I sit here half-way through Adam Smith's tome, The Wealth of Nations, which I understand to be the canon of modern economics and market theory. I bought the book because I wanted to understand not only its own subject matter but the contemporary rhetoric of business, and it seems to be the Rome to which all roads lead. It didn't take me long to encounter a few puzzling observations about his enquiry, what we assert is the reason for doing business and how both relate to what I see around me. Perhaps I will reconcile my understanding if I read farther, but until then, bear with me.

Let's say you're a late 18th-century merchant. You own a stock of goods you keep in a warehouse. You have effectively one choice with regard to what to do with it. You can sell the goods at a profit, which could mean you sell them directly, or have people work them into more valuable goods, or lend them to somebody else and take a share of his profit. You take full responsibility that in doing so, you risk a loss through some mishap in the process. Your other choice is simply to hoard them, knowing that they will certainly depreciate at whatever rate is consistent with a given type of good, plus the ongoing cost of keeping them, plus the risk of wholesale disaster, natural or otherwise.

In this position, then, it is perfectly reasonable to find employment for your stock, because a risk of loss with the hope of a profit is a better deal than a certain loss through hoarding. Furthermore, the profit you earn replaces the value of the goods you employ, and compensates you for your trouble and that of everybody else you employ in the process.

There should be no dispute then, that the purpose, outside of our own consumption, of employing a stock of goods, which will otherwise depreciate or be ruined, lost or stolen, is profit. This especially concerns money, which depreciates every time it is lent by a banker or printed by a government. This situation does not necessarily entail, however, that profit is the overarching purpose of a business. I think this distinction is important, and gaining importance as we settle into post-industry, with weirder and more abstract products and services, multiplying as fast as our accelerating rate of innovation can carry them.

That was Then, This is Now

From what I can tell, in Smith's time, all business was the employment of stock. Virtually everybody everywhere was employed in the harvesting of raw materials, fashioning those materials into usable goods, or moving the lot around the planet. While these are undoubtedly, as it is said, the commanding heights of industry, it's safe to say that in the 21st century we have that problem licked.

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest.

Right you are, professor, though let's break that down a little. A baker, for instance, does not necessarily bake because he wants people to eat his bread. He most certainly bakes because people want to eat his bread, or he would find himself quickly out of business. Furthermore, he bakes rather than occupying himself otherwise because he is competent, and presumably tolerates it enough to continue. We could also presume that if our baker was especially passionate about his craft, used the finest ingredients and applied the highest skill and attention, his bread would be more valuable than other bread. Most importantly though, the baker bakes because it works. People value his contribution and they are happy to pay for it, which, whether they acknowledge it or not, keeps him in business. He may not become the next food megaconglomerate, but he will prosper and be appreciated, and that's good enough for most.

To contrast that with what we have now, consider that the goods in Smith's time would have nearly all been well-understood and so would their value. Information about what an object was worth would have been woven into the social fabric for generations, because genuinely novel stuff didn't come along all that often. Moreover, if there was any doubt about the value of a good, a person would have an opportunity to haggle. Now, we have so many mass-produced products and services that can't be readily compared to one another, and negotiation is unheard of in commerce except for the most constrained or artificial circumstances.

Businesses have it easier in some respects, because any product sold to business, especially one that isn't for resale, will have its ROI estimated one way or another or the sale doesn't close. Individual people, however, are much less well-equipped to ascertain the value of the things they buy. What is the ROI of a can of baked beans? Or a flat-screen TV? Or a t-shirt? How can you compare the value of one make to another? If you disagree, to whom can you bring your issue? The checkout clerk?

Commerce is a Social Thing

It seems that somehow, in the last century or so, that the time we set aside to evaluate the social relationships we make through commerce has evaporated. There are now so many layers of indirection between the products and services that we buy and the people that make them. There is likewise at least as much indirection between what we contribute and where its value is felt. It is much too easy to forget that commerce reduces to a social interaction. It reduces to us, judging the value of the produce of another person or group, and voluntarily trading a portion of the results of our own produce in exchange. It reduces to us, making a material difference that others take enough notice of to pay for.

The value judgment that permits commerce to occur has never amounted to more than what resides in the perception of the buyer. It seems, though, that it has become in many regards more lucrative to invest in manipulating this perception than to create products or services that would substantively enable or enrich them. Hence soft drinks, zero-down adjustable-rate mortgages, and any other established consumer or enterprise product or service in existence.

Faced with this, an archetypal MBA might say that it doesn't matter. The purpose of business is profit to make money to get rich, and as long as we have a shrewd marketing team and aggressive sales staff, it doesn't matter what we sell. And he's right for the most part, but I catch a glimpse once in a while that his rightness is starting to erode.

The Sustainability of Subterfuge

There exist entire categories of business whose profit margins, if not their outright viability, rely on a vast disparity of information between themselves and their customers. Obscurantism, dissimulation, or outright deceit seem to be essential components in every transaction from mobile phone plans to synthetic CDOs. Just how well would these organizations perform if their customers could accurately and efficiently evaluate their products and services?

Well, how profitable would it be to run a casino in a country where everybody knew statistics? While it's a safe bet, so to speak, that they're secure for the time being, I wonder what it says about a business of any kind to stake itself on the ignorance, apathy, stupidity or desperation of its clientele. Morality aside, the decision seems to me like hosting a picnic on a powder keg.

Key phrase is stake itself. There will always be individual opportunities to exercise a strategic advantage. I'm talking about the systematic contravention of Lincoln's apocryphal warning: You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.

My concern here is that the ignorant can always learn. The listless can start caring. The stupid can wise up and the desperate can get lucky. It is easier now for each of these events to occur than it ever was. And when they do, the people involved will remember which concerns were genuinely aligned with their interests, and which profited, or more appropriately, pillaged, at their expense.

Increase Shareholder Value

We've all heard the mantra, but I wager relatively few of us are aware of just how young it is. Let's consider the world in which shareholder value would not only resonate, it would be grafted onto the mission statement of any company with a pulse.

The early 80s would have been an interesting time for business. From industrial robots to fax machines to VisiCalc to leveraged buyouts, business executives had all the means at their disposal to grow their employers super-huge and hyper-efficient.

And that's really what a first-order goal of increasing shareholder value is about: efficiency. At such a size, prying open the spread between costs and revenue by even a fraction of a point equates to a massive pile of cash. Likewise at this size, individual executives are so diluted and divorced from the consequences of their actions that they could be completely honest about acting in the interests of their customers, while at the same time signing off on systematic externality and rent-seeking expeditions. They'd believe it even stronger knowing that they get rewarded for their behaviour, in the form of cash bonuses, and equity whose value they can personally influence, poised to sell on a schedule. It works. Remember Smith's baker?

It occurs to me that a solid strategy for increasing shareholder value is by increasing customer value. To me that reduces to substantively enriching our customers so that they end up with more resources and a reason to come back and voluntarily buy more from us. It does not mean going in search of more efficient ways to extract value from them. That just makes them poorer, which leaves them less to buy with. Do the math.

Moar Inovashunz

The Ivy League did not earn its reputation by minting dummies. Its graduates that pepper the helms of industry recognize that there is only so much to gain by cutting costs and streamlining processes. Everybody knows that at some point new ground must be broken, but how should we approach and discuss it?

HBR publishes no fewer than three articles a day discussing innovation like it's a target you can plot on a line chart. The authors appear to completely fail to recognize that an innovation of any kind is the product of somebody with the resources to solve a problem they care enough about to solve. The harder the problem, the more there is to gain, but also the greater prerequisite for passion to see it through.

Wait. Passion? Sissy-hippy-commie-touchy-feely passion? Dude. What happened to greed? I'm trying to win here, not hold hands and sing Kum-ba-ya.

Hold that thought, Mr. Gekko, I'll consider it in a moment.

Innovation is not about increasing efficiency, it's about gaining new effectiveness. That means tearing up infrastructure, changing paradigms and solving problems, which are activities that are about as antithetical to efficient operation as you can get. Even if the result of a given innovation is improved efficiency, the act of innovating is sloppy and inefficient, almost by definition. You can't even speak about new kinds of effectiveness with the language of efficiency. If you're more concerned about conforming to a budget or a deadline than you are about solving a problem, you may be efficient but you sure won't be effective.

Now, to Answer Your Question

As somebody who has spent most of my life inventing things on the daily, I have a few observations to share on the subject of passion.

First, there is nothing you can pay me that will make your boring non-problem interesting. As part of the deal I need a new thing to learn and new mastery to gain. If I don't get that, whatever it is had better be quick. If that isn't an option either then I'm just carrying out orders, and if I wanted to do that I'd join the military. All more money will do is entice me to spend slightly longer in search for that nugget of intellectual value. If I can't find it, my attention will invariably wander.

Second, there is nothing you can do to make me work faster. I am already working as fast as I can. There is also nothing you can do to evaluate my progress, because if you had the same information I did, you wouldn't need to hire me in the first place. This also means you can't tell what is on-task and what isn't. For some solace in this regard, see point one. Further, while I recommend having me explain it to you, understand that preparing a lesson so will add to the total cost. Oh, and when I say I need a certain resource, I mean it.

Third, let's say I pull it off and you become effective in a way you previously weren't. How can I be confident that you will use your newly-acquired power in a way that benefits me and the world I live in? How do I make sure I'm not arming you with the means to turn around and screw me and everybody else over?

Land, Labour, Capital

Another important consideration is the character of an emerging category of economic activity and what it yields: the knowledge product. Off the top of my head it exhibits four properties in particular that set it apart from everything else.

The first is that a knowledge product cannot be consumed the sense of the bread produced by Smith's baker, or any other physical good. That is, consuming a knowledge product does not displace or destroy it. If anything, it is multiplied by consumption and endangered only when it is ignored or access to it is restricted.

The second property is its range. Not to pick on our baker again, but he could expect to sell his bread not much farther than a few miles from his shop before it would be more advantageous for customers to go elsewhere. Likewise, one loaf of bread would only be useful to a few people for one day. With a knowledge product, everybody in the world can access it instantly, at effectively zero additional cost to the producer. Its effect when it is employed is also arbitrarily significant. This is completely new.

The third is that for the vast majority of knowledge products, there is no significant cost in terms of capital stock. That is, there is no bulk of materials that must be consumed to produce it, separate from the maintenance of the producer. While we must acknowledge that this maintenance cost must be absorbed in some way, it is a mistake to assume that it must be tied to the same capital intended for the materials of earlier manufacture.

The final distinction is that the labour needed to acquire a knowledge product divides in ways that aren't immediately obvious, if it can be successfully divided at all. Putting two people together with half an idea each is just as likely to hinder acquisition as it is to accelerate it, no matter how smart they are. Collaboration and progressive refinement can indeed take off at a breakneck pace, but neither can be preordained or reduced to practice. Like agriculture, it is only possible to create conditions for success. This situation is as old as human innovation, if not humanity itself. It probably deserves an enquiry of its own.

It's More Appropriate to Call it Attention

Labour, with regard to knowledge work, is something of a misnomer. From the perspective of an employer, labour is interchangeable. If one ditch-digger drops dead, the next can take his place. What knowledge workers do is better described as focusing their attention to get information into and intellectual capital out of their heads. In a conventional labour scenario, it's the company who owns the means of production. For knowledge work, it's the individual. This shift happened decades ago. There is little ambient evidence however, even in 2010, that it has been taken seriously.

This entails another consideration: In order to perform I must concentrate my attention, a resource I can't buy more of, to draw on knowledge, most of which accrued at my own expense, to manifest intellectual capital, which is arbitrarily powerful. Furthermore, money and problems are abundant, but my attention is scarce. It can be said therefore that the stock I put at risk is my attention, and as such prudent to choose my projects carefully. It is not only a sound investment of my attention that I care about and morally approve of my contribution, it is a prerequisite for performance.

Eschatology

We seem to have evolved a perverted understanding of delayed gratification, namely that if we do whatever it takes to amass as much private wealth as possible, we can cease productive activity and ascend to the ranks of the leisure class. Not only does the paradigm create an incentive to get to that state as quickly as possible, it seems that it is only a feasible strategy for a waning few. Most of us have fantasized about how we would spend our time, given a windfall of extraordinary wealth, but how many of those activities we could we achieve right now, at a profit, having employed a little ingenuity?

My understanding of capitalism is that it is more about the freedom to dispose of our own property as we see fit, including putting it at risk for profit, than about getting rich speculating with somebody else's. When we fail to distinguish between profit as the purpose of employing a stock of goods from that of business outright, we go from a simple value judgment to the reason we get out of bed. An executive charged with the task of maximizing the performance of his employer is rewarded for short-term gains while being insulated from long-term risks. In the long run it isn't his capital at stake.

Suppose you fulfill the American dream and exit with a mountain of cash. Then what? You are now free to buy all of the crappy superfluities put to market by people employing exactly the same strategy you did. I hope you still have enough years left in you to enjoy them.

The purpose of my business is to enrich my customers with understanding they wouldn't have otherwise, so they can go on to enrich their customers and so on. Profit is my means of keeping the lights on and financing more elaborate expeditions, but most importantly it's a reflection of the value other people place on my contribution. If they like what I do, the evidence should speak for itself.