August 29th, 2013 at 9:00 am
This week our featured book is The Ethical Economy: Rebuilding Value After the Crisis, by Adam Arvidsson and Nicolai Peitersen. Today, we have the second half of an essay by Adam Arvidsson: “Ethical Economy: Can Capitalism Evolve?” In his essay, Arvidsson discusses how the information age is changing current models of corporate capitalism and looks to the future to predict how those changes will play out. You can find the first half of the essay here.
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Ethical Economy: Can Capitalism Evolve? (Part 2)
But values matter in an even more fundamental way. Financial valuations of companies at two to three times their book value are supported by so called ‘intangible assets’, chiefly brands, but also more esoteric things like ‘knowledge capital’ or ‘social capital.’ The problem is that nobody knows how to evaluate such intangible assets, or rather, there are as many methods as there are operators in the intangible-assets-valuation business. The Apple brand, for example, was evaluated at $150 billion by brand evaluation company Brand Z in 2012, while the market leader Interbrand valued it at $30 billion. But what are intangible assets? Some of them are probably cover-ups for speculation. But that aside, they are essentially estimations of a company’s ability to draw value from its use of common resources. The Apple brand reflects the fact that the Apple corporation is able to create cooler and more innovative products than, say, Samsung, while relying on the same suppliers, the same patents, and similar technical solutions. Louis Vuitton is not the only company around able to make high quality bags. But its brand is so highly valued because it is able to provide high quality bags that enable people to feel beautiful and elegant in ways that appeal across the world. Today the valuation of brands and other intangible assets are based on companies’ reputations for such excellence in the use of common resources. ‘Reputation’ in this sense refers to the opinion and hearsay among a small community of market analysts and experts (in some cases supported by a more participatory social media-based opinion). It looks a bit like 19th century monetary politics before the gold standard, where a small community of rich bankers came together to set interest rates and the price of money more generally, without there being any possibility for popular participation in the business. This way members of productive publics who continuously create the values that guide their own productive co-operation are excluded from the more important overall financial evaluations of what they produce. This is irrational in many ways. First, because it tends to perpetuate the ‘value crisis’ that now grows within corporations as well as in society more generally, creating a widespread perception, not only among the radical fringes but also within the core of knowledge of the working middle class, that corporations are not in the business of catering to what they really need and value. Second, because the absence of a wider participation in the opinion and reputation economy in which the values of intangible assets are set makes these evaluations unstable, incoherent, and insecure, thus providing an additional source of systemic risk and market volatility. Third, and perhaps most importantly, in this way ever more popular demand for really valuable products and innovation, that is, the kind of products and solutions that can help us transit to a more sustainable economic system, have no effect on the financial markets in which crucial decisions about the allocation of resources are made. This is a problem for corporations too. Most people who work in big corporations want to do something meaningful and constructive with their life; they want to feel that their professional activity is coherent with the overall values that they nourish. They want to do good. And intelligent corporations understand that they need to begin to cater to real use values, to acquire real social usefulness, if they want to survive the chaotic next century marked by resource scarcity and global warming. But as long as a company’s ability to do good is not reflected in the standards that reflect its economic performance, it is very difficult for this desire to have any serious practical consequences at the level of actions.
Throughout its history, capitalism has evolved though crises. In a crisis, declining rates of profit in the production of commodities drive money into financial markets. This phase of financialization creates higher levels of economic inequality and tends to distance the economy from overall social needs and perceptions of legitimacy. A resolution to the crisis, some new combination of technology, organisational forms, and mentalities reverses the flows, driving money into the commodity economy again as profitability rises, precisely because a new range of social needs can be satisfied. Since the 1970s we have lived in the crisis phase. What can turn the tide back again?
Our guess is that productive publics are going to become both more powerful and more widespread, threatening corporate control over innovation and production in a growing range of fields. We are already seeing how this is happening as local agriculture is transforming the food economy, Open design and Open Hardware networks are transforming innovation, ‘pirate modernity’ or Shan Zhai networks and informal markets for counterfeits are transforming the consumer economy in the Global South, and maker networks along with cheap and versatile numerically controlled machines (like 3-D Printers) might change how we produce basic necessities in the West, in particular as resource scarcity makes recycling a more widespread option. Financial markets are not going to go away—they are established ways of distributing investment capital and determining access to income in situations where access to regular employment is becoming ever more scarce. And they could be a rational way to manage an economy where the private in-house production, typical of the corporate economy, is replaced by diffuse publics using collaborative commons-based production. The trick is to create a stronger connection between these two dimensions. Today financial markets are tightly linked to the corporate economy, and enormous amounts of money go into generally useless Social Responsibility Initiatives geared toward creating visibility rather having a real impact, or into largely fictitious investments like Facebook (valued at about 100 times earnings) breathing artificial life into a ‘Web 2.0′ economy. At the same time, the multitude of Social Enterprises and grass-root innovation projects that proliferate around the world are starving for cash. But if we could find a way to make value decisions on financial markets rooted in a more widespread and participatory reputation economy that better reflects the values of people engaged in the productive publics where innovation and value is actually created, then those valuations would reflect a wider diversity of needs and concerns. This link could be a basis for a more widely anchored social contract whereby a financialized economy could be better connected to overall social values. But it would also offer a way to enable capitalism to evolve, as the wider value diversity that would result could open up new markets for investment and growth. Building these connections, creating a new public sphere whereby the bottom-up ethical engagement that proliferates in today’s ever more collaborative production processes could be better reflected at the financial level to create a more ethical economy, is, we think, a good way to help capitalism evolve.