We’re all in the same boat, but it’s sinking – what shall we do?

posted in: Entrepreneurship | 11

This is my summer blog post – meaning that I am on vacation and have some time to raise my head above the parapet and think about other things.

The world is flat, and we are being attacked by black swans – events arising from correlations of economic incidents across the whole world. Globally, humans are becoming increasingly interdependent. Local solutions no longer work; by minding my own business I am now inevitably meddling with yours. The results are global warming, worldwide water shortages, food scares, wild price fluctuations of rare earths and other natural resources, and so on.

Unfortunately, what we see all around is local selfishness and myopia. Britain is congratulating itself for staying out of the euro mess and the lending crisis on the continent, but is an illusion to believe that the UK can isolate itself from Europe. It’s our biggest trading partner by a long shot; and if Europe goes down, we go down.

The European region acts no better. The founders of the Euro knew perfectly well (and have publicly stated) that its functioning would require a common economic policy and a migration of sovereign rights. But all are sticking to the illusion that European countries can continue to mind their own business, avoiding the transfer of power to unloved EU institutions that is necessary to coordinate policy. It is lamentable that a continent with a still world leading infrastructure, and world leading knowledge and talent, throws away its influence because of internal squabbles and sovereignty fights.

The world acts no better, either. It is now becoming clear that we will not be able to slow global warming; rather, there will be an increase of more than 3°C over the next 50 years. Everyone clings to the hope that it will not be so bad; but when whole regions dry up into deserts and we face migrations on a scale never before seen in history, this illusion might shatter catastrophically, endangering the lives of our grandchildren, or even our children.

Climate talks have failed, and continue to fail, because everyone points the finger at someone else. The emerging economies accuse the developed countries of having sinned in the past (which is true) and of not doing enough today (which is also true). The US acts as though nothing is happening, and now claims progress because of a windfall from shale gas. The developing countries – above all, China – now produce more global-warming output than anyone else.

It all stems from a failure to look beyond our own little rice or cereal bowl at every level – national, regional, and global. Why? Is it because our politicians are too stupid or too lazy to tackle the problem? Or because they are beholden to cynical capitalist businesses that are blocking any move against their interests? No, that would be too easy; businessmen also worry about their children, and politicians are no more stupid, lazy, or corrupt than we all are.

The reason is that the negotiation games and interest conflicts among the many parties are just too complicated. All those involved – be they politicians or businesspeople – have day jobs that pay their salary, and can engage only part-time in tackling the wider-ranging problems.

The question we all face is this: how much am I willing to give, in order to achieve a benefit on a global basis, when it compromises my ability to be effective at my local level? How much investment can a CEO be seen to funnel into clean technology that helps the environment but not the share price, before he or she is dismissed? And how much carbon restriction can a head of state be seen to advocate, burdening the nation’s industry and slowing job creation, in order to support the lofty goal of reducing global warming?

Part-time negotiators simply cannot deal with this effectively. Because of the way our global governance institutions are set up, their work is inevitably pulled back into conflicting local perspectives all the time, making the negotiation and horse-trading too complex. They may secure a deal with two or three partners; but with 10, it becomes very hard, and with 190, impossible. The old approach of a G7, UN Security Council or G20 is no longer credible because the seven, 15 or 20 nations simply ignore the other 170-plus.

So, what can be done? I think there is a proposal that at least leads into a constructive direction. We need a world president (or chairman, or call it whatever you want): someone who is accountable not to any local constituency, but who can focus on the issues that affect us all. These problems have now become so large that we must find a way to address them.

I do not mean a global dictator, or anyone with a lot of power. For an example, look at the Queen. She does not have a lot of power – just enough to needle the political players and force them to pay attention. She is independent of any local constituency, and the greatest source of her power is her moral and ethical authority.

When I discussed this idea with a friend, he accused me of adopting an old Western imperialistic view. Well, I might be forgiven for using the Queen as an example (I am in the UK writing this, after all) but there is nothing particularly Western in this proposal. I am simply saying that we need a moral heavyweight to get us out of the coordination mess. Chinese emperors did precisely this over 2,500 years, and their symbolic unification power worked even when they could not use their formal power – for example, when they were too young or incapacitated.

The candidate for world president certainly does not need to be Western or male. And I am not saying that such a candidate, of high integrity and authority, is easy to find; though I could name a few.

We need someone who has the entire boat in mind, not just one row of seats; who has enough power to get attention from the big players; and who leads by moral authority. If someone like this could provide the general direction, then maybe it would be a bit less difficult for the part-time negotiators to follow it through to a deal. And that would give us a glimpse of hope.

11 Responses

  1. Sylvain Daudel

    Hello Christoph

    First of all, have a nice vacation!

    Second, couldn’t agree with you more…

    Here is a humble contribution to the ‘debate’ – in my view, it’s more than time to go beyond the debate and begin to act.

    Draft manifest to reinvent Capitalism
    From Shareholder Value to Humanity Value

    We are at a turning point in the history of capitalism. Its longlasting positive impact on the wealth of nations, on the worldwide poverty reduction, on the well-being of people is waning. Numerous warning signs have been identified, denounced, analyzed and explained. So far negative externalities have been denied, minimized, accepted or tolerated. Today, even the greatest defendants cannot but plead for a change. In the Financial Times, Lawrence Summers calls for “smart reinvention, not destruction ».
    This draft manifest is to contribute to the debate with some radical but non destructive measures to preserve the goodness of the system and direct it towards benefits for humanity and not just illegitimate profits for a few. It is a draft manifest as it contains only four propositions and needs to be criticized, enhanced and transformed into practical and legal dispositions.

    The aim is to continue satisfying humanity present needs without compromising opportunities for future generations.

    1) Feeding shareholders is illegitimate when Companies accumulate wealth depleting the planet and harming humanity.

    2) Companies should prove they have a positive balance of obligations towards humanity before distributing dividends to shareholders. It is not sufficient to pay taxes because you have harmed the planet. Profits are only legitimate if you do more good than bad!
    3) Companies failing to prove their worth will be boycotted by humanity.
    4) Shareholders require quarterly reports, humanity demands quarterly reports.

    The value of a company is currently derived from its capacity (short term or expected in medium to long term) to distribute a remuneration to the capital it has had accessed to. Shareholder value is then the ultimate indicator of capitalism. Under its various names (EBITDA, Earning per share, PER, EVA…etc.) it expresses the successful functioning of any company and drives all activities and decisions of management. Our first proposal says that shareholders should not receive dividends just because the company is producing profits in the way they are accounted for today – forgetting or forgiving all externalities produced on our planet, on humanity.

    Along our history we have learned to understand and recognize externalities; we have developed methods to measure them; we have established standards and rules and incentives to respect and preserve these standards; we even have laws that have been designed to enforce these rules and taxes or sanctions for those who do not abide by the laws. The problem is that results have not followed and there is little progress. On the contrary, sanctions have just been integrated as the price to pay to continue damaging the environment and extracting profits to the detriment of humanity and future generations.

    From this observation stems our second proposal: sustainability is not just limiting the damage we are doing or paying a price to be forgiven. Sustainability should be repairing whatever damage we are producing, just like in everyday life. When you damage your neighbour’s fence, she is entitled to have it repaired by you.

    Companies should contribute to repair the damage done. Before being allowed to announce any kind of profit that can be distributed to their constituents (shareholders) companies should prove that negative externalities have been compensated (through depollution, tree planting… whatever is good for the planet and humanity) and that the balance is positive or at least even. That opens a whole new field for productive employment, productive for the future, not just the short term illegitimate enrichment of a few.

    Our third poposal is certainly the most radical and controversial. It says that companies will be boycotted by humaniy if they fail to prove that they have a positive balance. The verb ‘will’ is not there by chance. It probably is the only incentive to produce the right decisions as it has a direct and devastating impact on the company’s performance and ultimately its value.

    To be able to decide whether a boycott is necessary, we need transparency and that is the objective of the last proposal. Just like shareholders require quarterly reports to decide whether they continue to give their confidence to such or such company, humanity should get quarterly reports on the balance of damage and repair to decide whether boycott is or not in order.

    We understand that there are numerous aspects of this draft manifest that should be criticized, refined, enhanced, changed and we open it for general discussion in the hope that we indeed find ways to reinvent capitalism without destructing its benefits for humanity today and tomorrow

  2. Chris Sinclair

    A very interesting blog! I think you’re right in much of what you say – but I fear that those whose duty it was to elect, nominat, or appoint this World Leader we would only find themselves running into exactly the same themes, vested interests, manipulations, and obstructive diplomacy as we currently face in dealing with most of the challenges you have already described above.

    As for which parties should take a leading role in changing things, the determination to get an edge over each other constantly prevails. I realise this isn’t the focus of your piece (if anything the opposite) but I feel the issues will inevitably affect each other. Your piece alludes to the old powers being unwilling to forego the benefits of their history, and the rising powers being keen to get their piece of the action by its reference to climate talks; but I fear that is just another facet of the constant evolution of and shift in the balances of power and influence which we have also seen for some time now in the urgent need (and strident calls) for UN Security Council Reform.

  3. Armen Papazian

    Excellent stuff, but
    You assume that it is a coordination issue, I think it is an imagination issue.
    No amount of global coordination will save us, without a fundamental shift in our financial imagination. We need to reinvent money without debt. We need to bring space into finance and economics, and we need to reinterpret the human experience as a galactic experience.
    We need to imagine and craft prosperity, instead of allocating resources in scarcity.
    We have enough presidents!
    We need the Force.

    • Christoph Loch

      Dear Armen,

      I agree. The way we fundamentally conceptualize factor pricing is based on an era when everything was of essentially unlimited supply, and costs were based on what it took to “rip the stuff out of the ground”. This has now changed (over the last 50 years), and we need to include into factor prices two things: (1) replacement or recycling costs, as some of the “stuff” is NOT unlimited, and (2) externalities, such as side effects on air, water or other environmental aspects. But it is unclear how this can be accomplished (fees, take-backs and taxation are part of an answer but not sufficient), and in one blog we need to focus on one issue.


  4. Denis K

    Who would be you candidates for the world leader role?

    And a question for Chris – what would the reform allow? What would be the goal?
    In essence, the problem is trust. Easter powers simply do not trust the motives of Western Governments, and vice versa. Therefore any reforms or shifts proposed by the west will all be opposed. In order to establish trust, power needs to be shared and given up. And from developing nations perspective, US investing trillions every year into weapons is a simple and clear proof of intentions.

    I am simply playing devils advocate, but this is the reason all of these talks fail – we dont trust each other. I believe that power has to be given up first before we can all feel “together”

  5. Chris Sinclair

    Hi Denis,

    The reforms *should* allow a freer-functioning, more efficient, and ‘fairer’ UNSC (if those are the ones you refer to). National or personal interest aside, they’re needed simply because the body doesn’t achieve what it wa intended to. Whether any suggested reforms *would* have that effect or not is a whole different issue – and a large part of the difficulty in finding the golden formula to get that body right.

    However, it is not much more or less of a problem than all of the obstructiveness, short-sightedness, and ‘zero-sum’ attitude towards diplomacy that affects any attempt to achieve reform. My main intention was to highlight that I believe those obstacles would be just as much of a hindrance to implementing Christoph’s good idea as they have been to achieving all of our other numerous well-intended efforts to resolve (or prevent) collective woes. I hope not, but I fear as much.

  6. Avneesh Pandey (Alumni)

    Dear Sir,

    The topic of your blog very aptly describes the state in which the humanity as a whole is caught today.

    While the blog narrates few of the many of complex problems that we face, the suggested solution of appointing a world president is rather a far cry. I am afraid to say that selection of such an individual in human form is virtually impossible and even if we take a refuge in theology for the “saviour” there will be plenty of contenders and sadly enough their followers will only add to the chaos.

    I feel the problems that have been illustrated in the blog stem from the “profit maximisation” maxim of the entities, be it an individual or a family or a corporation or a nation. We must not forget that we humans are territorial by nature and hence don’t like losing ground in any negotiations. Further the illustrated problems are mostly systemic in nature and perhaps define the evolutionary nature of our race i.e. selection by elimination. I observe that no two equals stay together. Having said this I feel this is rather an extreme position and as per the law of nature, equilibrium will eventually be achieved. Here again, I am fully aware that even the equilibrium is not permanent and can very easily be disturbed.

    In my opinion the imbalances that are discussed can be contained by constructive destruction; destruction of boundaries, by redefining them. Some may argue that globalisation has to some extent achieved that objective but I argue that globalisation has emerged on maxim of profit maximisation and have selectively eliminated the local enterprise.

    An attempt to bring about the world order has been made by forming the organisation like United Nations, WTO, IOSCO etc. but the moot question is whether the representation of the affected nations or societies is on equivocal footing. Moreover there are international donor organisations and reconstruction banks to ensure upliftment of “less equals” but are they really mandated to ensure that the decision taken at the various international forums are enforced while giving aid. In short we have taken the first step but for mankind to walk another one has to follow.

    I think we must stop here and ponder whether we are implementing quick fixes or build a long term strategy while we still have time to do that.

    Avneesh Pandey
    JBS (Technology Policy) 2008

  7. Richard Ossei

    Very interesting blog. I would just like to point out that the feeling that “the ship is sinking” itself is local and one that I sense is particularly strong in Western Europe. In many other parts of the world, there is no such sinking feeling.

    The proposal of the Queen would definitely meet serious opposition. Why not Nelson Mandela or Lula or Aung San Suu Kyi? Despite our best efforts, I fear we are incapable of thinking globally.

    Not only is global thought hard but long term thinking is even harder. For example nobody gets out business school without knowing how to operate the NPV/ Discounted cash flow machinery. This machinery asserts that only the insane would put huge resources into preventing something (climate change) which is not only far into the future but whose consequences are full of uncertainty.

    Some new analytical tools would certainly be a start to changing outlooks.

  8. matthewdbenson

    Interesting article – I particularly liked how you worded the intro, re flat world, black swans etc. (especially “Globally, humans are becoming increasingly interdependent. […] by minding my own business I am now inevitably meddling with yours”.

    Regarding your conclusion, I think I’ve always hoped that the UN, and in particular the UN leader (Ban Ki-moon, and formerly Kofi Annan) might play such a role as the one you desire (and to some extent the UN leader role already does, with the ‘needling’ effect also, but maybe with a slightly different scope to the role your describe).

    With respect to Sylvain’s comment, given the diversity in the world’s political approaches, I’m not sure the installation of such a global leader, or solving the world’s economic challenges should be described purely as a matter of ‘reinventing capitalism’ but rather something broader than, ‘above’ that. Nevertheless, I would agree that there is a valid argument for continued focus on ensuring that externalities are appropriately considered.

  9. Peter Baker

    Fantastic post. You are too negative about our current inability to solve the climate change issue.

    Our boat is not sinking. If you think the problems of the twenty-first century look difficult, take a look at the ones they were dealing with in the fourteenth century. Or, for that matter, the 1930s. Or even the 1980s, when tens of thousands of thermonuclear warheads were ready to annihilate civilisation with a few hours notice.

    Climate change is a new-generation, global issue, requiring the coordination of seven billion people. There are numerous novel cost-benefit decisions implicit to the problem. It is unsurprising that only 25 years after the issue was properly identified, we have not yet worked out a solution.

    Our civilisation is still young. But international cooperation has never been more comprehensive or sophisticated. Our understanding of environmental issues relentlessly improves.

    Planetary climate management was never going to be easy. We will get better at this sort of thing.

    Have a fantastic holiday, and keep up the excellent work.

    Very best

    Peter Baker

  10. Uchenna

    Interesting post, although I don’t believe we’re all on the same boat heading in the same direction, unless you look at the Western World has being the entire world. I think the Eastern part of the world is doing just fine in terms of economic growth, of course they have issues of poverty to deal with, but in the future I see these parts of the world controlling much of the planets wealth.

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