SVA - Economic Theory

Back in the 1700’s, Adam Smith the father of economics understood the inefficiencies of the capitalist system and realized the limitations of the capitalist system to efficiently allocate limited resources. Sellers and buyers are never equal and how easily business can distort the system for their own benefit and profit.

Capitalism together with a proper functioning democratic political system will maximise economic and social value for all. However, such ecosystems are horribly inefficient.

The inequality between the haves and the have not has increased over the previous 30 years together with the inability to address climate change highlights the inefficiencies of the capitalist system.

The limitations of today’s current economic systems have been recognized, discussed and researched for many years by economists. Economists call this issue externalities. Externalities are the consequences of economic activity which affects customers, and other parties without the effect (both positive and negative) being incorporated in the price of goods and services.

Economists wholly grail is the current Gross Domestic Product (GDP) figure which supposedly tells us whether a countries economy is growing. However, this figure is horribly misleading for example when the illegal drug trade sell more drugs, the GDP figure increases whereas the free meals provided by the local charity are never included in the GDP number.

The GDP figure is an incomplete guide as to whether a countries economy is expanding or contracting, that is a quantity measure. As to the quality of a countries economy the GDP is silent on this issue.

People in power are making economic decisions about the future when they have an incomplete measure on the size of the economy and no measure on the quality of economy.  

The source of the is the basic teaching of Economics 101 which has not changed over the previous 40 years and the demand and supply graph.  For more information on this topic go to “The Paradox of Price Article” https://www.socialvalueaccounting.com/adding-value/2022/3/21/the-paradox-of-price

Over 70 years ago the great economist John Manyard Keynes wrote about how incomplete and inefficient GDP figures are.

It has been over 50 years since the great Senator Robert F Kennedy spoke on the 18th March 1969 at the University of Kansas where he outlined why the current use of economic growth as a measure of success is fundamentally flawed. It could be said that Senator Robert F Kennedy saw the danger of America’s economic system and understood the importance of a functioning equitable efficient economic systemand how important such a system is to a countries democratic political system. Trump and the current state of the republican party is not the cause of the economic and political decline of the USA just the result. 

To listen to 2:11 minutes of Senator Robert F Kennedy’s speech go to Robert F. Kennedy challenges Gross Domestic Product

However, all is not lost. For all the damage done by Covid it has provided time for many to reflect on what is important and maybe the philosophy of endless consumption shop to drop appeal may wane. Also, climate change and its cause can no longer be challenged, unless you live in Australia.

At the big end of town progress is occurring slowly, company boards are beginning to address value and environmental issues. This is known as ESG Environment, Social and Governance.

Thomas Piketty the French economist looks at the issue from an economic theory perspective and sets out in his bestselling book Capital in the Twenty-First Century the issues and what needs to change. “The book galvanized global debate about inequality. In this audacious follow-up, Piketty challenges us to revolutionize how we think about politics, ideology, and history. He exposes the ideas that have sustained inequality for the past millennium, reveals why the shallow politics of right and left are failing us today, and outlines the structure of a fairer economic system.

Our economy, Piketty observes, is not a natural fact. Markets, profits, and capital are all historical constructs that depend on choices. Piketty explores the material and ideological interactions of conflicting social groups that have given us slavery, serfdom, colonialism, communism, and hyper capitalism, shaping the lives of billions. He concludes that the great driver of human progress over the centuries has been the struggle for equality and education and not, as often argued, the assertion of property rights or the pursuit of stability. The new era of extreme inequality that has derailed that progress since the 1980s, he shows, is partly a reaction against communism, but it is also the fruit of ignorance, intellectual specialization, and our drift toward the dead-end politics of identity.

Once we understand this, we can begin to envision a more balanced approach to economics and politics.”  Booktopia.com.au

From an economic practical point of view the English economist Kate Raworth book “Doughnut Economics” sets how and what needs to be done. According to George Monibiot of the Guardian “Kate is the John Manyard Keynes of the 21st Century.  To listen to Philip Adams  ABC Late Night Live interview with Kate go to  Growing popularity of 'Doughnut' economics

To round out your reading, Bruce Pascoe’s Dark Emu book shows how Australia’s first people society operated and how their belief system was in lock step with their economic system. When read as an economic text as well as an anthropological text the book provides many pointers as to how current capitalist systems can pivot so capitalism is more efficient, equitable and sustainable.  Without money, without property rights and with a numbering system limited to 1, 2 and more the first people’s society belief system was in lock step with its economic system.

This is the issue economics and accounting need to record measure and report on.

Accountants and economists need to promote a system and a society where individuals and corporations define their belief system and a recording and reporting system which measures, and reports assists ongoing improvement to the lock step position.

Social Value Accounting’s belief system can be viewed from the Ideology tab on our web site.