Blogging about

The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

Creativity is central to the human condition and gives rise to innovation and entrepreneurship in a range of domains and activities. Human beings are also deeply territorial – constantly creating and deconstructing homelands in a Phoenix-like dance through time. In Anthony Powell’s masterly opus on what it is to be English, A Dance to the Music of Time, the participants tread and re-tread over the same spaces as they attempt to make sense of their existence. In the Star Trek world of ‘boldly going’ it was claimed that space was the final frontier, but in its geographical and temporal senses, space is the first frontier we attempt to account for and create around, however unwittingly. In our dance to the current mood music, creative accounting and how we manage, operate and occupy our work spaces are pertinent. The frontiers of what is efficacious in the two areas appear to be cyclical and not particularly structural. Enron became synonymous with everything that is destructive about accounting, and the de-humanising environment of call centres with the zeitgeist of work organisation.

The Enron sign.
Picture © STANANDLOU, used under Creative Commons licence.

Accounting is a framework for evaluating resource allocation and management in organisations. It is not objective reality, whose methodologies and methods lead to optimal and efficient outcomes. This would only be the case if we lived in a world of efficient markets in which all prices equated to values. This world would correspond to the Arrow-Debreu Theorem, named after the two Nobel prize-winning economists, in which all market exchanges are matched by underlying contingent commodities within a general equilibrium framework. Differences in time and place, and thus transaction costs, are not a consideration within this framework, so the accounting profession is stuck between the Charybdis of efficiently measuring values of organisational assets and the Scylla of differences in the time and place in the transactions of these values through market exchange.

Some siren voices may claim that the profession deserves everything it gets given scandals like Enron and the recent financial crisis, as well as the tax avoidance schemes which reached their zenith in the UK in the 1970s. However, accounting isn’t the agency of these outcomes, it’s the result of unintended consequences and perverse outcomes of the structure of regulation and regulatory changes. The ingenuity of ways in which regulations can be bypassed and turned into market opportunities is manifold and legion, but you cannot regulate away creativity and innovation, unless one starts to distinguish between good and bad parts of this human condition. So, what is the distinction between good and bad creative accounting? The length of a piece of string or when the ‘perps’ get caught? As for tax avoidance schemes, well we could ‘eat the rich’, and then send the accountants and other ‘creatives’ like management consultants and advertising agencies to another galaxy on the pretext of the earth exploding, but then financial products would be created on the transactions in human flesh and ‘marked to market’ at, say, Smithfield, the meat market in London. Getting rid of one form of accounting and its creative variants would then just generate others. The creative frontiers for accounting are set by the statute and international standards. These frontiers are really thresholds, the negotiation of which can lead to deviant behaviour – which is perhaps also one of the properties of the human condition.

The question of organisational deviancy is one that arises from why firms appear to spend so much time, energy and resources in managing property. The fundamental reason is that land is both a fixed and variable form of capital and gives rise to a set of uses and values, and most of our net worth is tied to property. At the philosophical level, John Locke developed the genesis of the idea of property rights as the foundation of the modern liberty. In the hands of the Peruvian economist Hernando de Soto, these rights are the basis of sustainable economic development. So property matters.

There is also the issue of power and prestige concerning property. The management of a mutual society may look down in pride on their provincial locale as they survey it from the heights of their new building. No self-respecting bank in 1980s London was complete without occupying a building with an atrium and an internal galleria. The question of architecture has external and internal dimensions. Externally, the need for signature architecture with a Gehry, Foster or Pei designed building seems central to corporate image. Internally the complex socio-psychological relationships of workers to their spaces cuts across the human resource management, finance and estate management functions. For the latter, maximising personnel in minimum space is rational, but the ebb and flow of movement and work patterns means that open plan or Dilbert-like booths are not optimal solutions. The way in which workers seek to humanise their work spaces suggest that the deep territoriality in all of us isn’t restricted to the home, but the challenge is to manage the challenge that status being often linked to a spatial hierarchy. Many firms claim that employees are their most valuable asset, but if they don’t creatively account for and put their spatial resources where their mouth is, this claim will not stand scrutiny. If you want to stifle workers’ creativity and innovation in solving business problems, then housing them as automatons in a single open space will suffice and no amount of virtual working will change this. There are creative solutions, but these are not cheap as the frontiers between private and public spaces in the workplace are constantly crossed and re-crossed.

At the banal level, accounting for the creative frontiers of managing financial and work space resources is a question of races and riders. The bottom or winning line, however, will only reached when it is recognised that these organisational imperatives are part of complex systems in which creative spaces develop and thrive.

Find out more

Does business have a problem with ethics?

Ethics Bites on Business Ethics

OU courses

Study accountancy and finance with The Open University

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

Subscribe to Leslie Budd's posts

 

Blogging about

The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

A number of years ago, the sociologist Richard Sennett pondered on why it was, that in a so-called digital or virtual age, global financial and business services still crowded into the world’s leading cities. The answer to his question and that of why firms cluster near each other is rooted in the concept of agglomeration economies, of which there are three types:

• Localisation economies: which refer to the advantages accruing to firms in the same activity which result from their joint location;

• Urbanisation economies: which are concerned with the range of advantages to the individual firm which result from the joint location of firms in different and unrelated activities;

• Activity-complex economies: these refer to economies that emerge from the joint location of unalike activities which have substantial trading links with one another. In the case of manufacturing, such economies typically occur within industrial complexes.

 The City of London is a classic example of activity-complex economies at play. Financial firms and associated business services crowd together in the Square Mile and its environs in order to benefit from external and internal economies of scale and scope. Economies of scale that are internal to the firm include spreading a larger output over existing productive capacity, and differentiation of products or services from existing production platforms. External economies of scale and scope include the ability of firms to draw on specialised pools of local labour; and, to exploit different markets because of transport and technology infrastructure. Agglomeration economies are thus at the heart of the dreaded ‘c’ word – clusters – one of the topics of the latest BBC/Open University broadcast of The Bottom Line. The other topic is the future of television.

It’s reasonable to ask, “What on earth has the clustering of firms in the same locale got to do with the future of television?” Well, for many commentators the future of broadcast media is multi-platform. The advantage of multi-platform production, as in any industry, is the ability to exploit external and internal economies of scale and scope; in other words, the capacity to create activity-complex economies. Whether they’re in Euclidean space, cloud computing or cloud cuckoo land makes no difference; clustering concerns the co-location of business activities. The paradox is that in this supposed age of the ‘death of distance’, the dominance of clustering in real geographical space prevails.

The most frequently cited example of a cluster is Silicon Valley in California, the heartland of web-based companies and venture capitalists from where two of the guests of the current programme were drawn. In the 1980s, it was ‘Third Italy’, the region of Emilia Romagna in which small textile firms co-located and gave rise to the Benneton phenomenon, among others. Clusters are nothing new and the academic literature is informed by reference to the work on ‘industrial districts’ of the economist Alfred Marshall, who examined the characteristics of industries in 19th Century England, in particular their locational advantages. The conflating of clusters with industrial districts does a serious disservice to Marshall and his disciples. The celebrity academics and management consultants who have been significantly advantaged by their promotion of an increasingly elastic concept overlook one key fact. Many firms in the same sector are often blithely unaware of the immediate location of competitors, as countless surveys have demonstrated. This is especially true of small and medium sized enterprises: the basis of Marshall’s original ‘industrial districts’. It is the very elasticity of the concept of clusters and the lack of empirical evidence that weakens its claims as the universal panacea for economic development, as the economic geographers, Ron Martin and Peter Sunley perceptively note, “The cluster literature is a patchy constellation of ideas, some of which are important to contemporary economic development some of which are either banal or misleading.” One important issue that’s overlooked in the discussions of clusters is the bounty of nature. London became a global financial centre because its topography allowed it to be become a port; Hollywood initially attracted film makers because of its natural light. Similarly, the bounty of technology has created the television and Internet ages, but what sustains different forms of clusters is their underwriting by the state.

The question of the future of the televisual age is an important one, but one that can lead to debates that are both banal and misleading. Almost since the day John Logie Baird first demonstrated his new device, the television has been the hearth in the home that families cluster around. Whether that connected cluster we commonly know as the Web will change the locale of our emotional and social hearths and heimats is a future question but one that has contemporary resonance. For many, the Internet will replace television as the dominant medium of choice, but as the Chief Executive of the UK-based Channel 5, the other guest of the programme, pointed out, the two are complements and not substitutes. The most ubiquitous contemporary technology is the mobile phone, which has a visual function that allows the user to access television programmes. The Internet and associated technologies may be the medium of transmission but they are not the message.

In the present day, television has become a product and a process that generates its own cluster of activities because technology and social (and business) practices create external and internal economies of scale and scope: a basic condition for the development of clusters. The multi-platform of broadcast media has joined the pantheon of activity-complex economies and agglomeration around a hearth is no longer restricted to family viewing of the Billy Cotton Band Show or Strictly Come Dancing on a Saturday evening. In 1979, the Tubes sang “I really love my television” on the track ‘TV is King’ and, like geography, reports of its death have been very premature. Clusters have been around much longer than television but the future of these connected and networked phenomena is still assured as their natural and technological bounties lead us through the millennium.

Find out more

The following Open University courses will help you explore these subjects in greater depth:

Managing 1: Organisations and People

Understanding Cities

Understanding Media

Film and Television History

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

Subscribe to Leslie Budd's posts

 

Blogging about

The Bottom Line

Evan Davis gets to the heart of the big finance stories at The Bottom Line.

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way."

The most well-known passage of Charles Dickens’s novel, A Tale of Two Cities, seems an appropriate starting point to discuss private equity, one of the topics of the latest BBC/Open University The Bottom Line broadcast. Belief and incredulity appear to characterise our present epoch of financial booms and crashes, during which private equity firms are painted as the pantomime villain in capitalism’s triumph and fall: asset strippers in name and deed.

The relationship of Dickens’s tale of London and Paris, at the time of the French Revolution, to the financial centre of the City of London seems metaphorical and real. Joseph Addison had described London as an “Emporium for the whole earth” a century earlier, and in the emporium that is the global financial entrepôt of today, private equity firms are as much a part of its landscape as the trader of the 17th century. In the late 20th century, the leitmotif of the City of the furled umbrella and the bowler hat gave way to the yuppie and the mobile phone; the gentleman giving way to the player. For some commentators, these changes represented a revolution whose genesis rested on private equity firms and their ilk.

Businessmen shaking hands.
photo © copyright Jupiterimages Corporation

Private equity firms operate on the basis of buying and selling a portfolio of companies to extract returns of 20 per cent on their investment over a three-to-seven-year period. They institute cost cutting and disposal of parts of companies in order to sweat the assets they have invested in. For defenders of private equity firms, they create long-term value. For critics, they are the manifestation of the UK-based asset strippers of the 1970s; Jim Slater, John Bentley and ‘Tiny’ Rowland amongst others, whose activities were called the “unpleasant and unacceptable face of capitalism” by the then Prime Minister, Edward Heath. The language of private equity activities are, in this view: a climate of fear; downsizing; the casualisation of work and so on. This litany is universal to these firms, whether expressed in the English or any other linguistic form. For the famous economist Joseph Schumpeter, entrepreneurship represents the revolutionising of the economic structure which enables new activities to be born, phoenix-like, from the ashes through the process of “creative destruction”.

It is the important question of language that formed the second topic of The Bottom Line discussion. English is claimed to be the universal language of business, with its own cross–national dialects, so that knowledge of other languages is deemed not to be as important as it once was. But language is like football, the rules of the game may be pretty much the same but the variants are as numerous as the array of cities in the world. It is a linguistic truism to say that language affects the way in which one thinks. Knowledge of local customs may be useful upon introduction to a client, but knowledge of the rudiments of the local language is an important part of business engagement and sustainability. For example, in China, saying yes to a question does not signal agreement but rather that the speaker has been heard. These are important considerations for companies that engage in international transactions. It can be argued that globalisation will only be completed if the law of one price operates. That is, all prices in the world converge with the only differences being accounted for by transport and administration costs. Similarly, if English became the first language of everyone in the world it would become truly global.

Capitalism, as Schumpeter and others remind us, is a revolutionary system in which “all that is solid melts into air, all that is holy is profaned…” Private equity is part of that system and provides a vehicle for “revolutionising the conditions of production.” A single global language would be part of that revolution, and if that is not generally understood then change does need to be made. Blaming private equity firms and hedge funds for the financial crisis is a bit like Canute blaming the Moon for his failure to control the tides. There are compensations with more than two cities and more than one language in the world which makes us all richer, whether materially or culturally. The globalists, in whatever guise, make us all poorer as heterogeneity is sacrificed for homogeneity.

Find out more

Sovereign wealth to the rescue

Faith in fakes? Travels in hyper-mobility

OU courses

Financial strategy

Making a difference

Capacities for managing development

Beginners’ Chinese

About the author

Leslie Budd is Reader in social enterprise at The Open University Business School. He is an economist and has written extensively on the relationship between regional and urban economics, and international financial markets.

Subscribe to Leslie Budd's posts