The Economy: Don't Hit the Reset Button

Let's not set ourselves up for the next cyclical crisis

With apologies to rapper-actor L.L. Cool J and his song "Mama Said Knock You Out," don't call it a comeback.

In fact, let's not call our wobbly progress from the brink of a global financial meltdown a "recovery." Why? Because we are doomed by our collective mindset to plunge into more financial crises as soon as we recover. Some of the world's top business leaders, including General Electric Chief Executive Jeffrey Immelt and Microsoft CEO Steve Ballmer, have rightly recognized that we need to create a fundamentally different way of pursuing business and human endeavor.

"This economic crisis doesn't represent a cycle," Immelt recently noted. "It represents a reset. It's an emotional, social, economic reset."

I agree with the sentiment, but I think it doesn't go far enough. I submit that we ought to call our shared endeavor a "rethink." Whereas the term "reset" suggests we need to reboot our business software, the term "rethink" can help inspire us fundamentally to reexamine our companies, institutions and countries to make them 21st-century compatible. The problem is we continue to attempt to function according to a 20th-century operating system whose catastrophic bugs have been exposed as critical flaws.

The Same, But Worse
Merely rebooting our financial, political and social systems will bring more of the same, only worse: more intense crises that strike with greater frequency due to the hyperconnected, interdependent nature of our economies, businesses and lives.

In reflecting on our current crisis and on the nature of crisis itself, I have come to think that essentially two types of crises have confronted us as humans. The first and far worse type is the "End of Life" — the crisis that threatens to annihilate us by destroying our very existence. Think about the Cuban Missile Crisis or a massive meteor hurtling toward our planet.

The second type of crisis, what I call a "Way of Life" crisis, is far more common. While the effects can be devastating, they are not deadly. Unfortunately, we continue to respond to Way of Life crises as if they were End of Life crises, and that's why we need to rethink our response.

Way of Life crises such as the Great Depression, other global financial meltdowns, broken health-care systems and crumbling infrastructure do not pose the risk of physical annihilation. Instead, these crises disrupt deeply ingrained ways of thinking and behaving. The prices of real estate, dot-com company shares and tulips, it turns out, will not soar forever. Cheap credit will not always be available.

Trying To Ban Innovations
Yet we react — or more accurately, overreact — to Way of Life crises as if these challenges were the same as having a meteor zeroing in on our planet. "When bubbles burst and are followed by a wider economic crisis, as happened in 2008, the danger is that we overreact by trying to banish the innovations that sparked the boom, rather than learning how to use them wisely," write Matthew Bishop and Michael Green in their book "The Road from Ruin: How to Revive Capitalism and Put America Back on Top" (Crown Business, 2010).

The popping of a financial bubble, which is another Way of Life crisis, generates irrational states of panic and fear and such behavior as blame, paralysis and hunkering down.

Hitting the reset button — if one magically existed — would only place us on the path to overreacting to the next Way of Life crisis. We have become locked into these extreme emotional and behavioral patterns, which poses problems on three fronts. First, history shows that reacting to a financial crisis with a mix of fear, panic and blame only intensifies and prolongs the financial crisis, as the world experienced during the Great Depression.

Second, the frequency, intensity and unpredictability of our crises will only increase due to the interconnectedness and interdependence of our world. A volcano in Iceland kept planes from flying to and from Europe. And as we have seen with Greece, a small country flirting with bankruptcy can sap billions of dollars of shareholder value in one day. In the last century, our nascent global economy thrived despite the Great Depression. We were perfectly happy to suffer through recessions when they occurred only every 15 to 30 years. We are less willing to endure recessions when they threaten global stability more frequently.

Cooler Heads Make the Profits
Third, a subset of countries, companies and individuals always responds more moderately and, as a result, more profitably to crises, and that is what is owed to stakeholders. As New Yorker business columnist James Surowiecki points out, Kraft (Miracle Whip), Texas Instruments (the transistor radio) and Apple (the iPod) are among the highly successful companies that introduced game-changing products during the depths of economic downturns.

Given the increasing frequency and intensity of the economic crises in our hyperconnected world, we need to find a bulwark against our extreme reactions. Sustainable values are just the bulwark we're looking for.

During Way of Life crises, the companies and individuals who thrive (while others batten down the hatches) embrace sustainable values over situational values. Sustainable values arise from within company cultures and focus on long-term priorities that do not waver during bursts of volatility. Situational values change in reaction to external ups and downs: We engage in questionable selling, sourcing, cost-reduction or accounting practices because external conditions call for doing so.

Sustainable values are what Franklin Delano Roosevelt was seeking to inspire in Americans when he proclaimed that the country had "nothing to fear but fear itself" during the Great Depression. Roosevelt understood that when citizens lose hope and meaning, they hunker down, grow fearful of one another, and progress stagnates. Given that the need for sustainable values has never been greater in the modern business era, the question is, do countries, companies and individuals have the will to embrace sustainable values?

A Crisis of Ethics
Sustainable values took center stage at January's World Economic Forum in Davos, which this year had the theme "Rethink, Redesign and Rebuild."

It was striking to see 28 world leaders and dozens of CEOs at the world's largest and most innovative companies rallying around what a preconference survey identified as not a financial crisis but one of ethics. Rather than values-based discussions being relegated to the margins of the event, the world's breakdown in values took center stage alongside comprehensive considerations of global regulatory reform, corporate governance and global sustainability challenges.

At the same time, Toyota, the world's largest automaker, plunged into a crisis of its own. What is striking about Toyota's difficulties is how customers, regulators and other stakeholders judge the company. Rather than dwelling on the company's faulty automobile components (Toyota's "Whats"), people are peeling back the company's culture (Toyota's "Hows") to find out if behavior and values within the company caused and/or exacerbated its problems.

Inside boardrooms, more business leaders appear to grasp the importance of behaviors and sustainable values. When John Deere hired CEO Sam Allen last summer, Allen was asked what he planned to change. His predecessor and the company's current chairman, Bob Lane, explains that Allen was very clear on that matter. "His response ... was, 'It's too soon to tell what we're going to change. But what we're not going to change is the how and the way we do business.'"

Like Lane, Allen and other inspirational corporate leaders, Davos attendees and Toyota executives now understand the importance of "the how." Rest assured, the 21st-century versions of Apple, Texas Instruments and Kraft are aggressively rethinking the basics. As they do, they are no doubt focused less on 20th-century levers of outperforming and more on 21st-century modes — such as sustainable values and inspirational leadership — of outbehaving the competition.

So don't call it a comeback. If we treat our current problem that way, we will still be right here, mired in the 21st century's ever-accelerating crisis cycle for years. And it just may knock us out.

*This column appeared in, and was written for, BusinessWeek.com.

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