Capitalism as an Ecological Process

valuation mckinsey

Valuation: Measuring and Managing the Value of Companies

On April 2 The Economist published a book review of Valuation: Measuring and Managing the Value of Corporations, a 700-page manual on corporate finance and shareholder value published by McKinsey & Company. The views in both the book and the review come across as a reactionary defense of what Lynn Stout has called the myth of shareholder value. The essential argument is that there is nothing wrong with the principle of shareholder value, just in the way that its “rules” have been either applied or ignored.

As an aside, regular readers of my blog will know that I am allergic to the notion that a practice like management consists of the application of theoretical rules or principles. It reflects a Cartesian frame of mind that thought should precede action and that principles abstracted from one situation can be “applied” in others. Hence the relentless procession of business books claiming to have discovered the “secrets” of success. In a management context “principles” turn out to be either good intentions or desirable outcomes – formal and final explanations in Aristotle’s framework. These are “true” but largely unhelpful as guides to action. For guides to action managers are interested in material and efficient causes and, unlike principles, they are specific to each and every organization. In other words, they are context-dependent, which requires an ecological perspective rather than a Cartesian one.

Capitalism as an Ecological Process

In my response to the Economist review I suggested that we think of capitalism not as a “rocking horse”, as Andy Haldane, Chief Economist of the Bank of England has described the conventional view, but as an ecological process: “Suppose that capitalism in not an equilibrium system…. Suppose it’s an ecological process that goes through phases? In its Anglo-Saxon guise capitalism emerged in the passions and communities of the 17th and 18th Century Nonconformist sects. In this first phase it was all about creating value and new markets. Coalbrookdale was the Silicon Valley of the First Industrial Revolution and led to the first consumer markets for iron products like fire grates and pots and pans. In the second phase a logic started to become clearer – the phenomenon was only named as “capitalism” in the mid-19th Century. Now it was also about the allocation of resources, especially as the efficiency movement took hold toward the end of that century. Over the last 50-60 years capitalism has matured in power; the emphasis has become arbitrage in existing markets – the essence of the modern shareholder value movement. Because the processes of value creation are so slow and those of destruction are fast, it is also a recipe for the liquidation of many established businesses. This results in significant economic benefits for executives and private equity funds but in immeasurable damage to the social and political ecology. Donald Trump anyone?

From this ecological/systems perspective capitalism has become like a decadent old forest, once productive but now choked with hierarchical structures and in urgent need of renewal. We may have left it too late for the process to be a smooth one.”

An Ecological/Systems Perspective

The diagram below shows the ecocycle of capitalism:


It outlines a system that remains stable through perpetual change – represented by a stylized infinity loop. The system continually cycles between a long, slow “front” loop (the left-to-right solid “S-curve”) and a short, fast “back” loop (the right-to-left dashed “S-curve”). The long slow process of growth begins with the creation of value, progresses through the allocation of resources and ends in the extraction of value. The loop terminates in crisis as the institutions and patterns of thought that have sustained the growth become exhausted. On the back loop the resources that are redeployed are human resources, with humans seen not as instruments (as they are on the front loop) but as ends in-themselves. This recreates the passion and trust so essential for the creation of value and new markets, institutions and habits of thought.

The Influence of Technology

Bear in mind that small, fast processes at a level “below” are continually resetting the economic process. The most important of these are the technological changes have been identified by Neo-Schumpeterian economist Carlota Perez. The diagram below shows the five technological revolutions that she regards as being the most important:


Each of these revolutions goes through its own life-cycle but never goes away entirely. They linger on in some much-diminished form or another as they migrate from the centre of attention to the periphery. This makes for an extremely complex economic system. Today the heydays of canals and steam are long gone and the Age of Steel and Heavy Engineering is in decline (at least in the West). The age of Oil, Autos and Mass Production seems destined to follow it. The Information Communication Technology (ICT) revolution is in its prime. From an ecological perspective, however, the ICT revolution is on a much smaller physical scale than its predecessors and it scales in a different way. The result is that its does not bring with it the large facilities and the penumbra of suppliers (like the auto industry) that can create jobs for blue-collar workers displaced by the process. This poses problems for an economic system in urgent need of renewal as well as for the large, slow political systems that sit “above” the economic system. This is particularly worrisome when American politics seems firmly stuck in a systems trap and unlikely to escape it anytime soon.

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