Beyond Economics: Global Systems Accounting

Submitted by Arthur Dahl on 7. November 2021 - 16:20

Beyond Economics: Global Systems Accounting

Reflections from a systems science perspective
Arthur Lyon Dahl

The stimulating presentations from our IEF 25th Annual Conference and other events I followed at COP26 have triggered some reflections on the root causes of disintegration in our world and some of the challenges of the urgent transition facing us. There is probably nothing unique in these ideas, but I have not had a chance to explore all the relevant literature, so take this only as a starting point for further discussion.

Since indicators are important in telling us where we are and suggesting where we want to go, I started by abstracting some 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 wellbeing 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.

The fundamental fault 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 role 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 wellbeing 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. One COP26 event I watched on small island developing states said that money was available but projects aiming for a measurable economic return were 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.

Looking at the climate change crisis, the main proposal 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 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 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 they are removed. 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 market.

Similarly, one could imagine a biodiversity budget and accounting system, with natural ecosystems the capital, and every reduction in biodiversity increasing debt. Species extinctions would be bankruptcies and should be penalized accordingly.

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.

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.

Similarly, one could imagine an employment accounting system, with full employment, broadly defined as using the productive potential of every human being to render services to others, as the ideal capital stock. Unemployment reduces this capital and its capacity to generate further wealth, as does marginalizing part of the population because of gender, ethnicity, handicap or other biases.

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 could evolve into a global central bank for carbon accounts. The CBD and other conservation conventions 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 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 everyone some useful skill and the means to use it to earn her or his living through some meaningful service. 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 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 basic 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 in their areas of concern.

Together, all these forms of capital would become the basis for a new global currency, no longer subject to manipulation in the national interest of states, and founded on standards of human and natural well-being. The relative weighting of the forms of capital in the currency 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. Seen in this light, the proposals here are not so utopian, and could easily evolve from what we have already built and available capacities. We need to abandon the present economic system and its exclusively financial accounting exemplified by GDP as soon as possible, by constructing a better system in its place.

Organizing the transition

Another reflection on our present predicament concerns the problem of the necessary transition from our present materialistic system dominated by a financial economy to 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.

One simple example from Bonner’s presentation at the IEF conference is the car industry. Increasing traffic reduces connectivity and social relationships in a neighbourhood, and an enormous part of urban space is now devoted to personal vehicles. Changing to electric cars will only postpone the transition to net-zero, since it will take 20 years to replace existing cars, and because it does nothing to reduce the space occupied, which is needed to improve the more sustainable alternatives of walking, biking and public transport. Yet with the recent pandemic-induced shortages, car makers have raised their prices and increased their profit margins. The incentives are all wrong, and too often defend the present economic system and the infrastructure we have invested in to support it. Consumers resist change, but experiments show that, once they have experienced the alternative, they prefer not to go back.

Another example from a COP26 event was of projects allowing local village fishermen to collect data on their catch and their impact on the fishery resource, giving them the indicators to directly manage their own fishery for sustainable use, a kind of crowd-sourced resource accounting for local use. This is very close to the way indigenous knowledge systems functioned over many generations. Empowering local people can naturally create a more efficient multidimensional accounting system at the local level.

Last updated 22 November 2021