Saturday, December 3, 2016

A matter of TLC.

How the essence of our humanity also has the seed of national contentment.

She was weeping on TV news when she recounted the traumatic events of November the 16th. Her name is Thea. She is my sister. My trachea cramped shut as she made all watching the news clip, relive that experience with her: when an armed gang of six, having hi-jacked an ambulance at Eikenhof in Gauteng, tried to break into her home for abandoned children, taking two security guards hostage and kidnapping three of her boys. This within a week of having a gun slammed into her mouth and an amount of cash held for repairs to a water system, being stolen.

Only those that know Thea well, can appreciate the tight maternal bond that she has for all of her 60 adopted and fostered children, equal in intensity and care to that for her own blood offspring. All of them came to her haven – The Love of Christ Children’s Home -- at birth, abandoned and left to die. A total of 800 children have been adopted by others, but a good number have stayed on into early adulthood and Thea has adopted 19 herself.

The most remarkable thing about her is the huge reservoir of indiscriminate empathy she has for her fellow human beings. In an interchange within hours of the trauma, her first words were to ask after the condition of my life partner, who had undergone a hip operation. A week earlier, she had even offered to come and help if we needed her. One simply has to marvel at such a capacity to form so many deeply sincere attachments with others: attachments that inevitably bring much pain – constantly and repetitively.

Yet there is an indefinable power in that state, which places self-interest secondary to others and loses those debilitating and self-destructive egocentricities. Perhaps it is so elusive because it is counter-intuitive to everything we are taught about transaction, about our natural, instinctive state, and the self-gain motive as a key ingredient for success, or the “what’s-in-it-for-me” approach to all interactions. Relationships founded on those criteria will always be strained and distrustful. And we are only beginning to understand that relationships themselves are at the heart of social accord or discord itself.

If the pursuit of happiness, or social contentment is a fundamental state that all societies aspire to; that all systems, policies, institutions and social constructs should have as a primary aim, we are clearly sadly lacking in much of the world, and particularly at home. All of our actions are mostly geared to improving the material well-being of people on the assumption that it automatically creates individual life satisfaction. At the same time we create unintended consequences not only on economic balances, but on expectations. These can have a far greater negative impact on life satisfaction than the measures alone could ever hope to achieve.

It is a subject that has been raised by many, including myself (see article here), and new research and surveys are constantly being added to the many that already exist. There has been a clear shift from the Easterlin Paradox of decades ago which denied the link between individual happiness and prosperity. Today, the latter is not so easily discounted, although one explanation could be the extent to which society has become more conditioned to assume that link through advertising and more intensive consumerism. But the question remains whether national prosperity guarantees life satisfaction and poverty guarantees national misery. Or simply, does money buy happiness? And are national policies too skewed towards reliance on prosperity?

This year’s United Nations World Happiness report confirms that despite some correlation, there is no absolute link between prosperity and happiness. While socialist Nordic countries, with Denmark at the top, still feature strongly, others, such a Costa Rica and Puerto Rico, rank well above much wealthier countries. South Africa ranks 116th. On the strength of the report, the World Economic forum noted: “In the European study, well-being was seen to consist of three distinct elements: 1) life satisfaction, 2) the presence of positive feelings and absence of negative feelings, and 3) “eudaimonics”, the sense that one’s life has meaning.”

These studies will remain less convincing until one can determine a broad common denominator for contentment at an individual level. One comprehensive 78 years-long study by Harvard (see video here) came to a simple yet profound conclusion that good relationships keep us healthier and happier. As Research Director, Robert Waldinger put it: “People who are socially connected to family, friends, and community are happier, physically healthier and live longer.” This cuts right across status, wealth, and living circumstances.

Clearly we would do far better in lifting national contentment by focusing on fostering good relationships, rather than by an exclusive obsession with material well-being. That’s not to deny the latter’s importance, particularly where there is great inequality, but an absence of the former will not only render these efforts useless, but indeed could even make them more divisive and counterproductive. In the economic arena specifically, we have tragically come to view that construct as a functional one, and not a social one. On top of that, transaction itself, the most common form of interaction between members of society, is seen primarily as a means of extraction rather than contribution.

If sound relationships have to extend from the personal to the communal and social, then that understanding has to change. It is one mainly of perception, and not a huge leap to reverse. In the nature of things dating back centuries, supply exists because it serves demand, and transaction gives expression to the clich̩ that business is nothing more than people serving people Рthrough our employment, tasks, work and companies.

In that understanding it adds an essential ingredient that underpins personal happiness – a sense of meaning. 

Friday, October 28, 2016

The goose and the turkey

A big bird view of an economy and government budgets.

Each time the fiscus engages in a major exercise like a medium term budget, or the annual budget itself, I am prompted to mix some metaphors involving turkeys and geese. They present a perfect picture of how the government, perhaps all of us, view the economy.

Years ago, if you were called a turkey, it could mean anything from being as dumb as they come, to being rather silly. But that’s probably a generational thing, one that would raise the ire of a large number of people whose ancestors created the Ottoman Empire. Today, the overwhelming image of the turkey is one of a rather noisy, ungainly, ugly creature whose sole purpose to humanity is to be fattened for slaughter and fill the plates of a festive table. “Goose” will be remembered by the boykies from Brakpan as a possessive term for female partners. Geese also may have similarly assigned attributes to turkeys, but are not as popular for the pot, have sought after plumage, and of course, are known, according to Aesop’s fables, to occasionally lay golden eggs.

Those rather clumsily concocted images – one of a creature fattened for slaughter, and the other for protection, preservation and nurturing the longevity of golden egg laying, are a fitting analogy for an approach to an economy. By their very nature, governments tend to view all activities in the economy as turkeys, sometimes slaughtering an entire rafter for a massive binge for a few years, at other times struggling to keep them protected from predators from both inside and outside their enclosure. South African Finance Minister, Pravin Gordhan somehow reminds me of a solitary pen protector. But I’m still not sure whether he sees them as turkeys or geese. At the very least, when his income tax coffers are mostly filled by only 10% of the population, from which the rest must feed, he must be painfully aware that he is starting to cull his breeding stock.

But who can blame governments? Is it not a general view we all have of economies and transaction itself -- that they are there for plundering and for maximum self-gain in the shortest time possible? That all people and things – from a close relative to a wild flower in Namaqualand, are there for exploitation and extraction? In behaving that way, we should not be surprised if we feel that way: extracted and exploited – from the double digit increases in medical aid tariffs, toilet roll prices and shoddy service.

To temper that, and to try and ensure some balance in the forces that we ourselves  unleash through this twisted understanding of what makes us human, we create governments without having much assurance, apart from a very imperfect franchise system and some watchdog institutions, that they will not become even more predatory than private initiative and free transaction.

That leads to the choice that has occupied great minds for centuries, as well as conflict ridden streets, legislative benches, political party think-tanks and even war trenches. It is a question I sometimes ask my fundamentalist socialists: “who do you trust more to do the right thing? Governments or business?”

I don’t really need a response. Globally, private enterprise by and large is trusted more than government. In this country the gap is 16% trust in government and 60% trust in business. (See article here). It brings to mind a bit of banter I had with a former Finance Minister, in which I argued that in a utopian economy, he would not have a job.

Of course, that is purist mischief. The real world is overwhelmed by so many blemishes, pressures, fault lines, misbehaviours and imbalances, that it renders useless sound, intuitive and experiential knowledge. One of the unfortunate side-effects of this seemingly endless power juggling between state and business, is that gestures like the business leadership support for Gordhan ahead of the mini-budget, is that it is muted, if not ironic for the largest part of voting population – where business by and large is still seen as the “enemy” in the populist rhetoric of the day.

Which brings me to part 2 of my untold story – a story that in itself should go a long way to restoring business credibility and certainly relieve the facile call by so many to take, take, take from the capitalist cow. The first part reminded readers of the benevolent underpinning of private enterprise in providing society with the goods and services that they need, and under long established, ancient rules of legitimate transaction. Therein they add tangible and measureable value which translates into wealth creation. The fact that this process has mostly misguidedly, perhaps even falsely, been defended under a “profit” or self-gain motive, has done irreparable harm to that noble status. It supports a simple resentful refrain that if you are about taking, then I have a right to take from you! And I’ll do it through my big Boet come budget time.

But the indisputable fact demonstrated by centuries of experimentation, is that private enterprise is far better and more efficient in creating wealth than governments are. What is more hotly disputed is whether they are equally efficient at wealth distribution. Perhaps not as equitably as many would like, but still pretty well within the fundamental logic that the primary aim of sensible distribution is to support wealth creation itself. In that it has to meet the legitimate expectations of ALL of the stakeholders, especially the direct contributors of labour, capital and state; and ensure their continued contribution.

This becomes crystal clear when company figures are presented as a Contribution Account, and in my consulting days, in presenting these figures in company workshops, I was always amazed at the attitudinal shift it could effect. These workshops have now been converted into off-the-shelf transferable products that can be viewed here. In the dire need for stakeholder cohesion, and a broader understanding of this precious construct we have, it is unforgiveable to maintain such a narrow view of business that attracts an unbearable burden, whether in enmity, perceptions, tax or regulations. The tragedy is that business mostly has itself to blame.

The essence of part two of the untold story is that in the contribution account itself, demonstrated by years of working with it, and at many sites, labour and state (or government) together derive far greater benefit than capital or shareholders. Unpacking the detail each of these categories portrays a splendid narrative of enablement and empowerment.  Perhaps the fiscus should add this format, extrapolated into national accounts, into their research.

Along with many South Africans, I fear that the geese may have wedged their way to more promising pastures. They can fly you see. Turkeys not so well.

Will those that remain also take flight, with global credit ratings leading the wedge? 

Sunday, October 16, 2016

Clash of generations.

Can business be a greater bridge between hopelessness and promise?

“Every generation blames the one before.”

This opening line of that haunting hit song: “The living years”, by Mike and the Mechanics, and the full lyrics (see here) have a reflective message for all generations, both at an individual and collective level. They assume even deeper meaning, if you add another observation: that every generation hopes to leave the world a better place.

These two pronouncements reflect an ongoing struggle that often leaves the outgoing generation bewildered and deeply saddened, and the new agitated and belligerent.

It is the perpetual struggle of the living years. Rarely do the two mind-sets meet and then only when they face a combined threat to their existence and freedom such as a war or oppression: a reflection of my father’s and my youth respectively. In the absence of these or a state of uncommon national contentment, the young wage war on the old, mostly at a personal level, but often at a societal level. And those of the ageing who have entered the last of their living years, but can remember well their own troubled selves reborn in today’s student stone throwers, try to have their faltering voices heard above the sirens and shouts; when, as the song says: “all of their frustrations, come beating at your door.”

“You don’t know!” we say. “No-one possesses the ultimate truth. No noble end can justify malevolent militancy. Be patient. Your cause is being driven by a third force. You are not being heard because you cannot speak with one coherent voice. You create power vacuums that are filled by two-day hot head wonders intent on spectacle more than compromise. Above all, as much as we all fail to recognize it in a hormone active state, the struggle is as much with the self as it is with others.”

At the same time, we of the outgoing generation have to recognise that we are leaving a world of intolerable imbalances and fault lines. For too large a number, it is a world of little hope, of uncertainty, robbed of aspirational promise, of grudge inducing inequalities and of insecurity. It is fertile ground for dissension, frustration and anger and it fuels extremism and fanatical activism. It will force evolution into revolution. In that, the cause is often not the real issue and can morph from one to another. Being part of an angry mob, whether 25% or less of the whole, is cause enough for a good number and gives a critical mass to create social trauma.

The turmoil for many of the outgoing generation is multiplied by their own internal struggle, by posing at a personal level the same question: whether they are going to leave the world a better place in their sphere of influence. It’s a haunting self-prosecution in confronting mortality; one that imposes a burden of unfinished business; of repairing broken relationships; creating some modest legacy beyond material things for which much has been sacrificed but then abandoned to an estate in the forlorn hope of making up for past neglect, or receiving recognition and gratitude when one is past caring. I have witnessed that many times – in some even to the point of not being able to accept that their time has come and plunging their final living years, months, days and hours into misery.

In sharing my own, I am fully aware that I might be inappropriately narrow and testing the limits of your forbearance in what could be seen as self-indulgence. But at one or other point popular assumptions and the discourse in organisational practice have to change to become a valid and significant contributor to easing tensions.

I have always had a leaning towards interrogating context rather than content. It made me acutely aware of how the critical role of business as provider not only of goods and services, but of purpose and meaning, had been degraded and smeared by atrocious business behaviour, populist rhetoric, perceptions and assumptions. But most of all, by an obsession with reward and extraction rather than contribution. It has largely neutered business as a credible bridge between hopelessness and promise – a bridge that could remove some of the wind from the sails of dissent. I have unshakeable faith that business can reclaim that position and all I have written, done and am still doing has had that as its aim.

That path led to the formulation of an authoritatively endorsed argument, including testimony by retired retailer, Raymond Ackerman, that it is “the way of the future; the whisper of tomorrow”.  (See endorsements here.) The premise is simply that the fundamental underpinning of sustainable business is service, benevolence, empathy and making a difference to others. Acute awareness of the powerful interplay between behaviour and accounting, as well as the need to preserve sound business principles, prompted a questioning of the narrow nature of the final business accounts, the struggle for alternatives and the neglect of a long established format of value-added accounting, or contribution accounting.

It is not complex or even new. It is perhaps more appropriately called “accounting for contribution”. It is about being and doing, not just counting. Above all, it binds behaviour and measurements in a cohesive, harmonious and virtuous circle for sustainable growth. All of this has been captured in books, articles, workshops, interviews and speeches. But what has been missing is conversion of theory into broader application: the creation and widening of a comprehensive methodology embracing already proven application in areas such as employee awareness, involvement, communication, financial transparency, and service orientation; to overall strategy, reward systems and entrepreneurial pursuit.

This has been developed in the past few months into what I have called the Contribution Accounting Methodology, or CAM (see here). Above all, to ensure broader traction, the content had to be made highly transferable and break from the standard mould of high cost exclusivity. That has been my unfinished business. It comes at a time when globally there has been much soul searching about the conventional role of business in society.

While no-one, least of all myself, possesses the ultimate truth, evolution is as much about sharing ideas as it is about experimenting with the new.

Sunday, October 2, 2016

The untold story

Why company reporting fails to counter the assault on free enterprise.

We all have memories that make us cringe in embarrassment. One of mine is when I had to cut short a talk to a group of about 50 accountants of a large paper company, and in my opening, put the simple question to them: “what contribution do you think your company is making?”

I was expecting them to respond with: “producing paper”, or even a visionary “enabling people to record events and share ideas”. That would have been my cue to introduce value-added as the only measurement of that contribution. Instead I was submerged in EVA’s, HEPS’s, NOI’s, NOPAT’s, ROTA’s and RONA’s, and a plethora of other shareholder “goggas”.

It made me acutely aware of how narrow our understanding had become of this magnificent social construct we call free enterprise. So much so that it has led to an imbalanced obsession with immediate self-gain and material rewards. And then exclusively for one interest. For the most part that has been created first by our inordinate focus on reward or outcomes; second by the fixation with measurements, and third by the exclusive target of those measurements. 

What really gave this blinkered view weight is Milton’s Friedman’s argument some years ago that the sole purpose of business was to maximise profit; against another argument decades earlier, by industrialist Bill Kellogg, that the purpose of business was to add value to people’s lives and as a consequence one makes handsome profits. Friedman’s understanding creates pressure on business to contribute directly to state spending such as free tertiary education, against the perhaps disingenuous view that these costs, including corporate tax, are simply passed on to others such as customers and employment.

In what can only be called abysmal PR, we have distorted the better narrative: that of the contribution that has been made. Here tribute has to be paid to Mervyn King’s efforts at establishing the integrated report, which some may view as prescriptive and draconian, but most of which simply reflects what all companies do anyway – not only for shareholders, but for society at large. Unfortunately, the integrated report itself is still the Cinderella of company reporting, still has a primarily shareholder focus, is not widely read, and often submerged in too much detail, conveyed in reams of glossy pages that could rival Tolstoy’s War and Peace. 

What is missing is an inclusive stakeholder account that captures the essence of the contribution that each economic cell makes – an account that summarises the detail of the integrated report itself. This could be the Contribution account, which in turn is a small adaptation of the value-added statement. When one views the term “Contribution Accounting” as an active process or organisational methodology, it assumes a completely new and exciting dimension. (See full dimension here).

I am aware that to most readers I am being somewhat repetitive. But this omission from statutory accounting keeps gaining significance against the increasing political onslaught against free enterprise; the expedient non-recognition of what enterprise really means to us all, the harm narrow reporting has done and continues to do; and the dire need to change the conversation. (See Moneyweb article here).

It is true that there are enough systemic blemishes and misbehaviours by many to fortify its detractors. The monetary mess we are in, financial fault lines, and corporate megalomania have all added to a new ideological warfare. But for the largest part by far, the narrative at an individual non-corporate level is still a good one.

As a final account, the Contribution Account is broad and stakeholder inclusive. It could be called the “integrated account” in the spirit of the integrated report, but the term has already been deployed in bookkeeping systems. What certainly deserves repeating is the need for a reassessment of the power of the value-added measurement itself and challenging its inexplicable neglect in organisational strategy. I have previously labelled it as the majestic metric because: ​
·        It is behind all positive transformation
·        It is the source of wealth
·        It measures contribution
·        It measures reward
·        It links contribution and reward
·        It drives all contributory behaviour
·        It is the base of GDP, the nation's wealth
·        It is the source of profits, wages and taxes
·        It affects all company measurements.

The practical power of the measurement at company level lies first in its calculation of income less outside supplies, and then how to improve it through selling more, getting a better price and keeping outside costs to a minimum. It guides an enterprise into becoming truly market driven which in turn encourages growth rather than containment, employment and increased prosperity.

But then it also tells its own story of the difference the enterprise makes to others, the extent to which it enables those in the supply chain and the multiplier effects that far exceed the value that the enterprise itself has added. These three lines alone: Income, outside supplies and wealth creation, are at the heart of creating value for all. They can be practically demonstrated by all companies and ventures, large and small; cutting through generalised theories, abstracts and averages, debated with detractors and adolescent assumptions about what business should be doing as a social entity.

And if we want to focus on wealth distribution, then let’s at least get that into true perspective. The wealth distribution numbers in the Contribution Account reflect the contribution all three estates of labour, capital and state have made, and the benefits they have received. In most cases, labour and state (or government) together derive far greater benefit than capital or shareholders. Unpacking the detail each of these categories portrays a splendid narrative of enablement and empowerment. If we want to set so much store by metrics, then failing to tell the story behind them is tragic.

It is the better story to tell and it is simply not being told enough.

Tuesday, September 20, 2016

Standing next to the bishop.

The maxim cautioning advertisers against “standing next to the bishop” means simply that they must be wary of the attention they draw to themselves and their motives.

That saying came to mind over the recent furore sparked by asset manager Futuregrowth’s announcement that it would stop “lending” money to a number of South African state owned enterprises. That in turn set off a number of responses including market jitters with the rand losing 1½% on the day and most likely playing some part in Moody’s decision to review the ratings of five parastatals.

Futuregrowth, in the form of Chief Investment officer Andrew Canter, took the stand next to the bishop, not so much by the decision, but by its widely publicised announcement. While some hailed it as brave and even “revolutionary”, I had a very small overripe tomato that I flung as a question on social media regarding a lender unilaterally announcing to the world that it would no longer accommodate a specific borrower. Imagine if your bank blacklisted you publicly after considering a loan application.

Canter has subsequently conceded that there could “have been a fairer process” and that “the story had some remarkable unintended consequences”. Is being fully aware of these things not why one invests in these institutions? That aside, Canter’s integrity is not in question, and he was responding to a situation that was common knowledge.

The problem with hurling a tomato at the one next to the bishop is that you could hit the bishop. As I discovered when my missile was blown off course by a “fiduciary wind” and the argument that these high profile borrowers were being subjected to reckless political meddling. In the words of Pravin Gordhan, the move was a “useful lesson that we should not think the world is not watching us”.  But that should add more concern, because like cluster bombs, the fallout has been much wider and has added further stresses to all levels of the South African population.

With no innuendo intended and as a general hypothesis of the incredible weight of responsibility placed on financial institutions generally, one has to reflect on a conundrum they face.

If an institution can foresee that a certain public announcement could have a marked effect on financial markets, does it not have a duty to protect its own book against such a fallout? Perhaps even exploit that situation for its own or related clients? If it does not do so, and their clients are negatively affected, would they have acted in their best interests? The danger that presents itself under the umbrella of “fiduciary responsibility” is increased exposure to insider trading – albeit unwitting and perhaps even with good intent.

Of course, it would be outrageously illegal if an entire event is staged specifically for that end. This is covered by legislation, but the problem with insider trading is that its trail can so easily be lost from source, via brothers, lovers, uncles to one eventual beneficiary.

It is sometimes very easy to stand next to the bishop in a charged atmosphere. The American banks arguably did that in 1985 when they pulled the plug on South Africa. What was not so well known was that despite trade sanctions, these same banks, backing a commodities upsurge in the preceding years, were seducing the country into issuing more IOU’s. Financial sanctions coincided with American institutions unwinding commodity investments as the boom began to falter. (See chart here.)

Let me emphasise that the South African financial services industry is highly respected, well regulated and acknowledged by august institutions as one of the best in the world. This reputation has to be protected and defended at all costs. Positioning itself as an economic moral compass will ultimately make that task more difficult. No sooner had Futuregrowth gone public, than all kinds of misguided missiles were flying all over the place – from Mining Minister Zwane’s call for an inquiry into Bank behaviour towards Oakbay, to some naive interpretations of the role of the Reserve Bank.  

At least some of their baskets are filled with the toxic fruit of the Global financial industry. It is common cause that reckless behaviour played a large role in the 2008 meltdown – a state that led the then Fed Chairman Alan Greenspan to lament that he was wrong in trusting the industry to act in the interest of its long term survival. It has been rife with scandals, corruption and price manipulation for decades and is constantly being subjected to further controls.

On an individual and product or service level, financial services add little tangible and measureable value, yet their sheer size and spread contributes about 20% to global GDP (See Moneyweb article here.) It has become by far the biggest driver of the world’s economic destiny, with individuals in control using other people’s money to shape that course; being paid large sums to do so, yet risking very little of their own personal wealth.

The industry is widely fragmented and hugely diverse, but as a whole and virtually by default, it has become a “5th estate” perhaps the most powerful outranking others vaguely defined as government, the private sector, general consumers and of course the media as the 4th.  As a balancing force in a healthy democracy, any additional watchdog with teeth should be welcomed – especially in a country with deep-seated patronage, nepotism and corruption that even institutional bull-terriers and judicial Dobermans have difficulty in controlling. Ultimately, it’s about who is watching the watcher -- the 4th estate?

Standing next to the Bishop to the point of overwhelming his presence demands a full appreciation of the gravity of that position and an ability to put narrow interests aside for a greater good – especially those with market influence.

Can they do that? 

Monday, September 5, 2016

What would Leonardo do?

Distractions from contributing to the great age of innovation.

Leonardo Da Vinci was a truly remarkable human being. This 15th century “Renaissance Man”, not only left an enduring legacy in his art, but inventions and observations that bear testimony to his incredibly diverse mind and insatiable curiosity. These covered anatomy, flying machines and weaponry, architecture and water and land machines. They were so ahead of his time that only years later, indeed sometimes centuries later, some were tested and found to have worked!

Da Vinci must rank as one of the greatest inventors of all time. Yet he certainly does not stand out as one of the great entrepreneurs in history. Which points to some subtle distinctions between invention or discovery; innovation itself, and entrepreneurship. Invention is the idea; innovation the functional application of the idea and entrepreneurship, the commercial deployment of both. These roles are often, although not necessarily, found in one person. But they are all crucial to invention finding full expression in the difference it makes to mankind.

So where are the Da Vinci’s in our midst? They are everywhere, albeit on a much smaller and less impressive scale. Daily, natural curiosity and intuition drives each of us to question whether there is not a better way. Often enough, that finds some expression in an invention – from cow-poo power to a CAT scan that made its mark on the global stage. But do we effectively bring those three legs of discovery, innovation and entrepreneurship together to establish fullest impact?

The statistic tends to show that we do not. There are many global measurements of innovation in different countries and despite some impressive individual achievements (see top ten inventions here), we do not rank very highly in most of them. The Bloomberg comprehensive index does not put us in the top 50, where countries such as Malaysia, Ukraine, Tunisia, Argentina and Kazakhstan have a place. The International Innovation index gives us a more favourable position of 34th of the 110 countries measured. The authoritative Global Innovation Index, in its 450 page report for 2016 (see full report here), ranks South Africa 54th of 128 countries.

The mixed findings between these and other highly ranked research efforts illustrate the multi-facetted and complex nature of innovation. The three mentioned do not agree on even the top ranking with Bloomberg and the I.I.I. placing South Korea first and the G.I.I. placing the country below the top ten. It has Switzerland first.

But rankings aside, there is universal recognition that innovation is arguably the most important catalyst in ensuring sustainable prosperity for a nation. Even a superficial analysis of country prosperity over an extended period unequivocally shows that.

Getting there presupposes that the national economic goal itself obsessively nurtures and promotes it, and creates an environment in which it can flourish. That rests on 2 key interrelated pillars or choices: between being market driven or production driven; and between focusing on wealth creation or wealth distribution. Any talk of “adding value”, “establishing a manufacturing sector” or “beneficiation of raw materials” is just that – lip service in a confused understanding of what these really mean.

Then it becomes useful to reflect upon countries that consistently rank in the top of the most innovative and in economic health measurements.

Source: GII 2016 REPORT.
Human Development Index. 2014
New Zealand

Correlation is not proof of cause, but when correlation is fairly consistent over time then it certainly provides a good indication of cause. An important deduction that can be made from the innovation table is not what those countries have but rather what they, for the most part, don’t have – and that is natural resources or commodities. It boils down to simple logic, the more material resources you have, the less you focus on the development of people. In the second table, where there are more resource rich countries, those that succeed are also those who pay attention to human development. But even then, only three with abundant resources make the top ten.

Which works against the first imperative of innovation – being market driven rather than production driven. It is often argued that commodity producing countries are by nature open market-driven economies because they are so dependent on commodity markets. There’s a huge difference between being market driven, and being dragged by the market. The first is being a master; the second a dependent slave. The first is having an external focus; the second being internally focused.

The long established key requisites for national prosperity are: having an external focus and developing people. Commodity based nations seldom do either. Which naturally drives them into the second iniquity: a focus shift from adding value to people’s lives and creating wealth, to distribution of wealth that comes from simply breaking rock and digging big holes. This may work in the good times, and distracts these nations from being market driven. But when commodity markets slump the wealth distribution focus leads to greater government encroachment and state dependence.

Economic theory tends to put homo economicus in a production context rather than a social context. This is more so in commodity producers and blunts an important understanding of adding value – that of being useful to others.  As a humanist, it most likely came naturally to Leonardo Da Vinci.

You only have to gaze at the Mona Lisa to appreciate that. 

Tuesday, August 23, 2016

The Capital scarcity myth

Essential human attributes that question economic abstracts.

I have come to realise why I am so often at odds with economists, academics and economic theorists. They all have a tendency to define abstracts and assign to them predictable behaviours – such as labour, capital, resources and many other.

If only it were that simple! If only we did not have a messy and much nuanced dynamic called human behaviour, in turn driven by a creature with differing motives, hopes, dreams, expectations and aspirations; all mostly undefinable and certainly highly erratic and seldom predictable. If you impose these factors on economic abstracts, you quickly discover that the definition of those abstracts are often highly suspect.

This can be applied to the most basic of economic theory – the so-called factors of production. Earliest definitions focused on three primary or physical factors: land (natural resources); labour and capital. They clearly missed an element: that which ultimately determines the usefulness, or value of the production itself and without which any or all of the three become irrelevant. That is demand, in turn identified by some-one, an entrepreneur if you will, who marshals those factors into transforming one situation into another – or adding value to people’s lives. Entrepreneurship was added as a 4th factor and the four have become standard in economic teaching.

That addition soon triggered exuberant and sometimes debilitating conflict in economic theory about which is the most important, leading to different systems and constructs that continue to shape national and individual destinies today. My pet peeve is the one that claims capital rules supreme; that it is scarce and precious and that good things can only happen when it drives others in its accumulation, accrual and expansion in the interest of material self-gain. That understanding has even been expanded to cover other factors such as “human capital”, “social capital, and “natural capital”. This, it is claimed, gives birth to the entrepreneur, the selfish opportunist who then exploits the productive use of the other factors.

It is a most inaccurate and demeaning view of great entrepreneurs – one that I have tried to counter on many occasions in my column. (See here). A key trait of entrepreneurial behaviour is the ability to look beyond immediate and assured self-gain and focus on making a meaningful difference to other’s lives. That goes much further and is far nobler than simply following the whims of capital or self-gain.

It is tempting to adopt a mechanical view of “arranging the factors of production” to ensure maximum wealth creation. It creates neat little abstract boxes for theorists to play around with and propose as elements that simply have to be “managed”. Among many production improvement processes is Eliyahu Goldratt’s theory of Constraints, which means simply identifying and eliminating constraints to effect maximum productivity. I have come across many of those in my consulting days, the most popular of which was the elaborate Japanese process called 20Keys.

Regimentation on its own seldom works. It simply ignores or does not give enough credence to the most important factor of all: willingness and commitment by the troops in the regiment. This they get from meaning, not from processes -- from why not from what and how. It speaks to motive; about which we know very little but are discovering more and more that it is about having a sense of self-worth based on the contribution being made to other’s lives – satisfying that deep urge in most of us to make others happy.

These powerful human attributes not only inform, but actually define capital. Far from it being a calculable and tangible factor of production it is actually a factor of behaviour. Without this understanding, one has great trouble in distinguishing between capital and money. We know that the world is awash with debt-based money. This, it is argued, only becomes capital when it is used in investment in capital assets. So capital is defined not by the availability of money, but by the use of it.

Now it really gets confusing, because not only is the world awash with money, but there’s a credible argument that stagnant global economic growth has been exacerbated by this money not finding its way into consumer demand, but into investment in capital assets, including equity, property and financial instruments. This, and some other startling facts explode the myth of a scarcity of capital, including:
·       Buoyant stock markets;
·       A resurgence of new listings and IPO’s on the JSE.
·       Huge reserves (estimated at R800bn) in S.A. corporate coffers.
·       R4trn investment funding in The South African financial banking sector and
·       A further R7trn in non-financial institutions such as pension funds.
·       Share buy-outs such as Apple and Amazon, implying a conversion of capital into debt.

Buoyant stock markets demonstrate another argument: apart from reducing the cost of raising capital, high P.E. ratios mean simply that the price of using that capital (earnings) fall, and lower prices must surely reflect greater supply in relation to demand. An unfortunate side effect, though, is that it puts greater pressure on company managers to squeeze earnings; to maximise profits in a low demand environment that invariably leads to enterprise containment rather than growth.

Perversely then, there is no shortage of capital, but actually low demand – specifically a lack of willingness to invest in productive capacity. (See Moneyweb article here). Then the opposite is true: there’s a surplus of capital in relation to demand.

Capital seems to hunger for the Beta pushing Elon Musks of this world, who, in his perhaps cavalier approach to risk and shareholder interests (see Forbes article here), explodes another myth: that capital naturally flows to low risk, high returns. In Musk’s case, he not only increases risk, but also reduces assured (not potential) returns.

Capital scarcity and indeed most of our conventional economic abstracts are not defined by their physical calculable qualities or quantities, but by the human attributes that drive them. Perhaps the most important attribute that is missing is simply courage -- of the Elon Musk kind. Isn’t that then, what capital really is -- courage?