Regenerating the Nation

REGENERATING THE NATION -

A historical perspective, and the value

of scenario thinking during times of transition.

(A talk at the special symposium on social exclusion,

organised by the National Housing Federation

Elvetham hall, Hartley Wintney, Hamps.

12 and 13 November 1998)

Also in business there is fear for exclusion. Admittedly, a different form of exclusion than the one which is the subject of this symposium. But, maybe, there is a link and that is what I would like to explore with you this morning.

The fear for exclusion in business goes back some 20 years. It was felt by companies that make “things”. In the late Seventies, the talk had started about the “Post- industrial Society.” Initiative VOLVO -> Tällberg: “”what does it take to be a successful business in the post-industrial society?” or, rather, the negative version of the same question: “Are makers- of - things going to get killed or become 2nd rate citizens?” - “Are we moving, at least in our Western, developed societies towards a world of “services”, rather than industrialised products?”

Over the past 20 years, the question has not disappeared, although the words have changed: instead of “post-industrial society”, we now talk about the “Knowledge Society” or, popular in the USA, about the “New Economy.”

So, what are the distinguishing characteristics of this “New Economy?” Are there fundamental changes with the previous Economy, such that it could lead to the “exclusion” of industrial companies? To begin to answer these questions, I propose that we look at the manner in which we produce goods and services, rather than at the question whether we will produce goods or services. Of course, we will always produce both goods and services, although the proportion of services in the total packet is certainly increasing.

Allow me to use the language of Economics to explore those two questions “How do we produce goods and services?” and “Is the manner in which we do that nowadays different from yesterday?”

The science of Economics defines the production of material wealth (i.e. that what we do in business) as a matter of combining three production factors:1) natural resources/ land, 2) capital, 3) labour.

What the handbooks of Economics normally do not point out is that, over time, these three production factors did not have equal weight in this process of producing goods and services. Here historians can help us.

In our part of the world, a 1000 years ago, mankind produced its material wealth in a way that was strongly based on land and natural resources. That had consequences, economical, managerial and societal.

With very little capital involved, productivity was low. Increasing production was mostly a matter of increasing the land. Since land is a finite production factor, this led to “managerial methods” which were steeped in violence and the subordination of labour (feudalism up to slavery).

The societal consequences were very visible in Mediaeval society:
Those who had land were rich and powerful and
those who had not , were poor.

Starting in Northern Italy and Flanders, some 500 years ago, two surprising developments took place (see Fernand Braudel “Civilisation and Capitalism 15th to 18th Century”):
the production of goods and services started to exceed the immediate needs for consumption. In the language of Economics that meant that in those societies “savings” (= the difference between production and consumption) became available.

and the second surprise was that these savings found their way into the productive processes of the time, rather than into the life-style of the ruling land-based elite.

That had consequences, economical. managerial and societal.

It suffices to look at the paintings in the Western European museums to see the economic consequences:
ships became bigger, voyages became longer, mines deeper, and machines were added to the textile ateliers that were replacing the workshop of the mediaeval tradesmen.

Adding capital to natural resources increased manifold the output of material wealth. Capital is not a finite production factor. Its stock expands to the extent that people keep saving. The increase in output of material wealth, obviously, helped to augment these savings. This became a virtuous circle. Savings made available for productive processes increased output which in turn allowed to augment savings, etc.. Yet, the demand for capital soared even higher and exceeded quickly the available savings. Capital became the scarce production factor.

This increase of productivity as a result of adding capital to the production of goods and services was enhanced by a quantum jump in technology. The invention of the printing technique meant that the societal propagation of the accumulated knowledge of mankind became more precise and fifty times faster than before (Michael Rothschild “Bionomics”). Not only did this help to spread the knowledge of more productive wealth producing processes, but it played an important part in fomenting the societal changes (e.g. the Reformation) which helped society to move out of the feudal period.

For the leaders of the (mostly family) enterprises, capital was their most critical success factor . It meant that their managerial priority shifted away from land and the optimisation of capital became their top priority. This had two aspects:
they had to make the maximum use of whatever capital was available to them in order to be competitive

and they had to make sure that the capital suppliers (whether that was their family or outsiders) received a maximum remuneration in order to maintain access to capital/savings sources.

The societal consequences were equally fundamental:
to begin with, it created new social layers. Those people who had savings or access to capital became rich and powerful and those who had not were the poor of the nascent Capitalist era. Compared to the land based society, there were many more rich, both in absolute terms as in relative terms. Still, over time inequalities in society became unacceptably high. It took about three hundred years before these inequalities were addressed in some way by Socialism and Communism.

The Capitalist era was one of great achievements for mankind. It made possible the discovery of the globe, the sky, the human body and the human mind. It created the conditions for the technological inventions of the industrial capitalist age, but large swaths of the population, remained excluded, also in the countries that had succeeded to make the transition from land-based to capitalist society.

This situation lasted some 500 years. It probably still existed in the immediate aftermath of the 2nd World War. But then from the 1950’s onward, triggered by the Marshall Plan, large parts of the world (Western Europe, Japan and North America) began to accumulate savings at a rate until then unsurpassed. Year after year, decade after decade, these economies saved between twenty and thirty percent per year of an ever growing GNP.

Most of these savings were in the form of institutional savings. They accumulated in pension funds, insurance companies and banks of all types and descriptions, creating a financial resilience of these institutions as had never existed before.

Individual financial resilience increased in parallel. It does not mean that there are no more needy people in these countries, but previously unimaginable wealth has built up in the hands of individuals. An April 1998 study by Gemini Consulting and Merryll Lynch estimates that individuals with investable assets of US$ 1 mln or more now control more than £10 trillion (10 to the power 12!) worldwide (Financial Times 29/4/98). And in Germany alone, according to the economist, Prof. Manfred Perlitz, DM1 trillion will pass by inheritance from one generation to the next during the current five years from 1997 to 2002.

Both the institutional and the individual stocks of savings have grown over the last fifty years. At the same time, the velocity with which this money is circulating over the globe has increased. Firstly, by the abolition of capital controls in the high-saving countries. No longer is a permit of the National Bank required to transfer money from one country to another. Secondly, improved (tele) communications procedures have increased the speed with which money circulates. Estimates of the amount of money passing through the three money switching hubs (Tokyo, London and New York) talk about a trillion US$ each per 24 hours. As every economist will explain: Total money supply = Stock times velocity. The outcome of this multiplication, at some time since the 2nd World War, led to the situation in which money supply came to exceed demand or, in other words, the world’s capital market turned from a sellers’ market into a buyers’ market.

This means: Capital is no longer scarce. Money, as the expression of savings, is now a commodity like iron ore. It has a market price and anyone who can afford to pay that price can have access to as much money as he or she thinks she needs. The evidence has been with us since the early 1980’s:

Banks have become aggressive marketers of money. New bank departments and new “products” are expressions of a seller pushing more and more into a buyers’ market through packaging and repackaging of the product. Many banks have succumbed to the temptation to move into riskier markets, as have many individuals (even those of a non-gambling nature) who consider that they have money- to- spare to put into high performance/ high risk applications.

Banks are, even, competing to supply individuals. Rarely a month passes that a sizable part of the UK population does not receive an invitation to accept yet another credit card, to (please) use it and to (please, please) not repay the balance!

The world’s stock of savings has not simply accumulated since the 1950’s. From time to time, some of it has disappeared. Firstly, the cyclical nature of the economic system produces shocks which lead to capital destruction. But also, sizable chunks have been lost or destroyed through gambling, dishonest behaviour, bad banking practices etc.. Since the early 1980’s the world has seen quite a number of both events:
1982Mexico Crisis
1986Oil price collapse
1987Crash at the stock exchange
1993Another Mexico Crisis
1997The East-Asia Crisis

Several of these capital destruction events were of a magnitude- in real terms- as to be comparable to the 1929 Crash at Wall Street which produced in its wake one of the deepest depressions the world has ever seen. Yet, of late, all that seems to happen is that the financial world shudders, rattles a little to then have, inside 12 to 18 months, its “liquidity”restored” - which is the jargon for saying that fresh supply is actively looking for attractive markets. Much credit is due to the vigilance and expertise of the world’s supervisors of the financial system. At the same time, the ease with which individual financial institutions “write down” large losses and live to tell the story, point at a resilience that was unimaginable to the generation of our fathers. The accumulation of capital since the 1950’s has been of a magnitude such that

capital is no longer scarce. Its easy availability means that it is no longer the production factor, critical for the success of a producer of goods and services. This means that in economic terms- if not in political terms- the Capitalist Era has finished.

In economic terms, we have entered a transitional period. This has profound consequences, both for business as for the social exclusion problems. With capital easily available, the critical production factor has shifted not to “labour”, but to people. Knowledge has displaced capital as the key to corporate success and knowledge is carried in the heads of individually recognisable people. We live, however, in a period in which the language, the traditions and, most importantly, the Law still speak about business in the terminology of the capitalist era. Nevertheless, evidence is mounting that capital is loosing its significance for the success of business and that knowledge and the institutional ability to apply knowledge is becoming critical. Firstly, there is the rise of the capital-poor/ brain-rich companies and partnerships which have been climbing the Fortune 500 ladder over the past decade- the Microsofts with hardly any capital on their balance sheets, the international consultancy partnerships with no capital, no shareholders, but with 45,000 people on their payroll. Secondly, even the old type of capital-rich company, such as steel-, automobile and oil firms, need much more knowledge embedded in their actions and in their products than they did some 20 years ago.

Again, as in the 15th century, the shift in the dominant production factor is accompanied by a quantum jump in technology. This time the micro-chip revolutionised the societal propagation of knowledge. Modern information and communication technology increased by many magnitudes both the precision and the speed with which the accumulated human knowledge is disseminated across the globe.

And again, as in the 15th century, the economical, managerial and societal consequences are fundamental. Again new social layers are forming and the nature of social exclusion is changing:
in the world of knowledge, wealth and power are shifting to those with access to knowledge- the New Rich,
whereas those who have no access to knowledge or do not wish it, risk becoming the New Poor

Compared to the capital based society, there may well be many more rich, both in absolute terms as in relative terms. Still, the inequalities between them and the New Poor in society will lead to new tensions, especially if the fault line would be between the sexes with the females more inclined to seek knowledge and education.

Resolving these tensions will not be easy. Of course, we will have to continue the redistribution policies of the previous period, but we must realise that this cannot give a complete answer in the Knowledge Society. Unfortunately, in that Society there is no simple answer. Although nothing is easier, at the same time, nothing is more difficult than to redistribute the scarce production factor of today: Knowledge. It is easy and cheap to give. The problem with Knowledge redistribution is not in the giving- it is in the receiving.

We have not yet digested the real meaning of these consequences. Society continues to speak of its Poor in terms of the Capitalist era: unemployed, jobless, poor in money. We have no language yet with which to express the poverty of the newly excluded: those who have no access to knowledge and education or do not want it. The Swedish sociologist, Hans Zetterberg, spoke about them as “the Chaotics” and estimated already 25 years ago that in Sweden this new class of socially excluded people could amount to 25% of the total population.

Also in business, the shift to knowledge has monumental consequences. Managers have to change their priorities. Instead of running their companies to optimise capital, they must find a way to optimise people. Or to put it in other words, the managerial priority is to create a company that is learning faster and better than the competition. This means that managers must maximise the brain power in their company. One obvious way to do so is to increase the recruitment qualifications. There is circumstantial evidence that this is already happening: 16 years of formal education are required to get a job at the assembly line of the Nissan factory in Tokyo and, some years ago, the Dutch Steel works fired 3000 people, at the same time recruiting 1200 much higher qualified staff. Clearly, this is one way in which the new social exclusion is taking place.

Both in business and in society at large we are now in this transitional period. Contradictory signals are reaching us. Our thinking has been formed in the previous period. The language in which we talk to each other does not fit the new reality. Some of the consequences of the shift that is taking place are difficult to grasp. So, how do we develop a new language and how do we think the unthinkable?

Many years ago, Herman Kahn of the Hudson Institute in the USA developed a method to do just that. His new reality then was the nuclear bomb and the unthinkable in those days was a nuclear war. To get society and governments to deal with that new reality and to develop a new language in which to talk about it, Kahn used the scenario technique. The word “scenario’ comes from the film and theatre world. A scenario is the elaboration of a plot.Scenarios are internally consistent stories of possible futures. You can talk about them and explore the different consequences of the different stories. In so doing, you develop a new language and get used to thinking about different futures.

Scenarios are a very different way of dealing with the future than we normally do. In business we used to deal with the future mostly by trying to predict it. I believe that it is not much different in government. The trouble with predictions is that it is very difficult to get them right and it is very important to get them right, because the prediction is going to be the basis for our action. That is why group discussions about the future in a predictive mode are rarely satisfactory. Nobody knows the future, so the argument tends to be resolved by authoritarian force or by exhaustion. But even if there was anybody there who really did know the future, it is doubtful that this would lead to better decisions.

The Story of the Mayor of Rotterdam:

we cannot predict the future, but even if we could, we would not dare to act.

So how do we deal with the future, if we cannot predict? A break-trough happened when we came across the work of the Swedish neuro-biologist David Ingvar. Ingvar and his colleagues at the University of Lund had addressed the question: How does the human brain deal with the future? They published the results of their research project in 1985 in an article called : “Memory of the future”; an essay on the temporal organization of conscious awareness (Human Neurobiology (1985) 4: 127- 136).

You will not perceive anything, unless it is relevant for an option, you have worked out

The Corporate one-track mind sees little, hears little.

It is at this point that scenarios come into their own. Scenarios are always plural- they have no probability attached to them. They are the scenery into which a team, any team can walk, asking the question:
What would we do, if....”

In the ensuing discussion, people find the new words and begin to see their options in an, until then, unthinkable future. Having enriched their “memories of the future”, they will now be able to see the signs of change coming from the world around them. Scenarios change the shared mental maps of teams and gives them a new language to find new approaches to the challenges of the transition period in which we are presently living.

Guildford, November 1998