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The cornerstones of constructive capitalism
You have said the legacy of the financial crisis is not bonuses or bailouts, but ‘cornerstones’. Please explain.
Umair Haque is director of the Havas Media Lab, a global research institute, and the founder of Bubblegeneration
What does the new economic paradigm you propose look like?
What would be different about it, first and foremost, is the concept of optimization, which entails elements of minimization and maximization. First, organizations have to minimize the harm they do to people, communities, the natural world and future generations. For example, both cost shifting and benefit borrowing constitute economic harm because they leverage up a company, country or economy with deep and burdensome debt. The second element is maximization. The fundamental challenge facing countries, companies and economies is creating more value of higher quality – not just low-quality value in greater quantity. Think of it as a reconception of value creation: not merely creating larger amounts of thin, inconsequential value, but learning to create value of greater worth – or ‘thicker’ value.
You believe that the industrial era was marked by ‘dumb growth’. Describe the difference between dumb and smart growth.
For the last several decades, we have operated under the assumption that if our economies are growing, that is inherently a good thing. Yet many advanced economies have seen decades of growth which haven’t actually resulted in any significant tangible gains for huge chunks of society. In the U.S., the economy has been roaring away since the 1970s, but median income hasn’t grown at all. This is dumb growth -- growth that is devoid of real human benefits and meaningful gains to human welfare. Dumb growth is growth built on debt and consumption that focuses on diminishing- returns resources. At the dawn of the 21st century, the American dream entailed buying a McMansion with tons of credit, living in the right neighbourhood, all these kind of diminishing-returns systems. If we continue to invest the sum total of our effort, our ideas and our labour on this stuff, it’s going to be very difficult to sustain higher standards of living going forward.
Smart growth, which I call ‘constructive capitalism’, is the opposite: it is not predicated on consumption, but on investment, and not investment in just anything, but investment in ‘increasing-returns assets’: intellectual capital and human capital -- fitter, smarter, wiser people; social capital -- more coherent, tightly linked societies and wiser expectations; and emotional capital -- happiness, fulfillment, meaning in our work and in our lives. These are the assets the 21st century needs to power forward to be able to take on the daunting challenges we face. If growth to us simply means more money in our pockets to spend on ‘stuff’, the writing on the wall is clear: the incentives for real breakthroughs that result in higher levels of human welfare will be pretty difficult to generate.
What are the effects of dumb growth at the individual or ‘local’ level?
Dumb growth is self-destructive to people, communities and countries, and the U.S. in the noughties personified this. People consumed houses, cars and gadgets ravenously, yet failed to invest in better education, health care, energy, transportation or food. Being locally constructive means fueling people and communities rather than consuming more and more disposable – and ultimately self-destructive – stuff. For example, until recently, multinationals sold their stuff to Indians; today, the Shakti initiative is helping poor, rural Indians invest in themselves by providing microloans, inventory and entrepreneurial training, so they can become micro-entrepreneurs. That’s a textbook example of locally-constructive growth.
You have heralded “a new generation of renegades” that are learning how to become constructive capitalists. How are they going about this?
For the book, we studied 250 companies in hopes of finding a few that are innovating not just at the product, service or business-model level, but at the level of institutions or cornerstones. We were able to find 15 that are throwing yesterday’s cornerstones out the window (see sidebar). I’m not saying any of these companies is a paragon of perfection; none of them is immaculate or unblemished. But I do think that they are taking very small-but-meaningful steps forward, and it’s important to recognize that, because they are very much the exceptions to the rule. They aren’t profiting in spite of making people better off – but by doing so. That is the essence of authentic value creation.
For example, Nike’s 21st-century business model is very different from its 20th-century model. It is aiming to move away from the linear, industrial-aged model of production, which ends with a gleaming finished product that goes out the door and is never seen again. The problem with this approach is very simple: what happens after the stuff in the value chain is used up? Mostly, it ends up in a landfill or polluting our oceans or atmosphere. What Nike wants to do over the next decade is shift to a model of ‘circular production’: you will buy a pair of Nikes, and after you wear them out, you will take them back to your local Nike store, and the company will remanufacture a new pair of shoes for you from those old shoes. They’re working not just on the technology to do this, but on the logistics to set their stores up to be hubs for circular production. If you think about it from Nike’s point of view, the angle is really simple: Nike will have to invest, say, 10 bucks up front for all of the raw material that goes into a shoe; but as people bring shoes back to them and they remanufacture them, every time they remanufacture a pair, the average cost of that shoe goes down, because they don’t have to buy those raw materials over and over again. They might charge, let’s say, $20 for your new pair of remanufactured shoes versus $50 for a pair of freshly-manufactured shoes. The margin on the remanufactured shoes could actually prove to be much higher because the raw materials -- the input costs -- are significantly lower. That’s a, a very radical 21st century business model, and it exemplifies why companies have to make the shift from a value chain mindset to a value cycle mindset.
How can a company get started on the transition from value chain to value cycle?
The first goal of a value cycle is to achieve a loss advantage – to waste nothing and replenish everything. Nike’s efforts to recycle and repurpose are to achieve a ‘loss event’ -- to minimize losses, not just for them but for consumers and society. The beauty of this is, as they minimize losses, they will be able to achieve thicker value. It’s not just about selling cheaper shoes; the point here is really the loss event. Nike is saying, ‘We do not want all this rubber and plastic going to waste any more; we want to repurpose it so everyone can win, in a more economically-authentic way’.
You have said that “20th century businesses were built for value propositions, but 21st century businesses are built on a new institution: the value conversation.” Please explain.
Constructive capitalists don’t manage by monologues solemnly delivered from the inside-out and the top-down; they manage through dialogues that start from the outside-in and the bottom-up. In many ways, the ‘shareholder democracy’ that Industrial Age capitalism built is a mockery of authentic democracy. Sure, every shareholder has a vote, but almost no shareholder has a voice. If companies were countries, we’d say they had centrally planned, dictatorial economies. So perhaps it’s no surprise that companies embody the same inertia, rigidity and tendency to misallocate resources that plagued – and ultimately brought down – yesterday’s centrally-planned nations in a globalizing, opening world.
Authentic democracy is participative, deliberative, associative and consensual, and these are the four freedoms at the heart of value conversations. Twenty-first century organizations are democratic because the freedom to participate, the freedom to deliberate, the freedom to associate with peers and the freedom of dissent let managers, customers, communities – even competitors – hold conversations about what is valued and what ‘thicker value’ looks like.
In an interconnected global economy, where will institutions begin to evolve first?
Let me zoom out for a moment. America, to my mind, had two defining achievements in the 20th century. One was the moon landing, and the other was the creation of this thing we call GDP. The Bureau of Economic Analysis has called it the crowning achievement of 20th century economics; and they’re right, because before that, we didn’t have a comprehensive picture of what an economy really is, how it operates. Today, GDP is still the institutional axis around which the economy spins, and it was created in the U.S.
China has already leapt ahead and is beginning to update GDP, and India has a plan to do it this decade and create what is called a ‘green GDP’. As these countries begin to update the fundamental axis around which the economy spins – the thing that currently defines costs, benefits, profit and loss -- the entire composition of their economies will change. If India does develop a green GDP, it’s going to set incentives to develop leaner, cleaner and greener industries across the board. And my guess is -- in a world where very few people want to buy dirty, belching, wheezing industrial stuff -- the export sector is going to grow more and more powerful.
America needs to develop a fundamentally different set of competencies to move forward -- competencies in thinking and dreaming much bigger and in rebuilding the institutions that we pioneered in the last century. Because the world is a big, interconnected place, and tomorrow’s hungriest nations are already taking a quantum leap into the institutional future.
What is your take on the ‘metamovement’ that has arisen amongst the ‘99%’ in cities around the world?
I think the metamovement is very much about this phenomenon of global institutional failure we’ve been discussing. People feel that not only are they being left behind, but that human agency itself is being taken away from them, and they’re absolutely right. We have collapsing middle classes across the world’s most advanced economies. This is the breakdown of a social contract, the failure of a set of economic and political institutions. And by no means should we think that that what I call the meta movement (as in a movement of movements) is going to go away; I don’t think it is.
I think that what is fundamentally happening here is that people are waking up and seeing that, we kind of took for granted that our institutions would provide us with higher and higher standards of living going forward, and that we had solved the big institutional questions of the day. Questions like, What is an economy? What is GDP? How do we measure prosperity? Well, we use double entry bookkeeping, of course! I think we took it for granted that we had solved all those questions, but we’re beginning to see that maybe our answers to those questions were way too crude and too simplistic. At the end of the day, what these people really want is pretty simple: a working social contract predicated on real human prosperity that lasts and multiplies going forward. The question is, how do we get there?
To get there we’re going to have to think much, much bigger. The answer is not more entrepreneurs turning out more disposable Industrial-Aged stuff that you buy with money you don’t have to fulfill a void in your life. We have to think about rebuilding our institutions. I think that America and parts of Europe require the biggest changes, including things like updating GDP, rethinking the structure of our democracies, reimagining and corporate forum and reinventing the idea of what financial markets are.
When people ask me what I see happening in the future, I tell them I see a few possible scenarios. My most optimistic scenario is a lost decade, because all the stuff I just talked about, this process of titanic institutional re-imagination is something that’s going to take at least 10 years. My pessimistic scenario is just an ongoing decline, because there is no guarantee that a civilization or a set of societies will be able to grapple with the questions of institutional transformation. History shows that once societies become locked in to the institutions they have, it’s very difficult for them to update them. So, it may be the case that our institutions are entrenched and that the challenge of updating them is just too much for us to handle. And it may be that the future belongs to those countries that make an institutional leap forward. I think that’s what the game of global competition in the 21st century is really about: institutions and the incentives they set for people to live more fundamentally-meaningful lives.
Six Cornerstones of Constructive Capitalism
1. From value chains to value cycles
2. From value propositions to value conversations
3. From strategy to philosophy
4. From protecting a marketplace to completing a marketplace
5. From goods to betters
6. From dumb growth to smart growth
Umair Haque is director of the Havas Media Lab, a global research institute, and the founder of Bubblegeneration, an agenda-setting economic advisory boutique. He is the author of The New Capitalist Manifesto: Building a Disruptively Better Business (Harvard Business Review Press, 2011). He was recently named one of the world’s top 50 management thinkers by the Thinkers50, a UK ranking of global thought leaders.
[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]
