Deflation is a state of mind, David Ignatius

Opinion, May 2003, Al-Jazeerah.info

Deflation is a state of mind,

David Ignatius

The Daily Star, 5/27/03

Not so long ago, the students at St. Gallen, Switzerland’s elite European university had their pick of the global economy’s plums.
CEOs from the world’s top companies would come calling each year at the annual symposium organized by St. Gallen’s students, and the best and brightest would march off a few months later into fabulous jobs. It all seemed as dependable as the ticking of a Swiss watch.
But that was then. The theme of this year’s symposium was “Seeking responses in times of uncertainty.” That phrase sums up the psychology of the deflationary global economy into which this year’s graduates will be heading.
Deflation, like everything else that matters in economics, is really a state of mind. In an expanding, inflationary economy, confident investors decide to purchase new capital equipment and grow their businesses. While inevitably uncertain about the future, they feel in their gut that assets will be worth more tomorrow than today so they invest.
In deflationary times, the psychology is reversed: Investors fear assets will be worth less tomorrow, so it’s better to wait to buy that new machine or acquire that new subsidiary.
The saving grace of the globalized economy is that it can’t stand still. Even while economists are talking deflation, CEOs still have to plan for the future. They may not feel the “animal spirits” that Keynes described as the engine of a dynamic economy, but they can’t adopt mineral or vegetable spirits, either. They have to innovate or die.
That was the message that a parade of top global executives offered the St. Gallen students this weekend. The only viable response to times of uncertainty and deflation is to innovate, innovate, innovate and hope for the best. Christopher Meyer, director of the Center for Business Innovation in Cambridge, Massachusetts, told the students we are entering what he called “the adaptive economy.” The driving force during the next decade will be the convergence of biology and information technology so that business systems adapt automatically to the environment the way living organisms do.
Drawing an example from his new book, It’s Alive, Meyer cited the experience of the multinational tractor maker John Deere, which improved the efficiency of its scheduling by 25 percent by letting computers “breed” software solutions in the laboratory. Using what Meyer called the genetic algorithm, the company could test many generations of different scheduling models, with the most efficient emerging as the final winner.
Stephen K. Green, the incoming CEO of HSBC, described his firm’s expansion over the past two decades from a regional Southeast Asian bank with 30,000 employees to a global powerhouse with 215,000 workers. To stay international, HSBC this year will recruit graduates from 49 different countries. He warned the students of an old Chinese proverb: Today’s rooster is tomorrow’s feather duster. The president of Toyota, Fujio Cho, told the students that he sees two trends ahead: relentless pressure to cut costs to meet global mega-competition, and acceptance of environmental protection as an essential corporate goal. Rather than simply hunker down in this deflationary economy, he said, Toyota has been designing a whole new generation of environmentally friendly vehicles such as the hybrid gasoline-electronic powered Prius.
Colin Marshall, the chief executive of British Airways, described the catastrophic conditions in his industry, which he said has lost more than $31 billion in the last two years and will lose another $10 billion this year. Especially in such horrific conditions, Marshall said, successful companies must keep innovating.
Business must connect better with the world’s values, argued Franz Humer, the CEO of the drug company Hoffmann-La Roche. He wants his company to be seen as helping poor countries obtain drugs, even though giving drugs away free to African nations won’t necessarily put them in the hands of patients, because of corruption and lack of infrastructure. “In today’s world, shareholder value cannot be the only variable,” he said.
The most striking uncertainty was among the students. Many said they weren’t eager to go into consulting or investment banking like their predecessors in the boom years. Today’s students, like the CEOs who spoke here, know they are looking at a more complicated world and must struggle to adapt.
As one of the speakers here, I talked to a dozen or so students and found them less careerist than I had expected. If anything, their questions had an idealistic tone, as they pushed to know how companies can make the world better.
Making money won’t be so easy in this global downturn. It would be nice if the St. Gallen graduates decided to focus instead on making a difference.

David Ignatius, a Paris-based syndicated columnist, is former executive editor of the International Herald Tribune

Earth, a planet hungry for peace

The Israeli apartheid (security) wall around Palestinian population centers (Ran Cohen, pmc, 5/24/03).

The Israeli apartheid (security) wall around Palestinian population centers in the West Bank (Ran Cohen, pmc, 5/24/03).

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