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.

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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.

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.