Doughnut Economics – Quam Oeconomica

The Search for Oeconomica Phase III

The essence of Kate Raworth’s excellent book, Doughnut Economics, is that economics has to move from an understanding of the world in 18thor 19thC terms (based on a mechanical set of analogies) to a 21stC understanding based on how we understand evolution, our knowledge of systems theory and complexity.

Doughnut-Economics

In simple terms, the book suggests, that in order to develop from a perpetual journey to increase GDP and move to a world economy that “Thrives in balance”, we focus on critical issues such as inequality, changes in banking, CO2, new metrics and many other changes via a vast number of small experiments that will, under conditions of complexity, generate changes in our direction and potentially move us from this Phase of our economic experience (Phase II) via a phase transition to another. However, the range of changes that may be needed (this vast number of small experiments) do not appear to be extremely hopeful and each one is tiny compared to the enormous background material in which it exists. Any one may be successful or not and many, if successful together, may generate enough traction to propel society to the phase transition that it needs. However, it, or they, may not!

 

The dynamic set of changes that forged the industrial revolution, the move from a rentier society based around the ownership of land, to a capitalist-driven society based on the ownership of ideas, of speeding up production, of creating demand for goods and services, took on the form of a phase transition (if the continued use of analogies can be permitted). This dramatic change occurred over many years, but traction was firmly in place by the 1830’s in England. Years after this, by the time Karl Marx was writing das Kapital, capitalism had transformed the countries of western Europe and would do the same for the USA and elsewhere. While land remains a high value commodity, the demand for goods and services and the ability to pay for them has transformed most of the world and continues to do so.

 

However, this phase transition (Phase II) remains, even today, in a variety of stages of development. In the USA and western Europe, it is well entrenched. In India and China, it is feverish in its intensity. In sub-Saharan Africa and Afghanistan, it is well hidden. This means that prescriptions for moving beyond this Phase are unclear as different sections of the globe are at such different stages. No mention was made in the book of the Maslow hierarchy (that provides at least some analysis of the individual’s search for sustenance, from meeting purely physical needs to those of mental well-being) and it would be useful to seek some sort of understanding based on regional access to the Phase Transition of the industrial revolution before experimentations can be determined as useful.

 

This is because, while so much attention is given in the media, universities and in books, to the second and third industrial revolutions (supposed to be via computing and then via robotics, AI and bio-engineering), the real focus of Doughnut Economics is beyond this towards a third Phase – a post-capital-only phase. In driving towards that new Phase (if humans are to make it successfully), Doughnut Economics properly focuses on the Georgescu-Roegen notion of entropy being sufficiently understood so that the world  focuses on energy use and utilisation as the crucial underlaying of society, rather than the traditional notion of productivity (the making of goods and services in progressively more ‘economical’ ways). This is right but it is debatable whether this is the prime driver for change, at least from a human viewpoint. Humans exhibit potentially destructive tendencies when caught in a particular way of thinking. Kate Raworth described this in within the book (Easter Island as one example) and it seems that humans need to actually see and feel danger before they react. A good analogy is how the UK reacted to Germany before 1939. Rearmament did not take place until the enemy was rampaging through Europe. Why? Possibly, because the human tendency is not to give up on ways of life (having reached a reasonable plateau) unless forced by external change. Complexity theory would suggest that a plateau of living is only change when externalities require it – with ‘require’ being highly operative.

 

Phase II was driven by, as the book states, the notion of economic gain for those in charge of capital and ideas, focused on the desire of perceived need. This economic gain argument has been transformed over the last 200 years to permeate all of society not just through the notion of GDP at the macroeconomic scale but through accounting at the micro-level. Thus, financialization of the world at both micro- and macro-scales underpin everything that we do. Everything is priced and our utility (our desire for something) is only respected when it has a number against it. Recently, a charity worked out the value we place on parks. This notion of £974 per person per year is then used somehow to justify spending on parklands. The whole notion of natural capital flows from a need to show value of the aspects of life that make life worth living so that even companies and accountants can evaluate them in discounted cash flow techniques. This is where Phase II shows it has conquered the world or it may be showing that Phase II is nearing its end.

 

Changing this is an enormous challenge but Doughnut Economics, while preparing the way, seems to suggest that the world can be redirected by an understanding by economists about how the world is different to their theories and through the use of diagrams.

 

A more detailed analysis of the changes that induced the phase transition in England in the industrial revolution to Phase II would indicate the scale of the challenge now. The doughnut diagram is highly useful and the concepts that underpin Doughnut Economics are highly positive in that they speak in the language of the new century, even if hampered by the limits to our knowledge that such analogies provide.

 

However, if a phase transition in our model of living is required, and the book strongly argues in that way, then we need to assess how this can be done successfully in a world that it markedly at variance region by region and where, as a result, different nations and regions will adopt different attitudes. For example, those countries lower on the Maslow hierarchy (if it or something similar can be utilised on a national scale) will retain their pursuance of basic needs via growth in GDP for far longer than those countries that have reached higher levels of economic maturity, where post-quantitative norms may be considered. If this is the case, and it is highly likely to be, then how do the latter set of nations decide how to remain sufficiently competitive in productive means, assuming that they will not simply give up their desire to at least maintain a level of economic security in a world that will reward economic gains for many years because it is measurable?

 

Doughnut Economics posits, amongst many other things, repeated changes in GDP, up, down, level in no particular order and through a variety of changes in taxation from income and employment to energy usage or externalities. However, different countries will adopt different measures and taxes and there will be a vast range of unintended consequences in such a complex environment that will continue to drag down the impact of the desired moves to a new phase.

 

Of course, we do not even know what a new phase will look like. Doughnut Economics suggests some thoughts on this and they relate to the quality of life beyond the quantity of life that mature economies are building, where, having gained the basics (food, shelter, clothing), we have moved towards the second tier of luxuries (goods and services) and towards Maslow’s higher tiers of self-actualisation (although we would need to see this is national terms rather than individualistic).

 

What can economists and accountants (macro and micro) do for this future? Perhaps the role for such narrow providers of data is disappearing in the same way that the role of horses changed when the motor car appeared. To take us to the next Phase needs a whole new school of thought that understands the different levels of Phase II that has been achieved on a global scale and will address the new mix of qualitative and quantitative requirements of Phase III (against the background of natural resource despoliation and global warming). If the concept of ‘natural capital’ is the last cry of Phase II as an attempt to take a grip of the natural world by the accountants of Phase II, then Phase III has to develop a new breed of expert that can show how humans can retain the dynamism that ‘gain’ provided for many (although by no means all or even the majority) and moves us away from numeric (or financialized) gain towards a qualitative framework, from the historical meaning of economics – the art of managing a household (which, arguably, humans now understand) – to the art of managing quality of life.

 

This is likely to be back to the area of ‘political economics’, the relationship between the production of goods and services and the society within which they are produced and then forward towards an inclusion of the qualitative aspects of life (as individuals and communities) – ‘quam oeconomica’.

The Ownership Disconnect – Managers, Shareholders, Risk and Markets

Or a case of: Absent owners,  managers that act as if they own and get paid as if they take all the risks

Since the banking crisis that became a sovereign debt crisis, the world has begun to focus on the huge salaries and bonuses that are paid to bankers and top business people. In the last week, Barclays Bank announced that over 400 of their staff earned over £1 million in the last financial year.

Whereas those who place their financial lives on the line by building their own businesses and then, if successful, reap the financial rewards – but, if not successful, may lose everything – remain in high esteem amongst most people, those that risk no financial penalties whatsoever (but take massive salaries) have slipped further and further down in the public’s esteem quotient.

Senior managers and directors of major companies (including banks) and sales staff that take home huge bonuses (especially in banking and finance) are no longer lauded for any value they bring amidst a view that their rewards are far too high bearing in mind the lack of risk that they have. This has resulted in the EU plans to limit the bonus payments to bankers – an extraordinary intervention in the marketplace.

Does the marketplace work?

Stock markets are deemed to be the best place to see demand and supply at work. There is more data collected on stock prices than anything else and it goes back hundreds of years. Constant pressure on transparency and liquidity means that markets like the US (DOW, S&P, Nasdaq) and the London Stock Exchange (and others of similar size and liquidity) ensure that supply and demand usually results in a price that means something.

While this has changed markedly with the intervention of computer-driven buying and selling as well as the fact that around 70% of stock is owned by institutions, nevertheless stock markets appear to be mainly market driven. That never means the price is “right” – markets provide a price on any day that may be driven by a myriad of reasons. However, the market price is the price and buyers and sellers are able to take legitimate decisions whether to buy or sell.

Secondary markets

The owners of stocks and shares have, in the vast majority of cases, bought those stocks and shares in a secondary market – long after the IPO. While the majority of today’s owners of Facebook may be IPO buyers, this is only because the company had its IPO just months ago. For the rest of the publicly traded corporate sector, buying shares has little to do with the company involved.

Ownership of a share means potential increase in capital value and dividends growth – and some ownership rights which are rarely used by the individual buyer (although Martin Sorrell is facing some pressure from recently voluble fund holders). Shareholders are primarily interested in the value of the stock – almost unrelated to the company.

Robert Beckman, a well-known business writer from the 1990’s, estimated that 70% of a share’s value related to the way the market was going, 20% related to the industry and only 10% related to the individual stock. If true, this means that ownership of shares in the quoted sector is almost unrelated to the individual stock and owner responsibilities are negligible and rarely used.

In addition, the development of the joint stock company limits the risk to just the loss of the investment and no more (unless buying stocks through leveraged schemes or option trading).

Ownership means almost nothing these days when that ownership is in a publicly traded company.

Staff acting as owners

Lack of ownership in publicly traded companies (the understandable move away from the 19th Century where owners were managers), means that senior managers now act as owners. While it is absolutely true that managers spend considerable time talking to representatives of shareholders (pension funds and similar) and to others who write on their stocks (such as journalists), this is to keep the price up in the market relative to other stocks in the secondary market. It is part of the process of market transparency. Today, that is the main connection between management and owners (at least in terms of the value placed on the stock).

The Board  (with non-execs here to represent the shareholders) carries out primarily a governance role and has, usually, a compensation committee. Their job is to see that senior staff are paid a salary commensurate with the market or whatever and to secure senior staff in their jobs. This crucial role has, of course, been shown to be spurious in recent years.

The banking crisis has shown that there is no such thing as market rates for top staff in major corporations. Has it been just a way of jockeying for position that seeks to provide pay at the highest levels possible? CEO’s claim that they need to be paid international salaries to stay in their UK jobs no matter how poorly their companies’ share price performs.

Recent comments from those involved in the industry show how few CEO’s move abroad or from abroad to the UK. This basic tenet is mistaken, let alone the requirement to pay huge commissions to banking staff when their risk – like those of CEO’s – is no more than to keep their basic pay (already substantial) or in the worst case lose their job. This is completely unlike the entrepreneur, who has both management and ownership, and the heaviest of financial risks – the potential to lose his / her financial assets as well as their job. Both get potentially great rewards, but their risks are completely different.

Market rates of pay are notoriously difficult to derive. Where there is a vast statistical database, then it is possible – although here the markets are driven in different directions by groups of people getting together in unions to drive up market rates (and other forms of benefits).

The shareholder / manager dilemma

 

This can be stated for modern corporate life (in publicly traded companies) as:

Owners that stand back too far leaving managers that act as if they own companies and get paid as if they take all the risks

The issue is important for many reasons. We now have huge and dominant multinational corporations. We have shareholders that seek high and constant returns but have no affinity to the companies they “own”. We have managers that are (too?) highly paid and have wrestled a much higher share of the companies’ income to themselves than ever could have been envisaged and (in the UK and the USA at least) with over-dominant banking and financial centres which have tended to suck the life out of the entrepreneurial sectors rather than giving it life.

Can Shareholder Activism be Re-ignited?

As the West sinks dismally into austerity and behind the newly developing economies of China and India, where corporate ownership is complicated by government (intervention or direct ownership), we need a rebalancing away not just from banking and finance to areas of real value creation. We also need incentives for owners to own and managers to understand and accept real risk before they can access the type of returns that real entrepreneurs can access.

This will (if it is possible) drive any massive returns to the holders of real risk – those who can lose everything or gain massively. This is not the lot of managers – whose risk profile is slanted to the positive and whose manipulative skills are far greater than the quasi-shareowners buying their ownership in secondary marketplace.

Entrepreneurship is at the heart of business and growth of any economy. But, it is stifled by the rise of the manager in publicly traded companies where that rise absorbs far too much of the value created.

Shareholders are slow to act as they are, in the main, too far from the action, unknowing or a manager themselves – as in pension funds.

Now, the UK coalition government will be giving shareholders the right in annual general meetings to reject senior Directors’ pay proposals. The EU is considering the same thing. So, the pendulum is swinging in the direction of shareholder activism after many years of drift and decay. On both sides of the Atlantic, it is necessary for shareholders – who actually, in law, own companies, to assert themselves in pay and other issues. Economies in the West are dividing between those who are in control of an unrealistic share of corporate income (and in 2011, FTSE Directors pay rose 49% while average pay in the UK rose just 2%) and others. The others are shareholders and other employees.

A true market can only operate where monopolies fear to exist. It is apparent that quoted company directors have been able to set their salaries within a close market situation. In a long recession that we have seen in the West since 2008, it would be remarkable for there not to be a kick-back against the ability of one sector of society to benefit so much. Asking for constraint is insufficient. Markets have to be enabled and the recent moves to encourage shareholders to be more active and to give some powers that actually work are in the right direction.

Now it is up to the shareholders (basically, the senior staff of fund-holders like pension funds) to bare their teeth – like they are doing at WPP – and show that just because they go to the same clubs and come from the same schools, shareholders can be properly represented and the market for top directors’ pay can be made efficient.

A Proposal or Three

With stocks bought in a secondary market where ultimate owners have little or no real understanding of the business or ownership responsibilities, it seems reasonable to require large owners of shares to take their responsibilities more seriously – how should secondary market shareholder activism become real? Some suggestions:

Proposal 1: all owners of more than 1% of shares of any traded company should be required to nominate a non-executive director or actively support the nomination of one proposed by another such organization.

Proposal 2: such organizations, who normally buy shares on behalf of others (pension funds, hedge funds or similar) should ask their own investors (mainly those who put their savings into those companies – not just their own shareholders) to vote on their proposals.

Proposal 3: all such organizations have to register as “major shareholders” when they accrue over 1% of stock in a company and the FSA / Stock Exchanges should monitor the job they individually do to actively monitor companies – in the same way that organizations monitor MP’s voting.

All the above relies on making this easy – e.g. online only voting within pension funds and similar (i.e. no computer access, no vote) but, in an age of digitization and where companies and owners are so disconnected, secondary markets need to become activated.

 

The fight over education

19th or 20th Century dogmas are both wrong.

Michael Gove has a challenge and is enlisting 19th Century ideals to battle the 20th Century ideals that face him in our school system.

 

The Education “Challenge”

 

The challenge seems to be that forces that became dominant in the 20th Century – collectivism amongst school teachers, health and safety concerns, equality issues, access for all, centralised curriculum, centralised examinations, huge access to tertiary education (universities), building programmes, comprehensive education “norms” and belief systems – have, from Gove’s standpoint, gone too far.

 

While he believes that education should be always excellent, always accessible for those that strive, always providing a route to further and higher education, he feels stymied by what is seen as a Labour agenda from the 1960’s: public sector control over public assets and, worse, a public sector mindset.

 

That mindset means that equality risks being the bye-word for dumbing down – as expressed in views that exams are made easier so that everyone passes, that no-one is a failure, that competitive sport is old-fashioned and everyone should be a winner.

 

This simplistic notion of the maintained (government) school system is now rivaled by simplistic notions of what works better.

 

The Government Education Response

 

The Coalition response to the Challenge (or really the Conservative Gove response) is to throw 19th Century attitudes at it. The key to Gove’s rebuttal of mid-20th Century dogma is mid-19th Century dogma.

 

First, it is a market approach to the problem. The assumption is that the market knows best so bring in competition and all will be well. Some years ago, I wrote to Michael Gove when he was in opposition. As a Chair of Governors of a successful secondary school, I proposed, through my MP, that Government treats each of the 3,600 Secondary Schools as independent organisations in a way that business would not. Business would try to work out how such a range of “subsidiaries” would benefit from joint buying, better systems, better management and learning opportunities for critical IT staff and so on. Gove responded that he rejected this as each school should be seen to compete with each other and that it provided parents with “choice”. Only someone with no business sense whatsoever would say such a thing.

 

So, choice (like shelves of cornflakes that no-one can choose between) is the solution and we have old-style Academies, new-style Academies, grammar schools, independent schools, church and other faith schools, new free schools, chains of academies. The range is growing and is beginning to grow out of control.

 

When presented with a business-like way forward (such as above and also through the James Review on school buildings presented last year and which appears to have been dismissed), Government shuts up shop and develops ostrich tendencies.

 

Gove’s other 19th Century demand is to go back to reading our history and learning by rote; through progress via examination (no more modular teaching); through a private school regimen that comes from his background and his history. To this is added the rigour of school uniforms and standing when teacher enters the room. Sir Michael Wilshaw, now Head of Ofsted, is his main supporter in this area. Sir Michael’s approach (vindicated in several tough schools) is forthright and to the point – poor teachers should be expelled, poor schools turned around fast or taken over.

 

Gove is also pulled between business demands that pupils should be armed with the ability to be business fodder and the wider aims of education (which he understands well) and which provide our young people with the abilities to play a full part in the world they live in. Here, maybe there is a link between the 19th Century and the 21st, which Mr. Gove should consider deeply.

 

The Private vs. Public argument – the wrong argument

 

This is all typical of our outmoded politics and the strained linkage between the private sector and the public sector.  The private sector allows those who can pay to be separate from the rest. My previous notes on this: The Brave New World of Education (I and II)  – see https://jeffkaye.wordpress.com/wp-admin/post.php?post=153&action=edit

 

discussed how education was splitting into 3 – the private sector (alphas), good parts of the maintained sector (betas) and the rest (epsilons).

 

The response has been to play off the private sector and private sector attitudes against the public sector responses of the mid-1960’s.

 

Of course, the reality is that there is really hardly any competition between the private and public sector. Private education is for sale, goes to those who can afford it and it is only at the margin that a competition with the maintained sector exists. The vast majority of private sector parents never consider the option of not paying except between different independent schools – i.e. the competition is between private schools. Those that do are part of the “squeezed middle” – often moving to areas with good secondary schools to obtain at least the “beta” education on offer.

 

In the maintained sector, it is similar. A new building for a comprehensive school will immediately increase the demand for that school – but the demand is mainly drawn from other maintained schools in the catchment area.

 

Overall, competition is irrelevant to the question that is central:

 

What do we want from education for all our people?

 

Education for What?

 

In the 19th Century, we had two systems: one for the wealthy and aristocracy which educated our leaders; one (minimal) for the rest.

 

We retain the systems today and it has been hard to break the duopoly. However, we now have three systems within the two stated: private (alpha, still educating our leaders) and public (split by postcode into beta and epsilon).

 

What is needed is to generate a school system based on what society needs – not what entrenched groups may want. We do need to break the status quo.

 

If we (or at least most of us) agree that education should provide (from nursery to primary and through secondary) an education that provides accessibility to all, opportunity to all, does not shy away from the fact that we are all different, understands that education and opportunity should not be down to where you are born or the wealth of your parents, and persistent excellence in teaching, motivation and discovery, then the varied types of schools we now have should be joined in working to achieve this.

 

Students should not be born to lead or born to stack shelves. We should be opening up the doors to those who may have talent and desire to succeed and that means that those doors must be kept open continuously (not just at 11 and 16).

 

What is the answer?

 

There should be just one type of school – let’s call it an Academy as the Greeks (despite current problems) were intelligent enough to have the first and for many years the most prestigious.

 

All private sector and public sector schools should be converted to Academy status.

 

For the time being, funding will be retained as now – private to independent and public to maintained sector.

 

A team of from the private sector, maintained sector, civil society and government (not a government committee) would work to establish what education is supposed to be for: maybe a two-year review which will, undoubtedly be full of disputes and arguments, but will lay the foundations for the UK’s (if Scotland and Northern Ireland are willing to be involved) future learning – a model for the 21st Century.

 

The move to a common Academy system with two main groups within it (private-funded and public-funded) should be a forum for mutual learning via the needs of civil society, private and the public sector.

 

From this, we need to learn were the private sector (business) can work best – for example, provisioning of facilities and services (where the public sector is normally worse and too bureaucratized).

 

We should be able to build more cross-fertilisation that is happening on occasion now within private sector groups that adopt maintained schools – the smaller accumulation of knowledge across the divide that Haberdashers (for example) is providing.

 

We should also be able to explore how systems work in different environments – how to change the postcode lottery where it isn’t necessarily the teachers or the students, but the low aspiration levels of the communities.

 

Private / Public sectors and Education

 

Coming together in this way – and meaning it – rather than all-out competition in an area which cannot be completely market dominated nor purely public sector would be fit for the 21st Century. More than that, it would begin to frame the dialogue about what education is really about without (a) depriving the private sector of its rights to be different and (b) depriving the maintained sector (the public sector) of its right to improve. Moving the sectors to work together nationally (rather than merely at the local level) and ensuring that it is not just Government that can dictate what education is there to provide is essential in the 21st Century. Politicians are no longer the ones who know what to do. They do not represent public opinion and rarely shape it. Civil society needs to be better represented in the areas that count for the most and education is one area that cries out for change of this type.

 

Additionally, what is likely to emerge from this but a framework for a national education system with the potential to have the best of private and public education – but, for the benefit of those in the middle (the people who are being educated and their families).  A framework where private sector and public plus representatives of those whose education we are discussing (the educatees and parents and guardians) can continuously evaluate the benefits of particular models and judge progress.

 

A new model for the 21st Century is one where all sectors of the population work together rather than compete. The nation’s education is important enough for something really radical to take shape. Education is broken – it needs fixing but not piecemeal and not school by school.