Resilient Communities are the Foundations of a Resilient America.

The New Resilience and Purpose-Driven Businesses

In several recent posts, I’ve written about a re-imagining of the American Dream for our new century. In this post, I begin a look at how we can achieve greater economic resilience. Recently I read Conscious Capitalism: Liberating the Heroic Spirit of Business (by John Mackey, Rajendra Sisodia, and Bill George) which has definitely colored my thoughts. If you haven’t read it, you should.

The authors start by challenging one of the shibboleths of modern business – that the purpose of business is to make money. Their point is simply that this may be the purpose of “Business” writ large, but it fails to capture what an individual business is all about.

We know that small businesses are the prime engines of job creation in the US. They hire by one’s and two’s but in aggregate by the millions. A resilient economy demands the churning that small businesses provide. Thus, we need more businesses created. But why does someone start a new business? Is it simply to make money, as most in finance and economics believe? Or is it that the entrepreneur believes that he or she has something that the public wants? Think of Apple, Polaroid, and millions of others. They all started because their founders passionately believed they had something that the world would want enough to pay for. It seems almost self-evident that businesses are created to provide something of value to prospective customers.

But this is profoundly different from simply being in business to make money. A business is formed with a purpose in mind, to provide something that customers want. As long as customers want what the business provides, the business can be sustained. If a business’s product is no longer wanted (think Tom Peters’ National Buggy Whip Corporation at the advent of the auto age), then the business must either adapt or give way to new businesses whose product(s) better match the conditions of a changed and changing world. Thus, if businesses are indeed purpose-driven, then Schumpeter’s creative destruction (“the invisible foot”) is not only inevitable but highly desirable because it provides the mechanism for economic adaptation and resilience.

Thus, a more resilient economy will revolve around providing conditions favorable for formation of new businesses, and elimination of those that are no longer competitive. In terms of government’s role, this means removing (or at least lowering) barriers to formation of new businesses. Some of these include:
• Elimination of the Obamacare requirements that small businesses provide health care. I know there is funding available to provide assistance to small businesses, but I also know the paperwork is voluminous and far from user friendly. And does anyone seriously believe that the promised funding will always be there?
• Changes in financial regulations that favor bigger businesses simply because they are big. For example, Dodd-Franks created several new reporting requirements. The cost of compliance as a fraction of revenue is much smaller for larger entities (think Bank of America) than it is for smaller local or regional entities (e.g., a community bank). And yet during the Great Recession, it was the community and regional banks that best supported small businesses.
• Elimination of loopholes in the corporate tax code. Larger businesses are the primary beneficiaries of these loopholes – simply because they are big enough to have a staff to ferret these out. Economic resilience requires competition based on what customers want, not governmental favors.
• Simplification of environmental and other regulations. In many states, environmental regulations actually prevent environmentally beneficial projects, thus hurting small businesses in particular. A classic example is the warping of the permitting process for new transmission lines in California which has prevented wider use of renewable energy, and ironically increased the state’s dependence on Mexican generation plants using fossil fuels.
• And one more thing – never again see any business as too big to fail. We could have given everyone in America $1 billion and it would have cost us less than the >$700 B we spent on the TARP (and probably returned more in terms of enhanced economic activity). Business failures are an inevitable part of business life, just as death is inextricably tied to human life.

In short, the New Resilience requires government to stay out of business’s way as much as possible. Schumpeter’s invisible foot must be able to swing freely and kick to the side those businesses that won’t – or can’t – adapt quickly enough to changing conditions.

In my next post about the New Resilience, I’ll delve a little deeper into purpose-driven businesses. Rather than the macro-economic resilience I’ve discussed here, I’ll look at how a purpose-driven business might do things a bit differently than many businesses do today. I’ll also look at how Adam Smith’s invisible hand can play a crucial role in the New Resilience.