Economics for Humans

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* Book: Betterness: Economics for Humans. by Umair Haque. Harvard Business Press Books, 2011


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From the publisher:

"Betterness: Economics for Humans" is a powerful call to arms for a post-capitalist economy. Umair Haque argues that just as positive psychology revolutionized our understanding of mental health by recasting the field as more than just treating mental illness, we need to rethink our economic paradigm. Why? Because business as we know it has reached a state of diminishing returns--though we work harder and harder, we never seem to get anywhere. This has led to a diminishing of the common wealth: ... Read More »

"Betterness: Economics for Humans" is a powerful call to arms for a post-capitalist economy. Umair Haque argues that just as positive psychology revolutionized our understanding of mental health by recasting the field as more than just treating mental illness, we need to rethink our economic paradigm. Why? Because business as we know it has reached a state of diminishing returns--though we work harder and harder, we never seem to get anywhere. This has led to a diminishing of the common wealth: wage stagnation, widening economic inequality, the depletion of the natural world, and more. To get out of this trap, we need to rethink the future of human exchange. In short, we need to get out of business and into betterness." (http://hbr.org/product/betterness-economics-for-humans/an/11135-PDF-ENG)


Excerpts

Business Isn’t As Profitable As Betterness

Umair Haque:

"Academics have spent decades studying in great detail whether responsible companies are also more profitable companies, and three decades of evidence suggest that betterness yields greater equity returns, asset returns, and profitability. Researchers Marc Orlitzky, Frank L. Schmidt, and Sara L. Rynes found that responsibility was significantly positively correlated with financial performance: “corporate virtue,” in their words, “is likely to pay off.” Their work (PDF) was a meta-analysis of 52 studies, with over 33,878 total observations. Whew, that’s a whole lotta outperformance. How is that outperformance achieved? One pioneering study that I like concluded that responsibility fuels outperformance because it is risk management: better insurance against adverse future events. "If you can’t demonstrate that at the very least you’re not harming people, you probably won’t have a seat at the table. "

In People and Profits?, a landmark book reviewing three decades of research, Harvard’s Joshua Daniel Margolis and the University of Michigan’s James P. Walsh found that “when treated as an independent variable, corporate social performance is found to have a positive relationship to financial performance in 42 studies (53%), no relationship in 19 studies (24%), a negative relationship in 4 studies (5%), and a mixed relationship in 15 studies (19%).” They say, pithily: “the findings might be encouraging for advocates of corporate social performance and problematic in the eyes of opponents and critics.” In a recent interview, Margolis said, “There have been 80 academic studies in the last 30 years attempting to document the relationship between social enterprise activities and corporate financial performance. The majority of results (53%) point to a positive relationship, and only 5% of studies indicate a negative impact on the bottom line."

Economics isn’t physics, and the messy human world doesn’t obey ironclad laws. Yet, the link between greater returns and what isn’t quite yet at this point what I’d call betterness but more like not-worseness--for “responsibility” is essentially the notion that a firm inflicts less damage than rivals do--is one of the strongest relationships to be found in modern economics, grounded in thirty solid years of evidence. I’d conclude: business as shoulder-shruggingly usual isn’t as profitable as not-worseness.

And I’d bet that’s an arc that will continue an unbroken ascent toward full-blown betterness. My claim isn’t merely that “corporate responsibility is associated with greater profitability,” based on several decades of backward-looking evidence, nor is it that responsibility is the cause of profitability. It’s subtler and forward looking. Rather, I’m suggesting that in a resource-constrained, hungry, transparent, winner-take-all world, what we’re used to calling “responsibility” and seeing as a luxury will be akin to table stakes in tomorrow’s game, a competence necessary to enter the arena of human exchange. If you can’t demonstrate that at the very least and at the barest minimum, you’re not harming people, nature, communities, society, or tomorrow’s generations, forget about vanquishing your rivals; you probably won’t have a seat at the table.

And at that table, the measure of success isn’t likely to simply be better profits, equity returns, asset returns, and shareholder value. Those are part of an industrial-era definition of success that’s already increasingly out of date.


The bigger picture of twenty-first-century competition is richer, more nuanced and complex. Companies are beginning to be judged against a whole new set of criteria by customers, governments, communities, employees, and investors. They’re already saying, so you made a profit. Yawn. Did you actually have an impact? Did what you do have a positive, lasting consequence that was meaningful in human terms?

Harvard Business School’s Ioannis Ioannou and Georgios Serafeim recently found that socially responsible firms receive more favorable ratings from securities analysts: “We find evidence that in earlier periods, CSR [corporate social responsibility] strategies were perceived as value-destructing and thus, had a negative impact on investment recommendations, whereas for later periods, CSR strengths are perceived as value-creating, reversing the earlier negative into a positive impact on recommendations: analysts are more likely to recommend a stock ‘buy’ for CSR-strong firms in later years.”

See what just happened? The folks that recommend to the world’s investors whether to buy or sell your shares just upended their expectations about better and worse--and in which direction prosperity lies. Decode the message inside the logic, and they’re issuing a manifesto worthy of an uprising. It says: Want to create shareholder value in the twenty-first century? Tough. Now, it depends first on not destroying real wealth--and better yet, on creating it. Continue to map that trajectory, and here’s what you might conclude: we’re heading toward a world of human exchange in which hard-nosed measures of a company’s impact are as important to a company’s vitality and viability as yesterday’s weary conceits of “profit.”


Responsibility is strongly associated with greater profitability, equity and asset returns, and shareholder value creation. But that’s no longer good enough. Today, the bar is being raised; success is itself changing. Those are yesterday’s definitions of success, and more importantly, arcing toward betterness lets companies begin outperforming on tomorrow’s measures of success, which are going to hinge on the creation of real wealth." (http://www.fastcoexist.com/1679052/business-isnt-as-profitable-as-betterness)


The Corporation As You Know It Is Probably Obsolete

Umair Haque:

"There is a groundswell in new kinds of corporate forms that is gaining steam. Consider the rise of “for-benefit” corporations. They’re a new kind of corporate form, built from the ground up to create wealth, instead of being tiresomely legally bound to return maximum profit to shareholders.

Imagine, for a moment, the new organizational possibilities that the novel legal and contractual design of these organizations opens up, where bonuses are tied to marginal wealth attained by people, communities, and society, roles are created to manage benefits (think “chief impact officer”), and transparent accounts demonstrate real, meaningful benefits, not earnings. You’d have an organization geared to do explosively more than just buy and sell crap that’s slightly updated every year or so, on yesterday’s moldy old terms. You’d have instead an organization tuned not just to make stuff, but to have real relationships, to meaningfully enhance lives, to push the boundaries of elevating human potential, to laser-lock on to creating wealth, to do all the above in ways that matter, count, last, endure, inspire, amaze, and delight--and to do all the above habitually, consistently, and repeatedly. "You might begin to nervously ask yourself: 'Is there a bullet out there somewhere with my name on it?'"

Now put that new arsenal of enterprise, its disruptive new set of capabilities, its unexplored, undeployed firepower in the hands of someone with the unsatisfied hunger, unyielding determination, and laser-sharp insight of a Steve Jobs, Sergey Brin, Larry Page, or Richard Branson, and you might just begin to nervously ask yourself: “is there a bullet out there somewhere with my name on it?” Sure, the fact is that there’s no corporation in the world that works quite like this--yet. But the truth is that when there is, it’s going to put “business” as usual out of business. Ultracompetition Can Only be Won Through Betterness

In the twentieth century, rivalry was most often about a single kind of counterorganization: competitors. That was yesterday: in the twenty-first century, a new range of insurgent counterorganizations must be contended with, hell-bent on toppling imperious incumbents from their comfy, cushy thrones. They are markets, networks, and communities composed of a huge variety of actors: NGOs, peer and trade groups, customer and supplier communities, activist investors, and labor organizations, to name just a few.

Hypercompetition is an increase of like-for-like competitive intensity. Ultracompetition is increased competitive intensity across new kinds of counterorganizations. This turns up the pressure dramatically. Ever consider students a counterorganization? Think again. At Harvard Medical School, students self-organized to pressure professors to stop accepting gifts from pharmaceutical companies, citing a clear lack of interest and diluted objectivity. The result? Harvard profs stopped accepting gifts, and the structure of pharmaceutical marketing changed, just a tiny bit.

The lesson? Often, you can’t negotiate and bargain with ultra-competitors; the Harvard Med students weren’t interested in selling out, at any price. And you can’t lock out them out or ignore them; ultracompetitors don’t go away. Expand a small number of Harvard Med students to a metamovement of thousands of protests consisting of millions of people erupting across the globe, and you begin to get the picture of just how rapidly ultracompetition is intensifying.

To meet the new challenges of ultracompetitors requires organizations to learn how to become ultracompetitive. Ultracompetition isn’t just quantitatively greater, but qualitatively different. That means, in turn, it can’t be responded to simply by doing more of the same, harder, better, and faster, but only by better, in terms of real marginal wealth creation. It can’t be responded to through better marketing, cheaper products, or bigger threats. It requires a sea change in how to compete. Our products and services may be competitive when measured against our rivals, but are they competitive when measured against the full spectrum of counterorganizations?

For mere businesses, the answer is almost always no. Like Big Food, Big Pharma, Big Energy, and Wall Street, they are increasingly vulnerable to ultracompetitors. Companies in betterness, in contrast, are learning that the key to answering the threat of economic insurgency isn’t to ignore it, deny it, or try to crush it, but to redraw the boundaries of competitiveness." (http://www.fastcoexist.com/1679054/the-corporation-as-you-know-it-is-probably-obsolete)


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

Umair Haque:

"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. "Like a car that goes nowhere, a company that is useless to people, communities, the natural world, and future generations has no use."

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. "Yesterday’s arid, adversarial, and arrogant conception of advantage doesn’t cut the mustard."

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." (http://www.fastcoexist.com/1679058/the-next-global-economy-asks-companies-create-more-than-just-profit_