Date: 2025-05-09 Page is: DBtxt003.php txt00024762
THE SOCIO-ENVIRO-ECONOMIC SYSTEM
HOW IT WORKS
A diagram used by a major accounting firm ... ??? that really doesn't work!
HOW IT WORKS
A diagram used by a major accounting firm ... ??? that really doesn't work!
Original article:
Peter Burgess COMMENTARY
I am not at all sure what to make of this image. The 'headings' are all quite reasonable items to be included, but not easy to understand how they all fit together in the overall socio-enviro-economic system that determines quality of life and a sustainable future.
I do not see a particular pattern with respect to the interplay between the various 'headings' as displayed here. My experience suggests however that the system ... that is the socio-enviro-economic system actually has a relatively few main 'flows' that determine its performance and the resultant progress.
This diagram is too simplified in important ways to be very useful. For me, it is analytically valuable to know whether an interaction is delivering 'good' or 'bad' or a mix of both.
Conventional double entry accounting and financial reporting incorporates some useful ideas along these lines.
In conventional accountancy there is a very clear differentiation between 'balance sheet' accounts and 'profit anbd loss account' accounts. The balance sheet accounts reflect the state at a moment in time. The profit and loss account accounts reflect the activities that are happening between two points in time.
What follows here is a very important characteristic of conventional double entry accounting. The change in the balance sheet accounts between two points in time is the same as the difference between the 'good' and the 'bad' recorded in the profit and loss account accounts for the same two points in time. What this means in practice is that most fraudulent interference in the operation of the accounts requires two adjustments rather than just one ... and most crooks tend not to appreciate this when they do their thing!
These good ideas are applied with rigor in conventional financial accounting for a reporting entity ... but a weakness remains. That is that the rules and regulations for the reporting entity may be one that is 'allowed' by the rules but not necessarily one that is desirable for the broader general public and society at large. Worse, for much of recent history since Victorian times, it has been the norm for corporate accounting to focus on the needs of investors in the entity while ignoring the needs of all the other stakeholders like employees, customers, and the general public that has to endure all sorts of environmental issues.
Modern accounting has a very long history. It is powerful and has stood the test of time. Unfortunately it has not been substantially modernised since early in the industrial revolution during the reign of Queen Victoria. The main purpose of the accounting rules that emerged at that time were to have audit and financial reporting and audit that ensured that entrepreneurs and companies would not blatantly lie to investors and potential investors.
This very limited purpose still dominates modern audit and accountancy and financial reporting and explains why modern financial reporting is not as 'fit-for-purpose' as it needs to be for this century.
It has been convenient for investors to focus on profit and the 'value' of their investment using this history and the associated rules, regulations, etc. to drive corporate decision making ... a reasonable situation in the 1800s. For the past few decades we should have been using coarporate performance metrics that are more 'fit-for-purpose'. This would be metrics that include not only the money profit dimention of business performance but also the good and bad as it relates to people and society and the good and bad as it relates to that environment in all its complexity.
I find it helpful to remind myself that the global population was only 1.7 billion in the year 1900 and increased to 7.1 billion around 2014 ... and reached 2 billion in 2020!
I also like to remind myself that it is only very recently ... that is within the last 150 years that we got to retire the horse as the primary way to travel together with sailing ships. People invented the steam engine and then the internal combustion engine ... and then at a remarkable pace all sorts of amazing scientific and technological progress has been made to benefit ... and in some cases also to challenge ... humankind.
There has been amazing progress ... and there has been the use of amazing technology to do destructive things. Human behavior does not fundamentally change even though the tools available are very diifferent in the modern age than they have been in the past. Essentially everything is bigger and faster and capable of doing more good or more damage than at any time in history. This can be good ... or it could be catastrophic.
The 'system' we are using at the present time ... December 2023 ... is not well suited to the modern era and needs significant modernization.
This diagram maybe is a start ... but by no means enough!
Peter Burgess
MORE ON THESE 10 ELEMENTS OF THE SYSTEM
Population growth
Population growth has 8 outgoing and 1 incoming
There have been substantial changes in the population demography during the last 8 decades ... essentially my lifetime.
There are a number of major trends that are causing change: Rich countries and rich populations are heving less children. Population growth has slowed and in some cases going into decline.
Many economically poor populations are growing rapidly in numbers while becoming more poor. Many countries are experiencing rapid growth in their population of old people.
Wealth
Wealth has 8 outgoing and 4 incoming
Wealth is widely used as a metric for quality of life, but it really does not do it well. For people with a lot of wealth, quality of life is much more a function of other things and for people with very little or zero wealth, quality of life has to be about other things. In other words, there is an important discontinuity in the relationship between amount of wealth and quality of life.
There is also a big difference between 'wealth' and 'income'. In the case of the United States there are many people with reasonable 'income' who have little 'wealth'. This has been caused in large part by the way the US economy has been structured during the course of the past 40+ years. I call this the 'financialization' of the economy which has made financial performance of business the dominant force in the economy.
Worse, in this era of financialization, the negative issues in society and the negative issues in environmental matters have been ignored ... or worse, actively opposed by many of those with wealth and power. In the UK, there used to be a saying 'Noblesse oblige' ... meaning that those at the top of society had a responsibility towards society as a whole. In the modern era of American 'financialization' this idea has been completely dicarded. Society will pay a price for this, and eventually it is likely that the system will crash. This need not be so ... but it is likely unless there is a substantial course correction relative to what has been the track over the past 4 decades!
Food security
Food security has 0 outgoing and 6 incoming
What is meant by 'food security'? There are many different reasons for food insecurity
Food is clearly an important issue, and deserves strong focus in order to achieve socio-enviro-economic optimization.
It is probably fair to say that 'fighting over food' has been the norm in all of human history. It is also a modern reality that improvements in technology and agriculture have had a huge role in making mosdern socio-economic progress possible. It is a pretty amazing accomplishment that the world population has grown from 1.7 billion people in 1900 and to about 7.1 billion people by 2017) with a lower percentage of the total populkation hungry and undernourished. This came about in large part because of the application of technology to food production and substantial financial support from organizations like the Rockefeller Foundation and the World Bank during the 1960s and 70s.
Sadly, there are still many ... too many ... people who are malnourished around the world and the modern era of 'financialization' has failed to address the issue in a meaningful way. This problem was emerging many years ago, and remains unaddressed!
There are also too many people who choose to consume food that lacks good nutitional contents ... too many people have become obese because of unhealthy food! This has become a big prblem in the USA, and in the main, food companies are ignoring the issue because it impacts profit growth negatively!
Ecosystem decline
Ecosystem decline has 8 incoming and 1 outgoing.
Some people care a lot about this issue but most business organizations want to ignore the issue because it usually reduces profitability. In many cases, this is true for the short term but less true and likely seriously false in the longer term.
There is a lot of value associated with the economic survival of small businesses that are widely dispersed and easily accessible to their customers. And this should be taken into consideration in any comprehensive socio-enviro-economic optimization.
On the other hand, the same dynamic does not apply to big companies. In the case of big companies a very different dynamic is in play and in many cases the big company is in either a monopoly position or a somewhat similar oligopoistc situation.
The big company may have a different dynamic when it is large relative to a single country economy and when it is large relative to the world as a whole.
Companies also exhibit different behavior depending on where they are in the supply chain and what influence consumers of their products can bring to bear on the producers. An example of this is in the prodction of palm oil which has signficant negative environmental impact. End users of margarine ... that has palm oil as a major ingredient ... are stuck with high damage palm oil in the end-product and can do little to influence the palm oil producers as long as end-users remain unorganised and disorganized.
There are many other examples of similar corporate behavior. One such example is the case of wood ... timber, lumber ... and especialy high value tropical hardwood. Gutting the world's forests is in progress and has accelerated substantially over the last several decades. The law has been
Deforestation
Deforestation has 6 incoming and 4 outgoing
I do not hold myself out to be a forestry expert, but I have had a number of experiences that have taught me something of the issues associated with rostry and timberland manaagment. One of these ideas is to do with the time scale associated with trees and timber. It takes time to produce valuable timber, and in the modern day everyone wants quick ... and especially quick profit. This is resuling in rapid loss of 'old growth' forest which can be turned into cash profit now and may take in excess of 100 years ... maybe 200 years ... to grow back.
But the negative impact may be even worse than just this. In the short run, land can usually be used for quicker agricultural profit than slow growth timber ... and old forest is being converted to all sorts of agricultural use.
And there is also population growth and the need for urban and suburban development.
All of this adds up to really serious levels of dangerous deforestation.
Climate change
Climate change has 4 incoming and 6 outgoing
Many serious scientists have been talking about the emerging problem of climate change for more than three decades. It became clear several decades ago ... like in the 1980s when I was in my 40s and involved with the impact of record levels of drought in the Sahel and seeing first hand what hwppens when vegetation dies, and then livestock dies, and then people die. Inter alia, I trained as an accountant, and accountants use numbers. In this case my counting was not cash but thousands of dead people. I saw the impact of climate change first hand ... and this was in the 1980s. To me it has been unconscionable that the big oil industry should have engaged in blatant misinformation campaigns for decades to make sure that meaningful improvement in climate related emissions related strategies were never implemented or required by governments.
Energy and fuel
Energy and fuel has 4 incoming and 5 outgoing
The modern world needs massive amounts of energy in order to function. Before the industrial revolution that took hold in the mid-19th century, the horse was the main source of power ... hence horsepower ... but that all changed with the invention of the steam engine and burning coal to generate steam.
There is some current amazement at the speed of modern technological development, but we have largely forgotten ... if we ever knew ... that the speed of development of coal mining, steam generation, rail transportation and steamships was incredible fast and of enormous consequence during the century prior to World War I.
Over time, petroleum based crude oil and gas supplemented coal as an energy source ... adding to rather than replacing. And over time, electricity became the way energy was used in manufacturing and in households. All of this was good for most aspects of quality of life, but the burning of fossil fuels ... that is coal and petroleum products ... did massive environmental damage that went unaccounted for until very recently.
Change is happening. Broadly speaking, change is not happening fast enough and recent climate data suggests that c;imate change will be faster and more severe than the consensus of scientests just a few years ago projected. This writer / analyst anticipates that climate change will accelerate over the next few years at a cost that far exceeds anything that was projected five years ago. Paying for this will require some serious rethinking about what global priorities need to be and how they are to be funded.
Material resource scarcity
Material resource scarcity has 4 incoming and 3 outgoing
More than anything else, material resource scarcity is a failure of planning and management more than true resource scarcity.
Yes ... there may be some resources that are simply too small to support the raw material needs as presently computed, but in most cases, other raw materials may be used or other system designs used. There are some 'rare earths' that are used in electic batteries that seem to be in short supply, but other chemical compounds can be used for storing electicity.
I am not familiar enough with the evolution of battery technology to consider myself and expert, or even particularly well informed. I did, however, work for a producer of rechargable batteries in the early 1970s (Gulton Batteries ... a unit of Gulton Industries in New Jersey, USA). We used cutting edge technology (for the time) that was licensed from SAFT in France and I know a little about how much bettery technology has progressed over the years.
Water scarcity
Water scarcity has 5 incoming and 3 outgoing
I am reminded of the little ditty 'Water, water everywhere, and not a drop to drink! ...
I am also reminded that the default price for water is that it is free! This is, I believe an accident of history and geography. England had a lot of power and influence in the 19th century, and England was nototiously rainy ... and water was easy to get ... simply leave a bucket in the rain, and the problem of water supply was solved. Policies that worked well in the rainy climate of England were exported to every part of the world that were under the influence of the British Empire ... a very part part of the known world.
A lot has changed since the Victorian era including world population. A global population of 1.7 billion in 1900 became 7.1 billion by 2016 with a bigger proportion of the population living in drought prone areas in recent years compared to earlir times. Many of the big deserts have increased in size over the last several decades including the Sahara Desert in Africa. Recrods show that the now-dry Sahara has been growing, covering 10% more land since records began around 1920.
The era of 'free water' is likely over ... but desalination of ocean water is technologically feasible though energy intensive and quite costly. There are large stocks of walty ocean water that could be mobilized if this became neceassary.
Urbanization
Urbanization has 4 incoming and 6 outgoing
I read quite serious books and articles when I was quite young. I remember one book written in the 1930s about roads and highways and the way they were going to influence the development of suburbs a long way from the city center. This book wass written about the UK ... but when I migrated to the USA in the 1960s, everything in this book was visible across America.
But actually most of this book was way too simplistic and the implentation of American suburbanisation leaves much to be desired.
There is some stirring of a new era of urbanization to suit modern times. There are also a multitude of powerful interests that have little or no interest in optimized urban development fir every class of people, but usually just one. In New York City, several buildings have been built at the behsst of the super-wealthy around mid-town near 57th Street... arguably a huge strategic error for the City ... while in one of the wealthiest cities in the world, it looks like there will be record levels of homelessness in the next few years.
The way resources are allocated in the modern world is insane, and needs to be changed. NYC is a better city than most ... but it could be significantly better!
QUESTIONS . COMMENTARY
What ... if anything ... can be done based on this pictogram to make the world a better place?
It is not self evident what should be done as a priority and what might be easy ... the 'low hanging fruit'.
A useful starting point can be to review and revise the 8 issues that this pictogram suggests should be to prioritize.
The TVM perspective is to move away from a single circle to a more complex diagram. The single circle requires the loss of a lot of essential detail, while the more complex diagram is really much simpler because each of many elements in the diagram are essentially much simpler.
How is this different from the TrueValueMetrics perspective?
TrueValueMetrics (TVM) has its origin as a basic corporate management tool. In its original form it was simply about the role of different manufacturing departments in contributing to the profit of a range of products and optimising for the company's profit goals
Later, TVM was used to document and plan in various implementations of socio-economic projects around the world. It never became a dominant methodology for the World Bank or the UN but it was used quite frequently where this writer was part of the team during the 1980s and the 1990s.
TVM starts with the core analytical framework that is embedded in 'double entry accounting' ... that is the recording of changes to the 'balance sheet' and the recording of all 'costs' and 'revenues' associated with activities of the entity.
The TVM goal is to expand this basic analytical framework so that there is not only the accounting for the money (or economic) changes in state and impacts but also an accounting for the social impacts and an accounting for the environmental impacts.
Essentially this was an implementing of the Triple Bottom Line (TBL) that was articulated back in the 1990s by John Elkington. Around this same time, there was also a movement to make more use of the concept of Corporate Social Responsibility )CSR). While there was some interest in TBL and CSR, neither of these metrics gained widespread acceptance. About a decade later a new reporting metric ... ESG ... started to gain popularity. This stood for Environment, Social and Governance but in my view was more about avoiding meaningful reporting than it was about better reporting of the TBL. More than anything else, ESG made it necessary to have two reporting flows ... one for the profit and one for the ES of ESG ... an arrangement that facilitated the separation of profit from the other measures and enabling the sole reporting of profit!
TVM has been substantially reviewed and revised in the past year in order to make it more relevant for the current structure of the global socio-enviro-economic system. Better metrics have the potential to change the priorities of some big organizations so that they are able to optimize not so much for profit its own but for the impacts on society, environment and profit performance for investors taken all together!
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