Considering the Ramifications of the Emerging “Metaphysical Corporation”

Gord Hotchkiss
Gord Hotchkiss

The articles of business thinker and writer Gord Hotchkiss are some of my favorite “go-to” columns on the web because they’re invariably thought-provoking pieces to read.

In one recent column, Hotchkiss poses an interesting set of questions and points surrounding what he dubs the emerging “metaphysical corporation.” He notes that more business today is being conducted in non-physical markets.

As he points out, “Businesses used to produce stuff.  Now they produce ideas.”

To illustrate this claim, Hotchkiss cites a recent evaluation issued by intellectual property merchant bank Ocean Tomo, which reports that the asset mix of companies has undergone a massive shift over the past 40 years.

In 1975, tangible assets — equipment, buildings, inventory and land — made up more than 80% of the asset market value of the S&P 500 companies.

In just 35 years, that ratio has flipped completely. Intangible assets — patents, trademarks, goodwill, brand equity — now make up 80% of the S&P 500’s asset market value.

To Hotchkiss, this trend promised to have major implications on the future structure of corporations. He notes:

  • Historically, companies that made physical products needed a supply chain. Vertical integration was the common way to remove physical “transactional friction” from the manufacturing process. And vertical integration was best managed through hierarchical management styles.

 

  • On the other hand, companies that sell ideas or intangible products need to have a network. By their very nature, these networks don’t have physical friction, so supply chains aren’t required. In fact, attempting to control a network via a centralized organizational structure tends to be counterproductive, as branches of the network are prone to wither under such constraints.

Zero Marginal Cost Society by Jeremy RifkinEconomic and social theorist Jeremy Rifkin takes this point even further. In his new book The Zero Marginal Cost Society, Rifkin contends that capitalism as we know it is dying a slow death, to be replaced by a new “collaborative common market” made possible by the shrinkage of marginal costs.

Building on this notion, Hotchkiss concludes:

“As we move from the physical to the metaphysical, the cost of producing consumable services or digital concept-based products … drops dramatically. Capital was required to overcome physical transactional friction.  If that friction disappears, so does the need for capital.”

Like other big trends, this transformation won’t happen overnight.  But it will happen by degrees in the coming years and decades, according to Hotchkiss.

… So much so that the corporates structure we know today will be all-but-unrecognizable to workers 50 years from now.

I find this theory pretty fascinating, and I certainly recognize the logic behind it. What are your thoughts about it?  Are Hotchkiss and Rifkin onto something?  Please share your thoughts with other readers here.

Arthur Brooks Presents the “Moral Case” for the Free Enterprise System

The Road to Freedom by Arthur C. BrooksThose of us in the business world who experience first-hand the positive attributes of the free enterprise system while also seeing certain failings, usually find it much easier to defend the concept of free enterprise from the perspective of “facts, data and efficiency”: Things work better under a capitalist system because the profit motive and competition combine to reward both effort and results.

Of course, that sort of defense makes it pretty easy for others to accuse capitalism of being an essentially heartless, unfair system that promotes winners and losers … where more typically “the rich get richer and the poor get poorer.”

The lame response to that contention is often something like what Sir Winston Churchill once said about democracy: “It’s the worst system – except for all the others.”

Now along comes a book that presents a moral case for free enterprise: The Road to Freedom: How to Win the Fight for Free Enterprise, by Arthur C. Brooks. Published just last month, I think it’s the freshest, most modern exposition of ideas on the topic since Friedrich Hayek in the 1950s.

Dr. Brooks bases his moral defense of the free enterprise system on the ideals of earned success, equality of opportunity, charity, and basic fairness. Of these, I find the “fairness” argument for capitalism to be the most interesting and useful aspect in that it takes an argument normally used against capitalism and turns it back on its accusers.

Brooks does a very good job presenting the case of how the free market, while not perfect, is the fairest system for the largest number of people – including the poor. One of the ways that he illustrates his points is by citing “happiness” research exercises that have been conducted with groups of people over the past 10-20 years in many different countries all over the world. These studies show the power of the idea of “earned success” and the fact that it has near-universal human appeal over the alternative of “learned helplessness” of less free economic structures.

It’s refreshing to read a book on economic matters that doesn’t fall into the realm of a polemic, and that eschews doctrinaire philosophy and partisan labels. Instead, Brooks emphasizes that government has a role in protecting the population from corporate cronyism and monopoly power, even while defending free enterprise as the fairer and more moral system.

To top it off, the book is written in an easy-to-approach conversational tone with liberal doses of humor. How often can you say that about a book on economics?

For anyone else who has read Dr. Brooks’ book, let’s hear your reactions. Do you have a different take?