ALLIANCE OF UNIVERSITIES FOR DEMOCRACY
10th Anniversary Conference
Budapest
7th November 1999

THOUGHTS ON BUILDING A JUST AND STAKEHOLDING SOCIETY

Professor Michael Thomas, OBE., O.M. (Poland)
Strathclyde University
Glasgow
Scotland

E-mail: Michael.Thomas@Mi8.com

INTRODUCTION

Ten years ago - the curtain had just opened. The dust from the demolished wall had hardly settled. For many of you the world has changed very substantially - you all carry vivid memories of the pre 1989 situation and of the institutions that prevailed, but today those institutions and indeed those values have changed. Change is an uncomfortable experience, it is a great disruption, but I want to tell you why I think change in the next 10 years will potentially be more radical than the changes in the last 10 years.

You know that I am a Professor of International Marketing and Management - I am a citizen of the world, I am not a political philosopher. I have no solutions - on the contrary you will be relieved to know that I have many questions, few answers - but I want to try and develop an architecture for finding solutions - in the process I may be tempted to change my middle name from James to Karl.

The World in 2009

Here is my vision of the world in 2009.

1. Virtually all products now available to us to day will be available online via the internet.

2. Electronic commerce will change the face of shopping - in the USA and the UK, 70% of all existing wholesalers and retailers will have disappeared.

3. Customers will shop among online vendors for the best prices and the best terms, click ordering and paying over the internet. Delivery logistics will guarantee 3 day delivery from anywhere in the world - in country purchases will arrive next day.

4. Store based retailing will be based on entertainment, providing a variety of experiences - shops, cinemas, restaurants, gaming arcades, virtual reality simulators will make marketing an experience not as now, a search for product assortments.

5. Customers (you and I) will increasingly design our own products - cars, computers, entertainment centres, travel packages, appliances, clothing. We will be engaged by companies to help them design new and better products and services for us.

6. Business of business purchasing will have changed even more dramatically. Companies will post specifications for whatever they want, (both things and people), and invite bids - from suppliers all over the world. Out sourcing may cover 100% of many companies requirements - virtual reality companies with a small core activity, few assets and high rates of return for managing complex networks, will set a global standard. Suppliers will of course search the web for opportunities to sell and bid.

7. Business will be fully committed to relationship marketing - keeping customers loyal throughout their lives will be paramount in companies which move from transactions marketing to loyalty building. Competitors will find this customer loyalty barrier hard to break into - new opportunities for growth will increasingly be found far from home markets in Third World countries as they become First World countries.

8. Accounting systems will have to change fundamentally. The present systems look backwards. Companies in future will derive their competitive advantage from intangibles, for example, brand names. Accounting systems will focus on customer values not on the capital market. Real value is found by measuring the replacement cost of an asset not its historical cost, as present accounting systems do. Knowledge capital and social capital will have to be reported in company accounts.

9. Accounting systems will also become more discerning, focussing on customer satisfaction, on profitable customers, on profitable products and/or services, on profitable outlets, on profitable regions. Modern accounting was invented by an Italian Franciscan Monk named Luca Paccioli [Suma de Arithmetica, 1494] and continues to provide the rationale for modern accounting systems. It was a marvellous tool for accounting for wealth in the 19th Century - A century characterised by the production of tangibles, things, and accountants are good at counting things. But the 21st Century will be dominated not by things but by knowledge, by ideas and the ability to exploit them for gain.

19th Century Institutions enter the 21st Century

It is my contention that one of the major problems we must face in the first decade of the 21st Century is that most of our institutions, both public and private, were invented in the 19th Century - the institutions of communism were invented in the 19th Century to solve 19th Century problems (as perceived by Karl Marx). Parliamentary democracy began to flourish in the 19th Century, as a growing middle class demanded a system of government over which they had some control. The factory, the joint stock company, local government, the tax collection system - all have roots in the 19th Century. But we are on the verge of the 21st Century.

Public Choice Theory

The great problem as I see it is the problem of public choice. In the last ten years public choice theory has celebrated the market, which in my view has become an insidious form of contempt for political democracy. Market focused public choice theory advocates that market forces will resolve problems in favour of consumers, but consumers are also citizens. Public choice theory by definition excludes the possibility of deliberation leading to social learning, institutional refinement, and an evolving concept of what is the common good. Public choice theory says that the public good is the sum of selfish individual goals. I beg to differ.

Democracy and the Market

I make these assumptions in what follows:

1. We need true democracy as a bulwark against tyranny.

2. We need democracy for the development and expression of our selfhood - to be a free man or free woman is to express opinions, participate in deliberations, have some influence over the shape of the collectivity.

3. We need to cultivate civic skills and norms which is more than interest group politics.

4. The limits of markets require us to entrust government with functions beyond the minimal one of keeping order and enforcing basic property rights.

5. We need the habits and institutions of strong democracy precisely to keep markets in their place particularly when markets go haywire.

6. Democratic politics is the realm in which ordinary people make up for the disproportionate power exercised by organised money.

The market must be kept from running the polity, therefore we must design 21st Century institutions that will secure a healthy civic and political life.

But here is our problem. The days of the paternalistic corporation or state owned enterprise are gone. Television has caused the decline of civic involvement. The couch potato rules o.k? We are in danger of becoming passive consumers, passive voters and therefore passive citizens.

The Fundamental Question of the 21st Century

So, we must face a fundamental question. Can a secular society, exposed to the rigours of a global market, based on individual choice, lacking the settled ballast of religion or traditional social hierarchy, in the midst of a global communications explosion, also foster a sense of belonging, trust, respect and cohesion? Belonging, trust, respect, cohesion. Four key concepts.

I have to assume that no new Marx has yet or will appear, that capitalism will remain the model and the driving force of the world economy, certainly for as long as the USA directs the instruments of trade, through its influence over the WTO (World Trade Organisation). But it is helpful to recognise three different types of capitalism. They exist in 1999. Financial capitalism, knowledge capitalism and social capitalism.

If we can define these types we may begin the understand the task facing those of us who are concerned with the qualities we require in a just society - belonging, trust, respect and cohesion.

Inclusive and Exclusive Societies

We are surrounded by disruptive forces. We have highly strung global financial markets. We cannot return to Bretton Woods. We have unleashed a monster that no one can control, even that minority that profits from it. Unashamed self interest is a vice not a virtue. We must recognise that the usefulness of an activity is not necessarily measured by its profitability and that what someone earns is not always an indicator of the value of their talents and abilities, still less of their moral stature. We need to reconstitute many of our social, political and economic institutions. We need to design these institutions to enable them to withstand the disruptive forces that surround them. The institutions which we had hoped would protect us: large companies, trade unions, the welfare state, national governments even, seem incapable or uninterested in protecting us from disruption. Public, collective institutions seem enfeebled and overrun. Private sector institutions seem too self interested to be fully trusted. Technology has moved on in leaps and bounds, yet we are living with an institutional inheritance from the 19th century. We are scientific radicals but institutional conservatives. We have, I would argue, two models in front of us. One is of an exclusive society, perhaps the United States is the model we would look at. In such an individualistic society, such a litigious society, autonomy is strict, the establishment and exercise of private property rights rules, trading in property rights is encouraged. Property owners defend themselves, readily resort to law, and we observe high levels of criminal behaviour, it keeps 1% of its population in prison. Individualistic societies do not manage well those activities that must be undertaken collectively, such as environmental services, public education, and politics tends to degenerate into a clash between conflicting economic interest groups. Trust and co-operation is weakened. Moral obligation is weakened.

An alternative model is the non individualistic market economy. I would cite Japan, Switzerland, Norway and Singapore as examples of inclusive societies, of stakeholding societies which emphasise the right and duty to be part of the community. These societies have lower crime rates and ironically fewer lawyers because inclusive societies encourage the development of trust and confidence, they encourage co-operative behaviour and above all they offer security. It is interesting to note that both Singapore and Switzerland have specialised in financial services because people trust their institutions. Public education operates to high standards, streets are clean, pollution under control. These inclusive societies seem to me to demonstrate that trust and co-operation pays off since all four are rich nations. Yet, ironically, the United States has a phenomenal record of technical and organisational innovation and is the best example of knowledge capitalism that I can cite. But we return to this concept of the three forces driving change in the economies of modern societies, namely, financial capitalism, knowledge capitalism and social capitalism.

The Forces Driving Capitalism : Financial Capitalism

Financial capitalism currently is characterised by the disruptive power of deregulated interconnected global financial markets - which swirl around us in pursuit of shareholder value. This system sanctifies downsizing, restructuring and re-engineering of our economic life. The health of Wall Street underpins the whole system. There is an urgent need for structure and more transparent regulation of banks and stock markets. We need a world financial authority higher than that of the International Monetary Fund. We need stronger currency blocks. The Euro is the answer that Europe has to this problem. I would further argue that we need punitive taxes to deter short term speculative capital movement. We need to maintain beneficial long term global investment flows particularly directed to emerging markets and innovative economies whilst at the same time taming hot money and speculative excess. Flows of trade and investment carry ideas and people which bring with them innovation and creativity. Global trade and investment, in the long run, will make the world stronger and more peaceful than nationalism and protectionism.

Knowledge Capitalism

I turn now to knowledge capitalism. The modern economy’s most impressive feature is its ability to create streams of new products and services. More scientists are at work today than in the rest of human history. Scientific research results are being translated into commercial products more quickly, materials that mimic biology are emerging, genetic treatments of major disease, drugs that target specific parts of the brain, miniature robots that can work inside the body, all these are potentially the fruits of the scientific research that is going on as we speak. Knowledge capitalism is the most powerful creative force we have yet developed to make people better off.

Social Capitalism

Now I turn to social capitalism, perhaps the one least understood. I would argue that collaboration is the driving force behind creativity. The more you can depend on people you can trust the less risk you take. The more an economy promotes this capacity for sharing risks, information and rewards, the more able it will be to bring people together to back investment in new products or enter new markets. Successful economies are underpinned by social relationships which help people to collaborate - the dense web of relationships between banks and business in Japan and Germany for example, the co-operative relationships among craft producers in Northern Italy, the social networks in Silicon Valley in California.

An Innovative and Inclusive Society?

Networks of social relationships create social capital. The ethic of trust and collaboration is an important one in the new economy, as important as individualism and self interest. We need to reinvigorate and revive organisations capable of creating social solidarity. Any economy that writes off 30% of its people through poor schooling, family breakdown, poverty and unemployment is throwing away precious assets, namely, brainpower, intelligence and creativity.

The goal, my goal is for an innovative and inclusive society. This goal is for me important because the forces promoting inequality are growing more powerful. The knowledge economy threatens to amplify existing sources of inequality while creating destructive divisions. Modern society is increasingly organised to permit the winners to take all or a disproportionately high share of the rewards.

The Virtuous Circle

A trend towards inequality is deeply ingrained in modern society. Poorer people are less able than rich people to cope with the risks inherent in the global economy. We need to invest in new institutions for social solidarity.

The task is to combine finance, knowledge and social capital in a virtuous circle of innovation, growth and social progress. We have potentially three routes to take:

1. Organising society around the leadership of the market.

2. Organising society around the community.

3. Organising society around knowledge or creativity.

A society organised around a free market would put us at the mercy of impersonal and capricious forces of the financial markets resulting in widened inequality and under investment in the long term and the public goods on which we all rely.

The way ahead is not to navigate between the old left, a society organised around community, and the old right, a community organised around the market. We need a new destination: a society that maximises knowledge which in the future will be the source of economic growth and democratic self government.

A Knowledge Driven Society

The goal of becoming a knowledge driven society is both radical and emancipatory. These days most people in the most advanced economies produce nothing that can be weighed – communications, software, brands, advertising, financial services. The real assets of a modern economy are what is in our heads, mainly ideas, knowledge, skills, talent, creativity. It took 38 years for radio to reach 50 million users in the United States. It took 16 years for the computer to be used by 50 million Americans. The internet reached 50 million Americans within four years of its introduction. In the new economy more of the value of manufactured products will come from software and the intelligence they embody, much of what we will consume will be in the form of services. Knowledge push and market pull have made know-how the critical source of competitive advantage in the modern economy. So we are faced with this fundamental question: how should a knowledge economy be owned and organised for the common good? Competing in the knowledge economy will present us with large challenges. Life will be more volatile and insecure. Skills and technologies, careers and jobs will change more frequently, learning and entrepreneurship will be of equal importance. The most dynamic economies will have cultures open to new people and new ideas, all of them at ease with diversity and experimentation. The imbalance between the rate of technical change and the rate of institutional innovation is one reason we feel so uneasy. Our societies are lop sided. We have not created new institutions of co-operation in collective endeavour, to protect us against new risks, to share the rewards and match the pace of innovation in knowledge creation.

New Organisations for Old

The old hierarchical organisations were meant to excel at controlling costs. That will remain a competitive imperative. The old hierarchical organisations were less good at generating growth and creating value. Managers in the old organisations were mainly focused on its inner workings -- how to get work done in the most efficient way.

New organisations will be much more exposed to global competition. They will be less like bounded organisations – and more dependent upon networks of relationships with suppliers, vendors, partners and governments. Managing new companies will be synonymous with managing a web of relationships.

Exploiting Know-how

In building a knowledge society, education will not be enough on its own. We need to excel at exploiting and applying our know how – a dynamic knowledge society must promote innovation and entrepreneurship alongside education and learning.

Japan and Germany are examples of outstanding knowledge economies with good educational systems and well trained workers. These two economies excel at incremental innovation, they are less prolific at radical innovation.

California represents a radical culture of knowledge creation, yet ironically California has a rather poor public education system. It has significant wage inequality and poverty has grown in California, while Silicon Valley thrives, depending heavily on imported talent. The contrasts defined above show that we need a hybrid society, a society inclusive and innovative, open, liberal and entrepreneurial in its culture.

In the last decade we have seen the response in terms of what a knowledge society will need. The expansion of schools and universities and the drive towards higher levels of productivity can be observed. But universities are deeply conservative institutions, too like state-owned factories, a hybrid of factory, library, and prison. Universities are organisations with strong hierarchies and demarcated professional disciplines seeking to control and to standardise the knowledge they acquire and transmit.

The alternative model is institutions that are demand led, that use information technology and which tailor learning to individual needs.

Is education a rite passage to enough knowledge and qualifications to acquire a job, or is education a system to develop the capabilities to survive in a fast changing society, and to act responsibly toward others, to learn to work collaboratively and creatively, and to sustain the ability and yearning to carry on life long learning?

Silicon Valley exemplifies the connection between innovation, collaboration, relationships and social capital.

Knowledge creating networks depend upon the transmission of ideas and tacit knowledge – best done by face to face contact. Innovation requires risk taking, it requires trust, co-operation between those providing financial capital and those with ideas, the knowledge capitalists. In most innovative regional economies these transactions are underpinned by social relationships – ideas flow between companies and organisations most fluently if people do as well. In the most impressive knowledge creating networks, people are constantly on the move, crossing the boundaries between universities, research laboratories, science parks, large companies and the start up companies.

As finance and trade have gone global so innovation and knowledge creation has become localised. Dense, knowledge rich regions are the basic building blocks of the new economy.

Trust

Trust is an essential lubricant of creativity in the knowledge economy. Trust has become more important because it fosters the co-operation of this sharing that promotes innovation and flexible responses to changes in the global economy. Yet trust has become harder to sustain, precisely because there is so much disruption and change in the world, which threatens the central relationships that breed trust in the first place.

I believe that trust is the essential cement of the future and just society that I am seeking. We need to prospect for new sources of trust. First, the role of contract should be extended from commerce into other area of life such as government and politics, to set clear yardsticks for acceptable performance.

Second, to win public trust for innovation we need to establish a transparent publicly accountable system of trusted expert third parties who will assess risk on our behalf.

Third, we need to improve procedures to make sure that injured parties can have redress and appeal to arbitration and an independent review, without developing a litigation prone society.

Fourth, open trust can only flourish in a society in which information is open and accessible.

Trust and the New Security

Large employers have historically provided some sort of platform for security. It will be a problem for a society which is fluid and in which long term relationships will be an exception.

Procedures for treating people fairly: employees, colleagues, customers, suppliers and neighbours will be vital. Are people who manage organisations in both the public sector and private sector, and parliamentarians, fair in dispensing the power they have over us? Trusted third parties as arbitrators will be important This will provide quality control in a networked world. We see this on the internet, in so far as trusted third parties are vital to the expansion of the internet.

Finally, companies and government must be forced to share information with workers and customers and citizens in an era where there will be few technological restraints on acquiring and distributing information.

To create more creative collaboration and joint risk taking we need higher levels of trust. Yet we live in an era when the market has cut deeply into the fabric of trust we inherited from earlier times. The market undermines familiarity as a source of trust by corroding the bonds of community and family.

A Capitalist Utopia?

We need to create a society that fosters modern rather than traditional, open rather than closed forms of trust. This capitalist utopia that I am trying to define would embody the principles of radical democracy: self management and self organisation, not just in political life but increasingly in the economic sphere as well. Ownership of economic assets would be spread much more wisely, including a renewed role for innovative firms in social and public ownership of knowledge assets. This society would be inclusive and make the most of its reserves of human capital.

The ethic of the day should be self organisation and co-operative self help, in pursuit of innovation and change, in economics, welfare and politics. The values of a modern open high trust society are: universalism, open debate, disinterestedness, scepticism, inquisitiveness and pursuit of continual improvement.

We need to embrace modernity by creating distinctively modern ways to generate greater trust, co-operation and collaboration. Modernisation does not necessarily mean privatisation, individualism and markets. It could mean the society organised around a revived ethic of collaboration and mutual trust. We need to embark on a period of sustained and intense innovation in our civic institutions to create a new civic culture.

Conclusion

To summarise.

There is a clear and pressing demand in all of Europe for a society and therefore for a form of politics that promotes the values of inclusiveness and fairness, of social responsibility and social cohesion, a society that promotes the values of community – I call this a stakeholder society, a society that ensures that everyone has a tangible stake in the nation’s future, where there is a possibility of sharing power, wealth and opportunity.

Stakeholder theory suggests a management role which is chosen for Trusteeship, for the Trustee’s role is to balance the interests of various constituencies within society, of which stockholders are but one. This is particularly so in an era where most of the value of companies and corporations lies in their human social capital, and in the nature of the relationships that a company has with its customers, its employees, its suppliers and its venture capitalists. I do not believe that an inclusive, democratic and liberal society can be constructed without this sense of Trusteeship.

Social capital, knowledge capital and financial capital which I discussed previously will move constructively only if trust exists, hence trust is a central part of stakeholder society.

It is time to restore to capitalism the qualities that make it tolerable to those who will have to cope with the disruptive forces that will dominate for the next decade.

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