Economic action

 

Economic action


The meaning of economy


The business of business is economic activity. The ways in which we work, interact with each other in the process of that work, and share the proceeds of the work, combine together into what is loosely called 'the economy'. Whenever politicians and business analysts refer to the economy, they generally use the word as a synonym for 'management of finances on a national or international scale'; yet historically the word has a much broader meaning:

<p class="defn" align="center">Economy is the management of the household, in a manner which is efficient, reliable, elegant and appropriate to the respective context and scale.

In this sense, 'the household' exists on every scale: an individual, a family, a company, a corporation, an industry, a nation, the world as a whole. Originally, 'the household' was literally a family-household, and 'economist' was synonymous with 'housewife' - and in those days, with famine never far away, the efficiency of the household could often make the difference between life and death. Over the past couple of centuries - particularly with the move into the cities - that vital housewife-role became 'de-skilled' and denigrated in a way that has become all too familiar in other industries in more recent times; increasingly, material resources came from outside the household, leading to increasing emphasis and reliance on the external 'breadwinner' role; as a result, 'economy' slowly became synonymous with assessment of how the household money was spent - and hence, by analogy, how the nation's money was spent. And that's where we are today: the old meaning survives only in the archaic and somewhat tautologous term 'home economics'.

Yet it's that older meaning that we need to retrieve if we're to gain a better understanding of what's really going on in business. 'The economy' is more than just the management of money: it's the management of the entire household - of everything that occurs within and impinges upon the household. And, as before, that applies at every scale: the context for the 'household' could be an individual, a family, a company, a corporation, an industry, a nation, the world as a whole.

Managing a 'household' of any kind is hard. But in business especially, money tends to get the most attention - mainly because it's one of the few aspects of the economy that's easy to quantify, and thus provide a spurious sense of control. Yet as any home-parent knows all too well, money-management may not be easy, but it's often trivial by comparison with the people-management problems: and ultimately, whatever the issue looks like, it's always a 'people-problem' in one sense or another.

And we don't solve those people-problems by pretending they don't exist - even though that's the usual, and evidently the most preferred, 'solution' in both politics and business. There's an old proverb that "a fool knows the price of everything and the value of nothing": yet monetarism, for example, is one well-known political philosophy which was based on exactly that kind of foolishness, and which had disastrous results when attempts were made to apply it in the real world of business. True, some values and qualities can sometimes be assigned a monetary price, but most can't: what price would you put on morale, laughter, excitement, enthusiasm for work? And if you could invent some kind of price for any of such things, from where could you buy them? In simplistic monetarist terms, 'downsizing' and 'restructuring' may have seemed to make sense: but in the real world, the real economy of business, they definitely didn't - as many now-struggling 'downsized' companies are discovering to their cost.

Some things don't have a price, but they do still have value - and thinking solely in terms of price can lead us off onto a misleading and ultimately self-defeating track. I remember one example, in amongst those long conversations we often have with fellow air-passengers, which illustrates this mistake particularly well. He was recently retired, he said: he'd spent his entire working life 'valuing' things - by which he meant putting a price on things - and had got so good at it that he'd retired quite a rich man. "Everything has its price", he said; "if you can't put a price on something, it doesn't exist - and if you don't know that, you don't know business". Money was the sole objective basis of economics: feelings are "just subjective", and if we can't put a price on them, he argued, we can just ignore them - they can be dismissed as "irrelevant to business". He suddenly seemed a little uncomfortable at that point, though: he wanted to change the subject, to talk instead about his love of motorcycles, and I was happy enough to let him do so. He'd recently bought a new BMW bike, he said: he loved the quality of its workmanship, and even when he couldn't ride it, he felt a sense of pride seeing it gleaming in the garage. He felt sad that his wife didn't feel safe enough to ride it with him. It obviously meant a lot to him. And perhaps it was a little unkind of me, but I suggested that he applied his own argument to that purchase: what was the price of his enjoyment, his pride, his sadness? According to his own logic, it was 'bad economics' to ever ride the bike, as it depreciated in value as an asset every time he rode it; in fact its monetary value depreciated even when it wasn't used, so it was 'bad economics' to have bought it at all. Yet his feelings - his own real values - of enjoyment, satisfaction, pride were the reasons for buying the bike in the first place: and thinking solely in monetary terms destroyed them. A lot more of that journey passed, in quite intense conversation, before the full implications of that fact finally sunk in: facing the scale of his own life-long mistake, he left that flight a shaken man...

Money is only one aspect of the overall economy, at any scale of economy: it's by no means the central one or, in many contexts, even a central one. For example, most people buy not on the basis of price alone, but more on a subjective, qualitative sense of value for price: and that perceived value may have little direct connection with price itself - which is why branding is so important and so successful as a marketing strategy. Most people in marketing, and in business in general, know about this primacy of feeling in purchase-choices; so it's something of a mystery as to why so few people seem to understand that exactly the same applies within business itself.

As we've seen, feelings are at the source of all motivation and empowerment at work: so yes, money is one reason why people choose to work with one corporation rather than another - but it's only one aspect, and by no means necessarily the central one. Most people will prefer to work in a workplace where they feel productive and empowered; conversely, most people will avoid a workplace that's unpleasantly overloaded with power-over and power-under - and even if they can't afford to leave, they won't be able to work well in that environment. They certainly won't work well if they're treated as disposable objects, or as subjects for someone's inadequate experiments in monetarist economics and the like: multiply that effect by a few thousand or so angry, alienated, demoralised and disempowered staff and you'll soon discover that those subjective feelings that many analysts would dismiss as 'irrelevant to business' can have a big impact on the bottom-line... One of the original proponents of downsizing admitted recently that "we didn't often achieve the savings that we'd expected, because I guess we didn't take enough account of the human factors in our calculations". That particular 'minor error' in the economic equations has cost most downsized companies very much more than they can afford: rather too late, they've discovered that trust and loyalty do indeed have a value - and that that value which was so casually ripped apart and thrown away in repeated 'restructuring' may well take decades to rebuild.

The real problem here is that it is hard to describe qualities and values in a way which makes sense to others - especially if those 'others' are investors who are only interested in short-term monetary gains. As a result, attempts are often made to assign a monetary value to some of the qualitative aspects of business, such as goodwill, and potential intellectual property. Most of these attempts are legally dubious, because the assigned values are impossible to prove, and can rarely be realised on the break-up of a company. Even so, most companies assign themselves paper-values far in excess of the value of their physical assets: an excess of five or ten times the physical valuation is not uncommon, especially in 'information-economy' companies in which there may be almost no physical assets at all. And the 'valuation' of qualities solely in monetary terms is misleading in any case - much like trying to describe the usability or comfort of a car solely in terms of its fuel consumption or engine capacity.

A better solution than this kind of botched-together 'valuation' is to leave the qualities as they are, and devise meaningful measures for them. These measures will necessarily vary somewhat from company to company - they'll need to be related to the corporate purpose, in fact, as we'll see later - but even if they're only in the simple form of a subjective scale from one to ten, they'll still be more accurate and more realistic than the spurious pseudo-precision of a monetary valuation.

The real 'bottom line' isn't just that section of the company report where the finance-figures supposedly balance out, but a summary of how the whole of the company's economy balances out: all of our relations with all of our stakeholders. And this isn't just a wishful fantasy: there are now an increasing number of reporting-models which do exactly this - such as Balanced Scorecard, or the Social Performance Report structures pioneered by 'values-led' corporations such as Body Shop and Ben & Jerry's Ice Cream (the latter - one of the world's largest independent producers of ice-cream - being better known in the US than elsewhere). Or you could leave the standard financial report as it is, but attach a separate environmental-impact statement or statement of social responsibility: that's what several large multinationals such as IBM, Volvo and British Airways already do. Either way, the aim is stop misleading ourselves and others by trying to measure everything in monetary terms, and instead describe things as they really are - the real economy of the business.

The financial report is a report that in practice is relevant only to financial analysts. Even potential investors usually need more information than that: the downsizing debacle showed that morale, for example, is as fundamental as finance when it comes to maintaining business performance beyond the current quarter. And no corporation exists by itself: it operates within, and as part of, the economy of the wider community. Once that's understood, it becomes obvious that we need a form of reporting that makes sense to that wider community: in other words, all of our stakeholders, rather than only the shareholders.

Stakeholders are people who have a stake in the quality of our work: our colleagues, employees, customers, suppliers, investors, banks, unions, regulatory bodies, industry associations, government and the community in general. Ultimately, everyone is a stakeholder in our work, if only because what we do, and the ways in which we do it, may or does affect everyone. For practical reasons, it may be easiest to regard as stakeholders only those people who are immediately associated with our work: but we need to remember that, at times, they may include everyone.

Yet here we hit a significant problem. Everyone and anyone may be a stakeholder in our business: but in most Western nations the law in effect acknowledges just one group of stakeholders - the investors - as the 'owners' of the company, and assigns them automatic priority over everyone else. This is the same issue about 'rights versus responsibilities' that we saw earlier, and can cause exactly the same problems - with potentially disastrous results for the operation of the business, especially in the longer term. To get much further towards expanding the productive response-ability within a business, we first need to take a brief detour to rethink the end, or purpose, of ownership itself.

The end of ownership


In the earlier section on rights and responsibilities, we saw that the concept of rights is actually not necessary: the same result can be achieved with an interlocking set of mutual responsibilities. Much the same applies to ownership: as a concept, it seems obvious enough, but there's a surprising range of problems concealed within the concept - mostly to do with implicit power-over and power-under. In practice, as mentioned earlier, we need to draw a clear distinction between 'possession' and 'stewardship'. In Western law, property-ownership is essentially defined as a personal right:

Ownership
an assertion of right to exploit a resource.

In this sense, a 'resource' can be anything which is to be developed or used: a thing, a project, an idea, and so on. And by 'exploit' here, I mean 'make use of' in the widest sense, rather than solely the pejorative sense of 'mistreat' or misuse'. It's this kind of ownership that's meant when we talk about 'owning' a house, a car, a pen, or almost any other tangible object. But that meaning tends to fall apart when we try to apply it to intangible resources - a hope, a fear, an idea, an expectation. Or, for that matter, to relationship-resources: all manner of confusions can arise whenever anyone thinks that they 'own' their partner - or even their cat!

Unlike ownership, what I've called 'stewardship' does cover those other resources. On the surface, it looks much the same as ownership, because of the way that rights arise implicitly from interlocking responsibilities; but it gets there by centring on the responsibilities rather than the rights:

Stewardship
an assertion of response-ability for the appropriate management of the exploitation of a resource.

It's this sense of stewardship that we mean when we talk about 'owning up': that's an acceptance of responsibility - response-ability - to repair the damage from some accident or mistake in which we were involved. And it's also this sense that we mean when we talk about people 'taking ownership' of a project: they're expressing a commitment and responsibility for its expression, in the most appropriate way.

Stewardship is active, in that there's always a purpose for the stewardship of the resource; by comparison, ownership is often passive, in the sense that resources are often owned solely for the sake of having the feeling of 'owning' them - or, conversely, in order to avoid the feeling, or fear, of not having them in the event that we want them available. Much of the resistance to just-in-time inventory-management, for example, arises from fear-based 'needs' for ownership - the 'need' for a spurious sense of 'control' which often leads to inefficient use of resources. Another classic example of this trust-issue can often be seen in busy cafés and line-service restaurants: one person in a group will find and 'hold' an empty table for the others, preventing anyone else who's just been served from using it - even though the others in the group are waiting in line, and therefore don't need the table until they've been served. There are many other contexts, too, in which a much higher throughput or efficiency can be achieved if people don't try to 'own' resources that they don't actually need.

The other crucial distinction is that rights are personal, whereas responsibilities are social. In the terms I described earlier, it's actually a spiritual issue: in part, response-ability is the expression of the power of the self in any context which is greater than self. There's also a related and similarly crucial distinction between 'freedom for', which is usually an expression of responsibility, and 'freedom to', which, when analysed in depth, usually turns out to be a self-centred assertion of 'right' to indulge in power-over or power-under. (Freedom is important, so it's unfortunate that most assertions of 'freedom' to do or not do something in a commercial context generally fit into the latter category, not the former: to give just one example amongst many, the only apparent purpose of Microsoft's infamous 'Freedom To Innovate' campaign was to prevent innovation by others - an assertion of 'freedom to' being used to override 'freedom for'.) Most rights and freedoms are defined only at the personal level, and hence tend to incite self-centredness - the classic "what's in it for me?" attitude, often combined with a lack of awareness that others have exactly the same rights and needs. And when ownership is asserted as a right, a 'freedom to' without explicit responsibilities - as is the case with most property-law - the definition we actually get in practice is this:

<p class="defn" align="center">Ownership is an assertion of exclusive right to exploit a resource, without reference or responsibility to others, either in the present or elsewhen.

And that's where the real problems start...

To put it bluntly, stewardship arises from adult purpose, whereas, all too often, ownership arises from infantile self-centredness, 'to have and to hold' - with all of the toddler-stage problems that we saw earlier. We see ownership used as power-over: we prop up our sense of superiority over others by the 'exclusive' items we choose to purchase and display. We'll often see children, or adults, take hold of something not because they want it themselves, but because they want to withhold it from someone else; and in business - especially where office-politics runs rampant - we'll often see someone take on a role not because they want to do the work, but because they want to prevent someone else from making a success of it. We see ownership used as power-under - most obviously so when someone misuses a piece of equipment, and then tries to sue the manufacturer for damages. We see object-based attitudes to ownership - again, most obviously when someone misuses a piece of equipment. And we see subject-based attitudes to ownership - such as the person who makes a complete mess in the office kitchen, and leaves it for everyone else to clean up! These attitudes to ownership are common everywhere: and in business, we'll see the effects of the resultant waves of attempted 'export' and 'counter-export' echoing all the way down to the company's bottom-line.

But the real complications arise when a rights-based model of ownership is used in a context in which there are finite limits on a large shared resource. Each 'owner' has the right to use the resource; and since the emphasis is on personal rights rather than social responsibilities, it's always to their personal advantage to use as much of that resource as possible. If the limits of the resource are finite and obvious, the classic zero-sum problems arise, as we saw before. But if the limits to the resource are not obvious, and no-one appears to be responsible for maintaining the overall resource - or if someone is assigned that responsibility, as the steward for the resource, but is generally ignored by the 'owners' - every user tries to maximise their personal use of the resource: "just one more won't make any difference, but it'll make a big difference for me". The result is that the resource is over-used, but the over-use is concealed for a while by delays within the overall system; availability dwindles, as the resource loses its ability - if any - to replenish itself, or becomes harder to find; most individual owners attempt to increase their usage in order to make up for the apparent shortfall; and the resultant 'feedback-loop' destroys the usability of the resource, not just for a few 'losers', but for everyone.

This type of scenario is referred to as 'the Tragedy of the Commons', because the classic example is common grazing-land. Fifty years ago, for example, the Sahel in sub-Saharan Africa was rich grassland which supported a hundred thousand herdsmen and half a million head of livestock: but it's now a bare, almost lifeless desert - the direct result of un-managed overgrazing. "Forests precede civilisations, and deserts follow them" - a comment which was first made by a Roman writer more than two thousand years ago, and still as true today. And the same type of Tragedy of the Commons scenario may apply to almost any shared resource if it's over-used: think of a freeway at commute-time, or a research-unit shared between several corporate divisions or companies - or most mining operations, for that matter. These scenarios can cause enormous amounts of damage, in business and elsewhere, for everyone involved: and they can only be prevented by emphasising social stewardship - arising from personal power and personal response-ability - rather than personal 'rights'.

The Tragedy of the Commons is the almost inevitable result of any rights-based model of ownership. Which is a problem, because it's the model that's enshrined in most Western property-law... And the problems are particularly severe in business because of the way in which company law in most Western nations enforces a concept in which the investors - the shareholders and financiers - are assigned exclusive 'ownership' rights over a corporation. Back in the days when all the company's assets were physical, the valuation of the company was based solely on those physical assets, and most investors had a direct and often day-to-day involvement in the company, the concept made sense; but in the present day, where 'ownership' may literally last only milliseconds, and most assets are intangible anyway, it's now a dangerous anachronism - as the members of any corporation that's suffered a hostile take-over or the attentions of 'asset-strippers' will know all too well.

Without responsibilities as well as rights, the current corporate concept of 'ownership' may in effect be little better than theft. (From an anarchist perspective, all forms of property are theft; from an Islamic perspective, all forms of usury are theft; from a Marxist perspective, virtually all business activities are theft, since profits are created only by extracting 'excess value' from individual labour or individual transactions; such perspectives are unusual in Western business, of course, but they do have some real - if uncomfortable - validity that's well worth exploring.) That's certainly true of asset-stripping, for example, or most 'junk-bond' leveraged buyouts: they're technically legal, but that's about all that can be said for them. They're obviously power-over, power-under, or both, as the aim is to extract a short-term profit by destroying the corporation's overall long-term 'ability to do work' - which no-one could sensibly describe as responsible behaviour! The behaviour is also self-defeating, because asset-strippers eventually run out of prey on which to make a quick 'killing', and over-reach themselves: Slater-Walker, the original asset-strippers, lasted just three years before they imploded into bankruptcy; Alan Bond's paper empire lasted rather longer, but collapsed like a house of cards once it became clear that in essence it consisted of nothing more than an interwoven web of leveraged debts. Just as in Prisoner's Dilemma, the only tactic which works in the long-term is honesty, and responsibility: in business, the only viable end of ownership - the purpose of ownership - is responsible stewardship.

And it's here, again, that describing shareholders as 'the owners' simply does not make sense. It's not just that shareholders, because of the 'limited liability' concept, effectively have absolute rights over a corporation, but almost no responsibilities; it's not just the speed and anonymity of stock-trading, which reduces the role of most shareholders to that of a form of gambling best described as 'punters at the corporate races'; it's not just the short-termism inherent in control of corporations by people whose only interest - both metaphorically and literally - is the current quarter's dividend; it's not just that most stock-analysts still deprecate any emphasis on long-term rather than short-term profits, so any visible moves towards long-term efficiencies can lead to the destruction of a company by its 'owners': all of these issues are serious problems in themselves, but the real problem is that, given that most of the assets are intangibles, and the bulk of those intangibles reside in people, the shareholders in principle purport to 'own' the people of the company - which is not only absurd, but really is illegal. Businesses today are not commodities, but communities: and as Charles Handy, the British business commentator, put it in his essay 'A Company Possessed?', "I believe that the whole concept of owning a company is, today, misplaced. Buildings one can own, or land, or materials, but companies today are much more than these physical things - they are quintessentially collections of people adding value to material things. It is not appropriate to 'own' collections of people. Particularly it is inappropriate for anonymous outsiders to own these far from anonymous people." Ownership without responsibility is not an appropriate model for governance of a business: but stewardship - ownership with responsibility - is.

And it's not just that ownership is 'wrong' in a moral sense, as Handy argued: it's much more that it simply doesn't work, in terms of overall efficiency, and overall profitability in that wider sense of economy. Some nations - notably Germany and Japan - require corporate boards to be made up not only of major shareholders, but representatives for employees and other stakeholders too: companies there tend to be much more stable, and much more profitable in the long-term, than their shareholder-'owned' counterparts in other countries. The damage caused to corporations by the present system of Western company law is now so evident and so severe that Handy and other respected business analysts, such as Stephen Covey in the US, have called for major reform, to move the legal structure to something much closer to a stewardship-model.

Those changes will happen eventually: either that, or the entire system will break down into a chaos of infighting, which no-one in business would want. Yet the law moves slowly: significant change is unlikely to happen in the near future, however urgent the need may be. In the meantime, few companies - especially publicly-quoted ones - can risk much change on the surface: the short-termism inherent in the current systems of the Stock Exchange will quickly penalise any who try to go it on their own. But at the same time, no company can afford the real costs of all the power-over and power-under incited by any rights-based concept of ownership - especially within their own business. For our own profit, in both a personal and collective sense, we need to do whatever we can to reduce those human costs: we need to do whatever we can to assist ourselves and others in understanding that the end of ownership is the response-ability of stewardship - supported, in everything that we do, by a clear sense of personal and professional purpose.

Purpose, relationship, knowledge


A corporation's economic activity arises from individual, personal power. The only source of that power, as 'the ability to do work', is from within us as individuals: it cannot be 'taken' from others - and any attempt to do so, via power-over or power-under, reduces the availability of that power. For the reasons we've seen, the power is greatest when it can be expressed as response-ability in a purposeful way, in a context which is based on stewardship rather than ownership, and one which addresses the full scope and meaning of 'economy'. The individual 'motivation' through which that power arises is based on feelings - particularly a spiritual need for a sense of meaning and purpose, a sense of self and of that which is greater than self, within the work as a whole. And we express that power, and response-ability, within our work, as a dynamic balance of the triad 'work', 'play' and 'learn'. The simplest way to describe the power-triad triad graphically is as a triangular plane, with each point of the triangle representing one of the modes of power, as in the following diagram:



'Work/play/learn' is a useful shorthand term for the expression of power in general, even within in a corporate context. But it's not particularly descriptive about what that expression looks like in practice, in day-to-day work - and the idea that we improve productivity at work by intentionally promoting 'play' may still be a bit too hard for many business-folk to swallow! So we need to use different labels for those three modes of power, ones which match more closely to the general business context.

The 'work' mode is represented as purpose-fulfilment: the various ways and means through which we fulfil our stated purpose. Most of the more-visible aspects of a corporation's economic activity - production, purchases, sales, marketing and the like - have a strong emphasis on purpose-fulfilment.

The 'play' mode is represented as relationship-management: the development and monitoring of how, individually and collectively, we relate with others both within and 'outside' the company. (In other words, 'play-with', rather than 'play-to-do' or 'play-for-a-purpose' - which is play as purpose-fulfilment - or 'play-to-learn' or 'play-as-practice' - which is play as part of knowledge-technology.) Externally, sales, purchasing and marketing all have a strong relationship-management component; likewise training and the inappropriately-named 'human resources', internally within the company. Skills-development - as distinct from training - also requires strong emphasis on management of relationship with self more than with others.

The 'learn' mode is represented as knowledge-technology: the creation and management of knowledge - general, industry-specific and organisation-specific - and its expression through personal skill and awareness. By 'technology' I mean any systematic approach to the development and maintenance of knowledge, with equal emphasis on the human and technical aspects: in that sense, mentoring, informal education, the library, the office canteen and even the water-cooler are just as important as computer networks and automated 'knowledge-management' tools in the corporation's overall knowledge-technology.

So in a business context, the work/play/learn triad takes the form shown in the following diagram:



This triad forms the 'power-base' for the entire organisation, and allows us to view its economic activity as a whole, rather than as an assemblage of individual, isolated compartments with loosely-coupled activities. And everything that happens within and around the corporation has its own dynamic balance of work/play/learn, of purpose-fulfilment, relationship-management and knowledge-technology: so - as shown in the diagram below - we can map each department or area of work onto the triad in terms of the typical emphasis given to each mode in the respective area:



At any given time, and in any given work-area, there will be a specific emphasis for each of the three modes of power: but overall, over the entire corporation and the overall work-cycle, all three must be in balance for economic activity to take place consistently and productively. If any department - any specific combination of work/play/learn - becomes overly dominant, or is weak or absent, it upsets the balance of the whole. And because the balance is necessarily dynamic rather than static, there's also a need for an explicit 'go-between' role, moving from department to department, maintaining the balance and maintaining awareness of the need for overall balance. Some organisations do directly support this role: in one large multinational, for example, they're referred to as the 'bag-carriers', the people who maintain organisational unity and standards. But most organisations don't - with results that are often all too evident.

At the centre of the triad, at the exact balance-point of purpose-fulfilment, relationship-management and knowledge-technology, sits strategy, planning and review; and central to this, in turn, is the maintenance of corporate purpose, vision and values - because these set the direction for the organisation's response-ability, the expression of the organisation's collective power.

<p align="center"><img src="prkdirn.gif" width=424 height=252 border=0 alt="response-ability provides power, purpose provides direction">

As mentioned earlier, a corporation's purpose, the context in which it fulfils that purpose, and its relationships and its knowledge define that corporation and its economic activity - far more so than any physical assets, for example, or the infamous 'org-chart'! So the remaining sections here explore in depth each of those aspects of economic activity, starting with purpose and purpose-fulfilment.