Two years ago I was a staunch defender of markets and a largely apolitical businessman. Today I am still a defender of markets, but I have also become an agitated voice for economic and political change, calling for a radical overhaul of capitalism. This is the story of what happened during those two short years, and how it has motivated me to create the Universal Commons Project.
What’s Wrong with Profit?
It all started when I was invited to give a speech at the Harvard Club in July 2017. I decided to lightheartedly air some long held irritations I’ve had as a businessman and impact investor. I entitled the speech “What’s wrong with profit?”
I asked why is it that capitalism allows businesses to profit while harming our environment and eroding social wellbeing? Why are worthy not-for-profits universally underfunded, while we continue funding inefficient and wasteful ones? Why are good businesses that produce high quality goods and services at fair prices not respected for the value they create?
My raw intuition was that these things happen because profit is not aligned with value. If only we could align profit and value, then the forces of capitalism would be directed to create real value without it coming at the expense of the environment or social wellbeing.
It seemed a simple and elegant solution, but when it came time to put flesh on these idealistic bones, my raw intuition was no longer enough.
The Journey Begins
Two challenges immediately presented themselves. The first was how to measure what we truly value, like a stable environment or a literate community? The second was how to create an economic system that rewards those who generate value and dissuades those who would erode it?
Running on the fumes of my intuition, I zealously set out to overcome these challenges. My first inclination was to tackle the problem of how to bring externalities into the market, so things like pollution and public literacy could be folded into the way we calculate profit. If we could do that, then the market could use its power and efficiency to maximise value.
The problem was that even if we could measure externalities, why would anyone pay to use things that are otherwise freely available? Why would anyone invest in improving environmental and social assets when there is no-one to sell the improvements to?
Even with my undergraduate economics, I knew that a market cannot exist without buyers and sellers.
The Universal Commons
This is when a dear friend, the philosopher and ethicist Simon Longstaff, introduced a radical idea that shifted my thinking. He argued that all the world’s “Social and Natural Assets” - clean air, stable climate, literate communities, etc - actually belong in the commons, so they belong to all of humanity in equal shares. This was what he called the “Universal Commons.”
If our collective ownership over the Universal Commons was recognised, then we would act in our common self interest and demand payment for its use. Equally, our self interest would encourage us to reward those who preserve and enhance it. The Universal Commons would effectively solve the problem of creating a market in Social and Natural Assets. Or so I thought.
To my untrained mind, Simons idea was idealistic but not crazy. Despite a gentle warning from my wise son Oscar, I ignored the magnitude of the social and political challenges of creating the Universal Commons itself, and decided to use it as our anchor and our starting point.
Measurement and Markets
The Universal Commons only further underscored the importance of measuring the condition of the world’s social and natural resources, which I called Social and Natural Assets. So I spent months researching everything I could about the history, science and philosophy of measurement, and meeting with many of the world’s leading measurement experts.
My conclusions were encouraging. It seemed that measurement science had already solved many of the technical challenges in measuring the condition of Social and Natural Assets. In fact, the history of measurement showed that new and improved measurements have consistently unlocked value, increasing human welfare and prosperity. For example, more accurate measurements of air pressure vastly increased the efficiency of steam engines.
With better measurement of changes in the quality and quantity of Social and Natural Assets, and a functioning market of buyers and sellers, we could measure the value of a sustainable environment and of a healthy society. At last I had found a useful project that I could sink my teeth into!
My initial push was to create a measurement challenge prize that would award a substantial cash prize to the person or team that developed a “measurement framework for Social and Natural Assets”. I approached NESTA (National Endowment of Education Science and Technology), a London based innovation foundation, to undertake a research project on the viability of a Measurement Challenge. NESTA thought the idea had merit but questioned the broad scope of this Challenge. We agreed that they would limit the scope of their research to the measurement of clean air for human health.
The Market Design Project
Now that our contribution to humanity was under way, it was time to return to the question we had conveniently “solved” via the concept of the Universal Commons: who would be the buyers and sellers of clean air? What would a market for clean air actually look like?
I needed an economic evaluation of the Universal Commons Project, which brought me to a brilliant economist working at the London School of Economics, Reuben Finighan. Reuben’s economic evaluation was sobering. Whilst endorsing our aspiration to align profit with value, Reuben questioned the timing of the Measurement Challenge and encouraged us to think more deeply about the nature of markets and how they come into existence. He also raised a number of economic, social and political considerations that accelerated my late onset social and political awakening.
It was time for our first pivot.
It was time to cease relying on the concept of the Universal Commons as the panacea for creating demand and supply and return to the social and political elephant in the room: why would anyone invest in clean air when it is free and there is no-one to sell it to?
So we asked NESTA to pause their research and asked Gavin Starks, a London-based entrepreneur and environmental activist, to run a Market Design Project to answer the central economic questions of supply and demand.
The key output of the Market Design Project was the observation that people would only invest in externalities if they either volunteered to or were forced to do so. Some already volunteer to do so, such as philanthropists, Impact Investors and responsible corporations. But many don’t.
The Market Design Project concluded that if the Measurement Challenge produced a good measure of clean air for human health, we could harness voluntary demand and develop at least a voluntary clean air market. We could offer this capability to cities, states and national governments for adoption and strengthening via regulatory reform.
Eric Beinhocker and CO2e
Before we had the time to evaluate this idea, it was derailed over a coffee with Eric Beinhocker, Executive Director of the Institute for New Economic Thinking at Oxford. After I described our Market Design Project and our hypothesis, Eric asked why we were creating a market to demonstrate how externalities could be internalised when we could just describe an already existing one for carbon dioxide equivalent (CO2e)?
Eric was right. The CO2e market is an emerging proof of concept of an externality being internalised. We would save a lot of time and money by telling the CO2e story rather than by recreating it using clean air.
The story itself is compelling. Around 250 years ago, global warming was not a concern, and CO2 was not an externality. Then 163 years ago the scientist Eunice Foote revealed that the world was warming and the cause was CO2. Her theory kicked off a long process, substantially confirming our clean air hypothesis. The first step was a scientific and social consensus around measurement of CO2e. Then the science connecting CO2e and global warming became widely accepted and a critical mass of people started to feel strongly enough to want to do something about it. CO2e became a negative externality. This led to a level of demand emerging, enabling the creation of voluntary markets for trading CO2e. The final step is slowly unfolding today, with governments responding to public demand and using the knowhow and technology of voluntary markets as the basis for regulatory intervention.
Although many despair that we are doing too little too late, there is little doubt in my mind that within a decade or two CO2e will no longer be an externality. The full cost of CO2e will be included in the profit of all corporations. Doing so will be “mainstream business.” Then, when it comes to CO2e and global warming, profit and value will be aligned.
For the Universal Commons Project, our ability to connect the CO2e story to our broader mission of aligning profit and value has been a breakthrough. We can see that focusing on projects addressing the scientific and technical challenges of measurement and market design is necessary but not sufficient. The CO2e story shows us that we have vastly underestimated the role of story-telling and consensus building, and the inevitability of political struggle.
The Fundamental Social Problem
Reuben also helped us take a big picture perspective on what we’re trying to achieve. He showed that the challenge of aligning profit with value is just a modern manifestation of what has been called by evolutionary biologist David Sloan Wilson the “Fundamental Social Problem.” This is the problem that all life has faced over the past four billion years, and all societies have faced over the last several millennia. At its core, it is the challenge of aligning individual benefit (profit) with group benefit (value).
He also gave us reason to be optimistic about our ability to advance our mission. In his words “we have the evidence necessary to tell a grand, unifying story about the history of life and society on Earth as being a 4-billion year search for mutualistic strategies”.
If you believe that we have progressed as a species, as I do, you must attribute it to our unique human ability to develop new institutions to enable ever greater spheres of cooperation and mutualism: from tribes to metropolis, from barter to money, from feudal societies to modern capitalism, from monarchy to democracy.
By aligning our mission and the Universal Commons with Reuben’s vision of a truly “Mutualistic Capitalism,” we were able to tap into a new, and academically rigorous conceptual framework.
He also suggested that our strength was not necessarily in making incremental progress on the scientific and technical challenges, but rather encouraged us to invest in the transformative power of “big ideas, strongly articulated”. Change is only initiated when a critical mass of people recognise a challenge or an opportunity and wish to do something about it. And that change is made harder because those who benefit from free negative externalities are likely to resist paying for those externalities. So if we wanted to change the current economic system and its institutions, the starting point was changing people’s beliefs. This requires story-telling and consensus building.
Returning to the Universal Commons
I can now see that my intuition that profit must be aligned with value was a good one, but it fell far short of being a complete answer.
I can see that capitalism today is under siege because there is an emerging view that it no longer serves the common good. It has become what we call “Parasitic Capitalism.” I believe the Universal Commons can act as a powerful anchor for a new vision for Mutualistic Capitalism, one where profit can be earned, but not at the expense of the Universal Commons, and we must reward those who enhance it.
So now I believe we have a solid diagnosis of the problem (Parasitic Capitalism) and a good conceptual idea of what the solution would look like (Mutualistic Capitalism). We have also highlighted some key stepping stones to get there, like improving measurement standards, creating markets and improving institutions. The next step is to translate all this into concrete action. Our challenge is not finding something useful to do; our challenge is choosing the best thing to do with our finite resources. So stay tuned!
The Universal Commons Project has come a long way and we have a long way to go. We are approaching the end of the beginning. We are excited to get on with our adventure and to share the journey with you.