What role does government play in ensuring that the market serves society, particularly the poor and disenfranchised?

The market system is an invention of our society—an invention that manages inspiration and takes account of human aggressiveness and tries to corral both into productive work. If you stand back and look at history, you find that it’s our society—our culture—that stands behind that system. At the same time, our society wants to put limits on that system because of the problems it can create.

Now, there are many kinds of limits. There is the government and there are also trade organizations that business sets up—the Better Business Bureau, for example. Business people, as a group, are aware of bad business practices and they don’t want to have what some people call a “race to the bottom”—that is, if your competitors are doing dastardly things, you may go out of business because you can’t compete with them. So, business people themselves want limits.

But, generally, our society thinks the limits should go further. We think there should be more regulation rather than self-imposed regulation, which tends to be not as aggressive as government regulation. The United States has tried to avoid overregulating and to encourage self-regulation, so the U.S. government at various times has embraced the help of private regulators. The reason the government finds it difficult to manage all these things is that business is complicated.

Given the economic inequality that exists today, do you think we need a more inclusive form of capitalism?

Public-spirited people generally support that. I have my own phrase for it with regard to finance—it’s “democratization of finance.” It’s getting more and more people involved.

I think it’s a trend over centuries where financial arrangements are more and more inclusive. But it can go a lot further.

People wonder why some countries are rich and some are poor. A lot of people don’t think very clearly about ultimate causes of success. In Adam Smith’s day, there were these mercantilists who thought the country should be importing a lot of gold; Smith had fathomless contempt for that type of economic theorizing. Gold doesn’t make you rich, he said, it is human interactions that produce things that we want. So these more successful societies are societies that bring everybody in. Everyone with talents has an opportunity, as opposed to societies that grant favor based on connections.

Do you think the government is doing enough to promote and protect such inclusion?

I think we have a good system, but it could still be more inclusive. We are making a lot of incremental changes. For example, the Dodd-Frank Act of 2010 created the Consumer Financial Protection Bureau, which fields complaints and has the ability to impose regulations. There’s a tendency for businesses to try tricking people one way or another, like putting language in the small print of their credit card contract that is there not to protect the consumer at all but rather to create profit opportunities. And they have lawyers who write it in such a way that most people can’t read or understand it. But we’re on to that now. So we’re moving ahead. But I think many more things can be done.

What else can be done?

What can be done tends to be little details. One of them is to change the way we do mortgages. During the financial crisis, something like 15 million households were underwater on their mortgages—meaning their house fell in value to less than the amount owed on their mortgage. That was devastating because then they had negative wealth. A lot of people thought banks should offer workouts on them or reduce the principal. The government tried to encourage that, but it didn’t happen very much.

So my proposal is that in the future, mortgages should have a preplanned workout and it should be automatic. As home values fall, the principal should be reduced. Now, this is something that mortgage companies don’t particularly like because it sounds like they’ll lose a lot of money in that circumstance, but I argue that we can price that in.

Another example: I think we should have government subsidies to offer financial advice for low-income people. There’s also the issue of legal advice for low-income people. You have rich people with their lawyers and poor people who just don’t have a clue.

You mentioned businesses wanting self-regulation to avoid a race to the bottom. What else can businesses do to better serve their customers or society at large?

In the United States especially, corporate law has emphasized that boards of directors have a duty of loyalty to their shareholders. And our U.S. corporate law has resisted the idea of multiple stakeholders. So the U.S. model has been that corporations owe their loyalty to the people who put up the money to start the company—the shareholders—and beyond that only to uphold the law. They shouldn’t be promoting their community or “giving gifts.”

But that thinking has changed recently. Notably, there has been a movement in just the past three years for creating a new corporate form called the “benefit corporation.” Now half of the 50 U.S. states have it, and more will have it soon. The idea is that the company, when it’s founded—or later it could convert to a benefit corporation—puts in its charter multiple goals. Profits is one, but something like promoting the community or cleaning the environment is another. Then no shareholder could sue them for pursuing those things. In fact, a shareholder or anyone could sue them if they don’t pursue their idealistic goal. So they become identified as a corporation with a lofty goal or goals. There are now about 1,000 of these corporations. They’re all small, but it’s interesting that it happened in America, which had been the most capitalist country.