A NEW ECONOMIC ORDER and A NEW WAY OF LIVING

Capitalist economies are in serious trouble – what they are going through is a cumulative effect of systematic vandalisation of capitalist institutions and sinister manipulation of human motivations. And things will never be same again – because they should not have been the way they were.

It is time to decapitalize society, its institutions, and its motivations. Institutions need to be pruned to their pristine form, and people need to understand that they do not have to vandalize to live well. Society has to respect moderation. Capitalism has to mend its ways – it won’t survive otherwise

 The malaise

 There is no simple solution, because its cause is not an one-off incident. Its cause lies deep in how we have been managing our economy and living our lives.

Consumerism – People were asked to buy and consume more so that they can live well. Companies told them that they are entitled to good lives, and that if they buy the products and services that they sell, their lives would be more enjoyable and more worthy of living. This made a perfect sense till a point – I don’t have a car, and it is a pain traveling in a crowded train. I buy a car, and now I drive to office, and the company makes a profit on selling the car to me. But, the company comes back to me after two years and cajoles me to buy a new and a more expensive car. My old car is doing perfectly fine for me, but I give in to arguments of ‘more space’, ‘comfortable driving’ and ‘aesthetic interiors’. And then I am cajoled to buy another car, and then another car, and many more. And soon I have fleet of cars. It seems nice for everyone – People now know that I am making big bucks and that I have finally arrived, and the company is making larger profits. But, it isn’t really nice for everyone – When I bought my first car, I derived economic value from it. I reached office early, and in good mood, and hence I could work more productively. I went home less tired and hence less irritable, and was able to recuperate enough to be able to put in another hard day’s work the next day. But, it will be difficult to prove if my next car and others after that add any economic value. It is important to find if a product that an individual buys adds economic value because the money that is spend in buying the product can be put to alternate use. If I had not bought the car and left the money in the bank, some entrepreneur might have borrowed the money, bought a machine, and made screws from it. So when I own a fleet of cars, or homes in every city, what I am effectively doing is that I am making more and more capital unproductive –  the capital that is tied in my cars and homes would have been used by industrialists to build factories, and by governments to make roads. So more consumerist a society becomes, more number of people have more number of products from which they are not deriving any value, and more capital is becoming unproductive.

Capital markets – Capital markets were created to ensure efficient allocation of capital. It was supposed to work like this – I have $100 to spare, and there are other people like me who have $100 or so to spare. Individually and even collectively, we do not have the inclination to start an enterprise. But, there is an entrepreneur who is willing to take the risk of starting an enterprise, but he does not have enough capital to do so. I along with other people give him the money that we have, and he starts an enterprise with our money and some of his own money, and we all get the ownership of the enterprise in proportion to the capital that we have contributed. We take shares in the company. The enterprise starts earning profits, and I get dividends in proportion to the capital I have invested. A very fair and wise game so far. Then the enterprise starts doing well, and I start getting larger dividends, and other people start getting interested in taking the ownership so that they can also get the dividends that I am getting. A person offers me $150 for the $100 that I have invested in the company, and take his offer. I earn $50, and my $100 is sold and resold, and each time the seller earns. Traders earn money, but the enterprise does not get anything. It still only has the capital that I and others contributed initially. The fact is that besides the money that the companies get through initial public offerings, they are not getting any value from the trading that is happening in their shares. Lot of people are making money by trading in their shares, but they are getting nothing of it. Worst, speculators and gamblers are owners of companies, whose only interest is selling the ownership of the company as soon as they get the right price for it.

More money for more work – Managers believe that only way they can motivate their people to work is by offering them incentives. So when people would have worked on their own, they are being offered incentives to do so. The result is fatal. Manpower becomes expensive, and cost of doing business increases. It is almost impossible to give economic justification for the astronomical salaries that top managers of companies are getting today. When the CEO’S salary is a thousand time more than the salary of the average employee, the CEO has to justify that he is contributing one thousand times more than the average employee. It is humanly not possible to do so. This phenomenon is percolating in the lower layers of management. The fact is that more and more people in organizations are getting paid more than what they are contributing.

Greed – It is not only that ‘everyone is greedy’, it is that everyone is trying to make the other person greedier than what he himself is. So a sales manager offers incentives to his sales representatives so that they are able to sell more, and hence he can make his numbers and get his bonus. Every layer of management is trying to make the layer below it greedy, so that its own greed can be satisfied. It is not clear whether the donkey wants the carrot, but only rare donkeys refuse the carrot when it is hanging over them.

Layered money lenders – I take a loan from a bank, and use the money to buy a home, run a business or do something else. I am taking loan only when I believe that I will be benefiting more than the interest I am being charged. The bank is lending me money because its cost of capital is less than the interest it is charging me. If any financial intermediary or instrument comes in between me and the bank, it can earn by either increasing interest rate for me or reducing the margin of the bank. And large number of intermediaries have cropped up between me and the bank, making the cost of lending very complicated and expensive.

Pressure of growth – It is no secret that companies have done outrageous things to grow their businesses. In fact, they have set aside simplest of logic in pursuit of growth. When a detergent company wants to grow at 20 p.c., what it means is either the population is going to increase by 20 p.c., or that people are going to become more hygienic and hence use more detergent, or it can grab market share of it competitors. Since the first two possibilities are ruled out, the detergent company has to focus on grabbing market share of its competitors, which everyone knows, is a very expensive proposition in mature markets – and most markets are mature. So companies pay incentives to their sales and marketing people to increase sales, run expensive ads with celebrities featuring in them, and launch expensive sales promotion schemes. Most companies earn their market share at exorbitant costs, and it is really not worth it. The reasons why companies want to grow is more morbid. Analysts rank shares of a company depending on its growth projections, and since most shareholders are speculators, they are more interested in the increase in the price of the shares than the well-being of the company. Therefore they force the management to target irrational growth. Since senior managers have stock options, they have their own interest in increase of share prices. In pursuit of growth, companies have been hollowed out by being forced to operate on thins margins, parts of companies have been sold out, and companies have been rendered ineffective to face competition in future.

Speculation – I take a loan and buy a house for $20,000. A person offers me $25,000 and I sell the house to him. This buying and selling continues and the price of the house is many times its original price of $20,000. People make money, but has the value of the house really increased, or has the price increased only because there was someone offering more money to buy it. The value of a house increases when the road in front of it is improved, and the park behind it is beautified, and such value enhancements show only in marginal price increase. This phenomenon can become widespread if money is readily available and people start buying homes for earning money by reselling instead of actually using it. This is dangerous because when finally someone buys the house to live in it, the price would have been so high that it becomes unsustainable – it is economically wise to live in a rented apartment than buy one. What is true of homes is also true of others assets. When assets are sold and resold by speculators, it becomes expensive for the person who buys to use it, and he cannot earn enough from the asset to be able to justify its cost.

Resource utilization – When a manager proposes to buy machinery, he has to justify its purchase to many layers of management. Similarly when he has to hire, he has to justify how the new employee will add value to the organization. Utilization and productivity of machinery and manpower are strictly and rigorously monitored, and it is the right thing to do. Why should we buy machinery and hire manpower, when we cannot utilize them well? But the strictness and the rigor we apply to resource utilization in our organization gives way to profligacy when we buy for ourselves. I buy a four bed room apartment for a two member family, and we stay in it only for 10 hours a day – its utilization rate is 10.04 p.c. I travel alone in a car and my commuting takes a total of 2 hours – Its utilization rate is 2.08 p.c. Imagine an organization with this type of resource utilization! And since we are buying more and more for ourselves, we are seriously compromising productivity and utilization of our resources.

Inventory – Companies are trying to reduce their inventories of raw materials, work-in-progress, and finished goods. They are buying in small lots, and trying to implement just-in-time production system. It is a good thing because inventories block capital, and they hide problems. But, when it comes to our homes, we buy in bulk and store for months and days. In fact, companies encourage us to buy in large packs by offering us discounts on them, and economists keep telling us that since poor people buy in small lots, they get them dear, and hence continue to be poor. So affluent people are expected to buy in larger lots – A person who buys provisions for a month is definitely richer than a person who buys for a week. But, it is an extremely dangerous belief – when I buy provisions worth $1000 and consume it over a month, and do so every month, half of the provisions remains in inventory throughout the year. What it means is that $500 remains unutilized throughout the year. Imagine the amount of capital blocked in households! And a lot of it can be released simply by buying in smaller lots – so when I buy provisions worth $250 and consume it over a week, I am blocking only $125. The problem is that people are not aware that they are hoarding astronomical amount of capital simply because they are buying in larger lots. In fact, they are being told that they should be proud of themselves for doing so.

The cure

 The solutions are simple. In fact, evolved, and hence complicated minds would call them simplistic. The capitalist society and its companies have to go back to basics – go back to where it all started.

 No pride in ownership – Products and services have their functional value. I need a car to travel to office, but should I own the car? Not necessarily. In fact, a car rental company can provide me better service than if I own a car. I do not have to drive. It will be cheaper because the rental company will ensure that others will be traveling with me. I can rent different cars for different occasions. The car rental company will be able to run and maintain cars more effectively and efficiently than individual owners. The proposition becomes more attractive when car manufacturers start renting cars rather then selling them because then they will focus on making cars with better fuel efficiency and which will need less maintenance. Change has to happen at both at the societal and at the organizational level. Companies have to become interested in lending their products rather than selling them, and people have to be interested in the utility that the products provide rather than feel proud in owning them.

No trading in capital markets – Stock market should restrict itself to collecting funds through initial public offering. Trading in capital markets bring severe anomalies in the economy, but does not add any real value to companies whose shares are traded. Only middlemen and speculators gain, and funds do not go to companies. In fact, if trading is banned, all this money can go to companies through initial public offerings, which they can use productively. People will invest in companies for the long term and there will be less pressure on companies to deliver short-term results.

Work as an end itself – It is not that people do not want to work, it is just that they do not want to do certain work, and companies have to pay generously to make them do the work that they do not want to do. And even when companies are paying generously people are not putting their best in doing jobs that they do not want to do. Therefore, a better idea is to design jobs that interest employees. People will be willing to work at lesser salary, and will work with greater commitment when they do jobs that they like doing. It is important to see a job in terms of the tasks that it is made of, and a person takes up a job because he likes doing most of the tasks of his job. He does not like a few of the tasks of his jobs, and management has to substitute those tasks with ones that he likes, or he can be given more of the tasks that he likes. And employees are always willing to reveal what they do not like in their jobs – management has to just ask them.

It will work like this. My job as a teacher includes teaching and doing research. I do not like doing research, but my university penalizes me if I do not have enough research to my credit at the end of the year – an otherwise enjoyable job becomes a pain. And the fact is that I can teach more and better, if I am relieved of the pain of doing research. And there will always be a  teacher who does not like to teach, but wants to do only research – I teach for him, he researches for me, and the total output is much more than what we would have achieved if we both had done both the tasks. Management lives by the fallacy that if it asks employees what they like doing, and assign only those tasks to them, they will end up having tasks that no one would want to do. But the fact is that howsoever boring a task may be to one person, it will be very interesting for another person – we just have to find that person. There is no boring or interesting task in abstract – an individual finds a task boring or interesting. And when such reallocation of tasks is done, employees find their jobs blissful – some of them might be willing to pay to be allowed to do their jobs. Incentives will become superfluous.

Separation of earning and spending – People who earn more believe that they have a right to spend more, but society has to segregate earning and spending. A person should earn as much as he can, but there has to be societal and religious sanctions on how much he can spend. We should not forget that there are natural limits to how much we can consume. It may seem trivial, but the fact is that we can eat only limited amount of food, sleep on a single bed at a time, and wear only a single dress at a time. The constitution of human body does not allow excessive consumption; therefore there is strong logic for limiting spending. People have to be motivated to save, so that their savings can be channelized for more productive endeavors. And there is one more reason why we need to limit consumption and spending – Nature would not be able to able to support our current rate of consumption for a very long time.

New charisma – Rich people buy big houses and cars, and live lavishly to bestow charisma on themselves. So when a person owns an island and a jet, he starts believing that people look up to him and envy him. And he is right too. But there is an alternate method of acquiring charisma. Mahatma Gandhi acquired charisma through austerity. And there are people like Narayan Murthy and Warren Buffet who insist on living an ordinary life despite their wealth. People have started looking up to them. Society and media has to make examples of such people and motivate more and more rich people to live ordinary lives.

The new roles

 Capitalism will live. It should live, but it cannot survive in its current extreme form. It is extremist capitalism today. If it does not correct itself, it will face upheaval and some form of communism with all its ills will raise its head again. It has to be prevented; therefore capitalists will have to learn moderation. Active players of capitalist economies want their interests protected, even if it means that protecting their interests will see end of capitalism itself. People will have to learn to live with lesser salaries, bonuses, and perks. They have to be convinced that they do not actually need all the money that they want for themselves, and that they do not need to spend all that they earn on themselves.

Society and religious leaders will have to play pivotal roles. All religions teach moderation, and all societies try to maintain a balance between have and have-nots. Educational institutions, especially business schools have to take responsibility for instilling values of give-it-to-all instead of it-is-all-for-me, which they are doing now.