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  Agree with ANC problem - this happened when a country's future only become the 4th priority on the ANC list. 1st - Personal self enrichment, 2nd - ANC's as ruling party for ever, 3rd - “radical social...  

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Creating customers creates jobs

Is the focus on the role of capital too singular and misplaced?

SWELLENDAM – You have to hand it to the capital supremacists. They have convinced many, including a good number of naïve political policymakers, that capital creates jobs, economic growth and prosperity – in its availability, accumulation, concentration, control and deployment.

Small wonder then that those same policymakers will see control of capital as the quick and easy instrument to uplifting the masses, not only feeding into populist misconceptions, but indeed labeling those who do own, control and manage capital assets as enemies of economic freedom. And if you can put a label to it like “white monopoly capital” you have created a convenient personified demon to become the scapegoat for all kinds of ills. We’ve seen much of that recently, revived under the “radical social and economic transformation” slogan. But it’s a subject rife with alternative facts and misconceptions that have to be challenged and unpacked in all three dimensions – ownership, control and management – and the relationship between them, before embarking on remedial policies.

More worrisome is the persistent notion that redistribution of assets and income is a superior remedy to disparities to economic growth itself. But blame that notion on the success of the capital supremacy spin. To be sure capital is vital to economic growth. It is the air that economies breathe. But economies do not live merely to breathe, and air is simply one enabler for a full economic life. That spin has disingenuously ignored a longstanding intuitive truth: “Enterprise leads; capital follows”. And so do skills and other factors without which enterprise will be as hamstrung as it would be without capital.

Enterprise itself responds to the needs and wants of fellow human beings that makes up demand. In meeting those needs and wants it becomes supply, giving rise to another existential truth that supply exists because it serves demand. All I have done in my own writing, is to change the phrase from “supply exists because it serves demand” to “supply exists to serve demand”. That bit of impudence immediately raises the hackles of capital supremacists because it implies that customers rank above shareholders in an enterprise.

Their hysteria then drowns out important appendices:

  • That all transaction has to be guided by the three free-market pillars of supply, demand and price, and invariably problems arise not because the principles fail, but because they are severely warped by behaviour; and
  • That sensible wealth distribution has to meet the legitimate expectations of all of the stakeholders and encourage further contribution.

The ultimate reality is that tangible value, or wealth, can only be created when something useful is made for others – when it makes a contribution to other people’s lives. Wealth creation is indeed a reflection of service to another, and the source is customers, not capital, labour or even government. You can ascribe as many motives to the process as you like, but that existential truth will remain. Customers create jobs. Motives are irrelevant.

Rarely does one see a showdown between customers and shareholders. We witnessed one recently when the big bad builders joined an on-fire economics minister Ebrahim Patel to announce the ownership and control transformation in the construction industry. Despite soothing platitudes of state/private sector cooperation in doing “the right thing”, which frankly it was, the handful of industry representatives were clearly uncomfortable – more like schoolboys in the principal’s office. Patel held all the aces. Not that of judge and adjudicator of their collusive misbehaviour and not even as lawmaker. The ultimate power that he unleashed was that of being by far the industry’s biggest customer and the FOMO on a huge slice of infrastructure spending.

Of course Patel represents a single powerful customer. The power of ordinary individual customers is deeply and widely fragmented. When that comes face to face with large corporate entities driven primarily by shareholder interests, it crumbles and has recourse only to Consumer Protection bodies or courts. South African consumers seldom bother. But occasionally, perhaps not frequently enough, these entities are called to account, and shareholder-value arrogance is challenged. 

We had the perfect case study in the Ford Kuga incident. Those lengthy “procedures-to-be-followed” recourse on car recalls, and the view that recalls themselves are an admission of guilt, are clearly moulded by “cost/benefit” analyses that are such an integral part of maximising shareholder benefit. In the process, a model brand has been destroyed forever, and the outcome can still be hugely costly to the company. We’ve seen much of that globally recently. As clichéd as this may sound, you can never go wrong by doing the right thing. And the right thing is always to act in the customer’s interest first.

And then enter rand rigging banks. Not a completely new story, and certainly not surprising to someone who has regularly cautioned about the power and potential parasitic behaviour of the financial services industry. But a puzzling, if not bizarre outcome of all of these events is the surprising allegiance from the ruling party and even the EFF to the protection of free market integrity. Terms such as “break up cartels and collusions”; and “price fixing will not be tolerated”; and “price fixing creates distortions in the economy”, at best indicate some greater appreciation of working with markets rather than trying to control or ignore them. Hopefully it also reflects appreciation of an essential role of government in designing and enforcing the rules of fair play in free and open transactions.

To be sure, all markets are highly contaminated, especially those three essential pillars of supply, demand and price. But here’s the supreme irony: the biggest contaminators of these pillars, especially of price, are governments themselves. In South Africa many critical prices such as energy, rail and road tariffs are arbitrary to say the least. And of course one of the biggest and most important prices in the economy – tax, or the cost of government – is completely removed from individual choice. The real question is whether this seemingly new and modest appreciation of the merits of free enterprise will temper its own behaviour as an important actor in the economy.

Emphasis on wealth distribution or redistribution will always be divisive. Emphasis on wealth creation, which translates into always putting the customer first, creates a common, unifying purpose.

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Very interesting way of looking at the capital and wealth creation/distribution issue. Customer definitely is king all aspects of enterprise even in non-profit organisations or government. We are there to serve the people no matter what.

We need to find a way to educate South Africans on the complex inter-dependencies between consumer demand, entrepreneurship, labour and capital, but without the jargon and labels and politics that obfuscate the issues unduly. Maybe consider the fairytale of the shoemaker and the elves and make it prescribed reading in pre-schools.

Bringing balance to the force (a central tenet of the Jedi) refers not to equal magnitude dark and light sides locked in a stalemate but to the ideal state of the Force i.e. the light side. Exactitude, veracity and falsehood could be characterised similarly.

Balance is important in this context. Thus disturbances in the force such as the wanton destruction of Alderaan should be noted as critical junctures in the continuum. The reason I pen this is not to convince but to bring balance. A shift towards the absolute truth, if you like.

Enterprise responds to demand. When it meets those demands it becomes supply. Thus the entrepreneur and the customer are essential ingredients in the melange. It is however, more than this. Capital, land and the rule of law are also important ingredients. Maybe cigarette smugglers (bandit entrepreneurs of sorts) demonstrate that the rule of law is not essential but certainly countries where the rule of law abets entrepreneurs flourish compared to those where it doesn’t. Compare Singapore and Somalia, for instance. China and Columbia.

What is more important for life? The heart, the blood or the brain? If something comes first does it make it more important in the wealth creation chain? Lemma tell you this, britches: there are plenty in South Africa who aspire to a HDTV, nice house, car and other creature comforts. There is plenty of demand and few Spartans. What about entrepreneurs? I know there are plenty that would give it a go but don’t have the capital nor the expertise.

What about the rule of law. The ANC is a problem. This has almost become axiomatic. One cannot expect protection from criminals when jakkalas himself is guarding the henhouse.

The real question we should be asking is not what is first in line in a sequence of dependencies or what initiates it, but rather what is missing from the chain? Where is it broken?

Capital is more complex. If one looks at the marvels of the Olifants River irrigation scheme on the West coast one notices that the land below the canal is verdant and lush but above it barren and dry. Water flows downhill and so does capital.

What people don’t understand is that the interest rate is a market phenomenon and cannot be arbitrarily determined by decree but only by the bond market. Incredibly enough, the interest rate actually measures the marginal productivity of capital. We can define capital productivity as the annualized percentage increase in value added. If we rank all plant and equipment by productivity we get submarginal capital, marginal capital and productive capital. Holding capital and plant has an opportunity cost (of course) which is a critical factor. What prevents interest rates rising too much is that marginal capital is sold or idled and the proceeds plus maintenance quotas invested in bonds. This puts a brake on bond prices falling and interest rates rising.

From this we can conclude a high marginal productivity of capital is bad for the customer-is-king Grande Utopia. The deal between the capitalist and the entrepreneur is a simple one and at the heart of the problem. The capitalist exchanges wealth for income (simple isn’t it?). The entrepreneur converts the wealth into capital goods which produce income to pay wages, the capitalist, the regime taxes and for him, the leftovers.

Now therein lies the problem. The marginal productivity of capital in SA is very high. Sky high, in fact. Why is this? Additionally, there is a disturbance in the force in the form of compulsion. Not a mutually agreeable exchange by two parties who both stand to gain, but one by force or threat of force.

Agree with ANC problem – this happened when a country’s future only become the 4th priority on the ANC list. 1st – Personal self enrichment,
2nd – ANC’s as ruling party for ever,
3rd – “radical social and economic transformation”, break down the last working systems to any future,
4th – May be they will think of South Africa’s future

Every retrenchment is a customer lost, but we also have reached a point globally where every one that wants a toaster or microwave that can afford it already has one, so capitalism has reached conclusion. Who can we sell to next that can afford whatever the product is and still wants it?

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