Prediction Arie de Geus When capital becomes a commodity

The Living Company was very well received. Why haven’t you written sequel?
Most of the time since The Living Company was published I’ve been working on one of the lesser themes of the book. It is an economic theme. The business of business is the production of goods and services, for which other people are prepared to pay price. Companies produce goods and services by combining three production factors – land, capital and labour.
The Living Company effectively said ‘wouldn’t it be interesting if these three factors of production didn’t always play the same role – but had different weightings?’ When you look back through history you can see clear development in countries and continents.
In Western Europe for instance, there’s an early period when land and natural resources is the dominant production factor. That is followed by period in which capital is the dominating productive factor.
My hypothesis is that it is possible that we are now in period when the dominant production factor is what the economists call labour but which I call people and human talent.
If this is true, then the consequences are immense.

Was your description of companies as living communities deliberate attempt to challenge how we think about management?
Yes. Words are important. I’m very concerned to change the language of business because language creates reality. And the language in which we create the reality of business is still based on the capitalist period.
We still talk about human capital though it is contradiction in terms. It is possible to argue that labour has now taken over from capital as the most important factor of production. It has done that by two mechanisms.

And they are?
The capitalist period generated such immense material wealth and was accompanied by such high levels of savings – the source of capital – that the world is now awash with money.
As such, capital is no longer the scarce resource in business. Just as the raw materials, iron ore or wheat were replaced as the most important resources, so capital is no longer the critical factor.
The other mechanism for which case can be made is that in the capitalist industrial company we were constantly replacing labour with capital. We were constantly replacing people with machines.
But perhaps we have now reached the point where people cannot be replaced by machines any more. The last hope was that computers would do this. But there is now growing school of thought that says machines will not be able to replace people. Computers can help people, make them more effective, but not replace them.
So people are now the critical success factor in the production of goods and services. This is true even in capital-based industries like oil business and automobiles.
The critical success factor is whether you are better at extracting more of the oil from the ground or have car that is more attractive to the consumer. That is about human talent and ingenuity.

Companies have been saying people are their most important asset for years, but they are quick to lay them off in downturn.
Yes, and they still do. One of the many aspects of this particular theme that has kept me busy for the past five years is why do they do that. One reason is that we still use the words from the capitalist era to talk about modern business in which people have become the decisive factor.
The minute you use terms like human capital you begin to think in terms of yield, and of cost, and you are back into the old paradigm for managerial success which is efficiency.

So how would you characterise the new rules for managerial success?
The media, for instance, is 100 percent people-based industry. It is not about efficiency. The production of good article or book that sells is not matter of capital efficiency, it is about effectiveness.
So, the word capital leads to thinking about efficiency whereas the word people leads to thinking about creativity and effectiveness. Use the wrong words and you will think in the wrong way.

Do we need new business language then?
We certainly need to change some of the processes and the way we think. One obvious example is legislation. We still have the legislation that gives ultimate power to shareholders. Anglo Saxon law even talks about ownership belonging to the capital suppliers.
Shareholders can force management to run the company in their interests – to maximise shareholder value. So we have to change the law. Then we have to change accounting. Accounting is not science; it is an agreement about how we report information and distribute benefits.
We refer to ‘the bottom-line’. Very few people query the fact that the bottom line doesn’t necessarily belong to the shareholder. In company where all the revenue and production of services and goods are based on human talent there is very strong case that the company is living community which belongs to its members. As such, you could argue that greater share of the profits should be distributed to the employees than to shareholders.
There are other consequences of not using the right language. But some of these changes are in the system now and are undeniable.