Growth and Efficiency Argument, Deconstructed.

I am suspicious of the word ‘efficiency’ when it comes to business – big business to be more specific. There’s a level of honesty in small business that is absent in most of the big business models. Where new restaurants pop left and right, elbowing each other to deliver good food at reasonable prices, I don’t see this kind of eagerness to please a customer from an electric or a cable company or big pharma. What is their interest in going an extra mile for me? And why would they do that? Pleasing a consumer is no longer a goal of a modern day big business. These days, when I hear the word ‘efficiency’, usually from consultants and business majors, I don’t expect to hear about how they are going to devise new ways to deliver cheap and useful goods to a consumer. I usually expect to hear about a strategy of maximizing shareholders value – somehow a more sacred endeavor than merely serving their customers. The consultants never disappoint. In fact, customers of a monopoly have become merely means to an end, a stepping stone to the real endgame – profit at all costs. Peter Thiel, the founder of PayPal, knows this when he constantly encourages businesses to strive to become a monopoly, rather than wither under constant competition. In his view competition is bad. Nonetheless, we get fed endless stories about heroic entrepreneurs who risk their capital to deliver the goods to consumers, leaving aside the fact that those who are really risking their capital are idealistic mom-and-pops who have internalized this beautiful but obsolete narrative. The real entrepreneurs, the financial innovators in C-suites don’t take risks, because they know 1001 ways of unlocking the already existing value.

Great example of such ‘entrepreneurship’ is Valeant CEO Michael Pearson, a former McKinsey consultant of course, whose idea of efficiency includes firing scientists, cutting R&D funding, and overcharging consumers for some already existing run-of-the-mill drugs. Here’s one of my favorite examples of his value maximizing strategy:

“Meanwhile, patients were complaining about Philidor’s (Valeant’s subsidiary tasked with peddling Valeant’s drugs) business practices. To begin with, the co-payments on some of these drugs were absurd: $100 for an eight-milliliter bottle of toenail-fungus remover? Worse yet, Philidor was enlisting patients in an unadvertised “auto-refill” subscription program that automatically delivered more toenail-fungus remover and charged them ongoing co-pays to do it. Getting unsubscribed from this program was, according to patient complaints, almost impossible.”

And do I need to add that most of the company proceeds resulting from such racket are hidden in offshore accounts.

Who’s to say that this guy does not understand ‘efficiency’?

It is interesting that the modern-day imperative to be a good business in a broad sense hangs on a very shaky proposition of a CEO being a nice guy. The only incentive for a CEO to be concerned with broader benefits – to employees, customers, community as well as the shareholders – would have to come from his personal character and from his understanding of some ungraspable notions of ‘good’ that cannot even be measured properly. Contrast this esoteric feel-good mumbo-jumbo with solid, tangible notions of profit, stock-options, recognition, front-page media coverage and induction into the Big-Swinging-Dickhood and you’ll see that common good as a voluntary business proposition doesn’t stand a chance. As an aside, notice where Valeant CEO donated $30million. It’s Duke University, his alma mater. What, you thought he was gonna give it to the sick or the poor?

And this is exactly the weakest link that renders the whole efficiency argument impotent. The burden of proof that what’s good for the business is good for everybody else lays with the titans of industry. But it is never articulated. Exactly how and under what circumstances the good of the company or of the business translates into improving the lives of people? We are invited to merely assume that somehow those benefits make its way into the broader community but we’re never shown how. They say ‘employment’ but we see people getting laid off left and right. They say ‘new drugs’ but we see monopolistic price increases on already existing ones.

Efficiency, the way it is understood today in business circles, demands that customers and employees are thrown under the bus. It is time we redefined what efficiency should mean. Here I would volunteer my own definition.

Efficiency – a mode of management of a legal or physical entity that, in addition to turning a profit, seeks to increase the benefits to a greater society and environment and to minimize harmful side-effects and the waste of resources. Benefits to a greater society would include: full employment, livable wages, protection of the environment, promotion of public leisure.

Full employment, as some entrenched supply-siders would quickly point out, would not mean efficiency. To them it would mean a waste of resources (capital) on unnecessary employment of redundant staff. An argument like this exposes exactly why the current definition of efficiency is wrong. It is applied only to the capital, not to a person. Here capital is defended against being ‘wasted’ on bloated headcount. But is it wasted? I can suggest, via a crude back of the envelope calculation, that a company can hire ten people who work from 9 to 5, as opposed to five people who work from 7am to 11pm. The cost of changing the operation to the employer would not change, or change minimally. But the surrounding community would become healthier, more prosperous, with more time to pursue leisure activities. What I’m doing here is try to redefine the efficiency from a mode of operation that aims to stem the financial waste and protect capital to the mode of operation where capital serves the public needs. I think the latter is a more worthy goal in many ways (economic, political and moral) than the former. And if a company cannot operate in such a mode then it does not deserve to exist. Companies should work for us not only as consumers but as citizens and members of the community. Right now companies exist in some kind of entrepreneurial bubble, connected to a greater society merely through a profit while asking us to leave them alone merely because, look, they are profitable. Let’s stop measuring the virtue of businesses only by the profits they reap and the by the products they provide. Let’s begin to question the manner in which they provide it.

The above example doesn’t need to be taken literally. There can be nine people employed from 9 to 6, or eight people employed from 9 to 7. A generic optimization model will give a better answer than me. The point is that currently the capital – an abstract, a number, an electronic recording in a database – receives far greater reverence and consideration than the living humans. We have allowed an abstract to dictate our lives. We go through contortions to accommodate the capital at the expense of human needs, when we should be doing the opposite. Capital should serve our needs.

Growth is another favorite neoliberal notion that warrants scrutiny. Growth argument inevitably creeps into any economics discussion that is longer than one minute. Growth is implied to be a cure-all, an argument to end all arguments. When we hear ‘growth’ we rarely question the obviously good connotations of the word itself; it is a given that growth is good just as ‘food’ and ‘warmth’ are good. It is as if we are comparing growth to a lack of growth. But it is a mistake. Growth should be put in the context of public good as well. Today results of growth are not used for public good but are used to generate even more growth. It’s essentially become growth for the sake of growth. And again that perspective – the perspective of owners of capital – is the dominant theme. If we don’t see the fruits of such growth why should we be asked to respect it?

Furthermore, growth in one area often means a shortage in another. Growth in business may mean the deterioration of the quality of life for citizens or the environment, or the corruption of political processes. However, in this tug-of-war, business world vs public sphere, business always wins.

Here, a more cynical player would throw another growth argument’s red herring – a call to become a shareholder to share in on the growth. Leaving aside the obvious obstacle of many not having the money to become one, a person never plays only one role over the course of his life: one is never just a shareholder or just a worker or just a consumer. People straddle these roles all the time and an abundance in one area often means a shortage in another, bringing the net sum of benefits to zero. You gain as a shareholder and you lose out as a worker or a consumer.

I realize that trying to redefine the crystallized notions is a quixotic quest. It’s more of a philosophical argument beyond the immediate interests (and perhaps mental capacities) of business majors. As people who are accustomed to quick assessments and who constantly lack time and ability to contemplate, businessmen will think I promote socialism simply because I’m unhappy with the current business model. But who cares? We have to start somewhere.

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