161: Subramanian Rangan - Capitalism 2.0: Cultivating Leaders with Character

Speaker A: Welcome to Transforming Work with Sophie Wade. Exploring the future of work. Find out what's going on in m our multi generational distributed organizations. With a new tech and talent focus. Discover what you need to know to stay upskilled and relevant and ensure your business keeps its competitive edge.

Speaker B: Hi. Uh, this episode is about the higher level of transformation of work capitalism 2.0 and where we need to improve upon 1.0 to better build and lead 21st century businesses in the age of AI with a particular focus on work well being and character. To discuss the Implications of Capitalism 2.0, the economics, assumptions and rationale, I'm delighted to be speaking with Professor Subhi Rangan, professor of Strategy and Management at insead. Professor Rangan is also the Endowed Chair in Societal Progress. His contributions to societyforprogress.org include a chapter in the latest volume called Core Assumptions in Business A wedge between performance and progress. Hi Subhi, how are you?

Speaker A: I'm very well, Sophie. How are you?

Speaker B: I am um, well, despite everything that's going on, really there's a lot that we're being bombarded with. I do always very quickly want to start at the beginning which is what is it that you first studied and why?

Speaker A: I studied. I did an undergraduate in business. Mhm. And um, you know, my brother and sister had studied that and was, uh, to be honest, I wanted to join the military. Oh. And so that did not come to fruition despite being selected.

Speaker B: Okay.

Speaker A: And in those days children listened to their parents and. And the family also guided like what career you might pursue and what education. And so that's how it was. I think throughout my life it's been people that have influenced my choices. Um, and uh, it's. I have no regrets thus far.

Speaker B: I certainly did not expect you to say that you wanted to go into the military. How did you. You then evolve into find particular aspect of economics that you are now focused on.

Speaker A: I grew up in India and I studied my undergraduate degree there. And India was always a kind of country of contradictions. And I saw businesses. My father worked at this company called Tata.

Speaker B: Sure.

Speaker A: And you know, so we were like a Tata family. And Tata was so um, influential in a positive way that even in a country where many things were not working the way it might work in a first world rich country.

Speaker B: Mhm.

Speaker A: Tata was just ah, uh, a kind of beacon and island of excellence M and of hope and of saying that you don't need to just keep this as a small family enterprise. It can be a, a very large uh, business with hundreds of Thousands of employees and really have a uh, positive impact. And so that stayed with me. And then I lived in the US and studied in the US and there again I saw the role of business and innovation and entrepreneurship. And then I studied um, political economy. But it was really international business economics that I studied when I did my PhD and I saw how these businesses called multinationals are really platforms of uh, excellence and great human capital and globally diffuse.

Speaker B: Mhm.

Speaker A: Um, I came to France then on my way back to India across three continents and three countries. France now USA before that and India before that. I see that we have um, you know, two engines, which is business and government, um, that are trying to kind of help humanity advance on various dimensions. And I think the business dimension has always, partly maybe because I studied, partly because I saw um, the, the kind of evolution and impact of Tata. Mhm. I did try and join the government, so to speak, through the military angle. But that not having worked out and I felt, wow, business actually um, is a great platform for not only positive income but also for positive impact. M And that has uh, of course in the business school most of the time we study positive income. How can business have um, a good financial return and growth in that. But especially in the last, uh, you know, couple of decades, we see that business does not always have positive impact. And um, that the positive income which is sometimes reflected in the amazing stock markets that we see, um, may also come at a cost that society bears. And then when society bears those costs, then there is a likelihood, a high likelihood that it gets politicized. The economy is supposed to be self correcting. M And when the economy is not self correcting, then regulators and uh, government steps in. And that can lead to some good, but it can also lead to a lot of lobbying and corruption.

Speaker B: Having lived and worked in the US where the government is very reticent to step in, I don't know about India, but in Europe and um, the UK it does step in much more quickly. So how does that sort of influence.

Speaker A: So since Reagan, Thatcher there has been, since the 1980s there has been a different um, ideology let us say about the role of government.

Speaker B: Mhm.

Speaker A: And the idea of liberalization and allowing private enterprise to uh, work out and self regulate its um, operations and its um, strategies, um, has been the main trend. And that's how you know, business schools flourished. And even in formerly, let's say socialist countries or communist countries, private um, enterprise has achieved a lot of legitimacy. Initially it was those Asian tigers, but then we saw it more widely in the Global north and the global south, including in parts of Europe. And so the government kind of stepped back until maybe the global financial crisis and subsequently the whole climate concern. And then Covid and now, um, a whole host of other things, including the emergence of AI and government has become more muscular.

Speaker B: A couple of very deep conversations we've had about Capitalism 2.0, a revisiting of capitalism as it stood, as it stands. That wasn't capital 1.0, that wasn't working so well. Became aware of it probably 2013, maybe 2014. And it was the idea that yes, we got a lot of it right, but there are certain elements that haven't worked as well. One of those repercussions has been possibly the K economy. So I just want to understand from your perspective some of the aspects of this capitalism 2.0 or what we haven't got. Right. And then after that I'd love to just uh, talk a bit about the K economy.

Speaker A: The idea was that business would exist to um, enable wealth creation. Mhm. And eventually what we realized is that the models that we have really do work to enable this wealth creation. However, they seem to not have done a good job on creating well being.

Speaker B: Mhm.

Speaker A: So while we have enormous wealth in the world today, we don't, we can't say the same thing about well being. And in fact people feel there is uh, an anxiety that is quite unprecedented about the future, about the state of the world and including what you talk about as the key. So that's the second thing which is, you know, this modern economy obsessed understandably about efficiency.

Speaker B: Mhm.

Speaker A: But it neglected equity.

Speaker B: Right.

Speaker A: And that is reflected in what some people describe as the K economy and that there's this divergence that some people benefit but many people do not. Um, and the third thing is somehow the economy has generated tremendous size, both at a macro level, but also at the level of individual firms. But it has neglected sustainability.

Speaker B: Mhm.

Speaker A: So basically the 20th century economy produced great output, but it fell short on outcomes. Equity, sustainability, well being, these are outcomes. Mhm. That we care about deeply. And I think it would be wrong to say that, you know, the economy should focus on output and government should focus on outcomes. M it has to be co produced, especially if the source of the problems is in the way enterprises and households both, I mean we generally talk about enterprises, but on the demand side are households and individual consumers. On both sides we have this mass production and mass consumption which needs to become more caring, more thoughtful. And if we can have a more thoughtful consumer and a more Thoughtful producer. Um, I think that evolution is what the uh, capitalism 2.0 can be like and that requires better models, better methods and better measures. Notice I did not say newer models, newer measures, I said better, better. So we focus on new and not be better.

Speaker B: You gave an amazing lecture to my NCR class and in which he described a lot of the different systems. What are the key ones that you identified that are perhaps where some of the key sources of the problems or the things that need to be improved upon and refined in order to improve the well being that you're talking about?

Speaker A: So I think about our society influenced by and influencing four systems. The biosystem, the cultural system, the political system and the economic system. And we come from the biosystem and we are parts of that biosystem. The first system we created was the cultural system, which includes education in the academy, which includes media, which includes religion, which includes the arts, etc. And this was to regulate. I mean the problem that we face when we create something like society is the problem of interdependence. Mhm. How will we relate to one another when we are in proximity and we need to coordinate, we need to cooperate, we need to collaborate. Um, on what basis will we regulate our interdependence? In the beginning it's a, ah, social interdependence. When we create society and we co locate and come to live together in communities that grow larger and larger, then we need some guidance. Mhm. Of regulating this interdependence so that we don't end up resorting to violence to resolve our differences. So interdependence is a chronic dilemma for society and culture is the soft power, education, ideals, norms, etc. It was not sufficient and eventually we ended up creating the political system which says no, no, look, forget the social, you have a civic interdependence. Let's m be more um, systematic about it. And by the way, if you violate these laws, not the norms.

Speaker B: Mhm.

Speaker A: Then there will be consequences. And this is hard power. And we have an authority, a sovereign which is called the state, which will regulate that interdependence, that civic interdependence. Here are your rights, here are your duties. These are not informal, they're much more formal. We update them, we enforce them and we have the sanction of consequences, including you know, a monopoly on violence, which includes a capital punishment, etc. Etc. And uh, eventually when we achieve that over the last several hundred years, maybe about 400 years ago, so this is all quite recent in human history.

Speaker B: True.

Speaker A: Um, and then we created and started to formalize the economic system. And this system regulates our economic interdependence. So we have uh, ecological interdependence, we have a social interdependence, we have a civic interdependence and we have an economic interdependence which we can leverage in the division of labor and really create great efficiencies. And that economic system has worked extremely well. And over the last couple of hundred years taken us from um, a level of material well being that was, let's say, estimated at a dollar per day.

Speaker B: Mhm.

Speaker A: $400 a year per capita global income to something today approaching $14,000. Yeah. And that uh, it's amazing, um, empirical development is just unprecedented, extraordinary. And I don't think even Adam Smith or his successors could have anticipated such a great adoption of this idea. Mhm. And such a great positive impact of this idea. But that 14,000 is the mean, not the median.

Speaker B: Right.

Speaker A: The median is much lower. And then we have this K, you know, which is a very divergent kind of thing. So people are very angry about that divergence and the high GD coefficient. And so we have 3,000 billionaires and you know, California has 200,000 millionaires or more. I mean maybe they have 2 million. But there are also um, 200,000 homeless people there. And how do we embrace this contradiction? How do we kind of understand this?

Speaker B: Very impactful. For me, first reading about the uh, K economy it meant that if it really didn't, if the people driving the economy were so few people, there was wasn't such a driver to pay attention to what was going on with the general population, the average worker, uh, because they actually didn't contribute that much. And so they could be disassociated from and they could be sort of intermediated. Right.

Speaker A: I mean, that's right. And I think essentially it is possible to today have an existence which is not, um. Co. Mingled. What? The way people live versus the way the um, most elite classes. Elite and wealth, even in education, there is a certain um, capacity to buffer and isolate and be removed from.

Speaker B: Mhm.

Speaker A: If one believes in the idea of equality of opportunity. So if you believe in equality of opportunity, if you believe in the idea of meritocracy and merit and hard work, then you might believe that everybody had that same chance. And yes, some people are born into wealth, but many others made that wealth themselves by grit and creativity and hard work and etc. And so it might seem like it's okay it's fair that there was equality of opportunity and we ended up in these very wildly, you know, uh, different realities. Now, even if that were true, even in a meritocracy, the question is, what do you do with your, uh, the fruits of your competence and your merit? Do you use this to entrench yourself and your family in that social position?

Speaker B: Mhm.

Speaker A: Or do you also take the time to care about those who, for some reason, when they were younger, did not work as hard as you did?

Speaker B: Mhm.

Speaker A: Did not go to college, did not finish college, did not actually continue their education, did not do so many things? Uh, do we condemn people for choices they might have made and relegate them to the working classes and say, I don't owe you anything? So it comes back to this, in it, what do I owe you? If I'm in a position of privilege, either by education or by my political authority or my, uh, wealth or my technological capabilities, etc. To what? So the point is that it's okay to have a K in the power. Some power is always concentrated. That's why it's called the, uh, power curve. It's a log normal distribution. Power can be highly concentrated. Now the question is, how do you use that power? It's not about the concentration of power, it's about the exercise of concentrated power. If people who have the power can exercise that power to reduce that inequality, to go back and kind of say, like, wait, how can I make this better? Um, for all of us and for nature and for future, um, that's a very different choice. And it is a voluntary thing. Now, if you don't do it, maybe you end up with a situation like in India where you can have a billionaire and you can have a bunch of slums and they coexist without any big violence and kidnapping. And, you know, India is an interesting experiment in the coexistence of extremes. Mhm. But you can also have the French Revolution, which can be, um, a terrible kind of civil war where somebody decides that it's unfair. And, you know, as Balzac apparently said, behind every great fortune is a great crime. And so at some point you have your comeuppance and you can build bunkers, you can buy homes in New Zealand. But, you know, when the crowds come out, when the masses come out, they can really bring down society. So it can be a seismic event. And I think this is, uh, a question, you know, how do we, what kind of society do we want? Not only what's the right thing to do, do we want A society with such great differences.

Speaker B: In the paper that you shared with me was very interesting because you looked, you're looking at the assumptions in business theory that are not allowing for the type of outcomes that we were hoping for. And those actually need to be revisited. If the economy, the purpose of the economy is to increase wealth and we're not seeing that. Is it also you know, sort of distributed, more distributed wealth? And I'm really focusing on some of these things, um, because of where we are right now with AI. It's very unleavingly distributed within, within companies, within, you know, particularly within teams, um, countries. And how can we think about some of those assumptions that you have laid out? The stickiness of labor in terms of its ability to adapt, the purpose of the economy and management and there can be profit that is absolutely aligned with increasing well being. There are so many different aspects to this and uh, whatever you want to focus on, but those are some of the things that jumped out at me.

Speaker A: So I would just say, because we will not have the time to go through everything, I'd say, um, people can look at the uh, the chapter that I sent you.

Speaker B: Yes, I will be sharing, I'll be showing that for sure.

Speaker A: Core Assumptions by Oxford University Press, 2025. Now the first point is the economy focused on output versus outcomes. And I think this is something we have to embrace and the outcomes that we're lacking in sorely. The first one is fairness. Many people feel the economy is not fair.

Speaker B: Mhm.

Speaker A: And I uh, think this has to be addressed. And partly we see that in the capital labor ratio, how much of the income goes to capital versus how much goes to labor.

Speaker B: That was interesting.

Speaker A: Um, and uh, we see that in many, many ways it's not about whether you make money, it's also how you make money. Right. The second thing is, is the economy driving ill being or well being, whether it is streaming or AI, you know, people, if somebody a ah, white collar professional or a blue collar professional loses their job, Employment and well being are highly related. M tremendously related. Because the self esteem, the identity, the raison d', etre, the whole social, uh, network, all of that comes with employment. And so it's much more than income. And so, you know, here one of the assumptions we make is that a dynamic economy will constantly be adjusting the structure of employment. And we thought with trade, you know, people will just adjust and go on to other jobs which will spontaneously emerge at the right time.

Speaker B: Well they are spontaneously emerging, that's for sure.

Speaker A: I mean, but not necessarily in the place where the, you know, so labor is not as mobile as capital. And so labor adjustment is a serious issue that we don't really understand. And trade in technology. And this version of technology is called AI.

Speaker B: Mhm.

Speaker A: But trade and technology can cause labor market shocks. And if we don't intervene and develop better models. And the best ones to adjust to help this adjustment are the enterprises, not the government.

Speaker B: Mhm.

Speaker A: Not schools. Teaching happens in school, learning happens at work. And so if we can create that ecosystem of adjustment, you know, we did a project last summer called AI for AI.

Speaker B: Hm.

Speaker A: Which is Adaptive Individuals for the Age of Artificial Intelligence.

Speaker B: Adaptive individual. Oh, I like that. Yes.

Speaker A: Okay. We have to adapt. We need to adapt to demography, we need to adapt to climate change, we need to adapt to AI. There are several adaptations that we need. But you know, adaptation is not a solo sport. When you have an ecosystem, it's much more likely that you will adapt in a time horizon that does not destroy your well being.

Speaker B: Mhm.

Speaker A: And there are societies, I think economically from a labor point of view, Denmark offers a good model.

Speaker B: Mhm.

Speaker A: Where they embrace new technology, but the workers are able to adapt in a time horizon without destroying their community or their family or the net worth and their home equity, et cetera, et cetera. So I think the other thing is to kind of start, you know, really understanding what we value and how we can kind of incorporate, um, non price information. Because the economic system has the idea of the invisible hand. And the invisible hand is the price mechanism. But what is the price of gender parity or privacy?

Speaker B: Mhm.

Speaker A: Or animal welfare? There is no market for these things. There is no price. Does that mean we neglect them? Does that mean the price is zero?

Speaker B: Mhm.

Speaker A: If we behave that way, we will under produce those same outcomes that we care about. You know, what is well being? What is the price of well being? And so this is where education has to change. And business education in particular has to start helping executives and entrepreneurs reason about those outcomes and make their enterprises, make their products, their operations, their, their governance much more outcome centric than output centric. And they need to start making investments in capabilities that will lead to that and to change the incentive system.

Speaker B: Mhm.

Speaker A: And so I think there is a lot of work for business schools and business scholars, both in terms of research and teaching. And as you know, you know, we created these courses called Integrating Performance and Progress. Choosing to Care and Caring to choose. And I underline the K economy or any of these things. It's a choice. What we face is Not a technical problem. What we face is a moral problem. M and the question is what kind of society do we want to build in the 21st century? We mhm. Had a clear answer to that in the 20th century, which was we wanted to build a materially better off. We called it development and in fact economics was called development economics. And I think today we need to ask that same question. Okay, so we've achieved development, we figured that one out. But now how do we have well being, equity and sustainability built into and integrated into this economy? And I think, um, I'm optimistic about it. Um, but we need to change the models. We need to change the. We need better models, better methods and uh, better measures.

Speaker B: And so one piece of that is hard work and what that means. So when we focus on outcomes, outcomes, better outcomes doesn't necessarily mean harder work or longer hours. For example, if you have powerful AI applications, we can be working less, we can be working less hard, um, and still, still producing the same outcomes. I do think one of the challenging aspects, particularly which I see conflict across um, generations where there is still very much a connection between hard work and being a good person and being a diligent, conscientious worker rather than this focus on outcomes. And I think that's one of the harder transitions to make. Um, because I think it also may be one of those invisible assumptions there. No.

Speaker A: So I think that's right. I mean at the end of the day everything is endogenous. It's an inside job and it's endogenous to the human capital of elites and elders. The human capital of elites and elders. We have, and we've used education to deepen that. But the part we've deepened is what we call competence. The part we need to deepen more is character. M. Moral character. This is a moment of choice, it's not a moment of discovery. AI can be bi beneficial intelligence. If we have CI, which is constitutional intelligence, we have a constitute, we have an intention for this AI. It's not just a technology that is spontaneous and exogenous and we don't govern it. No, we can. Right? AI can be the greatest boon for non college human capital. The majority of humans, maybe 80% of adults, are non college. AI can be a great equalizer if we wish it to be. And if we orient it in that way, if the enterprises engage in that direction, then we can have that world where productivity goes up and um, you know, we can work less, spend more time with family.

Speaker B: Mhm.

Speaker A: We can address the democracy issue. People can have More flexibility, they can continuously keep learning and so on. And we're not just meant to procreate, we're meant to create. Right now we're not procreating and we're not creating. We're so, I mean we can. No, honestly.

Speaker B: Well, and it is creating a huge issue. I mean it's 5 million, 5 million fewer workers per, per year. Right? That's right.

Speaker A: That's right. And so I think it's a question of choice. And the choice depends not just on the competence of our leaders, but the character of our leaders. And education is a great technology for deepening human capital. But we need to understand how can we inculcate character in our leaders and future leaders and in our consumers and households so that we're all more caring and more thoughtful.

Speaker B: I know you focus on a lot on, on sort of business education and education for adults related um, to, to business that feeds into those core assumptions. I also look at how both AI is changing education and just technologies over the past, you know, 20, 30 years have been changing the need for people to be much more intentional. Each one of us, just as you're saying, taught me more self directed having I guess that sort of more of that moral core, that, that character so that one can be self directed and have, you know, be it all be aligned in the same path. We have the Jack Welch years and you know, the changes that happened in the 80s and 90s and how do we sort of reset that and refine that to make those better models.

Speaker A: The focus of education has been cognitive skills. Mhm. In younger ages, literacy and numeracy we need to add, we keep literacy and numeracy but we add decency. This is a non cognitive skill that we can teach our children just as we did. You know, we did not have a curriculum for literacy and numeracy a few hundred years ago. Today we do and same way we can do that now. The thing is the human brain develops differently and it is only after a, let's say the adolescent years, maybe 18, 20 etc that the frontal cortex is starting to develop. And it is in the mid-20s. And so it is the young adults where the moral capacity for judgment, caring and looking beyond yourself and kind of understanding, you know, what is the right thing and why I should do that. This moral reasoning, just as we've taught reasoning rationality, we can, can teach moral rationality. It's another set of heuristics, it's another set of logics. It's not so subjective and of course it depends case by case. But there is a set of principles that we can teach and this is what philosophers have been trying to do, but we've not really brought them into the applied professions like engineering or law or medicine or business. These are applied sciences, uh, businesses and applied social science. But we need to integrate the lessons from history and humanities, philosophy especially into this. And then our curriculum will be developing the human capital for both cognitive and non cognitive skills, competence and character so that people can feel, you know, I have a career and I make a contribution, I have money and I have meaning. And if people can have money and meaning, then I think that's a good um, way to be, then we will have well being.

Speaker B: You know when the formulation of the of GDP came up in the 1950s, 1950s and 1958, it was known at the time and pointed out that it missed a quality of life aspect to it. So much centers around know growth and output and is would that help to shift people's mindsets to now include a quality of life aspect to gdp? So that we're thinking about some of these other elements that help direct towards and shift the mindsets towards outcomes first, but also where this moral piece, this character piece plays in, I think this

Speaker A: is uh, an important thing. And so in 2009 there was a commission set up and in 2010 that commission published a book called Mismeasuring our Lives.

Speaker B: Oh wow.

Speaker A: And it's a wonderful book. It's a short book. Um, and it really goes into the history of what you're asking. And then based that, in 2011 or 12 the OECD created the Better Life Index.

Speaker B: Right.

Speaker A: I saw that the Better Life Index is actually trying to track what is called a multi dimensional outcome. So it's not just income, it's not just housing, it's not just health, it's not just education, it's not just security, it is also social relations and things like this. How much time for leisure do you have? Me time? Do you have time for caring?

Speaker B: Mhm.

Speaker A: For your kids, elders, etc. Parents. And so we have taken a big step and the beauty is that when you have a, an integrated measure like that then trade offs are made within but the measure itself, you know, the better life. So yes, maybe my income is not as high as it would have been if I were working three jobs.

Speaker B: Right.

Speaker A: Because my social life is better, my family life is better, etc. And so that measurement issue was uh, well addressed at the national level. And the OECD publishes every two or three years the Better Life Index. For a handful of about 30 to 35 countries, we have not seen that same analogous, um, measurement evolution at the enterprise level.

Speaker B: Right.

Speaker A: And that's where I think the research needs to go. How would we, uh, there are some firms that have done this. And again, in the chapter that I shared with you, I make a reference to one company, a Swedish company called LindenKrupen, which has done that. The true value. And so there are good efforts being made. Uh, the research really needs to move, I think, in this direction and addressing issues like, you know, caring, consumption or labor, uh, adjustment and the adaptation, but also things like character and the measurement issue. So, um, I, I think in a, In a couple of decades, I feel we will be. I'm, I'm very hopeful.

Speaker B: Okay.

Speaker A: And even optimistic. I see a lot of colleagues working on these issues in different, uh, countries and schools. Um, and I think, uh, this conversation with you is also one instance of where, you know, that's where the conversation is going. And I think if each of us plays our role, especially the Academy, because we do need to do this at scale, and paradigms and models and ideas allow us to evolve in a good direction at scale. And so, yes, today it seems like the world is influenced by individuals, but I think in the long run, the world is influenced by ideas. And it is time for those ideas to actually, uh, be better developed and better articulated. So thank you, Sophie, for this opportunity to talk to you about this.

Speaker B: Phoebe, thank you. And it lands so well with me that right now at this moment of AI, that what you're saying is character is the key thing that's going to. That we need to marry with that in order to take us forward in the most positive and productive way. So really deeply appreciate everything you've. All our conversations and everything you've shared with me and I will be sharing that the chapter and if there are other papers, um, and I will the book title, but that will all be shared in the show notes. So thank you so much.

Speaker A: Thank you. Bye.

Speaker B: Thanks again so much. To Professor Subhi Rangan, professor of Strategy and management at INSEAD. You can find out more about Professor Rangan at INSEAD. Edu I n s e a d edu and@societyforprogress.org There's a link to the chapter referred to in the show notes, which is from the latest volume, Core Assumptions in Business. A Wedge between Performance and Progress. If you enjoyed this episode, please like it and share it with a friend. For the latest curated useful articles, research information, please follow me on LinkedIn and you can sign up for my Work in Progress newsletter there or on, um, substack. Thanks for watching. See you next time. It.