Accounting for sustainability

By updating macro-economics

Now that the United Nations Conference on Climate Change held in Paris in December 2015 (also known as COP21) seems to have succeed in getting Governments from 195 countries representing the majority of the world’s population to accept that future global temperature rise needs to be kept below 2 degrees Celsius (and preferably lower than 1.5), then this has to be translated into a programme of actions that will also require the participation of organisations and individuals in each of these countries to limit the human contributions to climate change.

To make this happen, what is required is what is sometimes known as a ‘paradigm shift’; a transformative revolution in thinking:
• First we need to accept that concepts such as sustainability and security are of paramount value because without them the human economy that supplies our necessities and desires will not function effectively, let alone to maximum efficiency;
• The second step is to find ways to measure the key components that can provide us with sustainability and security;
• Thirdly, we need to establish the quantity (or range of quantities) of those components that is required to achieve our goals but yet not waste resources;
• Finally, we need to calculate the monetary value of the resources we have established are needed so that we can use this human tool (which is what money is) in the processes of human exchange that will help us achieve the end result.

What can easily be forgotten is that measuring with money is, at best, only a good indicator of human desire and does not help to prevent decisions that are likely to prove damaging to our economy and even critical to the future of our species. However, the practice and techniques of accounting, using monetary values as the measuring tool, has been built up over a period of several hundred years. Evidence suggests that accounts we can recognise as such today were being used by medieval merchants in Italy and now they are not only widely in use but highly trusted. By comparison, attempts to find a generally applicable and understandable way of measuring sustainability are barely forty years old. Nearly twenty years ago, I tried to answer the question ‘Can sustainability be measured?’ and the points included have not lost their relevance to the situation we find ourselves in at the conclusion of COP21.

Accepting that the world really has changed
When a plan for the future is drawn up the starting point is to establish the outcome that is desired but this is usually followed by an analysis of the past to see if there are lessons and data that can be used to achieve that outcome. What the present generation of political and economic planners are facing is a world that has changed in three important ways, each of which makes projections from history less relevant:

• The human population is greater than it has ever been in the past
• The Climate has changed and will continue to do so because of human activity that has already taken place
• Humans are more connected than ever before through travel and telecommunications

Accepting the truth of these important changes is the first step towards achieving a paradigm shift because the easiest route is usually ‘business as usual’, which dictates that plans for tomorrow largely reflect what is already happening. However, current ‘best practice’ should not be ignored, which is where our improved communications can give us a positive advantage in planning new actions.

For many the economic model they use and continue to advocate as a solution is based on competition at a time when cooperation is needed to face our joint challenges. Interestingly, scientific research, both physical and social, is suggesting that our universe is more cooperative than we realised in the late eighteenth and early nineteenth century, when economics began as an academic discipline. Therefore there is a better rational argument for embracing cooperation as a more efficient way of working ‘with the grain’ of the laws of nature.

This is not to suggest that competition is always bad (because it can lead to innovation and, particularly in sporting circumstances, great enjoyment) or that we should re-embrace the failed methods of centralised planning. What is needed is an improved economic system, which can deliver the goods and services (all of which are forms of energy) required for the larger population more efficiently than at present so that they limit or even reverse further damage to the climate.

There is another long-standing and distorting obsession built into the current international economic system: ‘growth’. The form of comparative national accounting adopted after the Second World War, which supported the ‘Bretton Woods System’ created in July 1944, has encouraged national governments to put great emphasis on the financial growth of National Income. This has continued to the present day, as the economic headlines related to falls in the price of oil and the slow-down of China’s economy illustrated in mid-January 2016.

But the methods of compiling the figures on which the published growth, or lack of it, are based has been flawed and under review from the outset, as I discovered when I was working in the Economics & Statistics Branch of a Department of the British Government in the early 1970’s. At that time, I was responsible for conducting a quarterly survey of the monetary value of investment in capital equipment and stocks, which was then seen as an important indicator of the potential for long-term growth in the economy, as opposed to the gains made to National Income as a result of consumer expenditure (which are featured much more prominently in the media at present), which can be very short-term. Many of the organisations from whom we obtained information were in industries that were more representative of the state of the economy in 1948, when the legislation that created what we would now recognised as national accounting was first passed by the UK Parliament. As a result I was asked to analyse the potential effects and suggest improvements. When I looked back at what were then classified files detailing a ten-year review of the system, I discovered that even by the late 1950’s (when Britain was only just leaving a system of post-war ‘rationing’ behind) there was considerable concern that the figures were, at best, misleading and possibly significantly inaccurate because changes in consumption patterns had altered the fortunes of individual industries and other suppliers of goods and services.

Despite alterations to information gathering methods made since that time, the essence of the problem caused by concentrating on achieving this type of growth in money terms remain and also inhibit the search for a means to change the emphasis to indicators that better reflect what might be called ‘healthy growth’ within the international economy.

The essentials of a new statistical model
When economics began to be formulated in the late eighteenth and early nineteenth century the approach adopted by its pioneers (such as Adam Smith and Thomas Malthus) was scientific in the understanding of the time. The relevance of the then new knowledge of thermodynamics and developing mathematical models was recognised. Darwin’s theory of evolution and the philosophical ideas that helped to shape the direction that Biology took from the middle of the nineteenth century can still be seen in the doctrine of ‘competition’. However, since the beginning of the twentieth century physics, chemistry, biology and even psychology have all been transformed by what has been discovered about events at the quantum level but, as yet, economic theory has not been updated to reflect what is now more clearly understood about the laws of nature within which it operates.

For example, evidence has accumulated during the second half of the twentieth century that questions the concept that economic decisions are made on a rational basis. Statistical analysis suggests that around 80% of purchases reflect habitual or impulsive behaviour.

What also seems to be overlooked in contemporary political economics is that competition and growth represent different parts of the energy cycle within physics. A growing organisation (whether biological or economic) needs to attract resources, whereas competition can lead to the break-up of organisations and the redistribution of resources. Rather than ‘survival of the fittest’ being the driver for successful business models, co-operation can be seen as necessary for development and growth. The best team has a competitive advantage, as has been demonstrated in sporting and business contexts.

Quantum theory and the observations of actual events on which it is based indicate that human intelligence is an example of a property that can be discerned at all levels rather than something that has evolved separately and sets us and our actions apart. This changes the starting point for an updated economic model.

Therefore we should return to what we observe in the environment in which economics operates and recognise the energy cycle as the framework and guideline for the human distribution of energy, which is what we are doing in our economy. Our aim should be to do everything we can, within current knowledge and technology to assist the recycling of resources.

There is a concept in economics that can be developed statistically to help this quest: ‘diminishing returns’. The explanation for this can be illustrated by using a cooking example. A cake recipe usually suggests quantities for individual ingredients. These can be adapted to accommodate personal taste or the availability of potential ingredients. However, both too little and too much of any one can alter the end product. In statistical terms, diminishing returns can be seen as a convex curve in which there is an optimum point where the most economic amount of any one resource is achieved and on either side of the curve is another point when the effectiveness of that resource ceases to exist.

Recycling and diminishing returns are both best measured in energy units but this can be translated into monetary terms to help with the integration of current and future economic accounting.

We now have all the elements of a twenty first century macro-economic model that reflects the ambition of the founders of the discipline to produce theories that could be expressed mathematically and be acceptable as a social science. I hope that it can also be used, practically, by numerically inclined non-economists working within a wide variety of organisations.

Paul Newman
December 2015
Updated February & May 2016