Real Values and Their Role in Global Governance (Part II)

Values lie at the heart of who we are and what we do. Values shape cultures, organizations, politics and policies. Values are more often described at the individual, religious, tribal or national level.

A question arises as to whether there are sets of global or universal values and, as we move to a more interconnected and globalized world, whether they are sufficient in scope and detail. To some extent, the answer is clear: Universal values, rights and freedoms are enshrined in the context of the United Nations, but these are state-centric and state “negotiated,” rather than individual or “citizen values.”

Nevertheless, the Universal Declaration of Human Rights has now been accepted widely as a basis for national legislation, and the Charter of the United Nations itself represented an important point of reference in determining universal values.

The larger question is, of course, how such values are transformed into real change. At the turn of the new millennium, the United Nations made a bold attempt to reaffirm those rights in the context of the Millennium Development Goals: a mix of (sometimes overlapping) social and economic goals aimed at reducing poverty in the emerging world. Sadly, progress on meeting these goals has been slow and sporadic.

Others have focused on what might be termed common values for humanity. They center around safety, community and relationships (often termed social capital); decent living conditions and an ability to earn sufficient money to cover more than basic needs (wealth); and a cleaner and safer environment (ecology).

Irrespective of details and competing terminologies, there are reasonable values that most people adhere to. Most value honesty over dishonesty; ethical behavior over unethical behavior; a decent life for themselves, their family and their children; decent health and education afforded to all; a cleaner and safer environment within which to live; a level of prosperity that takes them out of poverty; a sense of belonging to community; and a strong sense of social capital and purpose in life.

The key, of course, is whether we are able to translate such values into tangible actions. This is where economics enters into the equation.

The foundations for modern economics were built when the world was dramatically different from today. Current economic theory rests largely on assumptions that were made over 200 years ago, but many are no longer valid for today’s world.

Shifts in lifestyles, communications, production and consumption patterns have been sufficiently large as to call into question the validity of current economic theory.

It is based on a time when physical capital was scarce and natural capital abundant, when the global population was a fraction of what it is today, when economies were agriculture-based and services of little importance, when global public goods were unheard of and when public policy was limited or nonexistent.

As a result, there is now a nascent movement to review the underpinning of economic theory, as well as to begin using economics to measure many goods and services that have hitherto remained unmeasured, including natural resources.

Economics exists also in a wider spectrum of human societal activities: ecological, political and social. Increasingly, the lines between disciplines are blurred. Witness, for example, the growth in ecological economics and the valuation of natural capital.

Economics has also become both more specialized and more interdisciplinary. The simple micro and macro schism of the past no longer seems valid. The branches of economics have grown considerably: monetary, fiscal, growth, financial, market, development, sector (energy, industry, health, agriculture), climate (adaptation and mitigation), information and environmental, to name a few well-established streams. And others are emerging, including efforts to directly link psychology with economics (such as the economics of happiness or of social capital).

Yet all appear to have one thing in common: a sense of unease that the economics of today neither appears to address the real issues of today’s world, nor does it measure the things that really matter to people. Economics has lost its way. It may not yet be broken, but it needs a serious overhaul.

More generally, economists need to also turn their attention towards a better understanding of normative values. They also need to ensure that societal values that are unmeasured and therefore largely ignored by economists are brought into the mainstream of economic policy. Failure of economic policy to incorporate real societal values remains a central barrier to addressing the global humanity challenges we face.

As economics grew more specialized, it also lost much of its philosophical underpinnings. Ends gave way to means. Finding equilibrium between supply and demand dominated economic thinking, while maximizing human welfare or minimizing human suffering was an afterthought.

We lost sight of the real purpose of economics. Market outcomes that created surplus money were celebrated — even if they resulted in lost jobs, lost homes and increased personal misery. It is time for economics to be re-engineered and made fit for purpose.

Economics as we know it is neither supporting real wealth creation in the 21st century, nor is it facilitating the creation of the kinds of markets, policies and instruments that will guide us towards long-term sustainability. It is time to rethink and change our ways.

To end the “mechanistic” era where economics has become divorced from “real values,” we need to think about a few core challenges:

The Economics of Growth and Wealth:

The use of national income accounting metrics to assess wealth and social progress is more outdated today than ever before. And as we look to the future, we have to contend with a rapidly changing global economic structure, a world where complexity is increasing, where services are rapidly replacing manufacturing and a world where many people are beginning to question the extent to which economic policy and markets have failed to bring about real, sustained and lasting welfare.In light of all these factors, it is time to not only revisit our measurements of wealth, but actually change them into something meaningful for the 21st century.

Today’s growth perpetuates over-consumption. As growth weakens, governments promote consumption (to get companies back on their feet and to provide governments with more revenue). The fact that more consumption is part of the problem and not part of the solution escapes all but the clear-minded. It may also lead us to a point where we experience, on a large scale, the phenomena of what American ecological economist Herman Daly has called “uneconomic growth,” where the extra costs of a unit of GDP growth outweigh the benefits.

The Economics of Natural Capital:

Robust economics work in this domain has for too long sat on the shelves of academia, rarely making it into ministries of environment, and almost never into ministries of finance. And yet, the consequences of using incorrect economic values of natural resources can be considerable. The underpricing of water is leading perhaps to the largest single global economic subsidy in the world today.The management of our water resources represents an interesting case of rising costs and increasing scarcity of capital. The economic cost or “real value” of water is rising rapidly and discontinuously in many countries.

This represents a nuanced view of “limits” where the physical limit of fresh water is not reached, but the massive and discontinuous costs impose a significant real bind on economic growth.

The Economics of Social Capital:

The pioneers of economics largely considered a single form of capital, that which is man-made. Labor-capital ratios would find the optimum balance between the cost of physical capital and the price of labor.

Our world is now significantly more complex, and other forms of capital are beginning to be recognized as potentially binding and important to our understanding of economics.

Social capital has been largely untreated by economists, even though it may provide a better understanding both of the purpose of economics as well as a more practical understanding of how economies work.

Social capital may be described as the range of social interactions that can add value to our contentment, happiness and feelings of self worth. It has to do with how secure we feel within our families, our communities and our cities, and how safe we feel for our children and their future.

The depletion of social capital can extract a very high economic cost as social disruption, violence, destruction of physical assets, crime and vandalism increase. Given our presumption that economics should be about maximizing human well-being, it is remarkable that social capital has taken a back seat.

On the positive ledger, research is being undertaken on the economics of happiness, the bridging of economics and psychology. To some, happiness appears to be a rather esoteric concept for economists to grapple with. However, surely everyone on earth aspires to a happier and more contented life — a life of strong social capital where welfare is maximized and security assured. The economics of happiness is nontrivial.

The Economics of the Unknown:

Even though we live in an uncertain world where nonlinear events are possible, where booms and busts are commonplace, where civil strife and economic asset destruction can occur at any time, the role of risk and uncertainty becomes an important parameter for financial and economic decision-making.

Recently, climate change has focused our attention increasingly on probability theory and the management of non-linear events. Yet economics has, to a very large degree, remained deterministic in nature.We need to upgrade our economic thinking to embrace risk and uncertainty in a more rigorous and sophisticated manner. Least-risk considerations may need to replace least-cost planning. Options theory may need to replace deterministic planning. It is an area where economics has been historically weak and, as we move into increasing uncertainty, never more important.

Integrating social and environmental standards into public investment decision-making lowers implementation risk, improves the quality of the built environment and may reduce other environmental risks.

How to link economic risk more formally with social and environmental quality improvements remains an open question. In addition, the issue of how systems of public-good risk, time-dependent risk (especially inter-generational), and private risk coexist needs attention.

Read Part I here and Part III here.

Editor’s note: This essay was adapted from the author’s presentation at the 2011 Salzburg Trilogue. Hosted by the Bertelsmann Stiftung, the Salzburg Trilogue facilitates international cultural dialogue by bringing together recognized public figures to consider matters of global importance.