SWELLENDAM – I have learned a lot from Richard. He is the one who calls himself “Richard, the Great”.
Regular readers of this column (and others) will know who I mean and appreciate that it is not an admission I make lightly. I have a follower who tells me that when he opens my column he immediately goes to the comment section to see what Richard the Great has said. In the absence of a response, he seldom reads further. Thanks for the “click” anyway.
But for all of that, his Greatness does make you think both about what you have written and what you are about to write. His response to a recent column (see Moneyweb here) made me realise why we are so often at odds; indeed perhaps why I am so often at odds with economists, academics and economic theorists. They all have a tendency to define abstracts and assign to them predictable behaviours – such as labour, capital, resources and many other.
If only it were that simple! If only we did not have a messy and much nuanced dynamic called human behaviour, in turn driven by a creature with differing motives, hopes, dreams, expectations and aspirations; all mostly undefinable and certainly highly erratic and seldom predictable. If you impose these factors on economic abstracts, you quickly discover that the definition of those abstracts are often highly suspect.
This can be applied to the most basic of economic theory – the so-called factors of production. Earliest definitions focused on three primary or physical factors: land (natural resources); labour and capital. They clearly missed an element: that which ultimately determines the usefulness, or value of the production itself and without which any or all of the three become irrelevant. That is demand, in turn identified by someone, an entrepreneur if you will, who marshals those factors into transforming one situation into another – or adding value to people’s lives. Entrepreneurship was added as a 4th factor and the four have become standard in economic teaching.
That addition soon triggered exuberant and sometimes debilitating conflict in economic theory about which is the most important, leading to different systems and constructs that continue to shape national and individual destinies today. My pet peeve is the one that claims capital rules supreme; that it is scarce and precious and that good things can only happen when it drives others in its accumulation, accrual and expansion in the interest of material selfgain. That understanding has even been expanded to cover other factors such as “human capital”, “social capital, and “natural capital”. This, it is claimed, gives birth to the entrepreneur, the selfish opportunist who then exploits the productive use of the other factors.
It is a most inaccurate and demeaning view of great entrepreneurs – one that I have tried to counter on many occasions in my column. (See here). A key trait of entrepreneurial behaviour is the ability to look beyond immediate and assured selfgain and focus on making a meaningful difference to other’s lives. That goes much further and is far nobler than simply following the whims of capital or selfgain.
It is tempting to adopt a mechanical view of “arranging the factors of production” to ensure maximum wealth creation. It creates neat little abstract boxes for theorists to play around with and propose as elements that simply have to be “managed”. Among many production improvement processes is Eliyahu Goldratt’s Theory of Constraints, which means simply identifying and eliminating constraints to effect maximum productivity. I have come across many of those in my consulting days, the most popular of which was the elaborate Japanese process called 20Keys.
Regimentation on its own seldom works. It simply ignores or does not give enough credence to the most important factor of all: willingness and commitment by the troops in the regiment. This they get from meaning, not from processes – from why not from what and how. It speaks to motive; about which we know very little but are discovering more and more that it is about having a sense of self-worth based on the contribution being made to other’s lives – satisfying that deep urge in most of us to make others happy.
These powerful human attributes not only inform, but actually define capital. Far from it being a calculable and tangible factor of production it is actually a factor of behaviour. Without this understanding, one has great trouble in distinguishing between capital and money. We know that the world is awash with debt-based money. This, it is argued, only becomes capital when it is used as an investment in capital assets. So capital is defined not by the availability of money, but by the use of it.
Now it really gets confusing, because not only is the world awash with money, but there’s a credible argument that stagnant global economic growth has been exacerbated by this money not finding its way into consumer demand, but into investment in capital assets, including equity, property and financial instruments. This, and some other startling facts explode the myth of a scarcity of capital, including:
- Buoyant stock markets;
- A resurgence of new listings and IPOs on the JSE;
- Huge reserves (estimated at R800 billion) in SA corporate coffers;
- R4 trillion in investment funding in the South African financial banking sector and
- A further R7 trillion in non-financial institutions such as pension funds;
- Share buy-outs such as Apple and Amazon, implying a conversion of capital into debt.
Buoyant stock markets demonstrate another argument: apart from reducing the cost of raising capital, high PE ratios mean simply that the price of using that capital (earnings) fall, and lower prices must surely reflect greater supply in relation to demand. An unfortunate side effect, though, is that it puts greater pressure on company managers to squeeze earnings; to maximise profits in a low-demand environment that invariably leads to enterprise containment rather than growth.
Perversely then, there is no shortage of capital, but actually low demand – specifically a lack of willingness to invest in productive capacity. (See Moneyweb article here). Then the opposite is true: there’s a surplus of capital in relation to demand.
Capital seems to hunger for the beta-pushing Elon Musks of this world, who, in his perhaps cavalier approach to risk and shareholder interests (see Forbes article here), explodes another myth: that capital naturally flows to low risk, high returns. In Musk’s case, he not only increases risk, but also reduces assured (not potential) returns.
Capital scarcity and indeed most of our conventional economic abstracts are not defined by their physical calculable qualities or quantities, but by the human attributes that drive them. Perhaps the most important attribute that is missing is simply courage – of the Elon Musk kind. Isn’t that then, what capital really is – courage?
What we have to ask is what discourages it.