Philanthropy Australia National Conference
6th of Sep 2018
Remarks as prepared
Universal Commons Unveiled
As always, with respect and sincerity, I wish to add my acknowledgement to the traditional owners of this land, the Wurundjeri people of the Kulin nation.
What a fabulous two days we have shared, hearing and learning from each other about our efforts to make the world a better place. I feel very fortunate to be part of a community that seeks to reverse injustice and disadvantage and to preserve the earth’s bounty.
But… what we’re doing is not enough.
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.
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.
And today I am going to tell you how we can make this happen.
I am sure that at this point, you might be thinking, who is this guy and what is he talking about? I know I would be if I were sitting in your place.
About Alan Schwartz
I confess that I’m not someone who’s particularly comfortable with hyperbole and even less comfortable sharing my personal story, but many of you probably don’t know much about me, beyond my roles as President of Philanthropy Australia or Managing Director of the Trawalla Group, or perhaps who I am married to, or who I am related to.
I am the middle son of holocaust survivors. Their pain and their loss and their sense of injustice and betrayal, were wordlessly transmitted to me in my mother’s womb; post war, Lamarckian style. Like a dark and silent cloud, the horrors of my parents experiences haunted my childhood and adolescence.
What was their answer to this unspeakable injustice and cruelty? They chose hope and they chose life. We rebuilt our lives and our communities. And when we had healed ourselves we re-engaged with the broader world, committed to values of justice and fairness.
These few words define me, and all that I am, and all that I have become.
I hope that I was a dutiful son, a diligent student, a loving and caring husband and father, a hard working businessman and to my great surprise, later in life, a community leader.
But there was, and there is, the dark side, the scarred side.
The iconoclast - an atheist by the time I was 10,
the trouble maker - almost expelled from school for running the books for the Melbourne Cup,
the opportunist - the author of an economics textbook, written over the summer break after finishing high school, helping students “beat the system”,
the rebel - practicing my newfound legal knowledge by challenging and defeating Monash university over their illegal car parking regulations. Always happy to give authority a poke in the eye,
the outsider - always observing, always moving on,
the distruster of authority - how many examples do you want?
And, of course, the skeptic, with a small dose of cynic - never willing to accept anything just because someone says it or writes it.
And there is the curious side, the intellectual side and the eternally optimistic, adventurous, almost reckless side.
I went on to complete my legal studies and my articles, but having set up a conference business on the side and earning many times the salary I earned as an articled clerk, I retired from law, literally 15 minutes after being admitted to practice.
And then, I started growing up. I met and married Carol and together we raised four magnificent children. I built, acquired and sold businesses over a period of thirty years before transitioning to become what I now call an ‘active investor.’
Throughout the journey I was dipping in and out of business and philanthropy and community, soaking up the good and the bad in each of those realms.
Fourteen years ago, Carol and I established the Trawalla Foundation. Now I was a fully fledged philanthropist, and impact investor, sitting at the intersection of the “not for profit” sector and its “for profit” counterpart.
The more I saw, the more I learned, the more I asked, the less I understood.
I began to lose my bearings. How could companies be allowed to make profits at the expense of society and the environment? Why are extraordinary “not for profits” chronically underfunded? Why don’t people have respect for honest businesses? Why am I so uncomfortable with impact investing?
Something was cooking. I had a growing sense of foreboding, a feeling of dread; dread about what can happen in the world when there is injustice and when people start losing faith in their institutions and start looking for scapegoats.
Harvard Club Speech
So, when the Harvard Club asked me speak at their “not for profit” award ceremony about a year ago, I unleashed.
The title of the speech was “what’s wrong with profit” and it was deliberately provocative. It defended profit, honestly gained, and condemned profit earned at the expense of people and the environment. It praised efficient “not-for-profits” and criticised those who wasted government and philanthropic funding. It welcomed the promising new world of impact investing and social enterprise whilst despairing its lack of scale, and the scope for really bad practices.
It was a provocation, to be sure, but I had no idea what I was getting myself in for. Having formulated the problem and having described the solution, and even giving it a name, I felt compelled to work out if it was a mere flight of fantasy or something that could become a reality in the world.
Over the course of the past year, my obsession has deepened. I read dozens of books and academic articles, and I have met some of the most brilliant minds on the planet. I owe a huge debt to the scientists, economists, technologists and philosophers who have helped me to develop the ideas that underpin todays speech.
Dr William Fisher, who taught me that good quality measurement of social and natural capital is not only possible but has the capacity to change the world, Ant Stevens who convinced me that, if I wanted to bring externalities into the market, blockchain technology was both necessary and sufficient, Dr Simon Longstaff, who came up with the concept of the Universal Commons, and dozens of other friends, associates and complete strangers who have provided hugely useful feedback and encouragement.
The Universal Commons
And with their insights and guidance, 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..
(If you’d like to have a long conversation about the philosophy and science of measuring social and natural capital, I’d be delighted to chat to you after this speech. I suggest you bring a sleeping bag)
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.
What do you think?
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
Questions and Answers
I don’t propose to have an open Q+A, but just few questions from Sarah, selected from the list below.
1. “You say there is something wrong with profit, but profit and free enterprise have improved living standards throughout the world and has served us so well for so long”
We agree that profit and the free market have made a huge contribution to mankind. The moral justification of profit is attributed to Adam Smith. Smith said the pursuit of profit is good and moral because it enriches not only the person who makes the profit but all of society. If you read what he said carefully you will see that he placed an important caveat on his support of profit as a good thing. He said (find exact quote)that it is a good thing because it advances “the common good”. When he wrote these words, commerce and industrialisation were bringing people out of starvation and abject poverty. It was hard to visualise that profit could be earned at the expense of social and natural capital. Natural capital was unlimited. Cutting down a tree to build a house was an unquestionable good thing. There were unlimited trees and not enough houses. Human and Social capital were concepts not yet contemplated as part of economic discourse. Making children fatter was a good thing. Consumerism and its consequences were not yet contemplated
If he lived today Adam Smith would agree that profit earned at the expense of the common good must be “marked down”.
2. “Your proposal requires someone to measure things like the value of a tree or a human life. This is not possible and do we even want that.”
We are not proposing that anyone measures the financial value of literacy or a tree or a human life. We agree that this is not only impossible but also not desirable.
What we are proposing is measurement of movements in a numerical but non-financial measure of the attributes of literacy, water etc. More literacy vs less literacy, cleaner water vs dirtier water. And good measurement requires a scale, just like a metre is a scale of length. And by quantifying and placing social and natural capital in a market place we will rely on market forces (reflecting things that people actually value) to determine absolute and relative values.
Applying the above principles to a piece of timber. Imagine a world where length cannot not be measured on a scale that is widely accepted and understood. Saying it’s important to measure the length of timber is not the same as saying how much it is worth. It is simply providing information to enable people to trade timber in lengths, and thereby establish a market price for a metre of timber. Similarly we say it’s important to be able to measure things like health and literacy and clean water, so that people can trade those things and set market prices.
3. Social and natural resources exist today, but they are not measured, not traded and have no monetary value. Your proposal seems to create monetary value out of thin air. Are you suggesting that the Universal Commons project will be able to create financial value by measuring and enhancing social and natural capital and that the value created will sit on par with financial capital? Are you saying that a great social entrepreneur who creates exceptional social or environmental value at low cost will be able to earn a “profit” and convert that to “real money” and, if they are crass enough, go out and buy a Lamborghini?”
That’s precisely what we are proposing. The concept of money and monetary value are human constructs. To create monetary value you need a mechanism for measuring social and natural capital, a mechanism for people to trade that measured capital and a mechanism for that value to be acknowledged and protected by social norms and rules. Here are two examples.
Second Life is an online virtual world, launched in June 23, 2003
It has an internal economy and closed-loop virtual token called the "Linden dollar (L$)". L$ can be used to buy, sell, rent or trade land or goods and services with other users. The "Linden Dollar" is a closed-loop virtual token for use only within the Second Life platform. Linden Dollars have no monetary value and are not redeemable for monetary value from Linden Lab. A resident with a surplus of Linden Dollars earned via a Second Life business or experiential play can request to refund their Linden Dollar surplus to PayPal.
Linden Lab reports that the Second Life economy generated US$3,596,674 in economic activity during the month of September 2005, and in September 2006 Second Life was reported to have a GDP of $64 million
When Europeans settled on the east coast of America, “the West” was a huge pool of natural resources: unexplored, unmeasured, and untamed by white settlers. Ignoring for the purposes of this example the rights of the indigenous American Indians, it was there to be exploited, but valueless until it was conquered, occupied and “civilised”. In contrast to second life where value was literally created out of thin air, the monetary value of the West was released and realised through discovery, exploitation and improvement. Initially value need to be guarded through the barrel of a gun, until the sheriff arrived and until there was legal recognition and protection for private property claimed.
We can and will do better with Social and Natural capital, but these two examples demonstrate how monetary value can be created out of unimproved resources, and even out of thin air!
The human, social and natural capital of the world can be seen as equivalent to the huge unexploited resources of the West. By measuring social and natural capital and by bringing them into the market we can protect our precious natural resources and create enormous wealth for all of humanity.
4. “Your proposal to claim all unimproved social and natural capital for all of humanity sounds like a socialist utopia, or more likely, a communist dystopia”
The Universal Commons makes no claim on existing private property - financial capital. It simply claims the earth’s bounty for all of humanity.
To understand whether this is an exceptional, contestable claim, we need to examine the alternative: if the earth's bounty does not belong to all of humanity to whom does it belong? Does it belong to the shareholders of corporations who combine existing financial capital with social and natural capital to create more financial capital for shareholders? Only an argument based on naked self interest can dispute that the unimproved social and natural capital belongs to humanity. And when naked self interest is not only unjust but threatens life for all of humanity on earth, it will not be sustainable.
This is not to say that the rich can’t get richer. We have no objection to private property and we have no objection to financial incentives; in fact we would like to harness them for the advancement of financial, social and natural capital. As long as financial capital is enhanced without depleting social and natural capital, the increase in financial capital is genuine value, equal to social and natural value - and can be used to buy Lamborghinis alongside the shameless social entrepreneur referred to above
5. “The free market is the cause of so much that is wrong in the world today. Your proposal is to expand the marketplace even further, by including social and natural capital. Won’t that just make things worse?”
We believe that free markets are extremely effective mechanisms for allocating resources and increasing efficiency and innovation. The problem is not free markets but the disconnect between the definition of profit (which underpins free markets) and the things we actually value. Free markets do not optimise the things we value because “profit” can be made at the expense of society and the environment. Conversely, preserving or improving social and environmental capital is not regarded as “profit”. If we expand the market to include not only profit but also movements in social and natural capital we will harness the power of the free market to optimise not only financial profit but also social and environmental outcomes.
In his important book on this topic (What money can’t buy) Michael Sandel complains about the detrimental effects of th