‘The Latest Best Chance’:
Prosperity, Competitiveness and Natural
Capitalism – the Ultimate Integration
Last year I received a call from the authors of
this book. We had mutual friends in Amory Lovins,
Hunter Lovins and William McDonough. These ‘new’
authors from Australia (most innovation comes
from the periphery!) impressed me with their earnest
commitment to integrate the concepts of Natural
Capitalism and competitiveness. They knew all
the literature; they had a vision; and the vision
was correct, something that I dreamed of myself
for some time, but had precious little to show
for it. By the second or third phone conversation
between Australia and my home in Massachusetts,
I knew that I was speaking to people who had the
energy, insight and commitment to begin the discussion
of what I call ‘the ultimate integration’;
that is, integration of the concepts of competitiveness
and Natural Capitalism.
This new book teaches us to think that there are
four constituents to any business model: purchasers,
shareholders, employees and future generations.(1)
All business models serve the purchasers, or the
business model wouldn’t exist. Most serve
the shareholders or the business model wouldn’t
exist, for long. Fewer still serve the workers
of the world; and in fact, there are only a handful
of countries where workers participate in the
value created in a business model; and even in
these few countries there is precious little thought
to future generations. That is what this book
is about. How can we create business models that
serve all the constituents that we think of in
the present; but how do we make sure we leave
the world better off; how do we think intergenerationally
when it comes to business models; indeed, how
do we create value for future generations? My
view is that we need to consider two upgraded
concepts that come before Natural Capitalism,
in order to get the most out of it: ‘What
is Prosperity?’ and ‘What is Competitiveness?’
What is prosperity?
Prosperity
is the ability of an individual, group or nation
to provide shelter, nutrition and other material
goods that enable people to live a good life,(2)
according to their own definition. Prosperity
helps to create the space in peoples’ hearts
and minds so that, unfettered by the everyday
concern of the material goods they require to
survive, they might develop a healthy emotional
and spiritual life, according to their preferences.
We can think of prosperity as a flow and a stock.
Many economists view it as a flow of income; the
ability of a person to purchase a set of goods,
or capture value created by someone else. We use
an improved notion of income called purchasing
power.(3)
Prosperity is also the enabling environment that
improves productivity. We can therefore look at
prosperity as a set of stocks.(4)
There
are seven kinds of stock, or Seven Forms of Capital,
the last four of which constitute social capital.(5)
In this conceptualization we see all forms of
prosperity falling into the following categories:
natural endowments such as location, sub-soil
assets, forests, beaches and climate; financial
resources of a nation like savings and international
reserves; man-made capital which includes buildings,
bridges, roads and telecommunications assets;
institutional capital such as legal protections
of tangible and intangible property, government
departments that work with little hidden costs
to the economy, and firms that maximize value
to shareholders, and compensate and train workers;
knowledge resources such as international patents
and university and think-tank capacities; human
capital which represents skills, insights, capabilities;
and culture capital which means not only the explicit
articulations of culture like music, language
and ritualistic tradition; but also attitudes
and values that are linked to innovation.
Moving away from a conceptualization of prosperity
as simply a flow of per capital income, enables
us to consider a broader system, and the decisions
for investment in an enriched and enabling, ‘high-productive’
environment.(6)
Nobel laureate Amartya Sen suggests that: ‘The
advantage of a stock view would be to give us
a better idea of a nation’s ability to produce
things in the future’.(7)
Why does prosperity matter?
We
know that individuals around the world have vastly
different purchasing powers and countries possess
stocks of wealth in different proportions. According
to Thomas Sowell, ‘We need to confront the
most blatant fact that has persisted across centuries
of social history – vast differences in
productivity among peoples, and the economic and
other consequences of such differences’.(8)
Recent reports by the World Bank indicate that
the standard of living in many regions in Africa,
Latin America and Asia are being threatened because
of declining productivity. There are intimate
connections between poverty and malnutrition:
muscle wastage, stunting of growth, increased
susceptibility to infections, and the destruction
of cognitive capacity in children; but poverty
is more insidious than statistics can indicate.
Poverty destroys aspirations, hope and happiness.
This is the poverty you can’t measure, but
you can feel. There is a rich literature on correlation
between incomes and such progressive human values
as: productive attitudes toward authority, tolerance
of others and support of civil liberties, openness
toward foreigners, positive relationships with
subordinates, self-esteem, sense of personal competence,
the disposition to participate in community and
national affairs, interpersonal trust and satisfaction
with one’s own life.(9)
Ronald Inglehart writes that higher rates of selfreporting
of both objective and subjective well-being are
correlated with the levels of national prosperity.(10)
What is competitiveness?
Nations
that don’t create wealth for its citizens
share much in common. Our evidence, and that of
others,(11)
suggests that they are over-reliant on natural
resources, including cheap labour; and that they
believe in the simple advantages of climate, location
and government favour. Because of this they often
do not build the capacity to produce differentiated
goods and services that create greater value for
demanding consumers who are willing to pay more
money for these goods. By focusing on these easily
imitated advantages, on these lower forms of capital,
they compete solely on the basis of price and,
therefore, tend to suppress wages. Keeping wages
low is what I call competing tosee: ‘which
country can stay the poorest, the longest’.
It is exports based on poverty, not exports based
on wealth creation; and the only competition they
are in is to see which country can stay the poorest
the longest until its society disintegrates. A
nation’s ability to create both price and
non-price value for consumers inside and outside
the country is what determines its productivity
and, therefore, its prosperity.(12)
One
can categorize the many competitiveness choices
available to firms and governments as follows:
The
micro choices of competitiveness focus
business strategy on an integrated set of choices
designed to achieve a specific set of objectives
in an informed and timely manner. We see few strategies
of companies in developing nations that are informed
by good research, made explicit, and shared by
the firms’ leaders. We have found seven
patterns of uncompetitive behaviour at the microeconomic
level: overdependence on natural resources and
cheap labour, poor understanding of foreign customers’
buying preferences, lack of knowledge of competitor
activities, poor inter-firm cooperation, lack
of forward integration into global markets, a
paternalistic relationship between government
and the private sector, and a high amount of defensiveness
among government, private sector, the unions and
the press. These seven patterns are the norm of
companies in countries where the average citizen
does not have a high and rising standard of living.(13)
The results of these seven patterns are simple
exports which compete on price and, therefore,
low wages, in an increasingly demanding marketplace
which provides fewer returns. Mitigating patterns
of uncompetitive behaviour requires a set of firm-level
choices around structuring new learning and decision-making.
For inside each of these patterns lies a hidden
opportunity for creating prosperity.
The
macro choices of competitiveness
are the extent to which the government supports
the private sector. Some say that government needs
to do more for the private sector, and some say
government needs to get out of the way. If we
characterize government choices around its level
of intervention in the economy we can see a broad
range of choice between classic socialism and
monetarism.(14)
In Cuba, the government has become overresponsible
for the welfare of the average citizen; supplying
housing, health care, education, jobs, food and
even entertainment and news. Ownership is by the
state and accomplished through collectives and
accompanied by centralized planning which uses
quantitative targets and administrative prices.
Income distribution tends to be even, and growth
tends to be low. The monetarist approach is a
sparse but rigid social contract between government
and the private sector that says: government will
create a stable macroeconomic environment and
the emerging private sector entrepreneurs will
create growth. This strategy emphasizes stabilizing
markets, freeing wages and the currency exchange
rates, and allowing markets to develop. This strategy
appears to create, especially in the near term,
more poverty and greater gaps in income. It fails
to acknowledge that the government has a role
in the innovation process. In my view, it is an
overreaction to the failed policies of government
intervention, such as import substitution which
was so popular in Africa and Latin America in
the 1970s and 1980s.
My view is that the government needs to do everything
it can to help the private sector succeed, except
to impede competition. This means investing, or
helping the private sector to invest, in the higher
forms of capital. In poorer countries, government
will have to do more than in richer countries.
The relationship has to be customized, based on
a nation’s stage of growth, and the innate
capacities of each sector to contribute. I believe
that if these competitiveness choices, these micro
and macro choices, are informed and bounded by
the principles of Natural Capitalism, we produce
the best chance to build business models that
create value for all four constituents: purchasers,
shareholders, workers; and perhaps most important,
future generations. I also believe that The Natural
Edge Project, this group on the periphery, has
produced the latest, best effort for learning
how to do it.
OTF Group
Boston, Massachusetts
September 2004
1
The four constituents are from the forthcoming
book, The Prosperity Event: How Business Strategy
Transforms Nations, edited by Michael Fairbanks.
2 Ray, D. (1998) Development Economics,
Princeton University Press p9.
3 Ibid, p12.
4 Amartya Sen discusses the difference
between a stock and flow in The Concept of Wealth
(1996).
5 Michael Fairbanks developed
the heuristic of the seven forms of capital through
a metaanalysis of recent literature on economics
and social capital. Examples of the latter include:
Coleman, J. S. (1988) ‘Social Capital and
the Creation of Human Capital’, American
Journal of Sociology, vol 94, Supplement, pp95–120;
North, D. C. (1990) Institutions, Institutional
Change, and Economic Performance, Cambridge University
Press, New York; Olson, M. (1982) The Rise and
Decline of Nations: Economic Growth, Stagflation,
and Social Rigidities, Yale University Press,
New Haven); and Serageldin, I. and Dasgupta, P.
(1997) Social Capital: Integrating the Economist’s
and Sociologist’s Perspective, World Bank,
New York.
6
For the best practical example of this view of
prosperity, look at James Wolfensohn’s internal,
but now widely accessible memorandum on the Comprehensive
Development Framework (CDF), spring of 1999. The
president of the World Bank has begun to implement
a ‘holistic’ approach to development,
around the concept of a ‘social balance
sheet’.
7
Sen, A. (1996) ‘The Concept of Wealth’,
in Myers, R. (ed) The Wealth of Nations in the
Twentieth Century: The Policies and Institutional
Determinants of Economic Development, Hoover Press,
Stanford University Stanford, California p7.
8
Sowell, T. (1998) Conquests and Cultures, Basic
Books, New York p329.
9
Much of this rich literature is synthesized in
Inglehart, R. (1997) Modernization and Postmodernization:
Cultural, Economic and Political Change in 43
Societies, Princeton University Press.
10
ibid, Ch 1, demonstrates these connections with
the World Values Survey in the early part of this
decade and concludes that ‘far from being
randomly related, cultural, economic and political
variables are closely related’. This survey
provided a broader range in the variation of data
than had ever been available before. It is drawn
from over 56,000 respondents in 43 countries representing
70% of the world’s population. They varied
from populations with a US$300 per capita income
to US$30,000; and from long established democracies
with market economies to just-former socialist
countries, and authoritarian regimes. And these
conclusions often appear to hold across levels
of education, occupation and income. He also reports
that for richer countries there is a point of
diminishing returns where the subjective values
become more important than the objective values.
11
Sachs, J. and Warner, A. (1995) Natural Resource
Abundance and Economic Growth, National Bureau
of Economic Research, Cambridge, MA.
12
Krugman, P. (1994) ‘Does Third World Growth
Hurt First World Prosperity?’, Harvard Business
Review, June–August, pp113–121.
13
Fairbanks, M. and Lindsay, S. (1997) Plowing the
Sea: Nurturing the Hidden Sources of Growth in
the Developing World, Harvard Business School
Press, Boston, Chs 1–7 (with a Foreword
by Michael E. Porter) Chs 1–7.
14
Classic socialism: Cuba and North Korea; monetarism:
Chicago school, Chile between 1973 and 1983, Thatcher’s
United Kingdom. Keith Griffin (1989) at Berkeley
categorizes four other archetypes.