POINTERS TO THE FUTURE.

Democratic free-market capitalism is not 'the end of history' - it is 'work in progress'.
The current system of free-market capitalism has its roots in the industrial revolution, when the needs to provide money and credit in support of international trade and capital-hungry developments like canals and railways stimulated the evolution of markets for capital. The collapse of the disastrous Marxist/Leninist experiment in the Soviet Union has led to the optimistic idea that a version of capitalism based on the powerful economy of the United States had 'won' and would spread across the world, creating a uniform and beneficial economic template which would benefit all.
We have argued in the 'Reform' section that democratic free-market capitalism as postulated by neo-liberal economists and philosophers is a flawed system that is now probably causing as much harm as good.
Rather than being the 'end of history', capitalism is still work in progress. We argue this because there is growing concern that globalisation is damaging poor and emerging countries and that the socio-economic consequences of free-market capitalism are causing rampant inequality and unsustainable economies in the developed countries that spawned it.
A moment's reflection might provide some challenges to the prevailing neo-liberal dogmas:

• Free-market capitalism is based on the premise that the resources exist to sustain endless economic growth - we are witnessing early signs that this is not the case. Just think of global warming, energy supplies and the yawning divide between the rich and poor at global and national levels.
• Free-market economics has spawned widespread consumerism, founded on the notion that wealthy consumers are free (within the law?) to have whatever they want whenever they want it. In a sense, consumerism has replaced or elided with religion as the opium of the masses. But consumerism contains the seeds of its own downfall as whole populations begin to experience the consequences of rampant personal debt, ecological destruction and waste, greed and exploitation.
• 'Old style' capitalism is based on the notions that plant and physical capital assets were the main requirements for industry to succeed and that capital is a scarce commodity. To-day, human knowledge and endeavour are the most precious assets, and unlike unskilled labour, are in relatively short supply. Yet the financial system still rewards the suppliers of money with primacy of place and hardly recognises the value of scarce human skills - people are still rated as a cost with little recognition of their central role in business. The emerging knowledge economy will make the traditional investment markets progressively more obsolete, as they cannot cope with valuing human capital or the new, more 'virtual' forms of organisation that are emerging.
• There is considerable evidence of growing desires by many people to take back control from giant corporations and big government. The views of the populace in developed countries such as Britain are running strongly against remote control from above - and this extends to big corporations, government and the providers of financial services. This counter-force is growing in strength as it becomes clearer the extent to which people have been deceived about the responsiveness of big business, government and finance to their needs - customer service, 'choice' and the ability to shape what is offered from above are becoming revealed all too often as elaborate confidence tricks.
• The financial markets contain the worms of their own decline deep in their entrails. The suggestion that they are primarily animated by fear and greed is not very far from the mark. Global capital markets are not some value-free concept - they are populated by people, some of whom constantly remind us that human greed has no bounds. Many players in the markets are creaming off vast wealth for performance that is by and large mediocre. There is obvious collusion between the leaders of huge corporations and the investment markets to secure rewards that are in no way commensurate with their performance. The destruction wrought on industry by the financial markets and managers has deprived the UK economy of any presence in most high-technology industries. Most threatening of all, the development of rampant speculation in the forms of unregulated derivative trading and hedge funds will at some stage fuel another financial crisis, with the inevitable misery that will cause for millions of savers and pension holders.

Hope for the Future

It is almost certain that the current system of free-market capitalism will not be replaced by another monolithic philosophy. There is no successor to Marxism/Leninism on the horizon to challenge democratic free-market capitalism head-on. In any case, capitalism is not a monolithic system - Sweden, Finland, Norway and the Netherlands are market economies based on the conviction that the economy must serve society. Those countries have evolved sophisticated systems of capitalism that formally recognise the involvement and interests of society and people as stakeholders. Germany and Japan also have quite different economic cultures that recognise multiple stakeholders. China and India are also evolving forms of capitalism that will be quite different to the currently prevalent Anglo-Saxon model.

Future hope lies in diversity, not uniformity

So the first and most important message is the future will not see the end of history as a uniform capitalist system sweeps the world. It is likely that the history of the future will be complex and diverse - in fact, diversity will be the major theme.

Some hopeful developments

We have been spending time with a range of different organisations in the last year and have found a remarkably rich and varied world that lies beyond the depressing universe of big capital and large quoted organisations. It is almost certain that many of these will come to provide solutions to people's needs that are and cannot be supplied by conventionally financed private sector or government channels.
Here are some themes that we derived from our explorations:

• Networking and electronic communications is already enabling the transmission of knowledge and ideas out-with the control of government and large organisations. Some business academics are postulating that the growth of virtual organisations operating across boundaries that used to be controlled by large organisations will revolutionise future business and render the big monolithic organisation progressively more obsolete. We believe that at the least, large organisations will have to learn a wide range of responses that are currently outside their competence in order to cope with a hugely complex world. E-Bay, the on-line auction service is an extremely interesting example of a business with a strong commercial purpose that is also based on self-regulation by its customers. The system of co-rating each other by buyers and sellers seems to have virtually eliminated fraud, as the fraudsters get one chance only before being exposed by those with whom they have transacted and excluded from further transactions. A system of this kind could wreak miracles on the financial services industry!
• The growth of community-based and social enterprises is far greater in Britain and elsewhere than might be observed from the outside. Social purpose and community interest companies are springing up and growing rapidly. Such companies are supplying local and community based transport, waste management, recycling and many other services. They seem to encompass and successfully manage strong social purposes, local responsiveness and business-like efficiency without the imposed disciplines of the investment markets. The CEO of one large community interest company commented that the twin pressures of providing satisfactory services that involve local customers as formal stakeholders together with competitive contracting were discipline enough without the pressures coming from distant, uncaring financial shareholders. There is a huge opportunity for the growth of social-purpose businesses in which the key stakeholders are customers, communities and employees, rather than financial investors.
  Some of the features described can be detected in the evolution of Housing Associations into the providers of community regeneration services. We are beginning to see some housing associations providing rehabilitation for prisoners, running education services and schools, providing half-way accommodation for young people, together with work schemes and educational and skill courses.
  Housing associations are also big business, as the raise very large tranches of capital for housing development and act themselves as developers or work with commercial developers. They have commercial arrangements with their statutory regulator the Housing Association, but also raise loans and other forms of finance to fund long term development. They relate to central and local government and provide services to both. They are also regulated by the Financial Services Agency.
  The not-for-profit, third, or social sector as it is variously known, is rapidly catching up with corporations in productivity and sometimes surpassing them in creativity. It is also seeing rapid growth. A John Hopkins University study of the economies of 26 countries in 2003 found that in the mid-1990's the non-profit sector accounted for $1.3 trillion in expenditures world wide, employed 31 million full-time equivalent people and was growing fast - throughout the 1990's non-profits were taking on staff at more than twice the rate of the economy as a whole.
• A resurgence of partnerships and employee-owned enterprises. There are already shining examples such as the John Lewis Partnership, arguably Britain's most successful retailer over the long term. But there are many other organisations such as the fast-growing Loch Fyne fisheries and restaurants, which proudly emblazons 'an employee-owned enterprise' over its doors. There are also examples of longer term employee-owned enterprises, such as the Scott Bader Trust, a successful enterprise in the polymer industry that has been operating as an employee trust for years.
• The return of the family-owned business to the forefront of industry. Much has been written about the downsides of family ownership, but there are glowing examples of very large family companies that are leaders in their industries and have been for very long periods. There are indeed problems, but the better family companies have learned how to manage greed, involve outsiders to keep the bloodstock fresh and forge long term psychological contracts with their employees and customers in ways that no quoted company could. There are no reasons that family companies are naturally disadvantaged in relation to publicly quoted ones. The best family businesses combine a long-term outlook by the owners with a commitment to employees and customers that is difficult to match in the quoted sector.
• Vigorous and innovative medium-sized and smaller companies. A major strength of the UK economy is the smaller company sector, usually comprising companies that are privately financed through equity or loans. One of the strongest and best sectors lies in advertising and various media industries, along with design and architecture. The clusters of advanced industries that are spinning off universities also bode well for the future - Cambridge university science park pointed the way and many other universities are following suit. We have to hope that such enterprise will continue to receive government support, but also that smaller companies will be encouraged to engage in collaborative ventures - the success of the Dutch economy, based on a mixture of cooperative and competitive endeavour should be a beacon to us all.
  By the time some smaller ventures become large enough to require serious capital injections we hope that the investment markets will have become less of a killing ground for enterprise.
• Charities are extremely important suppliers of services to the community. Charitable organisations cover a huge spectrum of activities from advanced scientific research, humanitarian aid, campaigning through to the provision of a crucial part of the UK lifeboat and maritime rescue services. Some charities are beginning to contract with government and other agencies to provide services.

None of the forms of enterprise described above are the answer to the cancer in the bowels of big business - of insiders in the financial markets and management whose greed has fuelled a system that inhibits customer service, undermines the public service ethic and stifles innovation.
But in combination, the forms of enterprise described above can go some way to providing ethical services in a sustainable way.
More important, the development of new and innovative responses to meeting customer and community needs is likely to put the pressure on quoted companies to respond or lose business - thus it is highly likely that we will begin to see the evolution of hybrid forms of enterprise, involving partnerships and networks formed by community interest, charitable, local and national government and private companies. This could long term be one of the profoundest influences for change.

The problem of capital formation

There is still a very large problem to crack, and that is the supply of capital for business development, innovation and growth. This is the most intractable problem of all. There is good scope for efficient enterprises to grow out of their own cash generation, and this is a very useful discipline for established enterprises, as it encourages prudence and causes managers to think through their priorities very carefully.
Borrowing is also a viable means to fund growth and innovation - well-founded enterprises can borrow large sums at good medium-term rates.

The need

But the big hole in the middle is the availability of large sums of capital to sustain major organisations whose prime purposes are to benefit the community.
To be clear about what we mean: We believe that there is a crying need to nurture and support the growth of organisations that are very different to the joint stock company, which by law and long-established convention has the primary purpose of maximising the wealth of its financial investors. There is a huge opportunity for the formation of enterprises whose primary purposes are to serve the needs of society generally and communities in particular. In order to do this, enterprises need to be able to throw off the crippling yoke of the financial markets in order to focus on what matters most - serving the needs of customers and building a committed and motivated organisation to do it. This is axiomatic; organisations that fail to do these things will eventually fail. Capital is necessary for growing businesses, but it is only one ingredient, and of currently of prime importance only because it's supply is controlled by an oligopoly of global banks. This is not tolerable - the providers of finance have to be firmly led to their proper place as one stakeholder amongst others with no special pre-emptive rights.

Already many companies are springing up that aim to serve communities with transport, housing and regeneration and waste disposal and recycling. Other major ventures aim to address the problems of environmental degradation. But the field of opportunity should be far wider - why should social purpose companies not serve the community through the provision of banking and loan services, trunk and regional transport, pharmaceuticals and a whole range of products and services that are solely aimed at providing good value, ethical and moderately priced options for the community? Such companies are going to need capital to support growth and innovation, capital that will not come from the financial markets in their current form - there is too much baggage and far too many strings attached to the supply of such capital and crucially, there is always going to be a deep, irreconcilable conflict of interest between the primacy of investors' interests and those of communities.
The need is quite easily defined:
How to ensure the availability of large sums of long-term capital at reasonable rates from investment institutions that will take an involved and helpful part in the direction of the organisations in which they invest.
The key ideas are:

• Companies whose primary purposes are to serve the needs of customers, communities and society.
• Long-term horizons, starting with the belief that well-founded businesses can exist in perpetuity
• Involvement of investors in the direction and governance of the business alongside other stakeholders, in particular employees and customers.
• Moderate long-term returns, leaving adequate resources for reinvestment for growth and innovation.

The gap

The current investment markets are dominated by speculative, short term investors that gamble on movements in the share prices of companies. This applies equally to the quoted company equity sector as well as to private equity. Everyone is striving for excessive short-term returns and to outperform everybody else. Short-termism, greed and fear of failure are the dominant influences. They demand that companies be liquid, so that their value can be realised by selling the assets at any time. Companies tend to be valued as assets with a monetary value - any dimensions that cannot be numerically measured are regarded with deep suspicion.
But there is a spectrum of investment styles and objectives. Longer term value investing is a more engaged style, in which investors aim to hold shares for a long time and seek to understand and influence the strategies adopted by managers. A key investment criterion is the confidence of investors in the integrity and skills of managers. Warren Buffet and the very successful investment company Berkshire Hathaway are examples of longer term value investing. Long-term they have vastly outperformed the investment markets as a whole.
At the other extreme are venture philanthropists, who seek to encourage social entrepreneurship through investment in not-for-profit ventures. Venture philanthropists, like genuine venture capitalists (a rare breed in Britain) take a long term and involved stance to their investments, which are into socially useful ventures.
There are a small number of institutional investors, like the Charity bank, which seek to make capital available to community purpose organisations.
But there is a huge gap in the middle of the investment spectrum - there is a dearth of responsible long-term investors who will involve themselves with their investments and not require excessive returns.
We believe that there is huge scope for development in the availability of capital for socially beneficial enterprises. Two main developments are necessary.

• First, to clarify and enlarge the definition of social purpose companies so that the widest possible spectrum of industry types can be encompassed. Any company that includes the provision of socially beneficial products and services that involves its customers, staff and investors in its direction and governance should be included.
• Second, to make support and underwriting available to stimulate the sector. Significant tax advantages and a degree of risk underwriting will have to be made available to encourage the suppliers of capital to engage in the sector.
• One purpose of the social purpose venture funds should be to encourage companies in the private sector to convert to social purpose companies and privately held companies to seek responsible involved long term funding for growth.

In conclusion.

Traditional shareholder capitalism originally enabled owners of companies to gain access to capital - latter-day developments have seen the concept of ownership almost disappear with the appearance of institutional investors and the replacement of owners by professional managers. Now institutional investors are widely assumed to 'own' the companies in which they invest, and they falsely behave as though this was the case.
In a nutshell, we have moved from owner-managers hiring capital to institutional investors hiring and firing managers - somewhere in the background are millions of disenfranchised owners.

Future hope lies in new partnerships

We are postulating not ownership by one party or the other, but partnerships between the providers of capital, managers, employees and customers dedicated to developing businesses whose purposes are to enhance the well-being of communities and society. In such partnerships, all the partners would have rights, but no-one would have absolute primacy over the others.