management

Political Impetus for Re-evaluating Value Creation Strategies
part 2 in a series. Read the 1st - Business Policy Lessons From Our Estranged Revolutionary Allies
By AANKIT PATEL


Last month I spouted off the economic benefits and the value creation opportunities available in the social sphere. I theorized that Europe's social disequilibria, and the stifling regulations that attempt to address them, provides the US with a comparison for its own system, affectionately referred to as "cowboy capitalism" (1). This comparison concludes that while the US free market model is the most efficient in terms of productivity and asset allocation, it is plagued by behavioral inefficiencies that are the primary driver of social disequilibria here, too.

Europe attacks these behavioral inefficiencies with regulations ranging from zoning laws to legislation on monopolistic use of shelf space. Currently, there is a wealth of economic research and analysis being tossed around in academic debate that blames these regulations for stunting Europe's productivity gap with the US and their high unemployment rates. These debates amount to little more than boast sessions on which economist choose the most intriguing sector to investigate or lecturing on the "how's" and the "why's" of lagging productivity. The reason I dare to so easily dismiss the work by renowned U.S. economists and thinkers is that they all fail to realize that the EU and local governments are acting as their constituents are asking them to act. Their decisions are not made in some utopian economic bubble where efficiency reigns, but rather in a real-time political sphere with the concerns of their constituents to worry about.

The US is "blessed" with constituents that are increasingly conservative, illustrated by the Republican controlled federal government. The conservative US population seeks to deregulate and get government out of their life and their pockets. This shift and the increasing expenses of spreading democracy to the Middle East and Central Asia are leading to even more conservative government spending. It is likely that this trend in muted spending is to continue until the end of this decade; that, however, will be more certain after the Congressional elections next year.

On closer examination of the US populous, however, it is clear that they are not fully 'Republican' (2), in that they are not entirely pro-business. This is no surprise considering the impression given by idiotic accounting maneuvers of some of our "best and brightest" executives. Politically and morally, the American people seem to be in favor of increased regulations on US businesses as a result of the abuses of power and status by the managerial class.

I believe through this simple evaluation of the US political environment, there are two more compelling reasons for US businesses to explore value creation by investing in social ventures. There is a large planned move of cash and resources out of government funded social services that coincides with a deteriorating perception of business and its role in society. The intersection of these two forces should provide further motivation for re-evaluating the policies governing how value is defined and how it can be created using alternative projects such as social ventures. The primary reason must remain the simple economic argument that an unfulfilled demand exists for many social services and supplying that demand creates value for the supplier. I believe that the big question of why investors invest in a company that is planning to take on projects that are most likely not positive NPV and risky in a way that no adequate measure of this risk exists is answered somewhat by this model.

Write to Aankit Patel at editor@alberrios.com

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Footnotes

(1) For fear of falling into the noise of the academic debate between Euro-sclerosis and US "cowboy capitalism", I will use the terms social capitalism and pure capitalism to describe the two extremes represented by Europe and the US.

(2) Loosely defined as smaller government and pro-business for the sake of this report.

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Related alberrios.com Sections

- Consumers + Politics

- Politics + Law

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