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Why the Five Capitals Framework is key to understanding what is wrong with capitalism and simultaneously a fundamental aspect of socio-economic paradigm change

The Coronavirus pandemic has thrown into sharp focus the necessity of a paradigm change of socio-economic and political systems as an alternative to “the new normal” of continued massive wealth inequality, environmental degradation, ‘morally justified’ regime change wars and an open-ended ‘social distancing’ policy. The current prevailing socio-economic paradigm of ideological late-stage capitalism (or disaster capitalism or neo-liberal capitalism if you prefer those terms) cannot deliver anything approaching social justice or environmentally sustainable growth[i]. Specifically, it is overshooting at least some, but perhaps most, of the nine planetary boundaries identified by scientists and is therefore not sustainable in the medium-long term.[ii] Given that we humans have no choice but to instigate radically different systems in the wake of Covid 19, we had best be extremely reflective and picky about the changes we accept and implement or else we may find ourselves sleep-walking into an Orwellian nightmare.

The idea of land, labour and capital as the three main factors for understanding and stewarding an economic system has been used by Marxists and capitalist theorists of different schools to ‘prove’ or justify many things. The concept of capital has evolved in post-war economic thinking and today the five capitals framework is a key tool in understanding what is going wrong with the current system, and simultaneously one of the necessary tools in understanding the philosophy needed for instigating postcapitalist paradigm change. In his 2005 book Capitalism as if the World Matters Jonathon Porritt makes this observation of capital,

Capital is a stock of anything that has a capacity to generate a flow of benefits which are valued by humans (my emphasis). It is this flow — normally of goods and services of benefit to people — that makes the capital stock an asset, and the value of the asset is derived directly from the lifetime value of the flows to which it gives rise…It entails five separate ‘stocks’: natural, human, social, manufactured and financial… .These five forms of capital, judiciously combined by entrepreneurs, are the essential ingredients of modern industrial productivity (my emphasis). [iii]

The current ideological late-stage capitalist socio-economic paradigm is clearly wilfully blind to the glaring reality that if you exceed planetary boundaries by cutting down rainforests, dumping plastic into the ocean on an industrial scale, polluting water supplies and stimulating climate change, then all the (debt-based) financial capital in the world becomes worthless[iv]. Although there are numerous reasons for this, such as the prevalence of psychopathy and psychopathic traits within the financial system and political classes, one of the crucial reasons for this is a value system that has a warped interpretation of the nature of capital. It is of critical importance the order in which we rank each of the five capitals, as not all types of capital are created equal. Ideological late-stage capitalism commonly ranks the five capitals thus,

1. Financial capital

2. Manufactured capital

3. Human capital

4. Natural capital

5. Social capital

This is normally an implicit rather than an explicit assumption, but the ‘profit trumps everything else’ mentality speaks volumes. The cornerstone of conceptualising the five capitals framework like this are debt-based fiat currencies, which in a game theory analysis can be said to favour ‘nasty strategies’ (those preferred by psychopaths and sociopaths) over ‘nice strategies’ (such as tit for tat/direct reciprocity). Herein lies one of the intrinsic flaws of the whole conceptual framework and philosophy of ideological late-stage capitalism, its dominant mode of imagining human interactions is fundamentally sociopathic. Homo economicus, that strange mythical creature so beloved of neo-classical economists, requires a value system that dispenses with ethics in an obsessive quest for money. Furthermore, given the sheer number of negative externalities that this causes in a true cost accounting (something which ideological late-stage capitalism has the tools to do and yet consistently fails to carry out), to value financial capital so highly is also ineffective and inefficient in the long-term for the majority of non-sociopathic/psychopathic people. The emperor wears no clothes.

Economist Kate Raworth recognises the danger of basing an economic paradigm on so-called “rational economic man” when she states in her superlative 2017 work Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, “We wasted two hundred years staring at the wrong portrait of ourselves: Homo economicus, that solitary figure poised with money in his hand, calculator in his head, nature at his feet, and an insatiable appetite in his heart” [v]. Economist Ha Joon Chang concurs with this view when he states in his 2010 work 23 Things they don’t tell you about capitalism,

…if the world were full of the self-seeking individuals found in economics textbooks, it would grind to a halt because we would be spending most of our time cheating, trying to catch the cheaters, and punishing the caught. The world works as it does only because people are not the totally self-seeking agents that free-market economics believes them to be. We need to design an economic system that, while acknowledging that people are often selfish, exploits other human motives to the full and gets the best out of people. The likelihood is that, if we assume the worst about people, we will get the worst out of them. [vi]

Although neither author uses the words psychopathic or sociopathic what they describe are characteristics that are typical of people with sociopathic and/or psychopathic tendencies, moreover these people tend to favour nasty strategies over nice strategies. The order in which the five capitals must be ranked for a sustainable and (largely) egalitarian postcapitalist economy functioning within all planetary boundaries is,

1. Natural capital

2. Human / Social capital [vii]

3.

4. Manufactured capital

5. Financial capital

One of the intrinsic problems with the current financial system and, indeed, the whole philosophy of ideological late-stage capitalism is that, to a large degree, financial capital is distorted and has come to dominate the other forms in socio-economic and political thinking. Natural capital comes first in a very literal sense as this is where the other four ultimately spring from; Mother Earth is considered sacred by many cultures for this very reason. Natural capital may exist without financial capital, but financial capital may not exist without natural capital. It seems so obvious it does not need stating and yet mainstream ideological capitalist economists quite clearly have a problem with this aspect of reality. Financial capital is important, no doubt, but unless it is completely reimagined outside of debt-based fiat currency systems, then the very real negative externalities of the systems will continue to be overlooked, ignored or covered up, until the point where the whole system collapses.

Despite the fact that there has been an explosion of ‘social’ media, social capital has often been weakened by these technological developments and is far too frequently undervalued or ignored by mainstream economists. There are myriad areas in which social capital creates positive feedback loops that are, as yet, only partially identified but to disregard them as imaginary or unimportant is an ideological position and not one based on solid evidence. If we humans do not recognise this and act upon it, then it is likely that “the new normal” will be an incredibly ugly thing indeed.

The five capitals framework when applied in the correct manner and used in tandem with other socio-economic tools is incredibly powerful, but only in an open and evidence-based debate about our financial systems. We must question the assumption that there are no plausible alternatives to capitalism, identify what these alternatives are and implement them. Eric Weinstein in his 2016 article, Anthropic Capitalism And The New Gimmick Economy states that, “Capitalism and Communism which briefly resembled victor and vanquished, increasingly look more like Thelma and Louise; a tragic couple sent over the edge by forces beyond their control. What comes next is anyone’s guess and the world hangs in the balance.” We must make the balance tip in favour of a socially just and sustainable postcapitalist paradigm. To this end one key part is that financial capital must be put in its proper place, in service to mankind as a (non-debt based) tool to facilitate exchange, and not as slave master.

Bibliography

Chang, H (2010) 23 Things they don’t tell you about capitalism Penguin books London

Porritt, J (2005) Capitalism as if the World Matters Earthscan London

Raworth, K (2017) Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist Random House Business London

Weinstein, E (2016) Anthropic Capitalism And The New Gimmick Economy Edge [online] Available at https://www.edge.org/response-detail/26756 — Accessed 30/9/2020

[i] Although there are many different terms that different writers use to talk about capitalism, I have deliberately used the term ideological for the simple reason that so many of the assumptions it makes are not based in evidence and are, in fact, ideological assumptions that are flawed at their roots. Many other writers use late-stage capitalism, and this is factually accurate and less emotionally charged language that other terms that are often used.

[ii] The Nine Planetary Boundaries are.

1. Stratospheric ozone depletion

2. Loss of biosphere integrity (biodiversity loss and extinctions)

3. Chemical pollution and the release of novel entities

4. Climate Change

5. Ocean acidification

6. Freshwater consumption and the global hydrological cycle

7. Land system change

8. Nitrogen and phosphorus flows to the biosphere and oceans

9. Atmospheric aerosol loading

http://www.stockholmresilience.org/research/planetary-boundaries/planetary-boundaries/about-the-research/the-nine-planetary-boundaries.html

Note. Some researchers have proposed a tenth planetary boundary related to plastic in the environment.

[iii] Porritt P. 112 and 114

[iv] Almost every currency that exists today is loaned into existence by private banks and bears interest, thus the term debt-based financial capital or debt-based currencies. This is a huge issue that is fundamental to sustainable systems and will be explored in detail in a future article.

[v] Raworth. P 127

[vi] Chang. P 41

[vii] Human and social capital are so entwinned that it is often difficult to disentangle them. They are ranked equally here, in part, because of that.

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