Moscow, February 24, 2012. It’s freezing. I am in bed with the flu, with nothing to do but watch TV. Tonight I watched three programs I want to comment on: one about the Greek debt crisis; another an interview with George Soros; and the third a documentary about the history of Mercedes Benz, the car company.

The Greek Debt Crisis

A panel of prominent economists was debating whether Greece should default on its debt and leave the Eurozone. Two were for the proposition, two against. When the audience was given a chance to vote, more than two thirds rejected the proposal.

But, members of the audience asked, if Greece stays within the Eurozone and does not default, what should it do? What will the future be like?

The four economists offered no real answer to these questions.

Let me try.

Greece’s main problem is not debt. Other countries have an equal percentage of debt to GNP––some even higher. But they are not in a crisis.

So, what is the problem of Greece? It is its inability to pay its debt––to honor its financial commitments.

In other words, the debt crisis is the manifestation of the problem. If we want to decide what needs to be done, we must look for the cause.

I believe there were several causes.

First, Greece has a huge, expensive government apparatus, employing many people with lots of high-priced benefits. It is all (A) and no (P). Meanwhile, the productive sector, such as the shipping industry, is either exempt from paying taxes or is successfully evading them.

The result is that the government spends more than it collects.

Who covered the difference till now? Debt financing combined with subsidies from the European Union.

Obviously, there must be an end; both to the amount of debt a country can take on, and to how long that country can reasonably rely on subsidies.

That “end”––better known as “the debt crisis”––has arrived.

This practice of relying on debt to finance non-productive parts of a government system has also had social repercussions: It has created a culture of dependency. People expect not to work very hard but to live well. In other words, they feel entitled to be non-productive and let someone else pay the bills.

How did this happen in the nation that gave birth to democracy?

Let it be said that the citizens of all democracies are grateful to Greece. But it must also be said that in the modern era, Greek politicians have abused democracy.

How?

By awarding benefits to special interest groups to secure  their votes.

Those “entitled” special interests are how the government apparatus became obese, and also how many who could and should have paid taxes were given license not to pay.

As the root of the problem, I attribute the debt crisis to a flaw in the democratic system that enables mediocre and corrupt politicians to come to power, stay in power, and ultimately destroy the country.

And Greece is not the only country suffering from the abuses of democracy. We, in the United States, too, need to overhaul our system. It served us well for a while, but in the complex world we live in today, it can have more liabilities than assets.

The Hidden Hand is too slow to react to changes that occur in a complex environment at such a rapid rate. Economic theory that assumes the system will seek its equilibrium also, apparently, assumes a low rate of change.  At the current rate of change, the system cannot cope. “Things fall apart. The center cannot hold,” Yeats wrote 90 years ago, but he might have been talking about democracy in the 21st century.

We need a new theory of democracy, I would call regulated democracy, a system that take into account the complexity, the interdependency, and the high rate of change in modern times.

In the meantime, what should Greece do?

For one: Go on a starvation diet, which means significantly slashing the ranks of government employees.

Two: Change the tax code and improve tax collection.

Three: Severely punish corruption.

Four: Make loans easily available to small businesses and start-ups.

In other words, cut (A), increase (P), and stimulate (E).

And all along give hope to the people by electing technocrats to positions of leadership of the country. Bring new faces, a new generation of leaders who are honest and capable; What Greece needs more than ever is hope based on trust and respect—Build (I)!!!!!

Soros

The interview with Soros I found to be very interesting. His topic was the decline of the West and the faults of capitalism.

Everywhere, you read or hear that our society is being destroyed by uncontrollable greed. But nowhere have I read or heard that responsibility for the disaster must fall, in part, on business schools. I wrote about this in one of my blogs back in 2010.

Fifty years ago, when I took my MBA classes at Columbia University, there were very few business schools and MBA programs. They were not yet popular. Since that time, they have grown like mushrooms after the rain, especially in Eastern Europe and the developing countries. In India, I have noticed, they are everywhere. Meanwhile, in the United States, business schools are making fortunes essentially franchising their programs.

What is wrong with that?

Schools of economics and business schools legitimize greed. Finance theory and micro-economic theory assume that the goal of business is profit––earnings per share. The whole program is geared around profits as a goal.

Granted, here and there you can find a course devoted to social responsibility, but it functions as a fig leaf for the real program, which is clearly oriented around profit: market domination for profit orientation, etc.

Business schools train managers to seek profit above all other goals and making profit the purpose and goal for which an organization exists validates and justifies greed. The result is that we live in a galloping consumer society that is wasteful beyond comprehension.  To make profits companies have to create needs so they have increasing revenues. Companies are profitable while the environment is increasingly getting destroyed.  To increase profits companies seek global sourcing of products and go where the costs are the lowest. That seems right but it creates unemployment at home.  The search for maximum economic returns is impacting how top mangers behave too. The gap in salaries between top management and workers is the highest it’s been since the era of the robber barons in the late 19th century.  Overall I would say the system, as we know it now, is producing unexpected, undesired, collateral damage.

Profit seeking as the preeminent goal is a force of disintegration, which is hurting us and will hurt future generations even more.

I remember a consulting project I was doing in Israel over thirty years ago. The company had an opportunity to outsource its production outside Israel   and make significant money doing so. The top management decided against the move.

“ We have a responsibility to provide employment for the incoming immigration. The country is more important than how much more money we can make per share.”

Mercedes Benz

I watched a fascinating documentary about the company’s beginning and its history. It was like reading my book on corporate lifecycles, only changing the names.

Karl Benz was the company’s (E), and the (A)s kicked him out. (Sound familiar?) Then investors forced the company to bring him back (an older version of the Apple story).

A great topic for a doctoral dissertation at the Adizes Graduate School would be to take the history of a specific company and use it to validate the lifecycle theory. It will make for exciting reading I am sure.

Sincerely,

Dr. Ichak Kalderon Adizes