The Corporation in the 21st Century
Incumbents lost out because other businesses met customer needs more effectively.
Business has evolved but the language that is widely used to describe it has not.
The physical assets required by twenty-first century corporations are mostly fungible.
The modern business environment is characterized by radical uncertainty. The successful firms builds distinctive capabilities and distinctive collections and combinations of capabilities.
What we call profit is no longer primarily a return on capital but is economic rent. Economic rent is not an anomaly but a central and valuable feature of a vibrant economy.
The terms capitalism came into being to describe an economy designed and controlled by a bourgeois elite.
Love the product, hate the producer
Heineken refreshes the parts other beers cannot reach. Marketing messages are puff and unactionable. The term puff in legal circles date from a case in which the future British prime minister Herbert Asquith unsuccessfully defend the Carbolic Smoke Ball Company.
The term stakeholder was popularized in 1984, in a book by R. Edward Freeman, who used it, to refer to the range of people and organizations who have a legitimate interests in the performance of a business.
The tension between these perspectives – stakeholder capitalism or shareholder priority – is a recurrent theme throughout this book.
A history of pharmaceuticals: a case for treatment
The pharmaceutical industry has a chequered history.
Drug regulation began in 1906. Congress passed the Pure Food and Drug Act in response to the abuses in the meatpacking industry exposed by Upton Sinclair.
Aspirin was trademarked by the German company Bayer in 1899.
George Merck was a head of Merck that was one of the first companies that recognize and benefit from the potential of antibiotics. Merck Manuals are still a widely used medical reference, though they now contain more reliable information. For many years Merck topped Fortune magazine’s list of most admired companies. They positioned themselves as research company. They talk about profit as a result rather than an objective.
The post-war pharmaceutical industry enjoyed an implicit contract with the public and the government. The industry was permitted extraordinary profitability in return for the business behaving as exemplary corporate citizens.
US law permits direct advertising of prescription drugs to patients.
But some companies did not act as exemplary corporate citizens. Companies like Valeant, Turing Pharmaceuticals and Purdue Pharma.
The pharmaceutical industry illustrates modern business at its best and worst.
Two of the four largest charities globally are the result of the philanthropy of the leaders of the pharmaceutical industry.
There is no shortage of patient capital – institutions such as pension funds and university endowments are naturally looking for investment that may only pay off in the long term – but there is a shortage of patient individuals working in the finance sector, an industry remunerated almost entirely by transactions.
Economic motivation
Competition is a spur to effort, innovation and creativity; cooperation is necessary to make that effort productive and to realize the fruits of innovation and creativity.
Robbers Cave experiment of Muzafer Sherif observer human tendencies to create “in” groups (cooperations) and to reinforce the identification by shared hostility to “out” groups (competition). This is now described as active polarization.
Organizations exist because humans can do things collectively that they cannot achieve individually.
Today the word “capital” is often used loosely to describe both capital as a factor of production and capital as financial assets.
In the last half-century economists and legal scholars have emphasized personal rather than class identity.
Michael Jensen and William Meckling are talking about a firm as a nexus of contracts, a group of people who – for the time being – find it advantageous to do business with each other.
A Brief History of Business
The mechanical firm
The model of a production function pioneered by Philip Wicksteed (1894). Output is the result of the combination of capital and labour.
Charles Cobb and Paul Douglas created the Cobb-Douglas production function.
John Hicks, Roy Harrod and Robert Solow recognized that production functions might change over time. Technical progress might augment the productivity of capital, or labour, or both.
The firm is a collection of assets owned by people called capitalists, who employ workers and order them to attend their premises and operate their plant and machinery.
Frederick Taylor in his The Principles of Scientific Management (1911) sought to break down the business process into individual components which could be measure and monitored.
The issue of securing conformity by the workers to the purposes of the capitalists is the issue of the principal-agent problem. The solution to the principal-agent problem is to devise incentive schemes that will induce conformity.
A central theory of this book is that this transactional account of business is not just repellent but mistaken. Social aspects of work, including both relationships within the workplace and those between business and society at large, are crucial to both personal productivity and personal fulfilment.
The rise of manufacturing
Industrial revolution demanded hierarchical, disciplined organization.
The British Empire imposed Greenwich Mean Time as a world standard.
The logic of linear repetitive manufacturing process led to the assembly line. With this innovation Henry Ford, supported by the Danish-born engineer William (Bill) Knudsen, transformed the automotive industry.
The Marxist account of the distribution of income and wealth emphasized the importance of social roles and political power.
A similar combination of politics and economics govern income distribution today although the mechanisms through which these factors operate differ substantially.
In 1871 British legislation permitted the formation of trade unions.
The 1960s was the decade in which the then dominant model of business organization, based on closely monitored assembly line, peaked and began to decline.
The rise of the corporation
The word “corporation” is derived from the Latin corporation.
The City of London Corporation received a royal charter from William the Conqueror in 1067 but this merely confirmed rights it had held since at least the time of Edward the Confessor.
A company was just a group of people, they became a corporation when it acquired some special legal status.
The idea that one might deal in tradable securities that represent claims to tangible assets, independently of the assets themselves has a long history.
Banknotes were initially claims against the gold in the vaults of the banker.
The modern equivalent of the gold in the vault is a loan the bank has made.
The railways would change almost every aspect of economic life – including both the organization of business and the organization of production.
Building a railway was capital intensive, and the promoters and other well-off individuals provided funds in return for promised dividends on their stock.
The new infrastructure was financed by drawing on the savings of the English middle class; US railroads were funded similarly. Share prices peaked in 1845-6.
In 1856 legislation allowed promoter in Britain to establish a limited liability company without the need for a royal charter or special act of parliament: simple registration was sufficient.
Critical factors in the choice of business structure are the limitations of personal liability, reporting obligations, the tax treatment applied, and whether the business has plans to have more than a handful of shareholders and/or to offer shares to a wider public.
In Germany banks are more focused on supporting local businesses than international.
Transportation by railways and railroads, the availability of mechanical power in factories, the institutions of incorporation and public capital markets: these three factors, working together, had created a new business language.
The advantages of scale are technological and appear visible; the disadvantages are mostly human and less immediately apparent.
Changing fortunes
The business magazine Fortune published a list of the largest 500 US corporations and has continued to do so annually ever since. The list did not include retailers. None of these 1955 companies is today the dominant firm in its industry.
Now the list includes service businesses and the two top companies by sales are retailers.
The best guide to the leading corporations of the twenty-first century is perhaps found by asking which companies have the largest profits and stock market value.
The decline of manufacturing
In the first British census, held in 1801, one-third of workers were employed in agriculture. By 1861 only 27 % and at the end of the century only 10 %.
In 1960 manufacturing still provided 20 per cent of UK jobs. By 2019 the figure was 8.5 per cent.
Modern economies are necessarily diverse. But diversity of consumption is entirely compatible with specialization of production.
The Industrial Revolution was built on the substitution of mechanical work for human – or animal – labour. The manufacturing obsession has no economic basis but considerable social and political significance.
In the modern economy, value comes not from building something bigger or heavier but from creating something smarter.
Henry Ford’s Model T car, first produced in 1908, was priced at 850 USD, when American average annual earning were around 500 USD. By 1926 the price had fallen to 260 USD and the average wage had risen to 1.500 USD.
Once, the badge of poverty was not having enough to eat; now we describe not having a home computer as digital poverty.
The Secret of Our Success
Humans have become better at almost everything as a result of the steady accretion of collective knowledge and its transformation into collective intelligence – a problem-solving capability characteristically found in teams of people
Better at everything
The acquisition of knowledge and the development of capabilities are the product of the organizational context set by the institutions of the market economy.
By accumulating collective knowledge, applying collective intelligence and practising the division of labour on a global and inclusive basis, humans have become better at … almost everything.
We are distinguished from other animals by our capacity for social learning – gaining knowledge not just from our own experience but from the experience of others.
Better at business
Understanding of electricity advanced steadily through the eighteenth century. But such knowledge was a curiosity rather than a discovery with practical application. Benjamin Franklin, Hans Oersted, Michael Faraday, James Clerk Maxwell. They all discovered electricity. Carl Gauss had pioneered the idea that electrical impulses could be used for communication.
James Watt’s condenser (1769) greatly improved the efficiency of Thomas Newcomen’s (1712) steam engine.
The deployment of efficient steam engines may have been the single most important catalyst of the Industrial Revolution.
The development of steam turbines revolutionized seaborne traffic.
Coal opened up a different path of evolution.
Manned flight happened at the beginning of the twentieth century as a result of an accumulation of collective knowledge and its translation into collective intelligence.
The term ‘learning curve’, now used casually and widely came into being to describe the phenomenon that Adam Smith identified and claimed to have observed in the pin factory. Individuals become better at routine tasks, though usually at a decreasing rate, as they repeat them.
The division of labor requires exchange. And exchange requires a concept of value.
The concept of the wisdom of crowds is often said to originate with Aristotle. The modern popularization of the phrase is attributable to the American journalist James Surowiecki.
Value
“What is a cynic? A man who knows the price of everything and the value of nothing.” Oscar Wilde[1]
The rational of economic organization is that it adds value. A theory of value is the foundation of economics. Adam Smith, David Ricardo and Karl Marx subscribed to versions of a labor theory of value. They perceived value as a tangible property of the object – the result of the direct and indirect human effort put into its creation.
A subjective definition of value focused instead on the utility of the output.
In the second half of the nineteenth century Stanley Jevons, Carl Menger and Leon Walras provided a resolution that took elements from both sides of the debate. Value was subjective because it could not exceed the pleasure or use that the consumer derived from the product.
In a market economy, price is a source of information about values and costs.
The singular virtue of a competitive price mechanism is that it aims to achieve a property that economists describe as incentive compatibility.
In the pharmaceutical industry prices are a poor indicator of value.
Most of what is valuable falls outside the scope of the market economy. And not everything that has a price is valuable.
Stanley Matthews changes trains
Cost and utility were the two blades of Alfred Marshall’s scissors. Economic rent is the difference between the utility of output, as measured by what people are willing to pay, and its cost, as measured by what they would be willing to pay for the same factor, or combination of factors, in alternative use.
Only in competitive markets are distinctive capabilities turned into economic rents.
Valuable organizational rents are the product of distinctive capabilities that are both appropriate by the organization that enjoys them and sustainable over time.
Parasitic rent extraction by agents such as financiers and corporate executives is today a major economic issue.
The age of individualism
The 1960s were the zenith of the large manufacturing corporation. In the second half of the century a dominant narrative arose in which business was viewed in essentially financial terms. The purpose of the corporation was the creation of shareholder value.
Money can’t buy you love
The 1960s was an era of social and political turbulence. There were critics of the growing social, political and economic power of the corporation.
General Motors were the epitome of Galbraith’s technostructure and the target of Ralph Nader’s critique of corporate responsibility.
In 1968 students in many countries took to the streets in imitative protests.
This increasing hostility to business in intellectual circles provoked a reaction. Milton Friedman: “The Social Responsibility of Business is to Increase its Profits.”
The Vietnam War had economic as well as political consequences. Inflation accelerated in the Global North. The Yom Kippur War between Israel and the Arab states was the trigger for and oil price shock which entrenched inflation further.
Much has been written about the political influence of the Mont Pelerin Society founded in 1947 by Friedrich Hayek.
Or perhaps it can: the modern theory of the firm
Igor Ansoff and Kenneth Andrews are often described as the founders of the subject of strategic management.
Joe Bain and F.M. Scherrer were another authors of modern economic reality.
Porter’s widely discussed five forces framework is effectively a translation of the S-C-P approach into business language. But this approach fails to explain why some firms facing the same forces as others behave differently. The inability of economists to make sufficient contribution to business.
To act on belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.
The ‘need to know’ is almost universal. Humans continue to crave certainties that are not available.
Real businesspeople operate in large worlds, in which problems are ill defined and there are no objectively correct answers. Effective decision-makers in large worlds confront radical uncertainty.
Ronald Coase is defining the boundaries of the firm by the relative costs and efficiency of two methods of coordination: markets and hierarchies.
The world is radically uncertain. Information is imperfect. No contract can anticipate all possible contingencies.
Jensen and Meckling framework from 1976 states that the corporation was simply an artificial convenience to facilitate the execution of agreements between individuals, shareholders, other investors, employees, customers and suppliers.
Jensen and Meckling and the body of scholars who followed them describe a world in which there is little scope for collective action or the development of collective knowledge.
The nexus of contracts approach stands in sharp contrast to the long-standing and still influential legal doctrine of corporate personality.
It is not only the future that is subject to radical uncertainty. Information about the present is also imperfect – and unevenly distributed.
The hold-up problem and the principal-agent problem would occupy the attention of economists for half a century.
Incentives as a way to align individual and organizational objectives … incentives and delegated authorities are complements each makes the other more valuable.
The myth of ownership
Friedman’s answer was clear, the objective of the organization is to maximize its profits.
How can the principal (shareholders) induce the agents (the executives) to conduct in accordance with their desires?
Germany requires that any exercise of property rights has regarded to the public good.
In English law company property is not held for the benefit of the shareholders but is owned by the separate legal entity that is the company. Any benefit to shareholders must come from dividends and from any increase in the value of their shares, not from the property itself.
A Poison Pill is a device that enables Delaware corporations to issue shares on terms designed to dissuade hostile takeovers and activist investors.
A.M. Honore introduced useful concept of ownership. The eleven badges of ownership. The right to possess, the right to use and the right to manage. Ownership entitles you to any income that is earned and to claim the capital value of the asset. It imposes an obligation to refrain from harmful use. What you own can be seized to satisfy your unpaid debts. Owners may claim security against expropriation. They can pass on any or all of their rights to someone else. The absence of any time limit on these rights is another badge of ownership. Owners have an ultimate right of residual control. They continue to hold all rights they have not explicitly conceded to someone else.
Must companies maximize profits?
The UK’s section 172 of the 2006 Companies act. The formulation is a masterpiece of ambiguity and compromise. The obligation is to promote success of the company. The benefit to the members (generally; the shareholders) will follow from the success of the company.
Section singles out shareholders from other stakeholder groups without expressly giving them priority.
German law has no such ambiguity.
American corporate law is primarily state law.
The notion of corporate personality has many applications. Until 1965 a corporation in Britain was subject to income tax on the same basis as an individual.
Author is on the side of people who believe that corporate personality should be regarded as not just a legal doctrine but an empirical reality.
Businesses are social organizations and operate within a particular society.
Leaky pipes and overflowing sewage
We do not inherit the earth from our ancestors; we borrow it from our children.
In 1989 the water industry in England was privatized.
All businesses report their earnings over an accounting year.
Banking was different. Banks have always borrowed cheaply and lent more expensive.
With mark-to-market accounting, you might take credit for all the profit you expected to earn from the transaction at the moment the contract was signed. Mark-to-market accounting would be a principal source of the illusory profits reported by banks in the years before the 2008 global financial crisis.
The dumbest idea in the world
I’d be a bum on the street with a tin cup if the markets were always efficient. Warren Buffett[2]
Jack Welch is widely credited with inaugurating the era of shareholder value in a speech at The Pierre hotel in New York in 1981.
The efficient market hypothesis (EMH) is a cornerstone of moder finance theory.
Since everything that could be known about the company was reflected in the stock price, maximizing shareholder value could be equated to maximizing the current value of the company’s shares.
In 2013 the Nobel Prize in economics was shared between Eugene Fama, for formulating the EMH, and Robert Shiller, for accumulating evidence that it was not true.
Any idea that the market knows more about the corporation’s future that its management knows – or could or should know – represents the triumph of an abstract theory over common sense.
The move to shareholder value gave a new twist to the principal-agent problem posed by the separation of control and ownership. How were executives to be incentivized to maximize shareholder value?
After 2000 explosive growth in the use of stock options was associated with explosive growth in remuneration of senior executives.
How it all worked out
It is not a coincidence that the emphasis on financial metrics in business occurred at the same time as explosive growth in the size and remuneration of the financial sector.
The evolution of finance
For most of history wealth consisted of physical assets. But as finance evolved, the link between the financial and the physical became more tenuous.
By the end of the nineteenth century, retail banking in England was already concentrated into a handful of institutions such as Barclays and Lloyds. There was a distinction between investment (merchant) banking and retail banking.
In the later twentieth century, practice changed. Secured lending was inappropriate for a start-up world. Venture capital was better solution.
The boundaries between loans and bonds have always been blurred.
Michael Milken, of Drexel Burnham Lambert, is credited with the invention of the junk bond.
The internationalization of finance which had begun with the establishment of the Eurodollar market also had wide repercussions, many of them unintended.
The art of the deal
Until the 1960s mergers were typically horizontal, between companies in closely related lines of business. But in the later part of the century consolidation was more in focus. The term M&A would become central to the corporate lexicon.
Tex Thornton was the commanding officer of a group of ten young, numerically oriented Harvard Business School faculty who transformed US military logistic in the Pacific during the WWII. After the war he pitched their service to Henry Ford. He accepted the offer and they rejuvenated the business.
The British financier Charles Cloer is often credited with the invention of the concept and word ‘takeover’. In 1953 he mounted a bid for Sears.
The success of the first venture capital houses led to the rapid growth of the sector.
The management buyout enabled some incumbent executives to take a larger stake. Some see this as an answer to the principal-agent problem.
Not a pretty picture
The art of the deal allowed many executives to lay claim to the heroic status attached to the founders of businesses.
The M&A business is now substantially driven by managerial egos and the fees it generates for bankers, lawyers and consultants.
The two largest mergers in history (by value) both occurred in 2000. AOL and Time Warner and Vodafone and Mannesmann. Both mergers proved to be disasters of titanic proportions.
The fall of the icons
James Black discovered beta-blockers, the first effective anti-hypertensive drug. He later joined the SmithKline, where he discovered Tagamet, and anti-ulcer medication. Glaxo smaller company then focus on the other area and they found Zantac, that become words best selling drug. He directly or indirectly created more shareholder value than any other person in Britain.
In 1962 Sam Walton opened the first Walmart store in Arkansas.
In 1968 the 747 jumbo jet appeared and in the same year Bill Allen, who had been CEO of the company since 1945, retired. He and his colleagues eat, breathe and sleep the world of aeronautics. The 737 and 747 were the product of that culture. By 1990s only the European Airbus consortium offered effective competition. Boeing boosted its stock price by aggressive share repurchases. Since 2019 Airbus has consistently outsold Boeing.
In the 1970s and 1980s was the most valuable company in the world. The disappointing tenure of Ginni Rometty, one of the first women to head a major US corporation, ended in 2020.
Both Boeing and IBM were the victims of pursuing the maximizing shareholder value.
Deutsche Bank was the leading financial institution in Germany and perhaps in Europe. In 1989 its CEO Alfred Herrhausen was murdered by the Red Army Faction. In 2002 CEO Josef Ackermann announced a target of a 25 per cent return on equity by 2005. In 2018 the supervisory board finally appointed Christian Sewing. The shares dropped from 70 Euro when Ackermann took over to below 10 Euro in 2023.
The finance curse
Focus on financial metrics push executives to cut costs and raised prices in ways that reduced the long-term attractiveness of the business. Using accounting practices to increase balance sheet profits, making M&A deals to increase scope.
But some companies were able to resist the demands of shareholder value. Proctor and Gamble, Colgate-Palmolive, Coca-Cola, Unilever and Nestle.
In the Thacher era, activities traditionally carried out by partnerships – such as investment banking, law firms and estate agencies – became public or private corporations.
Neither quarterly earnings management nor merger and acquisition activity is a source of sustainable competitive advantage.
The corporation in the twenty-first century
At the beginning of the twenty-first century, the nexus of contracts and shareholder value approaches held sway in many business schools and consultancies.
Some observers and participants recognized that the successful twenty-first century corporation is necessarily a cooperative community.
Combinations and capabilities
Maybe we are burning some of the social capital we built up in this phase where we are all working remote. Saty Nadella[3]
Before the eighteenth century, most of the population had been working from home. Then the Industrial Revolution had taken them into factories.
Alfred Marshall described the effective combination of cooperation and competition. If one man starts a new idea it is taken up by others and combined with suggestions of their own, and thus becomes the source of yet more new ideas.[4]
The collective intelligence created by local competition and cooperation means that cluster may remain, possibly in attenuated form, after the original rationale for concentration has disappeared.
Land is an important factor of production today, but not in a way described by James Anderson or David Ricardo. Land is valuable because it offers proximity to commercially valuable collective intelligence.
The modern firm is a community, rather than an office or a factory.
The original meaning of the term entrepreneur describes a coordinator, someone who brings things together. The successful entrepreneur turns individual or collective knowledge into a product innovation or novel business process.
Fore Edith Penrose the firm was defined not by the assets it owned or the contracts it made but by its capabilities and its ability to deploy those capabilities in productive services.
The resource-based theory of strategy, as it has become known, was developed by Jay Barney and Birger Wernerfelt. The task of corporate strategy is to match the capabilities of the firm to its external environment. This view popularized in the core competencies approach of C.K. Prahalad and Gary Hamel. Core competencies became pretty much whatever the senior management of the corporation wanted them to be, and focusing on the core competencies a prelude to dealmaking.
Distinctive capabilities are those characteristics of a firm that cannot be replicated by competitors or can only be replicated with great difficulty.
A letter from Arnold Weinstock
If you want to hire great people and have them stay, you have to be run by ideas, not hierarchy. Steve Jobs[5]
Weber’s list of the defining characteristics of bureaucracy – the command structure, the identification of roles and responsibilities, the impersonality, the value of technical expertise – remains influential.
Hierarchy requires chains of authority, responsibility and accountability.
The most common device for diluting of defecting responsibility is the meeting – better still, the committee. If many people are associated with a decision, then no one is really responsible for it.
By the end of the twentieth century it was no longer possible even to run and army in the hierarchical style of Frederik’s Prussia.
Bill George was right to identify many modern corporations as learning organizations, filled with knowledge workers who don’t respond to top down leadership.
Margaret Blair and Lynn Stout describe the modern business as a mediating hierarchy.
The Macneil returns to Barra
The Macneil of Barra, forty-sixth chief of the Scottish Clan MacNeil. In the 1960s he introduced the concept of the relational contract.
Life is one contract after another.
Cooperation requires trust. Trust begins in personal relations.
Generalized trust is necessary for complex economic products and institutions. Positive generalized trust is strongly correlated with per capita national income.
Cooperation and competition can coexist only if competitors show mutual regard.
The law comes into play only when the relationship breaks down.
In 2016 Oliver Hart was awarded the Nobel Prize for his work on contract design.
The hollow corporation
The term hollow corporation seems to have been used first by Norman Jonas in 1986. Jonas described how modern firms were outsourcing more and more of their activity to independent. Specialist suppliers.
Thomas Friedman observed the importance of the emergence of global branding and international supply chains: the world is flat.
The successful Asian economies have accessed the available collective intelligence of the world and exploited it more fully and consequently are now themselves both insources and outsourcers.
The gig economy has taken this disintegration of supply chains a stage further.
These hollow corporations share the characteristic that the activities of the business have been pared down to the single link in the chain of production at which the corporation holds a distinctive capability and enjoys a competitive advantage.
Capital in the twenty-first century
If the meaning of capital is ambiguous, who should we identify as the capitalists of the twenty-first century?
Capital as a service
The hollow corporation is a combination of capabilities. Some of these capabilities are distinctive to the firm; sometimes it is the combination itself that is distinctive.
In a modern business capital and labour are purchased services.
Jonathan Haskel and Stian Westlake have described modern business as capitalism without capital. The idea of software as a service was pioneered by Saleforce in 1999. By 2020 the subscription model had become a business fashion – even a business cliché.
The Amazon warehouse you pass is probably owned by Prologis. Equinix, provides data centers for Amazon’s businesses.
Neither Amazon nor Apple has raised any money from shareholders since their IPO. The purpose of the IPO is not to raise capital but to demonstrate to earlier investors and employees that there is value in their shareholdings and to enable some to realize that value.
The divergence of finance from industry, of traded securities from physical assets, has never been so extreme.
Capital and wealth
Capital as a factor of production must now be distinguished from capital as a measure of personal wealth.
For Pikety’s purposes r – one of the terms in his famous inequality r is bigger than g – relates to capital as wealth; the other, g, relates to capital as factor of production.
Author defines national wealth or national capital as the market value of everything owned by the residents and government of a country at a given point in time, provided that it can be traded on some market.
The value of capital as a factor of production – as distinct from capital as a wealth – is usually measured by aggregating what has been spent to create it.
On average half the value of the physical assets of a modern economy takes the form of residual property.
Nineteenth-century housing was owned by capitalists; in the twenty-first century housing is owned by workers.
If the managers of a modern business do not want to succumb to the demands of their capital supplier; they can buy their capital services elsewhere.
Who are the capitalists now?
Many might today lay claim to the title capitalist.
The skills of the successful professional manager are different from the inspiration of the founder.
Francoise Bettencourt and Alice Walton are modern rentiers. This group are people whose income is derived from interest and dividends on inherited capital. A shrunken class today, unless one stretches the definition to include retirees such as Bill Gates and Jeff Bezos.
Few people – and very few outside the US – own shares directly. Several factors have contributed to wider distribution of wealth. One is the housing market. Another is the invention of retirement.
In search of capital
New types of capital are invented to describe recent developments in society. Intangible capital, human capital, social capital, natural capital and even Surveillance Capitalism.
You can rent human capital as a service but you cannot buy or sell it. Gary Becker popularized research on this subject.
The term social capital is today indelibly associated with the Harvard political scientist Robert Putnam.
The best of times, the worst of times
Ambiguity is a feature, not a bug
A Tale of Two Cities from Dickens starts with: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”[6]
The Protestant Reformation substituted decentralized authority for the rigid hierarchy of Catholicism. Pluralism, the freedom of thought and the opportunity to make mistakes. It was the collective knowledge and collective intelligence which arose then that made the Industrial Revolution possible. Economic advance through disciplined pluralism is an evolutionary process, resembling natural selection.
The disciplined pluralism is the genius of the market economy.
The proper goal of corporate activity is the flourishing of the multiple stakeholders.
The Sorites paradox. How many grains of sand can be removed from a heap, before it ceases to be a heap.
We live in a world of radical uncertainty, and every situation, every point of decision, is unique. The world often does not offer precision of on and off. Binary categorization raises another problem.
After capitalism
The modern business is defined by its combination of capabilities, not its production function.
The core ideas of this book – collective intelligence, radical uncertainty, disciplined pluralism, relational contracts and the mediating hierarchy. The pain of parting is nothing to the joy of meeting again. Charles Dickens[7]
[1] In the book on page 123
[2] In the book on page 193
[3] In the book on page 253
[4] In the book on page 255
[5] In the book on page 264
[6] In the book on page 343
[7] In the book on page 354
