View Point
October 26, 2006

The language of business

The objective of a business entity is the production of goods and services for which consumers are willing to pay a price. Companies produce those goods and services by combining three factors of production – land, labour and capital.

Since these factors of production don’t always play the same role, it would be interesting if each factor were assigned a weight commensurate with its role in the production process. In the European experience, land and natural resources were the dominant factors of production for an extended period. This was followed by a period when capital became the dominant factor. It is possible to argue today that labour has now taken over from capital as the dominant factor of production. This can be seen from two standpoints. {{more}}

In the first place, savings are a primary source of capital and high levels of savings augment the supply of capital. The contemporary world is well supplied with financial capital – money, and as a result it is no longer the scarce resource in business. Just as iron and steel were replaced as the most important material resources, so financial capital is no longer the scarce factor. Secondly, many of the world’s major industries were constantly in the mode of replacing labour with capital, that is, people were being replaced by machines. But perhaps we have now reached the point where people cannot be replaced by machines anymore. The last hope was that computers would do so. There is however, a growing school of thought which holds that machines will not be able to replace people. Computers can help people to become more effective, but will not replace them. So the role of people is now the critical success factor in the production of goods and services. Even in capital-based industries – automobiles and oil being examples – the critical success factor is whether you are better at extracting more of the oil from the ground or whether you have a car that is more attractive to the consumer. All of this is about talent and ingenuity – people factors.

For years companies have been saying that people are their most important assets, yet they have been quick to lay them off in a downturn. This has prompted the view in some business management circles that one of the reasons for this is our use of words from the capitalist era to talk about new modern businesses in which humans have become the decisive factor. When you use concepts like human capital you are beginning to think in terms of yield, in terms of costs and you are back into the old paradigm for managerial success which is efficiency. The media is a fine example of a 100 percent people-based industry. The production of a good article or book that sells is not a matter of capital efficiency, it really is about effectiveness. So while the word capital leads to thinking about efficiency, the word people leads to thinking about creativity and effectiveness. It is said that language creates reality. As long as you use the wrong word, you will be led into thinking the wrong way.

And now for some revolutionary thinking on why we may need a new business language. Current legislation gives ultimate power to shareholders, with ownership belonging to capital suppliers. Shareholders can force a company’s management to run the business in their interests – that is to maximize shareholder value. In a company where all the revenue and the production of all goods and services are based on human talent, there is a very strong case for stating that the company belongs to its members. As such you can argue that a greater share of the profits should be distributed to the employers rather than shareholders. There are also soccer clubs where the results of the club are dependent on the talent on the field.

In this new thinking, capital would become just another raw material. All you need is an auction process where you go for your capital. In such a case, money will become a commodity just like crude oil. Food for thought.