THE BLOG
10/24/2014 01:06 pm ET Updated Dec 06, 2017

Is the Digital Economy Still a Capitalist Economy?

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This is the first of a series of excerpts from The Digital Economy, 20th Anniversary Edition by Don Tapscott, released October 24, 2014.

Too bad the term "socialism" was appropriated by Karl Marx, because it would be an apt description of today's emerging social economy. The social media revolution is transforming the way we create wealth, work, learn, play, raise our children, and probably even the way we think. A billion people use social media daily. We have social networking, social business, social government, social entertainment, and social everything. Today's hottest concepts are social: collective intelligence, mass collaboration, crowd sourcing, and collaborative innovation.

During the first era of industrial capitalism, machinery was the means of production and the most important assets were physical and financial. Work was organized in hierarchies and capitalists had a single objective: maximizing their personal wealth. But today a growing number of people understand that this is not only unworkable, it threatens the planet. We need an upgrade.

Since the global collapse of the banking system in 2008, the future of capitalism has been a hot topic -- including among the capitalists themselves. The Financial Timesran a multi-part series on the issue. The Economist, a sophisticated defender and reformer of capitalism, has discussed capitalism's strengths and weaknesses at length. Dozens of books written by business leaders -- from The Crisis of Capitalist Democracy by Richard A. Posner to The Road from Ruin by Matthew Bishop and Michael Green -- discuss whether capitalism can be saved.

Earlier this year the French economist Thomas Piketty released Capital in the Twenty-First Century. It reached #1 on the New York Times nonfiction book list. Piketty analyzed massive data sets from twenty countries to show that growing inequality is at the heart of the capitalist system. "The main driver of inequality -- the tendency of returns on capital to exceed the rate of economic growth -- today threatens to generate extreme inequalities that stir discontent and undermine democratic values." While some of his conclusions are flawed they have pointed to a deep problem.

It's clear that democratic capitalism as we know it is broken and it needs to evolve into an economy that can generate prosperity for all and that is sustainable economically, socially and environmentally. At the same time we have a new medium of communications that enables a rethink of the capitalist system.

Call it Capitalism 2.0. But would be its guiding principles? If you look at social technology, business models, and thinking today, you'd be in for some surprises.

Under Capitalism 2.0 there is still private ownership of wealth and most goods and services are produced by firms. The law protects shareholders from ruinous liability. This is a solid concept and markets have historically provided the best incentives for innovation and wealth creation. But sophisticated companies understand that traditional Industrial Age approaches can be radically improved by social business.

Today as Linux dominates large computers and mobile devices around the world, smart companies like IBM and Google have embraced the open-source operating system, saving themselves hundreds of millions of dollars a year and generating billions of dollars in hardware and services revenue. Biotechnology (biotech) companies cooperated to place their intellectual property -- the human genome -- in a commons. Nike gave away 400 patents to the GreenXchange on the principle that "a rising tide lifts all boats." Elon Musk at Tesla did the same thing. Pharmaceutical companies are discussing placing clinical trial data in a commons. In a growing number of industries, competitors are beginning to share some of their intellectual property as a step toward improving their industry and their own chances of survival.

Increasingly the corporate world is concluding that business can't succeed in a world that's failing. Warren Buffett was called a socialist when he suggested closing tax loopholes for corporations and the rich. Bill Gates is marshaling his vast personal wealth and influence to make a better world and recently he has argued that social inequalities threaten business. Smart business leaders understand that the purpose of corporations goes beyond making money for shareholders. Even Federal Reserve Chair Janet Yellen has joined in, last week saying that growth of economic inequality in the United States is a problem of "great concern."

So while private wealth and market forces are necessary, they are proving to be woefully insufficient to move the economy and society forward. The #occupy movement is correct in saying completely unfettered market forces would result in disaster. Loosely regulated bankers, driven by greed, almost brought down the global economy. The class divisions in society are growing, and governments have cozy relationships with corporations that often seem to prevent them from acting in the public interest.

This is why some political leaders are starting to shift from the Industrial Age model of democracy. The "You vote, I rule" approach, where citizens are inert and politicians are beholden to vested interests who fund them is stalled and citizens are increasingly cynical. But experiments with digital age democracy are growing. From electronic town hall meetings, challenges, digital brainstorms, open data initiatives, and transparency initiatives governments at all levels are reaching out to engage citizens in developing new ideas and solving problems.

Under Capitalism 2.0, governments are still important. The notion that the best government is no government is foolhardy. However government bureaucracies could be smaller in many areas. The concept of "Reinventing Government" for better, cheaper government has been around for two decades but little has happened. Today, due to the social revolution, it's an idea whose time has come. The sovereign debt crisis in Europe and the spiraling debt in America and other Western countries call for more than tinkering. Social media not only changes the way we innovate and create goods and services, and it can change the way societies create public value, in turn enabling less costly and smaller government.

Governments can become a stronger part of the social ecosystem that binds individuals, communities, and businesses -- not by absorbing new responsibilities or building additional layers of bureaucracy, but through a willingness to open up formerly closed processes and data to broader input and innovation. In other words, government becomes a platform for the creation of services and for social innovation. Government provides resources, sets rules, and mediates disputes, but allows citizens, nonprofits, and the private sector to share in the heavy lifting.

With Capitalism 2.0, much greater transparency for every institution could change the regulatory paradigm, adding "citizen regulators" as a key element of the new economy. Governments could make everything transparent on the Web and let citizens and other parties contribute their data and observations. Rather, more disclosure and increased civic participation would add significant muscle to traditional regulatory systems.

There is at least one big problem with the vision of Capitalism 2.0. It can only be achieved in a smooth and managed way if today's capitalists get on board. Unfortunately, leaders of the old paradigms are the last to embrace the new. The transition from agrarian feudal economies and societies to Industrial capitalism was punctuated by revolutions -- such as the French, American, and National Independence revolutions across Latin America.

Many of the leaders of the old model of capitalism are tenaciously clinging to the past and hoping that things will get back to normal. The upshot is that the forces of change -- especially today's young people -- may have to find more extreme methods to achieve a new future. When conflict, discord, rebellion, and even revolutions occur it's anybody's guess what the outcome could be.

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A version of this article appeared on LinkedIn.com

Don Tapscott is the author of 15 books and rated by Thinkers50 as one of the top five living business thinkers in the world.