This chapter highlights the main takeaways from this book; emphasizes the usefulness of life-cycle track records for boards of directors, managers, investors, academic researchers, and business students; describes low-hanging fruit for spurring economic progress through changes in the regulatory state; and contemplates how the proposed new discipline of Progress Studies might evolve.³

THE NEW ECONOMY AND THE PRAGMATIC THEORY OF THE FIRM

The World Economic Forum in its Future of Jobs Report identified complex problem solving, critical thinking, and creativity as the most desirable skills in order for people to excel in the 21st century workplace.⁴ This resonates with the main theme of this book that knowledge-building proficiency is the key to long-term value creation by individuals, business units, and firms. A corollary theme is that resources are best allocated by management (including entrepreneurs) less concerned with hierarchical control mechanisms, and instead, intent on developing a knowledge-building culture keyed to innovation and constructive change. Such a culture rewards and motivates those who reveal obsolete assumptions; analyze problems to unravel root causes—ranging from process improvements that involve all employees to strategic choices made by top management; perceive significant change at an early stage; and figure out how to better serve customers in a changing world—that is, fast and effective traversing of the knowledge-building loop (Figure 2.1). But such a fast-paced, innovative world leaves behind those workers with obsolete jobs. They need training to become better value creators in the new economic environment.

In the New Economy, investors grapple with practical problems in analyzing firms in order to make investment decisions. This process is more complex compared to the Old Economy. For instance, how many “Value” investors have missed the New Economy's intangible-intensive winners (e.g., Amazon, Facebook, Alphabet/Google, and many more) due to their high PEs (price to earnings multiples)? Those earnings are based on standard accounting rules which are not attuned to intangible assets, especially platform business models that benefit from network effects. Worse yet, Value investors tend to buy low PE firms (e.g., Barnes & Noble, J. C. Penney, Sears, and many more) that subsequently suffered as consumers felt better served by their Internet-enabled competitors. The old rules for value investing keyed to selling high PE firms and buying low PE firms are ill-suited to the New Economy. Those who viewed the stock market as somewhat of a mystery in the Old Economy, must be genuinely puzzled by the challenge of analyzing value creation in the New Economy.⁵ The New Economy, focused on human capital and a firm's intangible assets, spotlights the slowness inherent in rigid hierarchical organizations designed for pre-Internet mass production where workers were told how to do a job and not trained to be problem solvers capable of developing improved processes.

While this book raises questions about a firm's organizational structure, broader questions are being debated about capitalism as the means for a society to achieve economic progress. Those concerned with income inequality argue that capitalism exacerbates a situation where increasing financial rewards accrue to the top income earners while making matters worse for those near the bottom. Should not economic progress mean enhanced prosperity for all?

In writing about capitalism, I frequently use the term free-market capitalism to emphasize the point made in the opening quote by Rajan and Zingales that critiques of capitalism most always center on corrupt, uncompetitive versions nurtured by “executives in pin-striped suits.” Another useful term is crony capitalism with its lobbying and exerting of power to orchestrate laws and regulations that benefit powerful firms and organizations by minimizing competition that would ultimately benefit consumers. The capitalism debate becomes more productive by making the distinction between free-market capitalism and crony capitalism.

To help us understand free-market capitalism, let's first acknowledge that business firms are the economy's engine for value creation—the powerful tide for economic progress that can lift all boats. Consequently, it is imperative to continuously build up our knowledge about better ways to organize and manage firms, leading to improved decisions. The decision makers range from those inside the firm, which includes the board of directors, management at all levels, and employees, to those on the outside, including investors and other stakeholders, plus lawmakers and regulators impacting business.

How can we evaluate the pragmatic theory of the firm, or any other theory of the firm, as to its contribution to our understanding of progress? In the beginning of Chapter 1, I offered six such metrics. With these metrics, I'll evaluate the pragmatic theory of the firm discussed in the previous chapters.

1. Clarity about the firm's purpose: Invariably, debates about the role of capitalism in society scrutinize the purpose of the firm. Clarity about the firm's purpose can defuse the seemingly never-ending argument between proponents of maximizing shareholder value versus proponents of stakeholder primacy. An important conclusion of this book is that maximizing shareholder value is the result of a firm successfully achieving its four-part purpose:
   • Provide a vision to behave ethically while making the world a better place so that work provides more than a paycheck.
   • Survive and prosper with a knowledge-building, adaptable culture that enables the firm to at least earn the opportunity cost of capital over the long term.
   • Sustain win-win relationships with all of the firm's stakeholders. Consider the many firms that have miserable scores on employee engagement, perhaps more accurately labeled as management failure. Getting to a win-win relationship between management and employees surely benefits not only employees but everyone who is impacted by the quality of their work.
   • Take care of future generations through the design of products and manufacturing processes that simultaneously minimizes waste and improves efficiency, and also eliminates pollution before it occurs.

   The purpose of the firm is the foundation for the pragmatic theory of the firm.

2. Source of competitive advantage: A recurrent theme in the company examples presented in this book is that attributes of successful firms, such as winning strategies and early adaptation to change, are rooted in a firm's knowledge-building proficiency—the central element in the pragmatic theory of the firm. If management asserts that employees are their firm's greatest asset, should not that translate into a continual top priority to nurture and sustain a knowledge-building culture and, in so doing, nurture and sustain competitive advantage?

   An often neglected source of competitive advantage is a firm's organizational structure. Neglected perhaps because pay and power in an existing hierarchical structure is accorded to managers of the bureaucracy. There is little incentive for them to change. However, the Haier Group (Chapter 6) reveals how a CEO of a large firm experimented and successfully eliminated organizational impediments to value creation.

3. Understanding the firm's market valuation: The pragmatic theory of the firm applies systems thinking to the firm in general and in particular to understanding the firm's market valuation. The bullet points listed below highlight how the life-cycle framework, described in Chapter 4, facilitates systems thinking. It provides a useful perspective on financial and valuation issues that is economically sound, although different from mainstream finance's reliance on CAPM (Capital Asset Pricing Model) thinking. The life-cycle framework focuses on the individual firm as the unit of analysis stripped of any assumptions about risk and return in an assumed equilibrium environment.
   • A firm's degree of success in efficiently providing value to customers results in a net cash receipt stream that ultimately drives its market valuation. A useful way to articulate these cash receipts is via a time series of economic returns and reinvestment rates (i.e., a firm's life-cycle track record).
   • Life-cycle track records highlight the impact of managerial skill and competition playing out over time, and benchmark a firm's financial performance versus the cost of capital while delivering insights about a firm's long-term shareholder returns versus the general market.
   • Viewed as a valuation system, the life-cycle valuation model employs a forward-looking, market-implied discount rate that depends on the forecasting procedures used for net cash receipts. This sharply contrasts with the conventional practice of inserting a discount rate which is estimated independently of how the valuation model orchestrates cash flow forecasts.
   • On average, stock prices represent astute expectations of a firm's future life-cycle performance. Decoding investor expectations embedded in stock prices helps to establish a crucial benchmark as to what a firm needs to exceed in order to outperform the general market.
   • The CAPM mindset, with its notion of volatility (Beta) corresponding to investor risk, has reached far beyond finance, influencing thinking in economics, management, and accounting. A useful complement to investor risk is the concept of firm risk as driven by obstacles to achieving the firm's purpose. Firm risk helps management analyze and potentially control significant sources of future shortfalls in financial performance.
   • Investors can incorporate the perceived benefits of intangible assets, such as brands, via a more favorable fade of economic returns and reinvestment rates. The same fade adjustment process can be used to “adjust for risk,” and instead of changing a discount rate, an alternative fade forecast is employed that provides an intuitive, visual feel for what one is doing.
   • An awareness of the importance of a firm's knowledge-building proficiency coupled to the life-cycle framework provides guideposts for analyzing excess shareholder returns. This can yield important insights that have too often been missing from the numerous correlation-based studies using financial variables as described in Chapter 5.
4. Source of improved operating performance: In the Old Economy dominated by firms utilizing a command-and-control, hierarchical organizational structure, managers were promoted and given bonuses for developing workarounds for problems, for firefighting, and for telling employees how to achieve the targeted accounting goals. Recognizing that the New Economy is dominated by human capital and intangible assets, the pragmatic theory of the firm emphasizes human capital as the central means to sustain continual improvement in operations. Chapter 3 described three major performance approaches: Lean Thinking, TOC (Theory of Constraints), and OPM (ontological/phenomenological model). The knowledge-building loop assists in understanding each approach as well as the differences between them. The same knowledge-building mindset can help evaluate any proposed way to “work smarter” in order to improve operating performance.

   A major improvement in operating performance may require a different strategy. The source of such a strategy fundamentally resides in knowledge building. Rather than attempting an accurate forecast of the long-term future, such a strategy requires crafting options to exploit the future as it unfolds. Richard Rumelt writes:

   When a leader characterizes the challenge as underperformance, it sets the stage for bad strategy. Underperformance is a result. The true challenges are the reasons for the underperformance. Unless leadership offers a theory of why things haven't worked in the past, or why the challenge is difficult, it is hard to generate good strategy.

   Many writers on strategy seem to suggest that the more dynamic the situation, the farther ahead a leader must look. This is illogical. The more dynamic the situation, the poorer your foresight will be. Therefore, the more uncertain and dynamic the situation, the more proximate a strategic objective must be. The proximate objective is guided by forecasts of the future, but the more uncertain the future, the more its essential logic is that of “taking a strong position and creating options,” not of looking far ahead.⁶

   In other words, knowledge building is the start of the development of good strategy.

5. Source of improved managerial decisions: Application of the pragmatic theory leads to better decisions because it emphasizes systems thinking and relationships among variables. This helps managers understand how efficiency of one local component of the system is necessary to promote continuous improvements, yet insufficient because overall system efficiency results from how all components work together. Of the many examples discussed in this book, a particularly important one is the crossover problem (see Chapter 5) where accounting-based performance metrics tied to accounting costs—when applied at lower levels of the firm—can interfere with improving the overall process. The reason involves language, which has a silent but strong impact on our thinking. Specifically, accounting costs, as previously pointed out, imply that components of a system are independent of one another, so optimizing local efficiencies must therefore optimize system efficiency. This is not necessarily true.

   By using life-cycle track records for a firm and its business units, management and the board can significantly improve resource allocations. The track records constitute a reality check when juxtaposing the past next to a forecasted future life cycle. The next step is to answer the question: Do the planned investments in the business make economic sense? More specifically, as described in Chapter 6, a business's life-cycle stage helps identify management's critical task. In the high innovation stage, for example, focus on quickly proving or disproving the critical assumptions about how value for customers is efficiently delivered. In the competitive fade stage, expand the opportunities for the firm to gain competitive advantage and add new capabilities as needed. In the mature stage with economic returns approximating the cost of capital, management and boards should replace the “grow the business” mindset with an imperative to simultaneously improve existing operations and redirect resources to potential high-return opportunities that may even compete with existing businesses—not an easy task. In the failing business model stage, decisive leadership (perhaps new leadership) is needed to purge the business-as-usual culture, similar to John Anderson's revitalization of NCR Corporation.

6. Analysis of firms: Analysis of a firm (especially a long-term, historical study) would improve if life-cycle track records were included. This is especially so for strategic analyses and security analyst reports that involve comparisons with competing firms since life-cycle track records facilitate insights not easily obtained otherwise. Absent life-cycle track records, company analyses typically range from one extreme of highly detailed Excel spreadsheets with mountains of numbers but little insights as to value creation or dissipation to the other extreme of little quantification. Hence, qualitative language abounds about “growth,” “profitability,” “competitive advantage,” and the like made by writers who are uninformed about the firm's economic returns versus the cost of capital and whether asset growth is actually creating or dissipating value.

   A typical Wall Street security analyst report focuses on dissecting a firm's latest quarterly earnings report and forecasting near-term quarterly earnings. This format serves as a template to facilitate writing the next report. However, what is rarely encountered is an in-depth analysis of a firm's knowledge-building culture and related issues such as the logic behind strategic options, the extent of lean manufacturing expertise, the degree of employee engagement, etc., each more difficult to quantify compared to quarterly report data on sales, margins, taxes, and earnings.

LIFE-CYCLE TRACK RECORDS ARE A SCORECARD AND A LEARNING TOOL

The pragmatic theory of the firm applies systems thinking to improve our understanding of firms and our measurement tools, and to upgrade decision-making. Consequently, I use the label “pragmatic” as contrasted with theories focused on issues such as why firms exist or what they hypothetically maximize.

Life-cycle track records are an exceptionally useful tool for advancing value creation. Although widely used by money management firms, they are not yet widespread as part of the conversations among top management and the board of directors. However, when money managers present to top management life-cycle track records of the firms they are managing, the conversations invariably shift to fundamental issues about long-term value creation. If similar conversations could occur between management and investors, this would help management secure an investor base with a long-term owner's mindset.

On the one hand, investors well-versed in the life-cycle framework have a viable long-term owner's mindset, and they are expected to support high-value-creation-potential investments that will depress near-term quarterly earnings if management has demonstrated superior value-creation skill in the past. On the other hand, we might expect these same investors to oppose sizable investments and favorable executive compensation for managements that have demonstrated decidedly below average skill, especially when they have presided over a firm that is in the failing business model life cycle stage. So, a viable long-term owner's mindset is rooted in sound economics with an eye on long-term value creation and on fixing value-dissipating businesses and the sooner the better. Shouldn't shareholders expect this of a firm's board of directors?

Hopefully, this book will accelerate the use of life-cycle track records as part of a common valuation language among managements, boards, and investors. To this end, the section “Integrated Reports, Life-Cycle Reviews, and Intangibles,” in Chapter 5 discussed Life-Cycle Reviews as a key element for improving both the measurement of past financial performance and the allocation of resources to the benefit of future performance. The core concept behind Life-Cycle Reviews is that management's strategy for a business unit and its planned reinvestment should be placed in the context of the unit's track record of economic returns in relation to the cost of capital and its reinvestment rates. Isn't this common sense? Moreover, Integrated Reports may communicate important ESG (environmental, social, and governance) information, yet none of this matters if a firm steadfastly fails to earn the cost of capital—the hallmark of value dissipation.

A firm's life-cycle track record is a critical readout of a firm's success in achieving its four-part purpose. These track records demonstrate how well a firm serves its customers and, in so doing, benefits society.

Life-cycle track records provide a superior “bottom line” compared to accounting earnings. They provide a direct link to market valuation and offer an economically sound means to link management compensation to value created—far better than linking compensation to growth in earnings per share. The preponderant challenge is handling the accounting treatment of human capital/intangibles, which requires ongoing experimentation that should be the responsibility of chief financial officers. Waiting for accounting rule-makers to solve these issues will be unacceptably long. Innovation is needed by CFOs and their staffs to overcome limitations of today's accounting conventions. This is fertile ground for finance/accounting researchers to jointly work with corporate staffs to develop industry-specific accounting treatments that advance value creation in the New Economy. The kind of innovation needed was briefly addressed in the Chapter 5 section, “System Principles and Effective Language,” that identified situations in which our existing language is deficient. For example, new measurements (better language) are needed to link process variables to accounting-based ROIs. Language improvements and experimentation walk hand-in-hand.

Throughout this book, I have illustrated that the firm is best understood using systems thinking. Moreover, the firm as a system acts and is acted upon within a broader socioeconomic system with important consequences. The next section discusses public perception concerning two interconnected issues—capitalism as a system to facilitate the greater good and the behavior of large corporations. Public perception is particularly important to managements and boards of directors of large corporations.

POLITICS AND THE GREATER GOOD

In an earlier chapter, I emphasized that maximizing shareholder value is best viewed as the result of firms successfully achieving a purpose broadly consistent with the four-part purpose noted above. That view continues to gain acceptance. On August 19, 2019, the Business Roundtable issued an open letter, “Statement on the Purpose of a Corporation,” asserting support for the free market system and a commitment to deliver value to all of their stakeholders: customers, employees, suppliers, communities, and shareholders. The letter was endorsed by 181 of the 188 CEO members. It is a major step away from the singular goal of maximizing shareholder value, with related concerns of management excessively focusing on short-term earnings. Keep in mind that to survive and prosper while acting responsibly toward all stakeholders requires a firm to at least earn its cost of capital over the long term.

Is this letter simply a politically astute move that means little in terms of behavior or is it a sign of major changes on the horizon? Will this letter impact corporate funding for lobbying to influence legislation and regulation? Does this letter mark an acceleration of a transition away from rigid hierarchical control with a pyramid of management levels to a flatter organization with less compensation to top management and more compensation to lower-level employees who are creating value? Perhaps these questions reflect impatience on the part of those wanting a level competitive playing field where compensation is directly tied to value creation at all levels of the firm and CEO pay is treated as a message to employees about a win-win partnership focused on value creation. The ideal competitive playing field for firms has regulations that may well be politically motivated but still agree with common sense while not putting an excessive burden on business in a quest for a marginal social benefit.

For example, I like being able to read about the ingredients in my cereal box. I appreciate the FDA's oversight to keep bad stuff out of our food supply. However, those in business, especially in small businesses, operate under an enormous regulatory load that has accumulated over decades with thousands of regulations whose costs greatly exceed their benefits. Politicians can pass laws and incentivize regulators to ostensibly make the world a better place, as they proclaim in their speeches, but politicians who don't own businesses or who never operated one do not always understand the pain of excessive regulatory costs that unnecessarily increase consumer prices, reduce investment, and curtail the creation of new jobs.

After many years as a Democratic senator and passing numerous onerous regulations on business, George McGovern left Congress and eventually acquired the leasehold on Connecticut's Stratford Inn. His worldview changed. In an October 21, 2012, op-ed in the Wall Street Journal, “A Politician's Dream Is a Businessman's Nightmare,” he noted:

I wish that during the years I was in public office, I had this firsthand experience about the difficulties businesspeople face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender.

I lived with federal, state and local rules that were all passed with the objective of helping employees, protecting the environment, raising tax dollars for schools, protecting our customers from fire hazards, etc. While I never doubted the worthiness of any of these goals, the concept that most often eludes legislators is: [should] we make consumers pay the higher prices for the increased operating costs that accompany public regulation and government reporting requirements with reams of red tape. It is a simple concern that is nonetheless often ignored by legislators.

Lawmakers and regulators experience limited feedback about the actions and unintended consequences from the rules they impose.⁷ There is growing awareness of the benefits from periodically repealing all regulations and replacing them with regulations that can produce benefits well in excess of their costs. Repeal and replace is about a shared concern for undoing the damage caused by well-intentioned but economically dysfunctional regulations that apply static rules to a dynamic system often generating unintended consequences. This is low-hanging fruit.

A Rhode Island Democratic governor and a Democratic legislature in 2016 initiated repeal and replace while transitioning to a greatly improved online regulatory system. Idaho's 8,200 pages of regulations were repealed on July 1, 2019, and replacements evolved in a bipartisan manner based on experience with how regulations performed in the past. Ohio is one of the most heavily regulated states, and its 2019 budget includes a provision to sharply reduce the regulatory load, as did Virginia in 2018.⁸ The fundamental reason that repeal and replace is gaining momentum is that replacing bad regulations with good regulations helps all members of society and paves the way for economic expansion.

In contrast, the goal of many Washington lobbyists is to explicitly tilt the playing field by securing special treatments for the large corporations that hire them. Not much has changed since 1922 when Franz Oppenheimer wrote The State: Its History and Development Viewed Sociologically. He argued that there are two ways to acquire wealth—the economic means through creating value for others and the political means by coercing and lobbying to gain advantage through laws and regulation. The latter involves transfers of wealth, typically by favoring one group by creating costs that are excessively burdensome for their competitors (or potential competitors), under the guise of promoting the general welfare. Also, lobbyists can persuade politicians to not pass legislation that would bring heightened competition to the firms that hire the lobbyists. For such firms this can be a very high return on the resources spent for lobbying.⁹

This political problem falls into the category of “wickedly difficult” to fix. Today, most voters don't understand the long-term consequences of what is happening, and politicians want to keep it that way. The flipside of benefits to firms that hire lobbyists is the campaign contributions sent by those firms to politicians. Legislation passed by politicians is implemented by regulators who have wide latitude as to what and how they regulate. Regulators and the regulated have a close working relationship. The regulated provide most all of the data that regulators need to do their jobs. Importantly, when regulators leave their government jobs, they often take higher-paying jobs with large firms in the industries they have been regulating.

How could this situation possibly change? Will managements have an epiphany and decide that for the greater good they will cease all lobbying? Similarly, will regulators forgo thinking about their future careers at higher-paying jobs in industry? The situation will change if and when the costs to continue the status quo exceed the benefits. Step one is to work toward transparency that effectively communicates to voters what is taking place.

The emergence of the Internet and electronic rulemaking dockets are changing the dynamics of the regulatory process. Regulation is no longer solely the purview of Washington-based lobbyists. Members of the public now have more opportunities to engage in the regulatory debate. As agency processes are made more transparent via the Internet, the once-arcane world of regulation will become more accessible to a much wider public, with the potential for making regulators and regulations more accountable to the people. Additionally, social media and other Internet technologies lower the cost of group formation and collective action so that citizens will be better able to educate themselves about the regulations that affect them and to take action to make their voices heard.¹⁰

Have you not felt hopeless about the lack of accountability as to how government spends the money raised from tax revenues and borrowings? Help is on the way from an important citizen initiative, www.openthebooks.com, which has a banner on its website, “Every Dime. Online. In Real Time.” The goal is to put every government expense—local, state, and federal—online in easy-to-access format. Another not-for-profit initiative with a similar goal is www.usafacts.org. These initiatives may foreshadow bipartisan efforts to restructure the regulatory state to minimize lobbying and cronyism in order to secure a more level competitive playing field and spur economic growth. Transparency can jumpstart engagement by the heretofore silent public who gets energized to make change happen. If management and the board believe that they have a strong case for regulatory change in order to level the competitive playing field, they should participate in the emerging transparency movement. So too for taking an active role in communicating their firm's purpose and what that means for society.

Why are there so few CEOs who vigorously defend free-market capitalism?¹¹ Do they believe that society has given them a perpetual license to operate with no accountability? Perhaps the answer to both questions is that the larger and more powerful the corporation, the more attractive is the return on lobbying to tilt the competitive playing field in their favor. They do not want to engage in public debates in which they might need to defend their lobbying behavior and, besides, “We would be at a competitive disadvantage if we did not lobby.” As previously noted, this is a wickedly difficult problem to solve.

An important ongoing debate about capitalism focuses on inequality; and, at a deeper level, should we trust the economic system in general, and large corporations in particular, to operate fair and ethically? The U.S. capitalistic system with its deep-rooted cronyism/lobbying enabled many financiers who played a role in the financial crisis of 2007–2009 to walk away keeping not-fairly-earned (as perceived by many) immense incomes. Deeply disappointed were the many supporters of a free-market capitalism that embodies a level playing field wherein the highest earnings go to those who genuinely provide the highest value to consumers.¹² IBM CEO Ginni Rometty neatly summarizes: “Society gives each of us a license to operate. It's a question of whether society trusts you or not. We need society to accept what it is that we do.”¹³

Consider the financial crisis of 2007–2009 and the precarious financial health of many large banks during that time. This was a period of “innovative” financial products such as negative amortization loans, which were very profitable in the short term for the issuing financial institutions. These loans facilitated trading up in order to buy more expensive homes because the early monthly payments were less than the interest expense, which might have succeeded if the purchased home continued to strongly appreciate. We know how that worked out. Many buyers of these loans suffered severe losses. Let's examine why BB&T Bank was the best performing major bank during this financial crisis.

BB&T Bank refused to sell negative amortization loans to its clients. John Allison, who was the bank's chairman for 20 years, describes the bank's culture:

If you want to have passion and energy in your life, you must have a sense of purpose in your work.… I ask the employees of BB&T: Are you truly making the world a better place to live through your work? Are you really helping your clients achieve economic success and financial security? Are you providing the quality of advice that ensures that they make better decisions?

You should never do anything that you believe will not be in your client's best interest, even if you can make a profit in the short term.… Life is about creating win-win relationships.¹⁴

The financial crisis of 2007–2009 was about too many managements in the financial sector adrift due to not being committed to a purpose grounded in building long-term value and earning client trust. Ever more extensive laws and regulations are not a substitute for earned trust.

PROGRESS STUDIES

The quote from Patrick Collison and Tyler Cowen, at the beginning of this chapter, promotes a new field of study—Progress Studies. This is strikingly important and seems so obvious once we think about it. However, we should not underestimate the challenge of building knowledge when researchers and students alike have preconceived beliefs coupled with the need for Progress Studies to include empirically grounded insights that may overturn strongly held assumptions by those on the political Left and Right. Since Progress Studies is about knowledge building within the educational environment, let's begin with the environment on college campuses and the study of business and economics in particular.

The purpose of education should be to increase our knowledge base with verifiable and useful assumptions (“truth”) and, most importantly, teach us ways to recognize and overcome the biases and limitations in our knowledge-building process (see the knowledge-building loop of Figure 2.1, which has been utilized throughout this book). In so doing, we have a better chance to make good decisions, to do well at work, and to live more satisfying lives that can contribute in some measure to making the world a better place. The knowledge-building process enables us to purge faulty assumptions thereby providing a useful guidepost to shape worldviews attuned to value creation.¹⁵ Awareness of how we build knowledge facilitates a healthy skepticism and a motivation to criticize and potentially improve our assumptive world. A desirable result of this constructive skepticism is asking penetrating questions that may result in profoundly useful discoveries. And another is being able to have civil and productive debates with those holding far different political ideologies as long as both share a commitment to building knowledge and a willingness to consider data that upsets one's strongly held beliefs.¹⁶ This is an issue on many college campuses. A good dose of straight thinking is reflected in the University of Chicago's January 2015 “Report of the Committee on Freedom of Expression,” which includes this quote from Hanna Holborn Gray, former President of the University of Chicago:

Education should not be intended to make people comfortable, it is meant to make them think. Universities should be expected to provide the conditions within which hard thought, and therefore strong disagreement, independent judgment, and the questioning of stubborn assumptions, can flourish in an environment of the greatest freedom.

The questioning of stubborn assumptions integral to Progress Studies requires a pluralistic inquiry that is not beholden to mainstream views in either business schools or economics departments. For example, this book makes a strong case that the firm is the engine of economic progress and it can be advantageous to focus on the firm as the unit of economic analysis. Neoclassical economics, as described in Chapter 1, minimizes the role of the firm, and more specifically, economists are inclined to utilize micro and macro theories which do not require in-depth knowledge of how firms operate.

An especially fertile line of inquiry for Progress Studies is the process of nurturing and sustaining a value-creation (knowledge-building) culture in the firm. Similarly, identifying the best method at any point in time to nurture and sustain a society's culture of dynamism is also uniquely important.¹⁷ Perhaps the culture inside the firm and the culture in the outside environment are much more connected than we currently understand.¹⁸ Perhaps the economists Vernon Smith and Bart Wilson are correct when they state: “For the science of economic betterment in the twenty-first century to be a study of humankind, it must likewise be an inquiry into human social betterment.”¹⁹

Consider the development of business schools and the role of beliefs about knowledge building. After World War II, management accounting and quantitative thinking flourished. This promoted quantitative analyses of component parts of the system (i.e., the firm) and wide use of accounting data to manage business systems in order to hit calculated optimum accounting targets.²⁰ Management accounting and quantitative methods have deep roots and have significantly influenced thinking about how to improve a firm's financial performance.²¹ In recent decades, the accelerating adoption of quantitative methods in business schools and highly mathematical models in economics raises the possibility that high-level mathematics and insightful thinking may be viewed as one and the same. Consequently, systems thinking may be downgraded in importance if it interferes with the application of quantitative tools. This concerned Peter Drucker:

There is one fundamental insight underlying all management science. It is that the business enterprise is a system of the highest order: a system whose parts are human beings contributing voluntarily of their knowledge, skill, and dedication to a joint venture. And one thing characterizes all genuine systems, whether they be mechanical like the control of a missile, biological like a tree, or social like the business enterprise; it is interdependence.… For what matters in any system is the performance of the whole; this is the result of growth and of dynamic balance, adjustment, and integration, rather than of mere technical efficiency.… Primary emphasis on the efficiency of parts in management science is therefore bound to do damage. It is bound to optimize precision of the tool at the expense of the health and performance of the whole.²²

One would hope that systems thinking plays a major role in future studies of progress.²³ In Chapter 3, I described three innovative approaches to improve performance (i.e., progress), which were not developed in the customary way that business and economics professors operate. The customary process is that articles published in the top journals constitute the best source of important, new knowledge and in turn this is eventually codified in the textbooks that guide student learning. However, with a pluralistic mindset we should be open to new ideas, especially those that demonstrate effectiveness, even if not developed in leading journals. Such is the case for: (1) Lean Thinking, as practiced by preeminent lean firms such as Toyota and Danaher; (2) the Theory of Constraints originated by Eli Goldratt; and (3) the work of Werner Erhard, which in recent years has been expanded into the ontological/phenomenological model (OPM). These three approaches involve a cognitive revolution, not minor organizational changes or adopting “best practices” without concern for nurturing a knowledge-building culture, and deserve further research as part of Progress Studies, including classroom discussions. Although these three approaches are currently taught to a limited degree in business schools, they deserve much greater emphasis to the ultimate benefit of students.

For many, Lean Thinking is synonymous with a worldview of waste elimination throughout the entire system (value stream) for a product or service. Less visible is the culture that engages employees in applying scientific thinking (hypotheses about root causes of problems and experiments) in order to continually improve processes. Lean companies that have sustained superior performance invariably reflect a deep and ongoing commitment by top management to orchestrate a learning culture. Helping employees effectively deal with uncertainty improves their human capital (personal skills) and results in earned success because they creatively contribute to their firm's progress. In other words, their jobs provide more than a paycheck. The common mistake is to focus excessively on learning about lean tools to the exclusion of learning about lean's knowledge-building culture.

Goldratt's mega-bestseller novel The Goal is an entertaining way for business students and others to learn about identifying and fixing bottlenecks. However popular this book is in business schools, it does not address Goldratt's thinking process that is applicable to problem solving in general.²⁴ His logical trees for mapping cause and effect and revealing hidden assumptions are time-consuming to construct but overall time-saving in discovering the root causes of seemingly complex problem situations. He always stressed that one should overcome the common perception of reality as complex; avoid accepting conflicts as unsolvable and tradeoffs being unavoidable—instead, after revealing hidden assumptions, find a simple solution that avoids compromises; always strive for win-win relationships; and be skeptical of believing one knows something with absolute certainty. Business schools should emphasize learning about Goldratt's thinking process.

The idea of a cognitive revolution certainly applies to OPM. The Erhard-Jensen Ontological/Phenomenological Initiative supports a worldwide program to assist academic institutions in equipping students for on-the-court experiences of being a leader that utilize a much improved understanding of how our worldviews automatically shape our perceptions.²⁵ The foundation for this approach resides in an awareness of how our brains function in constraining the future to be tightly linked to our past experiences so that one's being and acting is synchronized to the predicted future. To achieve breakthrough performance, leaders need to creatively transform the current context, enabling others to aspire to a far different future. Along these lines, successful lean transformations of below-average performing firms often begin with a radical change by implementing lean processes in a selected manufacturing plant in order to unambiguously demonstrate to employees that breakthrough performance is achievable in the future.

It would be beneficial for the study of capitalism to include how capitalism is perceived. Consider the contrast between capitalism and socialism. Perhaps current polls that show surprising support for socialism do not reflect an admiration for life in Venezuela or Cuba, nor a misreading of history as to the different prosperity outcomes for East Germany versus West Germany and North Korea versus South Korea. Is it not plausible that proponents of free-market capitalism have erred by focusing almost entirely on the societal benefits of competition? The efficient allocation of resources via competition appeals to economists since this spurs innovation and advances our standard of living. In so doing, resources move away from firms that are becoming obsolete. However, everyday people typically don't think about competition being the driving force of a rising standard of living. But they do recognize how competition leaves in its wake people hurt by what economists label “creative destruction.” I believe that this phrase, made famous by Joseph Schumpeter, should be creatively removed from our vocabulary because it is incomplete, misleading, and sends the wrong message.

Technology advancements including robotics, digitization, and artificial intelligence raise fear of job losses while simultaneously improving firms' financial performance. The economic argument that new jobs are being created may be true but offers little comfort to those left behind. We need to provide a helping hand for those left behind and for young people trying to get in the game. Surely, there are innovative ways that business firms can orchestrate mutual benefits through expanded training programs with minimal government involvement.²⁶ Our educational system for young people certainly seems ripe for disruptive innovation.²⁷ We owe people, young and old, equal opportunity to rise as high as their skills, determination, and insight can take them.

Young people joining a firm's workforce seek engagement with an enterprise that realistically can make the world a better place. So, too, for customers who want to buy from firms that operate with a purpose consistent with the four-part purpose promoted in this book.

Critics of capitalism assert that people are motivated to behave in selfish ways. However, those selfish actions are actually incentives to make mutually beneficial transactions even though each party is focused on meeting their own needs, not the other party's needs. As Adam Smith suggested with his metaphor of the invisible hand, such actions are the means to advance the common good.

Both successful business relationships and transactions between buyers and sellers occur due to mutually beneficial outcomes—not a zero-sum game in which if you win, I must lose. For example, how do you react to potential business partners who assert that their foundational principle is “greed is good”?²⁸ In contrast, how do you react to potential business partners whose track records demonstrate that they believe in win-win outcomes and are committed to serving customer needs?

A free-market economy is built on trust. When transactions involve strangers, institutions or firms establish rules that ensure neither side gets hoodwinked. At a macro level, laws protect property rights and do other useful tasks to facilitate human betterment through trade (i.e., the multitude of transactions that make up our day). Paul Rubin sums up with three points:

First, the term “competition” implies a winner and a loser, but in a market both participants (buyers and sellers) gain. Second, the fundamental unit of an economic relationship is a transaction, and because both parties gain from a transaction, it is cooperative. Third, competition has an important role in a market, but its role is to ensure that transactions (cooperation) occur on the best possible terms with the best possible agents.²⁹

Integrating cooperation into the explanation of the free market system makes sense.

In summary, my view is that an important role for Progress Studies is to better understand the evolutionary process in which firms build knowledge, create value, and generate progress—a bottom-up, concrete body of knowledge using the individual firm as the unit of analysis. This book is a step in that direction.