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Three Forms of Capital

Philosophy of Capitalism 800px-The_Sun

It’s been said that capitalism could be a great system, but it’s never really been tried.  Capitalism as it has largely been practiced to date has sought to accumulate economic capital at the expense of social and environmental capital.

Now it is true that the discovery of how to accumulate economic capital by offering a product or a service at a price that is more than the cost – thereby generating wealth –, is a great and important discovery.  Classical capitalism has wielded that great discovery to generate great wealth, but at a great cost to society and the environment.

Planetary Capitalism recognizes that there are at least three forms of capital essential to the creation of genuine prosperity.  In addition to economic capital (financial and manufactured), there are two other forms— natural and social.  Any business-person knows that, over the long run, a successful business needs to invest wisely to generate more income than expenses and to grow its capital.  If a business lives off its capital, it will eventually go bankrupt.  Planetary Capitalism recognizes that it is essential to build all three forms of capital in a True Market Economy.  In fact, a True Market Economy can be defined as an economy that uses market forces to build all three forms of capital.

Natural Capital:  The economy operates within design limits inherent in the natural environment.  If the economy disrupts the natural environment it disrupts itself, at great financial cost to society and to individual businesses.  Witness the devastation of Super Storm Sandy.  Under the deceptively named “free market” economy, which bears little resemblance to the type of market envisioned by Adam Smith, enormous resources have been lost that were once, in fact, provided for free by intact ecosystems.

Conversely, a True Market Economy recognizes its dependence on the natural environment for fresh air, clean water, climate stability, renewable energy, and a thriving eco-system.  In a True Market Economy, businesses derive value from the eco-system without disrupting it.  As the True Market Economy emerges it will utilize true cost pricing and true cost accounting to value major interactions with the natural world.

Social Capital:  A prosperous economy depends on a stable society with a skilled and creative workforce.  The economy threatens its own foundations if it disrupts society by allowing an extreme gap to emerge between the very wealthy few and the rest of the population or by inadequately supporting society’s ability to ensure public safety, an effective educational system, a well trained workforce, and quality affordable health care.

On the other hand, a prosperous economy contributes to a stable society by creating the jobs, the opportunity for productive work, and the income that people need to live satisfying lives.  A True Market Economy recognizes the profound contribution of social capital to a prosperous economy and builds social capital by reducing the wealth gap, paying its fair share of taxes, and making many other investments in social health and welfare.

Economic Capital:  Sustained economic prosperity requires that both the private sector and the public sector operate according to sound financial principles, using current income to contribute to the accumulation of  long term economic capital.  Massive government budget and balance of payments deficits are not sustainable and put the countries that incur them in jeopardy to foreign lenders.  At the same time, if the state of a country’s physical infrastructure is in serious decline, then its economic capital is in decline.

Economic capital is most effectively built and the economy works best when economic transactions are transparent and guided by appropriate policies.  Sound regulations provide the guard-rails that keep the economy on track.  If those who criticized sub-prime lending and exotic real estate derivatives had been listened to, the economy would have saved trillions of dollars and the Great Recession would not have happened.  Massive subsidies to major corporations and industries, hidden inside the tax codes, contribute to the deep distrust of the government, policy makers, and business leaders.  The allocation of our economic capital should be fully transparent to have an economy and a society that function well.

In a True Market Economy, the government (the public corporation) lives within its means, except during significant economic downturns, and partners with private businesses so that both private and public sectors operate in an economically responsible fashion, while maintaining a sound financial system and reliable physical infrastructure.  Investments of public funds for the benefit of current and future generations should be made regularly and wisely.

True Market Metrics:  A True Market Economy needs True Market Metrics – transparent, accurate, timely economic information reporting systems that include a national profit and loss statement and balance sheet to measure the health of our economy, society, and environment and the degree to which the economy is building all three forms of capital.

Philosophy of Capitalism Part 3 [New Way of Doing Business]