The past several months have been an interesting time to observe perceptions and opinions about the nature of the economy and its relationship to government. We have had a federal election, an economic meltdown of titanic proportions and,in British Columbia, a provincial election.
All of this has made me very reflective about the nature of business and the economy, and what managers and politicians need to understand about a free-market economy in a globalized world. We have reached a point in our country where we need to recognize reality and have all political parties, no matter what their colours, mature in their discussions of our political-economic challenges - rather than encouraging the occasional fanciful flight from economic reality. It is important that business aid in this dialogue by recognizing and conveying those realities.
So what, in my reflective opinion, are they?
Business creates wealth, government redistributes it. It is interesting how many people think that government is the source of wealth. It isn't. It is through the efforts of business and its employees that we create wealth and resources that governments use to deliver social, health and educational services.
Markets are a powerful force. We live in an interconnected world, with overlaying sets of markets. Defying market forces for the sake of some desired political outcome may be achieved in the short run, but at great cost. Markets around the world are more linked today than ever before. One cannot stop the merry-go-round and get off by establishing barriers and rules without introducing costs and dysfunction.
Capital moves. We may put more rules and regulations in place to observe capital flows, but the reality is that capital flows from places where it will realize a low return to places where the return is higher. If one creates a good environment for capital investment (which includes skilled workers, appropriate regulation, comfortable living environment, competitive taxes, etc.), capital will invest. The reverse is also true. If you introduce punitive local taxes on industrial sites, coupled with high corporate taxes, companies move or become uncompetitive.
At the same time, free enterprise without appropriate regulation is weak. We cannot maintain market forces and competition without it. The current credit meltdown has demonstrated that. Having said this, the issue is one of balance. We need appropriate referees and guidelines to ensure proper play. But too much regulation and the burden overwhelms the game.
Risk has two sides. We know that humans have all kinds of decision biases around risk. We need to recognize that there may be a "risk/return" relationship in that the average expectation is to realize a certain return given a level of riskiness in our investments. However, there are no guarantees.
Structural problems are just that. Reading the headlines about some of our basic industries today gives me a real sense of déjà vu. Yes, I'm old enough to remember the 1970s, including disco, polyester suits and long lineups at the gas pumps. And yes, I'm old enough to remember the dialogue about the same problems in industries like the auto sector. If we don't deal with problems because they just aren't painful enough in better times, they will come back to haunt us in the next downturn - only worse.
Externalities come back to haunt. Business has increasingly come to realize that society - in which its management and employees live - has become humourless about declaring issues like pollution or industrially exacerbated social issues to be outside their domain. Management must work with its communities and government to find solutions we can all work with.
Subsidies are bad and become addictive. While selective, one-time subsidies may be helpful in attracting or launching a business, but there is strong evidence that subsidies lead to addictive behaviour. Bureaucrats become addicted to giving them out, and companies come to rely on them, even in good times.
Bailouts are no free lunch. When we bail out something, we are taking money we could invest in our society and enterprises in the future and spending it today. Also, we are taxing people now and later to pay for misfortunes and misjudgments of the past.
It is what you negotiate and what you are worth. Management and labour have a problem: We have the misperception that high wage settlements are great for unions and their members. That may be true in the short term but, in the long term, you have to be adding enough value to justify the wage rates. Otherwise, the rest of us end up paying for the problem - which simply isn't fair to people - blue or white collar - in other industries.
Value added and productivity are the keys to success. We need to create more value than others and do it more productively. This applies even to governments that are providing social, health and educational services. We need to be asking questions about how productive our government service delivery is, not just how much they are investing in it.
Innovate or wither. Focusing on propping up what exists - or worse, what existed - for the sake of maintaining the status quo, especially with subsidies, is a road to defeat. This is true both in the economy in general and within companies more specifically. We need to focus on research and innovation, especially in Canada. We are a small country with a rich inheritance provided by our natural resources, but those resources are being depleted and we are now recognizing the total cost of exploiting them. If we wish to continue to be a relatively wealthy country, we need to learn to leverage our minds and skills in order to produce higher value added.
The next time politicians in your community ask for your vote, ask what they are going to do to boost innovation.
Daniel F. Muzyka is dean of the Sauder School of Business at the University of British Columbia, where he is the RBC Financial Group professor of entrepreneurship.
