Adam Smith Must Be Spinning In His Grave In Edinburgh
Self Value Is Maximized Only By Optimizing Value For Others
[Note: It has been an active seven months for all of us, as we have been watching the global and domestic political, economic and pursuit of freedom activity around the world. The reinforcement for the ideas we discuss here (from the kitchen table) has been flowing from all this activity. In this post we begin to address it all. It is a bit long (1900 words) but the subject matter requires it. J.]
CEOs should be on the factory floor and in the back offices every day, supporting, asking, serving and leading through inclusive, disciplined empowerment. They must also have the right people in the right jobs. Servant leadership is one imperative. As leadership goes, so goes the company, the government, the organization of any kind.
Only a small fraction of all companies, all organizations for that matter, practice this simple recipe for excellence. And it is this failing that significantly contributes to the national and global economic failures in the 21st century – brink of disaster failures since 2008 and continuing. And from about 1980 through 2007, just prior to the 2008 blowout in the U.S., the ground was laid for at least the U.S. and Europe to come to this cliff’s edge. And, China and the rest of the globe are in harm’s way going forward unless ways are changed.
This servant leadership stuff, mushy as it might sound, is one of the primary ingredients essential not only to recovery but to the path of value maximization and excellence. We will discuss the other ingredients in this brief post.
Is Adam Smith really spinning in his grave? Just consider the following excerpts from his writing, and a few comments from others, to understand that this moral philosopher taught that free markets would maximize value; a. if individuals were free to pursue their own interests – by employing their own labor in what manner they think proper and b. if individuals (and organizations) followed their nature to advance the common good – the good of all their neighbors. The quotes:
*“The property which every man has is his own labour; as it is the original foundation of all other property, so it is the most sacred and inviolable…To hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbor is a plain violation of this most sacred property.”
*“How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.”
*Man was made for action, and to promote by the exertion of his faculties such changes in the external circumstances both of himself and others, as may seem most favourable to the happiness of all.”
*Joseph Stiglitz, Nobel Prize winner in Economics and professor at Columbia University – Two observations about Adam Smith:
*“A naïve reading of Adam Smith might have suggested that he had relieved market participants from having to think about issues of morality.”
*“We should remember that Adam Smith was a professor of moral philosophy. …Economics is concerned with how we make decisions about the use of resources – and how these decisions affect others. Any (such) inquiry quickly brings us into a moral discourse.”
Smith always believed that man's self-interest was not in conflict with his urge to help others and that this sympathy between fellows was a fundamental part of human nature.
Another view of Adam Smith’s teaching: Howard Gardner is a Harvard professor. He recently wrote Five Minds For The Future. Some praise for his work includes:
1. “By most accounts, Howard Gardner is the most influential living theorist in the education world today,” NEA Today.
2. “Howard Gardner is….the man who changed our notion of what it means to be clever,” The Financial Times.
3. “One of the most influential psychologists of his generation,” The Economist.
Talking about markets, Gardner writes that, in addition to Smith’s well known invisible hand concept so widely embraced, “They (markets) can be quite cruel and, anyway, are fundamentally amoral. Adam Smith actually had a quite nuanced view of markets; their morality presupposed on a certain kind of society, inhabited by actors who were able to take a long – rather than a short term view. Moreover, when he moved from a singular focus on transactions (butcher, baker, brewer), Smith issued strong strictures: ‘He is certainly not a good citizen who does not wish to promote, by every means of his power, the welfare of the whole society of his fellow citizens.’ “(emphasis added).
We can take from all this that Adam Smith prescribed both perspectives and behavioral paradigms for societies and economies – in simplest terms, harmonizing of self interest and other interest. That is, self interest and the welfare of the whole society must advance together, and it does not happen automatically as a naïve reading of Smith’s writing might suggest. We can also be certain that he would not approve at all of the failure to achieve this harmonization in the national and global economies of today. In fact, this failure is the heart of the problem. That is why he must be spinning in his grave in Edinburgh.
Of course it has not helped that the once and long time intellectual leader of the University of Chicago School of Economics, Milton Friedman, and a long standing chair of the U.S. Federal Reserve Board, Alan Greenspan, effectively ignored the second perspective – choosing to assert that an automatically good outcome for the whole society would result if the first perspective is given free reign. What a monumental mistake!
The Congressional Budget Office (CBO) in the United States recently released its study on income inequality in the U.S. In a nutshell it shows that Smithian economics is not being successfully applied in the U.S.
A brief look at the income inequality story in The Peoples Republic of China gives us a similar picture. Of course, the Chinese economy has been growing rapidly over the last 30 years. A similar failure to satisfy the expectations inherent in Smithian economics, though, appears to be presenting itself in China. The details are different.
The point is that Adam Smith was setting out a prescription for maximizing economic and societal value through a specific economic model. The model, time has proven, works excellently when properly applied. That is not the case in the U.S. over the last 30 + years and may not be the case in China as it rolls out its market economy. This same reasoning applies around the globe, national economy by national economy and in the interactive global economy.
This brings us to self interest and value as a function of providing optimal value to others – to what are widely called the “stakeholders” of an organization. The CEO on the factory floor really means that leadership in all organizations, including governments, such as the U.S. Administration and Congress, must take on the responsibilities Adam Smith so succinctly prescribed in the second part of his two-part economic value maximization teaching – that of “promoting the welfare of the whole society of our fellow citizens.”
With or without Adam Smith’s wise and inspired teaching from the late 1700s, one could still easily reach this conclusion at the kitchen table. Self interest value is directly related to promoting the welfare of the whole society. The same goes for the conclusion regarding local and global economic value maximization.
It is really apolitical. It is not grounded in liberal or conservative philosophies, democratic or republican philosophies, left or right philosophies. Rather, it is grounded in the idea that all should be allowed and enabled to attain the happiness that Adam Smith prescribed.
The very idea that this self-interest, other-interest connection is not fully understood and embraced by leadership groups everywhere is a pivotal 21st century problem that must be solved.
How Do We Make Servant Leadership Flourish, Optimize Value For Others And Let Adam Smith Rest In Peace?
We connect the servant leadership, self-interest and other-interest imperatives by combining standard strategic planning elements with the organizational excellence elements that flow from our discussion here. This nexus, stirred together and then lived out by both leaders and all persons in every organization, will do the job.
Standard Strategic Planning.
This subject is sometimes regarded as superfluous, just a paper exercise that adds no real value. Perhaps the best judges of its value are coaches of major sports teams. Their playbooks, culture, style of coaching and year after year consistency in application are strategic planning in action. Its elements are; a. a core purpose and set of values, b. a vision, c. a mission, d. a set of long term and near term goals and d. adaptable strategies and tactics to achieve those goals. Those who do it best are most likely to achieve excellence.
Organizational excellence flows from a philosophically solid mind-set, has the clear and largely fixed sets of gold standard leadership and cultural characteristics, and the behavior necessary for excellence is that which applies this mind-set and these gold standard characteristics to standard strategic planning. The synergistic result is that “standard” becomes “robust” and the detailed pieces of an ongoing, adaptive strategic planning process are thoroughly enriched by the other-focused mind-set and the gold standard leadership and cultural characteristics. It all raises this nexus, this combination, to that individual, organizational, national and global level that lets Adam Smith rejoice, let alone rest in peace.
Our Actionable Take-Aways.
Selflessness is the key. Stakeholder value optimization is the goal and self-interest value maximization is the natural by-product. That is, to passionately re-state the answer provided above,… We connect the servant leadership, self-interest and other-interest imperatives by combining standard strategic planning elements with the organizational excellence elements that flow from our discussion here. This nexus, stirred together and then lived out by both leaders and all persons in every organization, will do the job.
As Professor Howard Gardner says, “Adam Smith actually had a quite nuanced view of markets; their morality presupposed on a certain kind of society, inhabited by actors who were able to take a long – rather than a short term view.”(emphasis added).
It is imperative that all persons in leadership positions - in government, business, in all organizations – rise to this high level of wisdom, courage and vision. The short-termism that prevails today is a fatal condition. The failure to consider the two parts of the Adam Smith prescription for societies and economies as co-equal and integrally connected is also fatal.
It is important to write the obvious: The fatal conditions we describe here apply to the real economies and their participants, to the financial sector part of the economies and their participants and to top government leadership groups – both executive and legislative branches.
So then, specifically in the U.S. it is time for the Congress and Administration to adult-up. It is time for the entire world to put in place the 21st century organizational, financial, economic and societal systems that allow this harmonization to be elegantly achieved going forward. Adam Smith, correctly understood and applied, demands it. He was and is a once-in-a-millennium visionary. He captured kitchen table wisdom. With or without him telling all of us the obvious about human nature, though, adult-up time is here.