Podcast: Economics and accounting of the future?

I'm new to business studies and economics but before I even started to read this discussion on "Buddhist Econimics" it was apparent to me [after watching the business news for the last few years] that there were some problems with the "increase shareholder value" model of running a business.

One of the most significant problems with the shareholder value model is "short termism". As was discussed in the blog, short term profits and paying higher dividends is prefered at the expense of longer term investment and development of the business. I think this "short term view" attitude exists throughout all society not just in businesses. Nowadays everybody wants everything now, nobody is prepared to wait. Shareholders want their big dividends and they want them now. 

Why is it that if a company makes £500 million profit on year then makes £300 million the year after, that it is considered to be in trouble, profit warnings are issued etc? It's all because of the idea that shareholder value is everything. As you say,other measures of success are not taken into account.

I agree that accounting models should also measure things other than profits and costs; I work in health, safety and environmental management and am fully of the conflicts that exist. Implementing safe working practises is good for the well being of the work force, but is often seen as impeding efficiency in the work place. Is there an accounting model that allows for the inclusion of the social and welfare benefits a business can generate?

In modern management we often hear "our people are our greatest asset", how can this be if they are not allowed to be listed as asssets on a balance sheet?

Another question on this subject - are proffessional footballers counted as assets of the football clubs they play for?

I'm not sure that "Buddhist Economics" is an accurate term for what you've been discussing [it's some way from true Buddhism] but I think that if we want continued, long term global economic development then  considering the needs of other people, the environment and society as an whole should be as much a part of a business model as making a profit.

We do live in a finite world, with finite resources so the the whole concept of sustained continous economic driven by the requirement to satisfy the markets and increase shreholder value needs to be re-assessed.

One of the ironies of the recent crisis is that those caught out in the pursuit of (unrealistically) high investment returns [through the stock markets, Icelandic banks or Bernard Madoff] included many pension funds, local councils, charities and NHS trusts. They were trying to serve the public interest rather than exercise private greed, yet would have lost their stakeholders' money without an expensive public rescue. Their dilemma was that if Madoff and IceSave had been genuine, and the stock-market boom really justified by fundamentals, then they would have been castigated for wasting shakeholders' money if they had not gone after these abnormally high returns. As well as education, legislation (or regulation) are needed to relieve those managing public or third-sector money of the pressure to gamble for higher returns. We have pinned unrealistic expectations on the stock market - looking to it to deliver asset growth that exceeds our economic growth, so as to let our incomes rise faster than our productivity and our pensions rise without bigger inter-generational tax transfers. In the longer term, our stock market can't be expected to grow faster than the economy - and if we move into the stock markets of faster-growing (emerging) economies, the higher returns are attended by higher risks. Buddhism can teach us a lot about confining our expectations within the limits of what's attainable - and, having done so, about recognising the duty not to put community resources at risk, and not to risk our own resources in a way that forces the community to rescue us. 

I think a combination of legislation and education are necessary. I'm sure there are legal complications, but I can't see why ultimately governements of the centre-left, for example, can't legislate to require (initially limited) employee share ownership (what is the Labour Party for?). Similarly, I can't see any reason why economists/accountants, for example, in higher education can't pursue research into alternative business models and educate students (as potential future business practitioners) along these lines, infusing their teaching with the results of such research. The 'social entrepreneurship' project, for example seems to have kicked off in recent years and Buddhist Economics could provide an additional impetus to this.

To follow up on that and perhaps raise something that is niggling me at the back of my mind, I like what you are suggesting and I think that it sounds very reasonable. However, as you discuss, it seems to me that if you look even a little under the skin of what has happened these last few years, "you" are facing extreme greed, selfishness and power (cf. the Simon Johnson article in 'The Atlantic' last year, "The Quiet Coup"), that is the power structures of the world comprise and protect views which are the polar opposite of what you are advocating. Given the "Buddhist" factor in this, one might go down the road of the relationship of this to Christianity, but, leaving that aside there is the practical problem of how one might move toward a more Buddhist system.

The bank bailouts and subsequent behaviour seem to suggest that those in power are quite willing to flirt with the collapse of the whole system if they can just get a bit more for themselves. Perhaps due to political capture, even after what has happened, no authorities seem willing to use this opportunity to restructure the economic system along saner grounds. If we can't do it now, will we eve be able to do it?

I guess to make this into a question, and despite what I've just written above, are there any simple legislative or regulatory changes which might shift us along in this direction? If you could mandate one change which had to be followed, what would it be?

Peter.

Yes, the Jeff Gates proposal would dilute the growth in earnings of existing shareholders (rather than absolute wealth), in order to provide a share in that growth to those creating it- employees!

Existing shareholders may not all be too happy, but the alternative is probably a collapse of the whole system! I suggest you check out his book the ownership solution 

Could you say something more about the ideas of Jeff Gates? Though you say that creating the new shares wouldn't disown the current shareholders, it would dilute their shares, which I presume they wouldn't be very happy about?

Peter.