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.

Can you give an example?
I see signals like the $20-million club in Hollywood. Films are totally dependent on the quality of the people who make them – the director, the scriptwriter, the actors. They have upped their remuneration to the point where you have this $20-million club and they expect to be richly rewarded.
Look at football – soccer – clubs. Here again, the club’s results are totally dependent on the talent on the field. Yet we have just gone through period where some people still living in the 19th century have converted most of the best clubs into limited liability companies with shareholders and are trying to run them in way that will make return to shareholders.
So, on the one hand there is massive denial and use of the old language, but on the other reality is creeping in and creating pressures.

Presumably the reason for denial is the huge power shift that is involved?
Yes. When it comes to change the vested interests are absolutely enormous. Think about Wall Street and the City of London. They will be wiped out at the moment this reality comes through.
Capital, in my view, has become just another raw material. All you need is an auction process – that’s the place where you buy your wheat or minerals and that’s where you go for your capital. Money will be commodity like crude oil.

What does that mean for big companies?
My original theme in the Living Company is the nature of companies. The book asks us to assume companies are living systems, and does that change the way we run them? I’m now convinced we are very close to having the theoretical evidence to say that companies are as much living systems as you and I – like cells in our bodies.

What are the consequences of this for business?
If we accept that companies have material content of which the most important component is people, then that is very important.
If we accept that you and I together make up group and with many others we make up company and that company with other companies will make up nation state – like the Russian Doll idea, where each doll contains smaller dolls – then we are getting close to proving that we are living system.
The combinations in which we work include our family, but the company in which we work is also living system. If that is so then we should change our language.

What does it mean for managers?
If companies are living systems then the goals change. Living systems do not live to maximise shareholder value. They live to survive and to increase the potential of their components because that is how they increase their own potential. M

Visited 6 times, 1 visit(s) today
Close Search Window