Is the real measure of a society’s prosperity the availability of solutions to human problems?

Eric Beinhocker and Nick Hanauer have published a thought-provoking article in McKinsey Quarterly, 'Capitalism Redefined'. Their argument is that, while it may be true to suggest that, over the last two centuries, capitalism has been responsible for our economic growth and prosperity, we do not correctly understand why and how it has done that.

They start by referencing Andy Haldane's view that 'rocking horse economics' has been superseded by wild horse economics. This is based on the evidence that real decision-makers are not as rational as we would like 'homo economicus' to be; the financial crisis provided plenty of material to challenge the theories of rational market behaviour. Their emerging conclusion is that, rather than allocative efficiency, markets tend towards creativity, finding solutions to human problems. Thus our growth in the last two hundred years should be measured not so much by how much money we have to spend, but by what we can buy with it - the antibiotics, the safe and efficient transport methods, the availability of unimaginable information via a phone in the palm of our hand.

We are familiar with the idea that GDP alone cannot measure our standard of living - this is part of the syllabus that we teach. This article contributes to that debate, with the idea that growth should be measured by the rate at which solutions to human problems are found, and that therefore prosperity should be seen as the accumulation of those solutions. They acknowledge indices such as Gross National Happiness, and the HDI, and suggest that their measure would sit somewhere between GDP and those two. What would be placed in a 'basket of goods' designed to measure the existence and availability of solutions to human problems? That could make an interesting extension exercise for a group of students to consider.

At this point, the article moves to consider the role of capitalism, and of super-normal-profit-seeking business, in finding the most effective solutions to human problems, from amongst the myriad of ideas with potential. This Dragons Den task conventionally assumes that an efficient market for capital investment will find and champion the best ideas, because those are the ones which will create the greatest shareholder value - seen as the over-riding objective for the investor. But this inherently carries the risk of short-termism - the problem here is that the solution to one person's problem can create different problems for someone else: market failure exists. In that case, how does an economic system resolve conflicts and distribute benefits? Here is the need for government interventions to encourage economic activity that solves problems and to discourage economic activity that creates them. It is notable, say the authors, that the most prosperous economies in the world all mix regulation with free markets, while unregulated and anarchic economies are universally poor.

What contribution do businesses make to society? And should this be measured by the jobs, tax revenues and profits they create, or by the tangible solutions to human problems that they provide?