Global Systems Accounting Beyond Economics

Submitted by Arthur Dahl on 24. November 2021 - 19:10
Author
Dahl, Arthur Lyon
Year
2021
 

Global Systems Accounting Beyond Economics

Arthur Lyon Dahl
Version 3, 24 November 2021


Key proposals

• A new system of global accounts relevant to human and natural well-being should be developed using relevant science-based non-financial currencies.

• Eight initial indicator forms of capital and associated currencies are identified to respect both planetary environmental boundaries and minimum social and economic standards.

• These accounts could become the basis for global taxes on damaging activities and payments for social contributions and environmental regeneration in the common interest, with the financial system serving primarily to interlink the capital accounts in an integrated dynamic global system aiming for human and natural well-being and sustainable development.

• Development of these accounting systems will provide the basis for the gradual replacement of the present financial system using only monetary measures such as GDP.


Despite significant efforts over the last 50 years to create forces of integration in a world that has become a single economic system while remaining socially and politically fragmented, the forces of disintegration are continuing to win out, increasing wealth has not benefited half the world population, and our environmental decline continues. We need to identify the root causes of our problems and the transformation that is needed to succeed in the urgent transition required to address the global environmental crises of climate change, biodiversity loss and pollution, the human crises of poverty, hunger, education, unemployment and inequality and all the related social crises representing existential threats to our future. We are trapped in an economic paradigm that calculates everything in terms of monetary profit and loss, capital and interest, return on investment and the theoretical efficiency of the market. The ultimate indicator in this system is GDP and its endless growth as the solution to all our problems. Yet these factors and measures have no inherent relationship to human or planetary well-being. The solution would be to develop an alternative set of accounts more organically related to the functioning of the biosphere, the desirable direction of human society, and the rights of everyone to a life of dignity and fulfilment.

This paper is a thought piece to stimulate reflection and discussion. It takes a systems perspective but makes no claim to originality. There has been no academic search for prior knowledge. Its aim is simply to encourage creative thinking on better ways forward.

RETHINKING ACCOUNTING

Accounting is a rational way to determine the state and trends in a system or process, while generating indicators useful for management. There is no reason why it should be applied only in terms of monetary currencies. These proposals suggest ways to apply this tool to measuring and motivating human and natural well-being, the real aim and purpose of development.

Principles of accounting and indicators

In designing new forms of accounts, we can apply the conceptual tools of economic accounting. Since indicators are important in telling us where we are and suggesting where we want to go, we can start with basic accounting principles and relevant indicators. Capital is a measure of the standing stock of a resource, that can either be static, like a mineral in the ground or a gold bar, or dynamic like a forest or investment in a factory, able to maintain itself, grow and provide beneficial services. Interest is extracting wealth from capital, either diminishing static capital (unsustainable) or harvesting part of the increase in wealth (sustainable). Debt is when we borrow capital with a promise to reimburse it at some future time, generally with interest. The assumption is that the direct investment of the capital, or some other source of income, will allow reimbursement. We usually think of all this in terms of financial wealth, but capital and its services or benefits can be of many kinds, contributing to the functioning and well-being of the biosphere and human society. Considering wealth or benefit only in narrow financial terms is a materialistic approach and the cause of many of our problems.

A critique of the present system

The fundamental fault of relying on accounting in the present financial system is that it favours profit or interest in monetary units (dollars, etc.) over all other benefits. The stock market links capital value to return on investment as dividends or interest, regardless of the purpose of the company. Profit is the basic aim of the banking system and corporations, and is seen as an end in itself. Money is borrowed through loans with interest determined by risk, and invested in what are expected to be productive activities generating further wealth. There is no inherent link to any other measures of well-being or of services provided. With risks increasing and interest rates down, central banks have pumped great quantities of money into the system to prevent its collapse, inflating government debt while the stock market hits record highs. Since wealth generates wealth in this system, the rich get ever richer and nothing filters down to the middle classes, not to mention the poor. A giant debt bubble has built up between government debt, corporate debt and consumer debt, with no imaginable possibility of reimbursement, only postponement of a reckoning to some indefinite future as debts are rolled over with further borrowing.

Development aid, in terms of capital transfer to poor countries, is largely as loans, but this seldom goes into activities generating adequate financial returns in weak and perhaps corrupt economies, and increased risk means higher interest, which accumulates in a vicious circle of debt. Apart from the exploitation of a neocolonial economic system that removes more wealth than it creates, developing country governments must spend much of their available income on debt servicing, and are unable to invest in infrastructure or to meet basic human needs like health care and education. This even impacts development at the local level. Money is often available, but projects aiming for a measurable economic return are lacking. Moreover, donor criteria requiring financial return on investment or reimbursement of loans for projects will also extract wealth from the local economy and ignore all the other non-cash benefits that may be more important to a local community.

Underlying values and principles

To design a new system, we need to start with the underlying values and principles that define our human purpose. These are presently identified by our global society as human rights and obligations. Achieving these is what human well-being is all about. In summary, the foundational principle of justice includes the right of everyone to human dignity, and to equitable treatment leaving no one behind, with special attention to women, children, the disabled and those otherwise marginalised. This expresses the fundamental truth that we are one human family and citizens of this planet in all our diversity, above any other more limited identity.

Following on from this, everyone has the right to the necessities of life such as food, water and shelter, and to the possibility to develop her or his capacity to contribute to human well-being and social advancement. These should not be conditioned by any artificial limitation such as nationality, ethnicity, religion or place of birth.

As the now-dominant species in our biosphere, we have the responsibility for the care and management of the natural world upon which we ultimately depend for our survival. This requires learning to live within planetary boundaries, moderating our material civilization, restoring past damage, and enhancing the regenerative capacities of nature that ultimately provide all the resources necessary for life and civilisation. This is what is meant by sustainability and is defined in the Sustainable Development Goals.

The human species is distinguished by its intellectual capacity for science, art, culture and spirituality, the intangible dimensions of life and civilisation beyond our material existence. This dimension values the realities of our physical world revealed by science, together with respect for truth as the foundation for trust and trustworthiness. Enriching, preserving and transmitting this heritage of learning and knowledge must be another central process as we imagine our way forward.

NEW FORMS OF CAPITAL AND RELEVANT CURRENCIES

For the environment, three major environmental accounting systems for climate change, biodiversity loss and pollution would already provide major drivers both to internalize environmental costs and to fund environmental restoration and regeneration. A set of social and economic accounts for basic income (poverty), food, health, work, and knowledge/education would capture some significant dimension of human well-being. Other accounts could be developed in the future as needed.

Environmental accounting

Carbon accounts

Looking at the climate change crisis, the present focus is to put a price on carbon to create a motivation to economise on its release. This is subject to the same flaw as the financial system, thinking in terms of money. What is needed is a whole accounting system with carbon as the currency. The planet became suitable for animal life when plants removed enough carbon from the atmosphere and stored it in the ground to bring down the planetary temperature to be suitable for life. The global carbon budget has since been in balance until recently, with animals releasing CO2 and plants absorbing it.

Extraction of fossil fuels has upset this balance, raising the carbon concentration in the atmosphere to dangerous levels. A proper carbon accounting system would consider the biomass of the planet and stored organic carbon as the carbon capital stock. Plant-dominated ecosystems maintain that capital and provide ecosystem services as well. Excess carbon in the atmosphere is carbon debt, and all releases of carbon dioxide and methane increase that carbon debt. We are living beyond our means in terms of carbon accounting. In this framework, countries with biological resources have the most carbon storage capital and should be valued accordingly, with incentives for environmental regeneration to increase stored carbon stock. All activities that destroy biological resources or release fossil carbon are increasing carbon debt and should be penalized accordingly.

The carbon accounts can be linked to the financial system, since the sale of fossil energy generates monetary wealth that can be taxed, and those taxes could be used to reward carbon removal. Since excess carbon in the atmosphere continues to cause harm, there should be a carbon tax not only on new releases of fossil carbon, but also an annual tax on historic emissions until the carbon is removed, like paying interest on a debt. Where a specific responsible entity (state or corporation) can no longer be identified, this would become a public responsibility of the fossil energy consuming countries. Conversely there should be corresponding payments for carbon capture and sequestration, whether by natural systems, environmental regeneration or technology. Note how differently this would rate industrialized and developing countries, with corresponding incentives.

Science should be able to estimate the amount of carbon in the atmosphere and the flows corresponding to inputs and withdrawals. It would not be necessary to measure the total geological carbon stock. The total carbon accounting system would provide the basis for quantifying national responsibilities and the corresponding payments by or to those directly responsible, especially in the private sector and civil society, generating positive and negative incentives to achieve a stable carbon balance. Countries with high per capita fossil energy use would pay the most, supporting mitigation and adaptation in poor countries.

Biodiversity accounts

Similarly, one could imagine a biodiversity budget and accounting system, with natural ecosystems and their component species the capital, and every reduction in biodiversity increasing debt. Species extinctions would be bankruptcies and should be penalized accordingly. The accounts could be based on biological inventories and measures of ecosystem services such as oxygen production, carbon sequestration, the balance or imbalance in ecological systems, remotely-sensed imagery of natural and cultivated systems and their dynamics, etc. This would provide an objective scientific basis for the biodiversity capital stock and accounting changes. Where the lost of biodiversity, such as deforestation, generates financial income, this should be taxed, with the revenues directed to biodiversity conservation and restoration.

Pollution accounts

A pollution budget system would consider a clean environment as capital to be maintained. All releases of pollution would increase debt. The environment has some capacity to clean itself of some pollutants, as a kind of wealth generation, but persistent pollutants are becoming an enormous debt burden on the future that is not presently accounted for. The quantification of pollution debts would permit the implementation of the polluter pays principle, with the damage to health and the environment from pollution no longer an externality to be ignored.

Initially, accounts would be developed for some of the main pollutants already well known and identified in international conventions, such as Persistent Organic Pollutants, mercury and plastics, as well as nitrogen and phosphorus for which planetary boundaries have been exceeded. Taxes on releases could go to finance cleanup measures, while creating a negative incentive for further production. For example, there could be a tax on nitrogen fertiliser production, and perhaps its use in industrial-scale agriculture, to reflect its environmental costs.

Social and economic accounting

For social sustainability, a similar set of accounts could be created for major dimensions of human well-being, again using as “currencies” direct measures of well-being and social values.

Minimum living standard (wealth) accounts

Addressing poverty has been the top priority since the Brundtland Commission popularised sustainable development in 1987, and is the top Sustainable Development Goal, yet extreme poverty is increasing again with the pandemic, and half the world population struggles to make ends meet. The social capital here could be defined as every human being having a guaranteed minimum income to make up any shortfall in earnings from employment or subsistence. There is adequate wealth in the world, so this is a matter of a universal social safety net without any conditions such as nationality, handicap or migration status.

Statistics on poverty are reasonably well developed to measure the debt side of the accounts. More work is needed to create adequate measures of individual wealth, especially since much escapes from national control. Graduated income and wealth taxes could transfer a share of that wealth adequate to meet the needs of the poor.

Food accounts

Food security is a growing problem, linked to poverty, crop failures and rising food prices. Food should therefore be considered another form of capital necessary for human well-being, with accounting of food production, distribution and waste, paying attention to meeting the nutritional needs of all. With the population still increasing, soil degradation and water shortages rising, extensive overfishing, and the limits of planetary food production closer, a comprehensive global assessment of food production is necessary. This needs to include measures of efficiency, with high inefficiency in meat production, as well as contributions to and impacts of climate change. With a goal of universally-adequate human nutrition, the set of food accounts could be the basis for controls or taxes on unsustainable production methods and commercial foods of low nutritional value, and support to maintain and regenerate food production capacities guaranteeing a decent income to both subsistence and commercial farming and fishing.

Health accounts

Health is another essential requirement for well-being. A health budget would treat human health and productivity as capital, and all activities that damage health would increase debt. This is only presently measured as increasing financial costs of the health care system, not as a loss of human well-being. Tobacco use and narcotic drugs presently generate financial profits, because the human health impact is not integrated into the accounting system with rewards and punishments. Pollution also impacts the health budget, as do all the impacts of climate change on health, so there are interlinkages possible between accounts from an overall systems perspective.

The existing framework of health statistics can provide the basis for this accounting, although more work may be needed to collect statistics on good health and life expectancy as the desirable outcome, to balance all the data on disease and morbidity. A multicultural perspective would consider all the contributing factors to good health, beyond the curative approach of Western medicine.

Work/employment accounts

We start from the principal that every human being has some capacity to contribute productively to society, and should both receive the education necessary to develop that capacity and the opportunity to use that capacity with some form of meaningful employment. Work is not just to earn money, but has a social function for human dignity, to be of service to others, and even to develop what might be called higher spiritual or moral qualities. Obviously this definition of work goes far beyond present definitions of wage employment to include social services like housekeeping, raising children, care for the elderly, subsistence food production, and many environmental and cultural services. The goal in this accounting system would be to maximise every person’s productive potential throughout their life as the ideal capital stock.

The employment accounting system would value all these contributions, and apply to all genders, ages, capacities and situations as full employment. Unemployment is a form of debt, reducing this capital and the society’s capacity to generate further wealth, as does marginalizing part of the population because of gender, ethnicity, handicap or other biases. Indicators and positive and negative incentives would be the drivers for a more inclusive and productive society.

Knowledge and education accounts

Beyond the purely material and social dimensions of well-being, humanity has through its intellectual capacity developed a vast storehouse of knowledge, science, art and culture that are intangible yet essential parts of human reality. Unlike material wealth, these distinctly human dimensions increase in value the more they are shared. Knowledge in a book serves no purpose until it is read. The beauty of art must be seen, and music heard. Scientific knowledge must be accessed and used to solve problems and create new knowledge.

Our present materialistic society has tried to turn knowledge, science and art into intellectual property, sold to those who can afford it, which is to deny its true social value and to exclude those who cannot pay for it. This creates a kind of knowledge debt relative to the broader benefits of open access.

Another unique feature of this form of capital or wealth is that it must be transmitted, primarily through education. Every person is mortal, and their acquired knowledge is ultimately lost. Each new generation starts over to receive relevant knowledge through formal or informal education.

The accounting system in this area would both measure the standing stock and preservation of various forms of knowledge and culture, but more importantly the dynamics of access to knowledge including through new technologies, creation and storage of new knowledge, and its effective transmission from generation to generation. These processes operate at multiple levels from the global and national to local communities and within families. This is an enabling condition for empowering people and creating many forms of human well-being. More needs to be done to define this accounting system because of the intangible nature of the subject, but an increasing number of educational statistics, knowledge inventories and uses of big data may suggest ways forward.

New global definition of wealth

Together, all these forms of capital would become the basis for a new global definition of wealth expressed in a set of complementary currencies, no longer subject to manipulation in the national interest of states, and founded on scientific standards of human and natural well-being. The relative weighting of the forms of capital could be adjusted to the priorities of the moment. Carbon accounts would clearly weigh more in our present climate emergency. A pandemic would raise the weighting and priority of the health accounts. These decisions would be the responsibility of institutions of global governance, in the same way that national central banks take decisions to ensure national economic well-being under the oversight of national governments. The proposals here could easily evolve from what we have already built and available capacities (see transitions below).

In this new framework, money would return to being a currency of exchange between parts of the system, a means and not an end in itself. Logically this would mean a single global currency to eliminate all the defence of national interests and speculation. People still need to earn wages, profits are a legitimate measure of efficiency in providing a service, capital investment should generate a moderate level of interest, and the financial system should be sized accordingly. As shown above, the capital defined in the different accounting systems often generates wealth that is converted to monetary units. What is needed is a better balance of inputs and outputs, revenues generated and contributions received.

The main thrust of these proposals is to replace the complete reliance on the present economic system and its exclusively financial accounting exemplified by GDP, by constructing and proposing a better system in its place.

PLANNING THE TRANSITION

Fundamental systems transformation to a new paradigm is never an easy process. Change is difficult, and there will always be winners and losers. Our present materialistic system dominated by a financial economy reflects self-centred values of national or personal interest, greed and competition, while these proposals aim towards a more human-centred, just and sustainable future. This is the challenge even the best-intentioned leaders face today. Climate science says that we must turn the corner within a decade. But what do we do with those millions of people whose jobs and lives depend on the fossil fuel industry, the consumer society, the military-industrial complex, and all the other parts of the economy that depend on unsustainable activities or are not contributing to human betterment? The system is extremely powerful and fights to maintain itself. The transition will inevitably be catastrophic one way or another.

However, it is not that we are at a standing start. The world has already gone a long way towards defining the necessary components of global common interest, for which accounting systems are needed, in the structures already created for elements of global governance in the United Nations system and other international agreements. The UNFCCC and IPCC could evolve into a global central bank for carbon accounts. The CBD and other conservation conventions, with their scientific advisory bodies, would be responsible for biodiversity accounting. UNEP and related conventions would become a global environment agency to manage the pollution accounts and other aspects of global biosphere accounting that would link to carbon and biodiversity accounts for management of the overall health of the planet’s natural systems and life support services. The FAO would be responsible for food accounting to ensure that the planet produced adequate food for everyone through sustainable methods and that it was properly distributed to ensure that no one went hungry. The WHO would be charged with ensuring the health capital of all humanity, and that global risks like the pandemic threatening that capital were addressed in the common interest. The ILO would have oversight of the human capacity to generate wealth and well-being through work and employment globally, ensuring that systems were in place everywhere to give every person some useful skill and the means to use it to earn her or his living through some meaningful service. The development organizations like UNDP and the World Bank could be reoriented to redress the present imbalance in global wealth and to devise mechanisms to guarantee a universal minimum income and eliminate poverty. UNESCO and related institutions would manage the accounting of the global capital of science, culture and knowledge to ensure its increase, preservation and transmission through education.

This list is not exhaustive, and there are certainly other dimensions of social and environmental health and well-being that should be included in the accounting system of an ever-advancing civilization. Obviously such institutions would not manage everything, applying principles of national autonomy and subsidiarity to encompass the wonderful diversity and creativity of human institutions at multiple levels from global to local. They would be responsible for accounting for the global common interest in their area of concern, and of signalling and motivating the maintenance and increase in global capital and wealth, and thus human well-being.


Author Profile

Dr. Arthur Lyon Dahl (http://yabaha.net/dahl/prof_e.htm) is an environmental scientist, President of the International Environment Forum, on the Advisory Board of the Global Governance Forum, and a retired Deputy Assistant Executive Director of UNEP, with 50 years' experience in international organisations. He participated in the 1972 Stockholm Conference on the Human Environment, organised the Secretariat of the Pacific Regional Environment Programme (SPREP), served in the secretariat for the 1992 UN Conference on Environment and Development (Rio Earth Summit), coordinated the UN System-wide Earthwatch, and lead the development of indicators of sustainable development. His recent work concerns proposals for UN reform, co-authoring the 2020 book "Global Governance and the Emergence of Global Institutions for the 21st Century" (Cambridge University Press) and recently “Towards a Global Environment Agency: Effective Governance for Shared Ecological Risks” for the Climate Governance Commission: https://globalchallenges.org/wp-content/uploads/2021/11/FINAL-%E2%80%93…


Last updated 24 November 2021