2011-12-29

Co.Exist

The Next Global Economy Asks Companies To Create More Than Just Profit

In a third excerpt from his new book "Betterness: Economics for Humans," Umair Haque discusses what companies have to do to survive in a future economy: create value, not just monetary wealth.

The global economy is a human construct—a tool. And every so often, it gets radically updated, as it did after World War II at the historic Bretton Woods conference, where a new global monetary and financial architecture was laid down.

Already, economists at governments, universities, and international agencies are hard at work laying the groundwork for the next global economy. Its contours? New systems of national accounts that explicitly count not just gross product, but the full spectrum of wealth creation.

I’ve called for countries to build national balance sheets, that take into account more than just GDP. Some countries are already taking baby steps in that very direction, and when they get there, the terms of an authentically beneficial human exchange will change, probably radically.

In the United States, the State of the USA project, under the guidance of the National Academy of Science, is starting to utilize hundreds of indicators to measure different kinds of wealth: education, health, and the environment, to name just a few. Economists in America, France, and Sweden are busy updating national accounts to measure not just industrial output in financial terms, but real wealth in human terms.

When this great shift is complete, companies will face a new hurdle: in a twenty-first-century global economy, built on holistic national accounts, they will have to prove that they earned returns in next-generation terms, those that flowed into a positive impact and weren’t earned through negative impact. Those that can’t will quickly be revealed as perhaps financially “profitable,” but economically bankrupt because they will be able to contribute little, if anything, to better, more accurate, valid, and meaningful measures of economic welfare.

Here’s what the new rules of competition might force you to conclude. Useless is useless. Like a car that goes nowhere, a company that is useless to people, communities, the natural world, and future generations has no use. Destroying the Common Wealth is easy, abundant, and cheap. It is what the vast majority of organizations do. Enhancing it, in contrast, is the scarcest, rarest, and single most disruptive capability an organization can possess. Betterness is the future because business isn’t good enough for people, communities, society, investors, governments—all of whom are demanding it—or even for companies, which are less and less able to survive on its dwindling morsels of profitability.

Hence, in the twenty-first century’s new competitive landscape, yesterday’s arid, adversarial, and arrogant conception of advantage doesn’t cut the mustard. Next-generation advantage isn’t merely competitive; it is generative. You may best your industrial-age rivals at the practice of “business,” but that’s no guarantee of having created enduring wealth and, hence, little foundation for relevance to constituencies that are beginning to fist-poundingly demand it. In this new landscape, next-level advantage is generative (not just competitive).

Poiesis—the root word of poetry—means to create, to generate. In the words of the great philosopher, Martin Heidegger, it is a transformative “bringing forth.” Companies in betterness generate new wealth, and a generative advantage means being able to multiply the Common Wealth to a greater degree than rivals. Creating wealth means adding to our metaphorical buckets, instead of emptying them—whether social, intellectual, human, emotional capital, or beyond.

From an economic perspective, generative advantage is about creating a surplus in authentic wealth, not just a skyrocketing share price. It means a larger multiplier than rivals, more real wealth created per dollar, yen, or renminbi earned.

Further—and crucially—by wealth creation, I refer not merely to “triple bottom lines” or other near-term measures championed by sustainability advocates. Economically questionable, they’re often half-measures of flows, not stocks, and more crucially, they’re often measures of inflows, flows into the firm, not outward to the Common Wealth. So, for example, by the creation of intellectual capital, I don’t merely mean that the firm itself books more patents and trademarks of its own, but that its customers are demonstrably smarter. By the creation of social capital, I don’t mean that a firm enjoys more trust with constituencies, but that constituencies are able to form closer, more coherent relationships. Creating wealth means igniting it in your constituencies, bringing forth their potential to live meaningfully better.

Companies in business often can’t ignite a generative advantage, because they have chosen instead to gain competitive advantage. Beating competitors doesn’t mean that you have actually created, generated, or ignited any wealth, merely that you have either prevented others from doing so or that you have captured a larger share of the wealth that they have created. Taken to the limit, competitive advantage becomes the living expression of what economists call rent seeking.
Wikipedia offers an easily understood definition of the term:

Rent seeking occurs when an individual, organization, or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth.

For example, retailers like Tesco compete by building land banks—hoarding prime locations to lock out rivals, while never building on them. That leads to a competitive advantage, but it’s the denial of generative advantage because the Common Wealth is damaged, instead of enhanced. Pharmaceutical players spend billions influencing doctors, seeking control over their key distribution channel. The result is competitive advantage, but not poiesis; marginal human potential isn’t brought forth when clinicians overtreat patients and when doctors prescribe drugs that benefit themmost instead of prescribing the best drugs at the lowest cost. The list is endless, but the story’s the same: rent seeking.

Merely capturing more rent can never yield a surplus. When Tesco blocks rivals from opening shops in your neighborhood and jacks up prices, the added margin isn’t value that has been created anew. It is simply a transfer of value from you to Tesco. No marginal surplus of higher-order capital has been created.

Generative advantage and competitive advantage are like night and day. Adversarial, arrogant, and alienating, competitive advantage is often extractive. It can be enjoyed without creating any wealth, and indeed, simply by transferring wealth from others. Hence, competitive advantage isn’t concerned with poeisis, generating surplus wealth for tomorrow, but with its very opposite, capturing value from today. So where orthodox business seeks merely to capture rent from an existing surplus, betterness seeks to create an authentic surplus in real wealth.

So why don’t more organizations create a generative advantage by multiplying the Common Wealth and put their clunking, wheezing rivals out of their misery? Because they can’t. Though they might have been built to last, built for greatness, or built to innovate, they weren’t built for betterness. The foundation of next-level advantage stems from reimagining human organization, not changing the structure of our companies yet again, but reconceiving why we built them in the first place and what we want them to do for us.

Reprinted by permission of Harvard Business Review Press. Excerpted from Betterness: Economics for Humans. Copyright 2011 Umair Haque

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2 Comments

  • Ken Cameron

    Fortunately, I will be long gone from this earth before these meaningless concepts get much of a foothold.   And unfortunate as well, these concepts are likely to gain some kind of an audience because those who truly create wealth are far outnumbered by those who do not.  (Recently tabulated as 99:1 per evidence in the OWS world and beyond).  "Reimaging" human organization should begin with the core non productive entities of our time such as government (especially the political components) and education (universities first).   The entire article makes the most sense when applied to organizations that produce less and less value over time - no matter how you choose to measure it.

  • Hugo Rodger-Brown

    Depends on your definition of the word wealth - which is something the article is challenging. Even using the traditional definition of wealth (monetary), the ratio is far greater than 99:1 - not only is that a completely made up statistic, it refers to those with wealth, not those who create wealth. John Pierpoint Morgan created enormous wealth, and did a lot with it. Unfortunately, 99%** of those who now work for JP Morgan are wealthy, but have done nothing to create wealth. That's what people object to.

    ** another made up statistic.