Wednesday, October 8, 2014

A critique of traditional economy

In an article in the NZZ of April 26, 2014, the editor Andreas Uhlig reported that Andrew Haldane, executive director of the Bank of England, has criticized the foundations of contemporary economy fundamentally. Haldane stated that “the unrestrained self-interest of individuals and companies, greed and unrestricted competition… have harmed society and made it poorer”. He made a case for “rethinking some of the central components of contemporary economy”. This would lead to a redefinition of the basic assumptions and insights of economic theory, and it would also have far-reaching consequences on the level of individual companies and for the Theory of the Firm.  

This critique, formulated by such a renowned figure, is of great interest for our institute, since we have aligned our own research of over ten years towards such a critique of the basic assumptions of the Theory of the Firm and of corporate strategy.
In a series of publications, particularly in our book Stakeholders Matter - A New Paradigm for Strategy in Society (1), we have presented our insights, which have also been discussed widely at international congresses.

In the spirit of Haldane’s criticism, we put forward the following basic assumptions:
  • The company shouldn’t be considered as a purely economic unity of action. It also forms an integral part of society. In addition to economically efficient behavior it must therefore also take its social responsibility seriously. A company’s strategy should incorporate the social aspects as well.
  • Companies create value only thanks to the commitment of people with all their peculiarities, employees as well as stakeholders. To understand the behavior of companies, the concept of the “homo economicus” who only pursues his own interests is shortsighted and can lead to managerial misconduct.
  • The performance and value creation of a company increasingly rely on the well-developed knowledge and skills of people. Today, knowledge is often a more crucial factor for innovation and sustainable success than capital. More than the equity investors it is therefore the employees and stakeholders who own crucial resources.
  • In order to understand the successful strategic behavior of companies, they cannot be seen as autonomous, competing decision-making units. They are increasingly part of manifold stakeholder networks. In such networks, value creation implies more than unconditional rivalry as the primary principle of action for managers. The model of the sovereign all-rounder has lost its value for contemporary management.
We believe that these revised basic assumptions for strategic management on the level of the company can contribute to a renewal of economic thinking postulated by Haldane.

(1) Sybille Sachs, Edwin Rühli (2011)"Stakeholders Matter - A New Paradigm for Strategy in Society", Cambridge University Press.

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