THE BLOG
01/29/2016 01:52 pm ET Updated Jan 29, 2017

Fixing Capitalism

As a proponent of both democracy and capitalism, I've always wondered why opponents have negatively critiqued capitalism. Until the Wall St. Crash of 2008, and its subsequent Great Recession, I took no notice. The basic argument against was greed. 2008 confirmed this.

Economic game theory and later Alan Green, a former Fed Chairman, influenced by Ann Ryan, had encouraged greed and minimal regulation, respectively. Today we know this is a mistake. Opponents did not help. Their arguments were essentially unstructured and not in a manner corporate managers could work with. Leaving management with little or no choices on how to change their behavior. The solution is to structure the profit seeking motivations.

Operations Research shows us that there are a class of solutions, mathematical programming, that can assist us to structure corporate financial management, to provide an alternative management approach.

Mathematical programming techniques are search algorithms to find an optimal solution, a minimum or a maximum, within a search domain, or region to be searched. While, in this case, we are not concerned with the search algorithms, because in corporate management, managers act as the search algorithm to find good solutions to their business problems. The value of this approach is that enables us to structure the profit-seeking management problem.

Mathematical programming problems are structured into three parts. (1) The objective function, or what we want to optimize. (2) a set of constraints that define the search domain, and (3) the boundary conditions that determine the limits of each constraint. Very simply put, the beauty of this class of solution techniques is the Primal-Dual solution, i.e. the objective function of the primary problem can be swapped with the boundary conditions, creating a dual problem whose solution is identical to the primary problem. That is, we can solve the initial problem from a different perspective, and still get the solution we need.

With respect to financial management, it is clear that profit-seeking is the goal or the objective function. What if we viewed it from the perspective of Primal-Dual? The profit-seeking objective function now becomes a constraint. How do we keep profitability, for example, within a 4% to 15% range? Of course 15% is easy to achieve. Just harvest the company, by laying off people, and selling assets. Dosen't need management talent. Nice for a few months, but will the company be around in 3 to 5 years? Long term investors should be asking the question, why are earnings so high?

Now you would probably ask, how do we keep management focused? Because of the swapping of the objective function with the boundary conditions, the new objective function is derived from the operating characteristics of the firm. Therefore, you get a management that is focused on risks, market share, capacity utilization, cycletime, staff development and the balance sheet. If you do all these correctly, by Primal-Dual, earnings will take care of itself.

It is too complicated? Then management has two problems (1) under talented management and/or (2) management haven't got their long range planning in order. The first, I cannot advise what to do with. The second requires a solid strategy/tactics methodology. In a previous post "Tesla Versus Volt", I have made Holistic Business Model, available for free. That should help significantly.

Returning to fixing capitalism. With small adjustments to the current management culture, yes, it can be done. I hope that in future shareholder meetings, we hear a more accountable conservation. ". . . because we did, this, this and this . . . per the operating characteristic of the firm . . . given the current and anticipated economic conditions . . . earnings were . . ."