A better measure of value: The Universal Commons

Posted on 21 Dec 2018

Leading Australian philanthropist Alan Schwartz is tackling one of the hardest challenges the planet faces: to put a true value on the social and natural capital of the world, including health, literacy, trust, clean water and biodiversity. He explains how doing so requires fixing a fundamental flaw in our current economics.

As a philanthropist and an impact investor, it is a difficult thing for me to admit, but I have recently come to believe that no matter how much good our sector does in the world, it will never be enough.

This is because the moral, social and economic foundations of our society - principally of our economy - are fundamentally broken.

Our economy still works under the assumption that Adam Smith's "invisible hand" will ensure that the self-interested pursuit of profit will simultaneously promote the common good.

And there's no doubt that Smith's economic vision has indeed enabled us to pursue profits and the common good simultaneously. But it has also contributed to critical environmental degradation, to serious social disadvantage, to "epidemics" of obesity, anxiety and depression, and produced staggering inequalities in wealth and privilege.

Alan Schwartz
Philanthropist Alan Schwartz has embarked on an ambitious project to transform the world's economies.

This is because, for all his genius, Adam Smith failed to properly account for two key things. The first is the planet's finite resources. The other was to neglect the importance of "externalities".

In Smith's time, the world's population was less than one billion souls. There were still vast tracts of land, air and ocean that had yet to be exploited by human enterprise. There was a perception that whatever we could extract, nature could replenish, as it had done for centuries.

We now know only too well how misguided that picture of nature was, and the urgent need for us to better manage the fragile ecosystem that sustains us.

Smith's other oversight was to neglect the importance of externalities. We know that some activities cause side-effects - some positive, some negative - and we know that when they're unaccounted for, we tend to under-produce positive externalities and over-produce negative externalities.

And so we get tobacco or fossil fuel companies that reap tremendous profits, but only because they're not required to pay for the harms they cause to health or the environment.

Meanwhile, organisations that work to improve literacy among disadvantaged youths, or that strive to preserve biodiversity struggle to attract funding because they're unable to capture the value they have created.

I firmly believe that unless we can fix this structural flaw in economics, we will forever be working against the system rather than making the system work for us.

So, I'm going to talk today about rewriting economics. Not because I think it'll be easy to do, but because I think if we want to have a healthier, more sustainable, more equitable and just world, then we simply have no choice.

Now, there are generally three radical responses to the problem of fixing our broken economic system.

The first is business as usual. Even though this is the default stance, I still call it radical because I think we all agree that if we continue on our current economic path, we're going to drive off a cliff.

Even tinkering at the edges - like regulating carbon emissions or increasing government spending on public goods like health and education - is not going to be enough. The problem with this approach is that it relies on governments and philanthropists, who work without the benefit of the market. In fact it requires them to work against market forces. So this is not my approach.

The second radical response is to abandon the market altogether and move to some kind of centrally planned economy. I don't think I have to say much to convince you that this path has been tried and has been found to be wanting. So this is also not my approach.

But there is a third radical response, which is to double down on the market and seek to internalise the externalities - to use the power and efficiency of the market itself to promote the common good.

After many years of reflection and soul searching and a full year of research and consultation, this has become my approach.

It might sound like a big task to rewrite economics to factor in externalities. But it's actually simpler than you might think.

It all comes down to measurement.

Currently, the overwhelming majority of businesses focus on generating financial profit because that's the only sort of profit they can accurately measure. They carefully account for their financial assets, income, expenses, debts, stock etc., and they arrive at a number that tells them whether they're doing well or doing poorly. But this profit figure doesn't actually tell us, or them, the full story. Profit tracks movements in financial capital, but it's not tracking movements in natural or social value.

But if we can reform this narrow conception of profit and expand it to include movements in social and natural value, we can change the very goals that businesses pursue, such that financial success equates to producing genuine value.

This means we need to stop thinking about social and natural impacts as externalities, and start thinking about them for what they really are: forms of capital that are no less important than financial capital. An economy that depletes its natural capital is doomed to starve itself dry, and one that ignores the value of social capital has lost its focus on who the economy is supposed to serve.

So we need to place value on not only financial capital but also social capital, such as health, literacy and the cohesion of our communities, and natural capital, such as the quality of our water, air and soil.

To repeat, because this is critical, profit must include improvements and degradations in literacy and the health of our communities, and it must embrace and account for changes in the state of the environment.

We need an economic system in which financial, social and natural capital sit alongside each other, on equal terms - so that "profit", being aligned with "value", is no longer a dirty word. So that Smith's "invisible hand" can steer the economy towards producing what we genuinely value, and do so sustainably generation after generation.

I have come to the conclusion that this alternative definition of profit is not only possible but necessary if we are to achieve justice for individuals and communities and sustainability for our planet.

Here is the solution I propose: It's the Universal Commons Project.

The goal is to bring social and natural capital into the market so that economic activity is steered towards producing genuine value for humanity and the planet.

It all starts with measurement, which is both the lynchpin and the weakest link of the Universal Commons Project.

One reason that movements in social and natural capital aren't currently accounted for is that many people think it's impossible or undesirable to measure them effectively. I disagree.

For the last nine months I have immersed myself in the history, science and epistemology of measurement and spoken to the top luminaries in the field. I will spare you the details and simply tell you what you need to know.

There is an emerging consensus amongst scientists and philosophers that measurement of social and natural capital is not fundamentally different, in principle, to measurement of physical things like temperature and air pressure. Creating scientifically sound and universally accepted measures for literacy, health, clean water, will be a long and hard road but it is not impossible..

In fact, there are already many metrics that seek to quantify social impact or the condition of the natural world today. However, they're based on a diverse range of methodologies, with varying degrees of rigour and accuracy. And very few of them are compatible with each other.

What we need to do is have a common measurement framework that can bring all these metrics under one methodological umbrella. The goal is to produce a system of metrics that even an accountant would approve of.

So, to this end, I'm very excited to say that my team and I are soon to announce a challenge prize that will offer a substantial cash prize for the individual or team that can produce a framework for measuring movements in social and natural capital.

Now, just a few quick caveats. We are not seeking to measure the financial value of a tree or a human life. We agree that this is not only impossible but also not desirable.

Rather, we're looking to measure whether water quality is going up or down, whether ecosystems are healthy or degraded, whether mineral stocks are abundant or depleted. We will then let the market set the relative value of these things, using a mechanism I will describe in a moment.

We're also not seeking to measure things like happiness or subjective well being. Rather, we will be measuring things that we believe reliably contribute to such things, like health, education, a lack of crime or social cohesion.

In order to bring social and natural capital into the market we will need not only measurement but also a functioning and efficient marketplace. To that end my team is developing a specialised exchange that will allow organisations to interact with and trade in social and natural capital. We call it the Universal Commons Exchange.

It will be built using the latest Distributed Ledger Technology (you might know it better as "the blockchain"), meaning that it is fully-distributed, decentralised, transparent and secure, thereby ensuring trust and integrity. Blockchain technology is unique in its ability to provide the incentives and the controls that are necessary for the creation and management of a new market for social and natural capital, in ways that the current economic system is not able to do.

So that when organisations improve something like literacy or water quality, they will receive tokens to represent their positive impact, and these tokens can be bought and sold by people who want to invest in literacy or water.

If you are technically minded, and/or sceptical about the latest technology being paraded as the universal panacea, there is a 45-page functional architecture document on our website that you can read at your leisure.

Now, once we have good measurement and an effective market for social and natural capital - who will care about these new measurements and who will use the new marketplace?

The first to use it will be social and impact investors, who are seeking to objectively measure the extent to which they are preserving and enhancing social and natural capital. The Universal Commons Exchange will also help them improve the efficiency of their social expenditure and their grant making.

However, social and impact investors are only a small proportion of all investors. They are vastly outnumbered by financial investors - those who seek a purely financial return. The grand challenge will be to encourage financial investors and the corporations they invest in, to participate in the Universal Commons Exchange.

How can we do this?

First of all, we hope to engage with corporations who, despite the lack of financial incentives to do so, genuinely care about their social and environmental impact. This includes B Corps, and those that have already signed up to the Global Reporting Initiative and the International Integrated Reporting Council, among others.

Many other financial investors will also find it's in their self-interest to engage with the Universal Commons Exchange. There could be great financial profits to be made in improving literacy, health, or in cleaning our waterways and our air.

Then, for those financial investors who are holding out - perhaps because they fear being held to account for the impact they're having on people and the planet - we will turn to a combination of community and political pressure. This stage will be many years away yet.

First, we have to build the measurement framework and demonstrate the efficacy of the Universal Commons Exchange. By then, we hope we will have generated enough credibility, goodwill and momentum so that the recalcitrants will be more motivated to hop on board.

But this is not the end of the Universal Commons Project. In fact, I haven't even explained the significance of the name "Universal Commons" yet - which is based on a brilliant idea by the brilliant Dr Simon Longstaff.

The Universal Commons is perhaps the most radical part of the project, but it's also the one that restores justice to our economic system.

My parents and their family suffered simply due to their race and religion and their place of birth. We can all see the injustice of this.

It is precisely the same injustice that allows those in this room, to live comfortable lives, while those who were born in the wrong place, to the wrong parents, in the wrong country, experience hunger, poverty and hardship. The Universal Commons seeks to redress this injustice and to create a new moral, social and economic system that is both just and efficient.

If you think about it, the world's bounty of social and natural resources belong to no one person. They reside in the commons. So they belong to everybody. And yet we have created an economic system that gives its blessing to businesses that consume or degrade some aspect of the commons for the private gain of their shareholders.

So, the Universal Commons will claim all the earth's social and natural capital on behalf of every living person. It will then issue a single, equal share that is indivisible and unsaleable, to every living human on the planet.

Then, any organisation or corporation that interact with these forms of capital will be required to lease them from the Universal Commons Exchange and return them, after use, in an undegraded condition. Their profit would be the value they create over and above the leasing fee and the cost of preserving the social and natural capital they lease.

And a portion of that leasing fee will be divided equally amongst all the Universal Commons shareholders, creating an important source of income for every living person. This becomes an effective universal income, one that is based on each living person's moral right to benefit from the commons that belongs to them.

I acknowledge that all this seems far fetched, but is it impossible? There was a time when elimination of slavery seemed beyond reach. At the time, some said that abolishing slavery would be too costly to the economy. But we did abolish slavery. And instead of destroying the economy, it helped unlock its potential by allowing people to be both producers and consumers.

If we can eradicate slavery, surely we can redesign our free enterprise system so that it enables all of us to profit by preserving and enhancing our real wealth - our stock of social and natural capital.

Now, I hasten to add that this has been a lightning tour through the Universal Commons Project. There are countless important details I've left out, and I don't doubt that you have many questions. For those of you who are detail oriented, there is another 45 page document on our website that explains how the Universal Commons would be established and operated.

Now, I am almost done and wish to return very briefly to measurement again for two reasons. Firstly, without high quality measurement, none of any of this can be achieved.

Secondly, although the vision of the Universal Commons is grand, there are things we can do right now to advance the cause of economic efficiency and justice.

And that is what we are doing.

Next year we will be launching a challenge prize to develop a measurement framework for the Universal Commons. We're working with Nesta, the world renowned social innovation think tank based in the UK. The prize will be open for submission from any person or organisation anywhere in the world. The winner will receive a very substantial cash prize - and the satisfaction of unleashing a tsunami of innovation and progress.

The exact specifications of the prize are currently being refined. We will be publishing updates on our web site later this year.

If you're interested in hearing more about the Universal Commons Project as it unfolds, please sign up on the website for occasional updates - we need your help to spread the word about the Universal Commons Measurement Prize.

What I am proposing is a natural evolution of economics whose time has come. We are proposing a simple fix that is nothing short of radical.

  • It will fundamentally change the way almost every "not for profit" and "for profit" organisation operates.
  • It will fundamentally change the way we measure national progress to better align with what really matters.
  • It will fundamentally change the way we preserve and share the earth's bounty.

This is why fixing the flaw in economics is both surprisingly simple and yet incredibly challenging, and yet it must be done.

Do we have a choice?

As for me, the promise of the Universal Commons is so tantalising, so challenging, so exciting, so important - that I don't have a choice.

But we need all the help we can get - we need moral support, we need brains, we need money, we need connections. Please contact me directly if you want to help or at least visit our website (Universalcommons.com) and sign up for occasional updates, and please spread the word about the Universal Commons Measurement Prize.

This is an abridged version of a speech delivered by Mr Schwartz to the Philanthropy Australia Conference introducing the Universal Commons.

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