In his widely reviewed new book, Harvard political philosopher Michael Sandel notes that ‘Over the past three decades, markets – and market values – have come to govern our lives as never before’. Almost anything can be, and, if the price is right, is, bought and sold: places in queues for Congressional hearings, the right to queue-jump, the right to use car-pool lanes, sterilisation, green cards, the insurance policies of those with AIDS, and body parts, to name a few. Bastions of the public sector such as health and university education are increasingly part of the market sphere. Says Sandel: ‘We have drifted from having a market economy, to being a market society’.

Have no doubt that this is a critical point. Once we are a market society, is there a way back? Behavioural economics supports Sandel’s observation that marketisation tends to be a one-way ratchet. For example, when an Israeli playschool decided to fine parents who were late picking up their children after school, against expectation the number of offenders increased. By paying, parents were relieved of guilt. They were no longer putting others to inconvenience: they were paying a fee for childminding. But when the school stopped levying the fines, lateness did not fall back again. It was stuck on the plateau. Paying had dissolved the sense of obligation to others.

Why should that be? One reason might be that it is a self-fulfilling prophecy. The SFP is well known to social scientists. Sociologist Robert Merton first wrote about it in the 1940s. Unlike the behaviour of physical objects, which is unaffected by human beliefs, what we think about human nature helps to shape it. ‘The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behaviour which makes the originally false conception come true,’ wrote Merton. Theory alters practice, which then confirms the theory. Neat.

But also troubling. There is plenty of evidence that this is what is happening in economics and management. This matters much more than you might think, given the reductive, one-dimensional version of human nature that they are both based on. ‘The first principle of economics is that agents are actuated only by self-interest,’ according to the great economist Amartya Sen – not casually and sometimes, but relentlessly and always. Self-interest in this extreme form is illustrated by Sen thus: ‘’Can you direct me to the railway station?’ asks the stranger. ‘Of course,’ says the local, pointing in the opposite direction, towards the railway station, ‘and would you post this letter for me on the way?’ ‘Certainly,’ says the stranger, resolving to open it to see if it contains anything worth stealing.’

Almost no one, including economists, believes than humans really act this way. But only by such simplification can they distill their theories into axioms and mathematical equations that work. Meanwhile, exactly obeying Merton’s description, the side-effect of telling people so often over the last three decades of marketisation that they are uniquely driven by self-interest is to make them believe it.

The most obvious instance of the belief in action is executive pay. Since the 1980s – ie just the period that Sandel writes about – appeal to self-interest has been expressly designed into Anglo-US corporate governance. CEOs are supposed to be greedy. In a caricature of Adam Smith’s invisible hand, under option and equity based pay schemes by enriching themselves they enrich the body of shareholders too. Greedy is what they have predictably become – witness Sir Martin Sorrell’s aggressive justification of his planned pay hike at WPP, using just this defence. As Alfie Kohn, a well-known writer on pay and motivation, puts it: ‘Do rewards motivate? Absolutely. They motivate people to demand rewards.’

But it is not just among CEOs that the SFP carries out its stealthy work. ‘A growing body of evidence suggests that self-interested behaviour is learned behaviour, and people learn in by studying economics and business,’ a group of respected Stanford academics concluded in 2005.

In what one of them, Jeff Pfeffer, termed an ‘incredibly depressing series of studies’, business and economics students were found to be more prone to cheat, free-ride and violate codes than counterparts in other disciplines. They are less cooperative and generous in business simulations. One study found that as they went through their courses, MBA students became more focused on shareholders and less on customers and employees. Anther identified business-school students as least concerned with knowledge and understanding, economic and social justice, and developing a meaningful philosophy of life. Yet another found that the tendency of larger firms to violate safety and health regulations was linked to the growing proportion of MBAs in top management. In short, business and economics students come more and more to resemble Sen’s caricature of economic man, the starting assumption of their discipline. ‘Economics,’ says Pfeffer flatly, ‘is toxic.’

The widening and deepening market logic described by Sandel follows the same dynamic, spreading the infection from business and economics into other spheres. Thus, researchers consistently find that while most people do not consider themselves self-interested, they think others are – a testament to the normative power of such beliefs. It doesn’t matter if people believe them themselves. They don’t even have to be aware of them. They just have to act on them to make them come true.

This then is the nightmare scenario. The battle of economic ideas is decided not by which ones best explain the world but which most affect it and thereby become true as a result of their own influence. Of course, there are positive economic ideas out there which could operate in the same manner. But the progression from market economy to market society that Sandel notes leaves little doubt as to which side is winning the battle of ideas. It is the result of a self-fulfilling prophecy in which the more market values are acted on, the more they are internalised, like a computer virus wiping our their own tracks in the process. As with the playschool parents, the market is well on the way to remaking human nature in the form of economic man and companies as prisons or boot camps to contain their rampant self-interest. Economics has long been referred to as the dismal science. Now we can see what that really means.

Management books don’t usually set the pulse racing. From the title, you might predict that ‘Delivering Public Services That Work Volume 2’ would do little to disprove that rule. But reading these case histories I confess I was moved to laughter, tears (well, almost), anger and deep reflection, sometimes all in the space of one chapter.

Disclosure is in order here. I have done, and still do, editing work for Vanguard, the consultancy whose thinking the eight cases reflect. I knew several of them, or thought I did, but reading them in this context reminded me all over again why I am both excited and proud to do it.

These are the opposite of the bloodless Janet and John stories most management books use to illustrate their theories. Here are real managers – real policemen, care workers, fire and rescue staff, food safety inspectors, care workers, town planners – wrestling with real issues in their daily work, issues that lead them to pose, and struggle to answer, the most important questions in management: What is our purpose? What are we here to do? How well are we doing it? How can we do it better, in ways that make people’s lives easier?

Although they all reference the ‘Vanguard Method’, this being real life each case is quite different from all the others. Each journey starts from scratch and entails real choices. There are no single right answers and plenty of compromises. Not one is easy or the result of applying an off-the-peg formula. Unexpected constraints – not only government targets and specifications, though these often loom large – obtrude and frustrate; people brought up on different management assumptions misinterpret or find it hard to adapt to new ones; there are false starts and setbacks.

Yet what they share at the end is the learning that improving service brings real benefits: halved costs of stroke care in Plymouth, dented crime figures in a tough sector of Wolverhampton, better development at lower cost in Rugby planning office, improved food safety in Great Yarmouth, slashed red tape and wasted effort at Staffordshire Fire and Rescue, halved advice costs in Nottingham, lives of vulnerable and elderly in Somerset radically improved and the number of missing persons reports in Cheshire reduced by 75 per cent.

Although improvement was obviously anticipated, none of these outcomes could have been predicted in advance. It is the result of intellectual curiosity, as rewarding to read (and write) about, let alone to do, as to solve a detective story. This is how real change happens – emergent, full of unexpected twists and turns, the fruit of the hard yards of repeated experiment and learning. It can’t be planned – it emerges from the learning. By opposition, the stories here demonstrate with blinding clarity the arrogance of planned top-down change like that currently being visited on the NHS. How can you plan a new destination if you don’t know what direction and how fast you’re currently travelling? Every case in this book demonstrates how little managers commonly know about their organsations. They have no idea how poor their service is from the customer’s point of view. Like referred pain, the presenting problem often disguises a quite different one underneath. Having lost sight of their purpose, they have little understanding of their costs.

One criticism of systems thinking is that its acknowledgement of complexity makes it hard to know where to start unpicking it. But what these cases – and indeed all Vanguard interventions – have in common is that they begin with an analysis of demand. In a thought-provoking chapter in part two of the book, Vanguard’s Richard Davis explains why this has to be so. For most managers demand is unproblematic – it’s what comes in through the door or, more likely, call centre. But as Davis shows, when demand is assessed against purpose – ‘what we are here to do’ – a very different picture emerges. Half or more of the ‘demand’ is likely to be ‘preventable’ – the result of not doing something or not doing it in a way that solves the problem in the first place. If you can get rid of this ‘failure demand’, there’s an immediate uplift in capacity, a hallmark of all the cases in the book.

Establishing ‘the problem that we want to solve’ is the critical first step from which everything else follows. But it is not always obvious. For example, when one council looked closely at its apparently insatiable demand for social housing, it found that in 70 per cent of applications, the problem was one that going on the housing list wouldn’t solve (‘The garden’s too big and I need help’, ‘it’s an insurance policy for when I’m old and alone’, ‘my kids are grown up and I want them out – give them a house’, ‘I’m homeless’). Writes Davis: ‘As a nation, we think we have a shortage of social housing. It’s possible that we do, but we currently don’t know.’

The book concludes with two more general chapters: a complementary piece by John Seddon on why the opposite, mass-production approach to services favoured by the conventional wisdom ineluctably makes them worse and drives cost up, and a final summing up by Charlotte Pell that pulls together the two most important messages of the book, both of them counterintuitive to those brought up on traditional management thinking: it’s cheaper to do it properly, and the only way to do it properly is to put people using professional judgment back in charge. As becomes crystal clear from these cases, when you understand the organisation as a system, improving service starts with a leap of fact, not faith.

Read my article on the myth of shareholder ownership (FT Business Education, 14 May 2012) here

Read my commentary on The Foundation’s forum on storytelling here

Pumped-up shareholders have enjoyed landing punches on plump corporate paunches in recent weeks, drawing blood at several companies where executives targeted by remuneration protest votes have resigned. The result: satisfied newspaper editorials on a ‘shareholder spring’, anticipating even sharper discipline when, as per Vince Cable’s proposals, remuneration votes become binding.

Don’t raise your hopes too high. As the BBC’s Robert Peston noted in a recent blog, the protests do not question high pay as such, just paying for failure. Better than nothing, you might think. But the difference is between tinkering and fundamental change is critical. Tinkering with present methods is a classic case of doing the wrong thing righter (and thereby becoming wronger). The effect will be to focus even more time, ingenuity and money, not less, on trying to make the unworkable work. Concocting new formulas for performance-related pay and bonuses is the wrong remedy for the wrong problem – the unfeasible in pursuit of the unjustifiable.

Can and should shareholders be expected to control executive pay in the first place? The answer to both questions is no. To start with, in an era of churn and high-speed trading when the average holding period for a UK equity is seven months (three for the banks), which shareholders? Those in it for the long term are outnumbered 30:70 by short-term gamblers and foreign owners with little interest in pay and governance. Although big UK shareholders have combined to strike a blow or two in recent AGMs, in its recent report Will Hutton’s Ownership Commission judged that they had made a poor fist of stewarding the UK’s assets generally, largely because of endemic short-termism and the intractable difficulty of speaking with one voice.

In practice, far from restraining managers, shareholders have often done the opposite. As the Bank of England’s Andy Haldane noted in the London Review of Books, ‘In the 19th century, managers monitored shareholders who monitored managers; in the 21st, managers egged on shareholders who egged on managers’. What’s more, the ‘shareholders’ who wield the telling votes aren’t the beneficial owners but institutional fund managers operating to the same short-term performance incentives as the managers they are supposed to be monitoring. Are they likely to risk calling attention to what they are paid for mostly matching the index by proposing fundamental change? Turkeys, Peston points out, rarely vote for Christmas.

By choosing fast exit, short-term shareholders effectively forfeit the right to voice. They are entitled to one but not both. They also demolish their own claim to primacy, resting as it does on the idea that bearing all the risk, shareholders are entitled to all the reward. That is an offence against common sense, not to mention elementary justice. The truth is that shareholders can, and do, far more easily sell their shares than workers can find another job. What’s more, it is employees who directly create value through their knowledge, skills, and entrepreneurship, not shareholders – buying shares on the secondary market doesn’t even contribute capital. Shareholders own own shares, not companies. There is simply no argument for shareholders, who have failed to do so in the past – and who helped devise the governance arrangements that legitimised the discredited reward mechanisms used today – alone deciding levels of executive pay.

Once that is admitted, the whole question of what to pay corporate high-ups is transformed. Long neglected issues of internal fairness, of critical importance for real as opposed to stock market performance, bring a stinging breath of fresh air as they rush in from the cold. Forget shareholder alignment: even überguru Gary Hamel, as red-blooded an advocate of capitalism as you can find, believes companies would be better off aligning CEOs’ interests with those of value-creating employees rather than distant shareholders. So of course employees should be on remuneration committees. Charles Handy would go further, giving long-serving workers, and possibly customers too, voting rights. Bonuses would shrink or preferably vanish, as would share buybacks. Paradoxically, cutting shareholders down to proper size as well as managers would in the long term benefit them too, as companies retained more cash to reinvest in building markets, better products and jobs. The insidious rise of income inequality would be reversed, so society would be the gainer too.

The current spat between boards and shareholders is a public settling of scores between the 1 per cent – entertaining but irrelevant to the rest of us. A proper shareholder spring would be about resetting the social contract, nothing less – a giant first step towards rebalancing the economy in the truest sense.

Just when commentators were beginning to query its growth prospects, Apple posted record Q1 2012 results of $39bn revenues and almost $12bn net profits, respectively 50 per cent and almost 100 per cent up on a year ago. That means its margins are increasing. As participants in a fascinating CRESC seminar on the Apple business model heard this week, they more resemble those of a software or professional services firm than a mass-manufacturer. According to one calculation, Apple’s capitalisation has overtaken that of Spain, Greece and Portugal combined.

Being unique, Apple in one sense is unrepresentative. But in another its very success starkly poses some of the most urgent, representative questions about 21st century capitalism – not the usual questions about how it does it, but why.

In some respects, Apple is a role model. It understands better what it means to be a company than almost any other. It has twigged that the best way to compete is to remove itself from direct competition through innovation. Markets eventually compete away the high price of novelty – although slowly in Apple’s case – but by that time it has been able to use the proceeds to innovate some more – first in computers, then in music, followed by phones, tablets and, not least, retail.

That is possible because Apple reaps full benefit from doing more things righter for consumers than any of its rivals. Apple’s real genius is embodied not in products but in the ‘institutional ecosystem’ that links products to their marketplace: first the integrated hardware and software, then iTunes and the App Store. iTunes is built on the power of ‘pull’ – it makes it absurdly easy for you to get exactly what you want, no more, no less, as opposed to what a record producer wants you to have. Nothing mediates between demand and instant supply. The App Store goes a step further, giving iPhone and iPad users the opportunity to go beyond customisation to create additional value themselves – as with burgeoning medical or social-entrepreneurial applications, for example.

Crowdsourcing apps means that Apple doesn’t even need to know what a device is for. The iPad is a mega-hit that has no killer app – but, hey, that’s OK, the customer can decide. Outsourcing innovation like this keeps Apple effortlessly differentiated (thus justifying those everyday high prices) while the customer does the work – and by the way, Apple, will take 30 per cent of your App Store returns as its cut for providing the platform. Financial genius: but because of the potential for user value creation Apple can claim to generate at least some of what Umair Haque terms ‘thick’ or authentic value, as opposed to the thin, extractive financial kind.

Not that Apple is light on the financial kind. And this is where questions surface that don’t arise for less profitable firms. Where does this stupendous profit come from? What is it for? As one blogger asked, is Apple too profitable?

In fact, unique as it is, the business model that emerged from the seminar evokes unease as well as admiration. Apple’s stakeholder relations are weirdly asymmetrical: while the tight customer relationship is legendary, the financial engine is overdeveloped at the expense of a social conscience that is stunted to the point of autism. How else could it have been caught so unawares by the labour abuses uncovered at assembler Foxconn’s Chinese plants? Apple’s reaction – to demand improvements without changing its own draconian terms – gives Foxconn little option but to replicate its customer’s behaviour in even more extreme form, outsourcing and beating up its own subcontractors. The sufferers are employees, many of whom, says activist and researcher Jenny Chan, are semi willing student interns. While in Apple’s relationships with customers both sides gain – thick value – in those with its Chinese suppliers there is only one winner. As Aditya Chakrabortty noted in The Guardian, Apple’s business model offers no benefits to US workers, who badly need jobs and incomes – but little more to its Foxconn subcontractors.

These issues come into sharp focus as, with margins rising as Foxconn’s fall, and $110bn (more than enough to satisfy even Steve Jobs’ notorious conservatism) sitting in the bank, Apple asks itself a momentous question. What is it to do with all that money?

The standard ‘thin value’ answer is to ‘disgorge’ it to shareholders. The thick value alternative – and Apple’s pivotal opportunity – is to use it to benefit the environment on which it ultimately depends by creating stable, well-paid US jobs and investing in supporting technologies and institutions. With labour accounting for just 4 per cent of an iPhone 4’s production costs, it could well afford to. And until 30 years ago, when the ideologically based shareholder value movement falsely decreed that shareholders alone bore risk and were therefore entitled to all the reward, that’s what it would have done. Instead, in the 1980s such inclusive ‘retain and reinvest’ models (keynote speaker Prof William Lazonick’s term) gave way to the sharply shareholder-focused ‘downsize and distribute’ as managers responded to their equity-based incentives. Employment, career and pensions have all been sacrificed on the altar of shareholder returns, not to mention (as Foxconn workers will testify) pay and conditions. Thus have business models like Apple’s been used to benefit directly the 1 per cent at the expense of the rest of us.

As Lazonick’s research shows, as dividends and share buybacks have absorbed ever larger proportions of US company earnings, less and less has been left for R&D. So not surprisingly innovation is another casualty. Will that be Apple’s story? Stock options currently worth $730m give CEO Tim Cook every incentive to continue on the ‘downsize/distribute’ track, and the recent announcement of renewed dividend payments and authorisation of share buybacks point ominously in the same direction. Perhaps naively, I still harbour hope that the company’s sensitivity to its customers (not shareholders) gives us a pressure point to push on. As Chan notes, ‘Products embody social relations’ – and those embodied in iPhones and iPads are simply unworthy of the company customers want Apple to be. This, rather than a drying-up of creativity after the passing of Steve Jobs, may be the real danger to Apple’s future: as Chakrabortty puts it, for all the sleekness of its products, Apple’s business model is not just unattractive – over the long term, it may be unsustainable too.

As editor of a magazine, I once had a problem with a young sub-editor. I thought she was sulky and lazy, and I turned down her request to become a writer – in effect a promotion. I reckoned my predecessor had appointed her for her looks rather than for her brains.

When I left, my successor promptly reversed the decision – and energised by her new job she became a star, ending up on a national where, exquisitely, she later commissioned me to write a couple of pieces for the business section.

That experience taught me a lot about the power of context and expectation, later backed up by impeccable academic research: although some human capacities are fixed (most people will never play football as well as Cesc Fabregas or invent the theory or relativity), many others aren’t. Generally speaking, if you expect people to do something well, they will do better than if you expect them to do badly – and that includes physical as well as mental attributes. Other evidence shows that only a tiny proportion of performance (Deming put it at 5 per cent) is dependent on the person alone, compared with 95 per cent on the system they are working in – and over which mostly they have no control, except to behave badly. To some degree, therefore, quality, or the lack of it, is in the eye of the beholder.

So I was mildly shocked to read a recent piece in the FT on managing mediocrity that perpetuates so many hoary old myths about talent management that it’s hard to know where to begin.

Let’s try. In fact the article is a classic case of looking at the world through management eyes, in which the worker figures only as an object. It’s as if management played no part in employees’ performance. Yet the best predictor of employee engagement and satisfaction at work, and thus of discretionary effort, is the quality of the immediate manager. And here the evidence collected by Julian Birkinshaw and colleagues at London Business School is incontrovertible. In the view from below, more people who actually do the work have bad managers than have good ones.

Survey after survey confirms the management gap. Thus, some years ago, the CIPD noted that if Britain at work was a marriage, it was ‘a marriage under stress, characterised by poor communications and low levels of trust’.

Only a minority of workers felt senior managers and directors treated them with respect, and two-thirds didn’t trust them. Around one-quarter of employees rarely or never looked forward to going to work, and almost half either wanted to leave or were in the process of doing so.

Or take the grim reading provided by Gallup’s Employee Engagement Index. In 2005 it found that just 16 per cent of UK employees were positively engaged, meaning they were loyal and committed to their organisation. The remaining 84 per cent were unengaged or actively disengaged, ie physically present but psychologically absent. And if anything the situation was getting worse – since 2001 the proportion of engaged employees had fallen, while those actively disengaged have increased.

Gallup then put the cost to the UK economy of active disengagement at £40bn, as employees expressed their disenchantment by going off sick, not trying, or going somewhere else. The culprit: poor management. ‘Workers say they don’t know what is expected of them, their managers don’t care about them as people, their jobs aren’t a good fit for their talents, and their views count for little’, Gallup reported. Disaffection actually grew with tenure, so ‘human assets that should increase in value with training and development instead depreciate as managers and companies fail to maximise this investment.’

Treating talent as a fixed quantity, categorising workers as A, B or C players and hiring (and firing) accordingly is yet one more crude example of the fallacy of composition that so besets management: believing that the performance of the whole is the sum of those of the individual parts. A better analogy is football. Most work, like football, is a team game. In teams the context is all: so a well-integrated team of B players can outplay a disjointed group of stars, a C player can be elevated into an essential element in an A team, and a star can be brought to earth by a transfer into an unsympathetic context. Just ask Chelsea’s Fernando Torres. Academic research among stock analysts confirms this: stars often underperform in a new setting because the role of the non-stars in establishing the enabling environment has been underestimated. A team is a complex and sensitive organisation.

This explains why the idea of bottom-slicing or forced ranking, as casually proposed in the FT article, is in most cases so misguided. Forced ranking has been a fact of life at GE, and also at Microsoft. But there is no evidence of a causal link with their success, and stacks to say that more often than not it does more harm than good. It takes no account of the team and the impossibility of optimising its performance by optimising the individual parts. Forced ranking introduces fear and competition, and while in economic theory these optimise individual performance, they sub-optimise the team. Fear makes people stupid, and if it motivates at all, it is the behaviours that undermine teamwork, such as hiding, cheating and hoarding precious information and other resources.

The definition of management is getting things done through people. Its authentic magic is getting extraordinary results from ‘ordinary’ resources by using good work design to multiply individual and organisational talent, making the whole more than the sum of the parts. That’s management’s job. If an organisation is mediocre, there’s only one place where the responsibility lies.

It was W. Edwards Deming who said that the most important numbers in management where unknown and unknowable. To most managers and economists brought up by the book that’s terrifying and unthinkable. Rather, they take comfort in disdaining anything that is not quantifiable. Hence the thoughtless parrotting of the unspeakable ‘If you can’t measure it you can’t manage it’, perhaps the most destructive slogan in management. Hence, too, the near total neglect of the ‘soft’, human aspects of work in management theory and practice.

One of the few economists brave enough to stand out against the crowd is Umair Haque, director of Havas Media Lab, eloquent and outspoken blogger at Harvard Business Review and author of 2010’s ‘The New Capitalist Manifesto’. Paradoxically, so strong is the economic orthodoxy – with its potential not just for ridicule but for simply freezing out dissident voices – that it takes more courage to confront it as a ‘professional’ than as an amateur ranter. ‘Manifesto’, with its distinction between ‘thick’ or authentic and the ‘thin’ value of conventional business economics, was a bold step off the beaten track (into the wilderness, the orthodox would sniff). ‘Betterness: Economics for Humans’ (Kindle Single or pdf from hbr.org) takes things a step further, sketching out a framework for thinking about the organisations of the future.

Haque’s underlying contention is that in 2008’s financial crisis, and its aftermath, we are witnessing not just the popping of a bubble, but the final meltdown of the obsolete social and economic institutions, including economics and management, that carried us through the 20th century. Our institutions have become ‘extractive’: they take increasingly more value out of the world around them than they put in. In these circumstances, he says, there can’t and won’t be a recovery in the normal sense, because the problem isn’t a recession. It is the end of an era and a paradigm, the Great Splintering of a whole social contract.

In many of his blogs, Haque heaps fire and brimstone on the corruption, trivialisation and McSerfdom that are the by-product of today’s reductive materialistic paradigm. Since Milton Friedman, theorists have posited that the job of economics, and of management as its faithful amenuensis, is to curb the pathologies of human nature. Haque is well aware that establishing a new paradigm it is not a simple matter of demonstrating the inadequacy of the existing one: at least the outline of a new and better model must be visible. Here therefore he concentrates on the challenging job of constructing a positive framework, one moreover that relates to individuals as well as corporations. This is by no means the final word, as he is the first to admit. But as the first on the long route to building a new and very different corporate order it has special value. So instead of companies narrowly built (notably unsuccessfully, as it happens) to prevent anyone else – workers, customers, suppliers and society as a whole – from eating the shareholders’ lunch, he proposes an architecture which would allow them to be judged not on financial profit but on how far they the world a better, more fulfilled place than when they found it.

The key is in the book’s subtitle – ‘economics for humans’. The overarching idea is ‘eudaimonia’, the Aristotelian concept of ‘human flourishing’ or wellbeing, a far wider idea of enrichment than material wealth. Wealth plays a part but as an enabler, not an end in itself (bringing to mind Dave Packard’s reminder from a different age that ‘profit is not the proper end and aim of management – it is what makes all the proper ends and aims possible’). Translated into economic terms eudaimonia would embrace measures of social, human and creative capital as well as the financial kind.

On the path to ‘a better path to prosperity’, Haque invokes three other difficult-to-quantify Greek terms as guides: poiesis, arête, and kairos, corresponding roughly to generational advantage, organisational advantage, and exploiting turning points – as now – to change the terms of the game. The starting point is that business as usual is not only not the answer: it is the problem. ‘Organisations that can’t contribute to the Common Wealth are increasingly useless to people, communities, society, the natural world and future generations. Though they may grow GDP or create shareholder value, increasingly they cannot spark the conditions for a meaningfully good life. Those that can, in contrast, are useful, and they are rarer than a downpour in the Sahara. And it is to those organisation that power, advantage, trust and returns are already inexorably flowing’.

No organisations have done more than start out along that route. But some companies offer a glimpse of part of the equation. For example, think of Apple, which has got to be the biggest company in the world by doing exactly what companies should: generating value through relationships (once an Apple buyer always an Apple buyer), through ceaseless innovation (rather than protecting what it’s got and extracting rents), and also, crucially, by turning devices like the iPhone and iPad over to buyers via the app store to create their own value in their own lives – iStethoscope, anyone? Apple is hard to compete against precisely because doing more of the same harder, faster, cheaper than rivals, the tradition recipe for competition, is simply irrelevant against this kind of mastery. As Haque observes in the chapter on arête, ‘the habits of betterness’, betterness involves going beyond competitive advantage: ‘The goal isn’t mastering and defeating rivals, but living up to your own potential’. An organisation’s most important adversary is itself.

There are plenty of implications to roll around here. One, as Haque points out, is that ‘the corporation as we know it is probably obsolete’. This may be true. Even if it is, however, that does not guarantee its demise or the automatic emergence of something better. ‘The corporation as we know it’ is not about to roll over and give up without a fight. The gravitational pull of the status quo is extraordinarily powerful, not the least of its strengths being that it has convinced us that this is the way it is and there is no alternative. It’s Haque virtue that he confronts this fatalism head on. If human beings have constructed one set of institutions in the past, they can demake and remake them for the different circumstances of the present. You can argue whether his formula is right or not. But more important is the trumpet call to arms: putting individuals squarely in front of their responsibilities to help build the next round of institutions we live by, ‘Betterness’ has an importance far beyond its 69 pages and £1.99 download price.

Read my April 2012 story in Management Today here

Deming was categorical. You can’t optimise a whole by optimising the parts. If you optimise the parts, you suboptimise the whole. If you optimise the whole, some of the parts will not run as fast or as intensively as they could.

Yet optimising the bits without allowing for unexpected consequences at the level of the whole remains the besetting sin of management, not to mention politicians who interfere in management. At the level of the firm performance-related pay, targets, outsourcing and privatisation of functions, shared services are all examples of the fallacy of composition – the idea that what’s good for the part is automatically good for the whole.

As John Kay remarked in a recent artlcle, ‘Although it is essential that they do, policymakers and business people have difficulty thinking in terms of systems. The common sense of everyday observation has an appeal that analytic, evidential reasoning can never match.’ So it is still believed that making individuals work harder will automatically produce better results, that targets will improve medical or other outcomes, ignoring the interaction of the local ‘improvements’ with the rest of the entity.

Unlike the fallacy of composition, however, failure to think in systems holds true at whatever level you look. Capitalists are especially bad at thinking of capitalism in these terms.

Take the economy. An economy, like an organisation, is not a machine, it is an ecosystem, whose different components are co-dependent, each living off and supporting the others. Thus a vibrant economy consists of a constant interplay of markets and organisations, each necessary but insufficient on its own. By definition organisations are different from markets, since otherwise there would be no reason for them to exist, and they have different functions and operating rules.

What is it that companies do that markets don’t? In brief, they innovate. Companies come up with new products or services, or better versions of old ones; markets sort out the good from the bad and eventually compete the advantage of the successful innovator away, passing on the benefit to society in the form of lower prices and, just as importantly, a more capable and resourceful economy. It’s Schumpeter’s creative destruction in action. Apple is a perfect illustration of how the relationship works. With each innovation – iPod, iPhone or iPad – it cannibalises an existing market segment and creates a new one out of a fresh set of resources. Already music players are in relative decline as they are commoditised and their capabilities incorporated into phones, and in time the same thing will happen to smartphones and tablets, building the pressures on managers to do the same thing over again. The company proposes, the market disposes.

Innovation is what companies are for. Over time they can’t outcompete the market (although Apple’s unparalleled differentiations skills allow it to outrun its rivals in the short term) – already it is possible to pick up all the parts to make up a competent music player on the open market. Apple is so large and profitable because it is set up to do what companies do better than anyone else. Now we can see why trying to make organisations behave more like markets is such an egregious mistake – a classic error of composition. Markets are about competition and efficiency. But they can’t innovate, any more than a shark can: their beauty (if that’s what it is) is that their discipline is impartial and intentionless. They prevent companies getting too big (or should). They decide which survives and which doesn’t. Companies, on the other hand, do have intention and purpose, and unlike markets can strategise to fulfill them. They can choose to take one step back in order to jump two steps forward. Instead of cashing in all their returns, they can decide to spend time and money on R&D to develop new and more profitable projects, enabling the cycle to start all over again.

In the past – up till the 1980s – some companies did important amounts of basic research. Between them, AT&T’s Bell Labs and Xerox Parc generated the transistor, lasers, cellular telephony, the Ethernet, fibre optics and the graphical interface for computers. In the UK Glaxo was sometimes described as a quoted university. All that changed with the advent of the shareholder maximisation ideology of the 1980s under which managers were able to shrug off any wider responsibilities to the ecology as a whole. Innovation rates in the private sector slumped as companies obeyed the summons to boost shareholder returns in the short term.

The slack was taken up by another element in the ecosystem, the public sector. Companies have always needed inputs from state-owned organisations to transform into economic growth, including the social (education, health, law and order) and physical infrastructure. To these was now added the basic research on which their innovations were based. Google’s algorithms, hypertext, the key components of Apple’s iPhones, the internet itself – all these originated in government laboratories. This, again, explains why private-sector (and government) exhortation to universities and research institutes to focus on near-term applied research is wide of the mark. It is in companies’ interests to do that. The system is optimised when each part concentrates on what makes it unique and what it does best.

To adapt and thrive, the economy needs different kinds of organisation inhabiting different niches and making different contributions to the health of the whole. In this light, the UK economy is an ecosystem that is badly out of balance. As Will Hutton’s Ownership Commission has obligingly noted, it is monolithic and unresilient, having become overdependent on giant, uniquely shareholder-focused PLCs which account for over half of economic activity.

The consequences are clearest in the banking sector, where companies that were too big and massively overextended have been artificially kept alive, and they are now bending the whole system to their requirements rather than the other way round. The same is true in less extreme form of many other sectors, where a few oversized firms have overwhelmed the system’s immune and regulatory defences: having no regard for the ecosystem as a whole, they are like cancers growing pathologically out of control. To change the metaphor, the world being reengineered to keep the dinosaurs alive. By contrast, other organisational forms such as coops, employee mutuals and medium-sized family firms are grossly underrepresented.

Ironically, for the market to work as capitalists pretend to believe it should, they have to learn that the power and influence of capitalists need to be severely curtailed in the interests of capitalism as a whole. The lesson of the financial crash was that just as individual optimisation blows up companies, unrestrained corporate optimisation has the potential to blow up the entire ecosystem. Nothing has changed since then. Unless we learn how to think and act systemically, the same thing will happen, over and over again.