Capitalism With Green Swan Characteristics
Tags: Capitalism, Sustainable Development, Sustainable Business, Climate Change, Green

John Elkington

How can our economies become “exponentially positive”?

In 2018, I announced a “product recall” for the Triple Bottom Line (TBL), a term I had coined back in 1994. Shareholder value, increasingly contested around the world, keeps social and environmental impacts — be they negative or positive — at arm’s length. Increasingly, however, forms of non-financial (or perhaps pre-financial) value that have been largely ignored by economists, accountants and investors are being pushed into the spotlight.

The diagram below illustrates the evolving shift away from mindsets and models that obsess with profit maximization and shareholder value to new approaches converging and integrating multiple forms of value. This is the domain of the TBL to date, though the original intention was to promote systemic change. In this Exponential Decade of ours, the ultimate aim must be to prioritize, value and deliver new forms of “system value”.

And if we are to truly transform capitalism, ensuring it is genuinely fit for the future, then a key task must be to transform capitalism’s master discipline of Economics. I confess that I gave up the dismal science after a year at university in 1968, concluding that it had little useful to say about the pressing social and environmental issues of the day.

The long road to System Value (source: Future Fit Foundation, via Green Swans)

So I was fascinated recently to come across these words from the late Nobel laureate Gary Becker about his own reactions to economics when he was at college: “I began to lose interest in economics [. . .] because it did not seem to deal with important social problems. I contemplated transferring to sociology, but found that subject too difficult.”

Shot for being right, at the wrong time

As it happens, I did transfer to sociology and got my first degree in that subject. Interestingly and influentially, Becker went on to apply the tools of economics to social issues related to addiction, discrimination, education, and marriage.

Another of my favourite economists, Nikolai Kondratiev, was shot in 1938 because he told Stalin that capitalism — at the time flat on its face during the Great Depression — would recover and come back even stronger than before the crash. Brave, accurate, but ultimately suicidal. Stalin preferred to think that capitalism was down and would stay down. Not true then and, I suspect, very unlikely to be true now, whatever COVID-19 may visit on us next.

Kondratiev’s work was picked up by Austrian economist Joseph Schumpeter, another huge influence on my thinking, and more recently by Carlota Perez, ditto. As Perez herself argues, new technologies periodically disrupt our economies — and are likely to do so in the coming decades, in the process creating whole new generations of challenges alongside the undoubted benefits.

Another Nobel laureate for economics, George Akerlof, concludes that a key design fault in the discipline is that it has favoured “hard” research over “soft,” numbers over narrative, causation over correlation. From this perspective, physics is hard, sociology soft.

But if economists are to be genuinely helpful in spotting and reining in Black Swan trajectories and blazing Green Swan pathways, they must work out how to embrace the “too difficult” worlds of environmental and social impact, and linked forms of valuation. Interestingly, Akerlof concludes that hard approaches favor silos, whereas the generalism needed to achieve successful cross-pollination and synthesis is too often seen as soft.

Two other Nobel laureates who have blazed a trail to better syntheses are psychologist Daniel Kahneman and the late Elinor Ostrom, a political scientist who blew traditional assumptions about the use of scarce resources out of the proverbial water. Kahneman has explored the illusory nature of much human judgement and decision making, while Ostrom’s Nobel profile explained her work as follows:

It was long unanimously held among economists that natural resources that were collectively used by their users would be over-exploited and destroyed in the long-term. She disproved this idea by conducting field studies on how people in small, local communities manage shared natural resources, such as pastures, fishing waters, and forests. She demonstrated that when natural resources are jointly used by their users, over time rules are established for how these are to be cared for and used in a way that is both economically and ecologically sustainable.

Mobilizing for the climate emergency

Among other economists who have been doing great work in this space is Joseph Stiglitz, another Nobel laureate for economics. Here is how he frames the implications of our intensifying climate emergency:

Advocates of the Green New Deal say there is great urgency in dealing with the climate crisis and highlight the scale and scope of what is required to combat it. They are right. They use the term ‘New Deal’ to evoke the massive response by Franklin Delano Roosevelt and the United States government to the Great Depression.

An even better analogy would be the country’s mobilization to fight World War II. The war on the climate emergency, if correctly waged, would actually be good for the economy — just as the second world war set the stage for America’s golden economic era, with the fastest rate of growth in its history amidst shared prosperity.

Other notable champions of new economic thought are Kate Raworth and Mariana Mazzucato. The former is renowned for her work on “Doughnut Economics” — and explains her approach as follows:

Humanity’s 21st century challenge is to meet the needs of all within the means of the planet. In other words, to ensure that no one falls short on life’s essentials (from food and housing to healthcare and political voice), while ensuring that collectively we do not overshoot our pressure on Earth’s life-supporting systems, on which we fundamentally depend — such as a stable climate, fertile soils, and a protective ozone layer. The Doughnut of social and planetary boundaries is a playfully serious approach to framing that challenge, and it acts as a compass for human progress this century.

As I worked to finish Green Swans, I had the immense pleasure of debating Mariana Mazzucato, perhaps best known for her work on the public sector’s crucial role in driving “moonshot” innovations. The idea was that I would assert that only the private sector could deliver the sort of breakthrough innovation now needed, while she would counter that only the public sector could shape markets in the right way. Not surprisingly, we began the session in furious agreement, concluding that both were essential and neither could do without the other.

Other thinkers who have stimulated our own thinking include Marjorie Kelly, with her brilliant book The Divine Right of Capital. Kelly has noted that she has long been “fascinated by the way an idea becomes antique, intrigued that a concept once considered ordinary can later seem absurd.” One such idea she flagged as headed in that direction, way back in 2001, was shareholder primacy. She might easily have added modern capitalism’s core concept of discounted cash flow.

The pernicious effects of discounted cash flow

In the early stages of our Tomorrow’s Capitalism Inquiry I had a profoundly helpful exchange with Steve Waygood, chief responsible investment officer at Aviva Investors, on “discounted cash flow,” known in the trade as DCF. Here is some of what he told me:

I see DCF as a super wicked problem with profoundly negative real world consequences. Our financial services system should serve society and the real economy. But very few policy makers, politicians or civil society representatives understand how the many different financial services institutions work together to finance the world we live in today and will retire into tomorrow. In the absence of appropriate oversight, society and the real economy serve financial interests, rather than the other way around.

This is dangerous for a range of reasons, particularly because of the short termism inherent within market valuation techniques. DCF valuation is important because it underpins every fundamental analysis in the global market today. But DCF ignores social capital as it is external to the corporate profit and loss statement. DCF ignores future generations with its discount rates. And it assumes away the need to preserve natural capital by assuming all investments can grow infinitely with its Terminal Value.

We are left with millions of professional investors managing trillions of assets on our behalf, all of which largely ignore the one planet boundary condition. Until, that is, we are forced to think about them by governments correcting the market failures, properly pricing natural and social capital and ensuring corporations pay the full price for the goods and services they consume. This is why fiscal measures such as carbon taxes, market mechanisms like emissions trading schemes, and standards and regulations are vital to sustainable development.

They help ensure that the market price reflects the full social and environmental costs, which drives corporate valuation. The valuation of every company helps it to compete: a higher market price means a lower cost of capital; which is a competitive advantage. Sustainable companies should be able to raise capital more cheaply than unsustainable ones.

So what are the implications for us normal folk? Waygood went on to explain:

Given how important this is and that all students aspire to become savers and investors, why isn’t sustainable finance and financial citizenship part of the national curriculum? Too often, the result is that we are left criticizing corporate sustainability platitudes without realizing that a fundamental part of the problem is all of us: How do we vote, spend, save, and invest as individuals?

And that doesn’t just mean how we vote in local and national elections: How many of us with pensions have bothered to check whether shareholder votes cast on our behalf at the annual general meetings of the companies we own reflect values we agree with?”

People are ignored unless they cost or spend money. The interests of future generations are literally discounted. The planet is regarded as a free resource and a limitless litter bin. In short, we have a giant Ponzi scheme for the planet — taking from the future in favor [of ] some of those alive today. However, with over $300 trillion in the global capital market, capital markets have the potential to solve the [UN Sustainable Development Goals] many times over.

And his upbeat — if you, too, believe that we can change sufficiently and fast enough — conclusion?

We do not lack capital. We lack imagination, compassion, and equality of opportunity. So it is time to declare war on these market failures and cure capitalism by restoring conscientiousness at its core.

By heading upstream to tackle such problems, we potentially can influence everything that happens downstream — including the operation of financial markets and business. But for that to both happen and be sustained, we must also work to transform the processes of democracy and, at least as importantly, the mindset that now drives the global sustainability industry. These are some of the themes I cover in Green Swans. Next in this series, ‘Democracy With Green Swan Characteristics’.