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Archive for August 2015

Why (African) business schools need more business history

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Early retail and distribution? Parade sales in early twentieth-century Cape Town (Source: Cape Town Archives Repository, Elliot collection, E8308)

Early retail and distribution? Parade sales in early twentieth-century Cape Town (Source: Cape Town Archives Repository, Elliot collection, E8308)

On Monday, when stock markets crashed globally, Larry Summers tweeted: “As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation.”

The first thing Summers did was to reference financial history. Implicitly he asked: what can we learn from the past to make sure we adapt, survive and prosper when conditions in the present change? I would think that the same applies to the world of business too: CEOs, directors and managers need to know how to react when change inevitably comes, either externally to the firm – for example, when the economy is heading into a recession (as the South African economy seems to be doing) or when the state decides to intervene – or internally to the firm – for example, when the firm grows beyond what it’s organisational structure can support or when developing a Corporate Social Responsibility strategy. And one source of wisdom to learn from (not the only one, granted, but an underappreciated one) is history.

The need for business history is understood in the world’s top business schools. Harvard Business School, most famously, has a large team of business historians and publishes the Business History Review. The reason a place like Harvard invests in business history is because of intellectual honesty. As Andrew Godley, director of the Centre of Entrepreneurship at the Henley Business School explained to me,

almost all MBA subjects are taught using case studies. Case studies are, by definition, historical. They are justified as devices to aid student learning of a particular theme (e.g. Diversification strategies). But because they are historical by definition, any successful interpretation of the case study (and so any successful learning outcome) depends on the students understand the historical context facing the decision makers in that particular firm. Acknowledging explicitly that context matters and that context changes therefore leads to the further acknowledgement that MBA students need some sort of grounding in business history methods to be able to correctly interpret (and so learn from) case studies.

While business history was born in the early twentieth century, it took off  in the 1960s. Alfred Chandler’s seminal Visible Hand (1977) explained the development of the firm from small-scale (often family-owned) businesses to large corporations and conglomerates. A 2002 paper by Naomi Lamoreaux, Daniel Raff and Peter Temin explain this Chandlerian view most succinctly:

Writing in the mid 1970s, Alfred D. Chandler, Jr., attributed the success of the U.S. economy in the twentieth century to the rise of large, vertically-integrated, managerially directed enterprises in the nation’s most important industries. These enterprises, Chandler argued, were dramatically more efficient than the small, family owned and managed firms that had characterized the economy earlier. Small firms had to depend on the market to coordinate their purchases of raw materials and the sale of their output, but large firms took on these supply and marketing functions themselves, coordinating them internally by means of managerial hierarchies. This visible hand of management, Chandler claimed, was such a vast improvement over the invisible hand of the market that firms that exploited its capabilities were able not only to dominate their own industries but to diversify and attain positions of power in other sectors of the economy as well.

The problem, though, is that this linear trajectory of firm development reversed by the 1980s. Conglomerates dissolved and large corporations began to divest their vertically integrated components. Here’s Lamoreaux et al. again:

Indeed, as the economic environment changed during the 1980s and 1990s, classic Chandlerian firms increasingly found themselves outperformed, even in their home industries, by smaller, more specialized, vertically disintegrated rivals. Many of the enterprises that now rose to the top succeeded by substituting for the visible hand of management alternative means of coordinating vertically and horizontally linked activities—most notably long-term relationships that were intriguingly similar to those that prevailed before the “rise of big business” or even before the so-called “market revolution.” Large Chandlerian firms in turn sought to improve their competitiveness in this new environment by refocusing resources on their “core” businesses, selling off subsidiaries and even entire divisions and, in the process, reducing significantly the range of economic activity subject to managerial coordination.

Lamoreaux et al. then develop a framework to understand why this trend reversed. Although there is much more in the paper, the following paragraph effectively summarize their view:

The perspective of hindsight enables us to see that this puzzling combination of trends can be attributed in part to the effects of communication and transportation costs on the location and organization of economic activity. When these costs are high, economic activity tends to be local and consequently small in scale. At the other extreme, when communication is virtually free, as on the internet, and transportation is very cheap, then economic activity can be located anywhere and even tailored to individual needs. In the middle, however, when communication and transportation costs are neither prohibitive nor trivial, there are advantages to be obtained from concentrating productive activity in specific locations and in large firms.

Thus, a u-shaped curve: when communication and transport costs are high, firms will be small; when they are infinitely small, they will also tend to be small. But when they are somewhere in-between, large firms will be the equilibrium outcomes.

Except: the paper was published just before the tech industry blossomed. (Google was four years old, Facebook was yet to be founded, the iPhone would only be released four years later.) How have their model held up to these developments? Not great. Only last week, Google announced that it will restructure into Alphabet as a conglomerate in industries ranging from ‘search’ (the original Google), to self-driving cars, to health, to finance. Apple, originally in PCs, now has phones, and watches and there is talk of a car too. I’m perhaps oversimplifying their argument, but it is clear that business forms do not only depend on communication and transportation costs.

This is especially true in emerging markets. As Harvard’s Aldo Musacchio suggests, emerging markets have specific ‘institutional voids’ that entrepreneurs must overcome if they are to be successful. This may be anything from capital market failures, a poor education system, or severe labour market regulations. How businesses react to these institutional voids determine the type of firm that will be established. His example: the rise of the Tata Group in India.

Our lack of understanding how these institutional voids gave rise to indigenous businesses is especially acute in Africa. In South Africa, we have two excellent business historians (Anton Ehlers at Stellenbosch and Grietjie Verhoef at UJ), but both are within a decade of retirement. There is much to be done to understand the institutional voids that gave rise to firms like SAB, or Discovery, or Black-Like-Me or the myriad of family businesses and informal businesses that continue to co-exist with larger corporations. We need to understand the rise and decline of state corporations. We need to know why banks collapse. We need to know why not-for-profit corporations exist. What are the role of ethnic minorities? What about black-owned businesses? What role for the apartheid state and sanctions? And what about colonialism and independence and state capitalism and corruption and its interplay with businesses in other African countries?

The rise of African capitalism over the next decades will require a large pool of skilled managers that can both understand the domestic complexities and global supply chains. I hope that these managers, trained in Africa’s leading business schools, will draw from the lessons of our own history and context. This, then, is my challenge to South Africa’s top business schools: Encourage student dissertations on the histories of indigenous businesses, introduce a course in business history (or the History of African Capitalism), appoint a tenure-track professor to research the histories of African businesses, create an archive of business history to protect the documents that future generations will need to understand our current successes and failures..

These challenges are not easy to fulfill in the time and resource constrained business schools of today, where accreditation uber alles. Yet we must try harder. We have a rich continent, with a rich (if largely unwritten) history. This history is messy and it still affects us. Which is why I love this quote by Stephen Mihm of the University of Georgia:

Business history – or the history of capitalism – is not a science. It’s a way of looking at the world that acknowledges the messiness of human economic activity even as it promises to explain both the recurrent patterns of the past and the unique factors that led up to the present. For business school students, history breeds recognition that the present is nothing more than the leading edge of the past.

What do Pope Francis and Julius Malema have in common?

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Beautiful but poor: The Transkei is still largely untouched by capitalism Source:

Beautiful but poor: The Transkei is still largely untouched by capitalism. Source: Tyler Brown

Pope Francis and Julius Malema live worlds apart. But both have a deep dislike – one might even say hatred – of an economic system in which trade, industries, and the means of production are largely or entirely privately owned and operated for profit. This system is called Capitalism.

During a march in Limpopo yesterday, Malema again pronounced the EFFs anti-capitalist sentiments. An Economic Freedom Fighters retweet summarised it best: (The) EFF HAS DECLARED WAR ON #CAPITALISM; MALEMA: THIS IS A DECLARATION OF WAR AGAINST EUROPEAN CAPITALISM.

And a month earlier, Pope Francis made an arguably more eloquent (and damning) critique of capitalism:

Time, my brothers and sisters, seems to be running out; we are not yet tearing one another apart, but we are tearing apart our common home. Today, the scientific community realizes what the poor have long told us: harm, perhaps irreversible harm, is being done to the ecosystem. The earth, entire peoples and individual persons are being brutally punished. And behind all this pain, death and destruction there is the stench of what Basil of Caesarea – one of the first theologians of the Church – called “the dung of the devil”. An unfettered pursuit of money rules. This is the “dung of the devil”. The service of the common good is left behind. Once capital becomes an idol and guides people’s decisions, once greed for money presides over the entire socioeconomic system, it ruins society, it condemns and enslaves men and women, it destroys human fraternity, it sets people against one another and, as we clearly see, it even puts at risk our common home, sister and mother earth.

Ouch. If the Pope and Malema are against it, who on earth wants to be for it?

Well, actually, history is. #awkward

Let’s look at what’s happened to world poverty since 1936, when the Pope was born. Or since 1981, when Julius Malema was born. The remarkable thing is that in 1936, more than half of the world’s people were living in extreme poverty (56%). In 1981, the year that World Bank data starts, 43% of the world’s people were still living in poverty. In 2011, that figure had fallen to 14%. In short, global poverty has fallen enormously in the space of Pope Francis’s lifetime. And the reason? The ‘dung of the devil’: capitalism.

Here’s another statistic to baffle the mind: As The Economist reports, in the decade between 2003 and 2013 (which includes a global financial crisis), the income of the median-person in the world has doubled. Yes, doubled! Why? Because India and China have opened their economies, encouraged innovation, reduced state-involvement and allowed economic growth to improve the living standards of their people.

And all of this has happened despite immense global population growth; in 1936, there were roughly 2.7 billion people, and in 1981 there were 4.5 billion.

We are not only more affluent, but we also live longer. And healthier: we have eradicated illnesses, like smallpox, and we have access to modern medicine that can fight diseases from the common cold to tuberculosis that in the past would have likely killed us.

Blame capitalism for reducing poverty in China: The Shanghai skyline in three decades

Blame capitalism for reducing poverty in China: The Shanghai skyline in three decades

Even the poorest of the poor have access to services that the richest of the rich could never have imagined in 1936. With the press of one button, a cellphone now has access to the world’s information on Wikipedia. It is estimated that 90% of the world’s population has watched at least one episode of Idols, an unthinkable share only two decades ago. And most governments now provide free or affordable schooling and sometimes even university education – a luxury product in 1936 (just ask anyone older than 80).

Of course, capitalism is not perfect. The market cannot and does not solve everything; no economist in their right mind would claim this. Adam Smith, the father of economics, was clear about how the state should create the rules and institutions for the ‘invisible hand’ to do its thing. And those people that, for whatever reason, are excluded should be taken care of by state institutions like pension funds, disability insurance and free schooling.

We can also just ask the poor. If capitalism is so bad, why is it that poor people in non-capitalist countries want to migrate to capitalist countries? Why is it that poor, rural people in South Africa migrate to the cities (where ‘European capitalism’ arguably has a bigger footprint)? Is it because, and this might sound radical to some, they believe they can attain a better life for them and their children in these capitalist places? I think so.

I appreciate the leadership qualities of the Pope and Malema; they are charismatic and have large numbers of followers that look to them for guidance. That is even more reason they need to understand that people are not poor because of capitalism, they are poor because of not having enough capitalism. (Replace the word capitalism with innovation, as Deirdre McCloskey suggests, and suddenly the ideological blinkers fall off.) Here is Venezuelan economist Ricardo Hausmann:

In poverty-stricken Bolivia, Francis criticized “the mentality of profit at any price, with no concern for social exclusion or the destruction of nature,” along with “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

But this explanation of capitalism’s failure is wide of the mark. The world’s most profitable companies are not exploiting Bolivia. They are simply not there, because they find the place unprofitable. The developing world’s fundamental problem is that capitalism has not reorganized production and employment in the poorest countries and regions, leaving the bulk of the labor force outside its scope of operation.

As Rafael Di Tella and Robert MacCulloch have shown, the world’s poorest countries are not characterized by naive trust in capitalism, but by utter distrust, which leads to heavy government intervention and regulation of business. Under such conditions, capitalism does not thrive and economies remain poor.

The ANC, in a discussion document released last week, knows this. It says

capitalism remains the dominant socio-economic system on a global scale. In the era of globalisation, there has been much technological progress which has opened up vistas for human progress and created the basis for the alleviation of poverty on a grand scale.

Spot on. Excellent. But then:

However, the rampant unregulated practices of the past 30 years, including appropriation of most of national income by a few, have undermined its legitimacy.

That is incorrect. Poverty has fallen significantly in South Africa over the last 30 years (the ANC should know better, they ruled for 21 of those 30 years). What has undermined the legitimacy of the ruling government is its inability to get capitalism (or innovation) working in places like the former bantustans (see picture), where conditions are not much better than they were 30 years ago. Where capitalism has worked – in the main metros – it has created jobs and wealth and a better life for all (although for some more than for others). Where capitalism has not been allowed – where chiefs still prevent private ownership, for example – poverty has remained high and living standards low.

If the Economic Freedom Fighters and others continue their campaign in South Africa to discredit capitalism as the solution to poverty, we will never alleviate it, especially not in those regions where the problem is acute. If Pope Francis continues to discredit capitalism in his speeches to the poor and destitute of the world, they will continue to remain poor and destitute. (The conspiracy theorists would say that that is what the church wants. That would be silly, because the church benefits from a rich flock. Ask John Oliver.)

Let us learn from that one true source of wisdom: history. India and China have managed to reduce poverty dramatically by embracing capitalism, not rejecting it. South Korea have managed to reduce poverty dramatically by embracing capitalism, while North Korea, by rejecting capitalism, could not. Pope Francis and Julius Malema should embrace capitalism if they really cared about the plight of the poor.

Books for the (never-ending) winter

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BooksCottonAt the end of August, Helanya and I will move to Utrecht, the Netherlands for an eight-month sabbatical. (This time, I’m tagging along.) There are many things to look forward to: a vibrant economic history research group (in Utrecht, but also in many other departments across Holland: Wageningen, Nijmegen, Groningen), fast internet (and no load-shedding), and a biertje en bitterballen at one of the quaint canal cafes.

BookPhishingBut there will also be challenges, and none more demanding than the never-ending winter. We leave exactly when the southern hemisphere transforms from winter to summer, and will return when it transforms back again, from summer to winter. In short: we will have 18 months of winter.

So, to keep myself entertained for the year-without-a-summer, I went book shopping. But book shopping presents a dilemma, one, I imagine, that is shared by many book buyers. I really like a printed book (especially a hardcover). It smells and feels great and sits nice and pretty on our bookshelf. And I like the idea of having shelves of unread books; Umberto Eco explains why:

The writer Umberto Eco belongs to that small class of scholars who are encyclopedic, insightful, and nondull. He is the owner of a large personal library (containing thirty thousand books), and separates visitors into two categories: those who react with “Wow! Signore professore dottore Eco, what a library you have! How many of these books have you read?” and the others — a very small minority — who get the point that a private library is not an ego-boosting appendage but a research tool. Read books are far less valuable than unread ones. The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market allows you to put there. You will accumulate more knowledge and more books as you grow older, and the growing number of unread books on the shelves will look at you menacingly. Indeed, the more you know, the larger the rows of unread books. Let us call this collection of unread books an antilibrary.

BooksAskariBut the thing is, a Kindle is just bloody amazing. It fits hundreds of books into a small device that is so user-friendly that it is often better than reading the hardcover. (This is especially true in winter when you want to minimize your contact with the world beyond your duvet.)

BooksFishermanSo, do I buy the hardcover to sit in my bookshelf, possibly never to be read? Or do I buy it for the Kindle with a higher likelihood of reading it but with no contribution to the antilibrary? #Firstworldproblems

Back to the books themselves. Here are my top sixteen picks for the coming cold winter nights:

Economics:

  • Misbehaving – The Making of Behavioral Economics, by Richard H. Thaler [Why we make the often irrational decisions we do]
  • Capitalist Crusader: Fighting Poverty Through Economic Growth, by Herman Mashaba and Isabella Morris [A mix of South African biography and how-to-fix-South Africa proposals]
  • Who Gets What – And Why – The New Economics of Matchmaking and Market Design, by Alvin E. Roth [Because, despite what a prominent South African historian might think, understanding game theory is important]
  • Uncharted – Big Data as a Lens on Human Culture, by Erez Aiden andJean-Baptiste Michel [Big Data is all around us, and exploiting it can make us better]
  • Why Information Grows: The Evolution of Order, from Atoms to Economies, by César Hidalgo [Economic growth explained by a physicist]
  • Phishing for Phools: The Economics of Manipulation and Deception, by George A. Akerlof and Robert J. Shiller [Why markets fail, and how to fix it]
  • Money and Soccer: A Soccernomics Guide, by Stefan Szymanski [Because, soccer]

History:

  • Political Order and Inequality – Their Foundations and Their Consequences for Human Welfare, by Carles Boix [A new big theory book on how the world is the way it is, this time from political science]
  • Cotton: The Fabric That Made the Modern World, by Giorgio Riello [World history through the lens of a plant]
  • Why Did Europe Conquer the World?, by Philip T. Hoffman [More guns, germs and steel]
  • The Rich: From Slaves to Super-Yachts: A 2,000-Year History, by John Kampfner [If you can’t beat them, join them. And if you can’t join then, read about them]
  • Revolutions Without Borders – The Call to Liberty in the Atlantic World, by Janet Polasky [What inspires people to protest?]
  • Askari – A Story Of Collaboration And Betrayal In The Anti-Apartheid Struggle, by Jacob Dlamini [History is never black and white]

Okay, fiction can be fun too:

  • All Our Names, by Dinaw Mengestu
  • A Man Of Good Hope, by Jonny Steinberg [Granted, more biography than fiction]
  • The Fisherman, by Chigozie Obioma

Written by Johan Fourie

August 13, 2015 at 06:40

Posted in General