Even more seriously, the threat is not only to arithmetic but to the very government of the country, which as Krugman points out is becoming increasingly ungovernable. “Banana republic, here we come.”
It’s a funny piece about deeply serious matters.
It should be read in conjunction with Bob Herbert’s column, “We Haven’t Hit Bottom Yet,” describing the pain felt by the poor who are becoming ever poorer and the middle class who are declining into poverty.
But it should also be read along with the editorials from the other side of the fence in the Wall Street Journal or Fox News that blame Obama and “big government” for virtually all our ills.
The real question that Krugman, Herbert or the other commentators don't get to is why we have come to such a pass? How did we get here? What can we do about it?
Unless we get to root causes, this great country may well end up as a banana republic or worse.
Root cause: the real economic pie stops growing
The embarrassing truth, and the root cause of these issues, is that in this country, work has become in a deep sense unproductive. The way of running organizations that worked for much of the 20th Century has come to the end of its tether. The fact that the economy can no longer provide good jobs for its citizens, that health care is increasingly unaffordable and the education system fails to generate real education are merely symptoms. The real root cause is that the way most established organizations are run has more negative effects than positive ones.
Seeming gains in gross national product turn out to be based on funny money, which was inflated in the 1990s by the Internet bubble, and in the 2000s, by the Wall Street/real estate bubble. When the bubbles had burst and the debris had settled, the apparent gains that had been made were phantoms. When “bad profits” are swilling around the economy in this fashion, profits and income are no longer good guides to the health of the economy. It is now increasingly apparent that we are not going through a business cycle, but rather a phase change, in which the true nature of our current situation is emerging: the economy can no longer provide a good living for its citizens.
The unproductiveness of today’s organizations is such a menacing thought that there is a widespread unwillingness to take seriously any evidence to that effect. Lang Davison, a co-author of The Power of Pull (2010) told me about the workshops that were run by the Deloitte’s Center for the Edge with their findings for example that the rate of return on assets of US companies is one quarter of what it was in 1965, or that the life expectancy of the Fortune 500 companies has declined to 15 years, and heading towards 5 years; the executives were unwilling to take the studies seriously. “We even heard executives say in response to our findings about declining ROA,” Lang said, “that it couldn’t be that bad if the equity markets still value corporate institutions so highly. They are living a delusion, but it’s all the more powerful as it’s a collective delusion, as reflected by the capital markets.”
Resolving the root cause: run organizations differently
These problems are not going be resolved by declaring war on arithmetic, or by writing articles pointing out how ridiculous it is to do so, or by calling Obama a socialist and condemning big government.
Instead of calling each other names, we have to get to the root cause of the problem and run our organizations differently.
The key reason why organizations have declining rates of return on assets is the shift in balance of power from sellers to buyers. The fundamental assumption that big established organizations could sell whatever they produce at a price that gives them a reasonable return on assets and not have to worry much about new competitors in the marketplace, has come unstuck. This is a cataclysmic event for traditional management. And traditional management has yet to come to terms with it. It means that a whole array of organizational practices that have been around over a hundred years no longer fit the current context.
Now unless organizations understand their customers in depth and are continuously coming up with innovations to delight them, the risk is that these organizations will be among the increasingly heavy casualties in the Fortune 500. This is something that traditional management is constitutionally unable to deliver.
Paradoxically, the more rigorously traditional management is applied, the worse the situation gets. Thus as the financial pressure on organizations begins to be felt, the normal response of "good" management is to run a tighter ship and to do the very thing that will make things worse: squeeze more work from the people doing the work. This lowers morale and makes the workers even less productive and innovative. In this way, the company enters a downward spiral of declining returns that eventually lead to the firm’s demise, either by chapter 11 or by being taken over.
Becoming more productive and innovative In a knowledge economy doesn’t mean squeezing more work from the workers. Instead it means creating a context where the workers themselves want to become more productive and innovative. This won’t happen if they are being squeezed to produce more. Instead, they have to be inspired to do to delight clients. The interesting thing is that when companies have been able to create such a context, the workplace generates deep job satisfaction, as opposed to the dispirited morale of traditional management.
The good news is that many organizations are already doing things differently. The practices are described in book after book that arrives on my doorstep, and include books like The Dragonfly Effect by Jennifer Aaaker and Andy Smith or Empowered by Josh Bernoff and Ted Schadler or Open Leadership by Charlene Li or Employees First Customers Second by Vineet Nayar or Reinventing Management by Julian Birkinshaw or The Power of Pull by John Hagel, John Seely Brown and Lang Davison.
A radically different management leads to very different results. It's not just that firms become more innovative and clients are delighted and jobs become more satisfying. Once the real economic pie starts to expand again, then there is more for everyone, and we can begin to resolve the current political stalemate, that stems from the failure of the economic pie to grow in line with the needs of the people: once there is enough to go around, then political solutions become possible again.
Paul Krugman is right that we do need better arithmetic. But better arithmetic by itself won't solve our problems. For that, we need radically different management. To learn more about radical management go here , or start reading my new book on radical management within a minute on Kindle here.