Public ideas
True-cost accounting
The disciplines of economics and accounting are a long way apart, but they shouldn’t be. At their core is the determination of the cost and the value of economic activity. The competitive economic model – that set of lines a lecturer constructs on a whiteboard – is supposed to set a price that exactly covers the cost of production. Accounting is also concerned with bringing to attention the true cost of economic activity in quantifiable units.
The disciplines diverge on a practical level, however. A basic principle of economics, transcending most political ideologies, is that it should ensure that scarce resources are put to use in a way that maximizes human welfare.[1] The cost of many of those resources do not necessarily appear in market prices, however, even when those markets seem to comply with the economists’ models.
The most prominent example of our time relates to the contribution to global warming resulting from use of fossil fuels. The true cost of a kWh hour of electricity, or operation of an internal combustion engine, should include the cost of the damage imposed to those who are affected or who will be affected by climate change: this is the principle upon which a carbon price can be set. It is an attempt to bring what is known to economists as the “externality” (otherwise “external” to the market), to account.
While the cost of climate change is the most important current example of externalities, almost all economic activity includes costs, and often benefits, that aren’t picked up in market transactions. They include the depletion of scarce environmental resources, and effects on the well-being of people resulting from economic activity.
Some people criticize the whole discipline of economics, claiming that it ignores environmental and social issues. It’s an inaccurate criticism based on a misunderstanding, that often results in social and environmental activists distancing themselves from public debate. Economics is actually concerned with all scarce resources, everything from the condition of wetlands through to children’s access to nutrition and education in poor countries, even if these are hard to bring to account.
The way these costs are covered is moving ground, but the general approach so far has been for corporations and governments to report what they can in conventional accounting terms, which would include those externalities that have been brought to account in a carbon tax or waste levy for example, and to cover other externalities in Environmental, Social and Governance (ESG) statements, or in equivalents such as our government’s Measuring What Matters statements.
The trouble with such statements is that they appear as an add-on, perhaps as a PR exercise or a concession to the “left”, separate from the “real” statements of profit and loss. That’s why many believe ESG is an inadequate and short-term way of dealing with serious issues of costing, while we work on something better.
Writing in The Journal of Behavioural Economics and Social Systems, Peter Fritz and Nicholas Malloy argue for bringing all costs to account in one system, giving meaning to what they call “true cost accounting”: “Money Changes Everything”: New Forms of Economic and Political Models. Their idea is not radical in concept: it is really about bringing the disciplines of economic and accounting together. They acknowledge the practical problems in such integration, but they note that there are more and more technologies that allow us to monitor and measure the effects of our activities. They conclude:
New accounting procedures which incorporate the costs of “externalities” into prices will use the same market forces which now encourage the exploitation of human and natural resources to favour companies which minimise harm. The majority of price-sensitive consumers hunting for the best quality at the lowest price will encourage innovation and efficiency in the cause of social and environmental responsibility just as the minority of socially conscious consumers already do.
1. This is also a “deep green” ideology, which suggests that this definition is too human-centric. ↩
Starvation or birth control?
In 1798 Thomas Malthus produced his major work Essay on the Principles of Population, where he pointed out that while the world population was growing at an exponential rate, food production was growing only at a linear rate. Mass starvation leading to population collapse was just around the corner.
The world population was about one billion at the time.
Then in 1972, when the world population had reached four billion, the Club of Rome published The Limits of Growth, a work that captured world attention. The Malthusian collapse had merely been deferred, but was now imminent if we continued on our business-as-usual path.
The “green revolution”, resulting from new plant varieties, better agricultural practices, and use of fertilizers, left the Club of Rome looking unnecessarily alarmist. The world population is now eight billion, and while there is terrible famine in parts of sub-Saharan Africa, there is no apparent problem with world food production.
Martyn Goddard, writing in his Policy Post – Defusing the population bomb – in his usual data-rich way, takes us through the dynamics of population growth and resource use, particularly resources used in food production. Malthus and the Club of Rome were right: we have been granted a reprieve, not a permanent escape from the fundamental rules of nutrition. The good news, however, is that birth rates are falling, and by some time this century we will reach peak population. Only in Africa is population still growing quickly.
That doesn’t mean we can sit back and relax. We need to be much cleverer in the way we use our scarce resources. For example we must use fertilizers much more carefully: the waste of phosphate fertilizers is increasingly serious, he points out. We must reduce food waste, and we mustn’t let poor agricultural practice wreck life-sustaining ecosystems.
Malthus saw starvation as the mechanism to limit population. Goddard, in common with development economists, sees the virtuous circle of lifting people out of poverty, educating women, and reducing birth rates, as the tried and morally more acceptable way of controlling population.