Archives for 2009

(Cedricmuhammad.com) Of all of the chapters that I wrote in my new three volume book series on entrepreneurship, The Entrepreneurial Secret (http://www.theEsecret.com/) the one that gave me the most anxiety from a technical standpoint was Chapter 4 of Volume I, entitled, “The Secret of Capital And The Business Firm.” It is a chapter that makes some strong assertions, such as the economics profession does not understand what capital is; money is one of the least of all of the forms of capital; entrepreneurs should understand that a business firm is actually a society; and that 90% of Black businesses have no more than a single paid employee partly because the science of what a business firm is, and legal forms of business that encase it (i.e. sole proprietorships, partnerships, and corporations) were never taught to Black Americans, or worse, denied to them.

My anxiety stems from the fact that we the people have been made so ignorant, miseducated, and misled on economic matters that it is difficult to get into certain economic truths without being misunderstood or mislabeled. As I wrote in the Preface to The Entrepreneurial Secret this is due to the fact that the public school system does not teach economics, the news media cannot explain it properly and the book publishing industry divides and compartmentalizes knowledge in the field into too many categories. On another level, we’ve been systematically denied certain elements of business knowledge and funneled into a phony capitalism versus communism shouting match that produces more debate and distraction than development.

In my book I make the case that macroeconomic policy does matter, and that a debate over market forces and State control of an economy is important (I devote an entire chapter to this discussion). But a central theme of my book is that what leads to wealth creation, economic development and growth is self-improvement, enlightened self-interest, cultural traditions of pooling money, the proper use of the business firm, and the standardization of a business organization so that it does not depend upon a single personality. None of these five elements fits neatly into the mainstream economic profession nor does it revolve around the Free Market versus State debate that dominates the capitalism-socialism paradigm.

In The Entrepreneurial Secret I define the business firm as a form of society, a social institution, not to be defined by a ‘State’ or ‘Free Market.’ It is a vehicle where human beings unite, pool resources and capital, organize them in hierarchical structures and make decisions, even on how to resolve conflict. In that sense I see the business organization not unlike a ‘gang’, sorority, tribe, or religious order.

And this is why I was so impressed with the fact that Professor Oliver Williamson of California, Berkeley was a co-winner of the Nobel Prize in Economics (http://nobelprizelaureates/2009/press.html). You see Professor Williamson’s view of the firm is similar to the one I express in my book. Here is the most relevant portion of the official press release announcing his victory:

“Economic transactions take place not only in markets, but also within firms, associations, households, and agencies. Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements…. Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson’s theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets.”

The Royal Swedish Academy of Sciences, which awards the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, uses a phrase, ‘relationship-specific.’ The untapped area in the field of economics which remains is that which revolves around ‘relationship-specific’ activity, and how such factors like love, envy, ambition and trust influence trade and commerce. Yet, the profession is only now getting around to how firms, associations, households and agencies are formed and impacted as a result of these forces. That Professor Williamson is being recognized for his work which looks at economic reality outside of central governments and markets is a positive sign.

On an empirical, conceptual, and anecdotal level my recognition of how people unite, resources are ordered, capital is arranged, and decisions are made in the firm is influenced by the teachings of the Honorable Elijah Muhammad and my experience as General Manager of Wu-Tang Management. The economic blueprint of the Honorable Elijah Muhammad, in its entrepreneurial aspect (contained in the 1965 book Message To The Black Man) encourages, “If there are six or eight Muslims with knowledge and experience of the grocery business – pool your knowledge, open a grocery store – and you work collectively and harmoniously, Allah will bless you with success. If there are those with knowledge of dressmaking, merchandising, trades, maintenance – pool such knowledge….help to make jobs for your own kind. Take a lesson from the Chinese and Japanese and go give employment and assistance to your own kind when they are in need. This is the first law of nature…”

To the Honorable Elijah Muhammad the business firm is a society within a society. The connection of his insights and reference to the ethnic communities that have been foremost in wealth creation around the world and in the United States as immigrant groups is worthy of deep study.

When I was interacting with Wu-Tang Clan (beginning in 1993 when I met them as a young concert promoter still in college) or serving as part of management for over a two-year period in the 1990s I saw these principles practiced at a high level, and was involved in helping to execute them (along with an incredible four-man combination of Mook, Divine, RZA and Power) on the group’s behalf inside of the music industry and outside of it.

I will argue the unparalleled achievements and example of Wu Tang with anyone.

There has never been a greater model for community and economic development – in a business context – provided by any single artist or group in the music business than that given by the Clan. Perhaps one day someone will make a detailed study on this subject.

One of the reasons for the group’s success was that it was never burdened by any superficial ideological debates. Everyone was clear on what the goal was and in many ways we embodied the first law of nature – self preservation – and building wealth according to the cultural kinship systems of the Chinese, Jewish, and African traditions for example, where individuals support a collective and the collective finances the individual (entrepreneur). We made mistakes and errors, and fell victim to the same vices and imperfections that we all struggle with, but at its highest level of operation, there has been nothing like the Clan, before or since.

I touch on some enlightening and hilarious anecdotes in The Entrepreneurial Secret.

In my book’s chapter on capital and the business firm I devote 12 pages to different arguments over the nature of the business firm. What I present kisses and embraces certain aspects of Nobel Economist Professor Williamson’s work which makes clear that the government and market are quite often not the place where real economic activity takes place. It is in informal institutions like associations and households where transactions take place, often without money changing hands. Just look at a family and how many ‘trades’ take place without cash being involved. Consider the New York-based Jewish diamond trade where contracts in the millions of dollars are sealed only with a handshake and a Hebrew-Yiddish greeting of ‘mazel and brucha’ (luck and blessing).

Yet, despite overwhelming evidence, the economics profession looks down upon kinship systems (families, tribes, ethnic groups, ‘gangs,’ religious groups) that often have more trust than formal systems dominated by markets and central authorities. The obvious truth that trust is a form of wealth, seems to be a fact that Western economists only seem willing to acknowledge after stock market crashes and financial panics.

What the work of Nobel Economist Oliver Williamson makes clear is that whether markets or strong governments exist or not there are always benefits and a principal role for what he terms ‘private ordering’ – the lead role of associations, households, firms and agencies in undertaking economic activity.

Every ethnic trading network and group savings association in the world already knew this.

Wu-Tang Clan; The estimated $80 million Muslim ‘economic empire’ of the Nation of Islam prior to 1975; Jamaican ‘partners;’ Ethiopian ‘ekoub;’ Jewish aktsiyes;’ and the Chinese system of doing business known as ‘guanxi’ are not created by governments or ‘markets,’ they are relationship-specific institutions that emerge culturally and defy the understanding and logic of the economics profession.

As I write in my book, Wu-Tang really was a clan and RZA was our head. We were the product of an entrepreneurial vision, voluntary association, kinship system (everyone involved was either a blood relative, childhood friend or serious student of Islam and universal principles). There were elite inner circle elements to the decision-making, and others that were more ‘democratic’ and still more that were authoritarian. Only an understanding of the nuances of the theory of the business firm (and not how markets or central governments work) and the hierarchy it creates or enables would explain how and why the Clan achieved so much.

In an interesting interview with CNN to promote his new book, The Tao Of Wu, CNN and RZA have the following exchange:

CNN: You say you ran Wu-Tang like a dictatorship in its first five years. I know you and Raekwon have had creative differences and Ghostface Killah is suing you over royalties. Ever regret the dictatorship approach?

RZA: I don’t regret it because it got us to the power we are. …To me, in the beginning, the dictatorship led us to such a strong foundation that even though Wu-Tang seemed to be crumbling, it didn’t fall because of the root foundation of one man’s idea. But now as it’s coming back together — we’re living in the twilight age of it right now — it’s still surviving because of the democracy of it.

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RZA’s assessment of the drawbacks but undeniable progress made with a ‘dictatorship’ would enlighten those who don’t understand why certain societies and electorates turn to authoritarian rulers with egalitarian messages (Venezuela, Cuba) or dominant spiritual leaders (Iran, Vatican, Nation of Islam). Much of it has to do with the shortcomings of ‘markets’ and ‘governments,’ and the ability of special human beings to inspire the greatest forms of economic wealth – trust and love – which always decrease transaction costs and provide a foundation for development.

On another level the theory of the firm explains why the entrepreneur is often more efficient than ‘markets’ at gathering, allocating, and determining the use of resources.

For the valuable role of direction and execution of resources that they fulfill, as well as the risk-taking they assume, there is always a dispute within groups (filled with envy, ambition, and structured on hierarchy) over how much of a ‘profit,’ reward, or compensation the leader or head should enjoy as opposed to the rest of the body.

In my book I make clear why I believe the word ‘entrepreneur’ is more accurate and appropriate than ‘dictator,’ to describe the dominant leader.

Yesterday, from Memphis, Tennessee, the Honorable Minister Louis Farrakhan, in an address commemorating the 14th anniversary of the Million Man March (http://noi.org/) represented one of the deeper regions of the Teachings of Honorable Elijah Muhammad connecting the structure and function of the human body, the origin of the universe, and the next stage of community and economic development that should take place in Black America, wasted urban areas, and distressed rural areas.

That anatomy, physiology, and universal order should enter a discussion on economics may be strange to some, but the deeper economists think into reality and study societies and their basic unit, the individual human being, the more they will see the unity of that which previously seemed disconnected.

I don’t believe in revisionist history, but the deeper economists get into anthropology, theology, cosmology, astronomy, anatomy and physiology – and I can’t leave out botany and zoology – the more likely they are to broaden the pool of likely recipients for the highest prize in the profession.

The Wu-Tang Clan and the Honorable Elijah Muhammad absolutely practice what Nobel Prize Economists Elinor Ostrom and Oliver E. Williamson have studied, “Economic Governance: The Organization of Cooperation.”

One day it will be acknowledged, if I have anything to do with it.

Cedric Muhammad
http://cedricmuhammad.com/
October 19, 2009

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