Read my 19 May 2014 Guardian Comment is Free piece on mis-selling here

Read my article in FT Business Education 12 May 2014 here

Thomas Piketty’s magnum opus Capital in the 21st Century, with its charge that inequality in much of the Western world is reaching Victorian levels, has rightly pushed the subject to the top of the political agenda. Coincidentally with the publication of a discussion note by the IMF showing that reducing inequality not only doesn’t harm economic growth but indirectly encourages it, it puts a premium on urgently finding means of shrinking the gap.

Piketty proposes draconian taxes, including a wealth tax, a remedy that, as even the author concedes, tests to the limit the bounds of political feasibility. But an alternative to redistribution would be to start at the other end: by modifying the way the market generates inequality in the first place. That would have to pass by way of modernising corporate governance.

One of the differences between today and other periods of great inequality, such as the late 19th century, is the striking preponderance (60 to 70 per cent of the total) of corporate executives, or ‘supermanagers’, as Piketty calls them, among the new 1 per cent. This is a new phenomenon. Only since the late 1970s, when the staggering surge in executive pay levels began, has it been possible to get seriously rich by managing large established corporations. US CEO pay is now 331 times as much as the average American’s $35,000 a year and 774 times as much as the minimum wage.

Driving this rise is partly what Piketty dubs ‘meritocratic extremism’, a competition for wealth and status in which executives see themselves as hard done by (yes, you read that right) in comparison with those who inherit. Why should real wealth would be the sole preserve of the already capital-rich, they argue. Rewarding talent and energy rather than birth, stratospheric pay is in their view an aid to rather than an offence against social justice.

Piketty is right to retort that current pay levels have little to do with managerial merit (most large companies grow at roughly the same rate as the economy) and are a product of a tacit collusion between executives and boards, and boards and shareholders.

But we can go further. It is no coincidence that pay escalation began in the 1970s. In fact, we can date it even more precisely than that. As no less than McKinsey’s global managing director, Dominic Barton, told a US journalist recently, the moment Western capitalism started veering off the rails was 1970, when Milton Friedman famously declared that ‘the business of business is business’ and the only duty of the chief executive was to maximise value for shareholders.

That subsequently triggered the ‘revolution in management pay’ that Andrew Smithers describes in his recent book The Road to Recovery (more here). It consisted in devising schemes that incentivised managers to focus on shareholder value by paying them in shares and options, which now make up 83 per cent of total US top management pay. Friedman’s programme, as later developed by Harvard’s Michael Jensen and James Meckling and Chicago’s finest, has since then wormed its way into every interstice of the management edifice, including formal governance codes, to the point where it, and the assumptions that it is based on, are not only unchallenged but have become completely invisible.

Yet, as speakers unanimously agreed at a Brussels conference of legal and management heavyweights in February, all the taken-for-granted assumptions that underpin the cult of shareholder primacy and rewards for managers based on it are false. In law shareholders don’t own companies, which are separate ‘legal persons’; shareholders aren’t principals, and executors and directors are not their agents; directors’ duty being to the company itself, there is no fiduciary obligation to maximise shareholder returns; most shareholders are secondary investors (or just punters) and don’t provide capital for firms, and in any case in recent years the function of stock markets has been to extract capital via share buybacks rather than raise it. Finally, evidence is stacking up that shareholders have done worse under the shareholder primacy regime than they did in the postwar period when managers were less well paid and considered their job to be to satisfy the claims of all their stakeholders. Because of managers’ ever shorter time-frames (CEO tenure in the US is now down to four years), the attempt to align their interests with those of shareholders has had the opposite effect to the one intended, driving a wedge between them and investors who are in it for the long term.

The cost of un-mooring executives from the fortunes of their co-workers and those of society as a whole and attaching them instead to those of remote shareholders is incalculable, and we are still paying the price. The link with shareholder value is the hidden ratchet that continues to polarise incomes by pulling executive pay upward while forcing the pay of other ranks down. This is what it is designed to do, and Vince Cable’s pleas for restraint are so much whistling in the wind so long as it is left in place. Conversely, though, snapping the link at a stroke pulls the rug from under any need to maintain such discrepancies. There is no intellectual or empirical justification for paying a chief executive 331 times more than the average, nor is it an inevitable outcome of economic determinism: it is a declaration of ideology, pure and simple.

The question of great inherited wealth, sometimes amassed by dubious means (as Balzac, one of capitalism’s sharpest observers and much quoted by Piketty, unequivocally wrote, ‘The secret of great wealth with no obvious cause is a forgotten crime’), is another matter, in which redistribution no doubt will have a role to play. But regrounding executives in their own companies to cut pay differentials would be a huge and relatively painless first step towards a more equal society. As the Brussels conference heard, that wouldn’t even need a law change (it’s today’s received wisdom that has got it diametrically wrong), although it would require a rewrite of the governance codes. But at a time when at least some of those who have gained most from it are beginning to query the shareholder value doctrine (‘Shareholder value is the dumbest thing in the world,’ famously declared GE’s own arch-supermanager Jack Welch a year or two ago), along with McKinsey’s Barton and many of the most thoughtful business school gurus, politicians should should not hesitate to push at a door that is already cautiously ajar. Reducing income inequality at source would make capitalism work better by marrying market dynamism ‘to a sense of shared purpose and achievement’, to quote the FT‘s Martin Wolf, promote social cohesion and at the same time nip in the bud the growing danger of a politics in total thrall to corporate wealth and power. There are simply no arguments against it.

‘Management’, economist Andrew Smithers told the FT’s Martin Wolf over lunch recently, ‘is not an intellectually satisfying occupation. It consists of telling people things that you’re not sure about and they don’t want to hear. So I’ve been much, much happier since I ran my own business and so can do what I want intellectually.’

Smithers runs an eponymous boutique advisory firm in the City, and his agreeable scepticism about management at the personal level carries over into his professional analysis of its role in the economy as a whole.

To be blunt, Smithers believes that most economists, in love with mathematically modellable theory, have got the real economy dramatically wrong. There is no mystery about the snail-like recovery from recession, puzzlingly lagging company investment and productivity, and higher than predicted inflation, he says. The recession is structural, not cyclical, and it is caused by changed management behaviour brought about by bonuses and incentives.

The argument is straightforward and compelling, and as outlined at a recent seminar at the High Pay Centre (more fully developed in a book entitled The Road to Recovery) goes like this.

Over the last 20 years there has been a revolution in management pay in the US and UK. As we know, total pay has soared. It has also shifted from being mainly salaries to being mainly bonuses (83 per cent of the total in the US), the aim being to align the interests of managers with those of shareholders.

As intended, the incentives have sharply changed managers’ behaviour. Unfortunately, their effect has been to align the interests of managers not with those of long-term investors but predatory and ultra short-term shareholders such as hedge funds and private equity.

‘These incentives came out of business schools, whose understanding of options theory evidently wasn’t very good,’ notes Smithers briskly. ‘Options depend on volatility. So they don’t do what they were designed to do and are damaging for the economy as a whole.’

Under the changed pay dispensation, the key risk for managers is not getting huge bonuses in the short period (currently around four years) of their tenure. The easiest way to combat this risk is to engineer sharp rises in return on equity (RoE) and earnings per share (EPS), or shareholder value for short, by jacking up short-term profit margins and buying back shares. That of course risks undermining their companies by making them uncompetitive compared with rivals which do continue to invest for the longer term. Significantly, private companies, where the incentives are weaker, are investing at twice the rate of quoted ones, according to research.

As Smithers shows with a huge assemblage of charts and graphs (be warned: his book although fascinating is not an easy read), this is exactly what is happening. In the US and UK companies are awash with cash and business investment has collapsed. At the same time, companies on both sides of the Atlantic are now buying back their own shares at the ‘astonishingly high’ rate of 2-3 per cent of GDP.

Viewed through the Smithers’ lens, conundrums that currently stump orthodox economists – the tardiness and timidity of the recovery, the failure of quantitative easing to spur investment, and declining labour productivity – suddenly come into sharp focus.

Although the cost of capital is currently negligible, with near-zero interest rates and sky-high equity prices, ‘if management’s perception of the cost of capital is the cost of not buying back their own shares, then, of course, there is a large wedge between the perceived cost of capital to management and the real cost of capital to companies’. So QE has no effect on investment.

Meanwhile, the changed management behaviour also makes the disappointing productivity performance suddenly ‘highly explicable’. Because managers don’t want to invest in plant and equipment, which would drag down RoE and EPS in the short term, to meet any increase in demand they choose to employ more people. But without more capital, diminishing returns to scale push down productivity. QED.

Smithers is of course not the first to point out the problems the bonus culture poses for the economy. His findings chime with similar narratives from one or two other sceptical observers such as Bill Lazonick, who has found that in recent years many large US corporates have been spending more than their total profits on dividends and buybacks, a strategy which he dubs ‘downsize and distribute’ to contrast with the ‘retain and reinvest’ policies that drove allocation before the advent of the shareholder value ideology in the 1980s. Many others, not least the High Pay Centre, have done much to underline the harm that pay inequalities do to society and the fabric of the individual firm

But Smithers’ is the most detailed and thorough assault on the effects of incentives on the economy as a whole. Because orthodox economics ignores these effects, he charges, official forecasts are wronger than they would otherwise be, and economic policies are not only ineffective, they make the achievement of non-inflationary deficit reduction, and hence sustainable growth, much more difficult. Smithers is the first mainstream economist to say it straight out: dismantling the bonus culture that governs managers’ investment decisions is the single most important task facing economic as well as social policymakers in the world today.

McGill University’s Henry Mintzberg has always been the most grounded, empirical and ‘political’ (in the sense of situating business and management within the larger context of society as a whole) of management thinkers. He has written about what managers actually do (react and fire-fight mostly), the nature of strategy (emergent) and the effect (harmful) of conventional MBA courses. He believes unshakably that management is a craft to be learned by doing and careful reflecting, inseparable from its context.

In recent years, Mintzberg has become steadily more disturbed by the direction that both management and business have been taking – the power and arrogance of business, and the greed and indifference to others of too many managers.

These concerns come to full flower, as it were, in his latest work, an ‘e-pamphlet’ entitled Rebalancing Society – radical renewal beyond left, right and center. As the title suggests, it is an urgent call for the Western economies, and particularly the Anglophone ones, to rethink the free-market fundamentalism that is leading them towards a bleak future, if not outright disaster. If the final stage of bondage, he notes, is when people no longer recognize they are slaves, then we are very close to it. We don’t realise how much we are imprisoned by the economic structures and institutions that we have allowed to close in on us over the last half century.

Mintzberg’s counterintuitive central thought, and it’s a persuasive one, is that we have been disastrously misled by the implosion of the Soviet Union and the supposed ‘triumph of capitalism’. What brought down the communist regimes, he argues, was not capitalism but their own massively unbalanced societies. Hopelessly skewed towards the monolithic state sector at the expense of the private and ‘plural’ or civic sectors, the Soviet bloc collapsed under its own dead weight. Unfortunately, tragically taking talk of the end of history (or the ‘end of thinking’, as Mintzberg prefers to call it) at face value, the West has made the reverse mistake of fetishizing the private sector at the expense of government and the plural sector. The result, paradoxically, is exactly the same. As the economist J K Galbraith put it, ‘Under capitalism, man exploits man. Under communism, it’s just the opposite’.

The current imbalance is most extreme in the US. As Mintzberg notes, rebelling against authoritarian rule from Britain, the founding fathers took care to keep their own government in check with an elaborate system of checks and balances. ‘But this had the effect of weakening government overall, in favor of non-state institutions and individuals, especially those with economic wealth. By curbing power in one place, the constitution overconcentrated it in another.’

The balance was then well and truly tipped by the rise of the business corporation. Mintzberg pinpoints the grant of legal ‘personhood’ to corporations in 1886 as the first step on the route to today’s crisis, culminating in the Citizens United ruling of 2010 allowing corporate spending on political advertising. ‘[Personhood] has made all the difference. From the liberties for individuals enshrined in the American constitution sprang [today’s] entitlements for corporations,’ Mintzberg writes. In his landmark study of American society, Democracy in America, Alexis de Toqueville had written that the genius of American society was ‘“self-interest rightly understood”. Now the country finds itself overwhelmed by self-interest fatefully misunderstood’.

Mintzberg has been thinking about all this for years, and it shows. The text is full of nuggets – the hypocrisy of business urging governments to stop meddling in business while it spends ever more energy and time bending government to its views, the paradox of liberty leading to individualism whose externalities, both personal and corporate, overwhelm society and the planet, humans consumed by consumption, the commercial commodification of everything (as corporations become people, people become resources, the withering of the state, irony of ironies, under capitalism rather than Marxism)… There is an adrenaline shot in a sobering list of the social consequences of the Great Imbalance in the US, suggesting that the country is now ‘depreciating socially, and politically, and perhaps economically as well. Yet globally, it still continues to promote successfully the very model that has caused its own troubles domestically.’ There is an excellent, copious bibliography.

Where to look for solutions? Mintzberg is clear that radical renewal will not happen without the eventual participation of government and business: ‘Governments will have to receive clear messages from their citizens, and businesses must reject the objectionable doctrine that they exist for the shareholders alone.’ But being a large part of the current problem, they are too compromised to provide leadership, so much of the initial impetus must come from the plural or civic sector that de Toqueville set so much store by in the 19th century – ie us. Mintzberg insists that the emphasis on social movements to trigger some immediate rebalancing is not a search for an illusory ‘third way’, nor is he anti-business. What is needed is balance and a proper distinction between the three main sectors, none better or worse than the others, each essential in its own place. In this he invites comparison with another important Canadian thinker, the great Jane Jacobs, whose 1992 book Systems of Survival argued similarly for need to understand and respect the moral foundations of politics on one side and commerce on the other, the real disaster, she maintained, being to mix them up.

Mintzberg begins and ends his pamphlet with a quote from Tom Paine’s 1776 pamphlet Common Sense: ‘We have it in our power to begin the world over again’. If that is to happen, Mintzberg is right: the most important word in that sentence is ‘we’.

Camphill Village Trust (described here) is a poignant example of the damage managers do when when they focus on doing things right rather than doing the right thing. But in this CVT is far from alone: imagine the same effect multiplied many thousands of times over and you get an inkling of extent of the malady that is now crippling the entire public sector.

As it happens, that crisis is the subject of a report launched last week by Locality, a network of social and community enterprises, in partnership with consultancy Vanguard. Called ‘Saving money by doing the right thing: why local by default must replace diseconomies of scale’, it estimates at £16bn (conservatively) the savings that could be achieved not by hiring more people or building huge IT systems but by something much simpler: stopping doing the wrong things and doing the right ones instead.

As the report (disclosure: I helped edit it) shows, it’s a design problem. The wrong thing that the public sector obsessively pursues is a services model based on the industrial principles articulated by Adam Smith in his famous description of a pin factory in The Wealth of Nations. Smith calculated that by breaking the overall task down into many simpler ones (18 in the case of the pin), quickly trained workers using basic machines were up to 240 times productive than craftsmen who made the whole thing.

The big idea here is economies of scale: the more and faster you make something, the cheaper it is. Scale economies are irresistible to managers looking to cut costs and are almost never challenged. Yet their importance is constantly exaggerated, even in manufacturing. According to one accounting guru, ‘There is no longer any reason to rule out localisation of economic activity on the grounds of scale economies. Scale economy, beyond very small volumes, is a concept that should be discarded’. It is reported that under Prime Minister Tony Blair the No 10 Delivery Unit was commissioned to compile a report on economies of scale. It was never published, the strong inference being that nothing of interest was found – or nothing that chimed with the Treasury’s preferred narrative.

In fact, in services, as the Locality report makes plain, scale economies lead up a dangerous and costly blind alley. More equals less, and for two reasons. One, scale thinking blinds managers to the real costs of service. And two, they depend on standardisation, which is fine for pins but a disaster for service organisations. Unlike for pins, human demand for services is individual and infinitely varied. Force-fitting human-shaped needs into standardised pre-determined categories designed to minimise unit costs (think 10-minute GP appointments, 15-minute slots for home care or ‘Press 1 for X, 2 for Y’ etc) is doomed to jack up cost and multiply demand as people represent over and over to get their problem sorted.

The truly momentous finding of Vanguard’s research is that inexorably rising demand on A&E departments, GP surgeries, social care and even housing is a myth. On the contrary, underlying demand for most public services is both stable and predictable. All the ‘increase’ consists of what Vanguard calls ‘failure demand’, repeat calls caused by a failure to do something or do something right the first time. On analysis typically between one-third and two-thirds of all demand on services consists of failure demand – demand that shouldn’t be there.

Unfortunately managers focused on scale economies don’t see this, because they measure activity or unit costs: the cost of taking a call, making an assessment or performing15 minutes of care.

But unit costs are irrelevant to the real cost of service or care, which is from beginning to end. To minimise true cost, services therefore have to be optimised for end-to-end flow, too. There is a world of difference between the fragmented industrialised transactions that managers think of as care and what people need and want. As the report graphically illustrates – it is the first to do so – most of what people experience as care (and most of the work that service providers perform) consists of repeated assessments and referrals; sometimes clents never get beyond that, or only when their condition has become an emergency.

This is both grotesque and eye-wateringly expensive. In effect, we have the worst of all possible worlds: public and private-sector organisations competing to do the wrong thing better, with increasingly intrusive regulation struggling to prevent inevitable abuses. Commissioning for scale, as is currently encouraged, make things worse. Crushed between a rapacious private sector and state regulation of near Stalinist prescriptiveness social enterprises and charities like CVT struggle to keep a space free for diversity and innovationx. Private-sector prime contractors strip out most of the value, leaving crumbs for lowest-common-denominator subcontractors now detached from direct connection with their end-funders and commissioners.

However, like the myth of expanding demand, the other main finding of the Locality and Vanguard work also contradicts the conventional narrative of doom. It is that, as the report title suggests, doing the right thing is far more economical and effective than doing the wrong thing. It’s a secret well known to the quality movement but counterintuitive to those brought up on economies of scale: poor service is never as cheap as it looks and always more expensive than good, because lower unit costs are more than wiped out by the corrections, revisits and rework involved in putting it right.

Examples in the report demonstrate that effective, ie efficient service, is delivered one person at a time. The four design principles are:

• local by default, allowing people’s needs to be understood in context;

• help people to help themselves, fostering agency and responsibility rather than dependency;

• focus on value, not cost. Managing cost drives cost up; managing value – solving people’s real problems – strips away failure demand and brings overall costs down;

• accountability to purpose, not outcome. Measures related to outcomes and targets distort behaviour and hide failure. Measuring achievement agains purpose foster learning, improvement and innovation.

Redesigning service around these four principles as opposed to industrial scale economies reveals eye-opening truths. Rebalancing lives is often a matter of simple practical measures: a walk-in shower, better lighting and even velcro fasteners for buttons on clothes can be enough to restore confidence and dignity and snap faltering individuals out of the medicalisation process that currently leads to repeated A&E episodes with an inevitable end point in a care home.

When lives are put back on track, wonder of wonders, demand begins to fall. As the report demonstrates, a problem family is likely to be known to many agencies – schools, police, courts, housing, benefits, mental health, for example. Turning such family round has a demultiplier effect, reversing the vicious circle of increasing demand and turning it into a virtuous one. Getting children back to school may help obesity, alcohol and health problems. Bit by bit, whole communities can begin to regenerate themselves from within. Switching off demand is where the long-term savings come from, a powerful second whammy that follows from the simple, less costly solutions emerging from newly joined up service.

A community like CVT’s Botton Village has always instinctively worked to the guiding principles laid out in the report. Not perfectly, but in good faith it has over the years built up a sophisticated and delicately-balanced model of what the right thing looks like in terms of looking after other human beings. Perversely, it and other good organisations are now being pulled away from them and forced to do the wrong thing by current obsessions with scale and standardisation. Saving money by doing the right thing – isn’t that what the public sector should be about?

See my commentary on the Foundation Forum of 28 February 2014, ‘Insight or foresight – where does future success come from?’, here

Last week I visited Botton Village. Botton is an extraordinary 230-strong community of people with mental disability, some quite severe, and volunteer ‘co-workers’ who live and work together in a tiny village tucked away in the wilds of the North Yorks moors. Now 60 years old, Botton’s frugal model of self-help and reciprocal care has helped hundreds of residents live lives of dignity and value, and inspired and attracted volunteers from all over the world. It is also a poignant test case for today: can its unique therapeutic community survive today’s rigid, rule-based public-sector management model?

Botton is the jewel in the crown of the Camphill Village Trust (CVT). Camphill was founded in Scotland at the end of the war by a group of Austrian refugees from Nazism, chief among them paediatrician Karl Koenig, basing themselves on the teachings of Rudolf Steiner. Some of Steiner’s views are controversial, but what is not in doubt is the record of the experimental communities the refugees set up to offer education and a shared life initially to handicapped children, then when they reached school-leaving age to adults as well. Camphill has sprouted more than 100 fellow communities and imitators all over the world, including one near Moscow; families wanting more for their relatives than the by-the-numbers care on offer in conventional care homes ‘would walk over glass’ to get them taken in, as one parent puts it.

As developed over the years, Camphill communities are a marvel of economy and balance. They are autonomous and self-managing, with the unsalaried volunteers at their centre. Living expenses are shared: everyone, regardless of disability, is expected to contribute, and the community in turn sustains and develops them in a spirit of brotherhood and equality. There is a strong work ethic. Botton, formed from a small estate made available and later made over by the Macmillan family in gratitude for the new life given there to a family member, has five working farms, all organic and biodynamic, workshops and its own school. The Camphill ethos doesn’t suit everyone, so after a month’s trial, new residents and their housemates get to choose whether they stay or go – but those who have found their place there thrive in its accepting embrace.

Over five decades Botton and CVT’s several other UK prospered, prudently husbanding resources and adding new properties to the original Botton base. Botton was the subject of an admiring TV documentary, and in 2005 won the Deputy Prime Minister’s Award for Sustainable Communities, which singled out its ethos of sustainability and mutual respect.

But while Botton went its own idiosyncratic way, the world around it was changing. The agenda in social care swung decisively towards personalisation, choice and ‘independent living’. The resulting suspicion of community care has been magnified by a series of high-profile scandals culminating in the notorious Winterbourne View. Risk, safeguarding and compliance with procedures have become the prime indicators of ‘quality of care’. Increasing suspicion of communities like CVT was matched by tightening public funding.

For Botton, too intent on its own affairs to pay much attention to the changing environment, it came as a rude shock when concerns were raised over its unconventional management and governance arrangements, followed in 2011 by critical reports from its funders, North Yorks County Council, and the Care Quality Commission. Caught on the hop, and fearing a drying up of funding, the charity’s board of trustees were panicked into the drastic step of bringing in a CEO and management team with NHS experience with the aim of reassuring funders and securing compliance with the regulatory regime.

The result has been a train wreck. For a finely balanced constitution that had been deliberately set up by refugees from the Third Reich to dispense with strong central authority, inserting a layer of top-down management was like injecting it with a foreign body. Long term co-workers, the heart and soul of the organisation, have felt themselves sidelined and downgraded by the import of paid care workers who have taken over some of their functions. Being volunteers rather than employees, they have no employment rights, and several have been suspended in controversial circumstances, being required to move with their families out of their homes of many years with minimal notice. Many have given up and moved on, leaving several of CVT’s communities with no or only vestigial co-working – in the view of many an abandonment of the ethos and way of life that they and their relatives signed up for. Even Botton, the Camphill stronghold, has suffered an exodus of residents and co-workers; together with a funding standstill by the local authority, the result is a Botton population that has shrunk by one third since 2011. Some of the workshops have shut, a full-time medical centre lined to the local GP surgery has been mothballed and there are fears for the school.

Most affected of course are the villagers. The ‘decarceration’ movement that gathered pace in the 1990s was rightly concerned with replacing dependency and ghettoisation in giant institutions with self-reliance and ‘care in the community’. But many see life at the now politically correct opposite end of the spectrum as just as restrictive, only in a different way. As former patient and social historian Barbara Taylor writes in her moving The Last Asylum, in the name of ‘choice’ and ‘independent living’, many mentally disabled have been shunted off into bedsits and hostels; nominally ‘in the community’, many live lonely lives with a TV their only company. Many see something similar happening within the CVT communities, where parents report villagers putting on kilos as they ‘choose’ Mars Bars over healthy house meals and decide to stay in bed rather than go to work in the mornings, and disturbed behaviour as individual TVs replace community life and interaction. ‘Another name for independent living is enforced loneliness’, says one insider grimly.

CVT is now facing a full-blown financial and identity crisis. A climate of fear and suspicion rules with tight-lipped managers on one side and many co-workers, residents and their families on the other. Family members say they are frustrated by a lack of dialogue with managers and the latters’ failure to come clean about their strategic intentions, while dire fears are stoked by the removal of co-workers from the board of trustees in favour of NHS administrators and the unpredictable and apparently arbitrary opening and closing of the membership lists. Both inside and outside, concerned observers fear that in the name of regulatory compliance, and with the tacit consent of the trustees, the new regime is bent on ousting the co-workers and turning the CVT communities into the kind of care homes they deliberately decided to keep their relatives out of.

The Botton experience underlines one of the lessons of Taylor’s book: in difficult and uncertain areas like mental health, management absolutes should be handled with as much care as high explosive. One generation’s political correctness all too often turns into the next one’s anathema. Learning proceeds from difference, as the great anthropologist Gregory Bateson put it, and there is no such thing as ‘best practice’, only hypotheses to be humbly refined and modified in the light of experience and experiment. For any organisation like CVT, human difficulty and dilemma are part of daily life, but it has experienced none of the scandals of the regulated sector. Indeed, it is now becoming clear that regulation is part of the larger problem. More alternatives like Botton are needed, not fewer. And respect for the evidence that for many people a caring, structured community provides a better and happier life than a flat on their own, whatever the dogma of the day says.

Silicon Valley is the envy of the world. The flywheel of US capitalism, it hums with energy, ambition and wealth that are magically transmuted into a seemingly endless stream of start-ups that want to change the world.

But what if is it’s gone into reverse?

The Financial Times recently carried two op-ed pieces, one querying the direction of capitalism and the other querying the direction of Silicon Valley, on the same day. They made a hint of a link between the two. But it’s time to spell it out.

To be plain, the real issue that’s emerging from Silicon Valley is not the gentrification of San Francisco and the disdain of überrich nerds for the area’s ordinary inhabitants. It is that the Silicon Valley innovation machine is increasingly focused on enterprise that is at best socially useless (does anyone need another social network or photo-sharing app?). You can go further. Scratch the shiny high-tech veneer and the Big Tech companies that we are in awe of are increasingly looking like something much grubbier, sucking sustenance out the economy rather than enriching it. Like the banks, in fact.

The engines driving the rogue flywheel are Moore’s Law, a polarising economy and a perverted sense of corporate purpose.

Moore’s Law, whose consequences continually take us by surprise, describes the exponential growth of computing power, doubling every 18 months for the last 50 years. It has given us the internet and Big Data; coming soon to a fridge, thermostat and waste bin near you, the ‘internet of things’ which will turn homes and indeed whole cities for good or ill into interconnected devices.

Meanwhile, thanks again partly to the internet, we live increasingly in winner-takes-all economies. Globalisation and naked power have help to strip out self-correcting feedback; for winners and losers alike, the process of winning or losing has become self-reinforcing.

Finally, partly as a result of the exercise of this taken-for-granted power, the tacit assumption has grown up that the economy exists to serve companies, rather than the other way around. Profit has become its own justification. But the decoupling of corporate from the wider social welfare has had consequences that are only now becoming apparent. One of the most important is the wholesale outsourcing that has savagely depleted what Gary Pisano and Michael Shih call the ‘industrial commons’, the technological and institutional infrastructure that supports innovation. The result is a hollowed-out economy in terms of both techology – Amazon couldn’t build a Kindle in the US if it wanted to – and, increasingly, employment.

To this fermenting brew Silicon Valley has added its own special, and diabolical, ingredient. Ironically, it stems from the hippy-libertarian mantra that ‘information wants to be free’. Dutifully following that idea, Google’s Sergey Brin took a momentous sideways step: by giving away the service and making money from advertising, he reasoned, he could have it both ways – information stayed free and he could have his money-making business too.

As it turns out, despite Google’s ‘Don’t do evil’ mantra, this was a pact with the devil. At a stroke, making information free altered the relationship with users from customer to product: Google’s (and Facebook’s, Yahoo!’s and Twitter’s) real customers are advertisers to whom they sell personal data gleaned from us as users. In effect, the business model of some the most powerful companies in the world is surveillance. (As The Observer’s John Naughton has noted, tapping into the servers of the internet giants ‘must have seemed a no-brainer to the NSA. After all, Google and Facebook are essentially in the same business’.)

The second consequence, warns internet seer and virtual reality pioneer Jaron Lanier, is that it bodily removed whole swathes of information from the formal, monetised economy and dumped it in the informal one where the only entities that could profit from it were the owners of the massive computers where it was centralised. The first casualty was the press – why would anyone buy a newspaper when you could read it free on Google or Yahoo!? But consider also something like Google translation.

Google translation is powered not by a marvel of artificial intelligence but by anyone who has ever translated a phrase, article or book from or into a foreign language. A giant mash-up, it works by comparing all the similar translations it can find and choosing the most appropriate. In other words, it takes the real work of human translators and moves it ‘off the books’. Writes Lanier: ‘The act of cloud-based translation shrinks the economy by pretending the translators who provided the examples don’t exist. With each so-called automatic translation, the humans who were the sources of the data are inched away from the world of compensation and employment.’

In this way the internet companies are benefiting from shrinking the economy across a whole raft of the ‘creative industries’ which were supposed to thrive online – publishing, music, video, photography – but whose denizens now find themselves subsisting on the margins of the paid economy. At its peak Kodak employed 45,000; when Instagram, today’s photography poster-child, was bought by Facebook for $1bn, it had a payroll of 13. Even computer jobs are in retreat as the benefits of economic activity accrue to a tiny number of massive concentrations of computer power at the apex of internet commerce.

If anything, the process is speeding up. At Davos, no less than Google’s Eric Schmidt warned that automation was eating its way up the food chain. ‘The race is between people and computers, and the people need to win. I am definitely on that side in this fight, it is very important that we find the things that people are really good at,’ Schmidt said, which in the circumstances is a bit like a fox simultaneously licking its lips and sobbing over the mysterious death rate of chickens in the hen coop.

Many, including Lanier, believe that part of the answer to what he sees as the hijacking of the internet must be to give individuals property rights over their personal data. Without such a reversal, he foresees the demise of a middle class steadily squeezed out of employment – and, when the 1 per cent can outspend the rest of the 99 per cent, the end of democracy too. Another, and critical, part is to challenge the assumption that what’s good for business is automatically good for society and the relentless economic and technological determinism that go with it. Otherwise, unthinkable as it might sound, Silicon Valley could turn from miracle into the economy’s black hole – a zone of (highly profitable) economic destruction from which only a fortunate 0.01 per cent get out alive.

Read my article on why it’s time to break management’s cringe to economics in FT Business Education, 27 January 2014, here