One of the most important challenges of management in the real world is how they can make their businesses truly competitive. Competition drives firms to be efficient and effective and to invest in technological innovation to provide improved ways of satisfying customer needs and wants. Such progress depends on the continuing ability to make sufficient profit to ensure survival in the short term and to invest for greater success in the long term. That is what real business is about.
Economists, such as Michael Porter, influenced generations of the leaders of finance, industry, the media, academia and politics, with their theories of competitive strategy, which were based on the not very profound equation that sales revenue minus cost equals profit. Therefore the way to maximise profit – which, for these theorists, is the whole purpose of business – is to have the lowest costs or highest prices.
The way to achieve the lowest costs is to have the biggest sales volume and therefore the greatest economies of scale. The way to achieve the highest prices is to make the product different in some way for which customers were prepared to the highest premium. So long as these processes are not interfered with by government regulators, then, according to the theory, the rules of perfect competition will apply and the consumer will be the ultimate beneficiary.
How does all this apply to the energy supply market?
Continue reading Energy, Competition and Pretence
According to the current edition of the Economist, Britain appears to be questioning the wisdom of its devotion to ‘the liberal economic credos of its recent past.’ Those are the credos which include free trade with open access to unregulated markets, minimised public sector, and so on and so forth – the whole baggage of neo-liberal economics to which the Economist itself is committed.
This questioning was prompted by popular responses to the threatened closure and disposal by Tata of its British steel operations. They were said to be losing around £1m a day, at least in part as a result of Chinese dumping cheap steel on UK markets. The outrageous suggestion had been made that the Brits should protect their domestic industry by charging an import duty on Chinese steel so as to at least level the playing field. Thus the classic dichotomy was drawn up between the two childishly simple minded economic ideologies: free trade on the one hand; protectionism on the other. These are the tips of the two ice-bergs of neo-liberalism and totalitarian communism. Continue reading There is an Alternative
In this election campaign, much is being made of whether or not the main UK Parties are business friendly. The fire sale of British owned assets, euphemistically nominated as foreign direct investment, is held to indicate that the UK is ‘open for business’. Over the past 35 years, company after company and industry after industry has been sold off to foreign ownership. The same has been achieved with the sell-off of public assets, the latest example being Eurostar, and public services and utilities which have been privatised and in the majority of cases sold to foreign owned entities.
It all has nothing to do with being ‘open for business’. The political motivation is to achieve a short term (ie relating to the next election) economic gain, completely ignoring the long term costs. The short term stats appear to be all that matters, so they can be quoted ad nauseam in media interviews.
Being seen as business friendly is clearly conceived as being worth either a lot of votes or a lot of money. So Parties shrink from confronting or challenging in any way what they conceive of as “business”. They appear ‘intensely relaxed’ about business people getting ‘filthy rich’. They seem tolerant of tax fraud on a massive scale. They shrink from regulation of markets. They are in awe of the financial sector. They talk about support for the SME sector, but do little. It seems they simply do not understand what business is about. Why should they? They’ve none of them been near it except for photo-opportunities.
Continue reading UK ‘Open for Business’
‘Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist’. Practical men, say, like Bob Diamond. You can’t get much more practical than a man of limited intellect who takes from his place of work £17m a year, less a bit for having led a banking operation now officially recognized for its lack of ‘skill, care and diligence’, not to mention its criminal fixing of international money markets. Bob, himself, admitted his favourite economist is none other than Milton Friedman of the Austro-Chicago school of laissez faire, free marketeers.
Friedman’s influence still dominates government, finance and business, not just billionaire bankers. When he first came to the fore it was as a monetarist. The way to a small government and light touch regulation was to grant maximum freedom within a tightly controlled framework: the quantity of money in circulation. According to Friedman ‘too much money chasing too few goods’ would inevitably cause inflation. With Thatcher and Reagan, that simple aphorism replaced the Keynesian economics that had ruled since the second world war. But it didn’t work. There were too many unknowns about the quantity of money and the velocity of its circulation, and that rendered monetarist policy ineffective. Friedman himself expressed his disappointment at the ineffectiveness of monetarist policy.
Continue reading The Defunct Professor Friedman?
Unilever’s Paul Polman must be a Chief Executive in a million. Or more. In his interview with Guardian Sustainable Business, Polman calls on business leaders, politicians and NGOs to recognise they cannot deal with the world’s environmental and social challenges by pursuit of Milton Friedman’s target of maximising shareholder wealth. Polman names a few other companies who are moving in that same direction, and suggests their numbers are growing. But it is a drop in the ocean.
“Why,” he asks, “would you invest in a company which is out of synch with the needs of society, that does not take its social compliance in its supply chain seriously, that does not think about the costs of externalities, or of its negative impacts on society?”
Sadly, the answer is simple and obvious: to make a quick buck. Friedman said that corporate officials had no other social responsibility than to make as much money as possible for shareholders, and that is what the business schools and university departments have been teaching ever since. So that is how the world now works. The world – business leaders, politicians, academics, and even the people in the street – have come to believe that it is the legal duty of those who run businesses to maximise the wealth of shareholders, and to hell with everything else. But it is simply not the case. We should not need heroic figures like Paul Polman to change the world. It should simply be a matter of compliance with the law.
Continue reading A New and Legal Orthodox Wisdom
The trouble with the provision of public services such as health, education and the police by private for-profit companies is pretty obvious. Successive governments from Thatcher on, have pursued this flawed policy which derives from a hopelessly simplistic ideology. Private providers, who are subject to the discipline of the market, are held to be more efficient than public providers. The late lamented Milton Friedman claimed they were twice as efficient. Therefore, the argument goes, services would be most efficiently provided by private firms operating in competitive markets so that, for example, NHS patients have choice, and providers who are not good enough to get chosen, will fail. That’s how markets work.
So far so good, despite the famous lack of supporting empirical evidence, and the difficulties, where real markets don’t exist, of creating pseudo-markets without the costly bureaucracy of targeting, monitoring and supervising pseudo-competitive performance. But another thread of that same ideology, most famously enunciated by the same late lamented Friedman, is that those who run for-profit businesses have no social responsibility other than to make as much money as possible for shareholders.
Continue reading Public Services and Predatory Shareholders
Mr Cameron really doesn’t understand what’s going on. When he talks of rebalancing the economy he appears not to have the faintest idea what has unbalanced it. He doesn’t understand the crucial difference between real markets and financial markets. Demand for real things is essentially finite – when you’ve had enough, you’ve had enough; demand for high yielding financial “products” is essentially infinite. An investment, such as a ‘carbon credit’ which would yield ‘up to 398% return’ (see: http://www.gordonpearson.co.uk/06/pity-the-poor-banker/), would attract anyone. Would you invest in a widget maker earning 10% a year at some risk, when you could be earning up to 398% risk free? Consequently, despite the sub-prime fiasco of 2008, money is still leaving the real economy to be bet on financial “products” which are high on promise, but low on substance. That’s the rebalancing that’s actually going on, with Mr Cameron’s approval.
The only rebalancing towards manufacturing and the job creating real economy results from the ingenuity and efforts of practical people achieving results on the ground, through co-operative rather than exploitative means (The Road to Co-operation is due out Gower in April). This achievement is despite Mr Cameron and his friends.
Continue reading Mr Cameron Doesn’t Understand