Umair Haque

How to Say "No" to an Economic Frankenfuture

Umair Haque - Fri, 08/27/2010 - 19:03

Dear Big Cheeses Who Run the World,

We regret to inform that you're fired. We're really, truly sorry about this, but we're going to have to let you go. It's time for you to pursue other opportunities.

In case you haven't noticed (and who can blame you? It's pretty hard to see it from private jets, mega-yachts, 158th floor boardrooms, and members-only backrooms) times are pretty tough lately, and we've got to cut back somewhere. In fact, that we're beginning to suspect that maybe, just maybe the entire contract between us, you, and tomorrow — the Washington Consensus, yesterday's blueprint for building economies, communities, and societies — is fatally broken.

Yes, though it did fuel a dismal sort of prosperity, we'd like to aim slightly higher than McGrowth. Because what that seems to have led to, at the end of the day, is a level-five epidemic of austerity. Your solution? Well, it's all a little too Dr Frankenstein for us, frankly — undead companies, banks, funds, and boards, patched and stitched piecemeal back together, shocked back into life via the electric jolt of yet another bailout, stimulus, or special exemption so they can stagger on into a desolate tomorrow.

Thanks — really — but no thanks. We'd like to pass on your very kind, rather creepy plan for a Frankenfuture. It's time, instead, for us to take a quantum leap into the 21st century; to, once again, with steadfast determination, unyielding courage, and just a little bit of trembling trepidation, leave the past behind — and furiously pioneer a better tomorrow.

Please don't worry about us, though — because we're not worried about you. Gambling away other peoples' money, glad-handing each other, double-crossing Planet Earth, and driving companies and entire economies into the red — these are highly employable skills, and we're sure you'll land on your feet. We'll be happy to provide a reference spelling out your expertise at being zombie overlords, should you ever need one.

Just in case, though, you're in need of some totally utopian, rather idealistic, hopelessly naive, laughably unrealistic, stupidly hopeful, colossally constructive, thoroughly impertinent reading material, here's a little crib sheet we're leaving behind for you. It's a brief, crude stab at a new set of design principles that might, just might, be able to spark 21st century economies, communities, and societies, and ignite a more authentic, enduring prosperity.

Call it, if you like, the Generation M* Consensus — the growing consensus of a global movement dedicated to toppling the old order, by doing meaningful stuff that matters the most.
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The Empty Vessel Rule. Government, Arthur Okun famously argued, is a leaky bucket — one which leaks money at every turn. Yet, though the government may be often a leaky bucket, the corporation is just as often an empty vessel: bereft of any purpose higher than profit. What the private sector offers in terms of efficiency, it subtracts in terms of virtue. So what we really need to do today isn't merely to privatize what used to be public, or the reverse, nationalization. We need to meld the efficiency of the private sector with the virtues of the public sector — to pioneer the legal, financial, and contractual basis for new corporate forms, like forporations, that balance obligations to shareholders and the many kinds of stakeholders; that exist "for" a higher purpose than mere near-term profit.

Shadow Tax Cuts. Low taxes are the next item on the Washington Consensus's agenda: nice, but not nearly good enough. Sure, sky-high taxes will kill prosperity dead. So what about the hidden taxes we all pay every second of every day? Consider. The fumes smogging up our skies are a tax. The junkfood lining the bleak exurban shelves is a tax. Most big-box stores are taxes sucking the life, heart, and soul out of town. Wall Street's "innovations" turned out to be a tax. The hidden charges and unfair fees that constitute most "business models" are the epitome of a tax. Where the Washington Consensus ignores all these very real taxes just a little too conveniently, the M Consensus suggests it's time to see them, face them, and eliminate them: steep enough shadow taxes will render all growth meaningless and illusory, because value has simply been extracted — not actually created.

The Lessig Principle. How? Here's one way to counterbalance shadow taxes. Property rights, the next bullet point in the Washington Consensus's agenda, are essential to growth — and so they've got to be enshrined, embraced, and extended. And have they ever been. The original term of copyright was, for example 14 years; today, it's nearly ten times that: up to 120 years. Given that growth rate, by 2100, the copyright on this blog post will last for approximately 47 billion years. Yet, as Mike Masnick tirelessly points out , building on the work of scholars like Larry Lessig, draconian intellectual property rights regimes stifle innovation, entrepreneurship, and disruption, at the expense of protecting tired, lazy incumbents (here's an eloquent explanation on why from Lewis Hyde). So where the Washington Consensus argues for a heavy, rigid approach to property rights, the M Consensus pushes for feather-light rights, knowing that the scarcer special privilege is, the more real value everyone's likely to enjoy.

The Porter Rule. While IP rights, are of course, a form of regulation, the next item on the Washington Consensus's agenda is deregulation in almost all other respects. A giant oil spill, an even more gigantic financial crisis, and an even more gigantic lost decade all evoke the dangers of a dogmatic devotion to deregulation. The M Consensus, instead, subscribes to Michael Porter's path-breaking Porter Hypothesis: crudely put, that stricter regulation isn't what stifles competitiveness — it can be exactly what induces it, by encouraging disruptive innovations to spark and catch fire.

The People Principle. Perhaps the biggest incentive we can give corporations to start getting serious about real innovation again, then, is what might be called humanization. The next item of the Washington Consensus's moldy agenda is legally protecting the corporation. It's been taken to an absurd extreme, with the doctrine that corporations must enjoy legal personhood. But (Earth to beancounters) corporations aren't people — only people are people. The former face few of the obligations citizens do, can't face the same kinds of punishments, are legally bound to maximize profit in ways that citizens aren't, and tend to have thousands of times more cash, time, and power, which means they can afford to de facto buy rights almost no person on earth has (like hiring batteries of lawyers to fight cases for decades). Corporations, like hammers, are just tools. And for the same reason we don't anthropomorphize hammers, nor should we empower corporations with the same rights and powers as people. Where the Washington Consensus humanizes corporations, and dehumanizes people, the M consensus suggests unhumanizing corporations, and rehumanizing people.

The Uninterest Rate. So where the last item in the Washington Consensus's agenda is interest rates, set by markets, to knock governments, people, and communities into shape, the final item in the M Consensus's agenda is what I call an uninterest rate: the rate at which income isn't transformed into outcomes. It's outcomes that count. Though we got a little bit richer, did we actually realize tangible, enduring benefits that mattered? Or did we just get more insecure, obese, unhappy, and disconnected? If the uninterest rate is high, it means income isn't translating into outcomes; because our economy's engines and engineers — corporations, CEOs, investors — are uninterested in making stuff that actually makes us better off; they're just interested in making a quick buck. The higher the uninterest rate, the more corporations are likely to be knocked into shape — by fed-up people, communities, society, and investors alike. If it's low, incomes equal better outcomes, and the mere paper wealth we may have earned actually matters in human terms.

The plight of the global economy looks a lot less like a headsplitting hangover and a lot more like what tends to happen to a two-pack-a-day smoker after twenty years. So what I've just described is really this: the agenda for the kind of innovation that's scarce, rare, and valuable today: institutional innovation. That's the kind of innovation we need to restore economic health. And every day, I see more and more organizations signing off on it, in ways big and small — from Starbucks, to Pepsi, to Timberland, to Wal-Mart, to Nike, to Google, to Tata.

There endeth (for now, anyways) the M Consensus. Truth be told, of course, it's not really a consensus, at least not yet. It's just a highly flawed, surely imperfect, quickly written blog post with just a few ideas — no, not a comprehensive set of answers — for what tomorrow's great consensus could be. So fire away in the comments with your own suggestions, questions, examples, and additions.

*Yes, I'm fully aware I don't speak for everyone under the age of 25, 35, 45, or 95. Nor am I trying to. There are plenty of exceptions that prove the rule that Millennials put meaning, fulfillment, and purpose first. That said, the "M" in Gen M doesn't stand for Millennials. It stands for "a movement to do meaningful stuff that matters the most". It's not about your age — it's about your values, your vision, and your calling.

Categories: Umair Haque

America's Lost Decade(s)

Umair Haque - Fri, 08/20/2010 - 17:06

Is America headed for a lost decade? And is that why I relentlessly propose that the days of industrial age business as usual are numbered? Yes — and no. In this short video post, here's what I advance: America just had a lost decade (I've also compiled four troubling charts, available here, that lend credence to my conjecture).

In many ways, what we're experiencing is less a great recession that started in 2008, and more a Great Stagnation, that began a decade or more before that. The real crisis isn't about bankers, bonuses, and bailouts — it's about an economy that's geared to create thin value; value that's artificial, meaningless, and often, actually worth little, in human terms. So the real challenge isn't about eking out another penny of profit by laying off more another hundred people, offshoring with an even greater ferocity, crushing your fiercest rival more savagely, or churning out more lowest-common-denominator "product." It's about learning to create thicker value: authentic value, that endures, resonates, and multiplies. Unless, of course, you think you can survive another lost decade.

Categories: Umair Haque

Why Economic Recovery Hinges on Values

Umair Haque - Fri, 08/20/2010 - 16:44

Categories: Umair Haque

Reseeding the Economy

Umair Haque - Mon, 08/09/2010 - 18:31

Whenever I visit an emerging market the following introduction is made, always in a hushed tone: "Mr Haque, this is one of our leading industrialists." It's a phrase that speaks volumes. In developed countries, "leading" and "industrialist" are an oxymoron — because, of course, their economies are supposed to be post-industrial.

But here's the funny thing. It's 2010, and we still don't know how to describe the archetypal magnates of the next economy. We don't have a word for it, so we resort to awkward neologisms, like "information entrepreneur" or "green mogul." It's as if we're still not quite sure just what kinds of "capital" tomorrow's tycoons will be "ists" of. What are the kernels of tomorrow's prosperity?

It's a vital question — because, as the eminent Jeff Sachs has recently argued, yesterday's conspicuous, debt-fuelled, binge-and-crash hyperconsumption shouldn't (and won't) be America's (or the world's) great engine of more sustainable, meaningful growth. Instead, investment must replace consumption. Like many today, Sachs concludes that the government should kickstart investment in clean-tech, high-speed rail, and a lot more besides. In other words, the economy's real capital gap — its critical shortage of productive assets — is in better, cleaner machinery: physical capital, next-generation infrastructure. While that's no doubt very necessary, I'm not convinced it will be enough. So what should we invest in?

By way of answering that question, let's discuss the third bullet point in what you might call an agenda for 21st century capitalism: recapitalizing the economy. (The first being having an economic purpose and the second creating higher quality demand)

The real problem's deeper than fixing a handful of today's broken industries. It's in the institutional structure of the economy: why industries get broken as often, and fall apart so easily in the first place. So instead of seeding a one-time harvest — like investing in machines that will inevitably reach obsolescence — perhaps we should be sowing hardier kernels, whose yield endures longer.

Here's what I'd like to suggest. It just might be possible to invest in more powerful stuff than mere machinery. And perhaps — to ignite a more authentic prosperity — we must do so. Yes, we've got to recapitalize the economy. But not with low-potential capital, like cash and machines. With higher order (more productive, more enduring, and more fundamental) kinds of capital.

So here's an investment mini-plan for what I'd call America's real capital gap, a widening fissure in social, organizational, and creative capital. It's these that are, I suggest, the real raw material of 21st century economies:

Clustering. When you say "Detroit", what do you mean? Not just the city, I'd wager — but, more deeply, the tightly linked nexus of car-makers, suppliers, auto consultants and bankers, and the like. You mean, in short, what economists call an innovation cluster. So think: dozens of new Detroits, Madison Avenues, Wall Streets and Silicon Valleys. (For the groundbreaking work on clustering, see Michael Porter's HBR article.)

A cluster is, of course, the living expression of social capital: a critical mass of densely interconnected, locally linked organizations, including investors, specialized suppliers, orchestrators, and schools and universities, amongst which spillovers — like disruptive ideas — catch like wildfire. America's economy yesterday was, in a very real sense, the four clusters above. And its great problem today is that each and every one is in decline, yet tomorrow's clusters haven't been seeded yet.

So instead of centrally planning the industries of tomorrow, let's give them fertile ground — and see what takes root. Instead of, for example, subsidizing Big Energy, let's invest in a next-gen energy cluster. Now, expand that principle: instead of giving zombified industrial-era businesses yet another chance to rise from the dead, let's spark one, two, three, or even a dozen, media, energy, education, transportation, clusters from which decades of invention and innovation might flow.

Forporations. What, then, might amplify the signal of these new Detroits and Silicon Valleys? Let's extend our historical analogy. Yesterday, Detroit, Madison Avenue, and Wall Street were powered by companies like...General Motors, General Foods, General Mills, and General Electric. Funny, isn't it? But perhaps also telling: that's "general" as in generic, commoditized, mass-made "product." Today, we're learning the hard way that "general" is, too often, the polar opposite of "meaningful." So consider then, a radical idea: that the corporation as we know it just might be past its sell-by date, an obsolete tool that's outlived its era.

Instead of creating new value, too many corporations merely transfer value from society to shareholders (consider, for a moment, the paradox of skyrocketing corporate profits versus record long-term joblessness, obesity, or carbon emissions). The problem isn't, when you think about it, that corporations are dysfunctional. The problem is the very opposite: it's that maximizing near-term profit, no matter what, is exactly what the modern corporation was made to do — and is bound to do.

Rebuilding our base of organizational capital means reinventing our most heavily utilized kind of organization, the corporation, to do bigger, better, more enduring things. How might we do it? By creating private-public partnerships to seed and invest new kinds of corporations. Consider the groundswell of states passing legislation for B corporations, a new kind of corporation which balances shareholder value and social returns, instead of prioritizing one over the other. Authentic prosperity depends on what I sometimes call "forporations": more efficient, effective corporate forms "for" the pursuit of more meaningful, disruptive goals than just near-term financial gain; that exist "for" the benefit of more than just shareholders.

Smarter Cities. Where, then, will we put these clusters, and the new kinds of corporations that buzz away inside them? Paul Romer has floated the idea recently of "charter cities." Let's go one step further and build what might be called "smarter cities": special economic zones (whether towns, villages, or, in reality, entire counties) where the real costs and benefits of business, like environmental, social, and human costs, are actually accounted for, where several clusters could thrive. In these zones, firms would finally have sharper incentives to innovate, and develop 21st century technologies, products, markets, and industries — like clean energy — that offer real, enduring gains. Think of them as Petri dishes in which the clean, ethical, people-powered industries and markets of the next decade can grow.

It's hard to take a giant leap into the future. So smarter cities let us take small steps, exploring the difficulties, challenges, successes and triumphs on a relatively small scale, anchoring the larger process of economic transformation on smaller, but still solid foundations.

Here's my guess. If we we seed a critical mass of social, organizational, and creative capital, next-generation industries, markets, and companies today — cleaner tech, faster pipes, speedier transport, and so on — unseen, even bigger ideas will emerge dynamically, from the ground up, tomorrow. Not just once, but over and over again, as interdependent elements of a system. That's what I mean when I talk about investing in "higher-order" capital: tougher, hardier kernels, which yield more fruitful harvests — plural.

If we were to sit down and write an agenda for the future of capitalism, I'd wager that recapitalizing the economy would be near the top of the list. Clusters, forporations, and smarter cities are my three tiny, imperfect, still-developing thoughts for kicking it off.

No doubt, to some, this might sound like the idle daydream of an idealist — and I'll be the first to admit that perhaps, well, it is. Yet, that's the real point. The future isn't in hand because we never created it. So perhaps my vision isn't what counts - just that each of us has one. The economy after all, is what each of us create every day, with each decision we make, and every ambition we pursue.

Categories: Umair Haque

A Deeper Kind of Joblessness

Umair Haque - Mon, 07/26/2010 - 16:56

In lieu of a catchy opening line, a hammer-blow of a chart. The median duration of unemployment is, today, more than double what's it been at any point in the last half-century, at 6 months and counting. It's what you might call the dwindling of the American Dream.

Reviving the ghost of the great John Maynard Keynes, economists from Paul Krugman, to Brad DeLong, to Martin Wolf, to Bruce Bartlett, are chalking up a jobless recovery to a lack of aggregate demand. I'd like to advance a suggestion: it's not just the quantity of demand that's problematic — it's also the quality of demand.

So let's talk about jobs — how they're created, and, conversely, how they vanish. Here's a company that caught my eye this week. Knights Apparel, top supplier of clothing to universities, is pioneering a factory called Alta Gracia where workers earn a living wage — 3.5x the minimum wage, to be precise. In an industry premised on rock-bottom pricing, that's an awesomely courageous move that rocks the status quo.

So will it succeed? Maybe, maybe not. Here's the bigger point. Knights is far from the first proponent of higher wages. One of its pioneers? None other than card-carrying communist...Henry Ford. Most know him for making cars, but in fact, he innovated something much bigger than a mere product: the institution of the "job" as we know it today. Not only did this radical innovator institute perhaps one of the first minimum wages, he did it while cutting working hours. Working 40 hours a week for at least a minimum wage? It's a fixture of American society today.

Surprised? Yet, Ford explicitly said that if he paid his workers above the norm, and gave them more leisure time, not only would he gain greater commitment and dedication, in a industry marked by quick turnover — but, more importantly, he'd also spark more, better demand for novel relatively expensive durable goods, like cars, amongst a still relatively poor middle class.

So one might raise their eyebrows, then, and reasonably wonder whether it's American preferences that are killing the American dream. If America has changed so much that what Henry Ford thought was eminently practical is now seen as hopelessly naive — well, then perhaps it's not just bankers, bonuses, and bailouts that are really behind the Great Crash.

Here's what I mean by that. Every time I buy something from your local big-box retailer, it's not that, as protectionists and "patriots" often claim, that I'm destroying an American job. In fact, it's worse: I just might be helping stamp out the idea that there should be jobs as we know them.
Consider: the bulk of that stuff is made, when we cut through the triumphant rhetoric of globalization, by people who are "sub(sub-sub)-contractors," enjoying few, if any, of the benefits we associate with "jobs" — security, tenure, benefits, labor standards, etc. And, of course, when those privileges are gained, production is simply moved to countries, regions, and cities where they haven't been.

Low quality demand, then, means that we buy cheap, but the price is invisibly steep: it ignites a global race to the bottom, what a complexity economist might call a dynamic equilibrium of negative consumption externalities, consumption that results not just in joblessness but a loss in the quality of jobs. The quality of a job is sparked by higher quality demand; or, valuing more than just the dollar price of a thing, but also its human and social impact. When we have low-quality demand, we have low-quality jobs. When we value McDonalds, the result is McJobs.

A living wage is a small, halting — and perhaps even thoroughly misguided — step in a great reset of those self-destructive preferences. Yet a step it nonetheless is.

Contrast it, then, with what you might call high-quality demand. Every so often, I take my own step, in a little experiment I started about a year ago: I buy specific items in my own little budget from a (preferably local) artisan — made with love, care, and respect — but which cost 20-30% more.

Now, my friends, folks, and colleagues seeing only the cost differential, think I'm going a little nuts. Here's what they don't see: that I'm deliberately attempting to see if I can also factor in a different set of benefits: the benefit I enjoy from helping support something and someone I actually care about, the benefits of having a trusted, ongoing relationship with them, instead of merely mutely, anonymously consuming mass-made "product."

Now, maybe I'm just a soft-hearted fool. But my little experiment is changing how, what, and where I buy — and what kinds of benefits I enjoy. In short, my preferences are changing radically: I do enjoy the stuff above, and often, I enjoy it more than the generic, disconnected, alienating stuff I used to "consume." I'm learning to value not just the financial cost of stuff, but, more deeply, its often-invisible, yet still very real, human and social benefits. I suspect that if we are to create tomorrow's jobs, it will require a sea change in preferences.

Note, here, a key nuance. Shifting jobs to lower-wage countries is a tremendous boon to the impoverished. But it would be an even bigger boon if it weren't a double whammy: if, sneakily, we didn't also denude jobs of quality as they were shifted overseas; if the wage differential itself was enough, instead of exploiting a lack of governance and legislation as well; if that which makes a job more than just mere work didn't get, ever so conveniently, lost in translation.

Were that not to have happened already, people around the globe might have had more to spend, and more time to invest in spending it, with less risk — and so perhaps the global economy's problem of aggregate quantity of demand might currently be less severe. As Ford presciently saw a century ago: "well-managed business pays high wages and sells at low prices. Its workmen have the leisure to enjoy life and the wherewithal with which to finance that enjoyment."

Yet, even that depends on a more fundamental cause: higher quality demand. Because to generate higher wages, more leisure, better standards, work that affords space for passion, care, and respect — to offer that to, well one another — we might just have to learn to value the human, natural, and social more, first.

Perhaps this post, like my little experiment, seems idealistic — even naïve — to some of you. And that's the real point. What Keynes and Ford understood that seems to have been lost in the race to hypercapitalism, is this: it's an interdependent world. And in such a world, tracing — and then turning — the ever-more complex, spiralling effects of feedback is what matters. Call it, if you like, by a much older name: wisdom.

Categories: Umair Haque

Apple's Real Achilles Heel

Umair Haque - Fri, 07/16/2010 - 18:07

Herewith, the second in a series of posts discussing a new agenda for capitalism. To get the most out of it, a gentle suggestion: please read last week's first, if you haven't already. Enjoy!!

So, does your iPhone 4 work? Its antenna issue, some say, including Consumer Reports, points to Apple's various weaknesses: arrogance, bad PR, poor testing, out of touch management.

So is this a great turning point for Apple? Well, yes and no. Apple does have an Achilles heel. But it's bigger — and more enduring — than any or all of the above. It's the second bullet point in what you might call an agenda for 21st century capitalism: building a high-impact organization. Apple's great weakness is that it isn't one — yet.

Here's a suggestion. Apple, when you think about it, is a microcosm of the global economy; a tiny but striking representation of both its strengths and its weaknesses. Apple mass produces "product" (with a smattering of services on top), mega-markets it (across mass media), and sells it in your local mall, mostly to developed-world "consumers."

Here are just a few of the downsides: The raw materials Apple uses are toxic to the environment; Apple's Chinese subcontractors have endured a spate of recent suicides; Apple takes advantage of a questionable Chinese exchange rate regime that effectively exports unemployment to the developed world (and subverts the very notion of "free trade"). And it does all this at a lightspeed pace of "innovation," which results in spirals of obsolescence; last year's junk heads, often, to the landfill. Finally, it's questionable whether Apple's products, as beautiful as they are, offer meaningful benefits to people. Are they just the technological equivalent of Jimmy Choos, the kind of stuff that underpins the consumption addiction at the heart of the global economic crisis in the first place?

Apple, to its great credit, strives mightily to minimize each and every one of these downsides. Yet, that it must do so is the very point. How different, as a linchpin of the economy, is Apple from the Ford of 1930, the GM of 1950, the P&G of 1980, or the GE of 1990? In economic terms, not so much: all are built on the same set of institutions: mass production, mega-marketing, "profit," hierarchy, opacity, "innovation." You know the score — and by now, you might just ask yourself: "isn't it time to move past the industrial age already?"

The hallmark of a 21st century business is having built a radically more fruitful set of economics, so a company, organization, or country doesn't have the downsides above in the first place. Hard as it might be, think of an Apple that can create awesome iStuff without a single one of the negative effects above — and then expand that vision to include carmakers, pharmaceutical companies, and banks — and you're beginning to picture a 21st century economy.

So Apple's Achilles heel is this: It's part and parcel of what you might call a global Ponziconomy. That's one where businesses do better by doing bad. There, companies compete to make some people better off by making others worse off. Like Bernie Madoff's returns to investors were largely illusory, so the benefits offered by a Ponziconomy are often simply fictional — as we've discovered the hard way over the last couple of years or so.

Permit me, then, to humbly offer a tiny challenge. Dear Apple — want to be the revolutionary you proclaim yourself to be? Then know this: being an economic renegade today isn't about building slightly better stuff, but making stuff better — building a 21st century business that does better by doing good. Today, you're about as revolutionary as a cup of lukewarm tea. From a larger economic perspective, you're still mostly a 20th century company in 21st century clothing.

Now, consider this. If I sound like I'm harshing on Apple — I'm not. Apple's perhaps one of the economy's most radical companies and one of its most explosive outperformers. Here's the point: It's still not good enough — not enough to create jobs, meet the needs of tomorrow's generations, give back to the natural world, spark higher-order innovation, or fuel a more authentic prosperity. If that's the best that our economy can do, well, we've got to do better.

No, it's not easy. In fact, Apple's Achilles heel is really the great challenge glaring down at all companies, leaders, countries, and the entire global economy. But if, like Apple, you yearn to be a revolutionary — well, then it's time to get radical.

Consider a small slice of history. When Steve Jobs was searching for his own replacement after his first tenure as Apple's CEO, he audaciously said to the front-running candidate, then-Pepsi CEO John Sculley: "Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?"

Perhaps, today, I might gently ask the same question of Steve: "do you really want to spend the rest of your life selling slicker gadgets, or do you want take this chance to change the world radically for the better?"

The future of capitalism isn't about making prettier, cooler gizmos every year; it's not about helping sell more movies, music, or apps. It's about building revolutionary companies, countries, and economies: those that are hardwired to do meaningful stuff that matters the most, and begin making up for the industrial age business-as-usual's glaring shortcomings; those that can fuel a more authentic prosperity instead.

If the first bullet point on the agenda of 21st century capitalism is discovering a higher purpose for the economy, the second might be said to be building high-impact organizations — those that can change the world radically for the better. Because when you think about it, that's what's really scarce.

Categories: Umair Haque

Real Prosperity Doesn't Come From Stimulus — Or Austerity

Umair Haque - Thu, 07/08/2010 - 15:19

Over the next few posts, I'm going to discuss what might be the five great challenges facing industrial age capitalism — and how they could be answered. Here's the first. Enjoy!
* * *

The crisis of the noughties is kind of like Jaws: just when you think it's dead, it keeps coming back for more. Unemployment, European stability, interest rates, and the specter of another Great Depression are just a few of the issues that have economists concerned...again.

Yet, a great schism divides them. Each side's answers seem incomplete to the other. On one side, Keynesians. On the other, "austerians." The former argue: spend, spend, spend, for the real problem in the economy's a lack of demand — not enough buying power to create jobs and trade. The latter argue: cut, cut, cut, for the real problem's a lack of supply — a shortage of financial capital, to fuel ever-growing debt.

Yet, though it might be fervent, the debate's anything but new. As this ridiculously nerdsome (yes, that's nerdly plus awesome) rap duel between them explains, in fact, it's been raging since Keynes and Hayek went for each others' jugular in the wake of the Great Depression (check out this exchange of letters).

Sounds intractable, right? It just might be — because both sides are arguing over the same thing: how to kickstart growth in gross domestic product. Because, in turn, the assumption from both sides is the same: that "growth" is necessary and sufficient for prosperity. In other words, common to both sides is the dogma that the purpose of the economy should be (maximizing) the volume of gross product.

I'd like to propose a third position in this great debate. Call it "prosperianism." Prosperians believe the economy's central problem isn't a lack of demand, or a lack of supply — but a lack of purpose. Prosperianism's foundation can be summed up in a single sentence: 21st century economies can, should, and must have a higher purpose than product.

Prosperians believe that the real challenge of the 21st century isn't kickstarting "growth" and churning out more "product" — but reconceiving what is growing, how it grows, and why it grows. The prosperian agenda is redefining prosperity, so it's more meaningful, authentic, and durable. It's not about just restarting the same old industrial-age engine of GDP, but building a better one.

Who might be said to be a prosperian? The economist Richard Florida, whose work discusses the central role of creativity in prosperity; the eminent Peter Senge, whose The Necessary Revolution fleshes out a wholer prosperity; John Hagel, whose The Power of Pull explains how to redraw the boundaries of industrial age business as usual; Gary Hamel, whose The Future of Management is an ode to higher purpose; and a raft of visionary CEOs including Timberland's Jeff Swartz, Interface Carpet's Ray Anderson, and Nike's Mark Parker. Not all prosperians agree on exactly what the "right" higher purpose should be, but what they do agree on is the need to move past yesterday's tired debates about product, and begin having a better one, about purpose.

Without a higher purpose for the economy, the door to creating the industries, companies, jobs — and advantages — of the 21st century will remain closed. By contrast, here's what having a higher purpose might achieve:

Ignite new industries. GDP alone doesn't, hasn't — and won't — create incentives for the industries of tomorrow to ignite. Why create a green energy industry, when GDP doesn't count the costs of pollution to begin with? So politicians spend decades horse-trading all kinds of slapdash fixes (like cap-and-trade schemes). But they're like putting band-aids on a gaping wound. They'll inevitably be gamed, tamed, and maimed — because the purpose of the economy hasn't changed. Endgame: new industries stillborn.

Seed new jobs. Why do we have a jobs crisis? Let me suggest the story is a little more nuanced than credit crunches, cutbacks, and layoffs. The deeper reason's this: because the economy has no purpose higher than product, tomorrow's industries were never created yesterday — even though we could see today's jobs migrating to lower-cost countries, whether China, India, or Madagascar. As Hagel has noted, the rate of net job creation has fallen off a cliff in America. Endgame: jobs sputter out, instead of sparking into life.

Price new risks. So the folks we pay to take risk, venture capitalists, have been overly risk-averse. But the flipside is just as true. The folks we pay to prudently sidestep risk, bankers and traders, plunge headlong into it — over and over again. Why? When the economy has no purpose higher than product — when it fails to matter in human terms — risk isn't priced effectively. The risk of, for example, the banking sector going kaput was severely underpriced by "the market." And so capital is consistently misallocated to activities that might be harmful to you, me, and our grandkids. Endgame? Because they keep receiving capital when they shouldn't be, yesterday's industries and companies, like the zombified living dead, lurch on forever, shuffling endlessly into the twilight.

Create new sources of advantage. All of which brings us to the really big picture: the competitive advantage of nations. Yesterday, the institutions of the industrial age were born in today's developed countries. Today, developing nations are, by copying them, discovering the power of industrial age growth. So how can developed countries maintain their edge in the 21st century? Or are they destined, simply, to decline, as global power inexorably shifts?

If the key to sparking a more vibrant, thriving economy is a higher purpose, then it's also the scalpel of competitive advantage for countries. Developed nations are learning, the hard way, the limitations of product-as-purpose — and they've hit the limits of industrial-age growth. China might be able to pay the human and social costs of growth, earned the industrial way — but America and Europe increasingly can't. So it's time to take a great leap up to a higher purpose.

Economics and management desperately need to have a new debate. We've been having the same old one since the Great Depression. And while both sides have valid points, neither side has been able to address the age-old shortcomings of industrial age capitalism.

Keynes once said: "Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." He was never righter than today. Today's debate is happening in yesterday's terms. Decisions that will echo down the generations are being made by the ghosts of economists past. From my tiny perspective, cutting or spending might recover "growth" either by eating the future or savaging the present. For both reasons, that so-called recovery will be — as it already is — jobless, anchorless, fruitless, and, ultimately, meaningless.

The great lesson the turmoil of the last decade should have taught us? It might just be this: that authentic prosperity is bigger, deeper, richer, and more lasting than growth in mere "product." So if we want a new wave of entrepreneurship and investment to seed tomorrow's industries, companies, and jobs, if we want to allocate precious talent, energy, and time to what matters instead of what glitters, if we want to create fundamentally new advantages — it's time to give the economy a higher purpose.

Categories: Umair Haque

Green Shoots: Fabricly and Bolder

Umair Haque - Fri, 07/02/2010 - 18:31

Quick — what will the shape of the recovery be: U, V, W, or L? Wrong question. The right one — unless all you want to do is resuscitate yesterday's business as usual — is, "How do we build a better economy?"

Hence, a new, semi-regular series of blog posts here: "Green Shoots." It's going to be a weekly (ish) discussion of a handful of rebels, renegades, and revolutionaries, radical innovators all — whether startups, projects, initiatives, or investments — that I think just might be seeding the green shoots not just of a back-to-square-one recovery, but of a better economy, that can take a quantum leap past the industrial age.

Now, that's not to say that any of the companies or ideas I discuss here will inevitably be (woohoo!!) "the next Google." Rather, it's to say that they're pushing the boundaries of the possible, and so maybe, just maybe, they can rewrite the rulebook, change the world, and have a bit of fun.

So let's kick off.

My first pick for this week: Fabricly. The fashion industry is, surprisingly, a growing hotspot in the venturescape after decades of underinvestment. Lately, Vente-Privee is a venture capital darling, the subject of much admiration, imitation, and solicitation. And it's a cool idea, which goes straight to the heart of the fashion industry's little problem: overproducing stuff, which then has to be discounted steeply, crushing margins.

Here's the problem. Vente-Privee is innovative only on the surface. It doesn't alter industry, market or economic structure. In fact, it props up a dying business model, by giving Big Fashion a place to sell the same old mass-produced, mega-branded stuff at a slightly lesser discount. Think of it as a faster, sharper TJ Maxx.

Fabricly's a little different. The founders, whom I mentored at Seedcamp, are a little more focused on disruption. Their idea? An open market (slash community) that connects independent fashion labels with quality suppliers. Here's the difference: where Vente-Privee is a "channel" for mega-producers to sell unwanted stuff, Fabricly is a market for microproducers to start producing better stuff.

Now, please don't suppose that I'm comparing Fabricly and Vente Privee in terms of revenues, earnings, etc. This isn't an exercise in beancounting. Rather, what I'd like you to see is the potential for disruption. Will Fabricly be a billion dollar business? Maybe. Maybe not. But what's interesting about it is that it's an attempt to solve not just the fashion industry's little problem (disposing of unsold clothes at a slightly higher price), but its big problem: making better clothes, with less marketing, produced with more love, passion, and feeling.

Vente-Privee is a strategic innovator, pioneering a new channel in the same old fashion economy. But Fabricly might just be what we've been calling on this blog an institutional innovator, pioneering a new market and community that help seed a very different fashion economy.

Here's my second pick: Bolder. Bolder lets businesses set up socially beneficial "challenges" and reward people and communities for taking them on. When you take part, and describe how you completed the challenge, you earn a reward. Mike's Bikes challenged people to bike a two mile trip — and if they did, they'd earn 50% off an accessory. Whole Foods challenged people to eat a piece of fruit, and earn even more fruit as a reward.

Here's what I like about Bolder: it turns the relationship between companies and people inside out and upside down. Instead of activists pressuring companies to do something responsible, companies ask people to take small steps with them. So it asks us to recognize, in other words, that real change begins with sets of interdependent decisions. From an economic perspective, Bolder asks companies to subsidize second-order decisions (those one step down the demand chain) that are the most socially beneficial. By doing so, it lets companies and people work together to create more meaningful, authentic benefits.

Bolder, in fact, is a tiny but vivid example of many of the principles of next-gen marketing, Instead of "consumers," there are people; instead of "consumption," there's positive impact; instead of "loyalty," there's reciprocity; and instead of zero-sum "responsibility," there is generosity.

Bolder is a baby, taking its first halting steps. There are many ways to improve it. I'm not a great fan of the word "rewards" — it's so frequent-flyer lock-in. And it might be just as cool (or cooler) to do the reverse, and let people challenge companies. Yet, its promise is what I find compelling: a radically innovative new kind of market, that begins to create incentives for both companies and customers to behave in more beneficial ways — together.

Think thick value — because that's what both Fabricly and Bolder bring to industries (fashion and marketing, respectively) suffering from a decades-long addiction to creating thin, weak, inauthentic value. Now, they aren't the only Constructive Capitalists rebooting the industrial economy. Nor are they the "best" ones. They're just two I liked this week. Not because they've reached perfection, but because of their potential, their promise, and their passion.

That's it for now. Add companies big or small you'd like to nominate for next time in the comments.

Categories: Umair Haque

Four Economic Benchmarks We Need Now

Umair Haque - Wed, 06/23/2010 - 14:26

Should governments accept the dictates of markets? It's the question raging across the econoverse in the wake of demands for austerity from bondholders.

But it's the wrong question. The right question is: are organizations and markets making decisions that help make people, communities, and society better off in the long run, by allocating their scarce resources to the most productive uses? The correct role of governance is to shape the decisions of markets, by breathing life into social preferences and expectations. Here's what I mean by that. Once upon a time, markets "wanted" indentured servitude, debtors prisons, and child labor. But those decisions were unacceptable to society, and so governments took on the challenge of shaping them, reforming markets by preventing them from choosing those options.

The key word is reform. It's shorthand for "macro institutional innovation" — creating new institutions that govern countries, economies, and regions.

Today, its increasingly clear that markets and companies aren't making the right decisions — and that without reform, they won't. Markets have been misallocating resources for decades, minimizing welfare gains. Consider the trillions spent on bailing out banks in just the latest housing bubble, for example. And those are a drop in the bucket compared to how inefficiently markets allocate, say, oil. The eventuality that oil will run out isn't priced into the market, just the marginal cost of producing the next drop.

What happened? How did our most basic economic tools become so blunted? There's much hand-wringing amongst macroeconomists about the failures of theory and models. I think the real failure is elsewhere: in real-world innovation. Though economists and management thinkers extolled the virtues of innovation repeatedly, firms were just mastering low-level product, service, and technological innovation. Ironically, it was the most powerful kind of innovation that was left ignored, and so simply stopped happening: institutional innovation.

The first half of the 20th century was a golden age, a period of intense institutional innovation. Simon Kuznets laid down the foundations of GDP. At Bretton Woods, world leaders built a global exchange rate regime. The idea of global governance and justice was formalized in international codes of law and tribunals. The groundwork was dug for new kinds of organizations, like 501c's, formalized in the 50s.

But the latter half of the 20th century was a relative dark age, a period of institutional disinnovation. The global exchange rate regime laid down at Bretton Woods simply fell apart. GDP, built for a world of factories, consumer goods, and superhighways, was never updated to measure the costs and benefits of a radically interdependent, post-industrial, information-based economy. New kinds of organizations languished, and the idea that the "corporation" was the terminus of organizational evolution became dogma. Therein lies the problem: our economy's trying desperately to shift past the industrial era, but our macro institutions are a rusting, creaking iron cage, trapping us in it.

Today, new reformers can kickstart radical macro institutional innovation. And It's not just for policy makers. In the 21st century, governance is no longer just about governments. What's different, now, is that smart entrepreneurs, investors, and companies can DIY it. Here are four areas where it's needed most, fastest:

New measures of national income. GDP is outdated; inaccurate, invalid, and unreliable. Better measures of national income that count real costs (like pollution) and benefits (like health) are what will shape better behavior from organizations and markets.

Measures of well-being. GDP is a measure of income. What's missing from that picture? Well-being, of course. More income doesn't automatically make everyone better off all the time, in the same ways. Without measures of well being to live up to, no better behavior is likely to ever flow from organizations and markets.

New currencies. A currency is an especially cruel a form of collective punishment, an implicit tax. In the aftermath of inevitable, regular-as-clockwork financial crisis, everyone holding a currency suffers, whether or not they had anything to do with said crisis. When currencies are created that are independent of countries and regions, people will the choice to escape the bone-headed organizations and markets within them. That, in turn, will set incentives for better behavior. Creating "product"? Stop. Create a currency instead.

New measures of returns. What counts as a "return," anyways? Increasingly, as we've recently discussed, bleeding edge investors are beginning to develop measures of returns to people, communities, and society. They provide a more nuanced, sophisticated picture of the value a firm has actually created — or a market allocated — than mere financial returns ("profit"). Better behavior from organizations and markets is ineluctably tied to better measurements of what is returned from them.

Want to be a radical innovator? Be a reformer. Today's great challenge is reshaping the macro institutions of the global economy. That is what the transition to the 21st century demands. Right now, what we've got is a set of macro institutions left over from the industrial era. They're obsolete and out of touch. They are what let firms and markets to behave exactly the same way as a century ago. What it means to transition to a post-industrial economy is to have built macro institutions that matter to people — not just machines.

It is the countries, companies, and people that can build them who, I think, will reap tomorrow's greatest rewards. Why? Because they will be shaping and molding the next tomorrow's high ground. And there's no source of advantage greater than that.

Categories: Umair Haque

How to Challenge Your Industry Dogma

Umair Haque - Fri, 06/11/2010 - 16:42

It's kind of like air. Invisible but omnipresent, every industry, market, and sector has a dogma — "a doctrine or code of beliefs accepted as authoritative." "This is just how things are done," dogma whispers, every second of every day, to every decision-maker in every boardroom.

What does it mean to be a revolutionary? To challenge an existing dogma, instead of complying with it: to reject its tenets, highlight its flaws and improve each of its shortcomings.

What makes Apple so revolutionary? Why is it able to disrupt industry after industry, and topple the mightiest of incumbents? Steve Jobs is, from an organizational perspective, more Che Guevara than Jack Welch: he's always challenging dogma, instead of complying with it. Apple's rivals, like most companies, do exactly the opposite: "this is how things are done," they think — and then try to do it harder.

Here are six ways to challenge the dogma that's invisible and omnipresent in your industry — to be a breath of fresh air:

Challenge products. Most companies make the same toothpaste, car, or shoe — just in a slightly different color or flavor. Not Apple. Every once in a while, it challenges the existing dominant design, the accepted ideal of what a product should be. That is, of course, the story of the iPad. Yes, tablets have been around for a while — but none with the features, attributes, and pricing of the iPad. Instead of contesting the same old stuff, Apple challenged everyone to rethink it.

Challenge strategy. Think of strategy as a pattern of investments a firm makes. What is it — really — that makes Apple different? It invests significantly more in design and usability, where its rivals don't; as an organization, Apple is more like a design studio (replete with control freak overlord) than a "company." Rivals never invested in design — because design was seen, in biz parlance, as a "cost center", not a "profit center", a frivolous, soft, unproductive use of hard-earned capital. Apple's great challenge has proven that design is perhaps the single most productive investment a firm can make — and that's why its rivals are desperately playing catch up. But they're missing the point: It's not about following Apple. It's about challenging dogma.

Challenge distribution. In the early noughties, the music industry rolled out wave after of portals, channels, and platforms: all new distribution mechanisms. The problem was that they were the same old distribution mechanisms, with a slightly prettier face. As PC World famously said, "the services' stunningly brain-dead features showed that the record companies still didn't get it." Who did? Apple. iTunes challenged the preconception that music could only be distributed in walled gardens — iTunes isn't perfect, but it is far more of a truly open market that anything that came before it.

Challenge business models. Apple's replicated iTunes' success with the App Store, of course. The App Store challenges business model dogma by turning media from product to service, letting new profit possibilities open up. Publishers can earn revenues from app sales — and perhaps further revenues from in-app sales. Apple is spearheading its own mobile ad service, shifting into a new industry, offering new products to a new market — ads that let publishers get more creative bang for the buck, and alter their business model dogma that digital ads are low-value commodities. TIME asking five bucks an issue isn't what I mean by challenging business model dogma — two kids at Stanford topping the charts with an awesome newsreader, one that people actually pay for, is.

Challenge sales and service. Apple sells very differently from its rivals, and I'm not just talking Apple ads. Instead, I mean the Apple Store. Yesterday, electronics were soulless "product," commodities hard-sold by tuned-out teenagers in big-box megastores. The Apple Store challenged every aspect of that and turned it on its head. The act of exchange became personal, passionate, and interesting. Who doesn't stop into an Apple Store every now and then just to check something out? The Genius Bar turned service upside down — giving people, well, actual service, instead of just outsourced script-reading (imagine that). That has paid steep dividends: the Apple Store is (by far) the most productive and profitable store in your local mall.

Challenge production. Apple has, as we've explored, challenged in a variety ways. Here's it's next and greatest challenge. Can it challenge how its products are made? As a recent spate of suicides at Foxconn's Hon Hai suggests, the effects of producing "magical and revolutionary" devices might not be so magical or revolutionary. Can Apple, well, "Apple" not just distribution, marketing, and retail, but the global economy's lowest-common-denominator battle for "labor arbitrage," making it simpler, cleaner, and more productive? If it can, it just might give Apple yet another edge for the next decade.

Lesson? It is through challenge — not mere compliance — that the disruptive outperformance is earned.

You might be wondering — what about Apple's dogma? After all, Apple's a pretty dogmatic company. Of course it is: that's the point. Don't accept it: it's becoming the new industry dogma. Now you know how to challenge it.

Categories: Umair Haque

Ethical Capital Is Capitalism's New Cornerstone

Umair Haque - Wed, 06/02/2010 - 20:51

Out of the great crisis, a mega-imperative: building a capitalism fit for a roiling, seething 21st century, one that's an evolutionary leap beyond its industrial era predecessor.

Here's how the unlikeliest of revolutionaries, Treasury Secretary Tim Geithner has put it: "Our system was not designed to sustain a shock, a crisis of this magnitude...capitalism will be different." But how will it differ?

By putting new "capital" in the "ism." Capital is the raw stuff of production and consumption — and it's past time for us to rethink it. I'd like to advance the hypothesis that the bedrock of growth in a radically interdependent world is ethical capital.

Economists define many different kinds of capital "stocks." They're different kinds of assets, that shape what business models and strategies are possible in the first place. Today's capital stocks aren't enough to power the shift from mere business to betterness, from pushing mass-made "product" to mattering in human terms. You can think of ethical capital as the stock of techniques, tools, and practices not just for creating value, but for defining and refining values, that an economy possesses.

Social investing, "CSR," social entrepreneurship? Macroprudential financial regulation, public-private partnerships, new measures of national income? All just the first, halting steps towards building ethical capital, developing more nuanced, sophisticated perspectives about what's "good" and "bad," "right" and "wrong." Here's the (much) bigger picture.

In Adam Smith's day, capital was centered on machines and cash — manufactured and financial capital. In the 20th century, as mere mass production itself became a commodity, the definition of capital expanded. Nobel Laureate Gary Becker spearheaded the formalization of human capital — the knowledge and skills people have that lets them create new innovations, like machines, in the first place. The great Peter Drucker, of course, fleshed out in startling detail the implications for firms, markets, and societies knowledge economy — one whose primary productive input was human capital. Today, it's time for the definition of capital to evolve again.

20th century capital isn't fit for 21st century prosperity. Today, long run productivity gains aren't just a function of being able to utilize machines, cash, or skill — but being able to utilize all the above without damaging the natural world, abusing the powerless, and taking from the future. Understanding ethical capital is what lets companies, countries, and people get there. It is the cornerstone of authentic prosperity, achieved without hidden costs, invisible subsidies, and socialized losses: it is what maximizes thick value, and minimizes thin value, what lets a company not just make a profit — but make a meaningful profit that matters.

The reverse is also true. Without ethical capital, industries face the problem that Lord Turner has called "social uselessness." Useless to people, communities, and society, they face more disruptive competition (like Wall Street does from Banksimple, Square, and Ally), a keener eye from regulators (witness Wall Street reform picking up pace in Washington), and growing contempt from customers (hedge funds today aren't just hedging trades — they're hedging their own deposits at banks).

But today, a lack of understanding for ethical capital is the rule — not the exception — from BP's questionable behavior during the Deepwater Horizon spill to Big Food's lobbying against salt standards to Detroit's war against public transport to Big Media's crusade to punish its own customers.

The single most significant difference between revolutionaries and also-rans, victors and vanquished today? A lack of understand of (and turning a blind eye to) ethical capital. Facebook's ongoing problems with privacy can all be traced back to a lack of ethical capital — and it is that lack that makes Facebook less than revolutionary. By contrast, when Twitter says they want to "be a force for good in the world" it's crucial: because it tells us Twitter is a company striving to develop 21st century capital. Apple's great test is developing more ethical capital: it can make awesome stuff, but can it make stuff more awesome? Social entrepreneurship, the next great wave of transformative commerce, has ethical capital wired into its DNA.

Rediscovering prosperity after the great crisis means recapitalizing a moribund economy, filling it back up with productive capital. That much is Econ 101. Yet here's what many economists overlook: Today's capital isn't yesterday's. Recapitalizing a 21st century economy means not just filling it back up with machines, cash, or skill — but with more powerful capital altogether. Capital that can knit machines, cash, and skill together to produce greater, more meaningful, and longer-lived gains.

The future of capitalism? It's about what capital was, is — and will be. Today's barren soil needs to be replenished with new crops. It is the seeds of ethical capital that can take root in it, and revitalize it, and prosper.

Want to be a 21st century capitalist? Begin with 21st century capital. Have you seeded any ethical capital — or will a revolutionary resilient with ethical capital uproot you?

Categories: Umair Haque

Ethical Capital Is Capitalism's New Cornerstone

Umair Haque - Wed, 06/02/2010 - 20:45

Out of the great crisis, a mega-imperative: building a capitalism fit for a roiling, seething 21st century, one that's an... Umair Haque

Categories: Umair Haque

Rebooting Prosperity in an Age of Austerity

Umair Haque - Thu, 05/27/2010 - 18:43

Welcome to the Age of Austerity. Austerity is, of course, the opposite of prosperity. It's the latest buzzword on everyone's lips. And it's not just about Europe. The vast majority of America has faced austerity for the last decade, too. Japan's been under austerity for two decades. To Asia, Latin America, and, of course, long-suffering Africa too, the bitter taste of austerity is all too familiar. Next stop for Austerity: America.

Today's austerity is the failure of yesterday's thin, inauthentic prosperity. That means the central challenge of the Age of Austerity is to reboot prosperity. Tomorrow's global economy must be built on a more authentic prosperity: one that is more nuanced and meaningful, because it matters in human terms.

In the Age of Austerity, it is institutional innovation — the most advanced and powerful kind of innovation — that counts. Today, we're still surrounded by industrial era institutions — corporations, resources, industries, exurbs, and GDP, to name just a few. Rebooting prosperity means reinventing the institutions that led to austerity.

It's the story of reconceiving, redefining, restructuring, revolutionizing, and recalibrating yesterday's economic institutions. The catch? Institutional innovation is a new, notoriously tough discipline. Few understand it, fewer still have succeeded at it. Here's my exploration of what a successful rebooting of prosperity might look like.

Reconceiving. Yesterday's prosperity was conceptualized as simply growth in GDP, the industrial economy's foundational institution. Rebooting prosperity begins with reconceiving that metric. GDP is about product. Prosperity, the measure of a good life, comprises more than growing a product. There's a tremendous diversity of perspectives on what else should be considered. Some seem utopian, like the King of Bhutan's Gross National Happiness. Some, hard-nosed, like the World Bank's Wealth of Nations. All are baby steps. Let's invent a hypothetical measure, just for this post: NA, or National Awesomeness.

Redefining. Reconceiving what prosperity is will let us redefine how it happens. It will let us finally begin taking up a challenge that should have been answered decades ago: updating our system of national accounts. When we speak of growth, it's GDP that grows. Growth equals more income in our national accounts. But for NA to grow, a new system of accounts would be necessary. One that might address the numerous shortcomings of GDP, and counts other costs and benefits that matter to people besides product. It's another new institution that will help reboot prosperity.

Restructuring. In turn, redefining how prosperity happens will change the definition of who generates it (and benefits from it). Mark Thoma, Robert Reich, and James Kwak are having an interesting discussion about the fact that the so-called Wall Street reform bill does nothing to actually "reform" Wall Street. They're absolutely right. What might help restructure not just Wall Street — but every industry that has a social uselessness problem, from Detroit, to Big Pharma, to Big Food? Making the institutions contribute in 21st century terms. New top lines, bottom lines, assets, and liabilities are the foundations of 21st century industry structures — they will radically alter industry boundaries, market sizes, and value chains, by reshaping entry barriers, mobility barriers, and sources of bargaining power. By doing so, they'll help pop tomorrow's industries into existence, vaporize yesterday's, and ask those in the middle to shape up — or bow out.

Revolutionizing. The global macroeconomy is a machine, just like an engine is. Perhaps its key institution is the Balance of Payments. The point of the BOP is to close a feedback loop — countries with deficits should see their currencies fall, so exports can rise, and the deficit fall, and countries with surpluses should see currencies rise, so imports can rise, and the surplus fall. What if we had a Balance of Awesomeness, instead? The Balance of Awesomeness might close a different, more pressing feedback loop. It's an institution that might ask a country to balance a deficit in its national awesomeness with investment in people, communities, or the natural world. Conversely, it might let a country with a surplus in awesomeness know it's overinvesting, and begin consuming a little bit more instead. And that, in turn, might revolutionize how sustainably assets are allocated are utilized.

Recalibrating. Today's investors are speculators with the attention span of a Tasmanian Devil with ADHD. Maybe, just maybe, all of the above might be a new groundwork for investing, by altering incentives radically. If new financial instruments — new institutions, again — were linked to either National Awesomeness, or a country's Balance of Awesomeness (think Awesomeness Derivatives), investment would slow down for the long haul, tune into what matters to people, and turn on to engaging with, not just taking from, society.

Sound like a pipe dream? Wishful thinking? Think again. You're behind the curve. The challenges above have already begun to be answered, at the highest level. China's beginning to include the value of ecosystems in its national accounts, for example. In America, the State of the USA project is going to unveil a new set of Key National Indicators this summer. In France, the Stiglitz-Sen-Fitoussi Commission issued a landmark report on measuring well-being, instead of income.

Rebooting prosperity is the great challenge of the teens. There's no single right way to do it. But those who don't, won't, or can't answer it — because of ideology, inability, or because they're just plain ornery — well, they're fossilizing as we speak. Institutional innovators are already hard at work igniting a better tomorrow. New measures of prosperity are already being conceptualized, new national accounts defined. And, as I've discussed at length here, a new generation of companies and investors is hard at work turning "business" into betterness at the micro-level.

Seen through the Cyclopean eye of economic evolution, a great meteor crashed in 2007 — and those who can't reboot prosperity are a bit like the poor, straggling dinosaurs who survived yesterday's great meteor crash (hello, BP): they're living on borrowed time in this Age of Austerity, in a world being furiously reshaped.

Categories: Umair Haque

Rebooting Prosperity in an Age of Austerity

Umair Haque - Thu, 05/27/2010 - 18:42

Welcome to the Age of Austerity. Austerity is, of course, the opposite of prosperity. It's the latest buzzword on everyone's... Umair Haque

Categories: Umair Haque

The Betterness Manifesto

Umair Haque - Thu, 05/20/2010 - 18:18

So you want to build a better 21st century. But how? That's what many of you have been asking me on Twitter and elsewhere.

We can feel it, I suspect, most of us, deep in our gut. Bailouts, global debt crisis, fourth estate destroyed, nature ravaged, future stolen. Welcome to the roaring teens.
Unless we do something about it, there won't be much of a tomorrow.

Here's the score. The global economy faces a series of tectonic structural shifts. The great gears of this vast machine must be reset over the next decade. Consumption must fall. Savings must rise. Investment must be more productive. Incomes and wealth must be shared more broadly. Borrowing from tomorrow must slow. The rate at which we value the future must grow. Growth itself must be revitalized.

Think of it as a great reboot of prosperity itself. How will it happen? Who will reset these great gears? Institutions are the "dials" that tune the gears, that set the rates. Exurbs, corporations, arms-length exchanges, industries, resources, "profit", and "GDP". All that's the stuff of the industrial era. Yet those are the institutions that still surround us today. A better kind of prosperity demands a new set of institutions. New kinds of cities, companies, communities, markets, capital, contracts, growth (to name just a few).

It's up to each of us to build them. Want betterness? Betterness doesn't begin with Ben Bernanke, Lloyd Blankfein, or Anderson Cooper. It begins with you. Creating a better 21st century means choosing to stop living in the 20th century.

So what can you do? Here are eight ways to kick start betterness:

Invest. More specifically, stop investing in corporations that don't do good. Put your money where your mouth is and support companies that are, yes, profitable, but that profit by doing meaningful stuff that matters the most. Stop investing in bad, start investing in good. The key word here isn't good, it's investing: take an interest, engage, put your money to work for the long haul. Stop speculating by the Jim Cramer style nano-second.

Allocate. It's a mystery why so many keep their money parked in big banks that bleed them dry through bailouts. Move your money to a better bank, a local bank, a community bank, a bank that hasn't needed a bailout, or a totally new kind of bank, like BankSimple. Switching costs are low and the benefits are clear.

Cut. "Consume" less. Do you really need another pair of designer jeans, three soy mocha Frappuccinos a day, or a bigger TV? Really? Betterness happens not through naked, aggressive consumption of disposable, mass-produced stuff, but by learning to spend your hard-earned cash on smaller amounts of awesome stuff that's made with love, ethics, and passion.

Work. You're worth something. Stop giving your talent away to organizations that misallocate it, underutilize it, and possibly even abuse it. If you're doing something meaningless, quit. Betterness can't happen if you're spending your life churning out toxic junk. It can only happen when more meaningful work is done. Find a company that's better. Better yet, start one. No, it's not easy. But here's the thing: over the next decade, the businesses that can't do better, the ones you're giving your talent away to, are to go extinct anyway. Cut the cord now, before the axe falls and cuts it for you.

Live. If you're living somewhere meaningless, move. Exurban sprawl, mega-highways, big-box stores: that was the American Dream in the 20th century. In the 21st, it's closer to the awesome Richard Florida's dream of thriving, tightly-connected communities, that make up vibrant cities. Living somewhere where you're forced to, like it's groundhog day, hit the same old big, lame, toxic businesses, over and over again? Those places and spaces were built to support an industrial economy. Today, they're a barrier to letting it crumble and fall. Move somewhere where there's a local community made up of passionate, talented people, a community you can nurture and that nurtures you. It just might be good for your soul.

Civilize. The Dark Mountain folks think the big problem in the world today is civilization and that we need to get radically uncivilized. I think the the opposite: we need to get re-civilized. We've forgotten what civics means. Join civil society. Become a volunteer. Mentor someone. Get involved with a local non-profit. Do something that has, in the parlance of economists, positive externalities: an activity that benefits others more than it benefits you. The basis of civilization is not naked self-interest, it's shared interest.

Support. Support what you think matters. Want a thriving democracy? Buy a newspaper. Want haute couture? Stop buying fast fashion. Want green energy? Invest in going off-grid. Every choice you make with your money, time, and effort reflects your true support for betterness.

Reflect. The 20th century was built never to allow room for reflection, only work. Take time out, no matter what. Pick a favourite place, a café, restaurant, park, or avenue. Hang out and reflect. What would betterness mean in your life? How are you helping betterness happen? How could you help betterness happen? Without time to reflect on those questions, and explore and refine your own answers, none of the above can happen.

None of this is easy. And no, it won't magically create a paradise overnight, or possibly ever. These aren't the only paths to betterness, or even the best ones. This is just a blog post. Here's the point. It is only by accepting the hard truth of personal responsibility for yesterday that each of us can begin to create a better tomorrow.

Institutions are emergent: born from the bottom up, they suddenly catch fire, and then transform the fabric of economies. It's through small changes massively distributed, like those above, that 21st century institutions are most likely to spark and ignite a great reboot. Call it a new American Dream. Its details aren't visible yet, but it's outline looms large. It's about a more meaningful prosperity, that matters in human terms, and it is institutions to support and nurture meaningful work, play, and living, that the 21st century demands.

Real change doesn't begin with governments, presidents, or prime ministers. It begins with each of us. In the 20th century, never-ending mass-marketing, monopoly, and mega-politics came together to convince us, each and every one, that we're not really free: just free enough to choose between different flavors of the same old toxic junk. It was a trick, a ploy, a television hallucination. We're the freest people in history. It's time to use it like we meant it.

Every revolution begins from the bottom up. Fed up with the status quo? Tired of the 20th century? Then don't just talk about it. Reject it and refuse it. Build a better 21st century instead.

One of history's greatest builders once said: "be the change you want to see in the world". Let me update Gandhi's wisdom for the next decade. Want a revolution? Be the revolution you want to see in the world.

Note: This is my opinion. You're more than welcome to disagree. If you'd like to, be polite and add to the discussion by letting us know why.

Categories: Umair Haque

The Betterness Manifesto

Umair Haque - Thu, 05/20/2010 - 16:00

So you want to build a better 21st century. But how? That's what many of you have been asking me... Umair Haque

Categories: Umair Haque

Why Betterness Is Good Business

Umair Haque - Fri, 05/14/2010 - 17:43

Lately, there's been a raging debate in the comments here. One camp's refrain: who is this snot-nosed idealist? Why is he telling us to do betterness instead of business, pursue awesomeness instead of innovation — and maximize good, instead of quarterly profits? What kind of expertise is that? We've got the hardest of noses — so where's the real-world evidence?

Here's the score: Striving to do more good is associated with greater profitability, equity and asset returns, and shareholder value creation. But that's still not good enough. Today, the bar is being raised: success is itself changing. Those are yesterday's metrics of success — more importantly, maximizing good lets companies outperform on tomorrow's measures of success. Increasingly, investors are using ethical/social investment criteria like the KLD score, corporate governance ratings, and other metrics we'll examine below. More and more, investors aren't just looking for near-terms financial returns: they're looking for financial returns *plus.* Why? Because the *plus* makes returns less risky, more defensible, and, the biggie, more meaningful. As the expectations of people, communities, society, and investors change, the definition of outperformance itself is changing.

Every year, the Ethisphere Institute identifies its most ethical companies and then tests their performance. In 2008, ethical leaders outperformed the growth of the S&P 500 by 40%. In 2009, again. In 2010, by 35%. Its drivers? CSR Magazine found a shareholder value performance gap of about 10% between, for example, the most and least transparent companies. No, neither are iron-clad tests. But they begin to hint at a relationship — one that, these days, most CEOs would give their eyeteeth for.

Here's a more powerful result. The mean Market Value Added of the top 100 Corporate Citizens is $36 billion, more than four times the Mean Market Value Added of the remaining companies — which is less than $8 billion, finds Curtis Verschoor of the SRI. In term's of Businessweek's ranking of Total Financial Performance — a composite of eight criteria, like sales growth, profit growth, and return on equity — the top 100 Corporate Citizens outperform by 10.4 percentiles. Both these relationships are statistically significant.

At Berkeley's Haas School of Business, Margarita Tsoutoura came up with even more interesting results: she found that companies who rated highly on the KLD rating score — socially responsible companies — had significantly higher profit margins, returns on equity, and returns on assets. Here's another pioneering study I like — one which, yet again, concludes responsibility fuels advantage, because it's risk management: better insurance against adverse future events. Those were a small studies; here's a huge one. 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 was a meta-analysis of 52 studies, with over 33,878 total observations. Whew: that's a whole lotta outperformance.

In People and Profits?, a landmark book reviewing decades of research, Joshua Margolis and Jim 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 says: "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."

No wonder, then, that the alarm clock's going off for investors. At least 538 institutional investors use social criteria when making decisions that used to be purely financial. Social investors manage assets of $2.71 trillion, already more than 10% of the $25 trillion of the economy's total assets under management. And that's not a groundswell. It's an explosion: fifteen years ago, the number was just $640 billion.

The tectonic shift to social investing going mainstream is going to amplify the effects above as it gathers strength. It will ensure that every marginal bit of good creates even more shareholder value — and every marginal bit of bad destroys even more. It's nothing less than the retuning of the global economic engine itself.

Yet, the next thing Margolis says is "we caution against drawing hasty conclusions." Why? Well, "responsibility" can be, as Michael Porter argues, a vague, often meaningless concept — and so discovering "how" it fuels outperformance is complex. The studies above have methodological limitations. Here's a paper, for example, that argues that not investing in alcohol, tobacco, and nuclear power brings socially responsible investment returns down to market averages — hinting at that complexity. Here's a killer paper from Michael Toffel about whether responsibility ratings actually do measure social responsibility in the first place. It's not as simple, then, as fashion: merely signing up to the latest supplier standards, buying into the newest set of audits, and being included in the latest list of ethical companies.

That's why I took a different tack in my forthcoming book: considering not just whether companies are "responsible" in the sterile, often easily gamed terms above, but whether they're maximizing good: creating authentic economic value. My starting point wasn't just "social" outperformance — but, more deeply, antisocial underperformance: the, well, market itself. Business as usual is intellectually, ethically, and morally bankrupt. Surprise: it's also economically bankrupt. The S&P 500 created no value over the noughties Not a penny. If we factored in negative externalities, like, for example, the costs of the banking bailout? Trillions in value would have been destroyed. Over the last decade, business as usual is net negative in terms of creating authentic economic value.

In the starkest of contrasts, what I call Constructive Capitalists — a set of companies who meet a Mount Everest-level bar for good, not just "social responsibility" — have outperformed by hundreds of percent. While business as usual has been busy going economically bankrupt, in the middle of the most turbulent, volatile, and downright nasty decade in recent history, companies who are doing the stuff we discuss on this blog have thrived, disrupted, and prospered.

The future of advantage is never seen with perfect clarity. Yet, its shape is more and more visible. Economics ain't physics. The debate's not 100% resolved and perhaps it never will be. Yes, there is much work to be done untangling relationships, directionality, and causality. Here's the kicker. By the time the evidence is totally, irrefutably, conclusive? Well, by then, the great shift will, by definition, be over. Too late: you'll probably be one of the fatalities being studied by researchers. A Constructive Capitalist with a betterness model, pursuing awesomeness, doing radical good, who had your creaking industrial-era empire squarely in his or her crosshairs, will likely have already have dug your grave.

The evidence already strongly suggests that good is better. It's crucial to understand the nuance in that statement. Not just because it leads to better profits, equity returns, asset returns, and shareholder value, though it does. Today, those are just table stakes, an industrial-era definition of success that's increasingly out of date. Good is better also because companies are being judged against a whole new set of criteria, by customers, governments, communities, and investors. They're already asking, "So you made a profit — yawn — but did you actually have an impact?"

Good, the evidence suggests, is the very opposite of Utopian idealism. The real utopia? That was the one economists, bankers, and titans of industry promised: in a world of perfect markets and infinite leverage, companies who blindly maximized profit would lead everyone, ineluctably, to unstoppable prosperity. It didn't work out that way. Just ask Wall Street, Big Food, Big Media, Detroit, Greece, Spain, Dubai, or anyone from the American homeowner to the Chinese migrant worker. Today's real idealism is this: pretending that business as usual is good enough for companies, countries, the world, or the future. It isn't.

It's time to get real: good is as sharp as a razor, as hard as a hammer blow. That's what decades of research suggest. That's why companies as different as Google, Wal-Mart, Pepsi, Lego, Starbucks, Nestle, Apple, Patagonia, Timberland, GE, Tata, are all, in their own ways, taking steps small and large towards it — and why customers, governments, and investors are joining hands with them on the way. Welcome to 21st century business. It's a movement to do meaningful stuff that matters the most — and if you're not part of it, well, the hard-nosed chance is: you're kissing your future goodbye.

I don't advise you to do this stuff because I'm a communist. It's because I want you to outperform — today and tomorrow. And I know you can.

Categories: Umair Haque

Why Betterness Is Good Business

Umair Haque - Fri, 05/14/2010 - 17:35

Lately, there's been a raging debate in the comments here. One camp's refrain: who is this snot-nosed idealist? Why is... Umair Haque

Categories: Umair Haque