Is FIFA-world just a microcosm of the real one?

Russia's president Vladimir Putin (left) and Fifa president Sepp Blatter

FIFA-world: a virtual world where you get ahead by what you pay and stay ahead by denying the evidence

“When we get bribed, we stay bribed.”

Jon Stewart on his Daily Show in the USA – his take-down of Sepp Blatter and FIFA. The legal onslaught on FIFA-world  has been 24 years in the making – 24 years before the legal process (headed by the US Attorney General Loretta Lynch) went into motion. As Stewart remarked, “even Switzerland” itself had moved on FIFA.

Yet, Sepp Blatter was overwhelmingly affirmed by FIFA delegates for another four years – on the votes of Africa, Asia and Platini’s France amongst others. This was despite the obviously dangerous legal claims made against many senior employees and representatives of FIFA by the US and Swiss legal authorities. This was despite the fact that Blatter has been President of FIFA for so long – it has been on his watch.

The President of FIFA has (under its latest statutes) the following responsibilities:

32. President

The President represents FIFA legally.

He is primarily responsible for:

a)  implementing the decisions passed by the Congress and the Executive Committee through the general secretariat; 

b)  supervising the work of the general secretariat;

c)  relations between FIFA and the Confederations, Members, political bodies and international organisations.

Only the President may propose the appointment or dismissal of the Secretary General.

The President shall preside over the Congress, the Executive and Emergency Committee meetings and those committees of which he has been appointed chairman.

The President shall have an ordinary vote on the Executive Committee and, whenever votes are equal, shall have a casting vote.

If the President is absent or unavailable, the longest-serving vice-president available shall deputise.

Any additional powers of the President shall be contained in the FIFA Organisation Regulations.

As FIFA’s legal representative on planet earth, it seems clear that Blatter would be held accountable for all its actions whether he knows about them (and he claims a complete absence of knowledge) or not. Yet, FIFA members, by a great majority, supported his continued Presidency.

For some of us, this seems absurd. For those of us brought up under democratic systems, where wrongdoing in an elected body is normally punished by the voter, the inability of FIFA to sort itself out appears naïve as does the apparent understanding of the electorate. Yet, to many of those who voted for Blatter, their response was entirely logical.

How FIFA-World Seems to Work

The world has changed over the last fifty years to an extent that is now becoming highly visible. Until the 1950’s, the great western powers and the USSR held military power (hard power) over the rest of the world. One by one, states outside this power block became politically independent. Asian economic power-houses like Japan grew quickly and then China began its sustained and dramatic economic renaissance. After the break-up of the Soviet Union, instead of democracy, economic power brokers developed (with Putin at the top of that tree).

While we understandably focus on military and security threats posed by those like ISIS, the world has been moving on – with economic growth at the centre (softer power).

However, instead of the west’s domination, there are now various centres of economic power – such as China, India and Brazil – which are breaking down long-established norms.

These norms (such as the desire by Western nations to link good governance with economic aid) are under real threat as newly enriched nations like China care less about the good governance of its supply and customer base outside China than it does internally and less than the stated aims of the earlier economic hegemonies.

This compounds the pent-up pressure on the governments of the newly developing world that may be tired of the continuous pressure put on them to do more of what the west wants them to do – such as reduce corruption and improve good governance. This is not the reaction necessarily of their people (most are completely sick of the bribery and corruption that exists, often sick of the absence of real democracy and the absence of real representation) but in many parts of the world, the people do not have a say.

Also, populations are torn between a natural desire to see things properly run (good governance) and feeding their kids or having a roof over their heads. Elsewhere, like in Russia, the government has a rigid control over their people. The same is true in China.

Finally, nations are now (because of their own economic strength and because of alliances with those like China) less likely to fold against the old hegemonies of the USA and Europe.

For all these reasons, FIFA-world seems symbolic of the new world order that is taking place where an organisation that has been corrupt for so long is able to maintain good relationships with its supporters through its economic success and the ability to pass on that financial success to a range of nations and individuals – upon which it also survives. It pays to support Blatter – even if you are in receipt of dirty money.

Despite pressure from the west (notably the UK – via, mainly, its newspapers like the Sunday Times while government was just as mercantilist when London was in the running for the World Cup), FIFA refuses to change from the inside. As there is no ability to march into Switzerland and take over the company by force (the 19th Century ideal), the only method remaining is via international law as applied by the US Attorney General and the Swiss. It has taken 24 years to get to this stage.

What could we be learning from FIFA-world?

This microcosm represented by FIFA-world must have lessons for the new real world order but it is not easy to overcome the concern that fifty years of working towards better governance (e.g. where we have seen increases in the number of democracies throughout the world) is under threat.

The natural focus on material wealth as the highest priority for all nations and all people is understandable. Worldwide poverty indicators are reducing (even if mainly from Chinese economic success). As Maslow showed so clearly in the 1930’s, most people focus on material wealth creation well before there is a serious thought given to quality of life issues.

MAslow

This is clearly seen in practice as the world pursues economic gains even in those countries that are already wealthy. Even the safety and maintenance of nature and the environment becomes translated into a form of costed “natural capital” so that it can enter into our economic thinking. If it has no valuation methodology, then humans seem unable to evaluate it. If we can’t count it, we can’t imagine it, apparently.

This means that issues like corruption are treated as secondary to economic benefit or economic security in most nations. It is no longer just a case of saying “Corruption is bad, stop!” because the complexity of the each situation means that, in the short term, those who gain through corruption and / or being part of a corrupt environment do not visualise the problems quickly enough. Moral crusades are not high enough on Maslow’s hierarchy (which was developed for marketing purposes but serves as a useful tool elsewhere).

Even the use of legal sanction by the USA, while applauded by many in developed nations, is not so well received elsewhere. Blatter knows how to utilize this reaction by appealing to the sensitivities of nations that do well out of FIFA economically and see themselves (as nations and individuals) threatened economically by the ending of corruption. This is not much different from oil-rich nations like Angola preferring to sell to China than the west – because no-one in China is demanding good governance from Sonangol, the dos Santos-owned oil company. It is similar to tribal leaders in Afghanistan that react badly to the west’s demands for an end to corruption in that country.

Those legal sanctions operating in the West (through a range of anti-money laundering devices, FCPA, Bribery Act and the like) can have great power when used against corporations. They are now extra-territorial in scope and can remove any one nation’s or company’s ability to protect themselves from legal onslaught. However, in the UK, for example, implementation of laws such as the Bribery Act are completely under-resourced so reliance has been placed on the US to widen its military policing role to one of legal challenge – where an individual using US assets (banking, currency or legal) is liable.

Such legal sanction needs to be policed (a) by more than just the USA and (b) in a way that is not seen as hegemony by former military world powers.

The first requires resources and a willingness to attack the problem; the second is far more subtle – a need to assess how to convince the world that corruption is hugely damaging to economies, sectors or society and even security (as is seen in Nigeria, Iraq, Afghanistan and many others vulnerable nations where armed forces are depleted by funding being ransacked by a few elites) when the benefits are clearer than the problems.

As an article in today’s National Post in Canada shows so well, giving the World Cup to a country well down Transparency International’s Corruption Perception Indicator (CPI) is asking for trouble. Yet, not giving the World Cup to such nations (which are developing nations in need of such investment and focus) until they have cleaned up their act would be seen to be counter-productive – and construed as anti-poor. There is no support for such a move.

What needs to happen is that good governance is seen as a central tenet of major corporations and of governments (national and local) and, for this to happen, a huge and relentless shift needs to take place in the way the non-FIFA world works so that the real economic needs of people are met while the ugly needs of vested interests that stand to gain through corruption are not.

For corruption to be minimized should be seen as one of the world’s major aims – where we need nations to meaningfully sign up to this in the same way as we sign up to human rights as corruption erodes human rights as well as any impediment known to humankind.

FIFA-world is a microcosm of how the real world tolerates corruption and the 24-year corruption story in FIFA is by no means finished. We need to learn from that story not just to fix FIFA-world but to fix the way the world tolerates corruption.

Note: I am a Trustee of Transparency International – UK

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No Accounting for the End of the World?

Jacob Soll’s book “The Reckoning: Financial Accountability and the Making and Breaking of Nations” makes a good case for economic progress being firmly based on the ability to account for that progress. Although he does not show direction of travel (or cause to effect) with certainty, there is a common sense from his historical analysis from ancient Greece to more recent times in the theory that progress is based partly on an ability to undertake double-entry book keeping. This measures progress but also provides the degree of transparency that ensures “buy-in” from society.

 

This may not be a riveting “eureka” moment for many and Soll’s dallying with more metaphysical comparisons about the debits and credits of a good life being reflected by the righteous in the way that good businesses and people (like Josiah Wedgewood of pottery fame who not just promoted cost accounting but used the principle of accounting to balance their sins and good deeds) do their accounting is somewhat stretched. However, there seems ample evidence that at both a corporate / organisational and national level, economic progress is assisted greatly by the ability to count your profits and losses – to show how progress is being made.

 

Soll refers to corruption in the past that resulted from both poorly kept accounts (at corporate and national levels) and those clever enough to hoodwink auditors and investors through manipulation of accounts.

 

From the analysis, it is clear that investors need good data to make informed decisions and that citizens need to know how governments spend their money – not just for the sake of transparency but to provide worthwhile and useable information. In the majority of developed nations, corporate accounting is subject to GAAP (generally accepted accounting principles) or equivalent; in other countries there is a wide disparity of accounting standards or a lack of them – in Afghanistan, it will hardly be a surprise that there is no accepted principle of accounting and very few qualified accountants from there.

 

Despite the developed world’s professional standards, this does not prevent disasters on the scale of the 2007-8 banking crisis or Enron or a host of other “accounting” failures. Often, auditors don’t see the problems and may even see them and do nothing.

 

On a national basis, the same is true. While it is hard to judge the efficacy of national accounts (which are the subject to revision for many years), it is hard to believe that any country which does not work hard to make its national accounts transparent is one where real economic progress is being made or where opacity is not hiding something sinister.

Back in 2010, Global Witness highlighted this in its report “Oil Revenues in Angola” which documented the problems that Sonangol (Angola’s state oil and energy company which was then considering a public stock listing) had in reporting its revenues. That report, one of the few independent reports in a sector that is riven with corruption, argued for greater transparency, improved systems and independent auditing to the highest standards for an organization through which Angola’s wealth derives. Soll would argue that its secrecy and lack of transparency and independent auditing shows all the hallmarks of a corrupt society. But, pressure on Sonangol to provide more and better information (better accounting) is a key approach.

Numerous, other examples exist in many countries – many where natural resources exist that should benefit the population but where the “resource curse” is made possible by lack of proper accounting to high standards, properly audited and verified.

Similarly, the Dodd-Frank Act in the USA opened up country-by-country reporting to reveal how much revenue was entering such countries. The USA (and hopefully with the EU to follow) are attempting to go around the opacity of nations (and their lack of accounting capability) to find the real accounting data through those that have that ability and are subject to our own norms of accounting – the major energy companies. In this way, good accounting may be accessible by the back door to show citizens of the affected nations just how their Governments provide for them (or don’t).

 

A recent example of this is shown by an analysis made by Richard Murphy (the progenitor of country by country reporting) on recent data issued by Barclays Bank. It shows, through analysis of that data, how Barclays shields its profits from the UK Exchequor.

 

 

 

 

Value accounting – can we properly Account for Natural Resources?

 

One of the latest “opportunities” for accountants is accounting for natural resources – our natural capital. It is believed that if we make up a balance sheet of all our assets (and liabilities) then we will better know by valuing them what impact we are making on them. We naturally sympathize with a society that is striving to understand its failings and what to do about them. There is no question that if it was possible for governments (nationally and internationally) to properly assess value in our natural capital, then we could (somehow) impose some sort of value adjustment to problems caused by companies and governments when doing the things they do that adversely impact our natural capital or trade-off costs and benefits and make better decisions.

 

There is a natural and realistic desire in some governments to properly account for their natural capital. For example, The Scottish Forum on Natural Capital aims to focus on its natural capital and

 

“To deliver on its goals, the Scottish Forum will:

  1. Calculate the monetary value of Scotland’s natural capital and the cost of depleting it. This will involve coordinating experts including accountants, people from business, academics and policymakers.
  2. Communicate to a broad range of businesses and other stakeholders the risk of depleting Scotland’s natural capital and the huge economic value from protecting and enhancing it.
  3. Set up collaborative projects to deliver tangible action to protect and enhance Scotland’s natural capital.”

 

 

The calculation of that value and the link between that and effective action are major challenges. This is because the pricing mechanism for such resources does not exist. Accounting is based on the ability to reach a value determination on goods and services. It is not always right but much of double entry book-keeping methodology is based on market prices – the prices actually paid for goods and services. Market prices provide information on those goods and services that allows a profit and loss account and balance sheet to be derived.

 

Now, even existing and well understood basic accounting is often flawed or wide open to judgement. An example from the recent past: in the days of high inflation, companies (that anyway provide accounts that are usually out of date by the time a user receives them) were encouraged to undertake inflation-based accounting in addition to actual costs. Oil companies still provide two sets of accounts (one takes the data back to the latest oil prices). Which is correct? Neither (although only actual costs are used by taxation authorities)– but, they may be aids to better informed decisions.

 

Accounts are always an approximation of reality. So, for example, accounts show labour costs (the costs of people who work in a business or organization) as costs. Yet, of course, people are only recruited to add value. Unfortunately, there is no balance sheet valuation of the benefits that they can provide. Back in the 1970’s, it was fashionable to consider whether people should have a value assigned to them on the Balance Sheet (much like footballers used to be valued on the Balance Sheets of football clubs). This proposition lasted only a short time and people are not valued on a balance sheet – except in those companies with traded shares where “goodwill” (the difference between the stock value of the company and its balance sheet value) contains an undefinable figure for people. Google’s share price (usually viewed as a multiple of earnings – its P/E which is currently around 30) takes account of its extraordinary people talent – but, in a way that the market is willing to trade – a form of market pricing.

 

When the accounting mechanism is brought to natural capital, it is much harder to “account” for it – there are limited pricing mechanisms.

 

At a micro-level, companies can provide information on where their natural risk lies (e.g. how they source materials upon which they survive, where the risks are and what they are doing about it) but some of this is pricing, much of it is risk analysis. From the latter (just like any risk analysis) actions can be taken to minimize risks and maximize opportunities.

 

Companies also produce “externalities” – they impact the environment, for example, through CO2 emissions, use and abuse transportation systems, can destroy environments. So, clean-up costs need to be established when developing projects along with the minimization of health hazards and environmental degredation. Governments in many countries can work with businesses to save the environment and recast it. In the developing world, this is harder. Many instances occur whereby companies ravish areas of natural beauty and poison locations with the side effects of their production processes and do not pay the consequences. This is often a corrupt bargain but becomes the norm where natural resource extraction and its “value” overcomes the perceived value given to those dependent for their lives and health on the land: from China to DRC, from mining to forestry.

 

The key problem is linking the micro activities to the macro (governmental) responsibility for the environment. The notion of valuation at least focuses the mind. The question is whether valuing natural capital (and the wide range of – usually erroneous – assumptions that have to be made in a non-market priced environment) is useful and whether such valuations can be used to make decisions – even whether there is a use for such decisions on a quantity basis at all. For decisions based solely on price (where all the risks are not taken into account) will be wrong except where there is a market-based pricing formula available (and, of course, perfect pricing relies on perfect information on both sides – which never occurs). We can “see” how Barclays used low tax jurisdictions (see the TJN report referred to above) to shield profits and decisions can, in future, be made as a result. Valuations of natural capital are far more tenuous.

 

The drive to valuing our “natural capital” in business jargon (through pricing) is centering our attention on this critical area. However, at this early stage of natural capital ideas development (although not at an early stage in the degradation of the planet) we should be understanding what we want out of it.

 

What if all the alligators in the world were to be destroyed because enough people were willing to pay the price for alligator skin handbags and shoes? Would this be acceptable because we “paid the price”? Clearly not as the value of preserving such an animal is not easily factored into the price – who assesses it and who sets it when the “value”of having alligators is unpriceable. That is why ivory sales are (in the main) banned. There is no price allowed in the system for the elimination of elephants from our natural environment – we have made a collective decision to try to stop it rather than pricing it.

 

This suggests that the “value” placed on part of our “natural capital” is not quantifiable in business terms – even if the costs of certain degradations (and “externalities”) are.

 

Not only do we need to ask the right questions, we have to start with the answers we want or the history of Easter Island is just repeated on a massive scale.

 

There is a place for good accounting – and good accounting should know its place.

 

Natural Capital – CIMA – Ethical Lens

February’s edition of CIMA’s (Chartered Institute of Management Accountants) Ethical Lens –  features my blog post from November 27, 2013 – Being Cynical About Natural Capitalism

Ethical Lens says:

“In his blog, Jeff Kaye FCMA CGMA , Chair of Future Brilliance Limited, writes about the challenges and possible moral implications of “pricing the priceless”. Highlighting that GDP rose during the BP oil spill, he argues that GDP and numbers won’t always be a good indicator of of how businesses or communities are doing.”

Ethical Lens goes on to report on Integrated Reporting as one of the ways that business is reporting on wider social issues.

It is interesting to re-read Eric Hobsbaum’s “Age of Extremes” about the world between 1914 and 1991, where he refers to John Maynard Keynes’s focus on macro-economics (virtually his invention) and that national estimates of the size of an economy were not developed until after the Second World War probably with an eye to the USSR.

“The first governments to do so were the USSR and Canada in 1925. By 1939 nine countries had official government statistics of national income, and the League of Nations had estimates for twenty-six in all. Immediately after the Second World War estimates were available for thirty-nine, in the middle 1950’s for ninety-three and since then national income figures, often with only the remotest connection with the realities of their people’s livelihood, have become almost as standard for independent states as national flags.”

Eric Hobsbaum, Age of Extremes.

Being Cynical about Natural Capitalism

A Cynic “Knows the Price of Everything and the Value of Nothing” – Oscar Wilde

The World Forum on Natural Capital took place in Edinburgh from 21-22 November 2013. This was around 18 months after the Natural Capital Commission was set up in England – see my earlier note on this.

The stated aim is to develop a way of costing the natural environment. In Scotland, the host for the Forum, the Scottish Wildlife Trust stated this as:

  1. Calculate the monetary value of Scotland’s natural capital and the cost of depleting it. This will involve coordinating experts including accountants, people from business, academics and policymakers.
  2. Communicate to a broad range of businesses and other stakeholders the risk of depleting Scotland’s natural capital and the huge economic value from protecting and enhancing it.
  3. Set up collaborative projects to deliver tangible action to protect and enhance Scotland’s natural capital.

Now, I am sure that all those accountants, business people, academics and so on are completely transparent about the not just perceived benefits but also the pitfalls of accounting for natural assets. I hesitate to criticize my own profession (yes, I am a qualified accountant) but the relatively simple task of accounting for profits, business assets, transfer prices, taxation, royalties, inflation, shareholder value and the myriad of other pricing mechanisms is an industry in itself.

Valuations of properties and land values (land which is marketable) are very difficult; valuations of anything is except in key market driven areas. So, before we consider whether everything should have a price, can everything be priced?

Pricing in the eye of the beholder

Michael Sandel has written vividly about the dangers inherent in pricing everything. The market continues to stretch itself to many aspects of our lives – to everything a price. Oscar Wilde described a cynic as “A man who knows the price of everything and the value of nothing.”

Well, maybe it is time to be a little cynical. The Greek Cynics such as Diogenes believed that humans should be rid of worldly goods and live as close to nature as nature intended.

To them, “natural capitalism” would be a paradox and if the word “cynic” has been usurped to mean one who distrusts others’ motives (a somewhat jaded negativity), then it is still worth us having a good look before we hurtle into the world of valuing nature – purportedly to enable it to survive.

The problem for us all is that we (humans) seem to respond automatically to numbers. Whether it is GDP or wages and salaries or league tables or baseball and cricket statistics or KPI’s or health targets or bankers’ bonuses, the human mind seems to adopt numbers as the common language. This has had ridiculous consequences.

We now actually believe that Gross Domestic Product calculations are a real and meaningful simulation of the value of our existence. We may note that GDP rose when the BP oil spill was in the headlines because of the way that GDP is counted. We may know that GDP rose enormously when the Viet Nam War was in full flight – a rise in our prosperity at the time when so many were dying. We may note lots of things and then discount the “knowing” as we allow our brains to consider only the number.

Just like economic theory is a very poor simulation of reality, using numbers to simulate life is very difficult and a very poor approximation of reality.

Pricing is in the eye of the beholder. When there are many of the same item and large numbers of buyers, then prices can be developed that (at a particular time) can be adjudged reasonable. A day later and the price will change; a bit more demand and the price may rise if the supply stays the same or there is no alternative; a bit less demand and the reverse – all other things being equal (which hey never are).

Yet, pricing is the underpinning of the marketplace and serves its purpose – allowing us to satisfy demand through the pricing mechanism. Where it is less workable is where the market is not large enough or where the item being priced is unique.

For a work of art, this does not matter too much. Such a work of art as the Francis Bacon triptych which recently sold for $142m or the $58.4m for a Jeff Koons painting potentially hurts no-one but the wealthy buyer should the price collapse overnight. Anyway, no one will be revaluing these works until they are re-sold. While the loss to public exhibition may be a shame (if they are kept locked away) it is not a tragedy.

For our natural capital, there is a different set of criteria.

Valuing quality

 Traditionally, major projects have used a form of cost-benefit analysis. Prices or costs are provided to each part of a project and the benefits calculated overall. In this way, countless projects (corporate and public sector) are continuously appraised.

Recently, the HS2 rail project proposal in the UK has been treated in this way. HS2 is a plan to link London to the north of England by a £50 billion investment programme (which some think will rise to £80bn) – to speed up rail links and to provide much more capacity. In this way, it is believed that significant benefits will accrue to the northern towns (although many see the benefits accruing to London as more northern towns become commuter towns for the capital).

As Frank Ackerman (an Environmental Economist) wrote in 2008 in an excellent paper for Friends of the Earth that there are six major flaws with cost-benefit analysis that he calls:

  •    Pricing the priceless
  •   Troubling Trade-offs
  •   Uncertainty and Precaution
  •   Distorting the Future
  •   Exaggerated costs
  •   Partisans and Technicalities

His paper warns against the simplistic tendency of cost-benefit analysis – its atomistic view of the world (a world of numerical opinions – usually slanted towards where the answer is directed to be).

The alternatives to simplistic cost-benefit analysis include one (the precautionary approach) that approximates to Nassim Nicholas Taleb’s antifragility proposition – or at least an approach tending to resilience.

The inclusion of natural phenomena and the benefits that accrue from them into a numbers game is a tremendous risk. It suggests that we hurtle towards some valuation methodology because we are caught up in the spirit of pricing everything. Yet, we don’t hesitate enough to consider the ability of the valuers (those who make the key assumptions which drive the computations) – which include those who work backwards from decisions they want taken to those who are inadequate in their assumptive judgements.

It is normal for large projects to overrun in terms of cost by two to three times and most large projects overrun substantially on timescale. This means that basic projects cannot be properly valued – how difficult is it to put a price on our natural capital and use those calculations in determining how we use the natural resources / capital? It is not our ability to compute that is at question – it is a mix of our ability to ask the right questions, to set the right assumptions and to reason on a qualitative basis.

Private and Public (People) needs

The sectors involved in developing natural capital accounting and using them for decisions are naturally coming at this from different directions. The private sector, especially large companies naturally concerned about the long-term sustainability of their businesses, need to evaluate their impact on the environment and on their raw material base in order to see their long-term survivability.

This is an essential survival tactic in a world with limited access to natural resources and where it is understood by companies that their customers are also taking impact on environment (for example) seriously. For almost all businesses, taking account of natural capital is a fundamental need of the 21st Century marketplace but should not be seen as companies becoming primarily societally driven. Accounting for natural capital wherever possible is a natural go-to for business. It sets up an accounting mechanism which, after all, is the basic language of business and which can be used for decision-making and for influencing those decisions internally and externally.

The external decision-makers are citizens – local, regional, national and international – often (not always) represented by the public sector (and, in many countries, misrepresented).

Quantity versus Quality

 

The problem for people (us) is, of course, fundamentally different to those of businesses that are fighting for long-term sustainability and want to manage their use of resources (and look for substitutes) and help the marketplace to view them as 21st Century businesses that are aware of society’s needs. Accounting for natural capital can help to do that.

Citizens (however grouped) have another consideration – the quality of life outside the quantity of goods and services that they can buy.

Quality of life includes good air to breathe and a sustainable climate – items not quite on Maslow’s hierarchy of needs or developed in his basic needs structure – which was, after all, originally developed for business marketing purposes.

Government (local, regional, national and international) is our representative – tasked with managing our natural capital to our benefit (along with private owners). The key question is whether Government understands that the issues are not just about how business remains sustainable (a world dominated by GDP) but how the quality of life is sustained for all of its citizens. While this includes key quantitative factors such as economic well being, that is not all.

To citizens, the environmental impact of business misuse is not just an “externality” that needs to be costed into business decisions. These so-called externalities are central parts of our existence.

So, one of the key questions is how to develop a framework that incorporates the requirements of the two sectors – private and public (here being used to define what people need) and the issues of quantity and quality.

 Slide1

Keeping that balance is the key – we should not be overly dependent on the numerically calculative approach as that leads to more goods and services but a natural environment that is depleted not just of raw materials but also the naturally occurring benefits on which life depends.

We cannot completely guard our natural capital either – as that will deprive us of needed goods and services.

Counting the costs and benefits of natural capital may assist in some ways to prolong sustainable business but real leadership on behalf of all of us should understand that counting is a tool – only to be used in certain situations and only as an aid to considered thinking – the use of our human brains in determining qualitative outcomes.

The Business of Sport

                                                                       

The Question: as the gap between elite sport and its fans grows ever-wider, should those who pay for the sport (its fans) expect to have a say, should the communities on which the clubs and associations depend be better treated by those at the top and, if so, how?

Many of us have a love affair with sport – many play it directly and millions watch sport and maybe actively or passively support a team. Sport underpins many of our lives – it makes us fit and provides excitement, motivations, inspiration, team-building and social cohesion.

As the 20th Century went on, professional sport was progressively distanced from the amateur and the fan by its takeover by business interests – initially, the local businessman but later, by international business.

This provides a distancing of ownership from the mass of people that generate the income in an industry that is unlike so many others: where the customers are so involved, often so passionate, often players.

This means that sports authorities (and especially businesses that own the major teams) have a responsibility that is different to other businesses or business organisations. They have a duty of care to their customers around the “game” and how it is played. This opens up the issue of how individuals (or groups of individuals) who are customers can be “played” because of their commitment and what can be done to protect them. There may be lessons for all industries from the examples available.

Business Governance and Sport

Governance in sport impacts many beyond the teams themselves. That is why Deloittes show their involvement in all the following areas :

  • licensing systems for sporting competitions;
  • cost control mechanisms;
  • transparency measures and anti-money laundering;
  • events and/or membership application and selection processes;
  • sporting calendar matters (national and international);
  • regulations in respect of players’ agents;
  • measures to protect the integrity of the competition;
  • independence of clubs – ownership rules and other means of influence;
  • player transfer rules; and
  • ‘football creditors’ rules.

Governance is much wider than this in regard to sport and its impact in  and on society can be shown by three articles in The Independent (Saturday, 18th May) that highlight the difficult interconnections between business and sport (here, England football teams) and the intertwining connection between sport and the community.

·      The first by Chris McGrath attempts to show the worst side (Manchester City’s owners sacking of Roberto Mancini) and the best side (the Portland Timbers superb response to a charity – Make a Wish – for help for an eight-year-old cancer victim).

·      The second (in the business section – Jim Armitage) reflects on the Arsenal blog that shows the support of Doan Nguyen Duc (a wealthy timber merchant from Viet Nam) for Arsenal and questions whether they should take the support (financial and otherwise) from someone that Global Witness (an anti-corruption NGO) says was responsible for much of Viet Nam’s destruction of its forests and the displacement of many people that lived there. He is said to have made the comment: “I think natural resources are limited, and I need to take them before they’re gone”.

·      The third (also in the business section by Simon Read) reports on how Sheffield Wednesday turned down a deal with a “payday lender” which it refuses to name but was said to have offered 25% more than anyone else.

The three articles (I assume “coincidentally” in the same newspaper on the same day) highlight the mistrust of journalists for the businesses behind the clubs but also for the type of ethical questions that the clubs have to consider at this time.  “This time” means at a time when business and the community is undergoing strains and, in football, when the position of a team as part of the community it serves is strained to the full. In the USA, big teams moves State; in the UK, only smaller teams like Wimbledon (now Milton Keynes based) have tried it as fan bases are crucial to the business (even if more revenue than ever is via TV and international support).

Whose business is sport?

It is a long time since amateur sport ruled anywhere (the top tennis players rarely joined the professional circuit until well into the 1960’s; athletics was similar and rugby became professional in the UK in the late 1990’s). In the UK, football was severely structured with maximum wages well into the 1960’s as well and even if clubs were limited liability companies, they were owned by local families who kept them private.

In those days of amateurism, sport was for the community. Players were not paid much (outside the USA) and players were close to those they played in front of, living in the same streets and drinking in the same pubs and clubs.

In the USA, football, basketball and baseball (and ice hockey and the rest) became business pursuits earlier. Europe and the rest of the world (and most sports) have followed. It is now the normal way of life that business had taken over professional sport to the financial benefit of players and (mainly through TV) the income for sport worldwide is now massive.

Whether the Olympics, football (through FIFA and its major tournaments such as the Champions League and World Cup), the Superbowl, 20:20 cricket in India and so many more, sport now generates massive income through its massive fan base and the ability of TV to generate that income. So, there has been a rapid shift by large businesses and entrepreneurs to own sports team and have influence over the organisations that manage sports – such as Formula 1 or baseball or football (of all types).

This income has been generated through the opportunity that sports presents over almost anything else – to transmit excitement visually and aurally through radio, TV and the internet to a mass audience that is entranced by the game played – with an excitement and passion rarely found elsewhere. This mass appeal is now available and reach-able worldwide and with that appeal comes massive advertising revenue (and, with the internet) growth is coming faster.

So, sport (something we all get involved in to some extent) has both appeal as participants and observers (although to a greater extent than anything else, the two are mixed with sport). This appeal is then converted into income for companies that are able to transmit sport into the home – via pay per view, rents and advertising.

Sky in the UK has become a dominant operator (although BT are now incurring on their territory).

Owners of sports teams (especially in football in Europe and all the major sports in the USA) benefit wherever they operate.

The Duty of Sport

Because sport is not just another product and because the “customer” is so involved, there is a chance that sport offers something different. The players are celebrities and, in modern culture, people that youngsters look up to (rightly or wrongly). More people know David Beckham than any politician or scientist – it is a (maybe unfortunate) fact.

This means that businesses involved in sport (and that means the sports clubs and managing organisations themselves) have opportunities to involve themselves with society that is not there for other businesses. Not only that, but they have a duty because of the nature of their business and for their own protection.

This duty can be said to be to serve the community that provides them with the income they derive. This is not about BSkyB or BT doing some CSR. They are the middlemen in all this – the means of transmission. No, this means the sports entities themselves working out how much their “community” means to them and how much they should give back to that community. It can be done.

A good example is Arsenal Football Club that has set up the Arsenal Foundation and, in turn, developed real partnerships with Save the Children (its international charity) and Willow Foundation (a national charity). I have an interest here in that I am Chief Executive of Willow Foundation – which provides special days for seriously ill young adults.

Arsenal is an international business these days but has worked out that it also has local roots and its Foundation works in the local community and with Willow on a national scale. With Save the Children, it operates internationally. At its recent Annual Ball, Arsenal Foundation raised over £300,000. That maybe small compared to the Football Club’s annual revenue of £226 million in 2011, but it is a start. Moreover, the time and effort of the club and those within it (like Arsene Wenger – an Ambassador of the Foundation) are worth a lot.

However, the balance sheet is patchy on sport’s involvement with their support base and through them with the community. There is no real driving force that connects through the massive distance that exists between them. While the same distance exists between many businesses and their customers (banking is a very real example, but the same can be said of energy companies and so many others), there is a very real difference in sport that is both for bad and for good.

The Sporting Difference  – and Opportunity

The business sector has been buffeted by recession and, in such a recession, business leaders and their companies are vulnerable to attack from other sections of society. So, the tax avoiders like Apple, Google, Starbucks and others (all under attack by newly-zealous politicians in the UK and the USA along with the tax havens that they employ) are not just seeing their potential tax bills increase. Their relationship with customers is also under attack that can lead to reduced sales. This may not be the case for Google (now so big and dominant that it may no longer care) but others may well feel the pain.

In the sporting arena, it is easy to see a large array of problems: FIFA and football corruption, allegations on racism across the world, NFL alleged behind-the-scenes collusion on player wages (the NFL is a not-for-profit – which may surprise) and the general disbelief that ordinary fans have with the salaries that players “earn”.

Football in the UK is an example of the changes that have taken place in the last forty years where salaries of £100,000 per week are not unusual (Gareth Bale is negotiating £200,000 a week at Tottenham) and the difference between that and the average wage in the UK of around £25,000 per year is stark.

Taking all this together, sport (as epitomized by the 2012 Olympic Games in London) can be magnificent but clubs and sports organisations have to take notice of the communities upon which they rely. The piecemeal CSR and charitable work should be as competitive as their sport rather than resisted or an afterthought – or done just for publicity.

Sport is a collective experience – whether in teams or the association between individual sports stars and their fans. This provides an opportunity to seal the gap between the stars and the fans that small groups of supporters on their own can never fill.

The link between the stars / clubs / associations (the elite) and the fans / amateur groups has always been a struggle. It is for each club to decide how it deals with the community upon which it depends. Some ensure the players get into the community – at Tottenham Hotspur in London, Ledley King and Jermaine Defoe are well-known for the time they spend with young, inner-City kids and clubs. Other set up Foundations and / or develop relationships with charities (usually connected in some way to the work they are doing or the area they are in).

Heading for Rollerball?

Deloittes produce an annual report on the top football teams – with the last issued in January of 2013.

No one (that I can see) assesses annually the contribution that sport and teams make in society or the potential for that contribution – let alone any analysis on the work individual clubs perform.

Business seems now to be the only driver – which is a Rollerball outlook on sport – a dystopian future that may well be here already. Made in 1975, the film showed the world in 2018 as corporate-controlled where sport was the controller – like 1984 with sport instead of three political blocs fighting each other.

So the Question: as the gap between elite sport and its fans grows ever-wider, should those who pay for the sport (its fans) expect to have a say, should the communities on which the clubs and associations depend be better treated by those at the top and, if so, how?

Bodies such as Sport England, the Department for Culture, Media and Sport and the major associations of all the sports and clubs discuss the wide range of benefits and opportunities that exist. Because it is hard to measure the impact of sport and the part played by big corporations in sport (it is not something easy to measure like GDP), the real impact of large corporations on communities and people in the UK is not assessed.

Like the problems of measuring the benefit of a woodland or a river, our focus on numbers (and scores) misses the potential for large sports organisations to do good – and the result is that newspapers see the Rollerball potential.

The Government has set up a Natural Capital Committee to measure the value of natural capital in the UK. It  just published its first Annual Report

Because of its enormous impact on society and people, one response may be to set up an equivalent in the area of Sport – to assess the benefits and problems associated with the business of sport and the benefits to society, people and communities in ensuring that Sport is well managed for the benefit of as many as possible and that Businesses in Sport gives back to society sufficient of the benefits it derives from those communities and show how they take those communities into account. We would then get to see an Annual Report on the state of sport in the UK.

Easter and Eostre, Germanic goddess

In the Christian tradition, it is Easter – named after Eostre, the Germanic Goddess of Fertility and Spring. It is that time of year, when we look for growth all around us. Yet, more prosaically, mention growth to most and we talk about recession and how ironically the current German goddess (Chancellor Merkel) is not so keen on helping those in need around the periphery of Europe.  She wants them to help themselves.

Growing Pains

Michael Heseltine, Cabinet Minister under Margaret Thatcher, who recently provided a report to the UK Government on the regeneration of English cities that David Cameron and George Osborne have welcomed , told The Independent newspaper on Saturday, March 30, 2013 that: “the richer you get the less imperative there is” for people “to drive themselves”.”

BBC Radio 4 followed this up with a debate on Saturday’s Today programme between Mariana Mazzucato (an economist) and Terry Greenham (from New Economics Forum – NEF). Terry ended by calling for more quality rather than quantity in how we measure “growth” – that GDP as a measure was flawed.

Our Affluent Society

Back in May, 2012, I posted “The Affluent Society and Social Balance” which looked back at the writings of John Kenneth Galbraith (author of The Affluent Society) and wrote about how mindsets had not changed since he wrote the first edition in 1958. Quantity was still valued over quality – economics was still all about more things, not more quality of life despite our (developed world) ability to acquire so much stuff.

I spelt out four areas for concern as developed nations seek to address further “growth” requirements. They were characterized as follows:

Forty years ago, five, major elements were missing from or only sidelines in Galbraith’s analysis – issues which have become more central over time and which complicate the prescription that Galbraith proposed: They are repeated below:

1. Globalisation

2. The errors in GDP accounting – quantity vs quality

3. The Environment – valuing quality

4. Civil Society – ending the private vs public sector spat

5. Social Balance

1. Global Trading

The world is a different one from 1958 or even 1973. We trade globally and the developed nations increasingly use labour from the undeveloped nations to do low-cost, manual work (often in conditions we would not tolerate in our own countries). It is a 19th Century state of work but internationalised– where now, international companies tend to operate as the mill owners of old.

From a micro-economic sense that is understandable – each company is different and many act responsibly. However, from a macro-economic viewpoint and from an international political viewpoint, there are limited mechanics for equalizing health and safety laws let alone education and pay scales.

Galbraith’s concern was that we produced too much and that we should be able to make less in a country like the USA. When the work goes international, the responses to the problem have to as well.

2. Production by numbers: quantity versus quality

In an affluent society, production is made the cornerstone of all we do (the economy is central to all our decisions) because work is needed to secure income. Even in an affluent society, income at a certain level is deemed to be critical. Products of progressively less use (or utility) are sold (often solely on the back of advertising) and we buy them and this is meant to keep us in work and more buying goes on.

Of course, in an international labour market, that won’t always work (as Gandhi found out in the early 20th Century when England produced most of the cotton garments sold in India) and it has become harder to focus just on one country.

However, the global economy does not mean that products become more useful – much of what we make is simply wasting energy and resources. However, it is keeping people in work in many developing nations.

But, growth is measured by GDP and GDP is a poor measure of quality of life or even production. Quality of education, for example, is measured in GDP by its cost (an input) not an output. A £500 handbag is deemed worth the same as £500 worth of essential foods – no difference in utility is assessed.

The felling of a rare tree is “valued” at the cost of felling or its price in the market as a table. The value of a river is missed completely – unless over-polluted when its clear-up costs may enter as a cost in a nation’s GDP.

It is production by numbers, quantity versus quality.

3. Environmental Balance

While mentioning the issue of environment, the main topic of “The Affluent Society” is the social balance between public goods and market production. All these are made by people – so, the environment in which we live is ignored. The trade-off is not, of course, that simple (even though the Galbraith trade-off has never been seen to function). The environmental trade-off (our need to maintain our natural capital) is now being understood but remains relatively hidden in economic debates. Natural capital needs to be brought into any debate on affluence in society – our quality of life as opposed to the quantity of life.

4. Civil Society

To Galbraith, the game is between the market and the public sector and to most, this battle still exists as the only one. There was not much mention of civil society – where most of us spend most of our time – except through discussion of leisure time. Here, the trade-off was between productive working and spare time. I expect that this assumes that all non-productive time is spent on hobbies or watching TV.

The creativity and value of civil society – a huge array of organisations from sports to international development, from charities to women’s institutes – is normally missed completely by economists and thinkers on society. The problem is that it does not fit easily into econometricians’ computer simulations: more of the “if you can’t count it, it doesn’t exist” syndrome.

Of course, for centuries, people have been undertaking “good deeds” – the history of the 19th Century is full of examples of charitable activities. However, society is changing fast and as politics loses its appeal for so many (with parties genuinely fearing for their future), the role of civil society is growing and, in affluent societies, taking back more from the state that it lost to the state in the 20th Century.

This escape from the centre is to be applauded, but needs to be better understood.

5. Social Balance

Complete reliance on the market or on the centre (libertarianism or communism) may still appeal to some. The reality is that complexity is the norm. Society is a mixture of competing ideas and competing structures – out of which we muddle through and where individuals take centre stage and form organisations to make their voice louder.

Nevertheless, we should learn from history and our mistakes. Centrism is a doctrine of the defeated; totalitarianism a doctrine of the damned. There is no one answer but a constant mix of opportunities that society provides and where changes are constant in the way we answer our problems.

The mix of competing answers does no longer rest between public and private sector in an affluent society – that is a 20th Century doctrine or response. The response now has to take into account the social balance we want from our lives between products, social value, natural capital and civil society relationships in a global context not a rigidly national one.

This means being adult about the causes of change and grown-up about the challenges – it means being international in approach and understanding the complexity of the problem – not something that can be understood wholly by quantities or computer simulations.

As we grow materially (i.e. through the quantity of products we are able to manufacture) and bump up against the troubles of environmental degradation and massive disparities of wealth and conditions (on a global scale), the question to be addressed is how does a complex society best form itself to take the decisions it needs to maximize the value we all give and receive from this “affluent society”.

So, should we Give up on Growth?

Terry Greenham of NEF would propose (as does NEF) that this is what we have to do. As the developing world strives towards economic well-being as described by growth of GDP (gross domestic product), the developed world should (in NEF terms) re-balance the lives of their people so that quality is maximized and quantity is stabilized.

Of course, all our measures and motivation focus on quantity. Homo sapiens have developed over 100,000 years to seek food and shelter and the more the better. However, following Maslow (Hierarchy of Need), humans aspire to more than just “stuff” and as we gain wealth, the majority want more that is not measured.

A salutary valediction from The Independent’s Michael McCarthy (Environment Editor) today after 15 years with the newspaper, showed a pessimism that the human race could wake up to the qualitative disaster that it was causing in its rush to quantitative growth. Governments have responded with nothing in this debate – transfixed as they are by the glamour of GDP statistics. Heseltine is the first senior Conservative in the UK to state the obvious – that being the fastest growing economy is not necessarily what we all want. GDP is, in reality, meaningless as it fails to measure value as outlined above. A tree is not worth the amount it costs to fell and transport; a river is not worth just the cost of keeping clean – they have value beyond this that is not within the bounds of GDP.

Businesses, operating in the micro-economy cannot be expected to make the change – they are set up to benefit their shareholders and adjust to cultural and legal pressures (usually with some degree of resistance).

It ends up with Government having to lead. In very few nations is there an understanding of the problems that faces us – the race to grow GDP. Most completely misunderstand what GDP measures (and that includes most economists – centred as they are on econometrics the simulation of economies that reflect the 19th Century reality not the 21st Century’s).

We need to establish measurement (if that is how we work best) of the Gross Domestic Value  –  GDV  –  where Value takes over from product (things).

In this way, CO2 in the atmosphere can be valued; that tree being felled can be valued; humans can better value their time given back to society.

We should not give up on growth, but growth of value not product or income (based on the wrongful simulation of salaries, costs and sale prices).

National Value or Gross Domestic Value should become the target – not how many products we have. The question is whether there is a drive and energy to establish an understanding of what really is important or whether (as economist Georgescu-Roegen said in the 1970’s)

“Perhaps the destiny of man is to have a short but fiery, exciting, and extravagant life rather than a long, uneventful, and vegetative existence. Let other species — the amoebas, for example — which have no spiritual ambitions inherit an earth still bathed in plenty of sunshine.”

Michael Heseltine is only partially right. There is a limit to the drive and push people have to continuously get more stuff – but, there is probably no limit to our drive for more value. Michael McCarthy is, maybe, too pessimistic – we can drive human growth through value not products – GDV not GDP.

 

Two-speed economics – Technology and Governance

The Price of Externalities: Georgescu Roegen Extravagance

Fast lane – Markets at the speed of technology

Tom Standage’s book “The Victorian Internet” describes how the mass of wired communications – the telegraph – changed the developing world – (http://www.amazon.co.uk/Victorian-Internet-Tom-Standage/dp/0753807033/ref=sr_1_1?s=books&ie=UTF8&qid=1347191394&sr=1-1).

As did Gutenberg’s printing press around 1450, the telegraph, the telephone, the fax, the mobile phone and now the internet and the world wide web continue to transform our ability to communicate and miscommunicate – instantaneously. There is no question that technological development races onwards. The human race has a special ability to make extraordinary progress in scientific research and understanding and in the application of that through engineering into products that transform the way we live.

The technological advance is propelled by the “marketplace” – where supply and demand perpetually force change.

Slow lane – Governance at the speed of bureaucracy

As we continue to make enormous gains in technology, our ability to keep up with the excesses of the market (market waste) is almost the opposite. It seems that we react late to technological advancement – delays that can cause inconvenience but also (at the extreme) loss of life.

Inconvenience: the UK awaits the Leveson Commission report into phone-hacking – the use of technology by certain newspapers to obtain salacious stories on (mainly) celebrities. Newspapers are closed, criminal prosecutions are under way and the possibility that press freedom will be curtailed.

Loss of life: the destruction of our environment through global warming (CO2 emissions and the potential for vast amounts of methane to be released by the rapidly melting glaciers) is a direct result of technology and manufacturing’s use of fossil fuels. It could prove just as damaging (or more) than the technology and development of weaponry that fuelled the two World Wars of the 20th Century.

The slow lane is inhabited by politicians and civil servants that exist in a variety of slow lane decision-making arenas. These could be democracies; they may be legalist governments such as China.

The slow lane is inhabited by the “mechanics of government” or “Market Governance Mechanisms” (MGM)– “governance”.

The tortoise and the hare

Since the development of governing institutions, those in government have continuously sought to control technology and its effects. From the control of counterfeiting (as in Newton’s day or now), developing health and safety standards, maintaining arms control, to reducing environmental degradation, people have put their faith in governments’ ability to manage the sweep of technology. Time after time, technology has been at the forefront and governance has been slow to catch up.

Aesop’s fable of the tortoise and the hare had the tortoise winning, but while the hare of technology can be tamed, it is continuously ahead of tortoise governance and, in the global economy we now inhabit, will extend that lead. It is only where governance is centralized and total (such as in Japan prior to the Treaty of Kanagawa in 1854 or where the government may be theistic such as with the Taliban) that the market is not allowed to exist at all and technology is starved.

As soon as market forces allow, the pace quickens. China is a recent example of a centralized, legalist state that remains in control but has opened up the marketplace – totalitarianism plus capitalism. Of course, the rise of technology is a serious threat to governance stability in China. This is exacerbated by world-wide communications technology that provides comparisons with the rest of the world to every region. This comparative data spreads the world on what is available and draws everyone to want the same – more products and the latest technology. The hare merely passes on the baton to the next hare.

In the same race?

The question of how Governance reacts to the market is being played out constantly. Whether it is the forlorn approach of international Governance to environmental issues or national Governance reaction to the internet or any number of other interactions, Governance and the governing seeks to manage technology and the effects of technology.

The rationale for Governance (and control) over technology is based on a mandate from the public (whether by vote via manifestos or on a perceived basis – as in China or a theistic basis or historic basis as in most of the Middle East). This mandate often runs against the market – and many, for example, Tea Party libertarians in the USA, believe that Government should play no part whatsoever in managing the market. They do not believe that Government has a role to play at all. This Ayn Rand view of the world, the most extreme market view of governance, believes that the “invisible hand” will provide the right result.

So, should technology be subject to control? Is this two-speed race real?

The answer has to be “yes” – but an acknowledgement that it is a race would be a start. Then, we may be able to establish some of the rules: rules which enable the development of products and technology while ensuring that the trade-offs that we have to endure are sufficient to allow us (and other life forms) to continue to survive.

Race to what?

The marketplace works best when there is an identifiable demand and an ability to supply. This is the basis upon which economics exists. The market, however, is but one aspect of our lives and the market cannot dictate whether a particular form of animal life is allowed to survive or whether desertification is made worse in Sudan, for example.

These are typical market externalities and the market appears to have no answer to such difficult outcomes. These are outside the market and the invisible hand assumes that they can be dealt with as externalities – and forgotten.

These externalities, or market anomalies, are where non-market forces reside. Much of this is the responsibility of market governance; some of it is charitable work or non-market, voluntary activities. However, technology is primarily (at least in the 21st Century) market driven (as opposed to driven by government spending on defence, which brought into play technological advances in the 19th and 20th Centuries).

The race that technology exists to fight is one of material “progress” (advances in health care, biotechnology and the like are within this area) where there is a defined demand.

Governance is then required to sweep up behind in ensuring that the advances or changes in technology are suitable or genuinely advantageous.

Of course, as Georgescu Roegen (a leading economist) stated in 1975: “Perhaps the destiny of man is to have a short but fiery, exciting, and extravagant life rather than a long, uneventful, and vegetative existence.”

Intersection: market and governance

At present, the governance of technological externalities problem is two-fold:

(1) Each nation works out its own response to changes – often many years behind the change itself

(2) There are serious world-wide technological implications – changes that impact regions and the world – not just nations.

The problems get bigger as the intersection of the marketplace and governance is mainly concerned with economics, not externalities. Yet, this may be the biggest problem concerning mankind. Working out how to properly manage the interaction between the marketplace and governance in terms of market externalities while allowing for competition (the essence of the market and the progenitor of technological change) may well be the biggest challenge we have. If capitalism is the norm – and through this the market economy – what role has governance of the market – nationally and internationally?

Can institutions that are already in place (such as the WTO or UN Conferences on the Environment or IAEA or any number of international institutions that operate today (see: http://www.genevainternational.org/pages/en/55;International_Organisations) keep up with the market whilst enabling or at least allowing the best of what the market does to flourish?

Is it even possible for the market – now on a global scale – to be centrally managed to the extent that externalities that we all pay for in terms of health and safety and maybe inter-generational catastrophes of the future can be in any meaningful way properly be taken into account?

Or, are there self-organizing principles that guide human evolution and probably guide our economic and technological progress which work and negate the need for any central institutions?

An Olympian Challenge

 

To repeat: the governance of market externalities may well be the major challenge that mankind has to bear.

Already, we may be dangerously close to bequeathing future generations with a challenge that may be unwinnable.

Whether it is genetic engineering, or nuclear warheads, or CO2 emissions or whatever, the global challenge is to admit that the challenge is a real one and that the market, left to its own devices, is unlikely to deliver the desired results in a timeframe that will allow life to continue to prosper – the Georgescu Roegen extravagance

Libertarians argue that we will ensure that technology and the market will find the solutions – a hope for the best approach that they believe will get us out of the Georgescu Roegen extravagance.

However, the danger that the challenge will be beyond the capability of the marketplace is large enough for us to consider the consequences of failure. The fact that we can obtain information quickly and internationally does not help unless we can use the information and make decisions quickly. Governance mechanisms are the opposite. It now looks increasingly like 19th Century institutions are incapable of addressing the negatives that the marketplace throws up – unpriced externalities Maybe the only way to solve the problems of the marketplace is through using technology and self-organization on a local basis so that externalities are assessed and redressed as appropriate.

This means that the role of international organizations would be to assist the process. Instead of not-for-profits like Witness (http://www.witness.org/) acting on their own to provide assistance to local groups (“See it, film it, change it”) it would be the role of large national and international institutions to enable local groups through technology. Markets are self-organizing but have created a degree of externality that is seriously and adversely impacting societies throughout the world. International governmental organizations are failing to come to terms with this. So, the role of national and international institutions has to be to equip and enable local groups – through finance and law changes but on a vast international scale.

Just like companies and government work together to develop the markets, so governments and NGO’s /local groups should be working to develop externality solutions (with the companies wherever possible) but on an international basis.

Research is ongoing such as at http://shapingsustainablemarkets.iied.org/ and sustainability in business is now a constant theme in best in class organizations. Those such a CIMA (Chartered Institute of Management Accountants – www.cimaglobal.com) have adopted sustainability and the role of senior management in delivering this for some time. Sustainability is the central mantra of organizations like Tomorrow’s Company (http://www.tomorrowscompany.com/) and the whole CSR movement.

But, just like microeconomics and macroeconomics never come together, so the business by business approach and the international institutional approaches never seem to gel.

Witness provides a great example of the ability of self-organization – governments, local, regional, national and international should now be harnessing the technologies to equip civil society to the same on a scale never before seen. Every national government should have an Externalities Minister – where such market problems are evaluated in total, practical help is provided to civil society to address the problems and genuine dialogue established with business. Governance and the markets would then be in the same race.

Hard Times – from 1854 to 1504 (Dodd-Frank)

Masters and “Quiet Servants”

Charles Dickens wrote “Hard Times – For These Times” (usually known as “Hard Times”) in 1854. This was a bleak analysis of mid-19th Century factories and the mechanistic drive for material reward.

The world of the Industrial Revolution saw immense material improvement within a 19th Century mindset that saw business develop on the back of “resources” – whether they were natural resources (like coal) or human resources – Dickens’s “quiet servants”. Resources were resources and how they were discovered, whose they were, the conditions under which they were mined, how they were shipped or the conditions under which they were placed into the manufacturing process were not much of a consideration.

Britain and other developing nations of the time grew wealthy on their own drive, ingenuities, financing and trading and manufacturing instincts but the whole process would have collapsed if access was not obtained to raw materials from the rest of the world and the use of “human materials” from all over (including their own countries). The terms “human resources” is still with us along with natural resources – but the “quiet servants” grew louder.

Gradually, from 1833 when Britain enacted laws that children under nine should not work in factories, throughout the second half of the 19th Century and into the 20th, our human resources (people working in factories and mining, for example, in the industrializing nations) campaigned and secured rights over income, health and safety, length of the working day and age restrictions.

Developed countries worked out that, to work well and succeed, we had to develop ways that we all could share to some extent in the benefits that material gain provided. This is the basis of free and fair societies based on successful economies.

From nation to global

The last thirty years has seen a vast shift from developed nations using the rest of the world merely to buy from and sell to, to a shift to manufacturing and now development and R&D throughout the world. Trade has grown internationally and the so-called integrated “global economy” is in place. We are no longer merely the industrialised west and the under-developed rest, but an inter-connected web of nations within one, world economy.

Yet, the strains are clearly showing. Allied to the vast changes in internet communications (similar to the vast increase of communications that shaped 18th Century politics and the 19th Century – the telegraph and the phone), all peoples of the world now see themselves as part of this world (or global) economy in the same way that 19th and early 20th Century factory workers saw themselves vis a vis factory owners. They then, understandably, demand rights and safeguards.

This is now happening on a world scale as we develop our global nation (economically).  The changes are profound and, if done properly, will be of enormous benefit.

21st Century Responses

This week saw the approval after two years of the US SEC (Security and Exchange Commission) of articles 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The two measures could have major implications for all of us in that (properly implemented) they set a real standard for the globalized economy in two, crucial areas:

  1. the willingness of all of us to buy items cheaply no matter how the raw materials were obtained
  2. the willingness of all of us to buy items from wherever in the world, no matter what corruption was employed in their provision.

Article 1502 refers to the mining of key raw materials in Africa such as tantalum, tungsten, gold and tin. It will (after an implementation period) require all suppliers and manufacturers to state that their products do not contain raw materials that financed war or bloody conflict. So many years after blood diamonds were headlined, there is now a statute that demands that companies step back and consider what they are buying. Manufacturers that buy such raw materials have had to count the cost of reputational disaster if they continue to sidestep basic human responsibilities in this global market. Now, there will be a legal imperative in the USA.

Article 1504 is the Cardin-Lugar rule which sets rules for country-by-country reporting of companies in the extractive industries concerning the revenues and profits they make in all countries where they do business (on a project by project basis).

Both articles require all companies that are listed in the USA to comply (although not immediately), wherever those countries are based. The European Union is expected to pass similar laws.

The implementation of the two articles will help to drive change on a global scale, where individual nations (e.g. where the resources are extracted) are unable to do so. Why? For several reasons:

  1. Developing nations (especially resource-rich and economically poor) are prone to corruption and often unable or unwilling to enact these laws themselves;
  2. Developing nations (especially in parts of Africa) use resource revenues to fund conflicts and wars;
  3. Corporations operating in those areas need to show global sensibilities – where treatment in their overseas subsidiaries and employees is brought up to levels that we believe are credible and reasonable. It is hard to do that without legal change as competition is too high to expect corporate ethics (whatever that means) to work on its own.

To Ayn Rand libertarians Dodd-Frank is an economic travesty and many in the US are waiting for Romney and Ryan to get elected and reverse these laws. That would be the travesty. It is enough that in developing nations, the gaps between the rich and the rest are widening; it is enough that nations like Greece are now collapsing economically. There is potential for real strife in nations where inequality is too widespread.

But, we now live in a global economy where we are all dependent on each other. That means simply that best practice (that works on a national scale) has to be introduced globally wherever feasible. The intricate balance of trade, manufacturing, design and the need for natural resources (as well as the need to work together on climate change issues or disease control, for example) dramatically increase the need to treat the global economy as one economy – which it is. This means that national rights have to be respected but that is not enough.

Article 1504, for example, takes the trust element away from many nations like Equatorial Guinea, where the leadership is a kleptocracy and where riches from oil revenues do not go to the people in any meaningful form. Country by country reporting will, eventually, put an end to opaque deals between companies and those who have taken over the ownership of natural resources in those countries by showing transparently what profits are made and revenues generated on a project by project basis. Citizens in those countries will begin to be able to see how those revenues are used or not. Information is valuable and a first step to more equitable conditions.

21st Century Ethics

As we enter the fifth year of the post-sub prime recession (with economic collapse in Greece and high youth unemployment in Spain), we remain much more concerned with ourselves than with people and nations thousands of miles away. The change that global economics has wrought, however, is that we can no longer ignore the plight of those so far away even if we (wrongly) wish to do so. Their plight is ours just as the impoverishment (economically and educationally) of our inner cities is a blight and our plight.

The Chinese view things differently, of course. A thousand years of relative impoverishment has left it hungry for economic growth and its hunger leads it to plunder the natural resources of Africa. China’s legalist centre, its Confucian heart and its loathing of western imperialism means that it is content to leave governance issues aside. Its own internal corruption (the corruption of a centrist and legalist government, where bribes are the common currency of the status quo) means that it is unlikely to require good governance in return for its acquisition of raw materials. In fact, its non-linkage of governance requirements gives China a distinct trading advantage in Africa.

It is to be hoped that this is a short-term business expedient and a long-term mistake for the Chinese. Just as the best manufacturers in the 19th and early 20th Century were leaders in improving conditions for their employees (notably, Henry Ford who wanted his own staff to be able to afford to buy his cars) and just as the US spearheaded safety rules in the 20th Century, it is likely that the best companies will understand that improving the safeguards overseas (whether in their own companies or those of suppliers) will be important, medium-term investments.

Reputational loss is now potentially huge (as Apple realized when suicides at one of its biggest suppliers in China, Foxconn, began to rise and changes in working practices were required by Apple). The raw materials that we require for so many of the goods that we buy are obtained under horrendous conditions in Africa. It is not just blood diamonds but all those naturally occurring elements that the SEC has just regulated into law.

In addition, the country-by-country reporting will shine a light on the regimes that take in billions of dollars of income and disburse so little to their people. Pressure will mount from outside and inside.

Organisations like One, Transparency International, Global Witness and Enough and the Publish What You Pay coalition deserve huge credit for a relentless drive over many years to enact such positive changes. The US Congress deserves huge credit for bringing it into law in the powerhouse of the US economy. The EU should follow and they should all work within the OECD and elsewhere to ensure that these measures, providing an ethical underpinning to the global economy, are made global.

We live in a globalized economy and comparative advantages should be developed through intelligence, hard work and ingenuity – not via the impoverishment or hardship of our global neighbours.  The bringing into implementation of Dodd-Frank’s articles 1502 and 1504 suggests that the global economy is waking up to the fact that our “quiet servants” deserve respect wherever they are – close to home or further away. The global economy (and climate change and air travel and the internet….) means we are all neighbours now.

Looking Down from Mount Olympus

With Olympics fervor at its height, it’s tough to resist Homer’s description:

“Olympus was not shaken by winds nor ever wet with rain, nor did snow fall upon it, but the air is outspread clear and cloudless, and over it hovered a radiant whiteness.” Homer, Odyssey.

Today, the equivalent of the 12 Gods on Olympus are, maybe, the G-20, or G-2, or the UN or any of the international organisations that are set-up on our behalf.

Or, maybe it’s closer to home – the national heads who make up the EU or the lesser number that make up the EZ; the 100 Senators in the US Congress.

Or, maybe they are the 1% who own 40% of the earth’s assets (financially-speaking).

Or, how about Forbes Global 2000 – the top 2000 of the world’s companies that, between them, account for $149 trillion in assets and employ 83 million people. This compared to McKinsey’s estimate of $212 trillion value of the world’s capital stock in 2011 – a huge percentage.

Icy Slopes

The Greek Gods took their place after a war with the Titans – who ruled before them. Mythology into reality – our new Gods rule in much the same way after a 20th Century where totalitarian regimes fought each other, amongst each and against  democratic nations in bloody conflict. Millions died in China, the Soviet Union, Europe, Vietnam, Africa, Indonesia and elsewhere as different theories of government battled for supremacy.

Francis Fukuyama declared it “The End of History” as liberal democracy supposedly triumphed. We know now that he was wrong (as he has himself declared). For, the winner (for now) was not democracy but a form of capitalism that promotes a new set of god-like creatures and a new Olympus where the wind does not blow and the air is clear. This new capitalism – the complete dominance of quantity no matter what type of government is in power – was relatively bloodless in its conquests, but no less callous in its purpose. Indeed, its callousness is worse than before as it is merely the “invisible hand” that drives the marketplace that has led to the victory of the new Gods.

Now, sitting upon the summit, surrounded by the icy slopes that let few into their circle, they can look down upon the rest in their eco-defended enclave.

How the War Was Won

 

The titanic struggle was won on the back of the primacy of goods – developing the ability for ordinary people to secure their basic material needs and then onwards to “choice” and leisure and luxury. This has been wonderfully accompanied by the ability of business to promote their products so that demand could be developed without the consumer realizing it. This ability to influence demand (so brilliantly described in Galbraith’s “The Affluent Society”) has led to a victory of quantity over quality in the West and will do so elsewhere.

The victory was made easier by Governments’ willingness to adhere to the 19th Century economic theories that made “growth” and GDP the concepts upon which all governing was placed – but, placed them in simulations which cannot reflect reality. Mathematicians and econometricians have extended the fallacy – we live for numbers. The evidence for this can be seen so well in Russia and China. For most of the 20th Century, both held out as anti-capitalist bastions as the world moved to strengthen democracy. Neither has succumbed to democracy – Russia is a gangster-elite State, China is a legalist, centralized State. But, both yielded wholeheartedly to the market.

Who Won the War?

Many argue that the democratic West won the war (as Fukuyama attempted to suggest) but this is wrong. The western form of liberal democracy with its desire to provide representative government, elections and low corruption levels (comparatively) as well as supposed access to education and upward social mobility is losing out. It is arguable that even in those countries that still pursue these ends, there is now a vastly worsening separation between rich and poor and a hardening of social structures – with far less mobility.

In China and Russia, elites have won the war and their instruments of war have been capitalist – as their citizens climb up Maslow’s hierarchy of need from the very bottom, quantity of goods is supreme no matter how they are derived. As Jonathan Fenby describes in “Tiger Head, Snake Tails” this is, in China, despite rampant corruption, ecological degradation and vast differences in wealth between elites as well as complete indifference to the vast population when their houses are demolished to make way for new buildings or motorways (for example).

Who Lost the War?

Millions of lives were lost in the 20th Century as nations defended themselves against the onslaught of totalitarianism. But, a new totalitarianism has taken root right beneath our noses.

It is the totalitarianism of the elites that control the markets – markets fed by a constant diet of GDP statistics and growth targets.

The losers are (in Orwellian-speak) supposedly the winners – the mass of the population that has grown “wealthier” throughout the latter half of the 20th Century.

So, it seems to be a benign revolution but the problems are becoming clearer by the day.

In Greece, home to Mount Olympus, the country is in its fifth year of recession. In Spain, 24.6% of people are now officially unemployed. In most countries, the gap between the wealthy and the rest is growing steadily.  Economic strains are now working their way around the system as growth (measured traditionally in 19th  Century models) stalls outside of newly developing nations (yet, who believes the measures coming from China?). Today’s youth in the developed west are unlikely to be “wealthier” than their parents in pure GDP terms.

But, we should not be focused on pure numbers. Economic growth is also threatening the ecology of the planet at an alarming rate. Whether or not fossil fuels are near their end, the effects on the planet are growing and recent changes to our weather patterns merely the first signs. Our damning footprint is ever more etched on the planet and real risks are emerging that the life styles we live now may not be available for long. As Rumanian economist Georgescu-Roegen surmised over fifty years ago, maybe we can’t change and will simply go out in a puff of smoke.

Maybe, though, society will not, for ever, tolerate the new totalitarians, the new Olympians.

The Gods were not immortal

 

Of course, nothing lasts forever. The Greek Gods did not survive (except in mythology) and neither will the current ones.

The problem is that we are engrained with the belief that quantity is the key to good life (which it may be up to a point) and have lost a connection with what society is about. Mass production has led to greater wealth but, as Galbraith saw 60 years ago, society cannot be all about quantity.

Maslow, developing his Hierarchy of Need as a marketing tool, expected that we would go beyond quantity to some form of self-actualization. We have definitely not managed that yet but we have some signs that societal self-actualization is possible.

A major problem in the way of this is that different countries are at different stages of economic development. China has a massive population still well down the material scale and there will be no let-up in the leadership’s drive for “growth” to stem the dismay of their people on all other issues. In Africa, the longing for material wealth is as strong and who can blame them bearing in mind the economic and social torment they have suffered?

So, initiatives like Zero Impact Growth being developed by John Elkington and his Volans company are worth considering.

This is an approach to growth with zero impact on the planet and ultimately to give back more than is taken out. Where others seek to quantify (and there are dangers in the approach of quantifying everything), the Elkington approach is to develop a maturity matrix as follows:

Maturity Level Definition from ‘The Zeronauts’ Analogy: Characteristics of a company on that level
No strategy and goals No definition The company barely understands the relevance of restructuring its actions towards sustainable solutions and hardly reports on sustainability. Furthermore, no strategy has been defined and no targets have been set.
Eureka Opportunity is revealed via the growing dysfunction of the existing order. The company understands the relevance of restructuring its actions towards sustainable solutions. No considerable actions have been taken yet and almost no strategies and targets have been set. The company does already understand the relevance of the topic though, has started reporting and communicates plans to ameliorate its sustainability performance in the future.
Experiment Innovators and entre­preneurs begin to experiment, a period of trial and error. Although the company has started its first inno­vation efforts and internal programs in certain sustainability areas and has developed initial policies and strategies, no concrete milestones and an overarching future vision have been defined yet.
Enterprise Investors and managers build new business models creating new forms of value. The company has developed a short- to mid-term strategy ( ≤ 2020) for specific areas and has set measureable targets. Nevertheless, almost no long-term milestones have been defined. Furthermore, they do not communicate an over­arching future vision.
Ecosystem Critical mass and part­nerships create new markets and institu­tional arrangements. Measureable, ambitious (zero) targets based on a mid- to long-term vision (≥2020) are set. Nevertheless, a conjoint approach and some collaborative aspects are still missing since the holistic zero impact growth vision has not been (fully) adapted.
Economy The economic system flips to a more sustainable state, supported by cultural change. The company has fully adapted the zero impact growth vision. Measureable zero targets that have been adapted jointly are set out for each field of action. A clearly defined strategy is in place on how to achieve these targets, with defined short- and long-term milestones. The underlying benchmarks are clearly defined.

Maybe there is some fight left and the reality behind the model is clear – we can’t fight the invisible hand but maybe there is a chance for society to develop some self-actualisation behind the corporate drive towards zero impact growth where the planet survives along with humanity.

That doesn’t impact on the gap between the wealthy and the rest as the focus is on economics and sustainability. Inequality is as important a problem as ecology. Numbers should be seen for what they are – where money is one aspect of our lives not the only one. Demos, a UK think-tank has just published: Beyond GDP – New Measures for a New Economy.

It is an attempt to seek a rationale for economics beyond numbers. Briefly it posits that:

  • GDP does not distinguish between spending on bad things and spending on good things.  By this measurement, the BP oil spill in the Gulf of Mexico “positively” contributed to the economy just like the many good and services that people actually want or need.
  • GDP doesn’t account for the distribution of growth. Our total national income has doubled over thirty years, and so has the share of national income going to the wealthiest households, but average households have seen little or no income gains. GDP doesn’t care if growth is captured by a few or widely shared.
  • GDP doesn’t account for depletion of natural capital and ecosystem services.  If all the fish in the sea are caught and sold next year, global GDP would see a big boost while the fishing industry itself would completely collapse.
  • GDP doesn’t reflect things that have no market price but are good for our society, like volunteer work, parenting in the home, and public investments in education and research.

Two studies that show on this morning after that wonderful Danny Boyle-inspired Olympics night – where values were keenly shown as more than just money – that the slopes of Mount Olympus are slippery but not completely impassable: a Danny Boyle-inspired dose of self-actualisation.

Should Everything have a Price?

Michael Sandel in his recent book “What Money Can’t Buy: The Moral Limits of Markets” writes excellently on how the market economy has turned into the “market society”. This view echoes Galbraith and “The Affluent Society”. Galbraith’s warning from the 1950’s has not been heeded – we are now subject to the “market” in everything we do – anything and everything has a price.

 

Sandel cites many examples – such as someone selling their organs, someone saving a place in a queue, schools being sponsored by companies and many others.

 

It could be argued that it was always so. Slavery, the selling of humans in the marketplace, was a common market phenomenon and still exists. Bribery and corruption – the selling of favours or ensuring something goes in your favour – remains common and Iraq and Afghanistan are riven by corruption on the grandest scale. Russia and much of Eastern Europe are held to be gangster nations – like much of the USA in the time of prohibition. Somalian pirates resort to kidnapping as an outcome of pure economic theory.

 

Yet, society does, from time to time, attempt to apply limits in a world where it seems that everything has a monetary price.

 

Market domination

 

The libertarian view that the market should be allowed to rule means that we abrogate our responsibilities. It is the role and duty of civil society (usually through Government) to judge where market rules and where other forms of decision-making are paramount.

 

We make those judgments continually. The right to be safe on the streets is, in most developed societies, made possible by laws which are enacted through general agreement by citizens. It is enforced, where needed, by legal systems and enforcement agencies – again, only there by the general agreement of civil society. In those countries where the market and price dominate, then the danger is that laws and police forces can be bought off. This is the case in many eastern European countries and many countries in Africa. Bribery and corruption rule through what may be called the market society – against the agreement of most of its citizens. As Sandel points out, this is against the best outcome for society – and by a long way.

 

Libertarians may argue that a legal system and an “open society” are the foundations for market economies to work, but the world is a global economy and it is no longer possible for one country to be cut off from the rest. The market domination into so many areas of life is a threat if basic norms do not exist.

 

The market versus societal norms

 

Sandel does not go too much into how society develops its norms – where market pricing should not intrude. We are in danger, of course, of taking on pricing into every form of our lives and there are plans to price our natural resources and to ensure that accounting incorporates aspects of social life into accounting rules – for example, through the Prince’s Accounting for Sustainability Project; through the Natural Capital Committee – which will report into the UK Government’s Economic Affairs Committee, chaired by the Chancellor of the Exchequor.

 

While this acknowledges the problem in one respect (i.e. we are not properly accounting for externalities like pollution, the loss of natural capital – our rivers, forests and such) it is perhaps giving up the struggle against the market society. By the very nature of accounting in terms of numbers for such “externalities”, we subscribe to the essential condition for market pricing of everything – the market society is allowed to dominate.

 

Our focus on GDP and numbers betrays a failing of society – our inability to see anything outside of numbers – so-called economic wealth. GDP, which rewards only that which can be measured, has been a poor simulation of real “wealth”. Our drive to economic success (measured by how many unnecessary items we make and buy) takes no account of what is really important. Ability to buy is all that “counts” – literally.

 

Societal norms are now up for sale. Instead of a rearguard action against the market society (as against market economics) where we defend those areas of society against pricing (as they should be beyond price), we succumb to pricing everything. This leads to everything having a price – an accounting-driven doctrine, a market society doctrine.

 

Beyond economics

 

Of course, this may be the price (!) we are paying for economic growth and relative economic success. As we become more economically successful and as the world derives basic economic success, maybe our brains are becoming hard-wired to numbers as the only register of what is successful. The left-hand side of the brain is assuming victory over the right.

 

There is no question that the discovery of numbers has made the human successful and to understand and control large areas of science. We have changed the world entirely. Our ability to count is now dominating our lives. Since the dawn of accounting (when we counted our grain), numbers now “account” for everything.

 

Where has been the debate to question the way we account? If numbers dominate everything we do, what outcomes do we envisage, what changes result? If all our successes depend on numbers, then what lives will we lead?

 

This is now beyond economics – which, as George Soros has recently outlined, http://www.georgesoros.com/interviews-speeches/entry/remarks_at_the_festival_of_economics_trento_italy/

has been shown to be terribly mistaken in its misunderstanding of the world. His analysis, that economics, in trying to copy the rules of science has travelled the wrong path. Economics is a social science and, as such, does not have definitive outcomes. But, the situation is worse than Soros makes out.  Macroeconomics is being subsumed beneath a torrent of numbers so that, worse than following a quasi-scientific path, we are now following an accounting outcome for everything.

 

Where are the norms for society? Who are the guardians?

 

The financial crash of 2008, which is still playing out in 2012, opened up severe cracks in our economic system. It is also opening up divisions in society between the very wealthy and the large swathe of middle-income earners who make up most of civil society. These divisions show how we are valuing society and show clearly that pricing is not working. The value given to bankers and bonuses (no risk activities for the individuals who can only lose their jobs, not their wealth and no risk activities for the banks, who are too big to fail) shows a dramatic failing in pricing – in which we apparently put all our trust.

 

Pricing mechanisms are not working successfully, yet we place more and more of our faith in pricing as the only arbiter of success.

 

We now price (or will soon be attempting to price) everything – from CO2 to education, from healthcare to shoes, from our rivers to our right to pollute – everything with a price.

 

Yet, macro-economics (the economics of society) is a social science – it is not based on rigid rules. It is (as Soros rightly states) bound up in decisions and thoughts of men and women.

 

Pricing is one outcome of a social science that is not unquestionably right in every case – it is actually, mostly wrong and most economists are only good at describing what has passed (i.e. rear view mirror gazers).

 

Accounting was originally a micro-based activity – to help regulate and tax individuals and firms. It is now being used to price everything.

 

Are there any alternatives to pricing everything?

 

Of course there are, but it is becoming tougher. The Bribery Act in the UK (following a mere 34 years after the Foreign Corrupt Practices Act in the US) is an example. Society has (at least in the UK) decided that winning contracts or influencing economic decisions should not be subject to corruption. In China, as Jonathan Fenby’s excellent “Tiger Head Snake Tails” so ably describes, bribery and corruption have existed for many years but (at least at home) it is not considered acceptable. In many other countries in the developing world, it is.

 

But, we know that price is in play throughout society. The best lawyers cost huge sums and only the wealthy can afford them – so, our legal system is subject to pricing. The best education is paid for; the best healthcare is paid for.

 

With wealth divisions becoming wider, pricing is everything. It is time for a real debate in society on how economics needs to be changed to reflect reality and how accounting for everything (and a price for anything) may not be the answer. The invisible hand of the market should not be allowed to grab everything.