Proposed by Kaleidoscope Futures
In reaction to shareholder value and inspired by social, environmental and stakeholder movements, the 1990s saw the emergence of a “new economy”. In fact, we can go further back to early pioneer economists, such as EF Schumacher and his Small is beautiful book in 1973, captioned “The economy as if people counted”,[i] and Kenneth Boulding who wrote on “the cowboy economy” – where resources are said to be endless, like the open plains of the Wild Western Frontier. Boulding opposed this to the call for a “spaceship economy,” where production and consumption are designed in a closed recycling system with finite resources.[ii]
Building on these foundations, former World Bank economist Herman Daly presented a comprehensive intellectual framing of the new economy in his 1989 book For the common good (with John Cobb).[iii] One of his most enduring contributions was the design of the Sustainable Economic Well-Being Index (ISEW), which adjusts economic growth (measured by gross domestic product, or GDP) to take into account the externalities that ‘it creates, such as the positive and negative impacts of economic activity on health, education, resources and ecosystems. Comparisons between GDP and ISEW show that for many countries, while economic growth has increased steadily for decades, the quality of life has stagnated or even declined since the 1970s, especially in income countries. raised.
Chilean economist Manfred Max-Neef, sometimes referred to as a “barefoot economist” for his work with poor communities in Latin America, brought a nuanced perspective to Daly’s findings on economic growth.[iv] In his “threshold hypothesis,” he argued that in developing countries, traditional economic growth is strongly correlated with social development. But every country reaches a certain threshold of wealth, when the societal costs of increased economic activity begin to outweigh the benefits. Subsequent metrics such as the Genuine Progress Indicator and Social Progress Index add strong evidence to support Max-Neef’s proposition.
In 1992, British economist Paul Ekins distilled these ideas into a four-capital model, arguing that we need to move beyond neoclassical economics’ emphasis on finance and manufactured capital to include capital. social (including effective institutions, trust and labor) and natural capital. (with ecosystems as sources of raw materials and sinks for waste absorption).[v] Subsequently, Jonathon Porritt, founder of the Forum for the Future in the UK, extended this to five capitals (adding human capital), and the International Integrated Reporting Council (IIRC) added a sixth intellectual capital.[vi]
The IIRC’s definition of six interrelated capitals, included in its integrated reporting framework, provides a comprehensive overview of multi-capital value and is worth briefly describing. According to the six capitals model:
Financial capital includes all funds available to an organization for use in the production of goods or the provision of services, and obtained through finance, such as debt, equity, or grants, or generated through ‘operations or investments.
Manufactured capital includes manufactured physical objects (as opposed to natural physical objects) that are available to an organization for use in the production of goods or the provision of services, including: buildings, equipment and infrastructure (such as roads, ports, bridges and waste and treatment plants).
Intellectual capital includes knowledge-based organizational intangibles, including: intellectual property, such as patents, copyrights, software, rights and licenses; “Organizational capital” such as tacit knowledge, systems, procedures and protocols; and the intangible assets associated with the brand and reputation that an organization has developed.
Human capital includes the skills, abilities and experience of people, as well as their motivations to innovate, including: their alignment and support to the governance framework, risk management approach and ethical values of an organization; ability to understand, develop and implement the strategy of an organization; and loyalties and motivations for improving processes, goods and services, including their ability to lead, manage and collaborate.
Social and relational capital understands the institutions and relationships within and between communities, stakeholder groups and other networks, and the ability to share information to improve individual and collective well-being. Social and relational capital includes: shared norms, common values and behaviors; relationships with key stakeholders, as well as the confidence and willingness to engage that an organization has developed and strives to build and protect with customers, suppliers, business partners and other stakeholders external; and the social license to operate an organization.
Finally, natural capital includes all renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an organization. It includes: air, water, land, minerals and forests; and biodiversity and ecosystem health.
Expanding the concept of capital makes a lot of sense. If you look at the definition of capital, it usually refers to an asset that holds a store of value that it releases over time. Money and machines are obvious examples, but it is clear that social institutions like the political system, justice mechanisms and cultural traditions also provide value over decades, if not centuries and millennia. Likewise, stocks of natural resources, including petroleum, metals, timber and groundwater, as well as ecosystem services such as climate regulation, water purification, bee pollination, birds and butterflies, and the oxygen production and carbon uptake by forests – all of them are also valuable repositories that unleash a constant stream of benefits.
[i] Schumacher, EF (1973). Small is beautiful: the economy as if people counted. New York: Harper & Row, 1973.
[ii] Boulding, KE (1966). The economy of the future spacecraft Earth. In: Jarrett, H. (ed.) The quality of the environment in a growing economy, resources for the future. Baltimore: Johns Hopkins University Press, 3-14.
[iii] Daly, HE, Cobb, JB (1989). For the common good: rorient the economy towards the community, the environment and a sustainable future. Boston: Beacon Press.
[iv] Max-Neef, M. (1992). From outside looking at: experiences in ‘barefoot’ economy. London: Zed Books.
[v] Ekins, P., Hillman, M. & Hutchinson, R. (1992). Inordinate wealth: an atlas of the new economy. London: Gaia Books.
[vi] Porritt, J. (2007). Capitalism as if the world matters. London: Earthscan.
Kaleidoscope Futures is a Cambridge, UK-based think tank, education and media company focused on promoting a brighter, brighter future. Our goal is to help organizations and individuals strengthen the disruptive movement to thrive, regenerate nature, society and the economy.
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