New Perspectives

In Economics and Finance

Value Economics: An Interview with Michael Griffiths

Michael Griffiths, author of Value Economicstalks to us about the concepts within his book.

Value Economics picks up from key conclusions made in Ethical Economics. Could you sketch some of these conclusions for us and explain how you arrived at them?

A key conclusion of Ethical Economics was that it is rational to see business as a “non-privative”, as opposed to a “privative”, activity, where the rational principles of business management are cooperation, not conflict, and service, not exploitation.

The Theory of Games demonstrates that all parties in a business transaction are better off if they take account of the self-interests of the other parties, which we call “alteritas” principle of economics, and which is a component of any rational theory of economic justice. In this sense business is not just the privative property of the owners, but a non privative activity where shareholders are part of a wider constituency of stakeholders, all of whom share in one way or another in the “economic value” of a business enterprise. This does not diminish the centrality of the “shareholder” in seeking to maximise his TSR (total return on his investment), but places greater emphasis on how the “cooperators’ surplus is to be distributed amongst all the stakeholders.

Have the events of the last two decades (the GFC and the growth of the gig-economy) reinforced or challenged your ideas about capitalism and labour?

The cardinal principle is one of “alteritas” (consideration of the “Other”), which supports the rationality of regarding business as a non-privative activity, where, by its very nature, we need to “empathise” with the interests and values of all those involved in that activity – shareholders as well as all the other stakeholder.

In terms of work and employment, “Value Economics” looks at the issues involved, with particular emphasis on unemployment, and the paradox of why there has been an increasing inequality between the rich and the poor in terms of the distribution of employment income and the “cooperators’ surplus”. We look at the demand of employees for participation in decision making and in company profitability, and at how the “future of work”, as depicted in the Shamrock and Hollywood models, may change the way in which people will be employed in future, and how we should define what we mean by full employment. The resolution of these questions call for a new paradigm of industrial relations and the role of the unions in how to improve productivity, and how their members can participate financially in productivity improvements, where recent research in the US has shown that worker compensation has been lagging behind these improvements.

You’re critical of the debate around austerity being narrowly defined by the pro-stimulus camp on one side and the pro-austerity on the other. Can you discuss this idea further?

In looking at the experience of economics since Bretton Woods, we look at the debate between the pro- and anti-austerity proponents, monetarists versus demand management economists.  When Margaret Thatcher won the UK General Election in 1979 she used monetarism to bring down inflation which by 1983 was reduced to under 5% compared with 10% when she came to power, but unemployment increased from 1.5 to over 3 million. This contrasted with a growth in the first years of Reagan’s presidency in US  government spending of over 4% per annum compared with rates of 2.5% during the Carter years. This growth was accompanied by the Fed raising interest rates to restrain credit which reduced US inflation from 14% in 1980 to 3% in 1983. But was the reduction in inflation due to control of the money supply, as the monetarists would claim, or to unemployment resulting in a reduction in demand, which the demand management economists would argue for?

 These are the kind of questions we look at in the chapters in “Value Economics” on money as “encapsulated choice” and the characteristics of the moneyed society, with its interaction between freedom, justice and economic value, and the relationships between money supply and control, and the demand for liquidity within the context of a moneyed society’s social setting, and the importance of reflexitivity, or the feed-back principle, in managing itself. Are we going to see a new synthesis between the theories of Keynesians and the Friedmanites arising from the work of economists like Paul Krugman, and those of the MIT gang he refers to, in getting the balance right between the pro and anti-austerity proponents?

Your third chapter sketches out the idea that business is an essentially cooperative exercise, where the self-interest of one business party is best served by accommodating the self-interests of the other parties. Could you sketch out how you arrive at this conclusion – it’s quite controversial given the assumption that capitalist society is generally understood to function competitively.

We propose that cooperation and facilitation are rational principles of economic activity and business organisation, as it is necessary to reconcile the different self-interests of all the parties involved in a business transaction. The Theory of Games demonstrates that it is in the interests of all the different self- interests of the parties involved. The Theory looks at four situations; “The Rule of the Road” which shows the importance of conventions which affect all parties; “The Battle of the Sexes” which demonstrates the need to balance different preferences in decision making; “The Prisoner’s Dilemma”, where it is necessary to compromise one’s preferred outcome; and “The Altruist’s Dilemma”, where one may need to adjust one’s own preferences in light of other people’s preferences. We conclude that contrary to the static solipsistic individualistic standpoint of classical economists, we are forced by these four cases to recognise that rationality is dynamic, leading us to take a wider personal view of what is involved in the decisions we take. This does not contradict the competitive aspect of business, where we have to take account of the “level playing field” in conducting business, where we are limited by the conventions of anti-trust conventions, and called on to compete fairly within our market environment in respecting health, security and environmental obligations, and to avoid the dishonesty of corruption or price fixing arrangements, which impact negatively on the requirements of “a level playing field”.

Do you think you could expand on this statement: 'for so long economics has been based upon the assumption that the rational man was an essentially selfish man'?

‘If business is to gain the respect of the general public for the legitimacy of what it is doing then the businessman, as “Economic Man”, has to demonstrate that he is a rational moral being, with a clearly defined and understood social role, and not just an economic manipulator of resources. Profit maximisation is not irrational or immoral when it encompasses not only “shareholder return” but also the return for all stakeholders, which leads to the concept of “shared value” in economic affairs.’

We challenge the false image of seeing “Economic Man” solely as a self-interested profit maximiser with scant regard for the requisites of corporate social responsibility. If we accept that profit maximisation may have to be modified in light of responsibility towards the other stakeholders in a business enterprise, this introduces a moral dimension into the study of economics in the Kantian sense that “we should act in a way which that treats humanity never as a means but as an end”. We have to refute the classical economist’s view that “Economic Man” is just an egoistical profit mazimiser, possessing perfect information and buying in the cheapest and selling in the dearest markets. Perfect information does not always exist, and people do not always buy or sell in the cheapest or dearest markets. This supports the importance of the indeterminacy of economics in forecasting consumer preferences when defining the assumptions for econometric modelling. “Economic Man” may believe that he is a rational egoist in wanting to maximise profit, but to do so he has to define the possibility of how to maximise profits, which requires him to be a skilful operator in managing risk in an economic world governed by a high degree of uncertainty and unpredictability. This requires a better but more complex definition of “Economic Man”, which also requires us to take a wider definition of money making, which takes better account of how people like to spend their money, which includes the philanthropic principle we discuss in chapter 4 of “Value Economics”, “Money as encapsulated choice”, where we discuss the potential for “giving back” to society the wealth “Economic Man” is creating.

In proposing that there is a close link between the creation of economic value and business ethics, why do you propose that economic value should become the basic metric for measuring economic performance and setting standards for executive compensation?

Economic Value which we define as NOPAT less cost of capital is a clear and comprehensible metric for calculating value as the first step towards establishing the longer term or intrinsic value of a business. It can become the metric for distinguishing between TSR (total shareholder return) in terms of earnings and dividends, and TSV (total shareholder value) over the longer term, where price may not reflect the underlying or intrinsic value of a business. As Warren Buffett put it; “price is what you pay; value is what you get”. And as a metric for executive compensation, it can ensure that performance is related to the creation of long term as opposed to short term value.

How does the creation of economic value have implications for economic justice, and why do you reaffirm the argument for economics as a moral science and not just a mathematical science based on econometric modelling?

The hypotheses for econometric modelling have to be based on consumer preferences, the rationality of economic decision making, and the indeterminacy of human behaviour. Moral issues are involved here, but do not have the strict uniformity and causality of the “scientific method”, since the rationality of the moral sciences have has to take account of the non-uniformity and random causality of human beings. This requires an empathy, or “verstehen”, of human insight when setting hypotheses for consumer decision making. There are ethical considerstions here for economics where as Amartya Sen says, “Economics has been substantially impoverished by the distance which has grown up between economics and ethics”. The creation of economic wealth is a basic principle of economic justice, since it provides a monetary quantification of what is available for distribution between the stakeholders in an economic enterprise, or as citizens in a national economy. In that sense economic value provides the quantification of the resources available for deciding what are the criteria on which distributive and fiscal justice are to be based in tackling the inequalities which arise when dividing the “cooperators’ surplus” between all those involved in the creation of that surplus.  The ethical debate for economics continues. See “On Ethics and Economics”, Amartya Sen, 1987.

In your discussion of the division which exists in a Moneyed Society between the private and public  you talk about the perception of “private efficiency against public inefficency”,  where the State is seen as a burden on society rather than a creator of economic wealth. What leads you to this negative view of the State in economic affairs, and how are perceptions of this kind to be changed into a more positive view of the relationship between the private and the State?

The “private good, public bad” mentality which seeks to minimise the role of the State in society, is irrational, and a false view of economic reality, where the State will always be . We start from the necessity of cooperation rather than conflict beween the two sectors. We refer to the book by Marianna Mazzucato, “The Entrepreneurial State” which seeks to make the case for the State as an active, entrepreneurial “professional risk taker” in promoting the research and innovation necessary for economic growth. She calls for an “ecosystem” of innovation which will require the State to be involved not just in the “de-risking” of the private sector and correcting “market failures”, but in the financing of projects at the drawing board stage. This will place new emphasis on defining the economic value of State projects and theiri intrinsic value in terms of national well-being. This will require measures for valuing the  outcomes of State economic enterprises and investment  projects, which might include the provision of private capital for State enterprises and projects. We now talk of “social impact bonds”, and the Global Deveopment Report on development impact bonds (DIB). We suggest that it could be useful to calculate the economic value of State economic enterprises, eg the NHS, and the return on the investments they are making. The cost side of  calculating value in these terms is easier than the income side, where the income is provided mainly by the allocation of State tax receipts, but also by charges for services rendered to third parties. The important principle is to subject the State to the same quality and efficiency criteria applied to the private sector in measuring its profitability efficiency and return on the capital invested by the providers of that capital.

“Value Economics” proposes five rational principles for economic philosophy. How were they chosen and why?

The key conclusion to emerge from an examintion of the rationality of economic activity in “Ethical Economics” published in 1996 was to challenge the false image which sees Economic Man solely as a self-interested (solipsistic) profit maximiser with scant regard fo the requisites of corporate social responsiblity. “Value Economics” relooks at these principles within the context of the last financial crisis, covering a) consideration of the Other in economic affairs, which we call the “alteritas” principle; b) cooperation not conflict in business relations, and facilitaton, not exploitation, in terms of the primacy of service to customers and society in general; c) money as “encapsulated” freedom of choice in satisfying consumer preferences; d) business as a non zero sum game which is non privative in the sense that it has to balance the different self-interests of all the stakeholders in an economic enterprise; and e) competence in managing the uncertainty and indeterminate nature of economic activity. We call these principles the ethical rationalities for business in designing practical codes of business ethics and codes of conduct. Each of these rationalities has implications for the business models which companies need to design for running their business. “Value Economcs” discusses what needs to be done in putting these philosophical priciples to work in practice for creating the economic value necessary for a sustainable “on going  business” in the future.

In posing questions for new economic thinking in the last chapter of the book you relate each question to the key issue of each chapter, eg, the key issue for Economics as a Moral Science is its contribution to “human well-being”, which raises the question “How does the theory and practice of economics contribute to this “well-being” in terms of analysing and measuring the creation of economic value, and proposing policies for the distribution and allocation of scarce economic resources?  “Value Economics” discusses how such questions might be answered, but does not enter into the detail of specific actions needed to answer them.

The first objective of “Value Economics” has been to define the key issues relating to new economic thinking in terms of the “creation of economic value”, and how this relates to achieving justice in economic affairs. These issues and their related questions, apart from the question raised above, cover a) the requirements for cooperation and facilitation, b) the need to manage the money supply in terms of the  freedom of choice for satisfying consumer preferences, c) how we need to control the quantity of money and its liquidity, and the levels of public debt required to support consumption and investment both private and public in a global environment, d) what lessons have we learnt from the boom bust crises since the Black Wednesday of 1997, and e) how we tackle the issues of unemployment and inequality of incomes, and the changing nature of work resulting from technology and the gig economy. These are all issues relating to economic managemen both national and global, which “Value Econmoics” examines in leading up to the central theme of how we should measure economic value, and relate it to the way we compensate people for the creation of that value. The need for doing these things has implications for regulation in getting the balance right between solvency and economic value, and also for corporate social responsibility in terms of “Triple Bottom Line” accounting. All this we propose confirms the need to see business and economics as a non- zero sum (non-privative), shared value, and indeterminate activity, which become principles for economic philosophy and business ethics. With the identification of all these foregoing economic issues and answers to their related questions, we can have the “information base” for defining what we mean by economic justice in terms of economic value, shared value and the ethics for the distribution of that value.

“Value Economics” proposes a number of research projects to study and analyse the financial crises over the past twenty years, and the experiences of different economic sectors and a sample of individual companies within those sectors, to provide “hard-fact” information for answering five strategic questions for new economic thinking set out in the concluding chapter of the book. The purpose of these projects would also be to provide information for predictive modelling and defining the assumptions on which econometric forecasts can be made. How might these research projects be conducted, and by whom?  

We need to understand the causes and outcomes of boom-bust conditions which occur during business cycles, and propose taking nine economic crises which have occured over the past 20 years, namely the Black Wednesday and Asian devaluation and banking crises of 1997, the Russian financial crisis of 1998 repeated in 2014, the Argentinian economic crisis 1999-2002, the Iceland crisis of 2008, the dot-com bubble of 2001, the global financial crisis 2007-2008, and the European sovereign debt crisis of 2010. We need to explain why these crises occured, why predictive modelling tecniques were often unable to predict them, and how economic theory has changed as a result.  This research might be undertaken by the Bank of England with the BCE in conjunction with institutions like the LSE and INET. Who would be the sponsor? Could the Bank of England act as the “kick-starter” for such a project?

General “after the event” analysis of these economic and financial crises could benefit by an anlaysis of how individual businesses were affected by these crises, perhaps taking the global financial 2007-2008 as a specific case. How did this crisis impact on different economic sectors, and on the economic and market values of individual companies. What actions did they take to survive, and what assistance did they receive from the financial authorities and governments? “Value Economics” proposes a possible sample drawn from 16 economic sectors, namely, retailing, oil, computing, motor, airspace, chemicals, pharmaceuticals, engineering, food, beverages, metal, electrical banking, diversified and trading. For each sector two sample companies are proposed. An “experience” research project of this kind could help to identify the “successful” and “less successful” experiences of economic sectors and individual companies during this global economic and financial crisis. Such research could aslo provide economic planners with a realistic basis for setting sectoral economic assumptions, and designing appropriate financial and fiscal incentives, also by economic sector.

“Value Economics” also proposes extending such research to the public sector as an experiment in analysing the experiences of public sector enterprises as economic operators, like any private business, subject to investment constraints and ROI, and to the disciplines of income and expense budgets, and cost-benefit analysis. We could perhaps start with one or two public sector “guinea pigs”, such as haelth and education. Such research could also have the advantage of analysing the economic value of public enterprises within the context of TBL accounting for social and environmental value.

This research of economic sectors and individual companies within those sectors would also need to involve the insitutions for the financial crisis research, perhaps running in tandem together, but would also need to involve at the UK level the CBI, TUC and the economic sector business associations. Should the research be extended to the public sectors for health and education, the Ministerial Departments would need to be involved in defining the project brief and how it should be conducted.

In concluding “VALUE ECONOMICS” proposes five strategic questions for new economic thinking based on the research of two projects to investigate the experience of businesses during the business cycles of the past twenty years, and the effect these have had on the economic value of companies in different economic sectors. How have these been defined, and how might they be answered? 

With the results of the two research projects we propose for analysing financial crises and the experience of  individual companies within specific economic sectors, and the issues discussed in “Value Economics,” we have formulated the kinds of questions new economic thinking needs to address in identifying, planning and managing business cycles. The five strategic questions we propose cover the various aspects of economic activity, all of which relate to the creation or destruction of economic value, covering a) the correlation between economic value and the key performance indicators (KPI) of growth, productivity, inflation, investment and currency values; b) how to measure competiveness in national and global markets; c) how are capital and liquidity to be provided for the private and public sectors of national economies, and in what form, viz, equity financing, government, corporate and project bonds, and other debt instruments ( securitisation, derivatives, credit, mortgage and consumer finance); d) standards and procedures for managing and controlling sovereign debt levels; and e) how should we define economic justice in a way which combines efficiency and ethics covering the outcomes in terms of economic, social and environmental value. The underlying theme of these questions is the ”creation of value” as the basic criterion for planning and managing economic activity. The final question for the businessman ( and the same applies to economists, bankers, business consultants and professional advisors, regulators and government policy maker) has to be: “What contributions are my decisions making to the creation of economic, social and environmental value?”

Who would be responsible for answering these questions which cover a wide constituency of ”interested parties”; businessmen as economic operators, economists, economic research associations, universities and business schools, banks and financial advisors, the professions, regulatory authorities and government departments? As a start, the Bank of England, as the possible “kick starter’ of the research projects proposed in “Value Economics” ( in conjunction with a panel of experts, including institutions like the LSE, INET, CBI and the TUC) could instigate a “round table” investigation to decide how to proceed. The inputs from university economic departments and businees schools will be essential, but the important thing is that answers to these strategic questions involve the “practical businessman” as well as the “economic experts” in a way which can bridge the gap between the worlds of economic theory and the day to day reality of managing an economic enterprise.

In the chapter “Philosophy of Economics and Business Ethics” you propose that codes of business ethics have to be based on the nature of the tasks and competencies of the job an employee is being asked to do, which take account of his or her responsibilities and accountability, and the competencies required in term of technical and managerial skills. You say that this will require us to decide what we mean by “management excellence” in evaluating performance in achieving the objectives of a specific job. How does this relate to business ethics?  

The Baldridge Model launched by the US Government, known as “The Criteria for Performance Excellence” specifies the management competencies for business organisation categorised into seven categories; leadership, strategic planning, customer and market focus, measurement, analysis and knowledge management, workforce focus, process management and business results. There are similarities here with Michael Porter’s five forces that influence competitive strategy and advantage defined as direct competitors, suppliers, customers, alternative products and potential new entrants. Neither of these approaches for defining the competencies for successful business management mention the basic competency of creating economic value.

We propose that the basic criterion for “management excellence” has to be how successful a businessman is in creating “economic value”. Implicit in this excellence are the “behavioural qualities” of honesty, fairness, magnaminity, and respect for the law, professional standards, and the legislation for health and safety, and environmental protection. The implications of these qualities for business ethics are discussed in Chapter 12 “Corporate Social Responsibility and Business Ethics” covering sustainability reporting , codes of business ethics, economic education, with an example of the content of a Code of Ethics and a Code of Conduct.

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