Thursday, February 25, 2010

Capitalism and Greed

Years ago, when the word millennium was rarely found in casual conversation, I was in business school working on case studies, which is the staple diet of the MBA curriculum.

The particular case study involved a mining company that found itself dropping from being a rising star in the top 20 to a company in financial trouble within the span of one year. Not wanting to bore anyone with details, my class presentation of the cause of this company’s peril was management’s poor understanding of what capitalism is. I went on to describe what would have prevented management from even considering the course they took, while the professor’s expectation was a solution more focusing on the financial management analysis and diagnosis of the case.

In short, and stated much less complicated than how it was described in the case study, the company, caught up in the prestige of record year-over-year growth, their rise on the Fortune-list of businesses and a healthy market capitalization, paid out their capital equipment reserves as dividends. It meant that they would have incurred enormous debt when replacement of their machinery was required. That the cycle of capital equipment replacement was measured in decades didn’t help and it placed a kind of apathy-blanket on management’s judgment to rather pursue immediate profits and prestige than the need to ensure that the company would survive.

Survive?

I was almost laughed out of the class because I dared to put something else above the pursuit of profit. I was given a fair grade for my task but I couldn’t help but feel that I was penalized for holding to a position that more accurately defined capitalism than what I got from the class. Granted, the class’ objective wasn’t to hypothesize about financial models, but to identify and recommend fixes for the subject company’s ills and get a better-than-passing grade for the case study. So, I took my medicine and harbored the unsatisfied notion in a safe place somewhere in my mind.

Over the years I would occasionally pull the unsatisfied notion from the deep recesses of my mind and raise the question to whomever would listen, perhaps to stir up a bit of trouble. Many were business owners and others were financial managers. The astonishing thing was that almost all scoffed at the idea that a company would entertain an objective of survivability above the pursuit of profit and that it was counter productive to attracting and retaining good investments in one’s stock. Additionally, they claimed, it would rather make management lethargic than nimble. I disagreed trying to explain my reasoning but I failed every time. I wondered what was wrong with my reasoning.

It turned out there was nothing wrong with my reasoning; I couldn’t properly differentiate between profit and survivability and neither could anyone from my professor, to my class mates right down to every person to whom I raised the question.

The answer came about when I watched a video of Milton Friedman (you can watch it here: http://www.youtube.com/watch?v=RWsx1X8PV_A) where he spoke on capitalism and greed. Then it struck me: words have true meanings and they have apparent meanings. (I always knew that, but somehow it never germinated in the profit-survive debate in my head.) Greed is a good thing, much like having a gun and just as much as it would be destructive to employ a gun in a reckless manner, so the reckless employment of greed would also be destructive. The same goes for the concept of capitalism. These terms, just like “gay,” “liberal,” and “progressive,” have been morphed into meanings they never had; meanings that are in total contradiction to the original.

So, I worked anew on profit and survivability and the answer came spontaneously while writing in a blog last week: Profit is the goal, survivability is the compass. I think it would be fair to say that greed is the fuel. Only when all three have been mixed into the business model in appropriate and responsible measures, will there be a pleasant, compassionate, and rewarding result coming out of the oven of time.

I think my professor’s dead already, so there would be no satisfaction in trying to tell him what I found.

About Me

Seeking the truth until I find it.