Interview with the editors of the newspaper, Business & Baltics Published August 18 2010

Editors: Experts are predicting that there might be a second wave of crises; do you agree? We remember that when we last spoke, you were calling the current crisis “just a warning.”

Adizes: I do not yet see yet any symptoms of the second wave, and I do not know whom and what it is going to hit. But I am sure that second and third waves are coming.

I am saying this based on the intense structural changes that are taking place in all spheres of life—not just in one sub-system, but in all—economic, social, political and legal. In all spheres, the situation is in turmoil. Systemic problems call for systemic solutions. Partial solutions like economic intervention do not work well anymore. It is becoming clear that we are going to need to find a new way of solving problems.

Furthermore, capitalism does not work, because it is a disintegrating force and this disintegration brings systemic problems.

Q: What is wrong with capitalism?

A: The main emphasis of capitalism is on capital. In other words, in capitalism I can invest my money without working myself. My money works for me, and I receive dividends. If I own a company and manage it at the same time, then I am in control of my capital. But in the stock exchange, a separation occurs: Those who invest the capital are no longer the controlling owners. I do not really control what I supposedly own, because I am not able to control the management of the company in which I invested. The investors do not control the Boards either.  If I do not agree with a company’s financial results my only choice is to simply sell my shares and invest in something else.

So the loyalty of the investors is based almost exclusively on short-term profitability. And material well being becomes the only priority. This approach has outgrown the earth’s capacity to regenerate itself, the planet is becoming polluted and natural resources are getting destroyed.

At this point, the governments need to get involved. But as usual, the administrative machine that is being brought to bear is becoming too big, too expensive, and is still ineffective. People are losing their patience and starting to demand less control, since it is not working.

Because there was no good balance between control and freedom, the whole system started to function badly, and the current financial crisis was born: People took risks in order to maximize earnings, but nobody was properly controlling the total process. And now, when Obama is trying to implement some controls, many people believe that the controls are ruining the business system.

Q: Do you see any solution to this situation?

A: No, neither freedom alone nor control alone is working.  Neither a mixed system is working. A third path is needed. A paradigm shift is being called for.

Communism is dead. Capitalism is dying before our eyes. The answer is not to strengthen or weaken the system of controls. A new regulatory system is needed. But today, nobody can predict what it will look like. It might be some compromise between socialism and capitalism that is able to integrate materialistic approaches with social consciousness.

But, since this new approach has not been born yet, new crises are unavoidable. We do not know which sector is going to be hit—the banking sector, real estate, or production—and that is why we are not able to predict when it is going to happen. What we do know is that currently we are fighting and solving only some consequences of some problems, but have not gotten to the roots of those problems.

The task for the new generation

Q: The question is how much time it will take to reach the roots of the problems and change the system. It took centuries to change the slave-holding system.

A: This is impossible to forecast. The only thing I know for sure is that the change will take place, and I have a few ideas about the direction in which we need to move.

If the problem lies in disintegration then the solution is in integration.  We need to stop behaving according to the philosophy that “Man is wolf to man.” We need to stop believing that the best results are reached only through competition. The ideas of Adam Smith and his “invisible hand” do not work anymore; in fact, they lead toward disintegration. Competition has moved from the market to inside the companies themselves: Employees are fighting management, managers are fighting each other. Everybody is against everybody and they’re trying to destroy each other, as if destroying others will protect them. This has to change.

So a serious change in our values system should take place. The cornerstone of the new system should be cooperation instead of competition.

Another point: We need to stop measuring the progress of the society by its economic growth alone. We need to focus more on social indicators.

Q: It is difficult to believe that such a major change in thinking could take place in less than a few generations. It would require that a significant part of society reject their wealth, hold each other’s hands, and start to help each other.

A: It might take a few generations until it becomes possible. But it might happen that a new generation is born that is less oriented toward materialistic values.

And it might happen even faster if a powerful crisis causes a change in behavior. Sometimes a crisis is needed in order to force important and necessary changes. “Crisis,” in the languages of many nations, means “time of big changes.” It is not only a threat; it is a chance for serious reconstruction.

Profiteers: A necessary evil

Q: You said yourself that materialistic society is wasting our natural resources. And we want to add: often for unimportant, even trivial reasons. What do you think about the idea of creating something that is useful for all human beings (for example, something that strengthens our environment)? Industry could get involved, and people would benefit from it.

A: I like the idea. But usefulness/non-usefulness is a question of attitude. For instance, people are buying Apple products like crazy. Do they really need all that stuff?

To define what is necessary and what is not is very difficult. The question is not only what do we need most of all, but also, do we need future products that are better than the products we have now, or are the current ones good enough?

Q: Economic development can be strongly influenced by speculators, who are capable of inflating or knocking down the prices of goods and resources. Is it possible to control them?

A: It is possible to increase the control by raising taxes for the high profits they are getting, but to completely get rid of them is impossible. The reason is that changes of any kind create discrepancies in the system that gets capitalized by speculators who see in them possibilities for exploitation.  In order to completely get rid of speculators, you need to stop all changes, and this is impossible. Speculators are a necessary evil—possible to control, but impossible to defeat.

Q: Who is going to be the driving force in future economic development?

A: I think the future belongs to the BRIC countries: Brazil, Russia, India, and China. They are highly populated. They started from a rather low level of development, and their growth is going to continue for long time. They are the markets of the future. And if you take a look, you will see that development in those countries is occurring very fast—especially in China, where they are not only consuming but also producing, and now are even starting to create products of their own. They are becoming an important economic engine.

The challenge for China is that its political system does not correlate with its economic system. In reality, the Communist party adopted all the devices of a market economy: proprietorship, banks, stock exchange, etc. The country actually functions as a capitalist country, while still calling itself Communist.

Ultimately, I think this problem is going to be solved by the Chinese people themselves. They are a very pragmatic people whose attitude toward the future is practical rather than influenced by strong religious prejudices or ideologies.

The dissolution of EU

Q: Economic skeptics are forecasting the fall of the Euro as well as the European Union itself, based on the problems in Greece and the whole Euro zone. What is your opinion of the EU’s future?

A: I do not think it is going to collapse. The globe is shrinking, new alliances are being born, and walls are falling down. There is no sense in going back to separatism, to individualism, to nationalism.

But development never goes smoothly.

After a movement forward, there is always a small movement back. This is normal and necessary for healthy adaptation to a new reality.

In my opinion, the EU will not collapse, but will wake up and start to think about the necessary tools to make some trims. They are not going to throw out the baby with the dirty bath water. They will try to clean the water.

In my opinion, it was a mistake to keep helping Greece for all those years despite its ineffective economy. I diagnosed Greece 20 years ago and said the country was surviving only because of EU funding. At that time, I asked: How long can you rely on that support? And now, after 20 years, we have the answer. But for the EU, this only means that in the future it will need to create new methods of control.

Q: What do you think are the prospects for the Baltic countries?

A: After looking at the situation in all three Baltic countries, I believe there is a direct correlation between the level of difficulties they are facing and the level of corruption and disintegration. . This is why Latvia is having the biggest challenges. The sooner you go for integration and combine your efforts, the faster improvement will come.

Q: You have traveled all over the world to advise corporations. Do you think organizations around the world have learned any lessons from the current crisis? Did any of them change their structures or cultures?

A: (Long silence). It is interesting that I did not notice a big difference. (Laughs.) No, corporations made some very predictable changes: they reduced costs, fired people, and became more careful, more conservative. But I did not notice any profound changes.

You can divide changes into three levels: First, to change what we do; second, to change how we do things—for example, to replace manual work by computer work. The third level is to change who we are, which is a powerful change of values.

So, during the crisis, I noticed changes of the first level and perhaps some of the second level. But most of the serious and necessary changes are in level 3 but still not visible at all. Because of that, I am sure we are going to be hit by even bigger crises, which will require, but also enable, level 3 changes.

Sincerely,

Dr. Ichak Kalderon Adizes