Modern capitalism is suffering a crisis of confidence. Faced with environmental emergencies, surging indebtedness, growing inequality and unemployment, neoclassical economic theory is struggling to remain relevant.
Economists today have few answers for governments trying to deal with the pandemic shutdown or - on a much larger scale - policy makers struggling to manage the historic transformation from an industrial to a digital knowledge-based economy.
Even worse, beyond all these technical crises, a sense of unfairness and decades of growing hostility have eroded public trust in capitalism and the foundational institutions needed to support and sustain the capitalist system.
Clearly, if we are to have a capitalism that’s fit for the 21st century we need to revisit and revise neoclassicism’s underlying principles and operating theories.
Normative Economics and Accounting are emerging as viable alternative systems of capitalist thought. Normative principles are more realistic, comprehensive and more socially aligned than the market-centric principles underlying neoclassical thought.
Like traditional economics, Normative Economics begins with the premise that capitalism is founded in the private ownership of property.
However, since both the own-able ‘things of value’ and the legal institutions that provide individuals’ title to property are social in their origins, society, its changing norms, values and interests should be both the starting point and strategic goal of economic study.
Normative theory not only links capitalism to social norms, but it also starts from a different place. The ‘Copernican shift’ that Normative theory brings to capitalism is to shift the central organising principle of economics, reorienting the analytical centre from market exchange processes to the institution(s) of capital.
Market exchange processes obviously remain important, but from an analytical point of view, market forces are secondary effects, not causal forces.
Capital and its derivative assets form the productive heart of capitalism; not only are they the source of productive output (and therefore corporate earnings), the engine of growth and mechanism of change in capitalism, they are also the keys to resolving divisive issues such as the social responsibilities of business and clarifying the theories of accumulation and distribution of wealth in capitalist economies.
Normative Economics also helps resolve an apparent dilemma buried within neoclassical theory - the value question.
Although neoclassical theory accepts the essential subjectivity of value based on the utility-in-use concept, it also contradicts that idea almost immediately by suggesting that ‘in a market-exchange transaction’ that value becomes objectified, both for the asset in question but also for all other similar unsold assets.
Strict value objectivity simplifies but also limits accounting practices and has frozen financial reporting to the point where these foundational institutions lack the institutional flexibility necessary to accommodate today’s dynamic economic reality.
In addition, economics’ over-focus on markets has created a situation where complex issues, such as what capital is in the modern economy, or how it evolves over time, or how a capitalist system ought to deal with carbon pollution or growing inequality are consigned to an analytical ‘twilight zone’ called ‘externalities’, meaning that - technically - they’re outside the scope of in-depth economic analysis.
But perhaps the biggest theoretical error buried in neoclassical economics is the extra-ordinary naiveté of the ‘free market’. No matter how complex economists’ econometric models may be, they are rooted in the following idealised abstractions of reality.”
Normative Economics helps resolve these inappropriate assumptions by accepting that market institutions- like all human institutions - are not perfect. The Normative approach to market efficiency is to strengthen individual self-regulation by utilizing the vast power of accounting to align private commercial interests with the public good.
The reality is the science of economics was established early in the last century. Unfortunately, its rigid industrial-era foundations have left economists underprepared for dramatic changes, like we are experiencing today.
Ultimately neoclassicism’s market determinism has simply not delivered the goods. Consequently, the modern world is in deep crisis, and needs answers fast. It is not good enough to leave capitalism unreformed; capitalism needs to serve the interests of the societies it impacts so dramatically.
Normative theory is rooted in the concept of stewardship. Normative Economics and Normative Accounting help redress the basic flaws in modern economics and more closely align capitalism with the evolving norms, sensibilities and value creation realities of the 21st Century.
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The first is The Catalysts.io. The Catalysts is a social enterprise founded for the common good to benefit everyone and everything. It holds the intellectual property relating to the net zero and other sustainability applications of normative accounting for intangibles and normative governance. The Catalysts has been founded to rapidly drive this work to adoption at scale.
Rules based on yesterday’s norms are a guarantee of failure – the rules which shape our economy will only endure if they are based on social norms that will endure. This cannot be a social norm which accepts the end of life on earth.
The economy has clearly changed. Intangibles dominate the global economy but accounting practice hasn’t kept up. As a result financial statements don’t show what is actually creating value (intangible assets) or those things that could lose value (intangible liabilities, such as climate risk).
As Alfred (Michael Caine) says to Batman (Christian Bale) in The Dark Knight: 'Some men aren’t looking for anything logical, like money. They can't be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn.'