Austerity to preserve the status quo is like trying to save the dinosaurs – dumb. But even if you accept austerity, slashing from the top, as the government is doing with the NHS, the police and almost every other public service, is super-dumb: a sure way to raise costs, worsen service, or more likely both.

Costs are what worry politicians and most managers most, so focusing on them seems natural. But it is actually back to front. Paradoxically, managing cost drives cost up. The promise that cuts will leave the NHS front line intact is meaningless, as we are now beginning to see. The result of deciding the amount of cuts first and fitting the organisation to it is never ‘more for less’, as politicians hope. It is always ‘less for less’ at best – and ‘less for more’ at worst.

Why? Because cost, like profit, is a consequence – an effect, not a cause. Costs are low if you do something well, high if badly. Those who didn’t know already should have learned from the crisis that treating profit as an end in itself and managing it accordingly is not a trivial error. Managing by cost is as destructive as managing by profit, and for much the same reasons: it distorts priorities and destabilises the system, making it harder and more expensive to manage.

Ironically, politicians are absolutely right in their intuition that most public-sector organisations are dismally inefficient. Unfortunately, they don’t realise that the private sector is no better. The issue isn’t public or private, market or state. It’s how work is designed.

Thus, while a typical manufactured product may take weeks or months to complete, it spends only a tiny fraction of that time actually being worked on. Most of the time is spent waiting to be pushed in batches through the next process or being taken in and out of storage.

The same is true of services, which have adopted the same clapped-out model. Dealing with a standard mortgage takes an hour of actual work. Yet by the time the application has been sorted, scanned, sent to a back office, processed, returned to a front office, checked and despatched to the customer, several weeks will have elapsed.

IT, outsourcing and shared services have made only minimal difference to this dismal performance. In fact, they are no more than (very expensive) go-faster stripes; by reinforcing the notion that the way to improve the whole goes through optimising the parts, they have seriously held back development of a better way of delivering service.

To control costs, organisations always assume that big is better. So a police force decides to shut down small police stations and concentrate staff in much bigger establishments, with a centralised call centre between them and the public. But a minute’s reflection confirms that the cops have one – and one only – cardinal asset: local intelligence. Increasing the distance, and multiplying the contacts, between the citizen and the police makes the service less effective (increasing response times and the chances of error) and thus drives overall costs up.

Or consider the NHS. The family GP is a brilliant concept. For any condition, a GP who knows your history and circumstances can make better, more intelligent treatment decisions that one who doesn’t. So what do we do? We put doctors in giant health centres and demand that they spend no more than 10 minutes on individual appointments, thus ensuring that that they don’t know their patients and their priceless, long-nourished combination of personal and medical knowledge is useless. Instead of going straight to the most likely solution, he/she has to work through the checklist one by one before (with luck) arriving at the same result, only much later. Worse service, higher costs.

Once you know the reasoning, you can see it everywhere. One way newspapers try to cut costs is by pooling the sub-editors who edit and trim the copy filed by front-line reporters. Like all such functional centralisations, it is a false economy. Whereas previously a query could be settled face to face, it now has to go by phone or email. If a business article is picked up by a sports sub, the queries (and opportunities for misunderstanding and mistakes) multiply; quality goes down, work and rework go up, more than wiping out any conceivable gain from the pooling.

The inevitable response to all such centralising attempts is to recreate the local expertise in some form, thus dashing the hope of savings. In the university where my wife works, managers decided to centralise the departmental administrators. Instead of having a trusted right-hand person at their shoulder who knew students, lecturers and the business of the department inside out, department heads now have no such support. Either they do the extra work themselves or recruit a junior for the purpose. Either way, the department and the students suffer; the gains are illusory.

Cutting costs is a classic example of management obliquity. Like profit, to which it is obviously linked, reduced costs are the reward for doing something else, ie serving the customer better. It was Taiichi Ohno, the architect of the Toyota Production System, who made the brilliant counterintuitive leap: good service (doing the right thing at the first pass) costs less, not more. Therefore, to cut costs you have to manage value. By focusing exactly on what the customer, internal or external, wants and designing the system to deliver against demand, costs fall away, surely and permanently.

Proving the point, Toyota has paid a heavy price in terms of raised costs, at least temporarily, for forgetting its own truth. Most managers and politicians have never learned it in the first place. Of course, our immediate crisis was caused by the equal and opposite mistake, assuming that profit in the financial sector could be decoupled from the way it was made. But in our impersonal, inefficient and unresponsive service industries, both public and private, we also see a more chronic crisis: a grim reflection of the cumulative failure to understand cost. For the moment there is no sign of that grinding crisis ending, only getting worse.

Dear Sir Richard

I’m now on the sixth, or is it seventh, visit from a Virgin technician to fix a fault on my TV service and beginning to lose the will to live.

Ironically, the diagnosis made by a chirpy employee on the first visit was the right one – part of the cabling needs replacing. But she was too junior to make that call. So a week later a second employee pitched up to check what the first had done and do the tests again. He left saying he needed to report to the area manager.

When I phoned a week later to chase up progress, I was told that the case had been resolved. To my protest that it certainly hadn’t, the call-centre agent patronisingly replied that I didn’t understand: she had opened a new case, so the tests had to be done again, even though I could tell her what the results would be. But even then she couldn’t authorise the new cabling.

After several more visits, and weeks, and repeated tests, we’re not much further forward. Latest update is that there’s a further problem, requiring a visit by another manager. At worst the repair could take another six weeks. Oh, but she says brightly, she’ll ring back within five days.

I’m telling you all this not as a rant (well, not only), but because I think you’d prefer Virgin not to epitomise much of what’s wrong with modern management. Let me count the ways.

First, I bet you have no idea how bad your service is. This is because the performance measures used by your managers are dumb. They measure things you think (wrongly) matter to you (how long agents take on a call, technician visits per day, how long it takes to ring me back with the good or bad news, even the number of rings to pick up the phone) but that have no relation to the purpose of the exercise from my point of view (fix my TV channels!). I suspect all the people involved have met their service-level targets, tell you proudly they deliver excellent service and collect their bonus accordingly. What they don’t know, because they don’t measure it like that, is that they have so far taken more than two months not to fix my cable.

Nor do you know how much this appalling service is costing (I mean literally – ie not counting the invisible cost of my badmouthing on Facebook and twitter). Sigh. This is because you’ve bought the consultancy and IT sales pitch for economies of scale and specialisation.

It sounds plausible – as in Adam Smith’s pin factory, specialists concentrating on one task each (answering the phone, doing easy technical tasks, doing harder ones) will do them faster and more cheaply than non-specialists. They’ll be still cheaper if, as with many of your call centres, the workers are in a low-wage country offshore.

So, yes, your unit costs per transaction (phone call, technician visit) are lower. Unfortunately, if the specialisation, as in my case, results in many more transactions because of errors, misunderstandings, non-productive visits and additional phone calls, then any gain from lower unit costs is more than wiped out. The cost you should worry about isn’t the individual phone call or visit – it’s the cost of fixing my f****** TV from first phone call to final sign-off. In other words, the economies aren’t in scale at all, but the reverse – the lowest number of transactions, or flow.

Still, look on the bright side. My dismal experience teaches three simple, counterintuitive and incredibly powerful truths.

First, don’t believe managers who tell you that better service costs too much – it’s poor service that’s unbelievably, catastrophically expensive. Forget transaction costs and economies of scale – get the same Virgin employees to deliver excellent service by turning the system through 180 degrees. Put people at the front end with the skills and authority to solve all the common problems at the first interaction (and the rest in one more). I guarantee costs will come down as service quality goes up.

Second, relate the measures to purpose – as defined by me, not you. I want my TV channels fixed as quickly and smoothly as possible. If you aren’t measuring what matters to me, how can you learn and improve? You can’t. In most such systems suppliers are paid on quantity (numbers of transactions) and service levels. I bet yours are the same. So they have no incentive to improve quality in my terms, in fact the reverse – with their fixation on unit costs (keeping activity levels up and transaction times down) managers are unwittingly making the service worse.

Third, and perhaps most counterintuitive of all, focusing on cost through economies of scale is counterproductive: it pushes costs up. We’ve seen how that happens at Virgin. By multiplying transactions it generates mountains of waste.

Of course, you’re not the only one to have been taken in by the scale economies fairy tale. Such is its near-mystical lure that systems like yours are everywhere. Scale economies are behind the misleading ideas of front and back offices, shared services, and the dismal white-collar factories of HMRC and DWP. All these are temples to early 20th century Fordism, and like the latter are outdated technically as well as a scandal in human terms. If you believe what you say about employees (as I think you do) that should be the clincher.

Such customer and employee alienation factories serve the vested interests of consultancies and IT vendors, not yours. Virgin is supposed to be young and different, isn’t it? Well, so ditch these sad relics of Victorian management – and, as we say on twitter, FFS fix my TV.

Yours etc

The strength of Charles Ferguson’s Oscar-winning documentary on the financial crash, the self-explanatorily entitled Inside Job, is its stone-cold soberness.

No stunts or showboating à la Michael Moore: just straightforward questions, politely asked, and the spectacle of his interlocutors blowing themselves to bits with their blustering evasiveness and inability to answer, the very matter-of-factness of the narrative (recounted by actor Matt Damon) contrasting with the enormity of the behaviour revealed.

I thought I knew quite a lot about the Great Financial Crisis. And, having viewed business up close for many years, I am more inclined to incompetence than conspiracy theories. But now I think I underestimated both the stupidity and the fraud, and the difficulty of doing anything about either.

Yeah, I knew about the hundreds, not tens, of millions pocketed by the likes of Dick Fuld, the CEO of bust Lehman Brothers ($484m, to be precise, none of which has been returned), who had a special lift to whisk him to the top floor of his office without ever having to come into contact with mere mortals; I knew about the cynical excesses of sub-prime mortgage lenders and the insane abrogation of accountability in turning them into derivatives and selling them on; and the equally bare-faced role of the credit-rating agencies in magically conjuring away the risk involved.

But other things I was less aware of. One revealing section of Ferguson’s film features Kristin Davis, an engagingly frank Wall Street madam, who recounts how firms which run ads in financial journals boasting of their probity and customer service kept $1,000-an-hour hookers and abundant cocaine on retainer for favoured traders and their clients. (The only person brought down by sexual scandal in the period was Eliot Spitzer, governor of New York state, who as attorney general had incurred to the wrath of Wall Street by prosecuting cases against corporate price fixing, stock price inflation by investment banks, predatory mortgage lending and the 2003 mutual fund scandal. Make of that what you will.)

Nor did I know quite how breathtakingly two-faced Wall Street had been with the so-called ‘Magnetar trade’: assembling and aggressively selling ‘shitty’ (their own word) poisoned CDO packages to clients with the sole intention of hedging against them – so the more the mortgages failed, the more money they made (the epitome, this, of Umair Haque’s ‘thin value’).

Perhaps most dismaying of all is the degree to which the fraud/stupidity is systemic.

Andrew Haldane, a director of the Bank of England, revealingly admitted recently that before the crisis, no one was looking at the banks as a system, only as individual nodes. But as we now know, it’s not just the investment banks and credit agencies that were conflicted and corrupted. The film shows prominent economics professors stuttering to explain not how they got it wrong (which is excusable) but how they could have taken large payments to write bigging up reports on, for example, the Icelandic banking system or smalling down ones on the risks attached to derivatives (which is not).

We know from other sources that similar hyping reports were written about Ireland, and critical ones suppressed. We know that auditors, as in the earlier case of Enron, condoned accounting practices among failed firms that may have speeded the crash and were on the very edge of legality.

We also know that representatives and ex-representatives of some of the very bluest-blooded management consultancies are under suspicion for insider dealing – which puts in jeopardy the whole confidential consultancy model – and that Monitor, the Boston group set up by eight founders with close links to Harvard Business School, including strategy uberguru Michael Porter, took a sizeable PR contract ‘to enhance the profile of Libya and Muammar Qadhafi’ – nothing to do with the crash, admittedly, but probably not a client that many large companies would want to be associated with.

As a coda, note that some on Wall Street, as a thoughtful recent article by William Cohan points out, pin its decline and eventual fall on the influx of clever, ideologically self-interested MBAs from the late 1970s who first persuaded the partnerships of the time to go public, then used their access to much greater amounts of capital to dream up ever more complicated financial instruments to gamble on their own account.

In other words, the entire management supply chain is implicated in the banking scandal: the economics and management disciplines and the business schools that teach them, accountancy, consultancy, the ratings agencies and insurance as well as the banks themselves. Of course, a whole system of corruption is much harder to unpick than than a few individual organisations however large. It’s no longer just a matter of reforming the banks: it’s a question of fundamentally reshaping the governance that links them all, across the whole rotten spectrum.

Is this likely? It would be hard enough even without the final, crowning keystone of this arch of doom – the fact that, as Robert Gnaizda, former director of the Greenling Institute, sums it up in Inside Job, ‘it’s a Wall Street government’.

It’s not just that the people who brought us this avoidable disaster are still running the Street, now by the way concentrated into even fewer, more powerful giant finance houses than before. It’s that almost every one of President Obama’s economic appointments and advisers has close links with the financial industry, and many helped push through the deregulation policies that contributed to the present crisis and are already stoking up the next one. ‘I think Britain is the only country where you don’t have to be a Goldman partner to be finance minister’, Alistair Darling joked recently.

Except that it’s not a joke. Finance used to be a service industry to the rest of the economy. Inside Job makes plain that it has not just captured business and the economy, inverting the relationship to perverse, indeed catastrophic effect; the giant vampire squid ate everything on the menu, including government and the political parties too. Ferguson began his Oscar acceptance speech in February by bemoaning the fact that three years after the great fraud, ‘not a single financial executive has gone to jail.’ He’s right. But I somehow don’t think we shall see any financial felons behind bars any time soon.

The race to the bottom in pensions continues at Olympic pace.

The sleight of hand is none too subtle. It consists of the private sector falling over itself unilaterally to tear up its previous pension obligations and then expressing outrage that by comparison public-sector pensions (typically £7,000 in the NHS, £4,200 across the Civil Service) are now so generous. Read CBI director-general John Cridland’s weaselly piece in The Guardian last week. Not only is it unreasonable, Cridland laments, that the private sector now has to support better public-sector pensions through taxation: these preposterously gold-plated provisions make it harder – in some cases impossible! – for the private-sector to bid successfully for public-sector contracts.

Pensions are deferred pay. What is Cridland boasting about when he complacently asserts that ‘there is so much to be learned from the changes made [in pensions] in the private sector’? Put bluntly, that employers over recent years have cut their contributions in half and payouts by up to two-thirds. And now he wants the playing field further levelled down so that private companies can cherry-pick the public sector too.

Notice that objective justification for reducing the already pitiful level of UK pension provision is never offered. It is taken for granted. The argument is that because lots of companies have done it, it must self-evidently be right.

Unfortunately, slippery and self-serving though this ploy is, almost all commentators have bought it. But the real question is the opposite one. The problem is not the profligacy of public-sector pensions (if only!): it’s the utter failure of the funded private-sector ones which a decade ago were being touted as the reason why the UK’s economy would be transformed and Europe’s wouldn’t. If, as Cridland obligingly notes, there are four companies in the FTSE 100 still offering traditional defined-benefit schemes, the obvious question is not why 96 companies aren’t doing it but why those four still can. How can we level up the playing field, rather than bring everyone down in the gutter?

Baldly, the CBI and others are asking us to accept that that the richer we get, the less we can afford a measure of collective retirement security. That to keep bankers and corporate grandees in comfortable old age, the mass of citizens in one of the richest nations in the world must accept cutbacks and pensions not much above the poverty line. In short, that progress requires civilisation to go backward.

That simply defies belief.

Or if it is true, then it casts doubt on either our system’s priorities, or, even more troubling, its underlying competence – or both. If capitalism is in such a poor way that the only way of saving its institutions is to slash the benefits of, or make redundant, those in whose name the returns are being protected – shareholders in pension and insurance schemes – then we’re in a looking-glass world and it needs seriously rethinking.

In fact, both are involved: the system’s bent pension priorities, grossly skewed in favour of finance and the very rich, are symptomatic of a capitalism that is running cancerously out of control. The Gadarene stampede from proper pensions is just part of what has been termed the ‘Great Risk Shift’ in which governments and companies have used any excuse to offload risk that was previously shared on to individuals and families. Retirement is going the way of career, social security is being weakened, trade union rights progessively reined in. The underlying justification was the idea that self-interested individuals acting in efficient markets would be better able to look out for themselves than the collectivity.

But 2008 taught those who hadn’t already twigged that there are tight limits on both self-interest and efficient markets. Extreme self-interest, as Alan Greenspan famously lamented, didn’t prevent the banks blowing themselves up, and shareholder-oriented governance was spectacularly incapable of providing countervailing checks and balances. As for efficient markets, the successive and increasingly frequent bubbles of the last two decades blows the idea out of the water.

The circle is vicious, not benevolent, the bursting bubbles being intimately connected with the current pensions debacle: the declining market returns blamed by companies for the non-viability of traditional pensions have been caused by stockmarket crashes as the ‘ponziconomy’ built on towering misallocations of resources repeatedly tumbles down. But it is not the middlemen in the City and Wall Street who have suffered from the serial busts caused by the Asian crisis, the dotcom boom, merger and acquisition mania and the great financial crisis – none of which could have occurred if markets were truly efficient – but the private- and now public-sector workers who are being asked to pay with their miserable pensions.

Just as with the banks, big business now wants the rest of us to bail them out for the malfunctioning pension system which that they’ve demanded we accept. Well, no. As Polly Toynbee recently remarked in The Guardian recently, ‘the ideal of the entrepreneurial, hyper-efficient private sector is as much a myth as the ideal public servant’.

The CBI’s pension arguments and the coalition’s opening up of the NHS to competition show that life (and vested interest) still remains strong even in ideas like this that have been discredited in practice as well as theory.

But most people don’t believe them any more. Most people believe that the roll-back of social protection (and concomitant glorification of the individual) of the last 30 years has gone too far, and that, as economist John Quiggin puts it, ‘we have the capacity to share and manage risks more effectively as a society than as individuals’. It’s time to put the Great Risk Shift into reverse. When private companies can show they match and beat the retirement payouts of the public sector, we’ll applaud and listen to their advice. But not until.

Mervyn King didn’t mince his words in his Daily Telegraph interview on the banks this weekend. Not only were people right to be angry at those who had caused the mess that we were now all involved in cleaning up, said the governor of the Bank of England: the finance houses also put “too much weight… on the importance and value of takeovers”, thinking it entirely legitimate to pile up their own short-term profits by destroying good companies in manufacturing and elsewhere; much financial innovation was a zero-sum gain, ie transferring value, not creating it; and, he added, since Big Bang in the late 1980s too many in the City thought “if it’s possible to make money out of gullible or unsuspecting customers, particularly institutional customers, that is perfectly acceptable”.

The response of anyone with a bank account will be, so what else is new? We’ve known for years that they’ve been ripping us off with sneaky overdraft charges and exorbitant interest rates. But the banks’ outraged response to the governor’s remarks shows that they have learned nothing. When both the sherriff (Lord Turner, the current regulator) and the US marshall (King, the next one) are saying that the days of the great free-for-all are over, it’s time for the cattle barons to accept the inevitable. The music’s stopped, the saloon is closed and there’s no one left to dance with. The show’s moved on to another town.

This really is an inflection point. King’s interview is an epitaph for a whole way of doing business – not just for the banks but for all the firms that are guilty of the same customer-cherating tricks: inflating costs, deflating quality, building in obsolescence, ignoring the claims of the planet, all for the sake of a few extra pounds of short-term profit.

For 50 years in the middle of the 20th century – from say 1930 to 1980 – it was possible for a chief executive to say, and be taken seriously: ‘What’s good for General Motors is good for America’. Big companies provided good jobs, material living standards soared and the damage to the planet could be ignored. But since then the returns fo business as usual have become vanishingly small. None of the previous justifications apply. Good jobs have been sent abroad, living standards haven’t budged, at least for the vast majority – and the environment is twisted with pain at the poisons poured into it and the goodness sucked out. The reverse proposition has become true: what’s ‘good’ for General Motors (or the banks, or the telcos) is bad for America.

Actually, it’s not even good for General Motors. As we’ve noted before, the last people to take advice from about what’s good for capitalism is capitalists. In a thoughtful blog at HBR, Justin Fox (always worth reading), asks ‘Just What Does it Mean to be Anti-Business?’ His starting point was an FT interview in which George Buckley, CEO of 3M, slammed Barack Obama as ‘Robin-Hood-esque’ and ‘anti-business’. ‘There is a sense among companies that this is a difficult place to do business,’ he complained. ‘It is about regulation, taxation, seemingly anti-business policies in Washington, attitudes towards science.’

It’s hard to know where to start with this. Only someone insulated from the world inhabited by the rest of us could have failed to notice that Robin Hood was a hero; wasn’t it the rich and powerful, in the shape of the Sherriff of Nottingham, who were the villains? Much later, it wasn’t Henry Ford’s altruism that led him to double his workers’ wages. It was the calculation that if he did they’d actually be able to buy the products his assembly lines were churning out. As Fox gently points out, after three decades of soaring inequality, a bit of Robin Hood (or Henry Ford) might again be a good thing – it might be in the interests of business, too.

Nor, as he notes, is regulation necessarily anti-business, although the two are now lazily conflated. After all, the all-time best decade for US business was the 1960s, perhaps the height of the era of the regulatory state. ‘It was hard to label this rise of government as ‘anti-business,’’ points out Fox, ‘since corporate profits grew and grew, too’.

Some observers are now beginning to draw a direct analogy between Western big business and the cynical kleptocracies of the Middle East. Of course, in the West it has all been perfectly legal, sanctioned by the academy and encouraged by government – yet the capture of the institutions of business by an unholy oligopoly of shareholders and managers is just as complete as in the Arab world. Hence the movements now gaining ground here, similarly determined to say enough is enough. But it’s now not just UK (and US) Uncut, the campaign for the Robin Hood tax, citizen’s capitalism and others who are on the march – the governor of the Bank of England, the chairman of the FSA and Harvard Business Review, the businessman’s bible, are on the same side, at least in spirit. High and low, the realisation is dawning: we don’t care about Davos, we don’t want business deciding how to run hospitals, schools, universities or libraries – we’re not actually very keen on business running finance, come to that. Business isn’t the answer any more, it’s the problem!

We could surmise that the intellectual battle having been won, the cycle will take its course and the pendulum inevitably swing back towards the regulatory state. But for the moment the zombies refuse to die and vested interests are strong, particularly in the US, where the hard right seems determined to perpetuate the reign of the rich and ignorant – and may have the political muscle to do so.

In which case, the parallels with the Middle East may become a lot closer and more dangerous.

Management takes such legitimacy as it has from economics, just as economics, equally misguidedly, has modelled itself on the ‘hard’ sciences such as physics.

It should matter to managers, then, that conventional economics, the kind that has shaped the thinking of policymakers and corporate leaders in both public and private sectors for the last 30 years, is in deep, deep disarray.

To put it bluntly, the events of the last three years have dealt it a blow from which it can’t recover. Luminaries as different as as Alan Greenspan, Nobel laureates Paul Krugman, Joe Stiglitz and Paul Samuelson, Larry Summers and Willem Buiter have all lined up to say publicly the same thing: market fundamentalism is dead, and whole swathes of economics needs to be rethought along the lines of what is, not what economists think it ought to be.

Three recent books do a good job of stating the revisionist case. Ha-Joon Chang is a Cambridge economist working within the traditional frameworks, and the finding of his excellent 23 Things They Don’t Tell You about Capitalism (Allen Lane, 2010) is admirably clear: ‘The last three decades have shown that, contrary to the claims of its proponents, [free-market capitalism] slows down the economy, increases inequality and insecurity, and leads to more frequent (and sometimes massive) financial crashes’.

Among the myths he takes on are rationality (the foundation of coventional economics) – since we can’t predict distant or sometimes even immediate outcomes, we need safety standards for financial instruments just as we do for cars, planes and drugs; self-interest – companies run for the benefit of shareholders do worse than those that aren’t; pay as an objective measure of performance – the poor tend to be more entrepreneurial than the rich, and a juster society would level the playing field to allow them to prove it; the obsolescence of manufacturing, which has misdirected investment towards problematic ‘thin air’ targets such as formal education and the spread of the internet; and finance as a source of growth and innovation.

Chang concludes that governments need to get better at crafting a more dynamic, stable and equitable economic system – which means ‘building a better welfare state, a better regulatory system (especially for finance) and better industrial policy’.

Chang’s subject isn’t the crash itself, but it certainly reinforces his findings. In his entertaining and provocative Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton, 2010), on the other hand, the Australian economist John Quiggin deals with the GFC (global financial crisis) head on, showing how the implosion of the financial system fatally undermines both economists’ most cherished axioms – efficient markets, general equilibrium, trickle-down, privatisation – and the policies based on them.

He shows that the ‘great moderation’ was a sham, providing soothing camouflage for the reversal of the long-term trend towards social protection and a ‘great risk shift’ from corporations and governments to individuals and households. This is the imbalance that now needs to be corrected, by policies and by economics that ‘focus more on realism, less on rigor; more on equity, less on efficiency; more on humility, less on hubris.’

Exactly the same, of course, applies to management – as proved, if proof were needed, by the third of the book trio, Dan Ariely’s Predictably Irrational (Harper, 2009). Ariely is among the most prominent of the new breed of behavioural economists shaking up the profession by taking the injunction to realism seriously, not least by taking the unheard-of step (for an economist) of testing his hypotheses with empirical experimentation.

From these experiments come some remarkable reappraisals, which conspicuously support the revisionist conclusions of Chang and Quiggin. Thus, Ariely’s experiments suggest that human preferences are so manipulable that our choices and trades in the marketplace are unreliable guides to our real utility; so unreliable, in fact, that ‘market prices’ themselves become arbitrary and suspect. Demand and supply aren’t separate things.

Momentous consequences flow from that. If, reasons Ariely. we can’t rely on market forces to set optimal market prices, and nor can we expect choice to be an accurate reflection of individual preference, the market’s claim to be an infallible allocator of resources falls away. For society’s essentials such as healthcare, medicine, education and the utilities, judicious governments must have at least a regulating role, ‘even if it limits free enterprise’.

The conclusion is underlined by other significant experiments with social and market norms. If the efficiency claim falls, and if, as it seems, money turns out to be the most expensive (and not very effective) motivator, then we need to protect the areas (healthcare, medicine, the professions) where cash is not king; where, to paraphrase Herzberg, people do a good job because they are given a good job to do.

As for management, the things that some of us have been banging on about for years turn out to be completely compatible with, indeed vindicated by, the new economics.

Reality demands that since human beings are malleable and neither all good nor all bad, we need to build organisations that bring the best out of them, not the worst. Equity demands that we build organisations that share risk and reward collectively, instead of heaping it on some constituencies to the benefit of one alone. And humility requires people think about the job rather than the reward, the whole rather than the part, the social as well as the commercial, and the planet alongside shareholder value.

If traditional economics is a zombie that needs garlic, a cross and a stake through its heart, then that goes for traditional management too.

The unspeakable treatment of the elderly documented last week by the NHS ombudsman Ann Abraham – worthy of a prison camp rather than a hospital – makes the blood run cold and then boil with rage. It was complemented by a deeply unflattering account in the Financial Times by writer Eva Figes of her stay in a ward for the elderly and bracketed a few days later by a report implicating an ‘overstretched and understaffed’ midwifery service in the preventable deaths of 34 babies in the West Midlands in 2008-2009. How did one of the richest, supposedly advanced economies get to the stage where its health service can only deal humanely with citizens in the prime of life, not at the beginning and end when they need it most?

The horrifying thing is that these weren’t pardonable cases of medical error. Clinically they were banal: having babies and getting old are hardly new or unexpected conditions. The failings are management ones, and they throw in sharp relief a stark truth. We know much more about the human body than human management.

These aren’t random accidents. They occurred because we devised systems that brought them about and were powerless to stop them. Economist John Kay once remarked that in terms of scientific knowledge, management is about where medicine was in the mid-19th century. The history of the NHS is a graphic demonstration. As medical science steadily advances, management marks time: in important ways, as the ghastly events above (and many others in both public and private sector: at random: BP, Lehman and the whole financial crisis) demonstrate, it is marching backwards.

In a prescient 2002 pamphlet (1), Duncan Smith coins a telling image. In the absence of an internal thermometer to provide feedback, the NHS has never been allowed to become a self-regulating (learning) organism. Instead, ‘it became an anatomy on which outsiders [politicians and management consultants] were allowed to operate with very little opportunity for the patient to express its opinion’ – not to mention zero qualifications. It has been a costly experiment. The patient has been bled, purged, starved, fattened, cut up, reassembled and given so many potions that it now resembles a shambling Frankenstein, which Andrew Lansley’s expensive and pointless reform will make even more grotesque.

In the rogue’s gallery of fake healings that have been administered over the years, two faulty prescriptions stand out. Both of them are traceable back to the neo-liberal economics that has held sway since the 1980s. The first is the driving out of social norms by market norms. Recent work by behavioural economists suggests that we simultaneously inhabit two worlds: the social world and the market. We know perfectly well how each works – we don’t expect altruism from the butcher or baker, nor do we expect our partner to charge for supper – and have no difficulty switching from one to the other in our everyday lives.

The trouble comes when one infects the other. For many decades nursing and medicine generally were governed by strong social norms. Medicine was a vocation, so motivation was intrinsic (the job) rather than extrinsic (money) and the public-service ethos was strong. As with many other profession with similar norms, ‘efficiency’ was a secondary consideration.

From the 1980s, impatient governments started importing market notions to challenge the public-service ethos (ie ‘inefficiency’) of the NHS. Taking a leaf from the private sector, they subordinated medical professionalism to an increasingly stark performance-management regime of targets backed up by fierce incentives and sanctions (‘deliverology’ was the unlovely name coined for it by Michael Barber at Tony Blair’s Delivery Unit; in the NHS, it became known as ‘targets and terror’, a much better handle for a management method that comes straight out of the Soviet central planning handbook).

Targets ‘work’, in the sense that if enough resource is devoted to a priority it will be met. But there is always a cost elsewhere in the system, as people stop paying attention to often essential aspects of the job for which they don’t get brownie points.

For the caring professions, the combination of market norms and targets, particularly when linked to pay, has been catastrophic. As Figes’ account graphically exposes, instead of centring on patient needs, whatever they are, today’s nurses and doctors have learned to do only what they are paid for and the targets tell them. Nurses wash their hands (target), but not elderly patients (no target). Thus do we arrive at the heart of darkness, the oxymoron of a health service which does compassion only if there’s a target for it.

This tendency is made infinitely worse by the second prescription of the management flat-earthers, economies of scale. True to form, this is a century-old concoction that comes to us in direct descent from the mass-production car manufacturers of the early 20th century. In the belief that is that is cheaper to do things in bulk, products, whether cars or patients, are batched and processed in turn, before moving on to the next process. Work is specialised and repetitive, and each worker takes responsibility only for his/her part of the process. Workers have no line of sight to the whole.

Even in manufacturing, these arguments have been rendered obsolete by Toyota, which by concentrating on economies of flow – shortening end-to-end times to build a car – rather than scale, despite recent problems has become by far the most effective volume car maker on earth. In services, literally applied economies of scale lead to travesties of efficiency like the grim sweatshop call centres of HM Revenue and Customs, the Department of Work and Pensions and many mobile phone companies, full of bullied, target-driven workers whose only concern is to get people off the phone, whether by passing the buck to someone else or requiring them to phone back. This is the high road that in the NHS leads to fragmented care and health services where everyone is ticking boxes and protecting their backs, while the patient becomes a condition to be treated and expedited to the next station. The result: a Stalinist (I use the word unapolagetically top-down, arse-about-face system that is built to achieve abstract meta-targets (no longer than four-hour wait for emergency treatment, a 50 per cent reduction in MRSA infection) but not individual patient care.

The desperate irony is that starting from the other end – the individual patient – and employing economies of flow delivers results that are not only incomparably better but far cheaper. For every condition, demand into hospitals and doctors’ surgeries is amazingly stable and predictable. Wouldn’t it be more sensible to design an organisation to meet this demand, and nothing else, rather than unleash another whirling dervish of change with the fruitless aim of making central planning work better? As befits a junior, less mature profession that wields far more power than it knows how to handle, before launching yet another reform management should take its cue from medicine and vow ‘Primum non nocere’ – first do no harm.

(1) Physician, Heal Thyself: The NHS needs a voice of its own, Duncan Smith, Socialist Renewal, series 3 no 2, May 2002

The Big Society is like sex: people either talk about it or do it. By and large, those who are at it too busy to pontificate, and of course vice versa.

It’s like sex in another way too: to put it crudely, those who are treated sensitively and as equals enjoy it more, participate more and take the initiative more than those who feel they are being shafted.

Let’s say it one more time. Citizen engagement, like engagement at work, is reciprocal. And at least initially, it’s an effect, not a cause – the result of being treated as a consenting adult. To participate in the Big Society you have to be included in society in the first place.

It couldn’t be simpler. Engagement and participation are created by public services that work.

Here are three examples of what I mean.

At Portsmouth City Council, residents get their housing repairs done at the precise time and day they chose. If that means a week on Monday at 8.05 am or this Friday afternoon at 4.50, fine. (Wouldn’t it be nice if Virgin Media or BT could manage something similar?)

Portsmouth’s housing repairs take a fraction of the time and effort expended by other councils. One counterintuitive corollary of this virtuosity is that the service costs much less to deliver – 50 per cent less, to be precise, using fewer people.

But another consequence is residents who care. With repairs carried out faster and better, the estate looks smarter. Then, as savings are re-invested, the housing stock is not just maintained but upgraded. People notice and respond. They put pressure on residents inclined to spoil the party to toe the line. They form committees, and, to everyone’s surprise, some stand for election to the council. And they suggest new improvements to the repairs team. What were previously dead-end estates now have queues lining up for the few vacancies. The circle is complete.

Or consider the case of the ‘beat policeman of the year’ who was interviewed a year or so back on the Today programme.

He had turned his patch from a nightly no-go area into an oasis of calm. The drug-dealers had moved out and the old ladies back in. How had he managed this triumph of law and order?

Well, said the copper apologetically, disregarding official injunctions to use the centralised call centre, he had given out his mobile phone number – and kept the phone switched on. Result: when people phoned to complain of a rowdy party, a suspicious loiterer or even people dropping litter – he answered (remember the Woody Allen dictum: ‘Ninety per cent of success is turning up’?). Then he nipped over on his bike and sorted things out on the spot.

By doing his job and using his discretion (ticking off but not criminalising badly behaved youngsters, for instance), he quickly won local trust and respect. The sequence is not hard to track. Effectiveness > trust > better intelligence > less petty crime and disturbance > calmer neighbourhood > people looking out for each other… and not a surveillance camera, vigilante committee or council-run Big-Society consultation in sight.

The third example: housing benefits. In most councils, it takes seven or eight weeks and up to 10 visits and phone calls to get through the social-security padlocks and perimeter fences that (in effect) ration benefits allocations. By then, claimants will have often run into other problems, such as rent and council-tax arrears, which feed back into each other in a never-ending cycle of insecurity and marginalisation.

But the cycle can be broken. By radically cutting time to calculate benefits (10 days or less), councils such as Stroud and East Devon made a startling discovery. Council tax and rent arrears problems fade away! They fade away even faster if benefits staff actively seek out such issues (‘Are you experiencing any other related problems?’) at the start.

One unexpected response: grateful claimants hand flowers and cake to staff instead of abuses and brickbats. But another is that they report change of circumstances more quickly, homelessness falls, and there are fewer desperate attempts to cheat. In short, they rejoin small society, a giant step towards being able to conceive of big one.

The Big Society can’t be directly wished or planned into existence, and the Big Society bank is largely a gimmick. It’s a good example of obliquity, the by-product of a working, functioning small society embodied in the local benefits office, police station or doctor’s surgery. And unfortunately at this level much of what the government is actually doing runs counter to its vision.

For example, a huge amount of the remedial work undertaken in hard-pressed local benefits offices, not to mention charities like AdviceUK, is the result of the unexaggeratable upstream incompetence of the Department for Work and Pensions and HM Revenues and Customs in performing (not) their primary job of calculating tax and other entitlements correctly.

These ‘flagships’ of public-sector reform are monuments to early 20th-century Fordism, animated by a crude faith in size, specialisation and automation that are the antithesis of joined-up Big Society concerns.

Ironically, the same damaging obsession with size and scale is now threatening to disfigure the voluntary sector itself.

To qualify to bid for giant public-sector contracts, charity and third-sector bodies are being forced to amalgamate into larger, even national bodies, thus destroying the local volunteering spirit that attracted people in the first place. The stultifying bureaucracy surrounding children’s services and social care, to name but two, perform a similar function of deterring spontaneous generosity and neighbourliness.

The problem not that the idea of a Big Society is unattractive – it’s that it’s so lacking in operational definition as to be practically meaningless. The reality is that current public services have brought about the opposite of the ‘have a go’ society – one that is done to, regimented and disengaged. No amount of excited fanatasizing can change that. Malcolm Muggeridge once remarked that sex on the brain was the least satisfactory place to have it. Similarly with the Big Society. Like virtual sex, it may be enticing in concept, but a concept is no substitute for the real thing.

Terra Firma’s takeover of EMI may be one of the worst deals in corporate history; its backers found out this week that it had cost them nearly £4bn in total. But even if it had ‘worked’, like all private equity deals the transaction was about appropriating value rather than creating it. The private-equity partners, particularly, would have benefited, but essentially the game is zero sum, their gain being made at least in the short term at the expense of the company itself.

That kind of paper gain is what Umair Haque, in his just-published The New Capitalist Manifesto: Building a Disruptively Better Business, calls ‘thin’ or inauthentic value. He opposes this to ‘thick’ value, a kind of social alpha, which adds to wellbeing after all costs have been taken into account. As well as the private-equity deal, Haque gives as an example of thin value the $1 profit made on a $3 burger. In fact, says Haque, the full cost of a burger is probably closer to $30. So the dollar made on the deal isn’t really value at all. The burger maker has borne just $2 of the burger’s full cost, leaving $27 to be picked up by people, society, and future generations. ‘No authentic value has been created; the profit booked an illusion of imbalanced accounting.’

Haque, director of Havas Media Lab, is the new kid on the block, posting a series of fiery blogs and tweets (@umairh) dissing almost all conventional business institutions from traditional economics (‘the ponziconomy’) to Davos (‘Egypt: the young desperately fighting for a better future. Davos: old rich dudes fighting savagely against it’). Michael Porter (also, interestingly, with a Harvard base) is infinitely less of a firebrand and more academically respectable. Yet the establishment strategy guru has come to a similar conclusion. In a big piece in the current issue of HBR entitled ‘How to Fix Capitalism’ (no less), Porter writes that ‘business and society have been pitted against each other for too long.’ Instead, he says, ‘The purpose of the corporation must be redefined as creating shared value, not just profit per se’.

Shared value means creating economic value ‘in a way that also creates value for society by addressing its needs and challenges’ and clearly has much in common with Haque’s ‘thick’ variety. They both aim to get away from the cynical and insulting idea of Corporate Social Responsibility and put the wider social need at the heart instead of the margin of business. They are both thus in the spirit of Peter Drucker who as long ago as 1984 wrote that ‘The proper social responsibility of business is to tame the dragon, that is, to turn a social problem into economic opportunity and economic benefit, into productive capacity, into human competence, into well-paid jobs, and into wealth’.

At the heart of all three approaches is the idea, self-evident to all except neo-classical economists, that that companies can only flourish sustainably in a healthy society. So if they are manufacturing ‘bads’ that society then has to spend time and money rectifying, they are in effect imposing a tax on everyone, including ultimately themselves. Just as bad, by manufacturing ‘bads’ that they decline to take responsibility for (pollution, obesity, the credit crunch), business steadily undermines its own legitimacy. As Porter points out, ‘diminished trust in business leads political leaders to set policies that undermine competitiveness and sap economic growth. Business is caught in a vicious circle’ – not only of of its own making, but also that of business academics, including, ironically, Porter himself.

Now, as Charles H. Green notes in a sympathetic but sceptical review of the two pieces, these are heady and exciting themes, and directionally they are surely right. But this doesn’t mean they will automatically come to pass. As he suggests, the ‘must’ (create shared value) in both authors’ texts has no causal force; it is ‘exhortation dressed up in the words of logical necessity’. He concludes: ‘The last thing capitalism needs right now is a new [closed-system] ideology. Business needs simply to take its seat among other social and political institutions, and to play nicely in the sandbox alongside them’.

Yes: but that raises rather large questions of its own. Business is hardly likely to get humbly down in the sandbox when the zombie shells of the misleading old ideology are still lumbering tiresomely around the landscape. It is they after all that prevented business from doing just that (or rather, exempted it from the need to do so) in the first place. And that raises problems in another and much less familiar arena: the political.

Although neither of them mention it, the corollary of the idea that companies have an obligation to wider society (unavoidable after a crash caused by the Friedmanite insistence that business should be left alone to concentrate on business) is the end of shareholder primacy. Actually, it was always a myth that shareholders owned corporations (see HBR if you don’t believe me), which is simply incompatible with limited liability; and shareholders in general didn’t do very well out of the shareholder value era anyway (HBR again).

But when the myth of the shareholder as organising principle is disposed of, it isn’t just the unlovely and dysfunctional edifice of today’s management conventions that come crashing down with it. Powerful vested interests are endangered too. One notable casualty is the business schools and consultancies, which over 30 years have have invested hugely in theorizing the shareholder model. Take for instance the popular version of strategy (chief guru: a certain Michael Porter) that casts the function of managers as value capture – basically raising barriers to prevent anyone else, including employees and society itself, from eating the shareholders’ lunch. By changing the manager’s job to creating new value through innovation, Porter’s shared value thesis laudably puts managers and society – at last – on the same side. But it may not do much for their pay packets.

This is because also swept away with shareholder value is the present stockholder-oriented governance arrangements. These have indeed done a terrible job of looking after the bulk of shareholders’ interests. But they have also underpinned and justified the grotesque compensation structures that now marry the interests of Wall Street and City of London with those of corporate boardrooms. Unfortunately this unholy alliance – which has hoovered up almost all the wealth increase of the last two decades at the expense of everyone else – now exercises an almost unimaginable sway over politicians, particularly in the US. As Green puts it, ‘Elections and legislation are heavily controlled by corporate interests in the United States today,’ and as he doesn’t put it, these are largely free-market fundamentalists who insist on their god-given right to make money even if they have to bring the world financial system crashing down on top of them to do so. Successive governments have been in similar thrall to finance in the UK, and to a lesser degree in many other western countries.

So now do you get the picture? After 30 years hiding behind the supposedly impartial axioms of economics, perhaps for the first time management is political; and no amount of talk about MBA oaths, ethics classes and even shared or thick value is going to change that. To rephrase Marx: the point is not to understand the world (we’ve done that). The point is to change it.

Read my article of 31 January 2011 in FT Business Education here