The Big Picture
Adam Smith’s original vision was of an economy where individuals could advance the public good by pursuing their own private profit. It was a vision of a truly mutualistic economy, where private profit and public benefit were aligned. People could do well by doing good.
The problem is that our economy does not live up to Smith’s vision.
Our current economic system allows businesses to derive a private profit while degrading the Universal Commons. It also fails to adequately compensate individuals and businesses that invest in and improve the Universal Commons. This means a business can make a profit while polluting a waterway, contributing to climate change or harming public health. Meanwhile, an organisation that cleans a waterway or improves public health will struggle to capture the value it has created.
The root of the problem is that profit - the engine of capitalism - is not aligned with what people truly value, such as clean air, a stable environment and healthy communities.
This disconnect between profit and value is causing tremendous harm to people and the planet. Metrics like Gross Domestic Product give the false impression that the economy is a success when it is consuming natural resources at unsustainable rates, damaging the environment that supports it, and investing in things that degrade human welfare. Meanwhile, our economy fails to direct investment towards things that would genuinely improve human wellbeing, such as repairing environmental damage or improving social cohesion.
We believe that markets are unmatched when it comes to efficiently allocating resources, transmitting information, and promoting innovation. However, we also believe that our current market system encourages businesses to generate a profit at the expense of the Universal Commons. Some businesses extract a private benefit while eroding the Universal Commons and the public good, and they are often not held sufficiently responsible for the impact they cause. Even more disturbing is their ability, via advocacy and lobbying, to influence the institutions that shape the economic landscape to preserve and expand their private advantage.
The good news is that there is a solution. We can rehabilitate capitalism by realigning profit with value. Then capitalism will fulfil Adam Smith’s original vision, where individuals can genuinely do well by doing good.
The solution is to ensure that the economic system encourages investment in the things that genuinely improve human welfare while preserving the planet and discourages investment in things that harm society and the environment – thereby aligning private profit and public benefit.
The key to unlocking this solution is a proper understanding of markets. There is no such thing as a free market and there has never been a free market economy. A market without property rights or a functioning legal system is inconceivable. All markets are guided by institutions, such as social and legal norms, industry standards and government regulations.
The Universal Commons Project will seek to align profit and value by contributing to the health and vitality of the institutions that shape our economic landscape and our markets.
We believe that it is our duty to preserve and strengthen these institutions to ensure that economic activity enables individuals and businesses to derive a private profit, but to also hold them responsible for the impact they have on the Universal Commons. These institutions ought to direct economic activity so that private and public benefit are aligned, so that generating a profit corresponds with preserving or improving the Universal Commons.
One of the key institutional reforms that the Universal Commons Project will pursue is bringing externalities into the market. Externalities like pollution or carbon emissions have a negative impact on the Universal Commons but are not reflected in market prices. The absence of market signals means that businesses acting alone or in small groups cannot reverse these externalities without placing their own viability at risk. If the Universal Commons are left unaccounted, then economic activity will tend to overproduce negative externalities and underproduce positive externalities.
If externalities can be internalised into the market, then products and services will reflect their true cost, including their impact on people and the planet. This will make products that degrade the Universal Commons relatively more expensive, and products that improve the Universal Commons relatively cheaper. Then market forces can use these price signals to direct investment towards efficiently generating genuine value.
Overcoming the Fundamental Social Problem
The challenge we face with the economy today is not new. It is essentially the same “fundamental social problem” that all life has faced over the last four billion years (Wilson & Wilson, 2007), and all human societies have faced over the last several millennia.
At its core, it is the challenge of aligning individual and group benefit. In the economic context, we can call individual benefit “profit,” and group benefit “value.”
It is well known that we can all do well when we work together as a group. But there are often opportunities for individuals to do even better if they extract value from the group without giving back. In biology, this is often called parasitism. Conversely, altruistic actions that benefit the group typically come at an individual cost, which means they’re often unsustainable.
However, if individual and group benefit are aligned, then actions that benefit one also benefit the other. This is a fine balance to achieve, but the last 4.5 billion years of evolution shows that it can be done, and that organisms that achieve greater alignment of individual and group benefit tend to thrive.
This fundamental social problem, and the tension between individual and group benefit, can be represented on a simple chart, with private benefit represented on the x-axis and public benefit represented on the y-axis (Finighan, 2019).
Any action - whether in a biological or economic context - can be placed on the chart. Its position will correspond to the magnitude of private benefit it yields for the actor as well as any public benefit it produces.
For example, if a business generates a profit but its manufacturing pollutes a river, then this action yields a private benefit while imposing a cost on the people who rely on that waterway for clean water. This places the business’s activities in the top-left “Parasitism” quadrant. On the other hand, if a philanthropist donates money to an organisation that improves education, they produce a public benefit but bear a private cost, placing the act in the bottom-right “Altruism” quadrant.
If a baker sells bread that feeds a town, they yield a private and public benefit, placing that act in the top-right “Mutualism” quadrant. Conversely, if a government spends taxpayer money poorly, it yields a private and public cost, placing it in the “Folly” quadrant.
If the economy systematically ignores the importance of the Universal Commons, and the impact that degrading it has on the public, then it drives economic activity into the Parasitism quadrant.
In this economy, there may still be those who seek to produce a public benefit, but because the Universal Commons is ignored, it is difficult for them to capture the value they have created. This drives their activity into the Altruism quadrant. Many philanthropists, charities, volunteer organisations and government services reside in this quadrant, but because the economy disadvantages their activity, there is rarely enough Altruistic investment to invest in public benefit and repair the damage done by those in the Parasitism quadrant.
The Impact Investment movement attempts to conduct business within the Mutualism quadrant by investing in enterprises that will yield a financial profit and also advance the public good. But because the economic system itself advantages the Parasitism quadrant, Impact Investment is often at a competitive disadvantage, and thus fighting upstream against the economic current.
We believe that we should seek to reform our economy and transform it so that its institutions create incentives for business to operate in the mutualistic quadrant and disincentives for those who operate in the parasitic quadrant. The key step in making this happen is properly accounting for the importance of the Universal Commons in the way we calculate profit, because the condition of the Universal Commons impacts the entire public.
Once the economy is structured to factor in the Universal Commons, then business activity will naturally migrate out of the Parasitism quadrant as it becomes less profitable and will naturally migrate towards the Mutualism quadrant. Similarly, because philanthropists and charities will be able to measure and be rewarded for the public benefit they are generating, they will naturally migrate from the Altruism quadrant into the Mutualism quadrant. When this happens, all investment effectively becomes Impact Investment that generates a private profit and advances the public good.
We do believe there will still be an important role for some philanthropy as well as government activity within the Altruism quadrant, particularly when they impact things that are not measurable, not a part of the Universal Commons or are best left regulated by government.
The Tide of History
The maximisation of economic activity in the mutualistic quadrant is not only good for all people, but history and biology show that it is the most resilient and competitive system in the long term. Biology shows that species that have found ways to promote mutualism have tended to outcompete those that are less cooperative or dependent on parasitic strategies. In fact, many biological parasites have evolved over time to become less damaging to their hosts, some even evolving to become cooperative symbiotes, lest they become extinct. This shows that it is not only possible to transition from parasitism to mutualism, but if we wish to thrive over the long term, then it is in our interests to embrace mutualism.
One of the main challenges to transitioning to Mutualistic Capitalism is that the rules that govern how society and the economy function have been strongly influenced by those who have the greatest power within the economy today, which tend to be those who reside in the Parasitism quadrant. This means they tend to manipulate the rules to entrench their advantage, such as by opposing legislation that would hold them responsible for the impact they have on the Universal Commons. This can be seen from moves by lobby groups that oppose things like environmental protection, the regulation of pollution, or the introduction of carbon pricing or sugar taxes.
Rather than fighting against the economic current with Impact Investment and philanthropy and attempting to introduce piecemeal regulation, we believe in systemic change. By emphasising the importance of the Universal Commons, and improving the way we measure and track the impact that business activity has upon it, it will enable us to achieve wholesale regulatory reform. This not only directs economic activity towards the Mutualism quadrant, but it lowers the regulatory burden, streamlines government and enables the economy to work more efficiently towards producing what people genuinely value.
We believe that Mutualistic Capitalism is not only good for people and the planet, but we believe it is necessary if we are to prevent Parasitic Capitalism from undermining our ability to maintain our standard of living. Four and a half billion years of evolution tell us it is possible. All we have to do is start making the change.