Opinion | A business redesign to make capitalism more inclusive4 min read . Updated: 01 May 2019, 10:25 PM IST
Businesses where producers are owners too can create wealth at the bottom of the pyramid
The number of millionaires at the top of India’s economy is growing while millions are scrambling for employment to earn adequate incomes. Something is missing in the middle of the economy.
The concept of a “circular economy" is being promoted to sustain the environment. It shows how materials and energy flow through production systems. It is a way to map and manage all material resources through their life cycle so that nothing is wasted. Another view of a circular economy explains how wealth is generated and flows through the economy. It reveals missing middles in India’s economic structure.
C. K. Prahalad promulgated the concept of “the fortune at the bottom of the pyramid". He used an example of the shampoo sachet to explain it. A multinational company wanted to sell its shampoo to poor people who could not afford to buy a whole bottle of shampoo. So, it repackaged its shampoo in very small sachets that could be purchased by people with little money. That way, poor people could get the benefit of a good product for hair hygiene, which they could not afford earlier. This is good “Business For the People".
But providing people with affordable products does not address the root cause of poverty. People are poor because they do not have incomes. They need employment and incomes to lift themselves out of poverty. Therefore, they must be engaged in the processes of producing goods and services. The economy needs innovations in business models that provide more jobs, so that business is not only “For the People" but “By the People" too.
By packaging its shampoo in small sachets, the company was able to increase its sales. However, the profit from the expansion of shampoo sales went to investors in the company wherever they were in the world. They made the profits, not the people. The wealth of investors increased further: they had found another fortune at the bottom of the pyramid.
The issue, therefore, is: who owns the enterprise? The people at the bottom, or people at the top of the economy? Unless people who work become the owners of the enterprises, they will not be making any profits, nor will they earn wealth. Those who have wealth will make more wealth by investing it in more enterprises to make more profits. Those who have little wealth, or none at all, will be left further behind. Therefore, we need enterprises run by the people and owned by the people too if we want to reduce income and wealth disparities.
There are similarities in the structures of the circular material economy and the circular financial economy. In the material economy, solid waste is generated from the production system and it begins to accumulate in a few places, choking up rivers and oceans. In the financial economy, financial capital is generated out of the production system and it accumulates in the financial sector.
The size of the financial sector in all economies has grown greatly in the past 30 years. Financial resources from banking are being invested in financial funds—in hedge funds, derivatives, etc. There they create more financial wealth for investors. They do not go back into the production sector. The size of the financial sector of economies has been increasing. In the US, for example, from 1960 to 2014, finance’s share of gross value added more than doubled from 3.7% to 8.4%, while manufacturing’s share more than halved from 25% to 12%. At the same time, only 15% of the funds generated are going to businesses in non-financial industries, says Rana Foroohar in Makers And Takers (2016). In India too, while stock markets boom, sufficient investments are not going to the manufacturing sector, which can provide more productive jobs.
Just as the environmental system is getting choked by solid waste, the shift in the structure of capitalist economies to financial capitalism is now choking up the economic system with the accumulation of a virtual resource, i.e. money.
Employees of enterprises owned by others can have incomes, but cannot share in the creation of wealth, the fruits of which go entirely to their capitalist owners. For fuller inclusion in the benefits of growth, innovations are required in enterprise design by which the producers become owners too. Such are enterprises and businesses “Of the People". In this vision, India, a country of over a billion democrats, can also be a country with hundreds of millions of capitalists spread throughout the economic pyramid.
The concept of “Businesses Of the people" is not new. They operate in many countries, including in India, with examples such as the Amul dairy cooperative, the SEWA group of women’s enterprises, and other examples of weavers’ and farmers’ cooperatives. This strand of capitalism must be strengthened to fill the missing middle in India’s economic structure and make capitalism more inclusive.
Why are there too few such enterprises in India even though there are some good examples? Management schools do not teach methods for building cooperative enterprises. These enterprises are encumbered by regulations which make expansion difficult. But more importantly, because it is not an aspirational idea of a strong economy: It is too “Gandhian", not Wall Street.
Businesses For, By and Of the People will make capitalism more democratic.
Arun Maira was a member of the erstwhile Planning Commission