interest in sustaining the obsolete.

The “capitalism abroad” part of our title, however, doesn't assume only one definition of “here.” Our point is that wherever you are, you need to attend to developments elsewhere. If you're an American, watch the emerging economies for cost-slashing innovations. If you're in India, Africa will be leapfrogging your payment systems. If you're in Singapore, look at how Brazil is exploiting bottom-up initiatives. The degree of connectedness and diversity of the global economy means that no island is an island.

Wherever you are, as capitalism takes new forms, the ways to succeed in the capitalist system will change, too. Firms will rise and fall according to how well they have tracked the shifting territory. You—your firm if you are a manager, your constituency if you are a politician, yourself if you are all you need to protect—will prosper according to how well you adapt. As the environment around you moves on, you must know how to move with it. It's no good to be a finch with an unevolved beak.