Everything we’re told about business is wrong (well, almost)  Too few understand the modern company

• We’re told business is run by a capitalist elite or bourgeoisie which uses its wealth to control the means of production.  

Wrong: The managers who control modern business are mostly wealthy. But they are wealthy because they control business, not the other way round. The richest people in the world today are founders: LVMH’s Bernard Arnault, Amazon’s Jeff Bezos, Microsoft’s Bill Gates and Tesla’s Elon Musk.

• We’re told ownership of the means of production is the main source of economic power. 

Wrong: In the 21st century, the tangible means of production – buildings, plant, machinery and so on – are mainly owned by anonymous institutional vehicles that have little or no influence on the conduct of business. Airlines don’t own their planes. Amazon doesn’t own its warehouses. Apple products are mostly assembled in China by a Taiwanese company. (And you probably haven’t heard of AerCap, Prologis or Hon Hai Industries). The intangible means of production – the organisational capabilities that characterise modern corporations such as airlines, Amazon and Apple – are incapable of being owned by anyone.

• We’re told multinational corporations are larger, more powerful and more enduring than states. 

Wrong: In 1990, Britain’s two leading industrial companies were ICI and GEC.      Neither company exists today. General Motors – the signature corporation of the 20th century – went bankrupt in 2009 and was rescued by the US government. IBM was the world’s dominant computer company, but the internet and mobile technology passed it by. Sears Roebuck, once the largest retailer in the world, now boasts just 11 stores. Do you really think Facebook is more powerful than the British Empire (which lasted two centuries) or the Soviet Union (which survived for 70 years)?

• We’re told that the stock market is a vital source of finance for business. 

Wrong: In the UK and US, cash acquisitions of listed companies and buybacks of existing shares now substantially exceed the proceeds of new share issues. The stock market is today a means of taking money out of companies (for the benefit of early-stage investors and founders), not for putting it in.

• We’re told that manufacturing – making things – is the central economic activity and the only source of ‘real jobs’. 

Wrong: Manufacturing now provides less than 10% of employment in the UK and US – and much of what it does comprise is in activities like pharmaceuticals and aviation, in which knowledge matters more than physical labour. Excavating coal and smelting iron may have provided ‘real jobs’. But they were awful jobs and we should be glad they are no longer needed. Assembly line jobs have been taken over by robots, or workers in poor countries where people are willing – even keen – to work for less than the cost of using the machines which are steadily replacing them. Yet we should remain alive to the social and political consequences of the decline of traditional communities. These populations were based on the solidarity of large groups of (mostly) men in low-skilled employment. That type of employment has disappeared. It will not return.

• We’re told that greed is the principal economic motivation and that any attempt to fetter it is an obstacle to prosperity. 

Wrong: ‘Earnings management’ and the ‘bonus culture’ have undermined many of the most successful modern corporations. Intrinsic motivation – the satisfaction of a job well done – is critical to success in business. The approval of colleagues is a powerful human incentive. ICI and GEC died because they shifted their focus from being great chemical and electrical companies to ‘maximising shareholder value’. The decline of Boeing is extreme – yet exemplary of many others. (And, by the way, Adam Smith didn’t believe that greed was good. Nor did he visit a pin factory.)

• We’re told that economic growth – our addiction to ‘more stuff’ – is taking us beyond the limits of planetary resources. 

Wrong: Modern economic growth is mainly about ‘better’ not ‘more’. It is the product of human ingenuity, which recognises no limits. An iPhone costs £5,000 per kilo and the Pfizer covid vaccine £500,000 per kilo. The value of the product lies not in the ‘stuff’ but in the ideas and skills of the people who make it.

• We’re told that businesses are defined by what economists call ‘production functions’ – the combination of capital and labour that yields output. 

Wrong: Businesses today are defined by their combination of capabilities, not their physical attributes. You can take the ‘means of production’ home and frequently do. Tangible business capital consists of computers, vehicles, offices and warehouses. Modern businesses purchase these things as services, just as they buy electricity and heating. They need power – but the electricity company doesn’t control the business.

• We’re told that modern business developments cause greater inequality. 

Partially wrong: There are several measures of inequality. No single generalisation is valid – or even possible. Income and wealth inequalities have increased in some countries. Seemingly paradoxically, this is true especially in some of the parts of the world where extreme poverty has declined most. Far more people have escaped poverty since 1980 than in any other period of economic history. Key      enablers of their escape are globalisation and the extension of the market economy in Asia and Eastern Europe.

• We’re told that hero leadership – the inspiration of people of genius – is the critical factor in business development. 

Wrong: Business development is mostly the result of cooperative activity. Nobody in the world knows how to build an Airbus. But 10,000 people working together do. Economic progress comes from the accumulation and combination of collective knowledge and intelligence – problem-solving capabilities – in groups working together. We would still have small computers in our pockets and electric cars on our roads if Steve Jobs and Elon Musk had never been born. These products – like almost all seemingly transformational innovations – were the inevitable inventions of their time, even if their exact form is the result of certain individuals in particular businesses.

• We’re told a different story about how business works – by both supporters and critics of capitalism. 

Right: Both sides of that debate have unconsciously connived in a description of business that is both repulsive and false. Business has evolved into a knowledge economy. Yet the language we use to discuss it has not.