How an Economist’s Cry for Ethical Capitalism was Heard

Not long ago, economist Noreena Hertz lived at the lefty margins of her field. But her (widely ignored) prediction of the credit crisis and her call for a more evolved form of capitalism have suddenly put her at the center of the universe.

How an Economist’s Cry for Ethical Capitalism was Heard
Photograph by Josh van Gelder Photograph by Josh van Gelder

Noreena Hertz had to seduce Bono. The Cambridge University economist was writing a book on the developing world, and Bono’s personal saga of getting the U.S. government to cancel more than $400 million of debt was just the pop-culture bridge she needed to move her ideas beyond the wonkish corridors of academia. After all, Hertz’s motive for The Debt Threat — a deep dive into the debt trap that, she argued, would have global consequences for all — was to juice the campaign that had been building slowly in activist ranks. The book itself would be a battle cry (a postcard inside made it easy for U.K. readers to urge the prime minister to cancel billions owed by the world’s poorest countries), and its release was pegged to hit before the 2005 G8 meeting. Hertz sent Bono an email, unsure if it would find him. To her astonishment, it did: “I’m so glad you got in touch,” read the rock star’s reply. “I’m a real fan of your work. Bono.”


Few academics have leaped from the critical fringes to the role of prophet as adroitly as Hertz. Wielding her contrarian message — that markets need to serve the interests of people as much as they serve companies or shareholders — Hertz has been campaigning for the past decade against the mantras of mainstream economists, urging a more ethical form of capitalism. But her message isn’t some yoga-infused spiritual quest. As she explained in her 2001 European best seller, The Silent Takeover, it is about the unsustainability — environmentally, socially, and economically — of laissez-faire capitalism and the idea that markets are stable. If the surge of corporate power was going to leave governments relatively impotent, Hertz argued, then those corporations themselves needed to fill the void. “She moved the conversation from what corporations can do to be socially responsible to a much more profound examination of the boundaries of corporate behavior and public behavior and where they have failed,” says Debora Spar, who was a dean at Harvard Business School for nearly two decades and is now president of Barnard. “She’s much more radical.”

Hertz — part activist, part detective — argues that both economics and business need to be put back into the human social context. “Over the past 30 years, economics became a narrow field completely out of touch with reality,” says Hertz, 41, who sees the discipline as a jigsaw puzzle. “I don’t believe you can reduce the world to a mathematical formula. I start with the world, assume it’s complicated, and ask where can I get help from a whole range of disciplines.” Drawing on subjects as diverse as anthropology, physics, geopolitics, and neurology, Hertz’s economic vision is at once eclectic and holistic, which may explain her apparent ability to foresee dangers and opportunities others do not. It is also relentlessly pointed, serving an explicit agenda — making corporations realize that they can no longer operate in their Adam Smith — designed bubble. “I really believe in a globalist agenda, but globalization isn’t just allowing companies to trade freely all over the world. It’s about what types of rights and responsibilities come with that,” Hertz says. With inequality surging, resources diminishing rapidly, and the earth’s very future in question, capitalism-at-all-costs is no longer an option, she insists: “I have problems with this very extreme form of capitalism where the pendulum has swung so far in one direction, where the focus is completely on the short term, and no one is thinking about the consequences.”

Few were thinking about the consequences, of course, before September of last year, when the financial system imploded. On this side of the Atlantic, Nouriel “Dr. Doom” Roubini and Robert “Irrational Exuberance” Shiller smelled the impending destruction, but many economic demigods like Alan Greenspan claimed they had no idea it was coming (Greenspan notoriously confessed his “shocked disbelief”). The Black Swan author Nassim Taleb says, with typical gusto, “The whole [economic] profession failed.” The largest financial crisis since the Great Depression confirmed Hertz’s long-standing conviction that there would be dire consequences if unregulated markets were rewarded for success but not penalized for failure. “Is there reason to believe that we are soon going to see more defaults on commercial debt, emblematic of a widespread financial crisis? I believe that within the next five years, yes, we will see this,” Hertz wrote in 2004’s The Debt Threat. “She was predicting what would happen,” says Joshua Cooper Ramo, managing director of the strategic advisory firm Kissinger Associates, who first met Hertz at Davos back in 2001. “For the past five or six years, everyone had pie-in-the-sky optimism that capitalism and democracy would be triumphant. Now we’re seeing all these incredible problems in the system, and she’s been pointing out that these problems exist.”

Indeed, Hertz is now being looked to as something of a visionary in Europe, someone uniquely qualified to rebuild our dilapidated economic theories while helping to create a blueprint for a new kind of capitalism. Her concept of “co-op capitalism” — an idea she plans to develop further over the next year — calls for businesses, governments, NGOs, and the public to experiment together to design new, more-adaptive business models and financial structures that take both profit and larger social goals into account. Companies should be financially motivated to behave in ways that benefit everyone. Where government lags, corporations will put pressure on the state; government, conversely, will impose more regulation on corporations as necessary. The key, Hertz says, is to be flexible, creative. “One of Marx’s biggest flaws,” she says, was trying “to find a unifying theory for every aspect of the world. I don’t think that’s possible.”

Hertz, who not long ago was being profiled in Socialism Today, is now being invited to give keynote speeches to the business leaders at the very heart of old-school capitalism: the CFA Institute European Investment Conference, the European Association for Evolutionary Political Economy, and confabs for banks such as ING. “People who are running Fortune 500 companies don’t know what’s happening around the next corner,” says Colin Byrne, U.K. and Europe CEO of Weber Shandwick, the world’s largest PR firm, whose clients include Microsoft and Samsung. Byrne has connected Hertz — who in the past has worked with McDonald’s, BP, and Citi — with his clients concerned about navigating the postcrisis world. “The last 18 months have taught us that we need new thinking,” says Byrne. “Noreena’s time has come.”


Noreena Hertz is teacup-size. In a little black dress, ballerina-pink fishnets, and 4-inch black pumps, she’s scurrying from one meeting to the next during London’s rush hour, her waifish figure more that of a posh schoolgirl than of an economist who’s gone head to head with Yassir Arafat. In the lobby of the Le Meridien Hotel, Yagil Weinberg, a serial entrepreneur who founded Ideo Israel and runs an NGO with Harvard’s Michael Porter, gives Hertz an airport-reunion-strength hug. “She doesn’t take shit from anyone,” says Weinberg, who hired Hertz in the late ’90s to help run a project to improve the chances for peace in the Middle East. (Hertz worked with business and government leaders in Israel, Egypt, Palestine, and Jordan to help align their economic interests, although she would quickly agree that peace is still a work in progress.) Now, on a quick stopover between New York and Prague, Weinberg pitches Hertz his latest venture, branding apps for companies such as Starwood and American Express. “Having someone of your stature on the team will be very helpful,” he says, trying to tempt her to sign on, which is clearly unlikely. As we walk out of the hotel, Hertz whispers in her directly polite way, “I don’t know what he thinks I could contribute.”

Such invitations have become the norm these days for Hertz, as if she has suddenly been given the password to a secret door. At her Primrose Hill flat the day before, she heard from a political adviser planning to launch an Iraq fund, a celebrity soccer player with a startup idea, a management consultant needing perspective on unemployment trends, and a fashion designer asking for advice on climate change. (Her corporate clients refused to speak on the record for this story, Hertz says, for competitive reasons.) “I have to decide what’s the best use of my time,” she says. “I like seeing the world, I like thinking about the world, but ultimately I need there to be some sort of practical outcome, which is about improving the world, making things better.”

Although Hertz comes from a long line of academics — her great-grandfather was the chief rabbi of the U.K. — appreciation for business came from her parents, who started their own fashion company. “My parents were entrepreneurs,” says Hertz, who spent most of her childhood hanging out in their factory. “I grew up believing in the power of innovation.”

It wasn’t until Hertz went to Russia at 22 that she began to think the free market might have serious shortcomings. The summer after graduating from Wharton as one of its youngest graduates ever (she skipped two grades and finished high school at 16), Hertz was invited by a professor to help set up Russia’s first post-Soviet stock exchange. “It was a school gymnasium filled with cigarette cartons and funeral urns,” recalls Hertz, who speaks Russian, French, German, Hebrew, and Arabic. “There were all these young guys who wanted to know how a stock market worked, so we were just kind of teaching them.” She soon had the ear of economists advising Boris Yeltsin about the fundamentals of a market economy. She was in Moscow during the 1991 coup.

Hertz quickly realized there were unintended consequences in imposing American-style capitalism on a country with a completely different history. At the end of the summer of ’91, she took a job with the World Bank’s International Finance Corporation (IFC) to help design Russia’s move from a centrally planned economy to a private one. (In the process, she ditched her dream of becoming a film producer: “History was happening and I could be part of that, or I could be a talent agent’s secretary.”) While living in a defunct tank factory “in the middle of nowhere,” she began observing the dangers of racing toward privatization. Under the communist system, factories were responsible for each town’s infrastructure; once they were privatized, schools and hospitals, for example, were no one’s responsibility.


She shared her misgivings with her bosses back in Washington. “I was told, ‘This isn’t what you should be focusing on,’ ” recalls Hertz. They reassured her that the market would sort everything out. “That was when I thought, They’re completely deluded.”

Hertz has since devoted her career to debunking economic myths. After a year, she quit her World Bank job and spent another four years in Russia while getting her PhD in economics and business at Cambridge. Hertz published a book indicting the World Bank and the IMF for imposing American-style capitalism on Russia without contemplating the social cost. “It was never about being anti-capitalist,” she says. “I realized that how an economy functions is not just about a market anonymously distributing things but also the way people relate to each other, their beliefs, the way power is distributed. All of that was being ignored.” She points out that life expectancy in Russia has fallen by 15 years since the early ’90s. Says punk fashion designer Vivienne Westwood, a fan of Hertz’s work: “Noreena looks at economics from the other side. From the people it suppresses. This is what punk is all about.”

For Hertz’s punk outrage to have scalable impact, however, she needed to export her ideas beyond Cambridge, where she’d begun teaching in 1996. In The Silent Takeover, she argued that corporations were gaining power at the expense of society and democracy. “Everything just kind of went mad,” says Hertz. Martin Wolf, the economics commentator for the Financial Times, wrote a lengthy, caustic review of the then-unknown author’s work. “Suddenly, everyone’s like, ‘Who’s this person who has him so riled?’ ” says Hertz. “He did me a huge service.” (Adds Kissinger Associates’ Ramo: “She famously got trashed by Martin Wolf, who is now preaching her same line.”) Bigwigs including George Soros, Benazir Bhutto, Larry Summers, and adman Martin Sorrell reached out to Hertz, who found herself being courted as the new progressive voice of Europe. “The world started coming to me,” she says.

The business world turned out to be Hertz’s most receptive audience. Even though The Silent Takeover reads at times as if it were written by a Greenpeace activist (“A system where the corporation is king, the state its subject, its citizens consumers”), it became required reading in European business circles. Hertz was asked to speak at Davos, where a year earlier she’d been outside getting hosed down with the protesters; at the Goldman Sachs party, the very bankers she’d harpooned were introducing themselves. CEO Marc Benioff hosted a book party for Hertz in Silicon Valley. “She is in many ways developing the economic theories we need to guide our new age,” he says.

It was Hertz’s ability to oscillate among so many different circles that made her so distinctive. “I was expecting to meet some kind of hippie woman,” says Simon Franks, chairman of a private equity group in the U.K. who offered Hertz free office space after reading The Silent Takeover. “There’s no event in the world where she’s out of place.” Hertz — who now makes roughly $30,000 per speech — was asked by McDonald’s Europe to speak to its top management. Paloma Castro Martinez, then the company’s director of government and regulatory affairs, set up a post-talk book signing for the executives. “They all ran over and queued up,” she says. “Now, these are huge egos, all of them are making millions, and well — they don’t queue. It was beautiful to see. Since then, I know many have contacted her directly for advice.”


And then there’s Bono. After writing The Debt Threat in 2004, and helping push the G8 to cancel all the outstanding debt of 18 of the world’s poorest countries, Hertz was recruited by Bono to help develop Red, his retail-driven fund-raising effort for African AIDS victims. “The Hertz brain is hardwired to the Hertz heart,” Bono tells Fast Company, “but it’s the unsentimental economic analysis that makes her such an effective instrument for change.”

When the financial crisis hit in September 2008, Hertz thought of Gucci. She published an obit, “The Death of Gucci Capitalism,” on the cover of the British political magazine The New Statesman, declaring the end of the Reagan-Thatcher era in which unregulated markets had more power than governments, risk was seen as a public good, success was measured only by GDP, and the aggressive expansion of Anglo-American capitalism had left the world an “interconnected mess of a system.” She wrote: “We are witnessing the death of a paradigm.”

Since then, European media outlets and CEOs, looking to get their bearings, have called in Hertz as one of the few economic prognosticators who’d been dead-on. “There is a lot of paralysis in business at the moment, and I think she can unlock it,” says Robert Phillips, CEO of PR firm Edelman U.K., whose clients include Unilever and Pfizer. This fall, Phillips recruited Hertz for the company’s advisory board to help its clients navigate the new terrain. “We are basically making sure that senior management in these large companies is engaged with the most important issues of the postcrisis world,” Phillips says.

Hertz saw the financial meltdown as not only a failure of the laissez-faire market, but also — and more important — a failure in thinking. “People either ignored the unknowable or purposely disregarded the facts,” she says. Banks were encouraged not to question models that were delivering otherworldly results, and economists were perpetuating myths — that housing prices would continue to rise, for example — based on patterns of the past. But, as Hertz is quick to point out, “things are going to happen that will have nothing to do with the past. We have to admit we cannot know everything. Otherwise you’re not dealing with the real world, which is messy and complicated.”

Last November, when a multibillion-dollar U.S. food company contacted Hertz in crisis mode, she discovered it was suffering from this syndrome. Its team of forecasters were “number crunchers” — as Hertz describes them — neglecting to factor in real-world variables, from the potential trade war brewing in Latin America to the banning of trans fats in U.S. cities, from postrecession food riots in developing countries to imminent emissions regulations to potential lands-rights issues in Mozambique, where the company has operations. Those factors may sound pretty obvious, but when Hertz asked senior executives what information their predictive models were based on, “no one had a clue,” she says. Just like the black box in the banking sector, “it was like, ‘Our forecasting department gives them to us and we just work off of that.’ “


Hertz is now helping the company create an internal think tank that will feed micro and macro trends to the forecasting team. To start addressing sustainability issues — which previously had been dismissed, she says, as something that “doesn’t affect our business” — the company recently adopted a new type of cattle feed to help reduce its massive methane emissions. Hertz’s last piece of advice was to the CEO himself. She told him if the company maintained its CEO-centric culture, in which voices from below couldn’t make themselves heard, it would continue to operate with blinders on. “Companies have a choice at this moment as to which side of the fence they’re on,” says Hertz.

Co-op capitalism, Hertz says, will rise from the ashes of Gucci Capitalism. These days she is taking notes of best practices around the world to help identify new ways of operating. She singles out the billion-dollar open-source Linux model and the field of biotechnology, where collaboration between academic institutions and companies is the norm. She points to the Emilia-Romagna region in Italy, where much of the economy is based on a cooperative model. There, co-ops work within a market-economy framework and are profit oriented, but because workers all own shares in the companies they work for, a long-term focus and a desire for collective success are built into the system. “It sounds like a charming story,” says Hertz. “But when you realize that this is the seventh-most-successful economic region in Europe, you think they’ve got to be doing something right.”

Hertz says that even though many necessary shifts — like caps on banker pay — haven’t happened yet, there are already indications that challenges to laissez-faire capitalism are taking shape. Anglo-American market dominance, she says, will be contested by emerging economies like those of Brazil, China, and India, whose votes are likely to be given greater weight by the World Bank and the IMF. At the same time, some countries are starting to question the notion that mere GDP defines success. France, based on recommendations from Nobel Prize economists Joseph Stiglitz and Amartya Sen, recently announced it would de-emphasize GDP in favor of other factors such as quality of life and the environment. (Hertz points out that a country’s “health” most often correlates with its levels of inequality, now at an all-time high in the United States.) To shake up the old boys’ networks, countries such as Norway and Spain have passed legislation that will require company boards to have 40% women. Hertz, too, is helping to drive these developments: She’s working with banks like ING to unite investors, environmental NGOs, and other groups in a dialogue about the thorniest global problems.

She’s also hoping to help shape the next generation of bankers. “I am shocked at how little reexamination is going on within traditional business schools,” says Barnard president Spar. “It’s scandalous.” This fall, Hertz will jump-start that process as the new chair of globalization, sustainability, and finance at the Duisenberg School of Finance, a new advanced-degree school in Amsterdam that has put ethics and critical and long-term thinking at its core — a radical departure for the dismal science. Holland’s finance minister, Wouter Bos, has also recruited her to ensure that the Dutch government doesn’t resort to quick fixes in dealing with the financial market. “All of us are living beyond our means,” says Bos. “We’re not managing our societies in a sustainable manner.”

Hertz’s optimism for co-op capitalism isn’t blind. “There are lots of vested interests for whom retaining the status quo would be the best thing,” she warns. Plus, she adds — reiterating the certainty of uncertainty — there’s always the 9/11 scenario. “There could be a strike on Iran, dirty-bomb repercussion, everything could get thrown out.” Then there is good old human inertia: “In Silicon Valley, we really only care about new technology and IPOs — that’s our psychosis,” says’s Benioff. “The groundswell isn’t going to happen as fast here.”


Even some of Hertz’s natural allies — folks who have long been in the trenches, such as CSR International founder and CEO Wayne Visser — say her ideas don’t address systemic problems. “Financial markets are geared around the short-termism of shareholder-driven capitalism,” he says. “How do you change that?”

By pointing to the costs that short-termism entails, Hertz answers. She offers the auto industry as an example: In the late ’60s, she says, when the Clean Air Act was being deliberated in the United States, American carmakers spent millions lobbying against it, while Honda decided to develop more energy-efficient cars. “Honda’s cost was on innovation and thinking about how the future might be, and making a product that might fit the future better,” says Hertz. “The other companies were spending their money on stopping the future from happening. In that case, Honda won.” Likewise in Holland, where, Hertz says, after the financial crash, “there was a huge flight of money from all the normal banks” into Triodos and Rabobank, both known for being ethical and sustainable. Those who resist, she says, will be left behind.

Every day now, Hertz sees bits of Gucci Capitalism falling away. She arrives breathless at her flat, hot pink BlackBerry in hand, just back from a meeting with a hedge-fund manager. She can’t resist spilling — vaguely — about the confidential deal they just made. “This is somebody who thinks of himself as right wing economically — on the right of economic capitalism,” she gushes. “But what’s incredible is that we’re 100% on the same page. Then, at the end of the conversation, he says, ‘The key question is — and it all rests on this — are you up for the fight?’ ” Hertz’s girlish smile turns a shade sweeter as her mind returns to her very public brawl with the FT’s Wolf, who’d attacked everything from her methodology to her author photo. In a couple of months, she and Wolf would speak at the same conference — sharing equal billing. “Am I up for the fight?” she grins. “I love the fight.”

About the author

Danielle Sacks is an award-winning journalist and a former senior writer at Fast Company magazine. She's chronicled some of the most provocative people in business, with seven cover stories that included profiles on J.Crew's Jenna Lyons, Malcolm Gladwell, and Chelsea Clinton