Monday, July 9, 2018

The toxic trade-off

And the stakeholder war that is destroying the economy.

From any point of view, it was a sad day to experience the recent power outages because of an Eskom wage dispute, and to witness angry workers trash Nelson Mandela Bay. Clearly not on the same scale, there is still some similarity between those actions and that of using women and children as shields in military conflict, or children as suicide bombers. Whoever the perpetrators are, they will vehemently defend the ends as justifying the means. To which Adam Smith would have responded: “Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience.”

It’s not acceptable to harm, or even inconvenience, others in the pursuit of self-gain, which in itself seldom qualifies as a noble cause. In the same vein, there can never be any justification for imposing your own needs and wants on customers, clients, consumers or users. It’s a moot point whether modern society has not become too tolerant of this behaviour, often excusing it in the same way we tend to be lenient on transgressors who have had a tragic upbringing.

Yet, it is understandable in broader context. For the most part we have made the pursuit of self-gain the most important, if not exclusive purpose of our economic endeavours. The term “exploitation” even features in some organisational theory handbooks as an objective when it comes to markets and resources.  It is that concept which inevitably spawns the kind of behaviour we witness on many fronts; of which labour agitation is just one. When these principles are marshalled and expressed through powerful groupings such as labour Unions, large corporations, business theory, governments and many other, they often do battle with each other and the fighting elephants crush the grass. It unleashes a toxic trade-off between vested interests; an obscene haggle which culminates in scheming, conniving, colluding, manipulation, theft, corruption, customer neglect, and even societal harm.

This conflict cannot be settled at a centralised level such as Nedlac or centralised bargaining. Solutions there often impose intolerable prescriptions down the line and undermine instead of encourage much needed flexibility. It has to happen at an individual enterprise level where a common purpose can unite the stakeholders and reward expectations managed. Do not blame labour only! Capital interests have been the architects and refiners of the short term profit maximisation model, and the destructive excesses we have seen in the last few decades. Labour simply follows the same logic, compounded by the commodity status it has been given (largely by itself) and in this country by a fall-back to radical cold war rhetoric.

The self-gain, profit pursuit theory is flawed in many respects. For one thing, it does not distinguish between purpose and motive. Purpose applies to the collective; motive more to the individual. Clearly the more individual motives are aligned to a common purpose, the more powerful that collective expression will be. But that common purpose will suffer when individuals or stakeholder groups pursue their own conflicting vested interest. The second flaw is the assumption that wealth is generated by the pursuit of those interests. In reality, tangible wealth can only be created by being useful to others. It is then a huge leap to say this happens automatically when people exclusively pursue their own maximum material self-gain; that we achieve the best in us by appealing to the worst – greed or fear. That particular assumption has been proved wrong time and again.

Despite King IV’s ideal of seeing business as an instrument of creating value for all; global emphasis on inclusive economic performance, and the wave of new economic thinking that challenges classic economic theory, we still don’t seem to be near forging new paradigms. The main participating stakeholders of labour, capital and state seem to be locked in dispute over who should get what. The focus is still mostly on benefits and distribution, rather than contribution and wealth creation.

The latest mining charter proposals are a case in point and this chart based on the PWC 2016 survey, shows how misguided they are.

With state and labour being 75% beneficiaries of mining wealth creation, the obsession with changing the capital structure seems absurd. It can be explained only by an assumption that in all things, capital rules supreme. Nowhere in the charter or in his comment on the charter, did Mineral Resources Minister, Gwede Mantashe explain how it would ensure higher production, mining sustainability and increased wealth creation. Again, and as always, it’s all about distribution rather than creation; about taking instead of giving.

If we want to take the “creating value for all” refrain seriously, not only must we stop the stakeholder trade off, but we must get them to share an unequivocal common purpose of maximum wealth creation and a common fate in sensible and flexible distribution.  I have written megabytes on this theme, but a more recent thought struck me that company boards must be re-examined. At present they represent virtually exclusively shareholder interests but could be broadened to include the other contributing stakeholders of labour and state. This will only work if all think entrepreneurially in line with the above common purpose of serving their markets. Frankly this can be said for shareholder interests. Perhaps more so!

And let’s not blame “the system”! The constant harping on “capitalism” or “socialism” has become presumptuous, boring and counterproductive. Economics is not about systems, constructs, institutions or numbers, but about an evolution of meaningful and mutually empowering relationships between people. Systems that we impose on that will always fail if the perceptions, assumptions and behaviour of people are flawed.

One of the most intriguing issues humanity has always wrestled with is the deeply profound relationship between contribution and reward; giving and receiving; empathy and survival. What comes first? Where must the emphasis lie? I’m more convinced that Newtonian, cause and effect logic is not appropriate. Not only are the two mutually supportive, they are one and the same thing.

That principle is reflected in accounting practice in the value added or wealth created measurement – what I have called “the magnificent metric”. It is also the oldest, simplest and most powerful economic principle known to humankind. It captures both contribution and reward in one number – a bit like those optical illusion drawings where two pictures are contained in one, depending on how you see it. And if the whole measures both, then the parts of labour, capital and state reflect both. We can quibble about proportions, but never to the extent of harming the whole.

So wherein lies the logic of expecting more by giving less – in withholding one’s labour or contribution? A price will inevitably have to be paid; somehow, somewhere. The body economic is scarred and those inflicting the wounds will ultimately pay a price beyond some loss of income. The bigger damage is loss of trust and tarnished reliability. But let’s not exonerate those who for too long have viewed labour as a cost, a drag and a burden to their own slice of the pie.

This thought from American Philosopher, Waldo Emerson: “It is one of the beautiful compensations in this life that no one can sincerely try to help another without helping himself.”

Imagine adopting that as the supreme principle of economics.

Monday, June 18, 2018

Government entrepreneurship.

The size of government is less important than the way it behaves.

The at times cavalier behaviour of the United States under Donald Trump’s “America first” refrain, raises a number of issues that can have a significant impact on the global economy.

The more obvious, and one that can affect South Africa’s foreign trade, is the global trade war he has unleashed. Barriers to foreign imports have already triggered the inevitable tit-for-tat response from America’s main trading partners, including China, Canada, and Europe. There are seldom outright winners and losers in this game. The initial gains you make in reducing imports are invariably set-off by a fall in exports, and you find yourself becoming more and more insular, until you lose your position and influence as a global trading nation.

It is counter-intuitive to a well-established principle, backed by years of World Bank research that the success of a nation depends on having an external focus and developing its people. You can apply those same principles to a company and even to an individual. It amounts simply to a desire to make a contribution to the world around you, and developing knowledge and skills to do so.

More significantly, is how this behaviour impacts on trust. Commerce has always been a proven counter to conflict, but the moment it is engineered for exclusive self-gain, it creates an imbalance and distrust. The U.S’s problem has been compounded significantly by its offhand approach to treaties, agreements and understandings; going back to its treatment of native Americans; the more recent scuttling of a highly valued Iran nuclear deal; reneging on climate change commitments; its propensity for covert involvement in regime change and many more. Sad to say, America is no longer as trusted a nation as it used to be. It remains to be seen whether the dramatic rapprochement with North Korea will improve or further damage that trust. But as things stand, there is a danger that ultimately trust will also be lost in its most powerful global instrument, the dollar.

This brings attention to the most significant aspect of all: the role governments play in our well-being: as individuals, as nations and as a global species. Governments are big, invasive and more in control of our destiny than any other single institution. As we saw with Greece and more recently with Italy, centralised authority can ride rough-shod over the democratically expressed will of the people. But it is the least trusted institution in most societies, below that of business, NGO’s and the media.

Yet they continue to grow. Not only in size as reflected in their claim on national resources, but in their regulation of citizen behaviour through legislation. They are there to stay, perhaps even becoming more dominant and invasive. With this, the classic ideological debate between capitalism and socialism is fuelled to hysteria and open conflict. The size of government is then used as an unsubstantiated premise to prove its role in national prosperity or poverty. In South Africa, President Ramaphosa has earned some kudos for promising to review the size and structure of the government. Few will take issue with that, especially in the light of the disastrous performance of state owned enterprises in recent decades and the high demands on dwindling revenue. There’s no question that we have a bloated, largely inefficient and wasteful bureaucracy.

But one must caution against a dogmatic approach based simply on size and metrics. Unbending ideology can often stand in the way of progress and muddy the path of economic evolvement. Many prosperous nations, such as Norway and Denmark, contradict the small government premise. Others, such as South Korea, post war Japanese recovery, and Taiwan have shown what can be achieved not only through strong collaboration with private initiative but having a firm government hand on the process.

British economist and author, Professor Mariana Mazzucato, of the University College London, has argued for a partnership of equals between public and private actors in the innovation economy. She writes: “The state has actively shaped and created markets, not just fixed them. It has done so by being an active investor along the whole innovation chain: not only in basic research but also even in downstream areas like applied research and early stage financing of companies”. South Africa’s Sasol is a good example of that.

Despite my own early fanatical aversion to state involvement in the economy and preference for private sector control of resources, a question that often irks me is what prevents the state or communities from having their own enterprises if they played to the same rules as those in the private sector? Of course that is a big “if”, but arguably those rules are as easily broken by big, centralised economic power-houses and corporates, as governments.

The answer lies, of course, in intent. The Holy Grail of purpose – that of serving its market or customers – that should apply to all business, must equally apply to government. The rules of reward distribution: meeting the legitimate expectations of the participating stakeholders and encouraging continued contribution should also be followed. In short, one should follow Common-purpose; Common Fate principles where government is involved. That would imply, for example, that civil service pay could be flexibly linked to nominal GDP growth once guidelines have been established for the appropriate size of the government wage bill in relation to GDP. Interestingly that would make the current 7% public sector wage offer close to that norm.

That “appropriate size” is at the core of the debate. In a social media post, Economist Mike Schussler argues that at 13.79%, the S.A. government wage bill is “very, very high” compared to the average of 6.3% for low income countries, 7% for middle income and 9.7% for rich countries. The legitimacy of using averages as benchmarks is open to question – just ask any individual shopper whether they believe the official inflation rate! But even in the Schussler table, South Africa is still below countries such as Denmark, Norway and Finland.

Big government is here to stay. But as Muzzucato argues, it has to start thinking entrepreneurially. Size matters far less than the way it behaves.

Monday, June 4, 2018

From Ashe to Ashwin.

Confronting the thorny issue of merit based appointments in society.

It may be connecting some very obscure dots, but former Springbok rugby player, Ashwin Willemse’s walking off the SuperSport set reminded me of tennis champion Arthur Ashe’s rebellious tour of South Africa some 45 years ago. The two events may be on a completely different scale. Ashe’s defiance of the global sport isolation of South Africa was a highly significant activist gesture against existing racial prejudice, while Willemse’s walk-out was less clear – at least at the time of writing. It seems to have had at least some measure of self-indulgent personality cultivation where one-upmanship is typical of many of these panels.

That the Willemse incident became a loud gnashing of teeth about sport transformation, racism and quotas, reflects a rather puzzling paradox – how little and how much we have moved on from the days of Arthur Ashe. At the centre of it all is that much vaunted, but highly mythical and misunderstood concept of merit.

Just as strange is the attention it receives in an arena where it is the least arbitrary: in sport. At the highest level in this field, merit is simply not an issue – you are either competitive or you fall out and Willemse is clearly one of the former.  If you don’t select the best by individual track record, you must be prepared to pay the price at the highest level; which in turn destroys aspirations to reach that level – at least for your own country. It’s clearly the surest road to mediocrity, and can only be addressed at grass roots where equal development opportunities supersede merit.

But the strangest perversion of all is the obsession with merit in sport, and the near absence of it in many far more important areas of society. I know this may resonate with some political rhetoric out there, but that too is based on a good measure of hypocrisy and no full understanding of the invidious, subtle and sometimes deliberate ways that merit criteria can be warped. They can as easily be used to entrench assumptions and prejudices as they can to ensure the best recruit. A self-evident sacrosanct principle of merit based appointments is that all the criteria have to be relevant to the task itself and the value that the task adds to society. Any other criteria not only detract from and dilute the merit principle, but place self-gain above the needs of society or customers.

But one can only invoke the merit argument when you have done everything possible to develop the broadest number of individuals to meet the standards required. Otherwise it will be unfair and seen to be unfair.

This gives some validity to affirmative action, which can be seen as a socially prescribed merit criterion but has arguably failed because it has focused virtually exclusively on demographic metrics, rather than the development of value creators. Mentoring and development demand much self-sacrifice by the mentors, mostly in first line and middle management. In my management consulting days, I regularly witnessed how intransigent and resentful these managers were of the task. Not only are we reaping the fruits of that behaviour today, but it has weakened the argument for merit based appointments in many sectors, adding some unnecessary fuel to “legacy” arguments. It has also largely poisoned the potential benefits of affirmative action, which is contrary to pure merit deployment in the longer run.

Despite the enormous hurdles in applying merit criteria to all tasks in society, it is an aspirational imperative that should rank as high as any of the most important provisions in our constitution. Few can argue that its opposites: nepotism, cronyism and patronage have become deep-seated and systemic and have led to disastrous corruption. This has to be rolled back at all levels. The only way to do so is through a serious rethink of our approach to merit based appointments, perhaps even a review of affirmative action itself.

To be sure, the most serious rot has been in government, starting with local government and the strong link between political party branches and member deployment into local authority executive positions. Rivalry there has become so intense that contenders will literally kill each other to secure appointments. How far are we from having political assassinations at national level? Mature democratic societies counter this inevitable politically expedient scourge by making a clear and unyielding distinction between legislative and executive positions, where the latter is drawn from any source, race or gender purely on merit. Political standards too can be lifted by applying merit criteria in nominations for positions.

Nepotism spreads like a virus. When one huge sector, such as government, is infected to the bone, then others respond with their own bias. We have all been either victims or beneficiaries of some form of nepotism or cronyism, accepting it as “part of life”. Some are born into privilege; others into poverty. In turn, inequalities and inequities are entrenched and by their very nature create a sense of unfairness which is the nemesis of merit based deployment of human contribution.

The case for merit based appointments in all of the working environment is self-evident and overwhelming. Yet it has been sadly neglected as a national principle. Service driven merit criteria will:
·        Substantially counter corruption.
·        Vastly improve service delivery, product quality, standards and competitiveness.
·        Optimise value creation, job creation and prosperity.
·        Enhance individual aspirations and self-development.
·        Create greater fair play in appointments.
·        Reduce disparaging of appointees.
·        Reduce accusations of discrimination in terms of race, gender and other.
·        Give self-confidence to and respect for incumbents.

Perhaps technology can come to the rescue. It should be possible with today’s advanced algorithms to design highly sophisticated and comprehensive aptitude testing, including brain scan imaging to detect the psychopaths and emotionally unstable. This should eliminate most, if not all, of the human prejudices in appointments.

Of course, if you don’t want to subject yourself to this dehumanised process, you can always become self-employed and take your contribution directly to the market, where merit is judged more rigorously. 

Monday, May 21, 2018

Curiosity feeds the cat.

The important role of this basic human trait to our well being.

What would you do if you saw a group of people gathered on a street corner? It was a question often asked of news reporting candidates. If they said they would walk away, they stood little chance of being employed because they lacked one of the basic and important traits of a journalist, which is passionate curiosity.

Tiring somewhat of all of the heavy stuff in current affairs, I have been reflecting on the days of my youth and some popular forms of barter at the time. I thought of my mother’s indignation with a shopkeeper offering her some Chappies bubble-gum instead of a penny in change. Of course, her refusal made me angry with her! One of the attractions of that messy chew was the “Did you know” trivia on the wrapper, and I used to save them to become a human Google to my friends.

That made me think of the power of curiosity, and my son who has developed the most irritating of habits. Whenever I ask him a question, he responds with a refrain: “Google is your friend.” It is a reminder of how much information is at our disposal, and how easy it is to access it. But beware the Googler in your midst. You could be having a casual conversation with a group of friends when one interrupts with: “You are wrong! I’ve just Googled it.” And a trivial conversation becomes a heated, acrimonious exchange.

In this era of information overload and the IT explosion, the initial assumption that it would lead to a much more informed society is now being questioned quite seriously. Some are arguing that much of the media that people have easy access to, distribute misinformation rather than authentic content. Even conventional news outlets are not immune. It is also argued that predilection confirms prejudices rather than challenging them. Still, one cannot deny that in a functional sense, we are much better off than a few decades ago. 

This all reflects on curiosity itself, which, as it turns outs, is a serious, albeit badly neglected science. Yet, it is self evidently one of the most important features of being human. It is the driving force behind knowledge, discovery, innovation, development and prosperity. It can be used or abused; encouraged or supressed and manipulated by malevolent forces that result in an entire nation, society or even a generation losing its head.

A key assumption of the science of curiosity is that it has the same framework that we apply to much of human behaviour: nature or nurture.  Astrophysicist and author, Mario Livio says “Curiosity is a fundamental human trait. Everyone is curious, but the object and degree of that curiosity is different depending on the person and the situation.” That difference is influenced by many factors: culture, gender, and individual circumstances and preferences. For instance, an unemployed homeless individual will be curious about very different things from those of a derivatives trader, or the guru on a mountain contemplating the meaning of life. I’m often appalled at the extent to which even well-educated and highly functional people simply avoid exposure to current affairs because they “find it too depressing”.

The key question is whether we understand curiosity enough, especially how it can be nurtured at the broadest level to encourage the acquisition of knowledge and discovery. Curiosity was at the centre of the success of post-war South Korea. I witnessed this in two Korean participants in a management development programme at the Oxford Centre for Management Studies in the mid-80’s. They had little understanding of English, and would record every word of the 6-8 hours lectures daily; play it back to an interpreter in Seoul; study the material, and join classes the following day as familiar with the material as any other participant.

Curiosity may be one of the most unappreciated and neglected attributes that we have in society. It is often discouraged by parents in children, yet one can only imagine how advanced they would be if you answered all of the more than 70 questions they ask daily. One should never discourage curiosity. Indeed it may be more appropriate to review not only all those areas where it is discouraged, but where it can be developed and nurtured. Do the formal structures and curricula of schools, for example, deliberately encourage curiosity in the subject being taught or do they simply “impose” learning on the learner?

I believe one of the most fruitful endeavours companies themselves can undertake is to encourage curiosity in the workplace. I have personal experience of how it is suppressed and often destroyed, especially at first line supervisory level. Knowledge and understanding of their working environment are the most empowering tools workers can be given – beyond simply having knowledge of the task itself. We are daily dealing with the toxic fruits of that neglect. I have witnessed too, how often that light can be switched on by demonstrating the direct link between the worker, the task and service to society through service to the customer. And then showing how value creation affects rewards for all. It is fully captured in the Common Purpose; Common Fate model and the Contribution Accounting Methodology.

In a broader sense and at societal level, we clearly have to become more curious about curiosity. Unless you are a cat, of course.

Monday, May 7, 2018

The corporate cauldron.

Reflecting on the wider issues of the Steinhoff scandal.

If there is one conversation that I would love to hear, it is that between Milton Friedman and Mervyn King. As a Nobel Prize winning economist and adviser to American President Ronald Reagan, Friedman strongly influenced the course of economics and the “greed is good” era of the 80’s; arguing that the sole purpose of enterprise was to create value for shareholders. South Africa’s governance architect, Mervyn King, on the other hand has taken a broader view in King IV, arguing that business has to create value for all. But both would find common ground on the need for regulation, differing only on what and how.

Regulation alone can never prevent corporate malfeasance. All it can really do is limit it. But the problem with that is that the larger the organisation involved, the greater the potential harm. It’s a bit like having basic rules of the road apply to all drivers, but the mistake of a car driver will seldom have the same impact as the mistake of a bus driver carrying many passengers. Our own Steinhoff scandal is one example, but globally we have seen misconduct by large organisations causing havoc with severe socio-economic implications, including a global meltdown.

There can be little doubt that concentration of economic power, of which big business is a key feature, is at the centre of a shift in economic thinking. I say this not only on the strength of empirical and anecdotal evidence, but also on intuition based on years of exposure in this field.  Developments such as the attack on the establishment, state capture, national isolationism, trade wars, pay and wealth disparities, our own populist hysteria around “monopoly capital”, exclusivity, increasing governance regulation, the effects of technology, environmental concerns and growing discomfort with globalisation, can all be traced back to a greater or lesser extent to financialisation, capital concentration and the size of multi-national corporations.

It is also at the centre of the evolvement of economic ideology, captured in this article: An age of economic soul-searching. It is perhaps supreme irony that the masters behind the ideological divide between capitalism and Marxist socialism – Adam Smith and Karl Marx found common ground in the threat of big business and mercantile interests charting our economic destiny. 

In the end, like the fallible bus driver, these large corporations are headed by fallible men and women whose task is compounded by trying to reconcile the broad interests of society with the narrow, often short-term interests of shareholders rewarding executive greed. They are very often in conflict, and it is a disingenuous over-simplification to argue that regulation can bring the two together. We had an inkling of this conundrum in Christo Wiese’s testimony to the Steinhoff Parliamentary enquiry, in which he highlighted the complexity of a multi-national corporation; where working in different countries with different legislative requirements created many loopholes for misconduct. Even more revealing was the testimony of JSE CEO, Nicky Newton-King that it was standard business practice for large corporations to maximise capital and tax efficiencies. I could not tell whether it was simply a statement of fact or one suggesting censure. But the two together point to the heart of the problem.

The standard defence of big business, corporates, large holding companies, and mergers and acquisitions mostly falls back on capital efficiency and the hunger for capital. In turn that is often distilled into a simple formula of the cost of capital. That assumption about capital formation is far too narrow and flawed both in terms of structure and motive. Human beings are simply not that one dimensional and one of the biggest failings of economic theory is that it tries to reduce us all to predictable, measureable abstracts. What has become clear however, is that the “invisible hand” does not work very well when that hand is very large, powerful and driven primarily by self-gain.

This is a vast subject and difficult to cover in an article of this nature. The last few decades have seen a significant shift in the debate against big business.  Flying on the fuel of capital efficiency is no longer seen as valid, and it is difficult to find many arguments in favour of bigness.

Robert Atkinson, head of a Washington research group, is one champion of corporate consolidation, on the grounds that big businesses create more jobs, pay better wages, and — by some metrics — comply better with environmental and workplace laws. He goes further in slamming the enthusiasm for small business whose only value, he argues, is as incubator for large businesses, especially if they do so with disruptive technology that makes the economy overall more efficient. He does have a point. Labour, for example, contrary to their trashing of “monopoly capital”, would find it difficult to extort their demands from a widely fragmented business sector.

Of the many criticisms of big business, one of the most coherent and well researched I have read is that of two Johannesburg academics: Pamela Mondliwa and Simon Roberts. They wrote in this Moneyweb article: “Economic concentration opens the door to market power being exercised in a way that undermines productivity. This can be seen, for instance, in value chains where downstream players have to pay high prices for inputs, with dire consequences for their competitiveness. The knock on effect is that economic growth slows down and employment creation is affected if downstream industries are labour absorbing.”

We too often seek answers in laws and coercion – until we are buried in police and have overflowing jails. And then the miscreants always seem to be one step ahead. We have to construct a different understanding of and relationship with capital in the economy. While Friedman’s shareholder-value creed may have been the “dumbest idea ever”, King’s “creating value for all” may become the “smartest idea ever.”  All that is needed is for the three contributors to wealth creation -- labour, capital and state – to think and behave entrepreneurially and become customer driven in a common purpose and common fate context. 

It’s not going to require a huge shift, but it certainly will create one.

Monday, April 23, 2018

The land madness.

Our most divisive issue is also the most misunderstood and incoherent.

As a young boy, I would often take long, lonely walks in the veld of the Free State Gold Fields: barefoot with hardened soles impervious to sharp pebbles and blades of dry grass; but still intuitively sensitive to the energy and magnetism of the virgin earth; the large promise of nature; flat and wide open spaces; of freedom and the mystery of what lay beyond the horizon. My fantasy would often expand to owning all of what I could see, giving me a sense of power, status, security and wealth.

Those two dimensions: the nomad and the settler; the romantic and the mercenary; and the communal and the territorial, are powerful primal forces in our relationship with land. They are often contradictory. They are also, for the most part, mythical, emotive and irrational. Yet they strongly influence our discourse about land, plunging it into an incoherent mess. A greater, and more explosive dimension is added by a wider territorial framing, embellished by the concepts of people and their homeland; tribe and territory; volk and vaderland; a place and a home; of flags and anthems; ancestry; culture; tradition; belonging and connection. These are strong enough to awaken the warrior in pacifist chests, adding volume to calls to action, and creating a powerful drug to be peddled by populist politicians.

It is small wonder that our debate about land, perhaps the most divisive issue in South Africa today, is trapped in an echo chamber of contradictions, conflicting statistics, confusing rhetoric and ideological warfare. For this column I’m not going to confront the issue some have raised that the proposed amendments to the Constitution have a much broader and more invidious implication of expropriation of all property: from your child’s favourite teddy bear to intellectual property. I don’t think that it is remotely possible and will bring down the entire economic system. In any case, the government is quite welcome to nationalise my tortured imperfect thoughts.

Our understanding and hence our whole policy approach to land transformation could be way off the mark. It has mostly been distilled into two ill-fitting themes – transfer of agricultural land and transfer of wealth. The first dominates the discourse and is perhaps the most incoherent of all, based not only on poor statistics and false assumptions around who owns what (see this article by the IRR challenging the 4% black land ownership), but also whether agricultural land is the real issue at all among the impoverished and disadvantaged.

All empirical evidence shows differently. Most of the land invasions and unrest have not been on farms, but in urban areas – people wanting homes and escaping cramped, poorly serviced living conditions in exploding townships and settlements. Their inability to achieve that is far more inflammable, pitching red berets against Red Ants in a fervour fuelled by anger, hopelessness and despair. I’m convinced that addressing that in land restitution will defuse most of the emotions far quicker and easier than the complicated transfer of farms.

It also makes much more sense in the distribution of wealth. Far more wealth is tied up in residential property than in farming or commerce and industry. It gives individuals an asset foothold and promotes inclusiveness in the economy. But that in turn needs a clear approach to private ownership and title. The Freedom Front Plus may have valid concerns that the government seems intent on expropriating land for the state and not for private ownership. The latter would certainly be at odds with the EFF’s “socialist” stance, which then implies opportunism on their part in using individual aspirations for home ownership to enrich the state. Surprising to many perhaps, blacks own far more first homes in South Africa than whites. According to an observation by economist Mike Schussler recently posted on social media: “Africans own 7,66 million houses (1st houses only) and Whites own 730 000. In total 56% of the value of 1st houses belong to Africans. Only 33% belong to the white population group”.

One cannot be dogmatic about state and communal ownership versus private ownership. There are too many permutations of ownership in different countries that invalidate ideological prescription. What is useful, however, is to understand that state ownership (ownership by all) is equal to ownership by none (not one.) It is then also imperative to have a clear understanding that government in its various forms: national, local and SOE’s are not the state per se but agents of the state. In that they cannot represent “all” and indeed too often act on behalf of a few, including themselves.

Compounding the entire discourse further and much deeper, is the macroeconomic positioning of land as a “factor of production” next to labour and capital. It’s perhaps the most essential perspective of all, but it is rife with complexity.  Land for commercial and industrial use, for example, is more appropriately classified as capital as a factor of production. Land has virtually disappeared from economic theory although undeniably still impacts on GDP. (See article here.) The constantly changing structure of macroeconomics through technology and human evolvement has meant that the role of land as a factor of production has become highly flexible and incalculable; in some cases even irrelevant. A reflection of this is the many small countries with little or no natural resources that are highly prosperous; and conversely, the many countries with abundant land and minerals, who are relatively poor.

I am aware that this article may well have raised far more questions than answers. Perhaps that’s the point. But what should be obvious to all is that our discourse on land is juvenile, irrational and tragically behind the times. It is anchored in falsehoods, flawed assumptions, and volatile emotionalism.

What madness would allow it to tear us apart?

Monday, April 9, 2018

Stakeholder capitalism.

Can South Africa create a fresh economic approach to growth and inclusivity?

Part of the enthusiasm of a “new dawn” in South Africa is the belief that a closer partnership can be established between labour, capital and state. It has a firm Ramaphosa stamp to it and is key to the President’s desire to galvanise the nation on a different business friendly path of cohesion, inclusivity and growth.

In this he has put renewed emphasis on the CEO initiative and the National Economic Development and Labour Council (NEDLAC) as “unique institutions” in bringing the three economic estates together and that are envied by many other nations. Sceptics could argue that most nations do not need them and have long since evolved beyond 19th century ideological divisions captured in theories of “capitalism” and “socialism” that still mesmerise many in this country. (See article: An age of economic soul searching here.)

Only a political or organisational theorist could come up with a term such as “stakeholder capitalism”. It’s counter-intuitive to the very definition of capitalism and borders on being an oxymoron. The classic definition of capitalism assumes the supremacy of ownership over “stakeholders”. Perhaps it is time to move beyond the debilitating semantics of capitalism and socialism. There are so many permutations of both in different settings that neither exists in its pure form. Yet the words themselves ignite knee jerk responses based on stubbornly nurtured prejudices.

Associative meaning has a subtle way of creating unshakeable intuitive prejudice – to the extent that many baby names are banned in some countries with some nations even having a pre-approved list. Have the words “capitalism and socialism” not reached that point? And perhaps with them other concoctions such as “communism”, “neo-liberalism”, “social capitalism” and “stakeholder capitalism”. There is, of course, much value in the inclusive stakeholder approach, but to achieve that, one simply has to let go of much of what is conventional capitalism – including the purpose of business and the accounting formats -- in favour of a common purpose; common fate approach.

It will also need a clearer distinction between capitalism and other concepts such as “free enterprise”, “free markets” and even notions such as innovation, entrepreneurship, and prosperity. Without that distinction, those laudable, more palatable and easily defended concepts become tainted with many negative connotations associated with the name of capitalism. It is said to be in a crisis. Its face has been called “unacceptable”. It’s been slandered as “ugly”. It’s even been demeaned as having no face at all. It solicits ill-informed responses from populist leaders that inflame without enlightening: much heat without light. Included in its defence, and entrenched by the word itself, are questionable assumptions about what accounts for its success.

The first is that human beings are singularly driven by their immediate material self-interest and profit. That is a silly generalisation. Human beings are far more complex than that. Free enterprise supports a different understanding, as pronounced by Adam Smith (See here). Without a good measure of benevolent behaviour we attract the very nemesis of free enterprise: more rules, regulations, laws, government controls and even coerced empathy in the form of a system mildly called socialism. Which prompts me to burst another assumption bubble: because homo economicus is a social being rather than simply a functional entity in one or other construct, it does not support the radical socialist argument of ownership by all – or ownership by none.

Interestingly, while capitalism is blindly married to the material self-gain driver, free enterprise does not concern itself with motive: as long as it is led by the fundamental rule that wealth is the result of creating something of tangible value for others or being useful to fellow human beings. In that it has a fundamental benevolent underpinning. Free enterprise is remarkably resilient and accommodating, and does not attract or even need the fanatical posturing that advocates either for or against often adopt in an understandable blind prejudice. Even in its aversion to socialism and the latter’s implication of bigger government at the expense of private initiative, it can accommodate permutations that fly in the teeth of many arguments.

Capitalism vehemently champions my old pet objection: the profit motive and profit maximisation as the ultimate driver of success and prosperity. I do not intend repeating my challenge to this claim as simply being false. What is worth repeating is the outrageous and demeaning assumption it makes about the motives of entrepreneurial giants who have made a marked and lasting impact on humankind. The social miracle of free enterprise is its ability to forge cohesion and a sense of common purpose between stakeholders. That obviously implies not trying to rank one above the other, and certainly not encouraging the exploitation by one of the other.

That is implied in the name “capitalism” itself. It assumes capital supremacy in all things, and the pursuit of its formation and growth is a precursor to all kinds of wonderful stuff. Free enterprise accommodates, indeed proposes, a different view: that enterprise leads and capital follows. Capital is indeed a critical enabler. But so are skills and labour, and government services and infra-structure. But the ultimate enabler is demand.

The results of a narrow and exclusive view on the role of capital formation have been devastating. We have not seen significant capital formation in organic growth through multiples of mom-and- pop ventures, small and medium enterprise growth, and growing middle classes; but in mergers, acquisitions, financial services, and financial or property assets. Control of capital, not necessarily ownership, has increasingly been concentrated in the hands of the few, who in turn, some have argued, have “captured” many free enterprise activities, parts of government, and the most invidious of all: banking and money creation.

The term “monopoly capital” may have no logical basis, but it’s simply a reflection of trying to find, or even create a demon that “will be confronted” by voting for some populist megalomaniac. The concentration of control over the means of production, either by government or a few plutocrats is the antithesis of free enterprise. The term itself is a P.R nightmare. Even in its origins it was demonised by novelist Thackeray to represent an exploitive landlord. It never featured in Adam Smith’s writings, but was repeatedly used by Karl Marx. So it was coined by its enemies.

I have no doubt opened the gates of wrath of many readers. And that is the essence of the problem, emotive responses linked to a name. You will unlikely find these observations in economic textbooks. The reason is simple: for the most part I have been dealing with perceptions, which most textbooks and academics ignore. At the same time they fail to recognise a fundamental truth: that perceptions create reality.

The one thing that globalisation has shown is that there is no one-size-fits all best economic system. All countries have their own uniqueness that often defy ideological prescriptions. Each has to evolve in its own way.

If we want to create something fresh, let’s not muddy it with dogmatic assumptions.