What really drives the economy?

The impact of an Ethical approach investment

Sebastian Parsons, KGJ Insurance Brokers (Stourbridge) Ltd, April 2020

Track human beings’ endeavours through history and notice that the secrets of success in the face of adversity, was not individual genius no matter how important that genius was, because without the supporting framework that allowed the genius to invent, nothing would have happened. For example, let us imagine how technology, which has changed the human experience so much over the generations, come to be developed.

Strip everything away in your mind – just you and nature – what is life like?  You are now pre-historic man, Stig-of-the-Dump, your life is almost entirely focussed on obtaining food and shelter. Back to today, and we do not live like that, food is in shops and accommodation available and stable for many people.  We have time to do more than finding food and shelter, if we are so inclined and gifted, we may even create an invention or have an insight that changes everything for everyone.

How did food and shelter, the basics of life, come to be so well organised?  By sharing tasks, working together, innovating better methods, we improve efficiency and make time to do other things.  Other things such as thinking, which generate skills and improve processes. People specialise in growing food, building houses, inventing, making, teaching, healing and so on.  The world changes, and it is a virtuous circle, the more it happens the more room there is for innovation.

But what drives this endless development?  Ambition.  From small to big, young to old, from the cardboard box to Einstein’s Theory of Relativity…  all ideas imagined by people, that become real in the world because someone created something new and then other people wanted the idea for themselves too.

Continuing the imaginary journey back from pre-history and we reach the point when the first skills and specialisations were emerging: working with animals, growing crops, making with wood, making with metal, building with stone, and in due course the wheel is developed, then weaving loom, the printing press, and eventually, the apotheosis of the modern world, the iPhone is created!

It’s maybe a little silly to rush through history so fast, but pause to think and you will notice that all those inventions required someone, or some people, to focus on one thing and all because they were not foraging for food and shelter. They had support from other people. People worked together to make it easier for them to obtain food and shelter, so they had time to think.

That is the secret and the magic of the economy.  When we do things for each other we become more efficient and we free up time for thinking and working out how to do it better. Little bit by little bit, over a long time, our world evolves and grows. Doing something that someone else wants or needs is the driving force of the economy. In a rather surprising way, at its very foundations, the economy drives progress through service.

But, of course, this is not a world of unalloyed positivity, success, and achievement. Things go wrong all the time, people suffer and fight, we hit blocks in the road and get diverted into projects that do not help us; we get it wrong; we lose everything.  That is life, it has its ups and its downs, its times of progress and its times of struggle (and of course struggle often leads to progress, but that is another topic).

In fact, because there are hard times, genuine worries and real things-to-fear there is a strong impulse in us all to protect and guard ourselves, to defend our families and our friends. We harbour our resources and guard our wealth and power.  That is just human too.

These are the two impulses, one is creative and risk taking, and one is defensive and cautious.  They are both needed.  For example, in a company, traditionally, this division can be seen in the two top management roles: chief executive (CEO) and financial director (FD).

Within a healthy organisation both these roles have to be functional and active to maintain the good health of the company.  The CEO, for instance, typically brings a creative risk-taking growth orientated drive which, in a healthy company, we may hope will be tempered by the FD’s caution and financial realism.  However, success and growth does require that the CEO slightly has the edge over the FD or the company won’t change and so won’t be able to improve – which is perhaps why the CEO is the top job and the FD is the Number Two.

What happens if it becomes unbalanced one way or the other? An overly strong CEO could too quickly invest all the reserves so that the company runs out of cash before the investments can make a return – risking disaster.  Or an overly strong FD could hold back development at the company to protect cash reserves which would cause it to become uncompetitive and over time start losing contracts – risking disaster.

Just as a micro system such as a company requires balance, so too does the macro system of the economy require forces to be evenly balanced but with creativity having a slight edge over defensiveness to tend towards good health and stability.  Conversely, in any system where the forces are unbalanced there will be less stability and more chance of crisis.

Just as our ancient forebears progressed by working together, so for us, success and security come from people working together and supporting each other’s needs so that individuals can focus on the things that they are best at.  In people’s hearts and heads, in company board rooms and in regional and national governments creative striving is balanced by cautious realism as human beings co-create together, in a myriad of different circumstances, their shared future.

That is the simple common-sense, picture that we use to understand what is happening in the economy and why ethical sustainable investment is the future.

At first encourntering this picture we may doubt the motivation because it feels to so many of us that we go to work for nothing more than our pay, nervertheless, but for the true underlying desire of someone else’s desire for our products or services, there wouldn’t be any work. 

We have work because someone else, outside our organisation, wants to have the product or service we are making or providing.  By being paid, each co-worker is able to spend their days at work, instead of using their time to obtain food and shelter. They can use their wages to buy what they need from other suppliers and further contribute to the cycle.

A virtuous cycle is established from achieving sales that exceed costs and allow co-workers to be paid enough that they can afford to continue to attend the workplace. The organisation can continue, it is sustainable.

The workings of companies and the economy are a never-ending ebb and flow of creative and defensive activity.  It is never static, it is alive with human activity, always changing, a subject of endless fascination to the serious investor.

The underlying positive effect of people collaborating to serve each other’s needs in this way is apparent from the way the economy has grown.  Here is a chart of the performance of the stock market vs RPI (Retail Price Index), building society interest rates and government gilts. 

A picture containing flying, kite, colored, smoke
Description automatically generated

The chart shows:

  1. What £100 invested in 1950 would be worth in 2015 if you had left it in a building society – £5,554
  2. What £100 invested in 1950 would be worth in 2015 if you had invested in government gilts – £81
  3. What is £100 worth in 2015 money – £3058
  4. And finally, what would £100 invested in equity in 1950 be worth in 2015 – £156,840

Keeping the money in the bank would just about have beaten inflation, but investing in the economy directly would have beaten it by 30 times.

Although the stock markets go up and down all the time, they have tended to go up much more than down.  It has been possible for investors to keep their money in the stock market and ride out the down-turns, so that their wealth, in the long term, has continued to grow.

We feel that this remarkable phenomenon is not chance, illusion nor the result of wishful thinking. It is the natural consequence and result of people working together to meet other people’s needs.

Of course, much goes wrong. There are many ways of abusing co-workers, shareholders, customers, and the environment; and many opportunities to accumulate wealth out of proportion to anyone’s real needs.  Power and wealth polarities exist and when they grow beyond certain limits, feel unfair, unjust and if left unadressed cause conflict and crisis in the short, medium and long term.

An ethical and sustainable approach to business aims to achieve these goals:

  1. Natural resources are used sustainably
  2. People are treated fairly
  3. We are consciously conscientious

Ethical and sustainable investment is an attempt to ameliorate the destabilising risks that arise from abuse of power and greed.  Alone in the world it is easy to believe that your only safe course is to maximise your own power and wealth, but the deeper truth is that our security and well-being is provided by being part of a collaboration, and shared striving in which we are co-dependent on each other for our needs.

All business must obey the law and work within the legal limits of power and wealth, but ethical investment sets a higher bar.  Done well, ethical investment will give as positive a return, over a longer term than investments that rely only on, or even seek to avoid, the standards set by law.

To conclude, the driving force of the economy is creativity, which is fostered by a collaborative approach innate in all human beings.  Defensiveness and a desire for security also come naturally and these two forces, if slightly dominated by the former, keep the economy moving forwards and upwards.  An ethical approach to business encourages this healthy dynamic whilst smoothing out some of the dissonance that can come from the illusionary and unfair security of excessively unequal wealth, power and carelessness with resources.