Archive for the ‘markets’ Category

Cartesian problems cannot be solved by Cartesian solutions, no matter where those solutions originate

April 13, 2019

Trying to persuade or educate individuals to change the way they think and act, by pointing to the facts or by making emotional or moral appeals, seems always and everywhere to be the default go-to solution for those interested in addressing social and environmental problems. I suppose that approach works to varying degrees for different issues, but behavior change never occurs on as massive a scale as when it is mediated by a technology that enables people to do something they value.

The meaning of McLuhan’s expression, “the medium is the message,” and the long history of the many ways in which technologies transform cultures, for better and for worse, all seem utterly lost and forgotten when it comes to efforts aimed at provoking culture change. The ongoing discourses of environmental and social justice inevitably always seem to come back to targeting individual decisions and behaviors as the only recourse for effecting change.

But history teaches us that, if we want to change our values, we have to figure out how to embed the new terms in virally communicable metaphors that enthrall imaginations and captivate people’s attention and interest. Cultures turn on shared meanings that make some behaviors more likely than others. Good metaphors (“love is a rose;” “God is love”) organize experience in ways that allow infinite creative variations on the theme while also lending just a bit of structure and predictability to how things play out. We need to root new metaphors embodying shared human values in information infrastructures that operationalize consensus standards as the common currencies in which those values circulate.

Though the ongoing culture wars seem to suggest wildly divergent values in play across communities, research in developmental psychology strongly indicates that these differences are not what they seem. No matter what their politics, people need to feel valued, to have stable identities, to be recognized as someone of worth, to have a place of dignity in a community, to be trusted, and to see that others enjoy all of these qualities as well. Experience shows that these conditions cannot be implemented by a simple decree or force of will. Broad general conditions have to be cultivated in ways that make the emergence of abundant social capital resources more likely.

A point of entry into thinking about how those conditions might be created is provided by a 2010 quote in the Miami Herald from Gus Speth, former Dean of the Yale School of Forestry and Environmental Studies (http://tinyurl.com/y7mqtzzn). Speth recounts his sense that scientific solutions to ecosystem and climate problems are insufficient because the actual causes of the problems are greed, selfishness, and apathy. So he appeals to religious leaders for help.

But Speth’s moral diagnosis is as misconceived and uninformed as his original scientific one. As has been the topic of multiple posts in this blog, many of today’s problems cannot be solved using the same kind of Cartesian dualist thinking that was used in creating those problems. Voluminous citations in those earlier posts tap a large literature in the philosophy, history, and social studies of science describing a diverse array of examples of nondualist ecosystem thinking and acting (for instance, see references below). These works show how technological media fuse, embody, distribute, and enact social, moral, aesthetic, economic, and scientific values in complex multilevel metasystems (systems of systems). Moral values of fairness, for instance, are embedded in the quantitative values of measurement technologies exported from laboratories into markets where they inform economic values in trade.

Our task is to learn from these examples so that we can develop and deploy new languages that resonate with new values in analogous ways across similarly diverse cultural domains. Beauty, meaning, and poetry have to be as important as logic, mathematics, and science. Readily available theory and evidence already show how all of these are playing their roles in the evolving cultural transformation.

And, fortunately for humanity as well as for the earth, the new nondualist noncartesian solutions will not and cannot be primarily an outcome of deliberate intentions and conscious willpower. On the contrary, these integrated problem-solution monads are living, organic, self-organizing embodiments of ideas that captivate imaginations and draw creative, entrepreneurial energies in productive directions.

Of course, this kind of thing has happened many times in the past, though it has not previously emerged as a result of the kind of cultivated orchestration occurring today. Williamson, North, Ostrom, Coase, and others describe the roles institutions have played in setting up the rules, roles, and responsibilities of efficient markets. Today, new institutions are arising in a context of reproducible scientific results supporting ownership of, investments in, and profits harvested from sustainable impacts measured and managed via virally communicable media spreading social contagions of love and care. This is coming about because we all seek and value meaning and beauty right along with the capacity to enjoy life, liberty, and prosperity. However differently we each define and experience meaning and beauty, caring for the unity and sameness of the objects of the conversations that we are enables us to balance harmonies and dissonances in endless variations performed by every imaginable kind of rhythmic and melodic musical ensemble.

So instead of expecting different results from repeated applications of the same dualistic thinking that got us into today’s problems, we need to think and act nondualistically. Instead of assuming that solutions do not themselves already presuppose and embody problems of a certain type, we need to think in terms of integrated problem-solution monads deployed throughout ecosystems like species in symbiotic relationships. This is precisely what’s happened historically with the oil-automobile-highway-plastics-engineering ecosystem, and with the germ-disease-pharmaceutical-public health-medicine ecosystem. In each case, financial, market, accounting, regulatory, legal, educational, and other institutions evolved in tandem with the emerging sociotechnical ecology.

Now we face urgent needs to think and act on previously unheard of scales and levels of complexity. We have to work together and coordinate efforts in social and psychological domains with no previous history of communications capable of functioning at the needed efficiencies.

But merely urging people to live differently will never result in the changes that must be brought about. No matter how compelling the facts, no matter how persuasive the emotional power, and no matter how inspirational the moral argument, individual people and small groups simply cannot create new shared standards of behavior out of thin air. We are all products of our times and our sociocultural environments. People cannot be expected to simply wake up one day and spontaneously transform their habits by an effort of will. Instead, the values of fairness, equity, inclusion, and justice we say we live by must be embedded within the very fabric of everyday life, the way hours, meters, liters, degrees, grams, and volts are now.

That is, measurements read off instruments calibrated in fair units of comparison—measurements mathematically equivalent to those made with the scales of justice, measurements expressed in the common metrics of a new international system of units, and measurements as adaptable to local individual improvisations as they are generally comparable and navigable—have to be built into every institution in just the same way existing units of measurement are. Education, health care, social services, human resource management, environmental solutions—all of these and more need to attend closely to ways in which the objects of conversation can be more systematically expressed in meaningful words. Ecosystem thinking demands that everyone and everything in a system of relationships must be consistently kept in proportionate contact, within ranges of reported uncertainty, instead of being disconnected off into separate incommensurable universes of discourse, as occurs in today’s institutions.

These are all monumentally huge challenges. But much of the hardest work has been underway for decades, with important results and resources spreading into widely used applications often taken for granted in the background of largely unexamined assumptions. These results are now well enough established, and the associated social and environmental problems are so serious, that more can and should be done to put them to use.

The need for new values is indeed urgent, but empty talk and doing more of the same is getting us nowhere, at best, and more often is worsening conditions. Conceptual determinations of reproducible mathematical values embodying people’s lived social and moral values in fungible economic values are not just theoretical possibilities or provisional experimental results. They are longstanding, widely available, and practical, as well as beautiful and meaningful. With attentive cultivation and nurturing, there are abundant reasons for believing in a safe, healthy, happy, and prosperous future for humanity and life on earth.

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LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
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Making sustainability impacts universally identifiable, individually owned, efficiently exchanged, and profitable

February 2, 2019

Sustainability impacts plainly and obviously lack common product definitions, objective measures, efficient markets, and associated capacities for competing on improved quality. The absence of these landmarks in the domain of sustainability interests is a result of inattention and cultural biases far more than it is a result of the inherent characteristics or nature of sustainability itself. Given the economic importance of these kinds of capacities and the urgent need for new innovations supporting sustainable development, it is curious how even those most stridently advocating new ways of thinking seem to systematically ignore well-established opportunities for advancing their cause. The wealth of historical examples of rapidly emerging, transformative, disruptive, and highly profitable innovations would seem to motivate massive interest in how extend those successes in new directions.

Economists have long noted how common currencies reduce transaction costs, support property rights, and promote market efficiencies (for references and more information, see previous entries in this blog over the last ten years and more). Language itself is well known for functioning as an economical labor-saving device in the way that useful concepts representing things in the world as words need not be re-invented by everyone for themselves, but can simply be copied. In the same ways that common languages ease communication, and common currencies facilitate trade, so, too, do standards for common product definitions contribute to the creation of markets.

Metrologically traceable measurements make it possible for everyone everywhere to know how much of something in particular there is. This is important, first of all, because things have to be identifiable in shared ways if we are to be able to include them in our lives, socially. Anyone interested in obtaining or producing that kind of thing has to be able to know it and share information about it as something in particular. Common languages capable of communicating specifically what a thing is, and how much of it there is, support claims to ownership and to the fruits of investments in entrepreneurial innovations.

Technologies for precision measurement key to these communications are one of the primary products of science. Instruments measuring in SI units embody common currencies for the exchange of scientific capital. The calibration and distribution of such instruments in the domain of sustainability impact investing and innovation ought to be a top-level priority. How else will sustainable impacts be made universally identifiable, individually owned, efficiently exchanged, and profitable?

The electronics, computer, and telecommunications industries provide ample evidence of precision measurement’s role in reducing transaction costs, establishing common product definitions, and reaping huge profits. The music industry’s use of these technologies combines the science and economics of precision measurement with the artistic creativity of intensive improvisations constructed from instruments tuned to standardized scales that achieve wholly unique levels of individual innovation.

Much stands to be learned, and even more to be gained, in focusing sustainability development on ways in which we can harness the economic power of the profit motive by combining collective efforts with individual imaginations in the domains of human, social, and natural capital. Aligning financial, monetary wealth with the authentic wealth and genuine productivity of gains in human, community, and environmental value ought to be the defining mission of this generation. The time to act is now.

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Why economic growth can and inevitably will be green

October 1, 2018

So, approaching matters once again from yet another point of view, we have Jason Hickel explaining a couple of weeks ago “Why Growth Can’t Be Green.” This article provides yet another example of how the problem is the problem. That is, the way we define problems sets up particular kinds of solutions in advance, and sometimes, as Einstein famously pointed out, problems cannot be solved from within the same conceptual framework that gave rise to them. I’ve expanded on this theme in a number of previous posts, for instance, here.

Hickel takes up the apparent impossibility of aligning economic growth with environmental values. He speaks directly to what he calls the rebound effect, the way that “improvements in resource efficiency drive down prices and cause demand to rise—thus canceling out some of the gains.” But that rebound can happen only as long as the economy remains defined and limited by the alignment of manufactured capital and finance, ignoring the largely unexamined and unconsidered possibility that human, social, and natural capital could be measured well enough to be also aligned with finance.

Hence, as I say, the problem is the problem. Broadening one’s conceptualization of the problem opens up new opportunities that otherwise never come into view.

The Hickel article’s entire focus is then on top-down policy impositions like taxes or a Genuine Progress Index. These presume human, social, and natural capital can only ever exist in dead formations that have to be micromanaged and concretely manipulated, and that efficient markets bringing them to life are inherently and literally unthinkable. (See a short article here for an explanation of the difference between dead and living capital. There’s a lot more where that came from, as is apparent in the previous posts here in this blog.)

The situation could be vastly different than what Hickel imagines. If we could own, buy, and sell products in efficient markets we could reward the production of human, social, and environmental value. In that scenario, when improvements in environmental resource efficiency are obtained, demand for that new environmental value will rise and its price will go down, not the resource’s price.

We ought to be creative enough to figure out how to configure markets so that prices for environmental resources (oil, farmland, metals, etc.) can stay constant or fall without increasing demand for them, as could happen if that demand is counterbalanced and absorbed by rising human, social, and environmental quality capital values.

The question is how to absorb the rebound effect in other forms of capital that grow in demand while holding demand for the natural resource base in check. The vital conceptual distinction is between socialistic centralized planning and control of actual physical entities (people, communities, the environment, and manufactured items), on the one hand, and capitalistic decentralized distributed network effects on abstract transferable representations, on the other. Everyone defaults to the socialist scenario without ever considering there might be a whole other arena in which fruitful possibilities might be imagined.

What if, for instance, we could harness the profit motive to promote growth in genuine human, social, and environmental value? What if we were able to achieve qualitatively meaningful increases in authentic wealth that were economically contingent on reduced natural resource consumption? What if the financial and substantive value profits that could be had meant that resource consumption could be reduced by the same kinds of factors as have been realized in the context of Moore’s Law? What if a human economics of genuine value could actually result in humanity being able to adjust the global thermostat up or down in small increments by efficiently rewarding just the right combinations of policies and practices at the right times and places in the right volumes?

The only way that could ever happen is if people are motivated to do the right thing for the earth and for humanity because it is the right thing for them and their families. They have to be able to own their personal shares of their personal stocks of human, social, and natural capital. They have to be able to profit from investments in their own and others’ shares. They will not act on behalf of the earth and humanity only because it is the right thing to do. There has to be evidence and explanations of how everyone is fairly held accountable to the same standards, and has the same opportunities for profit and loss as anyone else. Then, and only then, it seems, will human, social, and environmental value become communicable in a viral contagion of good will.

Socialism has been conclusively proven unworkable, for people, communities, and the environment, as well as financially. But a human, social, and natural capitalism has hardly even been articulated, much less tried out. How do we make human, social, and natural capital fungible? How might the economy transcend its traditional boundaries and expand itself beyond the existing alignment of manufactured capital and finance?

It’s an incredibly complex proposal, but also seems like such a simple thing. The manufactured capital economy uses the common language of good measurement to improve quality, to simplify management communications, and to lower transaction costs in efficient markets. So what should we do if we want to correct the imbalanced negative impacts on people, communities, and the environment created by the misplaced emphasis on aligning only manufactured capital and financial capital?

As has been repeatedly proposed for years in this blog, maybe we should use the manufactured capital markets as a model and use good measurement to improve the quality of human, social, and environmental capital, to simplify communications and management, to lower transaction costs, and to align the genuine human, social, and environmental value created with financial value in efficient markets.

Of course, grasping that as viable, feasible, and desirable requires understanding that substantively meaningful precision measurement is something quite different from what usually passes for quantification. And that is an entirely different story, though one taken up repeatedly in previous entries in this blog, of course….

 

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New Ideas on How to Realize the Purpose of Capital

September 20, 2018

I’d like to offer the following in reply to James Militzer, at https://nextbillion.net/deciphering-emersons-tears-time-impact-investing-lower-expectations/.

Rapid advances toward impact investing’s highest goals of social transformation are underway in quiet technical work being done in places no one is looking. That work shares Jed Emerson’s sentiments expressed at the 2017 Social Capital Markets conference, as he is quoted in Militzer’s NextBillion.net posting, that “The purpose of capital is to advance a more progressively free and just experience of life for all.” And he is correct in what Militzer reported he said the year before, that we need a “real, profound critique of current practices within financial capitalism,” one that would “require real change in our own behavior aside from adding a few funds to our portfolios here or augmenting a reporting process there.”

But the efforts he and others are making toward fulfilling that purpose and articulating that critique are incomplete, insufficient, and inadequate. Why? How? Language is the crux of the matter, and the issues involved are complex and technical. The challenge, which may initially seem simplistic or naive, is how to bring human, social, and environmental values into words. Not just any words, but meaningful words in a common language. What is most challenging is that this language, like any everyday language, has to span the range from abstract theoretical ideals to concrete local improvisations.

That means it cannot be like our current languages for expressing human, social, and environmental value. If we are going to succeed in aligning those forms of value with financial value, we have a lot of work to do.

Though there is endless talk of metrics for managing sustainable impacts, and though the importance of these metrics for making sustainability manageable is also a topic of infinite discussion, almost no one takes the trouble to seek out and implement the state of the art in measurement science. This is a crucial way, perhaps the most essential way, in which we need to criticize current practices within financial capitalism and change our behaviors. Oddly, almost no one seems to have thought of that.

That is, one of the most universally unexamined assumptions of our culture is that numbers automatically stand for quantities. People who analyze numeric data are called quants, and all numeric data analysis is referred to as quantitative. That is the case, but almost none of these quants and quantitative methods involve actually defining, modeling, identifying, evaluating, or applying an substantive unit of something real in the world that can be meaningfully represented by numbers.

There is, of course, an extensive and longstanding literature on exactly this science of measurement. It has been a topic of research, philosophy, and practical applications for at least 90 years, going back to the work of Thurstone at the University of Chicago in the 1920s. That work continued at the University of Chicago with Rasch’s visit there in 1960, with Wright’s adoption and expansion of Rasch’s theory and methods, and with the further work done by Wright’s students and colleagues in the years since.

Most importantly, over the last ten years, metrologists, the physicists and engineers who maintain and improve the SI units, the metric system, have taken note of what’s been going on in research and practice involving the approaches to measurement developed by Rasch, Wright, and their students and colleagues (for just two of many articles in this area, see here and here). The most recent developments in this new metrology include

(a) initiatives at national metrology institutes globally (Sweden and the UK, Portugal, Ukraine, among others) to investigate potentials for a new class of unit standards;

(b) a special session on this topic at the International Measurement Confederation (IMEKO) World Congress in Belfast on 5 September 2018;

(c) the Journal of Physics Conference Series proceedings of the 2016 IMEKO Joint Symposium hosted by Mark Wilson and myself at UC Berkeley;

(d) the publication of a 2017 book on Ben Wright edited by Mark Wilson and myself in Springer’s Series on Measurement Science and Technology; and

(e) the forthcoming October 2018 special issue of Elsevier’s Measurement journal edited by Wilson and myself, and a second one currently in development.

There are profound differences between today’s assumptions about measurement and how a meaningful art and science of precision measurement proceeds. What passes for measurement in today’s sustainability economics and accounting are counts, percentages, and ratings. These merely numeric metrics do not stand for anything that adds up the way they do. In fact, it’s been repeatedly demonstrated over many years that these kinds of metrics measure in a unit that changes size depending on who or what is measured, who is measuring, and what tool is used to measure. What makes matters even worse is that the numbers are usually taken to be perfectly precise, as uncertainty ranges, error terms, and confidence intervals are only sporadically provided and are usually omitted.

Measurement is not primarily a matter of data analysis. Measurement requires calibrated instruments that can be read as standing for a given amount of something that stays the same, within the uncertainty range, no matter who is measuring, no matter what or who is measured, and no matter what tool is used. This is, of course, quite an accomplishment when it can be achieved, but it is not impossible and has been put to use in large scale practical ways for several decades (for instance, see here, here, and here). Universally accessible instruments calibrated to common unit standards are what make society in general, and markets in particular, efficient in the way of projecting distributed network effects, turning communities into massively parallel stochastic computers (as W. Brian Arthur put it on p. 6 of his 2014 book, Complexity Economics).

These are not unexamined assumptions or overly ideal theoretical demands. They are pragmatic ways of adapting to emergent patterns in various kinds of data that have repeatedly been showing themselves around the world for decades. Our task is to literally capitalize on these nonhuman forms of life by creating multilevel, complex ecosystems of relationships with them, letting them be what they are in ways that also let us represent ourselves to each other. (Emerson quotes Bruno Latour to this effect on page 136 in his new book, The Purpose of Capital; those familiar with my work will know I’ve been reading and citing Latour since the early 1980s).

So it seems to me that, however well-intentioned those promoting impact investing may be, there is little awareness of just how profound and sweeping the critique of current practices needs to be, or of just how much our own behaviors are going to have to change. There are, however, truly significant reasons to be optimistic and hopeful. The technical work being done in measurement and metrology points toward possibilities for extending everyday language into a pragmatic idealism that does not require caving in to either varying local circumstances or to authoritarian dictates.

The upside of the situation is that, as so often happens in the course of human history, this critique and the associated changes are likely to have that peculiar quality captured in the French expression, “plus ça change, plus c’est la même chose” (the more things change, the more they stay the same). The changes in process are transformative, but will also be recognizable repetitions of human scale patterns.

In sum, what we are doing is tuning the instruments of the human, social, and environmental sciences to better harmonize relationships. Just as jazz, folk, and world music show that creative improvisation is not constrained by–but is facilitated by–tuning standards and high tech solutions, so, too, can we make that the case in other areas.

For instance, in my presentation at the IMEKO World Congress in Belfast on 5 September, I showed that the integration of beauty and meaning we have within our grasp reiterates principles that date back to Plato. The aesthetics complement the mathematics, with variations on the same equations being traceable from the Pythagorean theorem to Newton’s laws to Rasch’s models for measurement (see, for instance, Fisher & Stenner, 2013). In many ways, the history of science and philosophy continues to be a footnote to Plato.

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A Yet Simpler Take on Making Sustainability Self-Sustaining

September 1, 2018

The point of focusing on sustainability is to balance human interests with a long term view of life on earth. Depleting resources as though they will be always available plainly is no way to plan for a safe and pleasant future. But it seems to me something is missing in the way we approach sustainability. Every time I see any efforts aimed at rebalancing resource usage with a long term view of the Earth’s capacity to support us, what do I see? I see solutions that cost a lot, and people saying that the costs are the price we have to pay for the mistakes that have been made, and for a viable future. And so I also see a lot of procrastination, delays, and reluctance to commit to sustainable policies and practices.

Why? Because, first, there are a great many people who cannot afford to live in the world as it is, right now, simply bearing their existing day-to-day costs. Even in the richest countries, huge proportions of people live hand to mouth, or very nearly so. Second, it’s hard to detect and punish freeloaders. Many people, companies, and governments are willing to hold off committing to sustainability in the hope that some technological fix will come along and spare them avoidable costs.

So, my question is, and I do not say this at all in jest or with any sense of irony or sarcasm: how do we make sustainability fun and profitable? How can we make sustainability economically self-sustaining? How can we make sustainability into a growth industry?

My answer to those questions is, by improving the quality of information on sustainability impacts. What does that mean? Why should that have anything to do with making sustainability fun and profitable? What improving the quality of information on sustainability impacts means is measuring it well, using methods and models that have been used in research and practice for more than 90 years. What we need is a Human, Social, and Natural Capital Metric System. or an International System of Units for Human, Social, and Natural Capital.

As we all know from the existing SI (metric system) units, high quality information makes it much easier to communicate value. Easier communication means lower transaction costs, and lower transaction costs mean that it becomes very inexpensive to find out how much of a sustainability impact is available, and what quality it is. High quality information enables grassroots bottom up efforts coordinating the decisions and behaviors of everyone everywhere. Managers would be able to dramatically improve quality in domains of human, social, and environmental value the way they do now for manufactured value. And investors would be able to reward innovation in those areas in ways they currently cannot.

For instance, with high quality sustainability impact measures, you’d be able to buy shares of stock in a new global carbon reduction effort that realistically projects it is on track to reverse climate change back its 1980 status. If someone came out with a better carbon reduction product that would make it possible to get the job done faster or at lower cost, we would have the information we need to quickly shift the flow of resources to the better product.

Speaking to other components of the UN’s Sustainability Development Goals, maybe people need to wonder why they cannot go buy 250 units of additional literacy right now? Why can’t you get a good price on a specific amount of literacy gain for your ten-year-old child from a few minutes of competitive shopping? And while you’re at it, maybe you could catch a special sale on 470 units of improved physical functionality for your great aunt who just had a hip replacement. Oh, she doesn’t need it because she’s got herself listed in a health capital investment bond likely to pay a 6% return? Well, maybe you should sink some funds into one of those contracts!

To take up the SDG 16.1 issue, if efforts to reduce armed violence were measured with the same level of information quality as kilowatt hours, that form of social capital product would be available in market transactions just the same way manufactured capital products like electricity are now. Conversely, your personal efforts at reducing armed violence, or improving someone’s literacy, or helping your great aunt with gains in physical functionality—all of these are investments of your skills and abilities that will pay back cash value to you. And because having fun with the kids, and getting out for recreational activities, are healthful things to do, enjoyment also should pay dividends.

Maybe this focus on fun and profit in making sustainability economically self-sustaining might finally find some traction for efforts in this area. Sustainability commerce could be a way of talking about these issues that will speak to matters more directly and practically. We’ll see how that works out as I try it on people in the near future.

 

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LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
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Metrics, Stocks, Shares, and Secure Ledger Accounts for Living Capital: Getting the Information into the Hands of Individual Decision Makers

August 30, 2018

Individual investments in, and returns from, shares of various kinds of human, social, and natural capital stocks will be tracked in secure online accounting ledgers, often referred to generically using the Blockchain brand name. A largely unasked and unanswered question is just what kind of data would best be tracked in secure ledgers. To be meaningful, entries in such accounts will have to stand for something real in the world that is represented in a common language interpretable to anyone capable of reading the relevant signs and symbols. Since we are talking about amounts of things that vary, measurement will unavoidably be a factor.

High quality measurement is essential to the manageability and profitability of investments of all kinds, whether in manufactured capital and property, or in literacy, numeracy, mental and physical health, sociability, and environmental quality (human, social, and natural capital). The measurability and manageability of these intangible factors has achieved significant levels of scientific precision and rigor over the last 90 and more years.

This development is of increasing interest to economists and accountants who have long envisioned ways of reinventing capitalism that do not assume the only alternative is some form of socialism or communism (see references listed below). Many of today’s economic problems may follow from capitalism’s incompleteness. More specifically, we may be suffering from the way in which manufactured capital alone has been been brought to life, economically speaking, while human, social, and natural capital have not (Fisher, 2002, 2007, 2009a/b, 2010a/b, 2011a/b, 2012ab, 2014, etc.).

One in particular who speaks directly to an essential issue that must be addressed in creating an economy of authentic wealth and genuine productivity is Paul Hawken (2007, pp. 21-22), who says that Friedrich Hayek foresaw

“a remedy for the basic expression of the totalitarian impulse: ensuring that information and the right to make decisions are co-located. To achieve this, one can either move the information to the decision makers, or move decision making rights to the information. The movement strives to do both. The earth’s problems are everyone’s problems, and what modern technology and the movement can achieve together is to distribute problem solving tools.”

Hayek (1945, 1948, 1988; Frantz & Leeson, 2013) is well known for his focus on a distinction between a mechanical definition of individuals as uniform and homogenous, and a more vital sense of economic “true individuals” as complex and interdependent. To create efficient markets for the production of authentic wealth, we need to figure out how to extend the “true individuals” of manufactured capital markets into new markets for human, social, and natural capital (Fisher, 2014).

The distributed problem solving tools we need to support the decision making of “true” individuals are secure online ledgers accounting for investments in measured amounts of authentic wealth. Efficient markets are functions of individual processes that create wholes greater than their sums. The multiplier effect that makes this possible depends on transparent communication. Words, including number words, have to mean something specific and distinct. This is where the value of systematic measurement and metrology comes to bear. This is why we need an Intangible Assets Metric System.

For as long as economists have been concerned with markets, philosophers have been pointing out that society is an effect of shared symbol systems. In both cases, economists and philosophers are focused on the fact that it is only when people have a common language that an idea, a meme, can go viral, that a market can seem to have a mind of its own, and science can maintain an ever-increasing pace of technical innovation.

Our aim is to create the information that will populate the entries in the secure ledger accounts people use to track and manage their investments in literacy, numeracy, health, social, and natural capital. These entries will be posted right alongside their existing entries for investments in manufactured capital and property, which includes everything from groceries to autos to electronics to homes.

But the new ledger accounts will be different from today’s in important ways. Many current accounting entries are ultimately written off as costs producing untracked and unaccountable returns. We simply spend the money on groceries or school tuition or a doctor visit. The income is logged, and so are the expenses. We can see that, yes, buying groceries is an investment of a kind, since we profit from it by enjoying the processes of cooking, sharing, and eating tasty food, by avoiding hunger, and by sustaining good health.

Investments are tracked in a different way, though. Money is not just spent and kissed goodbye. Instead, investment funds are loaned to or leased by someone else who is expected to be able to increase the value of those funds. There are often no guarantees of an increase, but the invested value is associated with a proportionate share in the total value of the business. As the business grows or fails, so does the investment.

In much the same way, if we had the information available to us, we could track the returns on the investments we make in food, education, or health care. If we track the impacts of our dietary choices, we would be able to see if and when the investments we make result in healthy outcomes. The information brought to bear will have to include systematic advice relevant to one’s age, sex, pre-existing conditions, genetic propensities, etc. Additional information on the returns on one’s investments in a healthy diet should also be made available, as might be found in the expected income or expenses associated with the consequences of what is eaten, and how much of it. Sometimes there will be room for improvement, for example, if the foods we eat are too sugary or fatty, or if we eat too much. Other times, maintaining a healthy, varied diet may be all that is needed to see a consistent positive return on investment.

Public reports will allow us all to learn from one another. The ability to communicate in a common language and to see what has worked for others will enable everyone to experiment with new ways of doing things. People with common food interests or problems, for instance, will be able quickly evaluate the relevance and benefits of other people’s approaches or solutions. Because of the ways in which communication and community go together, it may be reasonable to hope that new levels of innovation, diversity, tolerance, and respect will follow.

Many aspects of work, education and health care are already undergoing transformations that move their processes out of the usual office, school and hospital environments. These changes will be accelerated as distributed network effects take hold in each of these various markets.

It is easy to see how the Internet of things may evolve to be the medium in which we manage relationships of all kinds, from education and school to health and safety to work and career. Secure ledgers immune from hacking will be essential. And an important health factor will be to know how much relationship management is enough, and when it’s time to get out into the world. That balancing factor will be a key aspect of a successful approach to connecting information on authentic wealth with the individual decision makers growing it and living it.

References

Andriessen, D. (2003). Making sense of intellectual capital: Designing a method for the valuation of intangibles. Oxford, England: Butterworth-Heinemann.

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

Cadman, D. (1986). Money as if people mattered. In P. Ekins &  Staff of The Other Economic Summit (Eds.), The living economy: A new economics in the making (pp. 204-210). London: Routledge & Kegan Paul.

Eisler, R. (2007). The real wealth of nations: Creating a caring economics. San Francisco, California: Berrett-Koehler Publishers, Inc.

Ekins, P. (1992). A four-capital model of wealth creation. In P. Ekins & M. Max-Neef (Eds.), Real-life economics: Understanding wealth creation (pp. 147-155). London: Routledge.

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

Ekins, P., Dresner, S., & Dahlstrom, K. (2008, March/April). The four-capital method of sustainable development evaluation. European Environment, 18(2), 63-80.

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

Ekins, P., & Max-Neef, M. A. (Eds.). (1992). Real-life economics: Understanding wealth creation. London: Routledge.

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. (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. (2007, Summer). Living capital metrics. Rasch Measurement Transactions, 21(1), 1092-1093 [http://www.rasch.org/rmt/rmt211.pdf].

Fisher, W. P., Jr. (2009a, November). Invariance and traceability for measures of human, social, and natural capital: Theory and application. Measurement, 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.nist.gov/tip/wp/pswp/upload/202_metrological_infrastructure_for_human_social_natural.pdf). Washington, DC: National Institute for Standards and Technology.

Fisher, W. P., Jr. (2010a). Measurement, reduced transaction costs, and the ethics of efficient markets for human, social, and natural capital., Bridge to Business Postdoctoral Certification, Freeman School of Business, Tulane University (p. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2340674).

Fisher, W. P., Jr. (2010b, 13 January). Reinventing capitalism: Diagramming living capital flows in a green, sustainable, and responsible economy. Retrieved from LivingCapitalMetrics.com: https://livingcapitalmetrics.wordpress.com/2010/01/13/reinventing-capitalism/.

Fisher, W. P., Jr. (2011a). Bringing human, social, and natural capital to life: Practical consequences and opportunities. Journal of Applied Measurement, 12(1), 49-66.

Fisher, W. P., Jr. (2011b). Measuring genuine progress by scaling economic indicators to think global & act local: An example from the UN Millennium Development Goals project. LivingCapitalMetrics.com. Retrieved 18 January 2011, from Social Science Research Network: http://ssrn.com/abstract=1739386.

Fisher, W. P., Jr. (2012a). Measure and manage: Intangible assets metric standards for sustainability. In J. Marques, S. Dhiman & S. Holt (Eds.), Business administration education: Changes in management and leadership strategies (pp. 43-63). New York: Palgrave Macmillan.

Fisher, W. P., Jr. (2012b, May/June). What the world needs now: A bold plan for new standards [Third place, 2011 NIST/SES World Standards Day paper competition]. Standards Engineering, 64(3), 1 & 3-5 [http://ssrn.com/abstract=2083975].

Fisher, W. P., Jr. (2014, Autumn). The central theoretical problem of the social sciences. Rasch Measurement Transactions, 28(2), 1464-1466.

Frantz, R., & Leeson, R. (Eds.). (2013). Hayek and behavioral economics. (Archival Insights Into the Evolution of Economics). New York: Palgrave Macmillan.

Gleeson-White, J. (2015). Six capitals, or can accountants save the planet? Rethinking capitalism for the 21st century. New York: Norton.

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

Griliches, Z. (1994, March). Productivity, R&D, and the data constraint. American Economic Review, 84(1), 1-23.

Grootaert, C. (1998). Social capital: The missing link? (Vol. 3). Social Capital Intiative Working Paper). Washington, D.C.: The World Bank.

Hand, J. R. M., & Lev, B. (Eds.). (2003). Intangible assets: Values, measures, and risks. Oxford Management Readers). Oxford, England: Oxford University Press.

Hart, S. L. (2005). (2007). Capitalism at the crossroads: Aligning business, earth, and humanity (Foreword by Al Gore) (2nd ed.). Wharton School Publishing.

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

Hawken, P. (2007). Blessed unrest: How the largest movement in the world came into being and why no one saw it coming. New York: Viking Penguin.

Hayek, F. A. (1945, September). The use of knowledge in society. American Economic Review, 35, 519-530. (Rpt. in Individualism and economic order (pp. 77-91). Chicago: University of Chicago Press.)

Hayek, F. A. (1955). The counter revolution of science. Glencoe, Illinois: Free Press.

Hayek, F. A. (1988). The fatal conceit: The errors of socialism (W. W. Bartley, III, Ed.) (Vol. I). The Collected Works of F. A. Hayek. Chicago: University of Chicago Press.

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

Krueger, A. B. (Ed.). (2009). Measuring the subjective well-being of nations: National accounts of time use and well-being. National Bureau of Economic Research Conference Reports). Chicago, Illinois: University of Chicago Press.

Swann, G. M. P. (2001). “No Wealth But Life”: When does conventional wealth create Ruskinian wealth. European Research Studies, 4(3-4), 5-18.

Vemuri, A. W., & Costanza, R. (2006, 10 June). The role of human, social, built, and natural capital in explaining life satisfaction at the country level: Toward a National Well-Being Index. Ecological Economics, 58(1), 119-133.

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LivingCapitalMetrics Blog by William P. Fisher, Jr., Ph.D. is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.
Based on a work at livingcapitalmetrics.wordpress.com.
Permissions beyond the scope of this license may be available at http://www.livingcapitalmetrics.com.

Self-Sustaining Sustainability, Once Again, Already

August 12, 2018

The urgent need for massive global implementations of sustainability policies and practices oddly and counterproductively has not yet led to systematic investments in state of the art sustainability metric standards. My personal mission is to contribute to meeting this need. Longstanding, proven resources in the art and science of precision instrumentation calibration and explanatory theory are available to address these problems. In the same way technical standards for measuring length, mass, volume, time, energy, light, etc. enable the coordination of science and commerce for manufactured capital and property, so, too, will a new class of standards for measuring human, social, and natural capital.

This new art and science contradicts common assumptions in three ways. First, contrary to popular opinion that measuring these things is impossible, over 90 years of research and practice support a growing consensus among weights and measures standards engineers (metrologists) and social and psychological measurement experts that relevant unit standards are viable, feasible, and desirable.

Common perceptions are contradicted in a second way in that measurement of this kind does not require reducing human individuality to homogenized uniform sameness. Instead of a mechanical metaphor of cogs in a machine, the relevant perspective is an organic or musical one. The goal is to ensure that local uniqueness and creative improvisations are freely expressed in a context informed by shared standards (like DNA, or a musical instrument tuning system).

The third way in which much of what we think we know is mistaken concerns how to motivate adoption of sustainability policies and practices. Many among us are fearful that neither the general population nor its leaders in government and business care enough about sustainability to focus on implementing solutions. But finding the will to act is not the issue. The problem is how to create environments in which new sustainable forms of life multiply and proliferate of their own accord. To do this, people need means for satisfying their own interests in life, liberty, and the pursuit of happiness. The goal, therefore, is to organize knowledge infrastructures capable of informing and channeling the power of individual self-interest. The only way mass scale self-sustaining sustainable economies will ever happen is by tapping the entrepreneurial energy of the profit motive, where profit is defined not just in financial terms but in the quality of life and health terms of authentic wealth and genuine productivity.

We manage what we measure. If we are to collectively, fluidly, efficiently, and innovatively manage the living value of our human, social, and natural capital, we need, first, high quality information expressed in shared languages communicating that value. Second, we need, to begin with, new scientific, legal, economic, financial, and governmental institutions establishing individual rights to ownership of that value, metric units expressing amounts of that value, conformity audits for ascertaining the accuracy and precision of those units, financial alignments of the real value measured with bankable dollar amounts, and investment markets to support entrepreneurial innovations in creating that value.

The end result of these efforts will be a capacity for all of humanity to pull together in common cause to create a sustainable future. We will each be able to maximize our own personal potential at the same time we contribute to the greater good. We will not only be able to fulfill the potential of our species as stewards of the earth, we will have fun doing it! For technical information resources, see below. PDFs are available on request, and can often be found freely available online.

Self-Sustaining Sustainability

Relevant Information Resources

William P. Fisher, Jr., Ph.D.

Barney, M., & Fisher, W. P., Jr. (2016). Adaptive measurement and assessment. Annual Review of Organizational Psychology and Organizational Behavior, 3, 469-490.

Fisher, W. P., Jr. (1997). Physical disability construct convergence across instruments: Towards a universal metric. Journal of Outcome Measurement, 1(2), 87-113.

Fisher, W. P., Jr. (1999). Foundations for health status metrology: The stability of MOS SF-36 PF-10 calibrations across samples. Journal of the Louisiana State Medical Society, 151(11), 566-578.

Fisher, W. P., Jr. (2000). Objectivity in psychosocial measurement: What, why, how. Journal of Outcome Measurement, 4(2), 527-563.

Fisher, W. P., Jr. (2002). “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. (2003). The mathematical metaphysics of measurement and metrology: Towards meaningful quantification in the human sciences. In A. Morales (Ed.), Renascent pragmatism: Studies in law and social science (pp. 118-153). Brookfield, VT: Ashgate Publishing Co.

Fisher, W. P., Jr. (2004). Meaning and method in the social sciences. Human Studies: A Journal for Philosophy & Social Sciences, 27(4), 429-454.

Fisher, W. P., Jr. (2007). Living capital metrics. Rasch Measurement Transactions, 21(1), 1092-1093 [http://www.rasch.org/rmt/rmt211.pdf].

Fisher, W. P., Jr. (2009, November 19). Draft legislation on development and adoption of an intangible assets metric system. Living Capital Metrics blog: https://livingcapitalmetrics.wordpress.com/2009/11/19/draft-legislation/.

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

Fisher, W. P., Jr. (2009). NIST Critical national need idea White Paper: metrological infrastructure for human, social, and natural capital (http://www.nist.gov/tip/wp/pswp/upload/202_metrological_infrastructure_for_human_social_natural.pdf). Washington, DC: National Institute for Standards and Technology.

Fisher, W. P., Jr. (2010, 22 November). Meaningfulness, measurement, value seeking, and the corporate objective function: An introduction to new possibilities. LivingCapitalMetrics.com, Sausalito, California.

Fisher, W. P., Jr. (2010). Measurement, reduced transaction costs, and the ethics of efficient markets for human, social, and natural capital. Bridge to Business Postdoctoral Certification, Freeman School of Business, Tulane University (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2340674).

Fisher, W. P., Jr. (2010). The standard model in the history of the natural sciences, econometrics, and the social sciences. Journal of Physics Conference Series, 238(1), 012016.

Fisher, W. P., Jr. (2011). Bringing human, social, and natural capital to life: Practical consequences and opportunities. In N. Brown, B. Duckor, K. Draney & M. Wilson (Eds.), Advances in Rasch Measurement, Vol. 2 (pp. 1-27). Maple Grove, MN: JAM Press.

Fisher, W. P., Jr. (2012). Measure and manage: Intangible assets metric standards for sustainability. In J. Marques, S. Dhiman & S. Holt (Eds.), Business administration education: Changes in management and leadership strategies (pp. 43-63). New York: Palgrave Macmillan.

Fisher, W. P., Jr. (2012). What the world needs now: A bold plan for new standards [Third place, 2011 NIST/SES World Standards Day paper competition]. Standards Engineering, 64(3), 1 & 3-5 [http://ssrn.com/abstract=2083975].

Fisher, W. P., Jr. (2015). A probabilistic model of the law of supply and demand. Rasch Measurement Transactions, 29(1), 1508-1511 [http://www.rasch.org/rmt/rmt291.pdf].

Fisher, W. P., Jr. (2015). Rasch measurement as a basis for metrologically traceable standards. Rasch Measurement Transactions, 28(4), 1492-1493 [http://www.rasch.org/rmt/rmt284.pdf].

Fisher, W. P., Jr. (2015). Rasch metrology: How to expand measurement locally everywhere. Rasch Measurement Transactions, 29(2), 1521-1523.

Fisher, W. P., Jr. (2017, September). Metrology, psychometrics, and new horizons for innovation. 18th International Congress of Metrology, Paris, 10.1051/metrology/201709007.

Fisher, W. P., Jr. (2017). A practical approach to modeling complex adaptive flows in psychology and social science. Procedia Computer Science, 114, 165-174.

Fisher, W. P., Jr. (2018). How beauty teaches us to understand meaning. Educational Philosophy and Theory, in review.

Fisher, W. P., Jr. (2018). Separation theorems in econometrics and psychometrics: Rasch, Frisch, two Fishers, and implications for measurement. Scandinavian Economic History Review, in review.

Fisher, W. P., Jr., Harvey, R. F., & Kilgore, K. M. (1995). New developments in functional assessment: Probabilistic models for gold standards. NeuroRehabilitation, 5(1), 3-25.

Fisher, W. P., Jr., Harvey, R. F., Taylor, P., Kilgore, K. M., & Kelly, C. K. (1995). Rehabits: A common language of functional assessment. Archives of Physical Medicine and Rehabilitation, 76(2), 113-122.

Fisher, W. P., Jr., & Stenner, A. J. (2011, January). Metrology for the social, behavioral, and economic sciences (Social, Behavioral, and Economic Sciences White Paper Series).National Science Foundation: http://www.nsf.gov/sbe/sbe_2020/submission_detail.cfm?upld_id=36.

Fisher, W. P., Jr., & Stenner, A. J. (2011, August 31 to September 2). A technology roadmap for intangible assets metrology. In Fundamentals of measurement science. International Measurement Confederation (IMEKO) TC1-TC7-TC13 Joint Symposium, http://www.db-thueringen.de/servlets/DerivateServlet/Derivate-24493/ilm1-2011imeko-018.pdf, Jena, Germany.

Fisher, W. P., Jr., & Stenner, A. J. (2016). Theory-based metrological traceability in education: A reading measurement network. Measurement, 92, 489-496.

Fisher, W. P., Jr., & Wilson, M. (2015). Building a productive trading zone in educational assessment research and practice. Pensamiento Educativo: Revista de Investigacion Educacional Latinoamericana, 52(2), 55-78.

Pendrill, L., & Fisher, W. P., Jr. (2013). Quantifying human response: Linking metrological and psychometric characterisations of man as a measurement instrument. Journal of Physics Conference Series, 459, 012057.

Pendrill, L., & Fisher, W. P., Jr. (2015). Counting and quantification: Comparing psychometric and metrological perspectives on visual perceptions of number. Measurement, 71, 46-55.

 

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Excerpts and Notes from Goldberg’s “Billions of Drops…”

December 23, 2015

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

p. 8:
Transaction costs: “…nonprofit financial markets are highly disorganized, with considerable duplication of effort, resource diversion, and processes that ‘take a fair amount of time to review grant applications and to make funding decisions’ [citing Harvard Business School Case No. 9-391-096, p. 7, Note on Starting a Nonprofit Venture, 11 Sept 1992]. It would be a major understatement to describe the resulting capital market as inefficient.”

A McKinsey study found that nonprofits spend 2.5 to 12 times more raising capital than for-profits do. When administrative costs are factored in, nonprofits spend 5.5 to 21.5 times more.

For-profit and nonprofit funding efforts contrasted on pages 8 and 9.

p. 10:
Balanced scorecard rating criteria

p. 11:
“Even at double-digit annual growth rates, it will take many years for social entrepreneurs and their funders to address even 10% of the populations in need.”

p. 12:
Exhibit 1.5 shows that the percentages of various needs served by leading social enterprises are barely drops in the respective buckets; they range from 0.07% to 3.30%.

pp. 14-16:
Nonprofit funding is not tied to performance. Even when a nonprofit makes the effort to show measured improvement in impact, it does little or nothing to change their funding picture. It appears that there is some kind of funding ceiling implicitly imposed by funders, since nonprofit growth and success seems to persuade capital sources that their work there is done. Mediocre and low performing nonprofits seem to be able to continue drawing funds indefinitely from sympathetic donors who don’t require evidence of effective use of their money.

p. 34:
“…meaningful reductions in poverty, illiteracy, violence, and hopelessness will require a fundamental restructuring of nonprofit capital markets. Such a restructuring would need to make it much easier for philanthropists of all stripes–large and small, public and private, institutional and individual–to fund nonprofit organizations that maximize social impact.”

p. 54:
Exhibit 2.3 is a chart showing that fewer people rose from poverty, and more remained in it or fell deeper into it, in the period of 1988-98 compared with 1969-1979.

pp. 70-71:
Kotter’s (1996) change cycle.

p. 75:
McKinsey’s seven elements of nonprofit capacity and capacity assessment grid.

pp. 94-95:
Exhibits 3.1 and 3.2 contrast the way financial markets reward for-profit performance with the way nonprofit markets reward fund raising efforts.

Financial markets
1. Market aggregates and disseminates standardized data
2. Analysts publish rigorous research reports
3. Investors proactively search for strong performers
4. Investors penalize weak performers
5. Market promotes performance
6. Strong performers grow

Nonprofit markets
1. Social performance is difficult to measure
2. NPOs don’t have resources or expertise to report results
3. Investors can’t get reliable or standardized results data
4. Strong and weak NPOs spend 40 to 60% of time fundraising
5. Market promotes fundraising
6. Investors can’t fund performance; NPOs can’t scale

p. 95:
“…nonprofits can’t possibly raise enough money to achieve transformative social impact within the constraints of the existing fundraising system. I submit that significant social progress cannot be achieved without what I’m going to call ‘third-stage funding,’ that is, funding that doesn’t suffer from disabling fragmentation. The existing nonprofit capital market is not capable of [p. 97] providing third-stage funding. Such funding can arise only when investors are sufficiently well informed to make big bets at understandable and manageable levels of risk. Existing nonprofit capital markets neither provide investors with the kinds of information needed–actionable information about nonprofit performance–nor provide the kinds of intermediation–active oversight by knowledgeable professionals–needed to mitigate risk. Absent third-stage funding, nonprofit capital will remain irreducibly fragmented, preventing the marshaling of resources that nonprofit organizations need to make meaningful and enduring progress against $100 million problems.”

pp. 99-114:
Text and diagrams on innovation, market adoption, transformative impact.

p. 140:
Exhibit 4.2: Capital distribution of nonprofits, highlighting mid-caps

pages 192-3 make the case for the difference between a regular market and the current state of philanthropic, social capital markets.

p. 192:
“So financial markets provide information investors can use to compare alternative investment opportunities based on their performance, and they provide a dynamic mechanism for moving money away from weak performers and toward strong performers. Just as water seeks its own level, markets continuously recalibrate prices until they achieve a roughly optimal equilibrium at which most companies receive the ‘right’ amount of investment. In this way, good companies thrive and bad ones improve or die.
“The social sector should work the same way. .. But philanthropic capital doesn’t flow toward effective nonprofits and away from ineffective nonprofits for a simple reason: contributors can’t tell the difference between the two. That is, philanthropists just don’t [p. 193] know what various nonprofits actually accomplish. Instead, they only know what nonprofits are trying to accomplish, and they only know that based on what the nonprofits themselves tell them.”

p. 193:
“The signs that the lack of social progress is linked to capital market dysfunctions are unmistakable: fundraising remains the number-one [p. 194] challenge of the sector despite the fact that nonprofit leaders divert some 40 to 60% of their time from productive work to chasing after money; donations raised are almost always too small, too short, and too restricted to enhance productive capacity; most mid-caps are ensnared in the ‘social entrepreneur’s trap’ of focusing on today and neglecting tomorrow; and so on. So any meaningful progress we could make in the direction of helping the nonprofit capital market allocate funds as effectively as the private capital market does could translate into tremendous advances in extending social and economic opportunity.
“Indeed, enhancing nonprofit capital allocation is likely to improve people’s lives much more than, say, further increasing the total amount of donations. Why? Because capital allocation has a multiplier effect.”

“If we want to materially improve the performance and increase the impact of the nonprofit sector, we need to understand what’s preventing [p. 195] it from doing a better job of allocating philanthropic capital. And figuring out why nonprofit capital markets don’t work very well requires us to understand why the financial markets do such a better job.”

p. 197:
“When all is said and done, securities prices are nothing more than convenient approximations that market participants accept as a way of simplifying their economic interactions, with a full understanding that market prices are useful even when they are way off the mark, as they so often are. In fact, that’s the whole point of markets: to aggregate the imperfect and incomplete knowledge held by vast numbers of traders about much various securities are worth and still make allocation choices that are better than we could without markets.
“Philanthropists face precisely the same problem: how to make better use of limited information to maximize output, in this case, social impact. Considering the dearth of useful tools available to donors today, the solution doesn’t have to be perfect or even all that good, at least at first. It just needs to improve the status quo and get better over time.
“Much of the solution, I believe, lies in finding useful adaptations of market mechanisms that will mitigate the effects of the same lack of reliable and comprehensive information about social sector performance. I would even go so far as to say that social enterprises can’t hope to realize their ‘one day, all children’ visions without a funding allociation system that acts more like a market.
“We can, and indeed do, make incremental improvements in nonprofit funding without market mechanisms. But without markets, I don’t see how we can fix the fragmentation problem or produce transformative social impact, such as ensuring that every child in America has a good education. The problems we face are too big and have too many moving parts to ignore the self-organizing dynamics of market economics. As Thomas Friedman said about the need to impose a carbon tax at a time of falling oil prices, ‘I’ve wracked my brain trying to think of ways to retool America around clean-power technologies without a price signal–i.e., a tax–and there are no effective ones.”

p. 199:
“Prices enable financial markets to work the way nonprofit capital markets should–by sending informative signals about the most effective organizations so that money will flow to them naturally..”

p. 200:
[Quotes Kurtzman citing De Soto on the mystery of capital. Also see p. 209, below.]
“‘Solve the mystery of capital and you solve many seemingly intractable problems along with it.'”
[That’s from page 69 in Kurtzman, 2002.]

p. 201:
[Goldberg says he’s quoting Daniel Yankelovich here, but the footnote does not appear to have anything to do with this quote:]
“‘The first step is to measure what can easily be measured. The second is to disregard what can’t be measured, or give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what can’t be measured easily isn’t very important. This is blindness. The fourth step is to say that what can’t be easily measured really doesn’t exist. This is suicide.'”

Goldberg gives example here of $10,000 invested witha a 10% increase in value, compared with $10,000 put into a nonprofit. “But if the nonprofit makes good use of the money and, let’s say, brings the reading scores of 10 elementary school students up from below grade level to grade level, we can’t say how much my initial investment is ‘worth’ now. I could make the argument that the value has increased because the students have received a demonstrated educational benefit that is valuable to them. Since that’s the reason I made the donation, the achievement of higher scores must have value to me, as well.”

p. 202:
Goldberg wonders whether donations to nonprofits would be better conceived as purchases than investments.

p. 207:
Goldberg quotes Jon Gertner from the March 9, 2008, issue of the New York Times Magazine devoted to philanthropy:

“‘Why shouldn’t the world’s smartest capitalists be able to figure out more effective ways to give out money now? And why shouldn’t they want to make sure their philanthropy has significant social impact? If they can measure impact, couldn’t they get past the resistance that [Warren] Buffet highlighted and finally separate what works from what doesn’t?'”

p. 208:
“Once we abandon the false notions that financial markets are precision instruments for measuring unambiguous phenomena, and that the business and nonproft sectors are based in mutually exclusive principles of value, we can deconstruct the true nature of the problems we need to address and adapt market-like mechanisms that are suited to the particulars of the social sector.
“All of this is a long way (okay, a very long way) of saying that even ordinal rankings of nonprofit investments can have tremendous value in choosing among competing donation opportunities, especially when the choices are so numerous and varied. If I’m a social investor, I’d really like to know which nonprofits are likely to produce ‘more’ impact and which ones are likely to produce ‘less.'”

“It isn’t necessary to replicate the complex working of the modern stock markets to fashion an intelligent and useful nonprofit capital allocation mechanism. All we’re looking for is some kind of functional indication that would (1) isolate promising nonprofit investments from among the confusing swarm of too many seemingly worthy social-purpose organizations and (2) roughly differentiate among them based on the likelihood of ‘more’ or ‘less’ impact. This is what I meant earlier by increasing [p. 209] signals and decreasing noise.”

p. 209:
Goldberg apparently didn’t read De Soto, as he says that the mystery of capital is posed by Kurtzman and says it is solved via the collective intelligence and wisdom of crowds. This completely misses the point of the crucial value that transparent representations of structural invariance hold in market functionality. Goldberg is apparently offering a loose kind of market for which there is an aggregate index of stocks for nonprofits that are built up from their various ordinal performance measures. I think I find a better way in my work, building more closely from De Soto (Fisher, 2002, 2003, 2005, 2007, 2009a, 2009b).

p. 231:
Goldberg quotes Harvard’s Allen Grossman (1999) on the cost-benefit boundaries of more effective nonprofit capital allocation:

“‘Is there a significant downside risk in restructuring some portion of the philanthropic capital markets to test the effectiveness of performance driven philanthropy? The short answer is, ‘No.’ The current reality is that most broad-based solutions to social problems have eluded the conventional and fragmented approaches to philanthropy. It is hard to imagine that experiments to change the system to a more performance driven and rational market would negatively impact the effectiveness of the current funding flows–and could have dramatic upside potential.'”

p. 232:
Quotes Douglas Hubbard’s How to Measure Anything book that Stenner endorsed, and Linacre and I didn’t.

p. 233:
Cites Stevens on the four levels of measurement and uses it to justify his position concerning ordinal rankings, recognizing that “we can’t add or subtract ordinals.”

pp. 233-5:
Justifies ordinal measures via example of Google’s PageRank algorithm. [I could connect from here using Mary Garner’s (2009) comparison of PageRank with Rasch.]

p. 236:
Goldberg tries to justify the use of ordinal measures by citing their widespread use in social science and health care. He conveniently ignores the fact that virtually all of the same problems and criticisms that apply to philanthropic capital markets also apply in these areas. In not grasping the fundamental value of De Soto’s concept of transferable and transparent representations, and in knowing nothing of Rasch measurement, he was unable to properly evaluate to potential of ordinal data’s role in the formation of philanthropic capital markets. Ordinal measures aren’t just not good enough, they represent a dangerous diversion of resources that will be put into systems that take on lives of their own, creating a new layer of dysfunctional relationships that will be hard to overcome.

p. 261 [Goldberg shows here his complete ignorance about measurement. He is apparently totally unaware of the work that is in fact most relevant to his cause, going back to Thurstone in 1920s, Rasch in the 1950s-1970s, and Wright in the 1960s to 2000. Both of the problems he identifies have long since been solved in theory and in practice in a wide range of domains in education, psychology, health care, etc.]:
“Having first studied performance evaluation some 30 years ago, I feel confident in saying that all the foundational work has been done. There won’t be a ‘eureka!’ breakthrough where someone finally figures out the one true way to guage nonprofit effectiveness.
“Indeed, I would venture to say that we know virtually everything there is to know about measuring the performance of nonprofit organizations with only two exceptions: (1) How can we compare nonprofits with different missions or approaches, and (2) how can we make actionable performance assessments common practice for growth-ready mid-caps and readily available to all prospective donors?”

p. 263:
“Why would a social entrepreneur divert limited resources to impact assessment if there were no prospects it would increase funding? How could an investor who wanted to maximize the impact of her giving possibly put more golden eggs in fewer impact-producing baskets if she had no way to distinguish one basket from another? The result: there’s no performance data to attract growth capital, and there’s no growth capital to induce performance measurement. Until we fix that Catch-22, performance evaluation will not become an integral part of social enterprise.”

pp. 264-5:
Long quotation from Ken Berger at Charity Navigator on their ongoing efforts at developing an outcome measurement system. [wpf, 8 Nov 2009: I read the passage quoted by Goldberg in Berger’s blog when it came out and have been watching and waiting ever since for the new system. wpf, 8 Feb 2012: The new system has been online for some time but still does not include anything on impacts or outcomes. It has expanded from a sole focus on financials to also include accountability and transparency. But it does not yet address Goldberg’s concerns as there still is no way to tell what works from what doesn’t.]

p. 265:
“The failure of the social sector to coordinate independent assets and create a whole that exceeds the sum of its parts results from an absence of.. platform leadership’: ‘the ability of a company to drive innovation around a particular platform technology at the broad industry level.’ The object is to multiply value by working together: ‘the more people who use the platform products, the more incentives there are for complement producers to introduce more complementary products, causing a virtuous cycle.'” [Quotes here from Cusumano & Gawer (2002). The concept of platform leadership speaks directly to the system of issues raised by Miller & O’Leary (2007) that must be addressed to form effective HSN capital markets.]

p. 266:
“…the nonprofit sector has a great deal of both money and innovation, but too little available information about too many organizations. The result is capital fragmentation that squelches growth. None of the stakeholders has enough horsepower on its own to impose order on this chaos, but some kind of realignment could release all of that pent-up potential energy. While command-and-control authority is neither feasible nor desirable, the conditions are ripe for platform leadership.”

“It is doubtful that the IMPEX could amass all of the resources internally needed to build and grow a virtual nonprofit stock market that could connect large numbers of growth-capital investors with large numbers of [p. 267] growth-ready mid-caps. But it might be able to convene a powerful coalition of complementary actors that could achieve a critical mass of support for performance-based philanthropy. The challenge would be to develop an organization focused on filling the gaps rather than encroaching on the turf of established firms whose participation and innovation would be required to build a platform for nurturing growth of social enterprise..”

p. 268-9:
Intermediated nonprofit capital market shifts fundraising burden from grantees to intermediaries.

p. 271:
“The surging growth of national donor-advised funds, which simplify and reduce the transaction costs of methodical giving, exemplifies the kind of financial innovation that is poised to leverage market-based investment guidance.” [President of Schwab Charitable quoted as wanting to make charitable giving information- and results-driven.]

p. 272:
Rating agencies and organizations: Charity Navigator, Guidestar, Wise Giving Alliance.
Online donor rankings: GlobalGiving, GreatNonprofits, SocialMarkets
Evaluation consultants: Mathematica

Google’s mission statement: “to organize the world’s information and make it universally accessible and useful.”

p. 273:
Exhibit 9.4 Impact Index Whole Product
Image of stakeholders circling IMPEX:
Trading engine
Listed nonprofits
Data producers and aggregators
Trading community
Researchers and analysts
Investors and advisors
Government and business supporters

p. 275:
“That’s the starting point for replication [of social innovations that work]: finding and funding; matching money with performance.”

[WPF bottom line: Because Goldberg misses De Soto’s point about transparent representations resolving the mystery of capital, he is unable to see his way toward making the nonprofit capital markets function more like financial capital markets, with the difference being the focus on the growth of human, social, and natural capital. Though Goldberg intuits good points about the wisdom of crowds, he doesn’t know enough about the flaws of ordinal measurement relative to interval measurement, or about the relatively easy access to interval measures that can be had, to do the job.]

References

Cusumano, M. A., & Gawer, A. (2002, Spring). The elements of platform leadership. MIT Sloan Management Review, 43(3), 58.

De Soto, H. (2000). The mystery of capital: Why capitalism triumphs in the West and fails everywhere else. New York: Basic Books.

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. (2003). Measurement and communities of inquiry. Rasch Measurement Transactions, 17(3), 936-8 [http://www.rasch.org/rmt/rmt173.pdf].

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

Fisher, W. P., Jr. (2009a). 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.

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

Garner, M. (2009, Autumn). Google’s PageRank algorithm and the Rasch measurement model. Rasch Measurement Transactions, 23(2), 1201-2 [http://www.rasch.org/rmt/rmt232.pdf].

Grossman, A. (1999). Philanthropic social capital markets: Performance driven philanthropy (Social Enterprise Series 12 No. 00-002). Harvard Business School Working Paper.

Kotter, J. (1996). Leading change. Cambridge, Massachusetts: Harvard Business School Press.

Kurtzman, J. (2002). How the markets really work. New York: Crown Business.

Miller, P., & O’Leary, T. (2007, October/November). Mediating instruments and making markets: Capital budgeting, science and the economy. Accounting, Organizations, and Society, 32(7-8), 701-34.

With Reich in spirit, but with a different sense of the problem and its solution

October 4, 2015

In today’s editorial in the San Francisco Chronicle, Robert Reich seeks some way of defining a solution to the pressing problems of how globalization and technological changes have made American workers less competitive. He rightly says that “reversing the scourge of widening inequality requires reversing the upward distributions [of income] within the rules of the market, and giving average people the bargaining power they need to get a larger share of the gains from growth.”

But Reich then says that the answer to this problem lies in politics, not economics. As I’ve pointed out before in this blog, focusing on marshaling political will is part of the problem, not part of the solution. Historically, politicians do not lead, they follow. As is demonstrated across events as diverse as the Arab Spring and the Preemption Act of 1841, mass movements of people have repeatedly demanded ways of cutting through the Gordian knots of injustice. And just as the political “leadership” across the Middle East and in the early U.S. dragged its feet, obstructed, and violently opposed change until it was already well underway, so, too, will that pattern repeat itself again in the current situation of inequitable income distribution.

The crux of the problem is that no one can give average people anything, not freedom (contra Dylan’s line in Blowin’ in the Wind about “allowing” people to be free) and certainly not a larger share of the gains from growth. As the old saying goes, you can lead a horse to water, but you can’t make it drink. People have to take what’s theirs. They have to want it, they have to struggle for it, and they have to pay for it, or they cannot own it and it will never be worth anything to them.

It is well known that a lack of individual property rights doomed communism and socialism because when everything is owned collectively by everyone, no one takes responsibility for it. The profit motive has the capacity to drive people to change things. The problem is not in profit itself. If birds and bees and trees and grasses did not profit from the sun, soil, and rain, there would be no life. The problem is in finding how to get a functional, self-sustaining economic ecology off the ground, not in unrealistically trying to manipulate and micromanage every detail.

The fundamental relevant characteristic of the profits being made today from intellectual property rights is that our individual rights to our own human and social capital are counter-productively restricted and undeveloped. How can it be that no one has any idea how much literacy or health capital they have, or what it is worth?! We have a metric system that tells us how much real estate and manufactured capital we own, and we can price it. But despite the well-established scientific facts of decades of measurement science research and practice, none of us can say, “I own x number of shares of stock in intellectual, literacy, or community capital, that have a value of x dollars in today’s market.” We desperately need an Intangible Assets Metric System, and the market rules, roles, and responsibilities that will make it impossible to make a profit while destroying human, social, and natural capital.

In this vein, what Reich gets absolutely correct is hidden inside his phrase, “within the rules of the market.” As I’ve so often repeated in this blog, capitalism is not inherently evil; it is, rather, unfinished. The real evil is in prolonging the time it takes to complete it. As was so eloquently stated by Miller and O’Leary (2007, p. 710):

“Markets are not spontaneously generated by the exchange activity of buyers and sellers. Rather, skilled actors produce institutional arrangements, the rules, roles and relationships that make market exchange possible. The institutions define the market, rather than the reverse.”

We have failed to set up the institutional arrangements needed to define human, social, and natural capital markets. The problem is that we cannot properly manage three of the four major forms of capital (human, social, and natural, with the fourth being manufactured/property) because we do not measure them in a common language built into scientifically, economically, legally and financially accountable titles, deeds, and other instruments.

And so, to repeat another one of my ad nauseum broken record nostrums, the problem is the problem. As long as we keep defining problems in the way we always have, as matters of marshalling political will, we will inadvertently find ourselves contributing more to prolonging tragic and needless human suffering, social discontent, and environmental degradation.

Miller, P., & O’Leary, T. (2007, October/November). Mediating instruments and making markets: Capital budgeting, science and the economy. Accounting, Organizations, and Society, 32(7-8), 701-734.

An Entrepreneurial Investment Model Alternative to Picketty’s Taxation Approach to Eliminating Wealth Disparities

May 14, 2014

Is taxation the only or the best solution to inequality? The way discussions of wealth disparities inevitably focus on variations in how, whom or what to tax, it is easy to assume there are no viable alternatives to taxation. But if the point is to invest in those with the most potential for making significant gains in productivity, so as to maximize the returns we realize, do we not wrongly constrain the domain of possible solutions when we misconceive an entrepreneurial problem in welfare terms?

Why can’t we require minimum levels of investment in social capital stocks and bonds offered by schools, hospitals, NGOs, etc? In human capital instruments offered by individuals? Why should not we expect those investments to be used to create new value? What supposed law of nature says it is impossible to associate new human, social and environmental value with stable and meaningful prices? And if there is such a law (such as Kenneth Arrow (1963) proposed), how can we break it? Why can’t we reconceive human and social capital stocks and flows in new ways?

There is one very good reason why we cannot now make such requirements, and it is the same reason why liberals (including me) had better become accustomed to accepting the failure of their agenda. That reason is this: social and environmental externalities. Inequality is inevitable only as long as we do not change the ways we deal with externalities. They can no longer be measured and managed in the same ways. They must be put on the books, brought into the models, measured scientifically, and traded in efficient markets. We have to invent accountability and accounting systems that harness the energy of the profit motive for the greater good—that actually grow authentic wealth and not mere money—and we have to do this far more effectively than has ever been done before.

It’s a tall order. But there are resources available to us that have not yet been introduced into the larger conversation. There are options to consider that need close study and creative experimentation. Proceeding toward the twin futilities of premature despair or unrealistic taxation will only set up another round of self-fulfilling prophecies inexorably grinding to yet another unforeseen but fully foretold disaster. Conversations about how to shape the roles, rules and institutions that make markets what they are (Miller and O’Leary, 2007) need to take place for human, social, and natural capital (Fisher and Stenner, 2011b). Indeed, those conversations are already well underway, as can be seen in the prior entries in this blog and in the sources listed below.

Arrow, K. J. (1963). Uncertainty and the welfare economics of medical care. American Economic Review, 53, 941-973.

Fisher, W. P., Jr. (2007). Living capital metrics. Rasch Measurement Transactions, 21(1), 1092-1093 [http://www.rasch.org/rmt/rmt211.pdf].

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

Fisher, W. P., Jr. (2009b). NIST Critical national need idea White Paper: Metrological infrastructure for human, social, and natural capital (http://www.nist.gov/tip/wp/pswp/upload/202_metrological_infrastructure_for_human_social_natural.pdf). Washington, DC: National Institute for Standards and Technology (11 pages).

Fisher, W. P., Jr. (2010a, 22 November). Meaningfulness, measurement, value seeking, and the corporate objective function: An introduction to new possibilities. Sausalito, California: LivingCapitalMetrics.com (http://ssrn.com/abstract=1713467).

Fisher, W. P. J. (2010b). Measurement, reduced transaction costs, and the ethics of efficient markets for human, social, and natural capital (http://ssrn.com/abstract=2340674). Bridge to Business Postdoctoral Certification, Freeman School of Business: Tulane University.

Fisher, W. P., Jr. (2010c, June 13-16). Rasch, Maxwell’s method of analogy, and the Chicago tradition. In G. Cooper (Ed.), https://conference.cbs.dk/index.php/rasch/Rasch2010/paper/view/824. Probabilistic models for measurement in education, psychology, social science and health: Celebrating 50 years since the publication of Rasch’s Probabilistic Models. FUHU Conference Centre, Copenhagen, Denmark: University of Copenhagen School of Business.

Fisher, W. P., Jr. (2011a). Bringing human, social, and natural capital to life: Practical consequences and opportunities. Journal of Applied Measurement, 12(1), 49-66.

Fisher, W. P., Jr. (2011b, Thursday, September 1). Measurement, metrology and the coordination of sociotechnical networks. In S. Bercea (Ed.), New Education and Training Methods. International Measurement Confederation (IMEKO). Jena, Germany: http://www.db-thueringen.de/servlets/DerivateServlet/Derivate-24491/ilm1-2011imeko-017.pdf.

Fisher, W. P., Jr. (2012a). Measure and manage: Intangible assets metric standards for sustainability. In J. Marques, S. Dhiman & S. Holt (Eds.), Business administration education: Changes in management and leadership strategies (pp. 43-63). New York: Palgrave Macmillan.

Fisher, W. P., Jr. (2012b, May/June). What the world needs now: A bold plan for new standards [Third place, 2011 NIST/SES World Standards Day paper competition]. Standards Engineering, 64(3), 1 & 3-5 [http://ssrn.com/abstract=2083975].

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