I've written before about the Natural Economy
and why it would be so much more effective and sustainable than the
existing Industrial ('market') Economy. And though I've read and
written a lot about the fact the Industrial Economy is dysfunctional,
and most large corporations have become pathological and hugely
vulnerable to change, I've never explained how I think they got that
way. This article is an attempt to rectify that situation.
If
you go back to the earliest days of enterprise, when groups of
artisans, farmers or other producers got together to make a living, the
model of equilibrium of such enterprises was simple: The more people in
the enterprise, the more relationships you have with potential
customers. The more relationships you have, the more you sell (most
entrepreneurs will tell you their revenue and the 'face time' they
spend with customers is highly correlated). The more you sell, the more
cash you have, and the more borrowing capacity (if you desire to use
it) you acquire. The more cash and borrowing capacity you have, the
more people you can employ.
It's a virtuous cycle, or, when it
goes south and something causes your sales to fall, a vicious cycle.
For the most part it achieves a certain equilibrium based on how much
intrinsic need there is for your product in your local market. Growth
is not an essential ingredient of the enterprise's sustainability, and
sales decline is not fatal -- you simply expand or contract the size of
your enterprise to match the needs in the community for what you are
uniquely capable of providing.
This is represented by the four
green boxes in the chart above. This is a Natural Economy model -- it
is almost infinitely flexible and sustainable through good times and
bad. Just as the number of birds that overwinter in a community (rather
than migrating or hibernating) is an adaptation to the availability of
food, so does the number of people that stay in an enterprise adapt to
the number of customers.
So far so good.
Humans being a
very creative and ambitious species, designed for problem-solving, we
don't seem to know how to leave well enough alone. So as the world
began to shrink through trade, some entrepreneurs realized that they
could increase sales, and hence employ more people, by exploiting cheap
foreign oil and commodities, and selling back into overseas markets.
This is the essence of 'globalization' and for many companies it has
been very profitable. It is however, subject to two vulnerabilities:
- C1:
The Finite Resources Constraint -- No matter how much the technophiles
and believers in the American Dream try to deny it, there is a limit to
the amount of cheap resources the planet can produce. Eventually we will run out.
- C2:
The Finite Market Constraint -- Ultimately there is a limit to how many
people will be able to afford your product, and once those people all
have it, the market for your product will inevitably plateau and
(unless you innovate new products) decline.
So resourceful
entrepreneurs, with the best intentions of employing lots of people and
growing prosperously, began to exhibit some decidedly pathological
behaviours to keep the growth cycle moving in an upward direction. The
first of these pathologies was greed (P1 on the chart). Entrepreneurs
noticed that the more cash (and other assets) the enterprise had, the
more it was able to borrow. What's more, if you promised people that
the company would grow forever, they would give you money interest-free,
in return for a share of the future incremental profits. This is called
financial leverage, and it works as long as you are able to continue to
grow profits at a rate faster than the rate lenders would charge for
'risk-free' loans.
Thus begins a cycle of addiction that introduces six new vulnerabilities into the enterprise:
- C3: The Ponzi Suckers Constraint -- The stock market is essentially a Ponzi scheme,
which relies on more and more people investing in stocks in the
expectation that large (double-digit) profit growth will continue
more-or-less forever. As people learned in 1929, and to a lesser degree
a number of times since, no growth continues forever.
In
order to try to keep the profits growing as long as possible, you do a
number of things: You cut costs. You lobby governments for tax breaks,
concessions and subsidies. You externalize costs by getting taxpayers
and future generations to pay for your waste and pollution. You
offshore labour to wage-slave countries with no social or environmental
regulations. You automate and hollow out what's core to the business
and outsource what isn't. You cut quality. You standardize everything.
Then you run into:
- C4: The Government Debt Limit Constraint
-- Eventually, even the friendliest corporatist governments exhaust
their treasury rewarding you with tax breaks, concessions and
subsidies, so they can't pay you anymore.
- C5: The Finite Earth
Constraint -- The planet can only absorb so much waste and pollution
before it begins to fight back, with storms, floods, droughts, and
global warming.
- C6: The Race-to-the-Bottom Constraint --
Ultimately you will run out of countries willing or able to allow you
to exploit their labour at ever-lower wage rates, and you will run out
of suppliers willing or able to cut costs every year.
- F1: The Wal-Mart Dilemma
-- Eventually your customers, deprived of reasonable paying jobs by
your and other corporations' cost-cutting and offshoring, will become
unable or unwilling to pay for the crap you produce, even at ever-lower
costs.
- F2: The Customization Paradox -- While your business
model depends on one-size-fits-all products and flogging lame 'new
improved' sequel products, customers will ultimately revolt and look
for innovation and imagination, even if that means they have to
sacrifice and cut other spending to pay for it.
At this
point, you're getting pretty desperate to keep the wheels from coming
off your enterprise. Pathology is now not an option. You conspire with
a few competitors, buy up the rest of them and create an oligopoly
(P2), threatening, bribing or buying off all new competitors, and using
your oligopoly (and oligopsony) power to fix prices you charge customers, and fix prices you pay to suppliers. Uh oh:
- C7:
The Consumer Debt Limit Constraint -- Soon, no matter what you charge,
your customers are maxed out, and they can't buy any more. They find
workarounds -- they share media files, borrow tools from neighbours,
make their own stuff, fix stuff instead of buying new from you.
Time
to abandon 'face time' and crank up the propaganda (P3) to brainwash
people into believing your 'brand' is worth a premium. So you blanket
the airwaves with commercials -- who cares if they're lies? But you're
just getting in deeper:
- F3: The Counterculture Paradox
-- It's easy to become 'too' trendy, over-hyped, and then people will
desert you in droves for the No Logo alternative. Yes, you can co-opt
it (Wal-Mart Organics) but lots of your customers are wise to you by
now. Your brand is now a joke.
Meanwhile, to ratchet up all
this activity, you've had to create a huge and hierarchical
organization (P4) so you can stay in (what you think is) control. Your
investments in legacy systems are massive. Trying to change anything is
impossible. Economies of scale turn out to be diseconomies. You at the
top are so disconnected from your customers you have to hire
consultants and experts to tell you what they think
your customers need. You can't adapt to changing needs anyway -- you
have to grow profits by 20% again this year with zero-risk new products.
- F4: The Strategy Paradox
-- By the time your massive hierarchical organization's strategy can be
implemented to respond to the changing market, the market's already
moved on you again. You're too big to improvise, and you have no
resilience to unforeseen changes.
- F5: The Innovator's Dilemma
-- The more you try to focus on your core customers, the ones that kept
you in business last year, the more vulnerable you become to disruptive
innovators, lean, hungry little organizations unafraid to take risks,
that eat away at your organization's sales from the bottom up, until
you start losing your customers in droves.
In his book Beginning Again,
David Ehrenfeld uses this analogy to discuss what happens when all
these vulnerabilities combine to stretch the Industrial Economy to the
limit, and then beyond: "It is like a massive flywheel, spinning too
fast for its size and construction, coming apart in chunks as it
spins". This is the economic world that James Kunstler portrays in The Long Emergency, as the fragilities of corporate growth combine with the constraints of unsustainability.
What
will happen when we run out of cheap oil and other resources, and cheap
labour, and borrowing capacity to buy anything more? When we run out of
customers for the shoddy junk we produce, and investors for wildly
overpriced houses and stocks? When the IMF tells the US Government it's
in default and has to pay back what it owes, knowing it can't? When
natural devastation produces more social, political and economic crises
than we could ever afford to repair or hope to cope with? When
customers can't and won't buy what we produce, and we are unable to
change and produce what they will buy?
It's a grim scenario, and the wild volatility in today's markets foreshadows its inevitability.
But
suppose instead of getting caught up in this madness, you and your
partners operate a Natural Enterprise? Instead of having to cut quality
to keep profits growing, you can provide products of high quality,
because there are no shareholders telling you you have to keep growing.
Instead of standardizing and mass producing, you can customize
everything to the individual customer's requirements, and the customer
is right there to help you do so. Instead of having to hype your brand,
you can hype your proximity to customers and the value of personal
service. Instead of having to plan for every unforeseen problem, you
have the resilience and improvisational ability to adapt to changes on
the fly, easily. Instead of being the victim of disruptive innovators,
you are a disruptive innovator.
You
don't have to worry about finite non-renewable resources because the
only ones you use are renewable. You don't have to worry about running
out of customers because your customers are so close to you they're
your customers for life, and they're all you need. You don't have to
worry about increasing your profits to keep shareholders happy because
you don't have any shareholders -- you control your own destiny. You
don't have to worry about government handouts running out because you
never had them or depended on them in the first place. You don't have
to worry about cleaning up your pollution and waste because you don't
produce any. You don't have to worry about finding cheaper and cheaper
labour because your enterprise does just fine paying its people what
they need. You don't need to worry about customers not being able to
afford what you offer because you've designed it so they can afford it
and because it meets a need that no one else can fill.
When the
massive flywheel of the Industrial Economy comes apart in chunks,
Natural Enterprises will be there to help people get what they need and
make a living for themselves, and to replace the collapsed economy with
a new, sustainable, responsible, Natural Economy.
It won't
happen any other way. We can't rely on the 'market' or on politicians
or consumer movements to fix the Industrial Economy in time, even if
they wanted to -- it operates on its own momentum, massive, fragile,
vulnerable and already beginning to shake apart.
And the
business model of this sustainable, responsible, Natural Economy will
be simple -- just the four green boxes in the chart above. Adapting and
responding to human needs, in equilibrium. No growth necessary.
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MADE IN CANADA
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