Tuesday, October 27, 2015

When business soars

A salute to the real spirit of free enterprise


It’s become quite fashionable to bash business. This is not only because of the often irrational adherence to, and in some cases the revival of outdated ideologies, but the perceived transgressions of companies in customer service, approach to labour, and often anti-social behaviour such as price and supply collusion, corruption, environmental pollution and many others. As we saw with the recent Volkswagen emissions scandal, even the most trusted brands are capable of breaking that trust.

Then there’s the business environment itself, which has changed dramatically in the past four decades to become increasingly shorter term in thinking; profit maximising; shareholder value focused; inordinate and arguably unjustifiable executive reward systems; income disparities and inequality; declining labour participation and centralisation and growth of global capital and financial instruments.

It must be difficult to throw the business laundry in this murky water and expect it to emerge unstained. Those are the things that pre-occupy popular news headlines. They also completely overwhelm and distort the true spirit of free enterprise. But occasionally some do break the mould and serve as a reminder what business is about; that they indeed come from the real and original mould.

That original mould is confusing for ideologists who claim that they have been produced by a particular economic system or theory. In fact, for the most part they stand apart from systems and yet are crucial to them. It also leads to some comical assumptions by organisational theorists who believe that these majestic giants can be replicated through structure, strategic templates and reward systems pandering to the material self-gain of those involved.

There are three forces that account for entrepreneurial genius and they seldom exist in one person.


This is the real creative power of humanity. It can happen at any level, sometimes by accident and sometimes dating back years, even centuries, More often than not discoveries come from the unrecognised, unsung, often unrewarded and yet the true heroes of innovation – scientists, researchers, backroom developers and even the average Joe or Jane. Discoveries are independent of systems or social constructs. They are nurtured through curiosity, and reinforced by education and knowledge.


This takes discovery and converts it into practical application. It changes form into meaning. Again, this is aloof to economic systems and is also the outcome of curiosity as well as the core of all successful and sustainable ventures – usefulness to others.


This is crucial to the sustainability, development and growth of what has been discovered and invented. Without commercialisation the first two will either die or lie dormant. Its critical contribution is in attracting resources such as skills, capital and labour, ensuring a sustainable equilibrium in their distribution in production.

It is clear that economic systems play a critical role in this phase which can only be nurtured and sustained in an environment of individual freedom guided by the forces of legitimate transaction of supply, demand, price and competition. But it also has a few flaws.

One is the belief that the system alone creates the whole majestic process, to the extent of attributing it exclusively to the application and rewarding of capital, sometimes at the expense of other contributors. In the process, weight is giving to institutionalised abstracts such as capital or labour, as if they have a singular thought, motive or predictable behaviour. In truth they are an imperfect abstract of a multiplicity of constituent forces.

Another is the inordinate recognition both publically and materially, that it gives to a specific person or people involved in this phase and failing to recognise fully other contributors. Yet, one has to concede that true entrepreneurial flair lies largely in commercialisation.

The best example we have of this process has been space exploration. The first discovery that led ultimately to propulsion in space was the use of steam in the last century AD and then by the accidental use of gun-powder in China in the first century. Many steps followed, with one of the more significant being the development of the V2 rocket in Germany during the 2nd World War. Then came the “space race” which saw the Soviet Union launching first a satellite and then a manned craft into orbit, and later came America’s first moon landing. The development of space exploration up to that point was clearly independent of systems and regimes – from individual experimentation to large scale government involvement.

Today we are still in the early stages of full commercialisation of space activity, primarily through the use of satellite communication and exploring space travel. There is little doubt that private enterprise is going to play a leading role in the final conquest of space, especially with the entrepreneurial genius of people like Elon Musk.

The most fascinating part of all is what motivates the great minds and actors that have made such a difference to our lives. Our singular obsession with capital, specifically the profit motive, denigrates and demeans these contributions. It taints them with a brush of material self-gain which simply does not give credit to the real essence of their achievements – their ability to look way beyond self-gain, often to the extent of ignoring the accounting spreadsheets. (See what motivates Elon Musk here and others here)

Yet we try and replicate that genius in a collective called companies or “business”, subjecting them to a completely different, arguably very narrow, focus of return on capital. It leads to the kind of confusion the huge battery of organisational theorists now display – trying to define “purpose” and “profit” as separate, and yet insisting that they are the same; purpose simply being a means to a profit end. This eventually leads to semantic gobbledygook. (For latest example see Moneyweb article here).

Ultimately you can never buy entrepreneurial genius, only reward it.

Tuesday, October 13, 2015

Why economists often get it wrong

When theories they follow no longer work in practice

The recent article by Moneyweb columnist, Magnus Heystek, challenging the reliability of predictions by rank and file economists, draws attention to the tenuous basis on which many forecasts rely. It was something of an offhand comment on social media by one of the more outspoken and challenging members of the profession, Mike Schussler, that points to a much deeper malaise – the divergence between conventional theory and practical experience. This indicates that it is not so much that economists are often getting it wrong, but that the assumptions they make are based on economic laws that may no longer hold true.

At the root of the problem is the massive accumulation of investment funds coupled with a growing capacity to generate these funds incestuously. It does so through large scale leveraging and speculation with a never-ending supply of money through debt. In the process it has rewritten a very old classic economic law that enterprise, or the production of goods and services, leads and capital follows. In essence that law means that enterprise creates value which in turn collateralises debt and ultimately redeems it. This holds true even for Governments who have to rely on tax income from enterprise to fund and redeem their debt.

Latest figures show that global debt stands at some $200 trillion. That is nearly 3 times gross world product (or the sum of national GDP’s), and $56 trillion more than it was before the financial crisis in 2007. In theory, debt should expand money supply, leading to increased consumption and demand, which boosts production and in turn increases incomes of workers and returns for investors. Hi-ho, hi-ho, it’s off to market they all go to spend for even more prosperity. That’s classic “trickle down” stuff that has been the basis of convincing arguments for capitalism. Indeed those that scoff at concerns about current levels of global debt rely largely on an assumption that in time that dynamic will kick in and we will see a return to the old and real world of value creation responding to consumer demand to gradually redeem that debt.

They point to the level of massive debt after the war, and how the world was able to restore equilibrium in subsequent years. Of course, what is ignored in that assumption is that reconstruction after wars not only needs massive debt expansion but also leads to considerably enhanced productive economic activity through repairs, renewal and replacement of destroyed property and factories. Combined with giant leaps in technology, it is virtually guaranteed to introduce an era of abundance.

But this time it is very different. Debt and low interest rates have not fuelled consumer demand which in turn would encourage production and higher economic growth. For that reason it has also not encouraged investment in productive capacity, with corporate reserves globally at high levels. In South Africa alone latest estimates put company savings at a staggering R600 billion. This is a fundamental break from conventional economic modelling, something which policy makers refuse to acknowledge with successive bouts of quantitative easing first in Japan decades ago, then the United States and now Europe. Today, there is an inconsistent combination of a system flooded with low cost money, low interest rates, low inflation, and low growth, causing untenable imbalances with which most readers will be familiar.

It is common knowledge that an inordinate amount of money has been flowing into speculative instruments, including high-end property, stocks, bonds and derivatives. Latest estimates put the last mentioned alone at some 20 times greater than Gross World product. The feverish speculation in shares is reflected in the U.S. where trading of securities in a year is nearly 130 times the value of underlying IPO’s and secondary offerings -- $32trn to $250bn.

This has fundamentally changed the relationship between finance and real value creation. In an earlier Moneyweb article I questioned whether financial services had not become a parasitic monster. It is no longer “fringe” or outrageous to question not only whether the sector adds value, but whether it may indeed be destroying it. The champions of speculation, derivatives, and trading in financial instruments have always argued that these activities “smooth” market adjustments.

This holds true only as long as the conventional model of enterprise leading and finance following is observed. When the roles are switched and the tail wags the dog you no longer have a smoothening effect, but the opposite. This is especially true when that tail is manipulated by anticipation, expectation, rumour and greed of a bunch of skittish, sometimes even cavalier actors. According to speculative theory one should never have enduring states of overbought or oversold, based on the underlying fundamentals.

It is not that those fundamentals are completely ignored. It is just that they are seldom properly assessed, given sufficient weight and can sometimes even be swayed and influenced by the speculation itself to become self-fulfilling prophecies. In these circumstances one cannot entirely blame economists for preferring a consensus view. Of course we should admire those that don’t; those that stick their necks out. There are few enough of them and it is indeed a great pity to see their heads blown off for breaking ranks and trying to emerge from the trenches of consensus or expedience.

But even when they do, one can only wonder how they cope with so many irrational variables. It’s a bit like trying to make sense of a conversation in a lunatic asylum.