Business strategies around long-run investment have varied over time. In General Theory (GT), John Maynard Keynes reinforces the analysis of the modifications in the structure of the capitalist class to explain the differences between entrepreneurs and investors in terms of the effects of their behaviour and decisions on capital accumulation. In Chapter 12 (GT), he establishes the difference between the old and the new business models. This historical approach shows that, in the old business model, there was an irrevocable commitment towards investment. Taking into account the new business model, the decisions about what amount and where to invest are no more an irrevocable commitment for investors and managers. Indeed, in the new business model, investors decide the volume of investment, but aggregate investment is not irrevocable since liquidity is the target.  This fact fosters macroeconomic instability in the economic system. As Keynes wrote:

Decisions to invest in private business of the old-fashioned type were, however, decisions largely irrevocable, not only for the community as a whole, but also for the individual. With the separation between ownership and management which prevails today and with the development of organized investment markets, a new factor of great importance has entered in, which sometimes facilitates investment, but sometimes adds greatly to the instability of the system” (Keynes, General Theory, 12, III).

And he added:

If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase” (Keynes, General Theory, 12, VI).

The historical changes in business have been related to qualitative transformations in capital accumulation and competition. Mainly after the 1970s, the changing practices in corporate finance fostered the growth of the participation of institutional investors, such as pension funds or private equity firms, in business management as relevant shareholders. The drive to increase the share-holders’ value and the incorporation of the managerial strata through share options has tended to postpone long-term investments. In addition, these practices have favoured mergers and acquisitions and fostered financial speculation.

After the middle 1990s, public policies and private strategies influenced the dimension and composition of balance sheets in different economic sectors. Among the main features:

  • The household sector has got increasingly indebted.
  • Corporations have moved to “surplus units” running financial surpluses that have been diverted towards the acquisition of financial assets instead of financing physical investments.
  • The balance sheets of mutual investment funds are now larger that before the global crisis with respect to the GDP and they have influenced the flows of investment in companies.

Considering the evolution of the business models since the 2000s, the strategies  of corporations and private equity funds have turned out to focus on short-term gains and the distribution of dividends to shareholders, that is to say, to investors. In other words,  the current business model can be apprehended as a form of governance that aims increasing short-term earnings by means of a “clash of rationalization”. In this context, competitiveness and productivity have been put together in the attempt to promote higher business performance.

In fact, the centralization of capital, through waves of mergers and acquisitions, created new challenges to business stability. Accordingly the OCDE, the current investment chain is complex due to cross-investments among institutional investors, increased complexity in equity market structure and trade practices, and an increase in outsourcing of ownership and asset management functions. In this scenario, the economic and social outcomes have involved a trend to ‘downsize and distribute’, that is to say, a trend to restructure, reduce costs and focus on short- term gains. In practice this has meant plants displacement and closures, changing employment and labour conditions, outsourcing jobs, besides the pressure on supply chain producers in the global markets.

As a result of current business strategies, investments that are fixed for society turn out to be liquid for investors. Today, the dominance of a culture based on short-term speculation has major implications that go far beyond the narrow confines of the financial markets.  The costs of this business model fall disproportionately on society because of the commitment to liquidity.  As Keynes warned,

“Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organized with a view to so-called ‘liquidity’. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities. It forgets that there is no such thing as liquidity of investment for the community as a whole” (Keynes, General Theory, 12, V).

If we WEA economists want to disseminate among our students these relevant changes in business models, then it would be interesting to include some of the following readings  mainly in micro and macroeconomic courses.

Berle, Adolf A., and Gardiner C. Means (1932), The Modern Corporation and Private Property, Macmillan.

Blair, Margaret M. (1995) Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, Brookings Institution.

Crotty, J. (2002) “The effects of increased product market competition and changes in financial markets on the performance of nonfinancial corporations in the neoliberal era”. Working Paper Series, n. 44.  University of Massachusetts Amherst, Political Economy Research Institute,

Çelik, S. and Isaksson, M. (2013) “Institutional Investors as Owners: Who Are They and What Do They Do?”, OECD Corporate Governance Working Papers, No. 11, France: OECD Publishing. (accessed 10 October 2015)

Fligstein, N. (2001) The architecture of markets, New Jersey: Princeton University Press.

Jacoby, S. (2008)  Finance and Labor: Perspectives on Risk, Inequality and Democracy, Working Paper, Institute for Research on Labor and Employment, USA, California Digital Library.

Keynes, J. M. [1936 (1964)] The General Theory of Employment, Interest, and Money. New York: Harcourt Brace.

Lazonick, W. (2013) “From Innovation to Financialization: How Shareholder Value Ideology is Destroying the US Economy” , in Martin H. Wolfson and Gerald Epstein, eds., The Handbook of PoliticalEconomy of Financial Crises, Oxford University Press.

Lazonick, W. and O´Sullivan, M. (2000) “Maximizing shareholder value: a new ideology for corporate governance”, Economy and Society, 29 (1).

Seccareccia, M.  (2012) “Financialization and the transformation of commercial banking; understanding the recent Canadian experience before and during the international financial crisis”, Journal of Post Keynesian Economics, 35 (2): 277-300.


Today the dominant paradigm in the business world is Result Based Management (RBM), which is taught to MBAs the world over. This is unfortunate since it is a seriously flawed model for management. RBM maxims like ‘If you can’t measure it, you can’t manage it’ are widely accepted as pearls of wisdom, while debunkers call it a ‘costly myth’ and ‘patently ridiculous garbage’. Creating good managers is essential for development but, as Henry Mintzburg points out in a devastating critique, we need “Managers, not MBAs.” The alternative to RBM is Procedure Based Management (PBM), which is the dominant practice in Germany and Japan, where it has produced excellent results. As opposed to this, Professor Zuboff, who taught Harvard MBAs for 15 years, writes that “I have come to believe that much of what my colleagues and I taught has caused real suffering, suppressed wealth creation, destabilised the world economy, and accelerated the demise of the 20thcentury capitalism in which the US played the leading role”. Our purpose here is to clarify the difference between RBM and PBM and advocatelove switching to the latter paradigm.

Suppose we want to improve research output from universities in Pakistan. The ‘result’ we are interested in is publications in high-quality journals. RBM starts by measuring the output — number of articles, perhaps multiplied by an impact factor. Then we provide incentives to increase this output. For example, the number of articles is made the basis of promotions, pay raises and other types of evaluations of faculty and institutions. As this RBM practice became popular the world over, the number of ‘fake’ journals has seen explosive growth. There are now a large number of journals which will quickly publish any kind of garbage upon payment of a hefty fee. Academicians churn out paper after worthless paper, seeking an increase in publication count, without any consideration of whether this paper adds to useful or relevant knowledge. Personally, I have seen many CVs which contain 10 or more papers that apply a single esoteric and unreliable technique to different data sets, as well as CVs which contain 20 papers published in a single year in fake journals. The extraordinary increase in noise due to RBM has made it difficult to distinguish between good and bad. The genuine researcher may only have a few papers of high quality, while the competitor has 20 or more marginal papers in low-quality journals. The most important things — like quality and depth of ideas — cannot be measured. This is just one out of many examples. Whenever a number is made to measure performance, people start playing number games instead of improving genuine performance.

The story of McNamara in Vietnam is an amazing example of how numbers blind us to human realities. With the arrogance common to fresh MBAs, McNamara dismissed the advice of his experienced generals, and applied the scientific and quantitative approach to war. He calculated that the number of the Viet Cong guerillas was limited, and used formulas to try to achieve kill-rates which would wipe them out in two years. Huge emphasis was placed on counting the kills, and often sorties sent out to count bodies would create more kills for the enemy than the original engagement. However, all this measurement failed miserably, as the extreme and wanton cruelty to civilians turned the Vietnamese against the Americans. More killings created even more guerillas, completely disturbing the quantitative calculations.

PBM pays much more attention to the human dimension. To improve research output, we would think about what leads human beings to produce great research. How can we inspire and motivate people to struggle hard to acquire and produce knowledge? The single-most important factor is an environment which encourages research and provides appreciation for intellectual efforts. Good researchers are driven by passionate commitment to a much greater extent than material rewards. Thus PBM would focus on creating an environment which nurtures research. In particular, developing research-based social networks and connecting students with inspiring role models would be crucial. PBM deals with soft and unquantifiable goals suitable for humans, instead of hard quantitative goals suitable for machines. Rejecting the MBA religion of measurement, PBM is based on common sense. We human beings manage diverse and complex dimensions of our lives, juggling friends, families, social and professional responsibilities without measuring and quantifying. Business tasks are no different.

Published in The Express Tribune, November 30th,  2015.

I would like to thank Robert Locke for making me aware of these issues.