To Achieve Prosperity, We Must Switch to Valueism

Overview

In this article, I want to explore the link between Valueism and Prosperity. The word prosperity will mean something to most readers but will mean even more after reading this article. The word Valueism is one I coined recently and will mean far less to most people. Both will be explored in more detail, but for now, Valueism is a shorthand for capitalism focused on value creation. I have been suggesting that capitalism needs to evolve, and Valueism offers a positive direction for capitalism or might be viewed as the next evolution of it.

Why am I making a link between Valueism and prosperity? Because, I believe value is best thought of in relation to prosperity, or what others might refer to as “standard of living”. I also think the two are inextricably linked; prosperity and higher standards of living are what Valueism is focused on delivering. 

It is interesting to note that in 1949, soon after the end of the Second World War, a group of nine economists from the leading universities of the UK wrote, “What we most expect from our economic arrangement is a high standard of living”. They also noted that science had made this possible by increasing productivity and, “The objective of raising standards of living is almost the only one that today unites nearly all the world’s politicians and statesmen” (Economics, Man and His Material Resources, Odhams press, 1949).

In this article, I will argue that today science and technology have made it even more possible to achieve higher standards of living. But whereas, in 1949, the objective of raising standards of living may have been the only one that united nearly all the world’s politicians and statesmen, today that is either not the case, or we can only conclude our leaders are incompetent.

My opinion is that our politicians, government and the public sector are failing us; management theory and business are failing us, and finance and accounting are also failing us. And, these failures are all interrelated. There is plenty of evidence to substantiate these claims, and that all these institutions of capitalism are threatening the fabric of our societies and democracies in the process.

The situation is not apocalyptic, but it should be viewed as a crisis or a disaster. There is some good news, however. Because one factor sits at the heart of all these issues, we only need to focus on fixing that for things will start to correct themselves. That one thing is to ensure we remain focused on the link between value creation and prosperity. The current form of capitalism is focused on economic theories, management theories and accounting practices that prioritise value extraction (profiteering), over value creation. We can change that. 

In making my case, I am assisted by The Legatum Institute, an international think tank and educational charity focused on measuring, understanding, and explaining prosperity. It argues, “prosperity is achieved with mutually reinforcing relationships between wellbeing and wealth creation”. Here, wellbeing can be considered synonymous with value and prosperity, since I don’t use the term value narrowly to mean only financial value. 

The goal of this article is to explain what Valueism is, and how it is linked to prosperity. If I achieve this goal you might then accept the argument that Valueism, a focus on value creation, is the root of sustainable prosperity - for you as an individual, for the business or organisation you work for, and for society in general.

How prosperous are we?

In global terms, extreme poverty has been reduced, but you could hardly describe those who have benefited as prosperous. At the other end of the spectrum, the extremely wealthy have become far more wealthy. Yet in many developed countries, the majority of citizens have seen falls in their levels of financial wealth and their relative levels of prosperity.   

A few of the ills associated with this include the rise of populism, falling productivity, employee disengagement, the anxiety and insecurity associated with the “gig economy”, the banking crisis, the great recession, austerity, widening inequality, falling levels of public trust in almost all institutions, the decline in public services, rising levels of illnesses and poor health (including diabetes, obesity and mental health problems), the crisis in health care provision for aging populations etc. etc.

The opportunity and challenge are well summarised by the economists I already referred to. In 1949 they said, “Man finds himself upon the crust of the Earth with the instinct and desire to keep himself alive now and, through his posterity, in perpetuity. Nature has provided the wherewithal to make this possible, both in the resources of the Earth and in the capacity of Mankind to find and employ and multiply and adapt those resources. But Man can be, and has been, blindly improvident in regard to those resources. For while his capacity and his ingenuity may be, humanly speaking, limitless so far as concerns the adaptation of himself and his material environment to each other, his material resources are certainly not unlimited; and so, the central problem of his physical wellbeing becomes the need to make the most efficient use of scarce resources”. 

To this they add, “The urgent task confronting economic science today, therefore, is a re-statement of economic principles, not only considering the much-needed research into the barely known facts of economic development, but also in terms of human values which for a century or more have been absent from economic thought, and about which economics has much to learn from the other social sciences”.

Much of what they said then remains true today in relation to the challenge of maximising the use of scarce resources to enhance physical well-being and achieve rising standards of living. But, economics has failed regarding “the urgent task”, and it is not alone. Politicians, finance and accounting, management theory, capitalism and the institutions of capitalism have also prevented us achieving our potential levels of prosperity. This is primarily because they took the simplistic ideas of the economists far too seriously, treated them as ‘laws’, and embedded them in their own thinking.   

What Drives Prosperity?

If what we value is prosperity or better standards of living. We better understand that Gross Domestic Product (GDP) is not a valid measure of the prosperity of a country. It is only an indicator of our financial well-being. The Legatum Institute, as an international think tank and educational charity that focuses on measuring, understanding and explaining prosperity argues, "True prosperity is more than just material wealth”. 

The Institute measures prosperity using the Prosperity Index which incorporates both economic wealth and social wellbeing, working together in a relationship where each benefit and advances the other. This is illustrated in their conceptual framework:

The diagram shows how a nation’s economic wealth and social wellbeing act upon each other, either accelerating or restraining the creation of individual and shared prosperity.

When things work well, the institute says, “An economic “flywheel”” can emerge. A surplus of wealth provides the resources for further investment in various forms of human development, such as healthcare and education, that build greater levels of social cohesion and trust. And, as this Social Capital grows, the flywheels both accelerate. This is because healthy, educated, high-trust societies are essential for sustained economic development. And the converse is also true. So, “High levels of material prosperity are not sustainable without strong social capital”.

The two flywheels are interconnected and interdependent. For this reason, they work together as a single engine of prosperity, each sustaining and accelerating the other. But, as the Institute points out, “they can also act as brakes upon each other” and, “When either of these two flywheels is prevented from turning efficiently, it retards the entire engine of growth”.

The Institute notes, “No model would be complete without considering the role of governance in creating and sustaining prosperity”. It argues that “The benefit provided, or harm inflicted, by national institutions is in direct proportion to the virtues of their leadership”. I would argue the same can be said of business and other institutions.

They go on to say that, for this reason, whilst free market competition can be beneficial, “It is essential to distinguish between the merit-based competition of free markets and the crony capitalism which thrives upon regulation, permits, licences, tariffs, and other political favours”. And it adds, “When virtue is weak and a sense of stewardship is absent, wealth is redirected by and toward the governing elite and their crony capitalist friends, leaving fewer resources available for essential investments in either economic growth or social capital”. Again the same can me said of the stewardship of companies and organisations.

The Institute recognises that prosperity is a multi-dimensional concept. Each year it produces The Legatum Prosperity Index, based on a framework that includes 9 pillars and 104 variables. The say, “It captures the richness of a truly prosperous life and in so doing seeks to redefine the way we measure national success”. And they claim it is, “an authoritative measure of human progress, offering a unique insight into how prosperity is forming and changing across the world”. 

1. Health A strong health infrastructure which enables citizens to enjoy good physical and mental health leads to higher levels of economic prosperity and wellbeing. Mentally and physically healthy citizens are the bedrock of a productive workforce, which in turn increases levels of income per capita.

2. Safety & Security. Threats to national security and personal safety jeopardise economic and social wellbeing. Organised political violence such as coups or civil war, as well as crime, hinders economic growth. In addition, an environment of fear and uncertainty negatively affects life satisfaction. 

3. Social Capital. Social networks and the cohesion a society experience when people trust and respect one another have a direct effect on the prosperity of a country. Thus, the word “capital” in “social capital” highlights the contribution of social networks as an asset that produces economic returns and improves wellbeing.

4. Education. Research on economic growth has found human capital to be an engine for growth, and that basic education enhances people’s opportunities to increase life satisfaction.

5. Environment. Several indicators of the environment, including the use of pesticides, land and marine area devoted to nature, and air quality, show a significant relationship with average national well-being and material wealth. A high-quality environment can also provide substantial material economic benefits to those whose living depends on the environment.

6. Personal Freedom. When citizens enjoy the freedom of expression, belief, and organisation, as well as personal autonomy in a society welcoming of diversity, their country experiences higher levels of income and wellbeing. And Societies that foster strong civil rights and freedoms have been shown to enjoy increases in levels of satisfaction among their citizens.

7. Governance. Well-governed, democratic societies tend to enjoy higher levels of per capita income and of citizen wellbeing.

8. Business Environment. A strong business environment is one that provides an entrepreneurial climate in which citizens can pursue new ideas and opportunities to improve their lives, leading to more wealth and higher social wellbeing.

9. Economic Quality. Sound and stable or, simply, high-quality economic fundamentals increase economic wealth and promote social wellbeing.

As these pillars indicate, the framework goes beyond GDP, the most commonly used indicator of the prosperity of a nation, because that is a measure of only wealth, and ignores wellbeing. They also claim their index is based on a conscious desire to achieve “academic and analytical rigour”, which they have evolved over the past decade. And they publish their full methodology so it is available for scrutiny.

The Legatum Institute want the Prosperity Index to be “a tool for change”, and see it as providing, the evidence leaders need to transform their nations into more prosperous ones, and the way in which citizens can hold those leaders to account. It makes this even easier with the Prosperity Gap analysis, which assesses whether countries are over or under-delivering prosperity relative to their income levels and their peers.

The Need for Balance

The first diagram above depicts a balance between social well-being and economic growth, but we know the balance is hard to achieve. At a personal level, we must maintain a balance to achieve a good standard of living and sustain it, and we know how hard that is. At a business or organisation level, the challenge of getting the balance right is harder still. So, it is not difficult to see that the challenge at the level of a whole society is a huge challenge. 

In business, the challenge is made worse by the real, or perceived, need to focus on maximising shareholder value, and on delivering short-term results and sustained performance quarter-by-quarter. By now we should have realised that it is just not possible to achieve this without balance. But because the focus is on profit maximisation, the emphasis is on value extraction. And this is often achieved by cutting costs and forgoing investment that would generate future value. 

Another way to look at this is to say that rather than trying to create greater total value (a bigger pie, more pies or better quality / higher value pies), the goal is more often how to compete to win a larger slice of the existing pie.

The third way to look at this is to recognise that profits are the sum of revenues minus costs where revenues are the numerator and costs are the denominators. We might describe the current form of capitalism as denominator capitalism. It is obsessed with cutting costs. Valueism, focused on value creation, could be regarded as numerator capitalism. That is not to say that Valueism ignores costs, which clearly need to be managed. It is to say, the growth of the numerator is even more important so further investments can be made in the future value drivers. 

This point was made clearly in my interview with Colin Price, co-author of Beyond Performance. The book said, “When it comes to achieving sustained excellence in performance, what separates winners from losers, paradoxically, is the very focus on performance. Performance-focused leaders invest heavily in those things that enable targets to be met quarter-by-quarter, year-by-year, but they tend to neglect investment in company health; investments in the organisation that need to be made today in order to survive and thrive tomorrow”.

Elaborating on this in my interview with him he illustrated the point saying, “If you are a bank and your time perspective is that you need to improve performance immediately, you would put no emphasis on the health of the organisation at all. You would go out and get everyone in the bank to bring forward all of their client pitches to tomorrow. You’d discount. You’d fire everybody that you could. You’d entirely focus on the finance. If I then gave you a different challenge and said right, you’re running one of the top ten banks in the world and your only objective is to be the best bank in 20 years, you wouldn’t think about any of those things at all. You’d completely reverse it and you’d say it’s about the brand, it’s about the quality of the talent that we’ve got, it’s about the integrity of the relationships with customers, and it’s absolutely about being trusted by the regulator and by society”.

This explains the difference between numerator and denominator capitalism. Numerator capitalism is achieved by focusing on value creation (i.e. Valueism) and leads to a greater total value that is of benefit to all. But the bank looking for immediate results is only interested in cutting costs i.e. denominator capitalism, and this is not a sustainable strategy. Nor is it a strategy that generates greater prosperity or standards of living for shareholders, employees, customers or society in general.

Valueism, Numerator Capitalism and Prosperity

Every decision made by us, our politicians, business leaders or the executives of other organisations either creates value and wealth (financial and/or non-financial) or destroys value. It leads to a higher standard of living and greater prosperity or reduces them. The same cannot be said for a decision to boost profits by cutting costs. Profits achieved this way are very likely to just re-allocated wealth from one group of people (e.g. suppliers or employees) to another group (usually shareholders). The result is not greater prosperity overall, and it may even destroy value and prosperity in the medium to long-term.

By imposing austerity after the financial crisis the government has reduced investment in social capital placing a drag on the economy and on levels of prosperity. By reducing overheads through outsourcing to poor countries, reducing investment in R&D or people development and training. businesses and organisations reduce consumer spending power, undermine consumer confidence, lower productivity levels and reduce their ability to innovate and create higher value products and services. Such moves add another drag on the economy.   

These problems are made worse by traditional management theories of the industrial era that suggest this is how businesses and organisations should be run: company law that encourages businesses to put shareholders above all other stakeholders; ineffective company boards whose remuneration committees incentivise bad executive behaviours; accounting standards that discourage investment that would lead to medium and long-term growth at the expense of short-term results because they have to be expensed immediately thereby reducing short-term results. And so on. 

All these factors encourage the focus on denominator capitalism and discourage value creation or numerator capitalism. Individually these factors act as a drag on the levels of prosperity that can be realised. And collectively their impact is even greater than the sum of their individual impacts. 

The challenge of managing in a way that creates real value and prosperity is so great that executives find it far easier to focus instead on managing and manipulating the value of the firm's market value, in the “Expectations Economy” as professor Roger Martin called it in an Harvard Business Review article. 

All the indications suggest executives are very good at creating positive expectations. In recent years, equity price increases have been driven by rising PE ratios rather than improving business fundamentals. And there is a record gap between hope and reality in the US, and very likely in other markets too.

In previous articles, I have said a lot more about the Expectations Economy. I have also referred to conversations with investors and others in the investment community whose opinions were all the same; that the majority investors don’t have the capability they need to understand the fundamental drivers of the future value of a firm, that analysts don’t either, and that only 0-1% of investors care about them anyway. Their attention is firmly on signals that may move market expectations. In other words, most 'investors' are really just speculators.

We should be worried that most ‘investors’ are really speculators. It means they are not interested in whether the firm is creating real value or not. It means we cannot rely on them to stimulate the kinds of prosperity that lead to greater standards of living. 

It’s not just ‘investors’ and analysts that don’t have the ability, or interest, in how businesses create value. The McKinsey research I have quoted several times before in other articles shows that a significant majority of boards don’t really understand how the firms they serve create value either. And other research shows that it is pressure from the board that drives them to focus on short-term results and to manage and manipulate market sentiment.

Changing the Game

There are many things that can be done to correct all these problems, but first, we need to re-frame the conversation and change mindsets. Boards, politicians, regulators, investors, executives and others all need to understand the difference between numerator and denominator capitalism. They must understand how their actions lead to denominator capitalism which has little to do with value creation, and everything to do with value extraction. Then they must understand the impact this has on productivity, on levels of wealth and prosperity and on standards of living.

Valueism, the focus on value creation, offers a philosophy that can help guide their understanding of the change that is required. More importantly, it provides a name and a common language to help communicate the idea. 

If every decision that those in the system made were to be judged based on whether it adds value that will lead to sustainable prosperity for the stakeholders, the business or organisation and for society, guided by the nine pillars of prosperity outlined by the Legatum Institute, then we could be sure they were creating rising living standards and greater levels of prosperity. 

Some may still argue in favour of the ideas, "the business of business is business"; that the only responsibility of business is to shareholders, and so on. Those that do so are to blame for the current state of affairs. They are also guilty of breaking the Social Contract. Fortunately, such attitudes are now widely recognised as being wrong and irresponsible. In an age of increasing transparency, they will also be called out and their positions will be increasingly untenable.

To conclude     

In 1949, the economists were right to point out that science and technology offer the opportunity of greater living standards for all. They were right to be optimistic at that time if the objective of raising standards of living was almost the only one that united nearly all the world’s politicians and statesmen, as they suggest. But I have my doubts that they were right about that then, and for sure the view did not last.

The economists said the idea was rooted in the fact that, “In most modern countries the vast majority of the people, rich and poor alike, take it as beyond dispute that there is an obligation upon governments to adopt measures that will reduce inequality”. They noted it was a “modern phenomenon”, but also recognised that “defenders of inequality are more often to be found among the middle classes than among the rich or poor”. They observed that the middle class, “tend to resent egalitarianism, and are the main philosophical and political sources of opposition to its rapid extension”.

This opposition found a voice in one of its strongest advocates, Frederick Hayek, the Austrian and British economist, political philosopher, social theorist and founding father of neo-liberalism. He was appointed a member of the Order of the Companions of Honour by Queen Elizabeth II, on the advice of Prime Minister Margaret Thatcher, for his "services to the study of economics", in 1984. Hayek was also a big influence on Milton Friedman's, and both were strong advocates of the concept of the free-market which inspired Thatcherism.

On becoming the leader of the Conservative party it is said that at one policy meeting Thatcher produced a copy of Hayek’s book The Constitution of Liberty (1960), and said, “This is what we believe”. As the daughter of a greengrocer with a small chain of shops, she could certainly be described as middle-class. As a supporter of Hayek’s ideas, she was also anti-egalitarian. She believed in the free market, the efficiency of the market, and deregulation to make it freer.

The economic thinking of Hayek, Friedman and others resulted in the dominant political ideology and the large-scale privatisation of nationalised industries. Deregulation measures were applied to the financial services industry, leading to the Big Bang and the re-shaping of the markets from 1986. Deregulation also led to innovation and the creation of many new financial instruments, a number of which were later associated with the global banking crisis of 2007/8 and the subsequent Great Recession.

At the heart of the neo-liberal ideology is the belief that competitive forces can deliver the best and most efficient results. The belief ran so deep that serious attempts were made to unleash competitive forces in sectors that many had previously regarded as natural monopolies - such as the energy and utility sectors or the railways. And in the public sector, in areas such as health. 

Whilst not wanting to get into party politics, it is impossible for me not to be political in pointing out that the blind belief in the power of competitive market forces is at odds with the philosophy of Valueism which argues instead for the collaboration in the co-creation of additional value, which embraces all stakeholders including the customer.

Along with an obsession with efficiency and performance designed to strip out costs (a natural fit with the idea of denominator capitalism), management theory has also been obsessed with achieving a competitive edge, or a Sustainable Competitive Advantage, as Michael Porter called it. Business Process Reengineering, Total Quality Management, Six Sigma are examples of this.

Thankfully there is now enough evidence to show that the many of these ideas, which use and abuse the simplifying cognitive models of the economist and treated them as laws make no sense. And many aspects of neo-liberal economics have now been largely discredited. Nevertheless, the ideas are still the basis of what gets taught on courses in economics, finance and business. And they still have a strong influence on the way businesses get managed. This is because alternative ideas are still emerging, are still piecemeal and are not associated with a movement like that of neo-liberalism. 

It is for this reason I put forward the concept of Valueism. It is an alternative to neo-liberalism; the obsession with free market competition and with cost cutting and efficiency to achieve performance, which I have called denominator capitalism in this article. Valueism is instead based on the belief that prosperity is achieved by taking a balanced approach to the creation of economic and social well-being, and this is true at the level of the personal, business or organisational, and society. It does not deny that costs must be controlled and that competition exists. But it does argue that to overemphasise them, and to fight for a share of value as if the amount available were fixed in size, is to ignore the truth that collectively and collaboratively we can all benefit from creating and sharing more value.

To focus on value creation would allow us to return to the optimistic days of 1949, and the objective of raising standards of living as the goal of all the world’s politicians and statesmen. To that, I would add it should also be the focus of every executive of every business or organisation in every sector. In this way, we would overcome the problems of falling productivity, stagnation or sluggish growth, inequality and falling standards of living. We are also far more likely to find solutions to the some of the biggest social, economic, environmental and other challenges we face today, and will face in the future.

Finally

Finally, I would remind business leaders that to earn and keep a customer was said to be the only goal of a business by Peter Drucker. That goal can only be achieved with a focus on the delivery of value. And to this, I add a third element, by suggesting a focus on value creation can also help you grow your customer, grow your business, and grow your profits. And that is how shareholder value should be maximised, rather than cutting costs and pandering to the market of sharetraders. This approach is spelt out clearly in the Johnson and Johnson Credo. It is also reflected in the writings of Henry Ford. And can be seen in the practices of the Quaker-owned enterprises. They were all numerator capitalists but, adopted conservative approaches to cash flow management.

I am available to speak on this topic

If you would like to hear more on the topic of this article, I am available to speak about it at public or corporate events, in-house meetings or one-to-one briefings. Email [email protected] for details