Reinventing Capitalism: Diagramming Living Capital Flows in a Green, Sustainable, and Responsible Economy

I often make reference to the difference between the currently predominant three-capitals economic model and the emerging green, sustainable, and socially responsible four-capitals model. I also cite my primary sources for this distinction in the work of Paul Ekins and Paul Hawken (see references below), though the basic ideas go back to older work by John Hicks, Irving Fisher, and many others. A picture is worth a thousand words, so it’s about time I took the trouble to explain this vital difference in greater detail, graphically.

The basic issue is that the current state of capitalism is problematic because it is still at an early stage in its development. Capitalism is incomplete. Its fundamental flaws stem less from inherent contradictions than from resolvable ones. The moral fundamentals of capitalism are identical with those forming the basis of meaningful and productive relationships in natural and social ecologies. Profit, for example, is perhaps best understood as nourishment for life (de Geus, 1997; also see Friedman, 2008; Goldberg, 2009; Greider, 2003; Hawken, 1993; Shermer, 2007). This is in fact the point of the emergent field of ecological economics. Thus, as Hawken, Lovins, and Lovins (1999, p. 5) put it,

“Capitalism, as practiced, is a financially profitable, nonsustainable aberration in human development. What might be called ‘industrial capitalism’ does not fully conform to its own accounting principles. It liquidates its capital and calls it income. It neglects to assign any value to the largest stocks of capital it employs–the natural resources and living systems, as well as the social and cultural systems that are the basis of human capital.”

Ekins, Hillman, and Hutchison (1992, p. 49; also see Ekins, 1992; Hawken, Lovins, & Lovins, 1999)  provide a diagram modeling the incomplete three-capitals economic model (see Figure 1). Here we see the narrowly-defined land, labor, and manufactured capital being burned for consumption, utility, and profits, some of which are recycled back into new investments. Waste and inefficiency do not figure into the process enough to be of concern. Profit is defined in terms of whatever the market will bear and the destruction of the capital resource base.

Figure 2 (from Ekins, Hillman, & Hutchison, 1992, p. 61) diagrams the comprehensively-defined four-capitals model. Now we have human, social, natural, and manufactured capital flowing together in a system that includes all of the resources necessary for life, liberty, and the pursuit of happiness. Profit is defined in terms of waste removal and increasingly lean thinking and acting (Hawken, Lovins, & Lovins, 1999, pp. 125, 133). Since all human suffering, sociopolitical discontent, and environmental degradation can be be expressed in terms of waste (Hawken, Lovins, & Lovins, 1999, p. 59), the four-capitals model is a necessary component of any policy platform that focuses on driving sustainable increases in Genuine Progress Indicators or Happiness Indexes (Anielski, 2007; Cameron, 2008).

One of the major themes of this blog is the concept of living capital.  Though human, social, and natural capital literally involve living beings, capital itself must be brought to life before a four-capitals economy can be made workable (Fisher, 2002, 2005, 2009a, 2009b, 2010). Capital is brought to life via measures that (1) scientifically stand for something that adds up in a way that can be meaningfully expressed in numbers and (2) are expressed in univerally uniform and accessible common languages that function as currencies for the exchange of value.

Scientific and financial instruments of all kinds are calibrated in order to tap the flowing current of value in an economy, giving tangible expression to something inherently abstract and intangible. When we can represent capital via scientific measures, it comes alive in the way that its flow is unimpeded by the inefficiencies of so-called measures that do not add up and that are locally dependent on specific instruments (Fisher, 2002, 2007, 2010). Transaction costs, the most important costs in any economy, are dramatically affected by the quality of measurement (Barzel, 1982; Benham & Benham, 2000). The core problem in re-inventing capitalism is figuring out how to bring social and environmental externalities into the market. Measurement will inevitably be of vital concern in solving this problem. Unfortunately, deep, broad and usually unexamined cultural assumptions about the supposed limits of measures made using tests, surveys, and assessments are needlessly  shackling expectations and prolonging dependence on obsolete technologies. See prior posts in this blog and my publications (Fisher, 2000, 2005, 2006, 2007, 2008a, 2008b, 2009a, 2009b, 2010, etc.) for more on the technical opportunities and economics of metrology.

No matter if we’re measuring bushels, barrels, hours, kilowatts, health, motivation, trust, performance, or environmental quality, scientific measurement opens the door to legal and financial means of establishing value and ownership. When our metrics are not scientific, as is the case with the vast majority of measures of human, social, and natural capital, it is nearly impossible to know what we’re getting for our money and to show how much stock of value we hold. It is accordingly also then impossible to manage the economy systematically and responsibly for long term sustainability. We must then build the metrological infrastructure of human, social, and natural capital (Fisher, 2009a, 2009b) in a new extension of the metric system if we are to ever achieve a comprehensive four-capitals economy that effectively re-invents capitalism.

References

Anielski, M. (2007). The economics of happiness: Building genuine wealth. Gabriola, British Columbia: New Society Publishers.

Barzel, Y. (1982). Measurement costs and the organization of markets. Journal of Law and Economics, 25, 27-48.

Benham, A., & Benham, L. (2000). Measuring the costs of exchange. In C. Ménard (Ed.), Institutions, contracts and organizations: Perspectives from new institutional economics (pp. 367-375). Cheltenham, UK: Edward Elgar.

Cameron, G. (2008, Spring/Summer). Oikos and economy: The Greek legacy in economic thought. PhaenEx, 3(1), 112-33.

de Geus, A. (1997). The living company: Habits for survival in a turbulent business environment (Foreword by Peter M. Senge). Boston, MA: Harvard Business School Press.

Ekins, P. (1992). A four-capital model of wealth creation. In P. Ekins & M. Max-Neef (Eds.), Real-life economics: Understanding wealth creation (pp. 147-15). London: Routledge.

Ekins, P. (1999). Economic growth and environmental sustainability: The prospects for green growth. New York: Routledge.

Ekins, P. (2003, March). Identifying critical natural capital: Conclusions about critical natural capital. Ecological Economics, 44(2-3), 277-292.

Ekins, P., Folke, C., & De Groot, R. (2003, March). Identifying critical natural capital. Ecological Economics, 44(2-3), 159-163.

Ekins, P., Hillman, M., & Hutchison, R. (1992). The Gaia atlas of green economics (Foreword by Robert Heilbroner). New York: Anchor Books.

Ekins, P., Simon, S., Deutsch, L., Folke, C., & De Groot, R. (2003, March). A framework for the practical application of the concepts of critical natural capital and strong sustainability. Ecological Economics, 44(2-3), 165-185.

Ekins, P., & Voituriez, T. (2009). Trade, globalization and sustainability impact assessment: A critical look at methods and outcomes. London, England: Earthscan Publications Ltd.

Fisher, W. P., Jr. (2000). Objectivity in psychosocial measurement: What, why, how. Journal of Outcome Measurement, 4(2), 527-563 [http://www.livingcapitalmetrics.com/images/WP_Fisher_Jr_2000.pdf].

Fisher, W. P., Jr. (2002, Spring). “The Mystery of Capital” and the human sciences. Rasch Measurement Transactions, 15(4), 854 [http://www.rasch.org/rmt/rmt154j.htm].

Fisher, W. P., Jr. (2004, October). Meaning and method in the social sciences. Human Studies: A Journal for Philosophy and the Social Sciences, 27(4), 429-54.

Fisher, W. P., Jr. (2005). Daredevil barnstorming to the tipping point: New aspirations for the human sciences. Journal of Applied Measurement, 6(3), 173-9 [http://www.livingcapitalmetrics.com/images/FisherJAM05.pdf].

Fisher, W. P., Jr. (2006). Meaningfulness, sufficiency, invariance, and conjoint additivity. Rasch Measurement Transactions, 20(1), 1053 [http://www.rasch.org/rmt/rmt201.htm].

Fisher, W. P., Jr. (2007, Summer). Living capital metrics. Rasch Measurement Transactions, 21(1), 1092-3 [http://www.rasch.org/rmt/rmt211.pdf].

Fisher, W. P., Jr. (2008a, March 28). Rasch, Frisch, two Fishers and the prehistory of the Separability Theorem. In  William P. Fisher, Jr. (Chair), Session 67.056. Reading Rasch Closely: The History and Future of Measurement. American Educational Research Association, Rasch Measurement SIG, New York University, New York City [http://www.livingcapitalmetrics.com/images/RaschFisherFrisch.EJHET.pdf].

Fisher, W. P., Jr. (2008b). Vanishing tricks and intellectualist condescension: Measurement, metrology, and the advancement of science. Rasch Measurement Transactions, 21(3), 1118-1121 [http://www.rasch.org/rmt/rmt213c.htm].

Fisher, W. P., Jr. (2009a, November). Invariance and traceability for measures of human, social, and natural capital: Theory and application. Measurement (Elsevier), 42(9), 1278-1287.

Fisher, W. P.. Jr. (2009b). NIST Critical national need idea White Paper: metrological infrastructure for human, social, and natural capital (Tech. Rep.  http://www.livingcapitalmetrics.com/images/FisherNISTWhitePaper2.pdf). New Orleans: LivingCapitalMetrics.com.

Fisher, W. P., Jr. (2010). Bringing human, social, and natural capital to life: Practical consequences and opportunities. In M. Wilson, K. Draney, N. Brown & B. Duckor (Eds.), Advances in Rasch Measurement, Vol. Two (p. in press [http://www.livingcapitalmetrics.com/images/BringingHSN_FisherARMII.pdf]). Maple Grove, MN: JAM Press.

Friedman, D. (2008). Morals and markets: An evolutionary account of the modern world. Palgrave Macmillan.

Goldberg, S. H. (2009). Billions of drops in millions of buckets: Why philanthropy doesn’t advance social progress. New York: Wiley.

Greider, W. (2003). The soul of capitalism: Opening paths to a moral economy. New York: Simon & Schuster.

Hawken, P. (1993). The ecology of commerce: A declaration of sustainability. New York: HarperCollins Publishers.

Hawken, P., Lovins, A., & Lovins, H. L. (1999). Natural capitalism: Creating the next industrial revolution. New York: Little, Brown, and Co.

Korten, D. (2009). Agenda for a new economy: From phantom wealth to real wealth. San Francisco: Berret-Koehler Publishing.

Shermer, M. (2007). The mind of the market: Compassionate apes, competitive humans, and other tales from evolutionary economics. New York: Times Books.

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8 Responses to “Reinventing Capitalism: Diagramming Living Capital Flows in a Green, Sustainable, and Responsible Economy”

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