The Business Thinker

LINKAGES FOR COORDINATION ADEQUACY (WORK FLOW, PART 2)

John Psarouthakis — Mon, 06 May 2013 16:03:29 +0000

Dr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, Distinguished Visiting Fellow at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, publisher of www.GavdosPress.com. Founder and former CEO, Industries, Inc., a Fortune 500 industrial corporation

The linkages listed in this segment and following segments on this topic to be posted in separate categories are based on my experience as senior executive as well as an entrepreneur on managing growth businesses. Because statistical techniques test for probabilities but not certainties, the wordings are stated in terms of likelihoods. Discussions of these linkages are to be presented in future articles. Other executives and entrepreneurs could come to different conclusions compared to those listed in the segments posted. Therefore, those that read my views should take them as the experience of one person and use their judgment as to whether these linkages are to be taken as stated in their case.

LINKAGES FOR COORDINATION ADEQUACY (WORK FLOW, PART 2)

Linkage-1: The more able the firm is to obtain needed managers, capital, and information from OUTSIDE the firm, then the more effective coordination strategy is likely to be, the less likely are things to slip through cracks, and the less often are unnecessary work delays likely to occur.

Linkage-2: The more closely employee goals integrate with company goals, the better are employee morale and commitment likely to be, And the more effective is the CEO’s value-sharing strategy, the more effective is coordination strategy likely to be.

Linkage-3: The more closely employee goals integrate with company goals, the better employee commitment and morale are, and the more effective the CEO’s value-sharing strategy is, the less are unnecessary work delays likely to occur.

Linkage-4: The more closely employee goals integrate with company goals, and the more consistent managers’ perceptions of values are with the CEO’s, less likely are things to slip through the cracks.

Linkage-5: The better a firm is able to allocate equipment, supplies, and people, the more effective coordination strategy is likely to be.

Linkage-6: The better a firm is able to allocate equipment, supplies and people, the less likely are things to slip through the cracks.

Linkage-7: The better able the firm is to allocate people, the less are unnecessary work delays likely to occur.

Linkage-8: The fewer the unnecessary work delays, the less the CEO must wait to receive financial reports.

Linkage-9: The fewer the unnecessary work delays and the less likely things are to slip through cracks, the better the firm’s reputation.

Linkage-10: The more effective the coordination strategy is, the better product (or service) quality, technical skills, and productivity are likely to be.

Linkage-11: The more that things slip through the cracks, the worse technical performance is likely to be.

Linkage-12: The reliance of business-service firms on monitoring systems is significantly greater than that of construction, manufacturing, and wholesale.

Linkage-13: Construction firms and manufacturers rely significantly more on daily plans to coordinate efforts than do wholesalers or business-service firms.

Linkage-14: Construction firms rely significantly more on work standards than do business services and manufacturers or wholesalers.

Linkage-15: The larger the employment size, the less directly involved is the CEO likely to be, the more he or she is likely to rely on chain of command, and the more managers he or she is likely to delegate to.

Linkage-16: The larger the employment size, then the more likely it is that written guidelines, job descriptions, and meetings will be used to coordinate efforts.

Linkage-17: The larger the employment size, then the less often informal conversation likely to be used to coordinate efforts.

Linkage-18: The larger the employment size, then the greater the number of monitoring systems a firm is likely to have.

Linkage-19: The more a CEO relies on work standards to coordinate efforts, the better are profitability and cash flow likely to be.

Linkage-20: The more monitoring systems a firm sets up, the greater the reliance on employee judgments, the greater the use of meetings, and the fewer managers delegated to, the more effective is coordination likely to be.

Linkage-21: The larger or older a company is, the better the cash flow (same year and previous year) is likely to be.

Linkage-22: The more predictable the firm’s environment is and the less diversified the firm is, the more effective coordination is likely to be.

Linkage-23: In firms with fewer than 20 employees, the greater the reliance on chain of command, the greater the reliance on employee judgments, the fewer managers a CEO delegates to, and the greater reliance on work standards to coordinate efforts, then the more effective coordination is likely to be.

Linkage-24: In firms with fewer than 20 employees, the fewer managers a CEO delegates to, the higher profits are likely to be.

Linkage-25: In firms of 80 to 500 employees, the fewer the written job descriptions and the greater the use of meetings, the more effective coordination is likely to be.

Linkage-26: In firms of 80 to 500 employees, the less reliance there is on written job descriptions, and the more on informal conversation to coordinate efforts, the better cash flow is likely to be.

Linkage-27: In industries with low predictability, the more reliance there is on work standards to coordinate efforts, the more effective coordination is likely to be.

Linkage-28: In industries with low predictability, the less directly involved the CEO is in work flow and the greater the reliance on work standards to coordinate efforts, the higher profits are likely to be.

Linkage-29: In industries with high predictability, the more directly involved the CEO is in work flow, the higher profits are likely to be.

Linkage-30: In industries with high predictability, the more daily planning that takes place, the worse cash flow is likely to be.

Linkage-31: In single product or services outfits, the fewer CEO “total delegations” and the more monitoring systems there are in place, the more effective coordination is likely to be.

Linkage-32: In single product or services firms, the more directly involved the CEO is with work flow, the higher profits are likely to be.

Linkage-33: In firms with several related products or services, the more informal conversation is used to coordinate efforts, the better cash flow is likely to be.

Linkage-34: In firms 5 to 10 years of age, the more the CEO relies on employee judgments, work standards, and monitoring systems to coordinate efforts, the more effective coordination is likely to be.

Linkage-35: In firms 5 to 10 years of age, the fewer the written guidelines to coordinate efforts, the better cash flow is likely to be.

Linkage-36: In firms 11 to 20 years of age, the more work standards are used to coordinate efforts, the more effective coordination is likely to be.

Linkage-37: In firms older than 39 years, the more the CEO relies on chain of command to coordinate efforts, the higher profits are likely to be.

Linkage-38: In slower growing firms, the fewer the managers the CEO delegates to and the more work standards are used to coordinate efforts, the more effective coordination is likely to be.

Linkage-39: In slower growing firms, the less often written job descriptions are used and the more work standards are used to coordinate efforts, the better cash flow is likely to be.

Linkage-40: In manufacturing firms, the more monitoring systems are used, the more effective coordination strategy is likely to be.

Linkage-41: In manufacturing firms, the less involved the CEO is with work flow and the more informal conversation is used to coordinate efforts, the better cash flow is likely to be.

Linkage-42: In wholesale firms, the less often meetings and the more often work standards are used to coordinate efforts, the higher profits are likely to be.

Linkage-43: In construction firms, the more often meetings are used, then the higher profits and the better cash flow are likely to be.

It’s All About Education

John Psarouthakis — Mon, 15 Apr 2013 17:59:09 +0000

Dr. John Psarouthakis is the Executive Editor of www.BusinessThinker.com Internet Magazine, Distinguished Visiting Fellow / Professor at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, Publisher of www.GavdosPress.com and Founder and former CEO, JPIndustries, Inc., a Fortune 500 industrial corporation

The world is a better place because of great novelists and poets and painters and musicians and sculptors and actors. We could include great chefs on a short list of specialists who add value to our cultural lives. Even such a basic need as food, after all, can be lifted above the ordinary and into the realm of art. As a voracious consumer of the arts (and occasional patron of the arts), and as someone who enjoys a wonderfully prepared meal, I obviously believe esthetic good things enrich us all. I also believe everyone’s education should include a well-guided tour of the literary, visual, and musical arts. But only a relative handful of citizens can pay the rent by knowing the difference between a sonata and a fugue, or by sharing their opinion of Moby Dick—or, for that matter, by knowing how to play a fugue or write a novel or choose the best fresh ingredients and bring them to table well enough to rent a building and start printing menus. The world doesn’t work that way. The overwhelming majority of us always have needed to make a living in the mundane realm of commerce and industry (or, via subsidy by the private sector, government). Education’s role in that familiar dynamic must be fundamentally recast, however, for the 21^st Century.

At a glance, educating young people for the 20^th Century workforce didn’t look much different than what education must accomplish in the new age. For example, all young people preparing for today’s job market know the lately fashionable acronym “STEM,” meaning “science, technology, engineering, and math.” Pointing toward a STEM career means, according to a 2011 Bureau of Labor Statistics essay, preparing for a job that will . . .

“ . . . play an instrumental role in expanding scientific frontiers, developing new products, and generating technological progress. These occupations are concentrated in cutting-edge industries such as computer systems design, scientific research and development, and high-tech manufacturing industries. Although educational requirements vary, most of these occupations require a bachelor’s degree or higher. Accordingly, STEM occupations are high-paying occupations, with most having mean wages significantly above the U.S. average.”

That BLS quote is entirely true this afternoon, and was entirely true decades ago (many decades ago, if you eliminate reference to computers). College graduates now in their 70s and older understood, back in their own school days, a marketplace distinction between a degree in “hard science” and a degree in “soft studies.” If you possessed the inclination and grit and aptitude to follow the former path, toward being not a poet but a lab rat, you were more likely to be rewarded with “job security” and a larger paycheck. So that part of the new acronym isn’t really news. In 1940 parents would rather foresee their sons (and now, increasingly, daughters) as engineers or scientists or medical doctors than as shoe salespersons or postal workers or even “schoolteachers.” That is not to demean the other occupations. Parental preference for a hard-science education over an arts or literature degree, and certainly over jobs requiring only a high-school degree, did not derive from a love of calculus or biology. It came straight from the near-universal desire to see one’s offspring thrive and lead a prosperous life. The hard sciences were never a poor path to that result, especially in a parent’s mind’s-eye. An engineer or a researcher or an M.D. with a bent for the arts could always, after all, afford a grand piano and season tickets to the opera.

What has changed about that dynamic, and continues to change at an increasing pace, is basically threefold and could be summarized as “it’s more truer than ever.” First, more and more jobs—not merely those in the “STEM career” path—require a certain level of math and science literacy, and almost any career requires or is at least enhanced by advanced computer literacy. Second, as countless studies and simple observation reveal, a larger and larger percentage of available jobs will require bachelor’s and advanced degrees in math and science and engineering. Third, whether you are a Ph.D. doing pure research, or a community college night student making car components by day in a Midwest factory, your job will require appropriate continuing education as surely as do surgeons and psychologists. Keeping one’s skills in sync with evolving technology means shooting at not just a moving target but an accelerating target. Profound changes in the workplace will become more profound. The need for parallel changes in how we prepare workers to be employable is obvious.

The workplace is market-driven. Competition creates profound change without new government policies, without any prompting from outsiders. Any new manufacturing technology or more efficient process becomes a prerequisite for survival. Large workplaces that don’t heed free-market cues to change will go under—or send their CEOs to Washington, hat in hand, to seek rescue via unorthodox, taxpayer-funded bankruptcy. Industries that can infect an entire economy just by sneezing might find relief that way (though their secured creditors will not). But even in the case of GM and Chrysler’s bailout, the result was massive change. GM, in fact, became almost unrecognizable. No such change is yet visible across an educational system that needs three new R’s: reform, refocusing, and response.

I am not here to suggest how our K-12 schools can best be reformed to produce students who are better readers, better at math, more devoted to scientific method, and more literate in those cultural enrichments mentioned at the outset of this chapter . . . to say nothing of making a better impression at job interviews. The experts will need to find answers within a daunting environment that includes new family dynamics, social change, instant and omnipresent communications media, and budget constraints. Such answers, however, must be found. We are the world’s greatest nation and yet we have communities in which most kids do not graduate from high school, and many of those who do graduate lack credible readiness for further education. Schools in almost every district have become engaged in a running battle with a standardized testing system that may or may not be adding value to the educational process. The American public school system, including its urban schools, once could claim a gold medal for democratic excellence. Today, among parents, some of the loudest educational buzz is about “charter” schools as a means to avoiding these same public schools. Too many schools are failing both as educational institutions and as centers of socialization and security. It will take some of the best minds of this generation, fully dedicated to the problem, to find solutions and instill public confidence.

Meanwhile, every graduation day, for better or worse, millions of our offspring take one more step—we hope—toward entering a fundamentally changed, and changing, workforce. In that regard I am here to suggest that our schools, however they attack their demons from the bottom up, must pay more attention to the workplace. It’s true that schools are tasked with preparing students for a life, not just a work life. I remain fervently in favor of providing that guided tour of the arts for everyone, and I do not believe eighth-graders need to be or should be deciding whether they will become surgeons or teachers or ironworkers. But precious few students will find life rewarding without ability to compete—first for a job and then within a workplace culture, or as an entrepreneur. Jobs that require only a high-school education while offering new employees a career that will support a family are virtually extinct. A good salesperson can always make a good living, of course—sometimes a very good living. But any young person with that in mind should interview a few sales managers and find out how many newbies must be hired and fired before a single success story is written. There is no avoiding the fact that every 21^st Century K-12 student needs to be exposed to all the “STEM” courses he or she is capable of completing successfully.

Exceptions to the STEM advantage tend to be entrepreneurial, unless you are that 1-in-20 salesman or that 1-in-20,000 athlete. Some exceptions are, of course, as enormous as it can get. Bill Gates is often, and accurately, described as the world’s richest college dropout. Gates is not the only entrepreneur who became wealthy without a college degree. Almost every town in America includes high-school dropouts on its roster of serious entrepreneurial success stories. Behind every statistic, including the BLS numbers regarding the workforce outlook for those trained in science and technology, lurks someone who has shattered that statistic’s expectations. Unfortunately, the someone who did the shattering did it on his or her behalf alone, not for others in the statistical group. Outliers—positive or negative, admirable or to be scorned or mourned—are mere blips in the statistics. Many people live to defy the life insurance industry’s actuarial tables, but the tables nonetheless are bankable. Do not quarrel with numbers that say the more science and technology you have in your educational resumè, the better off you will be in the job market. The numbers are indisputable even if you know someone with a Ph.D. in physics who is living in his parents’ basement and working as a night-shift manager in the fast-food sector.

There you have a few words about the first two 21^st Century “R’s” in our education dilemma, one bearishly difficult and one incredibly obvious. The first, a bearishly difficult question about reform (which of course I leave to the experts to answer), is: What must our educational establishment do to confront an era in which external social factors have helped diminish the quality of our K-12 output, even as career paths are demanding better-prepared high-school graduates? The second, incredibly obvious puzzle piece is this refocus: No offense to the “soft” or liberal-arts faculty and curriculum, but what today’s students will most need as adults is every successful hour of science and technological education they and the system can handle. With a little will to act, this second element is simple (in concept, a least), nothing more than a bit of a shift in emphasis, and an intense effort to make science and technology education absolutely as inclusive as possible. Through his or her K-12 studies, no capable student should be allowed to make a soft landing away from fundamental science studies. It’s as obvious as the statistics about STEM graduates. It becomes much more obvious if one simply looks around to see a citizenry that is literally plugged into technology most of their waking hours.

That leaves a third “R”—response. This element is all about change, and relates to education as FedEx and UPS relate to the Pony Express. “Exponential change” has been a popular phrase for a generation or two. In the scientific sense of the word, exponential change means change of a magnitude equal to a mathematical exponent, those superscript numbers in an equation. In other words, a particular exponential change would upset the proverbial apple cart to the second or third or fourth or 50^th power—or as is also popularly, and without specificity, used in daily conversation, “to the nth degree.” Despite all the common usage of such phrases, and despite my talk about fundamental change, it is important here to note that for the most part I am not talking about the need for our educational system to deal with “exponential change.” If the exponent were merely modestly large and quick, it would be an impossible task. We haven’t reached that point, at least not yet.

Technology does advance with remarkable speed, sometimes with breathtaking speed, occasionally with stunning speed. We have come to expect that technology will make fundamental changes in world within a single lifetime. But we do not wake up on Monday and find the printing press invented, wake up on Tuesday to discovery of the microprocessor, arise on Wednesday to find the first personal computer being marketed, greet Thursday with our first peek at the internet, and end the week attending a dedication for the first advanced manufacturing plant that does not employ a single human being, not even a security guard. Calculate an exponent spanning each of those morning surprises, if you wish. But console yourself, as an education reform planner, in knowing that a 21^st Century education system must move merely very, very fast . . . not impossibly fast.

It’s also important to note that despite my interest as a citizen in K-12 education, this little book is essentially about how, as the politicians always (meaning something that never changes, exponentially or otherwise) say, getting the country moving again. That means growing the economy, in a free-market setting, so as to create a larger pie and thus benefit everyone who participates in the process. And although better grade-school outcomes and better high-school outcomes absolutely will help in that effort, it is at the college and university levels where the fastest, most direct connection occurs. That is the only connectivity level with which I have had direct experience as a technology manager and entrepreneur. It is the only connectivity level where education can seek to move if not as rapidly as technology moves, then at least rapidly enough to nurture a competitive workforce and continue to produce a domestic “technology supply” that has fast become the world’s most valuable raw material.

In other words, when our colleges and universities offer curricula that turn on a dime to support the changing technological savvy required of world-class manufacturing employees, then our manufacturers will know their workforce can compete globally for the long term. And if our colleges and universities continue to produce graduates who create world-class technology, either in academic research or in the private sector . . . then our great holistic economic engine, if allowed to run at full speed, will remain unchallenged as the world’s foremost sustainable generator of per-capita prosperity. World-class research and scientific education have been our strong suit for a very long time, and remain ours to sustain or lose. The quick-turnaround “continuing education” of the workforce, top to bottom, is the new, 21^st Century imperative.

Just-in-time manufacturing came on the scene as a managerial strategy that increased efficiency, reduced inventories, aided quality control, reduced costs, and enhanced profits. It is tempting, and I think valid in a certain oxymoronic sense, to think here of “just-in-time technological education” for the manufacturing sector. Similar to a new part being manufactured just in time to keep an assembly line moving efficiently, a college can create a new training class—whether an actual, semester-long course with hourly credits, or simply a seminar unique to a particular company—that will bring workers up to speed on a brand-new piece of technology. Unlike just-in-time manufacturing, however, it’s not a matter of delaying the process until the last effective moment; “just-in-time education” is about providing knowledge at the first practical moment in the face of rapidly advancing technology. In either case, something happens just in time. With parts and inventory it’s a matter of being just in time, on the back side, for efficiency and profit. In the educational arena it’s a matter of being just in time, on the front side, for survival. A workforce that falls behind the educational curve is a workforce that might soon be without a workplace because others are moving quicker to integrate new technology. It can happen not just to one plant, but to an entire market sector.

When I created JP Industries in 198X I walked straight into the world of acquiring manufacturing companies that could and should be doing better, improving their operations, and integrating each new unit as a synergistic piece of the larger corporate entity. This is equity capitalism. I did not invent the process, but I was an early student of the process and soon thereafter a practitioner. Contrary to equity capital’s poor image in some quarters as a mere “bleeder” of companies that otherwise would have thrived, most such acquisitions—and every acquisition I was involved with—pursue the long-term best business plan and operational strategy for any acquired unit. A hypothetical 200-employee company that survives and thrives for the foreseeable future as a 150-person company, for example, has emerged in a better position than an obsolescent 200-employee company that clunks along for a year or two or three, then goes out of business. The numbers are different with every acquisition, and the possible parameters are infinite. But that is the model I followed throughout my entrepreneurial career.

Some acquisitions are more successful than others. Usually there is a near-instant reduction in payroll. One could say “of course” that’s true, because in most cases the plant was for sale because it was bloated or otherwise inefficient. Often the owner could not solve its problems and did not see a good future for it. In some cases lost jobs eventually returned in part or in whole as efficiencies and new technology were implemented. This entire era of American manufacturing, don’t forget, did not occur in the same environment as, say, the Eisenhower era. In the middle of the 20^th Century many undeveloped nations would have been hard-pressed to produce even those aforementioned cocktail-stirring umbrellas. Most of Europe’s great factories had been bombed into rubble. Japan was just beginning to reinvent its manufacturing base. The cargo container had not been invented. It was assumed that except for specialty items and products we did not wish to make, we owned the manufacturing trading lanes, and that most of what arrived here from the Orient was junk. You know how that story turned out.

Within a few decades, manufactured goods and components of every stripe, from cars to TV sets, were flowing in this direction. Small and medium-sized companies across the heartland could no longer coast along with marginal efficiency, barely caring about new technology, and sending the sales force out twice a year for a seasonal handshake. Many, however, remained stuck in the old culture. That was the operational environment in which equity capitalists came on the scene to triage underperforming companies, creating a healthy new life for many, almost always with a regimen that included dead-weight loss. It is fair to say that my company and others were not always the most popular arrivals in town. It is also fair to say that an underperforming and troubled company’s prospects are seldom a secret, so our arrival was welcomed, though rarely cheered, more often than you might think. At any rate, JPI never overleveraged a deal, and never bought a company for no reason but to sell its component parts for a quick profit. I selected underperforming companies which, if brought up to their potential for efficiency and quality, could contribute to our corporation and stay around for a long time. That was not merely an honorable way of doing business; it was vital to the economy—and will remain so.

One such acquisition was a small manufacturing operation in Grand Haven, Michigan, where about XXX employees made automotive camshafts. That product was a good fit for JPI. It came as no surprise to anyone when one of our first actions was to lay off perhaps 15 percent of the workforce, the first step toward bringing the operation into a reasonable state of competitive efficiency. Soon thereafter we saw a way the plant could produce better, more competitive, more profitable camshafts by transferring newer technology to the operation. The technology was already in use by a JPI unit in Germany. Some of our German employees flew to the shores of Lake Michigan and led any necessary retraining of our Grand Haven technicians and machinists. The new technology brought in more orders—meaning a workforce that previously had to be shrunk for efficiency’s sake was hiring new employees because of technological efficiencies.

At another plant, in western Iowa, workers began feeling out the new ownership—us—to see what they could do to improve their own prosperity. Some of their proposals, particularly on benefits that these days are called “legacy issues,” simply would not work within the plant’s bottom line. Recent, and ongoing, debacles involving both government and private-sector legacy costs show what can happen when, at midday, you promise the moon. When JPI explained that to the Iowa workers, some of them raised the idea of profit-sharing. I suggested that could be a fine idea, as long as productivity remained high and as long as there were profits to share. We moved toward a plan that seemed like a win-win situation until we hit a surprise stumbling block. It became clear that many employees, perhaps most, had no idea how to read a balance sheet. Some could not differentiate revenue from profit. What to do? A call from JPI to the local community college resulted in creation of a brief “course,” just for us, on how to read financial statements. Suddenly the workers had a profit-sharing program, understood it, knew how to communicate about it, and in most cases developed a heightened interest in creating a profit . . . for them and for JPI.

That is not an example of just-in-time technological training, but it certainly was just in time to rescue a win-win personnel situation that was going bad for no good reason. The nature of JPI’s integrated auto-parts business plan meant that much technology-specific continuing education could be done in-house, the way our German unit worked with staff in Grand Haven. Community colleges, however, offer excellent accessibility for manufacturers with plants scattered about the country, often in small cities and even semi-rural areas. The junior colleges are not only geographically accessible, relatively affordable, with minimal bureaucracy and strong ties to . . . well, they aren’t called community colleges for nothing.

As competitors for tuition dollars, two-year schools generally are delighted to develop synergy with local employers. As grassroots educators, most are willing to develop new programs specifically designed for a new business in town, or for an old business with new technology issues. At JPI, though we took care of our own group training for new processes or machinery, we paid employees’ tuition for any college-based training that related to the workplace, be it in engineering or accounting or management. And we paid any vocational training tuition for laid-off workers during their first year of a job search.

Community colleges are not America’s sexiest post-secondary educational institutions. But they are vital, and they should become more vital. I have been out of touch with that scene for two decades, but I know four-year institutions have begun to partner with two-year schools to build networks stressing preparation for the regional workplace—nursing, for example, where health-care is a major employer. Small manufacturing operations looking for a new plant location put that kind of educational access on a short list of site priorities. Response among the more nimble two-year schools is already happening. We need more of that, with access to quickly custom-made science and technology curricula. And we need the paradigm to trickle upward to four-year colleges and universities in every way that more advanced rapid response education to technological advances can be enhanced. Not an original idea. It is happening. It needs to be intensified. The public needs to be aware of this synergy, needs to know the stakes involved. Good things happen when good ideas have broad support.

The above are simple examples of an American education system responding to specific job-training needs down at the retail level, where the “just-in-time” concept can work efficiently. It’s a template that also can be viewed from within the philosophy of continuous change—which clearly is a fact as much as it is a way of thinking. The institutions that fail and crumble sooner rather than later, whether taken in the broadest historical scope or within the much shorter timeline of an era, are the institutions that insist on static goals, insist on static ways of reaching goals, insist on fealty to “grandpa’s idea.”

Pretend for a moment that the greatest influence on contemporary life, technology, is a static thing. Technology is the least unchanging thing imaginable, but try to imagine it anyway. Even lacking new ways of designing things, making things, marketing things and using things, one hopes change in the form of “social progress” would occur. We saw a great deal of that, for example, between the invention of the wheel and the invention of the steam engine. I am one who raises both eyebrows at some “legislation” that emanates from our court system. Yet it is also inarguably true that the only way our great Constitution has worked, and can continue to work, is via a certain amount of flexible interpretation. Our national touchstone cannot be static. Let us not forget that the founders themselves waited just two years before massively editing the Constitution with the Bill of Rights . . . but the Boston Red Sox won the World Series four times (and even the Chicago Cubs won it twice) before American women were allowed to vote. The spirit of the founders’ Constitution, its grand sweep wrapping federalism and unprecedented individual rights into the same system of government, is indeed indelible. It was the founders’ own genius that has prevented the document from falling into a landfill with other lifeless documents.

Channeling continuous change toward positive and productive ends is an excellent definition of progress, one that good business managers understand and call “continuous improvement.” I once adapted the idea to a little book for my own employees entitled Better Makes Us Best. Research showed, by the way, that lower-level workers were most likely to have read the book. For sure, any institution that seeks to thrive and grow must steer itself across the seas of change rather than try to build a dike and hide, unaffected by such a powerful force. That includes our largest and greatest institutions of learning, which to my observation are doing quite a decent job of continuous improvement.

Reference: Book “The Technology Imperative: What Jobs! Jobs! Jobs! Really Means in the 21st Century”, www.GavdosPress.com, September 2012.

Managing a Business in Today’s world

John Psarouthakis — Thu, 11 Apr 2013 06:28:10 +0000

We have been in the midst of a fundamental and historic shift of how the economies around the world develop. With the collapse of communism, the centralized and state control model of the economy has also collapsed. Other socialist State models, i.e., Sweden, UK before Margaret Thatcher, have also collapsed. What we have now, however, imperfect it maybe, is the model of the “Free Market.”

This shift is occurring in parallel with two other sociopolitical expressions:

Smaller government, though the last four this has been demonstrated to be a very difficult, politically, objective to achieve.
The need, indeed the demand by our society to provide assistance, protection, and distribution of economic benefits a “fair” way

What we are witnessing is a major shift on “how we can fulfill our expectations of a humanistic society” while we keep the state’s interventions and control power at minimum.

Before I deal with this question (shift) let me digress in to a bit of history . . . . After all, how can a Greek like myself discuss such matters without referring to HISTORY .

These great shifts of power are not without precedent. What is new is the rapidity of change that we are witnessing. When such major shifts of power occurred in the past, they had a great impact in the ways the society functioned. Examples:

The emergence of secular values over religious values and authority during the 16^th, 17^th and 18^th centuries. Power centers changed. Princes of church gave way to princes of land, who, in turn, gave way to the chiefs of industrial, commercial and financial wealth.
Societal institutions and the most firmly established organizations were forced to conform or disappear with the passage of time.

These shifts took place not without sacrifice of then well established ways of life. Now, let’s get back to the question I posed earlier. Let me repeat it.

How can we reduce the intervention of the State (or at least slow it down) and at the same time, respond to our humanistic societal needs?

I believe the answer is:

The evolution of the “Business Enterprise” from a strictly economic mechanism to one that also is directly instrumental and involved in fulfilling our humanistic societal needs.

Again, back to history. With the 18^th Century we had the practical use of science along with the government’s commitment to bring about prosperity to its citizens and the acceptance of exploitation of material resources which resulted in an, relatively speaking, immense economic growth.

During this time, the corporations came to function without undue external interference. Economic results were the measure of performance. Good or bad intentions were not relevant and the compassion was a sentiment that did not last long. This is not difficult to understand when cost reductions, efficiency and growth were paramount.

Growth in itself became a dominant. Corporate growth and all corporate activities evolve and revolve around it, i.e., management careers and rewards were and continue today to be directly tied to the “Bottom Line.”

The pressures that our societies exert on businesses to respond to our societal needs, i.e. environmental preservation, welfare safety-nets (via taxation), etc. do not conform to the traditional way business and its management operate.

Gradually, we are moving toward a restructured thinking of what a business should do and measured accordingly. What we are witnessing today is the introduction of the concept of social performance of corporations, which I believe, relevant measures will emerge, which along with the “Bottom Line” measure will determine the career paths and financial rewards of management.

Business has been defined as a mechanism (or system, if you wish) with which (or within) individuals and organizations seek profit and accept the related risks, employ people and other resources in order to produce and distribute goods and services.

Now, let’s move forward to the present. In addition to the major shifts already mentioned, we now have also other shifts caused by the explosion occurring in front of us in the information industry.

One change: is globalization that has rendered national borders meaningless. This in turn has increased competition for goods and services by several orders of magnitude. Today, companies anywhere in the globe can compete in markets which in the recent past were not accessible to them. They can have the advantage of new technologies, low-paid and highly skilled labor, and capital availability as they need it.
Second change: Quality of labor. In 1972, one third of the work force in the USA were “brain power” related, while two thirds were people that used “muscle power.” Now, it is exactly inversed of two third’s “brain power,” one third “muscle power.”
Third change: Whether the worker is “brain power” or muscle power, he or she must be able to think for themselves. They must be involved and make critical decisions on the goods and services they are engaged to produce.
Fourth change: We must be a team
Make technology your friend
Fifth and most important: Business executive leadership is redefined.

A business leader today must be able to

- Be innovative
- Communicate
- Motivate
- Solicit participation by teammates
- Be a Visionary
- Be involved in the affairs of the community
- Be sensitive to employees problems beyond the workplace
- Attract the financial community
- Be analytical / conceptual
- Be sensitive to the bottom line
- Be aware and sensitive to societal needs and the corporation’s
participation in fulfilling them
- Contribute time and money to worthy causes

A business, however, must operate in an environment that understands and welcomes the “Free Market- Capitalistic” economic model that is sensitive to societal needs and takes the initiative towards satisfying such needs.

The Moral Foundations of Society

Imprimis a publication of Hillsdale College — Tue, 09 Apr 2013 05:23:06 +0000

LADY MARGARET THATCHER earned a degree in chemistry from Somerville College, Oxford, as well as a master of arts degree from the University of Oxford. For some years she worked as a research chemist and then as a barrister, specializing in tax law. Elected to the House of Commons in 1953, she later held several ministerial appointments. She was elected leader of the Conservative Party and thus leader of the Opposition in 1975.
She became Britain’s first female prime minister in 1979 and served her nation in this historic role until her resignation in 1990. In 1992, she was elevated to the House of Lords to become Baroness Thatcher of Kesteven. The first volume of her memoirs, The Downing Street Years, was published in 1993 by HarperCollins.

In November 1994, Lady Thatcher delivered the concluding lecture in Hillsdale Center for Constructive Alternatives seminar, “God and Man: Perspectives on Christianity in the 20th Century” before an audience of 2,500 students, faculty, and guests. In an edited version of that lecture, she examines how the Judeo-Christian tradition has provided the moral foundations of America and other nations in the West and contrasts their experience with that of the former Soviet Union.

“Republished by permission from Imprimis, a publication of Hillsdale College.”

The Moral Foundations of the American Founding

History has taught us that freedom cannot long survive unless it is based on moral foundations. The American founding bears ample witness to this fact. America has become the most powerful nation in history, yet she uses her power not for territorial expansion but to perpetuate freedom and justice throughout the world.

For over two centuries, Americans have held fast to their belief in freedom for all men—a belief that springs from their spiritual heritage. John Adams, second president of the United States, wrote in 1789, “Our Constitution was designed only for a moral and religious people. It is wholly inadequate for the government of any other.” That was an astonishing thing to say, but it was true.

What kind of people built America and thus prompted Adams to make such a statement? Sadly, too many people, especially young people, have a hard time answering that question. They know little of their own history (This is also true in Great Britain.) But America’s is a very distinguished history, nonetheless, and it has important lessons to teach us regarding the necessity of moral foundations.

John Winthrop, who led the Great Migration to America in the early 17th century and who helped found the Massachusetts Bay Colony, declared, “We shall be as a City upon a Hill.” On the voyage to the New World, he told the members of his company that they must rise to their responsibilities and learn to live as God intended men should live: in charity, love, and cooperation with one another. Most of the early founders affirmed the colonists were infused with the same spirit, and they tried to live in accord with a Biblical ethic. They felt they weren’t able to do so in Great Britain or elsewhere in Europe. Some of them were Protestant, and some were Catholic; it didn’t matter. What mattered was that they did not feel they had the liberty to worship freely and, therefore, to live freely, at home. With enormous courage, the first American colonists set out on a perilous journey to an unknown land—without government subsidies and not in order to amass fortunes but to fulfill their faith.

Christianity is based on the belief in a single God as evolved from Judaism. Most important of all, the faith of America’s founders affirmed the sanctity of each individual. Every human life—man or woman, child or adult, commoner or aristocrat, rich or poor—was equal in the eyes of the Lord. It also affirmed the responsibility of each individual.

This was not a faith that allowed people to do whatever they wished, regardless of the consequences. The Ten Commandments, the injunction of Moses (“Look after your neighbor as yourself”), the Sermon on the Mount, and the Golden Rule made Americans feel precious—and also accountable—for the way in which they used their God-given talents. Thus they shared a deep sense of obligation to one another. And, as the years passed, they not only formed strong communities but devised laws that would protect individual freedom—laws that would eventually be enshrined in the Declaration of Independence and the U.S. Constitution.

Freedom with Responsibility

Great Britain, which shares much of her history in common with America, has also derived strength from its moral foundations, especially since the 18th century when freedom gradually began to spread throughout her socie!y Many people were greatly influenced by the sermons of John Wesley (1703-1791), who took the Biblical ethic to the people in a way which the institutional church itself had not done previously.

But we in the West must also recognize our debt to other cultures. In the pre-Christian era, for example, the ancient philosophers like Plato and Aristotle had much to contribute to our understanding of such concepts as truth, goodness, and virtue. They knew full well that responsibility was the price of freedom. Yet it is doubtful whether truth, goodness, and virtue founded on reason alone would have endured in the same way as they did in the West, where they were based upon a Biblical ethic.

Sir Edward Gibbon (1737-1794), author of The Decline and Fall of the Roman Empire, wrote tellingly of the collapse of Athens, which was the birthplace of democracy. He judged that, in the end, more than they wanted freedom, the Athenians wanted security. Yet they lost everything—security, comfort, and freedom. This was because they wanted not to give to society, but for society to give to them. The freedom they were seeking was freedom from responsibility. It is no wonder, then, that they ceased to be free. In the modern world, we should recall the Athenians’ dire fate whenever we confront demands for increased state paternalism.

To cite a more recent lesson in the importance of moral foundations, we should listen to Czech President Vaclav Havel, who suffered grievously for speaking up for freedom when his nation was still under the thumb of communism. He has observed, “In everyone there is some longing for humanity’s rightful dignity, for moral integrity, and for a sense that transcends the world of existence.” His words suggest that in spite of all the dread terrors of communism, it could not crush the religious fervor of the peoples of Eastern Europe and the Soviet Union.

So long as freedom, that is, freedom with responsibility, is grounded in morality and religion, it will last far longer than the kind that is grounded only in abstract, philosophical notions. Of course, many foes of morality and religion have attempted to argue that new scientific discoveries make belief in God obsolete, but what they actually demonstrate is the remarkable and unique nature of man and the universe. It is hard not to believe that these gifts were given by a divine Creator, who alone can unlock the secrets of existence.

Societies without Moral Foundations

The most important problems we have to tackle today are problems, ultimately, having to do with the moral foundations of society There are people who eagerly accept their own freedom but do not respect the freedom of others—they, like the Athenians, want freedom from responsibility. But if they accept freedom for themselves, they must respect the freedom of others. If they expect to go about their business unhindered and to be protected from violence, they must not hinder the business of or do violence to others.

They would do well to look at what has happened in societies without moral foundations. Accepting no laws but the laws of force, these societies have been ruled by totalitarian ideologies like Nazism, fascism, and communism, which do not spring from the general populace, but are imposed on it by intellectual elites.

It was two members of such an elite, Marx and Lenin, who conceived of “dialectical materialism,” the basic doctrine of communism. It robs people of all freedom—from freedom of worship to freedom of ownership. Marx and Lenin desired to substitute their will not only for all individual will but for God’s will. They wanted to plan everything; in short, they wanted to become gods. Theirs was a breathtakingly arrogant creed, and it denied above all else the sanctity of human life.

The 19th century French economist and philosopher Frederic Bastiat once warned against this creed. He questioned those who, “though they are made of the same human clay as the rest of us, think they can take away all our freedoms and exercise them on our behalf.” He would have been appalled but not surprised that the communists of the 20th century took away the freedom of millions of individuals, starting with the freedom to worship. The communists viewed religion as “the opiate of the people.” They seized Bibles as well as all other private property at gun point and murdered at least 10 million souls in the process.

Thus 20th century Russia entered into the greatest experiment in government and atheism the world had ever seen, just as America several centuries earlier had entered into the world’s greatest experiment in freedom and faith.

Communism denied all that the Judeo-Christian tradition taught about individual worth, human dignity, and moral responsibility. It was not surprising that it collapsed after a relatively brief existence. It could not survive more than a few generations because it denied human nature, which is fundamentally moral and spiritual. (It is true that no one predicted the collapse would come so quickly and so easily. In retrospect, we know that this was due in large measure to the firmness of President Ronald Reagan who said, in effect, to Soviet leader Mikhail Gorbachev, “Do not try to beat us militarily, and do not think that you can extend your creed to the rest of the world by force.”)

The West began to fight the mora! battle against communism in earnest in the 1980s, and it was our resolve—combined with the spiritual strength of the people suffering under the system who finally said, “Enough!”—that helped restore freedom in Eastern Europe and the Soviet Union—the freedom to worship, speak, associate, vote, establish political parties, start businesses, own property, and much more. If communism had been a creed with moral foundations, it might have survived, but it was not, and it simply could not sustain itself in a world that had such shining examples of freedom, namely, America and Great Britain.

The Moral Foundations of Capitalism

It is important to understand that the moral foundations of a society do not extend only to its political system; they must extend to its economic system as well. America’s commitment to capitalism is unquestionably the best example of this principle. Capitalism is not, contrary to what those on the Left have tried to argue, an amoral system based on selfishness, greed, and exploitation. It is a moral system based on a Biblical ethic. There is no other comparable system that has raised the standard of living of millions of people, created vast new wealth and resources, or inspired so many beneficial innovations and technologies.

The wonderful thing about capitalism is that it does not discriminate against the poor, as has been so often charged; indeed, it is the only economic system that raises the poor out of poverty. Capitalism also allows nations that are not rich in natural resources to prosper. If resources were the key to wealth, the richest country in the world would be Russia, because it has abundant supplies of everything from oil, gas, platinum, gold, silver, aluminum, and copper to timber, water, wildlife, and fertile soil.

Why isn’t Russia the wealthiest country in the world? Why aren’t other resource-rich countries in the Third World at the top of the list? It is because their governments deny citizens the liberty to use their God-given talents. Man’s greatest resource is himself, but he must be free to use that resource.

In his recent encyclical, Centesimus Annus, Pope John Paul I1 addressed this issue. He wrote that the collapse of communism is not merely to be considered as a “technical problem.” It is a consequence of the violation of human rights. He specifically referred to such human rights as the right to private initiative, to own property, and to act in the marketplace. Remember the “Parable of the Talents” in the New Testament? Christ exhorts us to be the best we can be by developing our skills and abilities, by succeeding in all our tasks and endeavors. What better description can there be of capitalism? In creating new products, new services, and new jobs, we create a vibrant community of work. And that community of work serves as the basis of peace and good will among all men.

The Pope also acknowledged that capitalism encourages important virtues, like diligence, industriousness, prudence, reliability, fidelity, conscientiousness, and a tendency to save in order to invest in the future. It is not material goods but all of these great virtues, exhibited by individuals working together, that constitute what we call the “marketplace.”

The Moral Foundations of the Law

Freedom, whether it is the freedom of the marketplace or any other kind, must exist within the framework of law. 0thenvise it means only freedom for the strong to oppress the weak. Whenever I visit the former Soviet Union, I stress this point with students, scholars, politicians, and businessmen—in short, with everyone I meet. Over and over again, I repeat: Freedom must be informed by the principle of justice in order to make it work between people. A system of laws based on solid moral foundations must regulate the entire life of a nation.

But this is an extremely difficult point to get across to people with little or no experience with laws except those based on force. The concept of justice is entirely foreign to communism. So, too, is the concept of equality. For over seventy years, Eastern Europe and the Soviet Union had no system of common law. There were only the arbitrary and often contradictory dictates of the Communist Party. There was no independent judiciary There was no such thing as truth in the communist system.

And what is freedom without truth? I have been a scientist, a lawyer, and a politician, and from my own experience I can testify that it is nothing. The third century Roman jurist Julius Paulus said, “What is right is not derived from the rule, but the rule arises from our knowledge of what is right.” In other words, the law is founded on what we believe to be true and just. It has moral foundations. Once again, it is important to note that the free societies of America and Great Britain derive such foundations from a Biblical ethic.

The Moral Foundations of Democracy

Democracy is never mentioned in the Bible. When people are gathered together, whether as families, communities or nations, their purpose is not to ascertain the will of the majority, but the will of the Holy Spirit. Nevertheless, I am an enthusiast of democracy because it is about more than the will of the majority. If it were only about the will of the majority, it would be the right of the majority to oppress the minority. The American Declaration of Independence and Constitution make it clear that this is not the case. There are certain rights which are human rights and which no government can displace. And when it comes to how you Americans exercise your rights under democracy, your hearts seem to be touched by something greater than yourselves. Your role in democracy does not end when you cast your vote in an election. It applies daily; the standards and values that are the moral foundations of society are also the foundations of your lives.

Democracy is essential to preserving freedom. As Lord Acton reminded us, “Power tends to corrupt, and absolute power corrupts absolutely.” If no individual can be trusted with power indefinitely, it is even more true that no government can be. It has to be checked, and the best way of doing so is through the will of the majority, bearing in mind that this will can never be a substitute for individual human rights.

I am often asked whether I think there will be a single international democracy, known as a “new world order.” Though many of us may yearn for one, I do not believe it will ever arrive. We are misleading ourselves about human nature when we say, “Surely we’re too civilized, too reasonable, ever to go to war again,” or, “We can rely on our governments to get together and reconcile our differences.” Tyrants are not moved by idealism. They are moved by naked ambition. Idealism did not stop Hitler; it did not stop Stalin. Our best hope as sovereign nations is to maintain strong defenses. Indeed, that has been one of the most important moral as well as geopolitical lessons of the 20th century. Dictators are encouraged by weakness; they are stopped by strength. By strength, of course, I do not merely mean military might but the resolve to use that might against evil.

The West did show sufficient resolve against Iraq during the Persian Gulf War. But we failed bitterly in Bosnia. In this case, instead of showing resolve, we preferred “diplomacy” and “consensus.” As a result, a quarter of a million people were massacred. This was a horror that I, for one, never expected to see again in my lifetime. But it happened. Who knows what tragedies the future holds if we do not learn from the repeated lessons of histoy? The price of freedom is still, and always will be, eternal vigilance.

Free societies demand more care and devotion than any others. They are, moreover, the only societies with moral foundations, and those foundations are evident in their political, economic, legal, cultural, and, most importantly, spiritual life.

We who are living in the West today are fortunate. Freedom has been bequeathed to us. We have not had to carve it out of nothing; we have not had to pay for it with our lives. Others before us have done so. But it would be a grave mistake to think that freedom requires nothing of us. Each of us has to earn freedom anew in order to possess it. We do so not just for our own sake, but for the sake of our children, so that they may build a better future that will sustain over the wider world the responsibilities and blessings of freedom.

IF GERMANY LEAVES THE EURO ZONE

Athanase Papandropoulos — Sun, 07 Apr 2013 16:37:07 +0000

Dr. Athanase C. Papandropoulos studied economics, politics and media communication in at the university of Mons, university of Liege and university of Lille. He obtained his PhD in Economics in Mons.

He has become one of the leading European personalities among media people, especially in European and business affairs.

He is International Honorary President since 1998, and Former International President 1992-1998, Association of European Journalists; Anchorman for financial matters at SBC TV; Editorial consultant at “European Business Review” magazine.

This time the situation is indeed very serious. A new party made its appearance in German politics and is composed of economists, lawyers and Christian Democrat politicians who believe in the dissolution of the euro area before this, they say, breaks Germany. The new party will be called «Alternative for Germany» and its basic philosophy is the exit of Germany from the euro zone and return to the Deutschmark, or another currency involving The Netherlands, Austria, Finland and any other country shares the German positions on competitiveness, fiscal discipline and reduce government borrowing.
«Joining the euro zone and the adoption of the single European currency proved fatal mistakes, that undermine prosperity. The old parties, not only do not understand the mistakes they made, but continue to grow», said Hans-Olaf Henkel, former president of the Association of German Industries and well-known europhile. «In my professional life I made the serious mistake some years ago supporting the euro», adds the German industrialist, who has a strong influence on German political and economic lives.
«Our exit from the euro is now imperative. Differences between North and South is the cancer of Europe, which self-destructs. The Mediterranean countries can maintain the euro to devalue and try to deal with their debts. May be so subsided threat of bankruptcy for these countries», says professor Bernd Luque, who is also a leading member of the new party. «When we see the Italians vote for Bepe Grillo and ignore their massive debt and to deal with it, we do not understand why German taxpayers should tend a helping hand», says the German economist Kurt Hetzel, member of the new party. «The Italian elections demonstrate the real risks for the euro. To the extent that the repayment of excessive debts of Southern Europe depends on political decisions of their peoples and electoral choices, something is not clear», argues Horst Keller, journalist, commentator on German television channel ZDF. Moreover, recent poll conducted on behalf of the channel shows that 69% of Germans believe that the euro is disastrous for the economy and 49% favor the exit of Germany from the euro zone.

Based on these political developments in Germany, many European observers point out that, on the one hand, Europe has embarked on a very slippery slope and, on the other hand, the German chancellor Mrs. A.Merkel elections next September is now facing very seriously the specter of defeat. This is because the new party can achieve an electoral score of around 10%, which mainly comes from the Christian Democrat area. Therefore, there may be quite a messy political situation in Germany after the September elections. The Social Democrats could be the first party again, but without the ability to form a majority government. «The Social Democrats, in Agenda 2010 managed to strengthen the German economy by making reforms that ultimately cost them power. Under these circumstances, the return to power would lead to even more reforms», says journalist A.Frouktman.
The latter clearly hinted the former Social Democrat chancellor Gerhard Schroeder, who, in an interview to the newspaper Bildt, said that in the new and highly competitive world, Germany should maintain its position, for the benefit not only of the people but also of Europe. These words of the ex-chancellor –who, in essence, the Agenda 2010 is the man who created the conditions for the high flights of the German economy– mean much, in our opinion. Essentially, we have reason to conclude that, with respect to fiscal discipline and political management of the public debt, Germany is not going to put too much water in the glass of wine. Moreover, the trend of the euro is doubtful, if the European Union decides to go ahead to the economic union, after ten years of monetary inflation.

So, if Germany quits the euro zone, who will give loans to the vociferous populists of the South?

Mind the gap (North and South Europe)

Alexis Papachelas — Mon, 01 Apr 2013 14:22:26 +0000

Mr. Alexis Papachelas is a guest editorial writer to The Business Thinker. He is currently the Executive Editor of the long standing and highly respected daily Greek newspaper “Kathimerini”.

The Cyprus crisis is deepening the cultural gap between the north and south of Europe abruptly and dangerously.

Here in the south, we feel a confirmation of the stereotype of Germans and Finns as being rigid and obsessive and playing the game according to the toughest of terms.

Up there in the north, the stereotype of southerners as being incapable of facing up to reality and clinging in vain to their lifestyles and a generous state funded by foreign money is taking deeper root.

The European project has been derailed by the first big crisis, obviously because it was designed with only the good days in mind. The chasm between south and north is hard to bridge because, thankfully, we are all democracies.

As impending German elections push Chancellor Angela Merkel to take a more extreme position, the vote in Italy and public opinion polls elsewhere show that anti-systemic forces are gaining ground.

It will take a lot of hard work and some visionary leadership – which as yet is nowhere to be seen – to salvage the ambitious European project, whose main objective was to refute the lessons of history that see the continent either at war or in the grips of a major crisis every 40 years or so.

Greece, however, is a particular case, a country that since its birth has been torn by the dilemma of whether historically, culturally and politically it belongs to the East or West.

In Greece, as is the case in Cyprus, serious crises tend to activate deep rifts within society. We have always had and continue to have the usual groupings: those who want the privileges of the Western club of nations but on softer terms tailored to our Eastern proclivities; those who wrongly believe that we should shed our national traits in the blender of Euro homogeneity; and those who want us to maintain our particular characteristics within the context of Europe and to become a profoundly Greek yet modern European nation.

But, emotion and history aside, the debate of where Greece lies in the greater scheme of things and where Europe is heading should be based on specific ideas. Accusing everyone treading the current path of treason is nothing to go on.

We all love our nation and we will give our support to alternative propositions that protect the nation’s interests – at least as far as these alternative paths are well thought out and not based on dreams of geopolitical and other oases that are ultimately nothing more than mirages in the desert where Greece and Cyprus currently find themselves.

Markets of the Poor: Limits and Opportunities

Aneel Karnani — Sun, 31 Mar 2013 14:34:02 +0000

Dr. Aneel Karnani is Associate Professor of Strategy, Ross School of Business, University of Michigan. His interests are focused on three topics: strategies for growth, global competition, and the role of business in society. He studies how firms can leverage existing competitive advantages and create new ones to achieve rapid growth. He is interested in global competition, particularly in the context of emerging economies. He studies both how local companies can compete against large multinational firms, and how multinational firms can succeed in these unfamiliar markets. Karnani researches poverty reduction and the appropriate roles for the private sector, the state and civil society. He is interested in how society can strike the appropriate balance between private profits and public welfare in tackling major societal problems.

The ‘base of the pyramid’ (BOP) proposition, famously popularized by C.K. Prahalad and other business gurus, assumes that there is much-untapped purchasing power at the base of the pyramid, and urges companies to make a fortune by serving the poor masses. The Economist magazine, given its market-oriented ideology, has been a strong advocate of the BOP proposition. On the opposite side, I have long been a skeptic, and in my book Fighting Poverty Together I argue that while private companies should try to market to the poor, the profit opportunities are modest at best and I suggest a cautious approach. In a recent article ‘The limits of frugality: Making things cheaper is not the same as making profits’ The Economist starts to walk back from its earlier support of the BOP proposition.

The Economist article acknowledges that it is politically correct for many executives to espouse the BOP proposition, because it serves an ideological purpose by showing that capitalism is inclusive, rather than only for the middle classes. “Whether their firms profit as a result is less clear.” The article goes on to cite examples of several firms in a variety of industries including mobile telephony, consumer goods, insurance, and consumer finance that have failed to profit from targeting the poor.

Contrary to the BOP literature, there are very few examples of profitable businesses that market socially useful goods in low-income markets and operate at a large scale. After an extensive survey in India of 270 market-based solutions to poverty, the consulting firm Monitor Group concluded “only a small handful – mostly well publicized ones like Grameen Bank and Aravind Eye Care – attained a scale sufficient to transform a ‘business model’ into a ‘solution’.” It is ironic, and instructive, that even both these examples are not really profitable businesses. The generous and well-intentioned social objectives of BOP initiatives must not hide the fact that these opportunities present tough economic and strategic challenges. The desire to do good should not blind managers to the realities of underlying economic forces that determine business success and failure.

There is no fortune at the base of the pyramid. Marketing socially useful products to the poor offers only limited business opportunities. Still, there are some profitable opportunities and we need creative entrepreneurs to design the right business models to serve the poor. It is necessary to understand that unmet needs do not necessarily constitute a market opportunity. A ‘market’ can exist only if there are buyers willing and able to pay a price that covers the total cost of production, including the opportunity cost of capital used. Unfortunately, due to the very meager income of the poor, markets for many socially useful goods simply do not exist. The French company Essilor found that not enough poor people were willing to pay even $5 for a pair of customized eyeglasses conveniently delivered on the spot. Procter & Gamble found that not enough poor people were willing to pay even $0.01 per liter for clean drinking water.

To serve the markets of the poor, firms have to dramatically reduce costs, by as much as 90 percent in many cases. A significant improvement in technology could reduce costs dramatically, as for example in telecommunications. Unfortunately there have not been such technological leaps in most other product categories. It is thus often necessary to reduce quality in order to reduce costs significantly. This does not imply selling shoddy or dangerous products. To profitably serve the poor, firms need to make the cost-quality trade-off appropriately in order to make the products affordable by the poor; the challenge is to do this in such a way that the cost-quality trade-off is acceptable to poor consumers. A simple or minor adaptation of the business model from affluent markets usually results in products that are too expensive and not affordable by the poor.
Selling low quality products to the poor might seem unethical. But in fact, selling products at the appropriate cost-quality trade-off is not only ethical, it is socially virtuous. The appropriate reference point for quality is not the standard prevailing in affluent markets, but rather the status quo in BOP markets, which usually is unfulfilled basic needs. A low quality product is better than no product at all.

A good example of this logic is the low-price detergent successfully marketed by Nirma in India. The quality of Nirma is clearly inferior to that of Surf, the product marketed by Unilever. Nirma contains no active detergent, whitener, perfume, or softener. Indeed tests performed on Nirma confirmed that it was hard on the skin and could cause blisters. It seems the poor like inexpensive, low-quality products. This is not because they cannot appreciate or do not want good quality. They simply cannot afford the same quality products as the affluent; so, they have a different price-quality trade-off. They are even willing to put up with a detergent that sometimes causes blisters! The standards to judge what is acceptable have to be from the perspective of a poor person who before could not afford any detergent, and not from the perspective of an affluent person who routinely buys a high-quality detergent.

The biggest difference between BOP and affluent markets is the obvious but under-emphasized fact that the poor have very low purchasing power. Designing business models to serve markets of the poor has to start with this basic insight rather than a minor adaptation of the business models successful in affluent markets.

Ganging Up on Poverty

Aneel Karnani — Sat, 30 Mar 2013 14:47:23 +0000

This is an interview based on his book “Fighting Poverty Together: Rethinking Strategies for Business, Governments, and Civil Society to Reduce Poverty” he gave to iMpact of the University of Michigan. Prof. Karnani authorized us to publish it in the Business Thinker.

Despite global efforts to alleviate poverty in the past half century, it remains a vexing social problem. Livable wages and lack of access to the basics — clean drinking water, sanitation, roads, and security — remain far too elusive for far too many. Recent efforts such as microfinance and base of the pyramid (BoP) ventures may generate attention, but they don’t achieve the objective, says strategy professor Aneel Karnani. Efforts should instead focus on ensuring that governments provide access to essential services while creating a climate in which businesses create jobs. Nonprofits, meanwhile, should serve as catalysts and watchdogs.
In his book, Fighting Poverty Together: Rethinking Strategies for Business, Governments, and Civil Society to Reduce Poverty (Palgrave Macmillan), Karnani argues this alignment across multiple sectors is critical for raising the incomes of the poor.

In the following Q&A, Karnani discusses why he thinks this approach is more effective than microfinance and BoP outreach.

Q: What motivated you to write a book on fighting poverty?

Karnani: I’ve been at the business school for 30 years. And for the first 20 I did the traditional things — teaching, research, and consulting, all focused on competitive strategy. But in the last 10 years, as I get older and more philosophical, my interests have broadened. Rather than studying how companies can get a competitive advantage and make more money, my interests have shifted more to the role of business in society, how society tackles larger problems, what the tradeoffs are, and how we manage these tradeoffs. I hear a lot of executives these days talking about corporate social responsibility and asking, ‘What is the role of business in solving these problems?’ When I talked to MBA students 20 years ago, most of them just wanted to go into consulting or investment banking and make money. Now many of them want to influence the world and have an impact on social issues. So all of these factors came together and my own interests shifted in that direction.
The second motivation is that when I hear other people talking about these social issues — whether it’s business people or academics — they all talk about win-win, feel-good solutions. I’m very skeptical that we’ll all be able to hold hands, sing, and solve the world’s problems. I see major tradeoffs in the world, and the whole field of economics is about how to manage tradeoffs. So I wanted to come at this with a more critical approach in terms of questioning popular perspectives.

Q: In the book you question the more recent solutions to poverty alleviation, including one that has a real home here at Ross — the BoP approach. Why do you think these recent attempts, notably microfinance and BoP, have fallen short both philosophically and on the ground?

Karnani: The major problem with microfinance is an underlying assumption that poor people want to be entrepreneurs. It also assumes they have the skills and drive to be entrepreneurs. I think this is a major fallacy. What’s an entrepreneur? It’s a person who has creativity, drive, persistence, and vision, who manages to bring an innovation to market, create value, and bring a new business model to the table. It is wonderful when people have entrepreneurial skills, and some of them do, but to expect a large majority of people to have them is not realistic.
If you look at a rich, advanced country like the U.S., more than 90 percent of the workforce is on a salary. If 90 percent of the people in the U.S. don’t want to be entrepreneurs, why do we think poor people in emerging countries want to be entrepreneurs? If you ask a poor person, ‘What’s the one thing you would like,’ I think the most common answer is, ‘A job at a reasonable salary.’
The second problem is that the bulk of microcredit isn’t used to fund a business. The bulk is used to finance consumption. That cannot increase your income in the future and, in fact, it can decrease your future income.
The third problem is that microcredit, even when it’s used to finance a business, usually does so in a highly competitive sector. The entry barriers are low, not much skill is required, and there’s no physical capital or assets. Profits are low and they just don’t earn enough. To top it off, the interest rates on microcredit are very high. The rates are often 50 percent, and in some cases 80 to 90 percent, effectively. It’s a rare business that’s going to get a rate of return on investment of 80 to 90 percent. So you put all of this together and microcredit is not going to lift people out of poverty.

Q: You mentioned that the poor, along with having low incomes, have vulnerable incomes. Does microcredit, microfinance, address that?

Karnani: No. It doesn’t do anything to change the vulnerability of a person’s income. The only good purpose it serves is that it can smooth out the consumption. As a poor person, if you earn a lot today but not tomorrow, a loan can help you smooth out the gaps. But even with that, it’s doing it at a very high price. What the poor need instead are microsavings accounts rather than microcredit. The trouble with microsavings is that the cost of providing the account is too high and nobody can do it today on a for-profit basis. There are a few NGOs offering microsavings, but it’s a very small part of the industry.
My argument is not just theoretical. There is now empirical evidence that shows microcredit does not help. I don’t know if it hurts or not, but we are putting a lot of resources into it and not getting enough impact out of it. So as a world, we can put those resources to better use in helping the poor.

Q: Why do you think the BoP approach doesn’t work?

Karnani: The thrust of the BoP logic is to sell things to the poor that are profitable and simultaneously will help alleviate poverty. I think this basic logic is very problematic. A poor person is not going to become better off by consuming more. He’s going to become better off by producing more. So I think the starting point is key: Treat poor people as producers, not as consumers. I think the BoP logic focuses too much on consumption and too much on large, multinational companies rather than small- and mid-size enterprises that are the engine of economic value creation in emerging countries. After years of exploring the BoP approach, we still don’t have good examples of how well this is working. I think it’s interesting and not accidental that the most celebrated example used by BoP proponents is Aravind Eye Care, which is a nonprofit organization.

Q: But the BoP proponents have recognized that this is a difficult challenge. They never expected it to be a success overnight, and agree there haven’t been homeruns. One of the things they’ve noted is that early BoP ventures focused on market entry, not market creation. For example, in your book you laud the example of TechnoServe, an NGO that facilitated a rebirth of the cashew-growing industry in Mozambique. That looks like market creation so wouldn’t that be along the lines of a BoP 2.0 venture? Certainly there is a role for NGOs in the BoP model.

Karnani: It’s true that Stuart Hart and (Ross professor) Ted London (authors of Next Generation Strategies for the Base of the Pyramid: New Approaches for Building Mutual Value) are critical of the early BoP ventures. But I think there is a difference when you talk about market creation. The difference is this: In the market created, who is the consumer? Even the BoP 2.0 literature is still talking about the poor as the consumers with that market creation. Whereas in the TechnoServe example I used, the consumers are people like you and me who are eating the cashew nuts. The poor are selling the cashew nuts, they’re not eating them. The fundamental issue here, which is absolutely central, is that if you want to help the poor people you have to treat them more as producers than consumers. What is the defining characteristic of a poor person? Low income. Let’s increase their income. The way to do that is to provide jobs, increase their productivity, increase their education, increase their access to markets.
I’m not dismissing the BoP logic totally. We have to try to sell things to the poor that are truly good for them at a price they can afford. I think both of those are critical points. We need to ensure these are prices the poor can truly afford and that the products serve high priority needs, such as housing, basic nutrition, healthcare, education, and clean drinking water. The trouble is there aren’t too many successful examples of that. I have several examples in the book of companies trying to sell things to the poor that are beneficial and high priority, like nutritious yogurt and clean drinking water. But it’s very hard to make it cheap enough where the poor can truly afford it and where the company will make a profit. But we can find some positive examples, like Nirma (the Indian detergent company) and mobile phones.

Q: It sounds like that’s a philosophical difference between your position and the BoP position. They might argue that selling a low-quality product to the poor is exploitative. You think taking the time to create high-quality products they can afford isn’t necessary.

Karnani: That is a big difference. The way to resolve it is to find enough examples, and I just don’t see that many examples where you can keep quality high and reduce the price dramatically and make a profit by selling to the poor. I think it’s disrespectful to the poor to say, ‘Let’s wait and find a way to do it.’ We can’t keep waiting. Let’s do what needs to be done now.

Q: Let’s talk about your framework. In a nutshell, you want to use the engine of business to push job creation, while governments provide the proper landscape with a legal framework and infrastructure to make that happen. At the same time nonprofits, or NGOs, will facilitate the connections and serve as watchdogs. Why is that more effective?

Karnani: To reduce poverty we have to increase the income of the poor and the best way to do that is to provide jobs. In fact, the International Labor Organization says nothing is as fundamental to poverty reduction as job creation. The last 50 to 60 years shows conclusively that business is the best engine of job creation. We’ve seen countries try communism and heavy-handed government intervention in the economy and we know that we need markets and private enterprise to create jobs. But you just can’t tell a private company to create jobs. Private companies will create jobs when it’s in their self-interest to do so.
What society needs to do, especially the government, is to foster job creation, employment growth, and business growth. The World Bank has a useful project called Doing Business Right that analyzes what’s needed to foster business growth and job creation — things such as reasonable regulation, property rights, and infrastructure. The role of business is to create jobs and the role of the government is to create the environment for this to happen. Unfortunately, many emerging countries have not done that in the past. In fact, they have often had policies that stifle business. We need to change that.
NGOs can play a role as a catalyst. Sometimes markets don’t work very well and NGOs can play a role in un-sticking these markets. A good example of that is TechnoServe, which is a mid-size NGO. All it does is emphasize job creation. It helps local entrepreneurs who are sort of stuck. TechnoServe doesn’t create the business, it just helps get rid of the bottlenecks, and it’s doing it very well.
I think we should concentrate our efforts on job creation among small- to mid-scale enterprises. And this is where I differ with the BoP logic, which I think emphasizes big, multinational companies. But if you look at even a rich country like the U.S., more than 60 percent of employment is in the small- to mid-scale enterprises. If you go to countries like India, what you see is a polarized economy. There are a lot of microenterprises, there are large enterprises, but the mid-size enterprises are missing. It’s these midscale enterprises that are the engine of job growth. I think countries like India need to encourage the growth of small to mid-scale businesses rather than microcredit at the bottom and large companies at the top.
The second area where we should focus our efforts is on the people who are getting the jobs. I think we should focus our efforts on the youth, say from 16 to 25 years. If you don’t get this young person a job, it has a lifelong impact on this person. If this young person is not given a proper job by the age of 25, he or she will probably go on the wrong track.

Q: What else does government need to do besides foster job creation?

Karnani: Next to a job, the poor need basic public services — education, clean water, sanitation, roads, public health, vaccinations, and public security. Those are the basics of life. Without that, very little else is going to work. Even a job isn’t much use if a child is dying of malaria or diarrhea. In many poor countries, the government has failed miserably at this. I don’t have a magic formula for doing it but we know it can be done. In some poor countries there are hopeful signs. I think we need the public will to do it. One of my objectives in the book is to present the facts, to provide some stimulation leading to rage that we shouldn’t accept the status quo as inevitable. We should say it’s essential that we provide clean drinking water to poor people. In some countries, like India now, there is a movement called the rights-based approach to development. It is the moral right of every human being to have access to the basics of life.

Q: Poverty is such a long-term problem and we’ve seen such slow progress despite tremendous economic growth in some sectors. Is it hard to get people enraged and engaged?

Karnani: I think we haven’t tried the right policies. You can’t do it with business alone. But governments alone can’t do it, either. We need to find the right balance. That’s why the title of my book is Fighting Poverty Together. There’s a role for business, there’s a role for government, and there’s a role for civil society. We need to understand these roles and everybody needs to do their share. One thing that is different now is that poverty and affluence have come closer together physically. You see slums right next to rich neighborhoods; the media expose us to poverty everyday. This is not a stable situation. The rich and the middle class just cannot turn a blind eye to poverty. Our sense of social and moral justice does not let us tolerate such pervasive and desperate poverty. My objective is to stimulate a public debate leading to action. This book is meant for smart people with a conscience. You don’t have to be an economist or a business expert. I think we should all be engaged in this debate. Business schools, companies, trade organizations, civil society and governments are in fact engaged in a widespread dialogue. I am hopeful that this dialogue will lead to both private and public action to reduce poverty.

Europe’s Disturbing Precedent in the Cyprus Bailout

George Friedman — Tue, 26 Mar 2013 19:44:38 +0000

Mr. George Friedman is Founder and Chairman, Stratfor, a private intelligence company located in Austin, TX.

This article is published here in by permission of Stratfor.

The European economic crisis has taken different forms in different places, and Cyprus is the latest country to face the prospect of financial ruin. Overextended banks in Cyprus are teetering on the brink of failure for issuing loans they cannot repay, which has prompted the tiny Mediterranean country, a member of the European Union, to turn to Brussels for help. Late Sunday, the European Union and Cypriot president announced new terms for a bailout that would provide the infusion of cash necessary to prevent bankruptcies in Cyprus’ banking sector and, more important, prevent a banking panic from spreading to the rest of Europe.

What makes this crisis different from the previous bailouts for Greece, Ireland or elsewhere are the conditions Brussels has attached for its assistance. Due to circumstances unique to Cyprus, namely the questionable origin of a large chunk of the deposits in its now-stricken banking sector and that sector’s small size relative to the overall European economy, the European Union, led by Germany, has taken a harder line with the country. Cyprus has few sources of capital besides its capacity as a banking shelter, so Brussels required that the country raise part of the necessary funds from its own banking sector — possibly by seizing money from certain bank deposits and putting it toward the bailout fund. The proposal has not yet been approved, but if enacted it would undermine a formerly sacred principle of banking in most industrial nations — the security of deposits — setting a new and possibly destabilizing precedent in Europe.

Cyprus’ Dilemma
For years before the crisis, Cyprus promoted itself as an offshore financial center by creating a tax structure and banking rules that made depositing money in the country attractive to foreigners. As a result, Cyprus’ financial sector grew to dwarf the rest of the Cypriot economy, accounting for about eight times the country’s annual gross domestic product and employing a substantial portion of the nation’s work force. A side effect of this strategy, however, was that if the financial sector experienced problems, the rest of the domestic economy would not be big enough to stabilize the banks without outside help.

Europe’s economic crisis spawned precisely those sorts of problems for the Cypriot banking sector. This was not just a concern for Cyprus, though. Even though Cyprus’ banking sector is tiny relative to the rest of Europe’s, one Cypriot bank defaulting on what it owed other banks could put the whole European banking system in question, and the last thing the European Union needs now is a crisis of confidence in its banks.

The Cypriots were facing chaos if their banks failed because the insurance system was insufficient to cover the claims of depositors. For its part, the European Union could not risk the financial contagion. But Brussels could not simply bail out the entire banking system, both because of the precedent it would set and because the political support for a total bailout wasn’t there. This was particularly the case for Germany, which would carry much of the financial burden and is preparing for elections in September 2013 before an electorate that is increasingly hostile to bailouts.

Even though the German public may oppose the bailouts, it benefits immensely from what those bailouts preserve. As I have pointed out many times, Germany is heavily dependent on exports and the European Union is critical to those exports as a free trade zone. Although Germany also imports a great deal from the rest of the bloc, a break in the free trade zone would be catastrophic for the German economy. If all imports were cut along with exports, Germany would still be devastated because what it produces and exports and what it imports are very different things. Germany could not absorb all its production and would experience massive unemployment.

Currently, Germany’s unemployment rate is below 6 percent while Spain’s is above 25 percent. An exploding financial crisis would cut into consumption, which would particularly hurt an export-dependent country like Germany. Berlin’s posture through much of the European economic crisis has been to pretend it is about to stop providing assistance to other countries, but the fact is that doing so would inflict pain on Germany, too. Germany will make its threats and its voters will be upset, but in the end, the country would not be enjoying high employment if the crisis got out of hand. So the German game is to constantly threaten to let someone sink, while in the end doing whatever has to be done.

Cyprus was a place where Germany could show its willingness to get tough but didn’t carry any of the risks that would arise in pushing a country such as Spain too hard, for example. Cyprus’ economy was small enough and its problems unique enough that the rest of Europe could dismiss any measures taken against the country as a one-off. Here was a case where the German position appears enormously more powerful than usual. And in isolation, this is true — if we ignore the question of what conclusion the rest of Europe, and the world, draws from the treatment of Cyprus.

A Firmer Line
Under German guidance, the European Union made an extraordinary demand on the Cypriots. It demanded that a tax be placed on deposits in the country’s two largest banks. The tax would be about 10 percent and would, under the initial terms, be applied to all accounts, regardless of their size. This was an unprecedented solution. Since the global financial crisis of the 1920s, all advanced industrial countries — and many others — had been operating on a fundamental principle that deposits in banks were utterly secure. They were not regarded as bonds paying certain interest, whose value would disappear if the bank failed. Deposits were regarded as riskless placements of money, with the risk covered by deposit insurance for smaller deposits, but in practical terms, guaranteed by the national wealth.

This guarantee meant that individual savings would be safe and that working capital parked by corporations in a bank was safe as well. The alternative was not only uncertainty, but also people hoarding cash and preventing it from entering the financial system. It was necessary to have a secure place to put money so that it was available for lending. The runs on banks in the 1920s and 1930s drove home the need for total security for deposits.

Brussels demanded that the bailout for Cypriot banks be partly paid for by depositors in those banks. That demand essentially violated the social contract on the sanctity of bank deposits and did so in a country that was a member of the European Union — one of the world’s major economic blocs. Proponents of the measure pointed out that many of the depositors were not Cypriot nationals but rather foreigners, many of whom were Russian. Moreover, it was suggested that the only reason for a Russian to be putting money in a Cypriot bank was to get it out of Russia, and the only motive for that had to be nefarious. It followed that the confiscation was not targeted against ordinary people but against shady Russians.

There is no question that there are shady Russians putting money into Cyprus. But ordinary Cypriots had their money in the same banks and so did many Cypriot and foreign companies, including European companies, who were doing business in Cyprus and need money for payroll and so on. The proposal might look like an attempt to seize Russian money, but it would pinch the bank accounts of all Cypriots as well as a sizable amount of legitimate Russian money. Confiscating 10 percent of all deposits could devastate individuals and the overall economy and likely would prompt companies operating in Cyprus to move their cash elsewhere. The measure would have been devastating and the Cypriot parliament rejected it.

Another deal, the one currently up for approval, tried to mitigate the problem but still broke the social contract. Accounts smaller than 100,000 euros (about $128,000) would not be touched. However, accounts larger than 100,000 euros would be taxed at an uncertain rate, currently estimated at 20 percent, while bondholders would lose up to 40 percent. These numbers will likely shift again, but assuming they are close to the final figures, depositors putting money into banks beyond this amount are at risk depending on the financial condition of the bank.

The impact on Cyprus is more than Russian mafia money being taxed. All corporations doing business in Cyprus could have 20 percent of their operating cash seized. Regardless of precisely how the Cypriot banking system is restructured, the fact is that the European Union demanded that Cyprus seize portions of bank accounts from large depositors. From a business’ perspective, 100,000 euros is not all that much when you are running a supermarket or a car dealership or a construction company, but this arbitrary level could easily be raised in the future and the mere existence of the measure will make attracting investment more difficult.

A New Precedent
The more significant development was the fact that the European Union has now made it official policy, under certain circumstances, to encourage member states to seize depositors’ assets to pay for the stabilization of financial institutions. To put it simply, if you are a business, the safety of your money in a bank depends on the bank’s financial condition and the political considerations of the European Union. What had been a haven — no risk and minimal returns — now has minimal returns and unknown risks. Brussels’ emphasis that this was mostly Russian money is not assuring, either. More than just Russian money stands to be taken for the bailout fund if the new policy is approved. Moreover, the point of the global banking system is that money is safe wherever it is deposited. Europe has other money centers, like Luxembourg, where the financial system outstrips gross domestic product. There are no problems there right now, but as we have learned, the European Union is an uncertain place. If Russian deposits can be seized in Nicosia, why not American deposits in Luxembourg?

This was why it was so important to emphasize the potentially criminal nature of the Russian deposits and to downplay the effect on ordinary law-abiding Cypriots. Brussels has worked very hard to make the Cyprus case seem unique and non-replicable: Cyprus is small and its banking system attracted criminals, so the principle that deposits in banks are secure doesn’t necessarily apply there. Another way to look at it is that an EU member, like some other members of the bloc, could not guarantee the solvency of its banks so Brussels forced the country to seize deposits in order to receive help stabilizing the system. Viewed that way, the European Union has established a new option for itself in dealing with depositors in troubled banks, and that principle now applies to all of Europe, particularly to those countries with financial institutions potentially facing similar problems.

The question, of course, is whether foreign depositors in European banks will accept that Cyprus was one of a kind. If they decide that it isn’t obvious, then foreign corporations — and even European corporations — could start pulling at least part of their cash out of European banks and putting it elsewhere. They can minimize the amount of cash on hand in Europe by shifting to non-European banks and transferring as needed. Those withdrawals, if they occur, could create a massive liquidity crisis in Europe. At the very least, every reasonable CFO will now assume that the risk in Europe has risen and that an eye needs to be kept on the financial health of institutions where they have deposits. In Europe, depositing money in a bank is no longer a no-brainer.

Now we must ask ourselves why the Germans would have created this risk. One answer is that they were confident they could convince depositors that Cyprus was one of a kind and not to be repeated. The other answer was that they had no choice. The first explanation was undermined March 25, when Eurogroup President Jeroen Dijsselbloem said that the model used in Cyprus could be used in future bank bailouts. Locked in by an electorate that does not fully understand Germany’s vulnerability, the German government decided it had to take a hard line on Cyprus regardless of risk. Or Germany may be preparing a new strategy for the management of the European financial crisis. The banking system in Europe is too big to salvage if it comes to a serious crisis. Any solution will involve the loss of depositors’ money. Contemplating that concept could lead to a run on banks that would trigger the crisis Europe fears. Solving a crisis and guaranteeing depositors may be seen as having impossible consequences. Setting the precedent in Cyprus has the advantage of not appearing to be a precedent.

It’s not clear what the Germans or the EU negotiators are thinking, and all these theories are speculative. What is certain is that an EU country, facing a crisis in its financial system, is now weighing whether to pay for that crisis by seizing depositors’ money. And with that, the Europeans have broken a barrier that has been in place since the 1930s. They didn’t do that casually and they didn’t do that because they wanted to. But they did it.

10 to Midnight in the Garden of Credit: Socrates Wonders About Cardinal Rules, Historical Precedents, Matter-Antimatter, and the Fantasy Era of Fiat Money Creation

John E. Charalambakis — Sun, 24 Mar 2013 18:47:12 +0000

Dr. John E. Charalambakis is the Chief Economist at Blacksummit Financial Group, Inc. Lexington, Kentucky. He is also with the Adjunct Faculty at Patterson School of Diplomacy, University of Kentucky.

This article is contributed by the author for publication in the Business Thinker. It has also been published by the Blacksummit Financial Group Blog.

The unfolding events – by the hour – in Cyprus shine light to a historical precedent: When the next crisis comes around bank deposits may not be spared. This is presented to the public as a “just” decision due to the Cypriot “banking sins”. We will be exploring justice issues in this commentary, but before doing so, shouldn’t we be asking why such justice was not also applied to the banking sins uncovered during the 2008-’09 crisis? Why did we choose to bailout with trillions of dollars all those banks in Germany, France, England, Ireland, Switzerland, US, Spain, Italy, Belgium, Holland, etc., that seem to have created the financial catastrophe? (See pertinent tables with the amounts at the end of this commentary). And, if we couldn’t afford to do so back then, why don’t we break them now?

In Plato’s Republic we find Socrates asking the fundamental question that has been with us for centuries, “What is justice?” It seems that for Plato, as well as for Aristotle who followed him, justice is the essential virtue of a society. Socrates taught his disciples that justice is giving and getting one’s due. Plato describes that justice must be counted as desirable for its own sake. Justice in other words is harmony in the soul and harmony in the state. Furthermore, Plato tells us that responsibility should be delegated in accordance to one’s ability and place. I believe that nowadays, the latter should be the foundation for viewing international decisions regarding bailouts and bailins (where depositors lose a good chunk of their savings).

In this framework of thought, justice is viewed as fairness, power is restrained, and the interests of the society as a whole are being advanced. If that is the case, then, sectors in the economy would work together in harmony (nowadays that would apply to the production and financial sectors), while convergence would be observed across nations through the creation and sustainment of middle classes. However, the unfortunate result these days is the divergence of financial interests from the production sector, increased instability (economic, political, social, and financial), and the destruction of middle classes across nations. When the financial interests of collateralization and securitization, are separated from production interests at a global level, then Pandora’s jar is being opened, financial crises take place, and the reverse route starts i.e. the destruction of the middle class and injustice prevails.

In the Republic, Socrates refuses and rejects the argument of Thrasymachus who argued that justice always serves the interests of the rulers of the society, the interests of the stronger in our midst. Moreover, Socrates rejects Glaucon’s argument who suggested a more modest approach, that justice is ultimately a matter of self interest and that people observe justice to avoid punishment. Both of these negatives views about justice have been rejected by Socrates who insists that justice is the ultimate responsibility of the person, and should be delegated according to ability and place. Justice cannot be viewed as punishment, retribution or revenge. In the ancient time, in Platonic terms, justice is a matter of social harmony and in Christian ethics it is a matter of mercy/grace. In economic terms we can talk about just wages, just distribution of rewards and of income. Issues of justice come at the forefront when there are exchanges. In his famous 1971 book, The Theory of Justice, John Rawls takes the liberal approach to find the proper balance between liberty and equality, with a particular concern for the least advantaged. A few years later his colleague, Robert Nozick takes a more libertarian approach to justice defending a strong notion of entitlement where everyone gets what he or she is entitled to based on endowments, without any reference to needs or inequalities.

I have the impression that any reference to justice by neglecting the concept of community would have horrified Plato, Socrates, Aristotle and their followers. Cicero has long argued that the leading virtue in a society is justice and that the definitive ingredient of justice is merit. Therefore, meritocracy in society is a necessary condition for justice to be administered. Meritocracy at the same time requires the observance of the rule of law, because the rule of law distributes rights and a just law advances fairness. When you break the cardinal rule of banking and confiscate deposits then you plant the seeds of destruction. If production responsibilities are designated according to merit and ability (Plato and Cicero) then, the responsibility of justice is to enable the individuals across nations to produce according to their natural and enhanced capabilities and endowments, i.e. to advance their competitive advantages. When decisions taken destroy those competitive advantages (services in the case of Cyprus), then economic truncation occurs that ultimately lead to segmentation and the breakup of the chains that hold that community together (the Euro in this case which has become a fetish since means and ends have been confused by those who executed the single currency).

If we take the concept of justice a step further, we would probably understand that justice is inseparable from righteousness, at least in the Platonic and Aristotelian paradigms. In that sense, Plato’s central claim of righteousness is “performing the functions for which ones nature is best fitted” (a.k.a. competitive advantages as discovered by Adam Smith about 2200 years later). It is also interesting to note that both Plato and Aristotle defend inegalitarian views of justice.

In The Ethics, Aristotle gives us a complex concept of justice. He divides justice in two broad categories as the lawful and the concept of fair and equal. It is the latter that is advanced in Aristotelian ethics. The literal meaning of the word justice in Aristotelian ethics is the meaning of righteousness, which is the form of justice that represents complete virtue of the soul which cannot be understood unless it is comprehended within the framework of community, i.e. in relationships. Aristotle divides this kind of justice into distributive and rectificatory. For Aristotle, the student of Plato, justice should be viewed as fairness. Distributive justice for Aristotle is primarily concerned with what people deserve. We also need to keep in mind that Aristotle is particularly concerned with the justice of transactions. When Aristotle talks about justice in transactions, he refers to commutative justice in voluntary exchanges such as buying, selling and lending, or involuntary matters where we have victims of insults, thefts or assassinations. When Aristotle talks about equality and justice he refers to proportional, or what he calls geometrical proportion in distributive justice. Through the centuries since then, we understand that in Aristotelian ethics we need to treat equals equally, while unequals deserve unequal treatment in proportion to their merit, in proportion to their abilities, and in proportion to their enhanced capabilities.

The applied solution to the Cypriot banking problem violates the above principles, create a confiscation historical precedent, undermines the foundations of community (let’s not forget that the EU is the advanced form of a European Community), while it betrays the concept of fairness.
I believe that central to Aristotle’s overall argument is the concept of justice as a state of attitudes, habits, customs and cultivated policies that advance and enhance the capabilities of persons, groups and nations. The enhancement of that capability leads to the development of character and to the development of a nation. When individuals are deprived from their potential and competitive advantages, their nations cannot prosper. This kind of justice according to Aristotle is complete virtue, not complete virtue unconditionally, but complete virtue in relation to another (signifying the communitarian dimension).

St. Thomas Aquinas synthesized the Christianity of the Church with Aristotelian ethics and came up with some articles relating to justice that can be summarized as follows (Solomon and Murphy, 1990): First, justice is a habit whereby a man renders to each one his due by a constant and perpetual will. Second, justice is always towards another, and third, justice is a virtue and actually it’s the chief of all the moral virtues. Aquinas concludes his thesis on justice by echoing St. Augustine and Cicero by suggesting that charity, generosity, and liberality is an essential part of justice, especially to the ones who are the least among us. I am wondering then if the measures applied comply with any notion of what we consider justice in the West.

Now, if we go further back and examine the ancient Chinese and Far Eastern philosophies, we will discover that there are two concepts that summarize the moral elements of the mind and of the soul. Those two elements are the concept of “Li” and “Ren”. The idea of “Li” is what is known in Confucian thought as the rules of conduct. Without any doubt the applied solution violated the cardinal rule of banking conduct. The second concept is the idea of “Ren” or what we would call today agape, the benevolent love toward others exhibited by rulers as well as the average person. In the Far Eastern thought when the soul loses its sense of justice it loses its moral compass and as Confucius said it’s like a mountain that has lost its trees. As the EU passes through the circle of violence in the inferno they have created (see the March 18th commentary) they may have crossed the point of no return in the eventual destruction of the dysfunctional currency that not even Germany can afford.

In the midst of the seventeenth century Thomas Hobbes in his classic work The Leviathan, describes the state of nature and a state of affairs as one underlined by fear and insecurity. It’s a state of affairs where there is no right or wrong, no right to property, no mine or thine, no law and justice or injustice, only force and fraud (circle #8 in Dante’s Inferno). It is in this state of affairs and in this climate of uncertainty where all members in the society feel the need for a mutual social compass, a social contract that becomes a matter of rational necessity. The need for this kind of social compass forms the basis of Hobbes’ argument that people have a basic ability to do damage to one another and in the absence of any sense of duty towards one another, in the absence of any power over the people, people become competitive, insecure, and mutually defensive. From a trade perspective Hobbes views international exchanges as a zero sum game where life on earth and exchanges are nothing but unhappy transactions of a life where there is no justice. Obviously Hobbes portrays a horrifying state of relationships maybe one before the statecraft of treachery (circle #9) is unfolded.

Scientists these days intensify their discussions on the mystery that there is more matter than antimatter in our universe and are contemplating about the neutrinos – those subatomic particles whose mass cannot be measured and which are nearly invisible – and their consequential role in the cosmos. In the financial world the neutrino called Cyprus can create what physicists call a beta decay (or a double beta decay), where the equivalent of an isotope (or a handful of isotopes e.g. Germanium 76 or in the financial world Germany, Holland, and Finland of the community called EU) decays by shedding electrons and antineutrinos in the process. In the financial world the shedding of the rules and faith in the credit mechanisms has the potential of turning upside down the asymmetry between matter (monetary reserves) and antimatter (money supply) in the financial world. As the imbalance follows a course of reversion then, dark matter (the cosmological force that prevents expansion and in our terms recessionary forces) takes over from dark energy (the force that expands the universe i.e. the growth force in market economies).

Let’s close by reviewing a couple of tables that show the amounts used by central banks in bailing out the banks that were on the verge of collapse in 2008. All tables are taken from the Fed’s audit conducted by the GAO (Government Accountability Office).
The first table below shows that more than $10 trillion were used in swap lines, with the ECB being the recipient of almost 80% of the Fed’s generosity in bailing out EU banks! (I will let the readers divide the $7.5 billion that Cyprus’ mess was about by the $10 trillion shown in the table below, and then reflect on “just” solutions).

I believe that instead of offering a conclusion we should review the lyrics of Bob Dylan’s song titled “License to Kill” and as we review them we may be thinking of the Cypriot Banks destruction.

Man thinks ’cause he rules the earth, he can do with it as he pleases
And if things don’t change soon, he will
Oh, man has invented his doom.
…
Now, they take him and they teach him
And they groom him for life
And they set him on a path where he’s bound to get ill
Then they bury him with stars
Sell his body like they do used cars

Now, there’s a woman on my block
She just sit there facin’ the hill
She say who gonna take away his license to kill?

Now, he’s hell bent for destruction
He’s afraid and confused
And his brain has been mismanaged with great skill
All he believes are his eyes
And his eyes, they just tell him lies

But there’s a woman on my block
Sitting there in a cold chill
She say who gonna take away his license to kill?

…
Now he worships at an altar
Of a stagnant pool
And when he sees his reflection, he’s fulfilled
Oh, man is opposed to fair play
He wants it all and he wants it his way

Now, there’s a woman on my block.
She just sit there as the night grow still.
She say who gonna take away his license to kill?