How To Make Capitalism Rock And Roll.
This post includes a previous post that was incorrectly formatted and posted. The introductory paragraphs are intended to make the total message clearer. We can only hope.
The heart and soul of the piece is that there is a self-evident best mindset paradigm for capitalism as a catalyst for long term value creation. It has remained mostly (and tragically) under-used over the decades.
There are many reasons. One fundamental and longstanding reason, though, is a misconstruction or misunderstanding of Adam Smith’s teaching. In more recent years the dogmatic teaching and assertions of Professor Milton Friedman, the main themes taught in business schools and, sadly, Wall Street’s short-termism affliction have had a pervasive and subtle negative effect on mindset choice. Negative in that even though much economic value has been created over time, we have sub-optimized economically, with the associated opportunity costs, precisely because the ultimate commercial, economic and societal value that this alternative paradigm can create has been largely missed.
Some work has been done to move toward this paradigm, including by academicians and practitioners, but virtually all that work has been either incremental or organization-specific and, in any event, has not embraced the ultimate fullness of the essential mindset change that is at the core of this new paradigm.
Choice of mindset precedes all other matters for corporations (all organizations), nations and the global, interactive societies and economies. The multi-year plans of organizations (strategic plans – with their goals and strategies), as well as the current year budgets (with their objectives and tactics) are all established in accordance with the dominant mindset of an organization. So, it is clear that we must get this mindset matter right. It is explained in the post below. However, much goes unsaid in the post, for the sake of brevity, and is only fully discussed in a longer explanation. For example, the idea of fiduciary obligation is commonly focused on owner-investors in an organization. This is an entirely too narrow construction of fiduciary. The robust, essential construction of the fiduciary obligation of every organization is that it exists for each one of the organization’s primary stakeholder groups. One fortuitous and natural by-product of this construction is, in fact, that the long term value for owner-investors will be maximized.
Local and global value creation (use GDP or any other measure of value creation) would have been much greater over the last 100 + years, all other things equal, if our mindset presented here had been dominant, rather than the Wall Street, university business school-taught (implicitly or explicitly) old dominant mindset - short term, inward-focused and win-lose. And, this old dominant mindset was heavily influenced by that tragic misapplication and misunderstanding of Adam Smith’s teaching.
The piece below addresses this new paradigm, this new and essential 21st century learnable dominant mindset. This post uses a recent event to present this ultimate value-creating mindset.
One important note first: Michael Porter and Mark Kramer of Harvard have articulated the concept of creating shared value (CSV). They consider it the next big transformational idea for business (and perhaps economies and societies by inference). Professors Andrew Crane and Dirk Matten, business ethics, corporate citizenship and corporate social responsibility (CSR) professors take issue with the Porter-Kramer CSV concept. This post below, together with the notes here introducing it, acknowledge the good incremental value of both Porter-Kramer and Crane-Matten, but make it clear to the attentive reader that both sets of professors fall short of articulating a truly transformational big idea. Our idea is the big idea. Adam Smith, the Dalai Lama, Pope Francis and other thinking leaders and practitioners would sign up for our idea below in a New York minute.
The Dalai Lama, Adam Smith, AEI and Capitalism.
The 21st Century Essential, Dominant Mindset.
This post is prompted by a reminder for which we are grateful. The reminder is that we must stay with our nose to the grindstone on this matter of mindset, achieving excellence and living the full life. Again, serendipity plays a role, this time in the form of a channel-surfing bonanza.
The American Enterprise Institute (AEI) sponsored a panel discussion on Thursday, February 20, 2014. CSPAN televised it. I surfed right into it.
Here is the punch line, from my take on the panel’s discussion when connected to the essential mindset for ultimate excellence assertion I make, all in one brief paragraph – you will not need to read the entire post, unless you really want to :-):
Adam Smith, the free enterprise capitalist's capitalist, taught that a person's self-interest could best be served if he/she was allowed to do their thing without interference and if then a willing buyer wanted to buy it and he wanted to sell it, the transaction happened – fancier words have been used, but that's the deal. The other thing he insisted on, though, was that a person was not a good citizen if he was not also promoting the welfare of the whole society – he called it fellow feeling. Well, it turns out the Dalai Lama, the self-described Marxist, advocates the same thing – he reduces it to being “wise-selfish.” At Jack Haffey & Associates we call this very same thing the essential 21st century dominant mindset – our self-value is maximized only if we focus on and create optimal value for each of our primary stakeholder groups (those whose lives we significantly affect over time) over the long run.
My friends, this paragraph describes how to make capitalism rock and roll. The Dalai Lama will join right in if we all get it right. And, Adam Smith's teaching will finally be correctly applied. Read on for color commentary. Otherwise, just give me a note or a call and we will schedule our first meeting.
In addition, the essential 21st century dominant mindset, as we present it here, has related concepts which flesh it out, and they must be robustly understood and lived. Here they are, simply listed:
Mindset, excellence, happiness, fiduciary, stakeholders, optimization, blocking and tackling, universal and unalienable rights, ubiquitous virtues, traits and valued things, self-interest and other-interest, gold standard leadership characteristics, gold standard cultural characteristics, profit (npv of future cash flows, etc.), purpose, vision, mission, multi-year plans (playbooks), long term, ethics, full potential – seen and actualized, and opportunity costs, local and global.
Back To The AEI Panel.
The panel included, among others, Arthur Brooks, President of AEI, and the Dalai Lama. It was an unprecedented discussion. So much was said. This brief note zooms in on what we consider the heart of the matter.
Arthur Brooks, president of AEI describes himself as purpose-driven, not product-driven. He appears to be the one most responsible for bringing this panel together, and he also appears to be leading AEI in an enlightened 21st century way. He summarized his purpose in a few ways, and this quote captures it for me:
"I don't care about the Republican Party because here's what I really, really want. I mean, I care about the Republican Party -- I care about the Democratic Party -- because I care about America," he said. "To bring back the Republican Party? No, that's not the objective at all. I want, 15 years from now, to have the free enterprise movement be as apolitically accepted as the civil rights movement is today."
To do so, Brooks said, conservatism needs an attitude adjustment." To be a part of the conservative movement, you should be expected to love people," he said. "This is a movement that must answer anger with love."
I believe Arthur Brooks has done a truly great service to the global discussion on and the global vision of capitalism and society by bringing the Dalai Lama to engage in dialogue with AEI.
The AEI panel's moment in time is in harmony with other voices in recent years, including that of Joseph Stiglitz, Nobel Prize-winning economist from Columbia University.
The Dalai Lama's comments at the panel discussion, for me, are summarized as follows:
I. The Dalai Lama said that people should be wise-selfish rather than foolish-selfish.
III. “Today, I developed more respect about capitalism,” the great Buddhist monk said with a smile. “Otherwise, in my impression, capitalism only takes money, then exploitation.”
Here are a few thoughts from and about Adam Smith, and see whether and how they connect with the Dalai Lama and Arthur Brooks (AEI):
I. “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.”
II. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”
III. Adam Smith also said that “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.”
IV. 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.
V. Moreover, when he moved from a singular focus on transactions (butcher, baker, candlestick maker), 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.’
Our thoughts on these subjects have been presented in our website and our blog site. Here they are in brief:
One of our fundamental beliefs, that we call the essential, dominant 21st century mindset, is: The real breakthrough big idea is that self-interest value maximization is a direct function of optimization of the value provided by an organization (and a person) to each of that organization's (and person's) major stakeholder groups – each relative to the others.” That is, when a business devotes its time, talent and treasure to doing its best to optimize the value it provides to its major stakeholder groups (customers, employees, [and investors as a stakeholder group], suppliers, communities in which it has a presence and society [the general public interest]), it will maximize its own long-term value as an outcome (a by-product) - measured in appropriate financial terms as well as the other value measures it holds dear. This is not a belief; it is a self-evident axiom.
It can be expressed in equation form:
IVM= f (S1VO, S2VO,..… SNVO), where “I” is “institution” (any organization), “f” is “function of,” “S” is “stakeholder,” “V” is “value,” “M” is “maximization” and “O” is “optimization.”
Unleashing the local and global potential of organizations (for profit companies, non-profits, governments, etc.) will create value. Fully unleashing this potential will create ultimate long term value – for each organization and the global population. There is a functional relationship between self-interest value and other (stakeholder)-interest value. This relationship is grounded in the highest characteristics of human nature. And properly understood and acted on, it will unleash this ultimate potential. It is philosophically sound, practically actionable and economically (commercially) optimal. Importantly, capitalism’s highest catalytic effects on value are also unleashed through this concept.
We call this idea the essential and dominant 21st century mindset. What do we mean? Companies have mindsets – ways of looking at the best way to conduct themselves as entities, in pursuit of their purposes. The primary mindsets are: a. the short-term, inward-focused and win-lose mindset; and b. the long-term, outward-focused and optimizing mindset.
Unfortunately, businesses and other organizations usually choose the former. It is sometimes called “short-termism.” They choose it or they are forced into it. This has been the norm over the years. It has been guided by the idea that the organization exists because of its owners and, therefore, primary focus should be on rewarding the owners. One example is the SEC quarterly report requirement for publicly held companies in the United States. Wall Street has used these reports , much of the time, as a hammer to pressure companies to behave in short term ways, and solely to reward the owners.
In stark contrast, our big idea is unambiguously dogmatic that the dominant organizational (and individual) mindset must be the long-term, outward-focused and optimizing mindset. One outcome, in fact the fortuitous and yet necessary and natural outcome of behaving in accordance with this mindset will be that the owners’ long term value will indeed be maximized.
How do these perspectives (Adam Smith’s, the Dalai Lama’s and ours) connect with each other, if at all?
It seems clear and without need for explanation, that:
1. What the Dalai Lama calls “wise-selfish,” and what Adam Smith taught, using a few different ways to explain it including “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,” and what we call “the essential and dominant 21st century mindset - “the long-term, outward-focused and optimizing value for each stakeholder group” mindset are the same concept, and
2. What the Dalai Lama calls “foolish-selfish,” and what Adam Smith discusses as, ‘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, and what we describe as short termism, the dominant mindset that has organizations behave in a short-term, inward-focused and win-lose manner are the same concept.
This concept, happiness, of course was part of the whole panel discussion that was primarily centered on capitalism. The Dalai Lama's focus is on happiness. Arthur Brooks recognizes and shares that focus, it appears.
And, our focus is there as well. Mortimer Adler, a 20th century philosopher, was well known for teaching that the happy life can only be known as it approaches its end, and that the full life well lived is the way to determine if the life has been happy – has been good. The panel discussion includes some indication about achieving this state of happiness, as described here.
However, all people must share in this happiness. All people must have the opportunity to actualize their potential. A prescription for how to enable us to successfully pursue and achieve this goal is set forth in this paper.
A vivid and incentivizing reminder of the job ahead is the recent information published by Oxfam that the 87 wealthiest persons in the world have the same total wealth as the poorest 3.5 billion people. This inequality is criminal. It is absolutely unacceptable anytime and especially now, in the 21st century global economic village.
A Final Thought.
Congratulations to Arthur Brooks and his leadership at AEI. The Dalai Lama's message for the world really is harmonized with capitalism as long as the dominant capitalist mindset is long term, outward-focused (other-focused) and committed to optimizing value for stakeholders.
And, Adam Smith's message, properly understood and acted on, is also in harmony. For more than 200 years his teaching has been largely misapplied. Now is the time to robustly apply his guidance. Capitalism should and will rock if this paradigm is embraced.
And, Democracy, properly acted out, goes hand in glove with this understanding of capitalism. Life, liberty and the pursuit of happiness are unalienable rights of all people in the world. Democracy will rock, along with capitalism, if people continue to demand it – as is happening in the Ukraine now, in 2014, for example.
The Practical Connection Between This Article And Organizational Pursuit Of Excellence.
There is a clear connection, a nexus, between a. the essential 21st century dominant mindset, the Dalai Lama's wise-selfish and Adam Smith's sympathy between fellows that is a fundamental part of human nature and b. The guiding and ongoing foundation documents of every organization – purpose, vision, mission, multi-year plans (goals and strategies), budgets, gold standard leadership characteristics and gold standard cultural characteristics. In fact, these latter organizational elements will not lead to ultimate excellence unless they are based on the former concepts.
At Jack Haffey & Associates, LLC we teach and advise organizations about how to make this connection – how to make this ultimate excellence achievable – in practical, actionable ways. The Dalai Lama's happiness state is also achieved when all are behaving in this way. To be sure, it is not a walk down Main Street. It is, though, the fun and full-life-well-lived way to achieve global, inclusive excellence – with capitalism rocking and democracy rocking.