Alan Schwartz · Feb 12, 2020

Solutions beyond partisanship

The Australian recently published my op ed on why the Australian Prime Minister, Scott Morrison, should act decisively and boldly to create economic incentives for business to invest in a low carbon economy.

You might be wondering how I managed to convince a conservative publication to run an op ed about a “progressive” issue like climate change. It’s precisely this ability to cross – or transcend – the traditional partisan divide that I believe is a strength of the Universal Commons framework.

For those of you who don’t obsess about the shortcomings of capitalism every day, here is a very brief recap of our framework.

The Universal Commons Project supports capitalism, whereby private property and markets are the prime drivers of economic activity and resource allocation. At the same time, it acknowledges that when the rules governing capitalism are inadequate, business is able to profit at the expense of the common good.

We brand this behaviour as “Parasitic Capitalism”. Importantly – and this is when the Universal Commons framework eludes classification as either “left” or “right” – we agree with Milton Friedman that the business of business is business. It is merely a tool of society, just like the judiciary or the public service.

We do not blame business when the rules it follows are unsatisfactory. We do not blame business for emitting CO2e. In the absence of rules taxing or limiting CO2e emissions, a business that invests in emission reductions will be at a cost disadvantage to one that does not. If, however, CO2e emissions were taxed or capped, their true cost would be reflected in the market, and business would quickly work out how to make profits with lower carbon emissions. Those who could not adapt would quickly fail.

This framework makes it possible to create a narrative for change in the middle ground between left and right: we are pro-market, and yet we recognise that it’s the rules, from property rights to environmental regulations, that make markets work.

This framing enabled me to argue that while the business of business is to make a profit, capitalism depends on a rule-making process that isn’t distorted by private interests. Business lobby groups who oppose climate action are simply destructive. They undermine the market on which we all depend, and they must be stared down by a strong leader who serves the common good of Australia.

Alan Schwartz · Aug 3, 2019

From reporting to the market

The primary motivation of the Universal Commons Project is the observation that profit, when narrowly defined in purely financial terms, does not exhaust “genuine value”, which includes social and natural goods alongside financial goods. This is also a primary motivation of the Integrated Reporting movement, which encourages businesses to consider social and natural impact alongside financial profit when reporting.

As such, we see the movement and the Universal Commons as fellow travellers, working towards the common goal of gearing the economy towards generating genuine value while preserving the condition of the natural environment that sustains us all.

You can read more about the overlaps between the Universal Commons and the movement on the International Integrated Reporting Council (IIRC) website. The Universal Commons Project looks forward to working closely with the IIRC in advancing our common goals in the years to come.

Alan Schwartz · Aug 7, 2019

My Journey From Profit to Value

Two years ago I was a staunch defender of markets and a largely apolitical businessman. Today I am still a defender of markets, but I have also become an agitated voice for economic and political change, calling for a radical overhaul of capitalism. This is the story of what happened during those two short years, and how it has motivated me to create the Universal Commons Project.

What’s Wrong with Profit?

It all started when I was invited to give a speech at the Harvard Club in July 2017. I decided to lightheartedly air some long held irritations I’ve had as a businessman and impact investor. I entitled the speech “What’s wrong with profit?”

I asked why is it that capitalism allows businesses to profit while harming our environment and eroding social wellbeing? Why are worthy not-for-profits universally underfunded, while we continue funding inefficient and wasteful ones? Why are good businesses that produce high quality goods and services at fair prices not respected for the value they create?

My raw intuition was that these things happen because profit is not aligned with value. If only we could align profit and value, then the forces of capitalism would be directed to create real value without it coming at the expense of the environment or social wellbeing.

It seemed a simple and elegant solution, but when it came time to put flesh on these idealistic bones, my raw intuition was no longer enough.

The Journey Begins

Two challenges immediately presented themselves. The first was how to measure what we truly value, like a stable environment or a literate community? The second was how to create an economic system that rewards those who generate value and dissuades those who would erode it?

Running on the fumes of my intuition, I zealously set out to overcome these challenges. My first inclination was to tackle the problem of how to bring externalities into the market, so things like pollution and public literacy could be folded into the way we calculate profit. If we could do that, then the market could use its power and efficiency to maximise value.

The problem was that even if we could measure externalities, why would anyone pay to use things that are otherwise freely available? Why would anyone invest in improving environmental and social assets when there is no-one to sell the improvements to?

Even with my undergraduate economics, I knew that a market cannot exist without buyers and sellers.

The Universal Commons

This is when a dear friend, the philosopher and ethicist Simon Longstaff, introduced a radical idea that shifted my thinking. He argued that all the world’s “Social and Natural Assets” – clean air, stable climate, literate communities, etc – actually belong in the commons, so they belong to all of humanity in equal shares. This was what he called the “Universal Commons.”

If our collective ownership over the Universal Commons was recognised, then we would act in our common self interest and demand payment for its use. Equally, our self interest would encourage us to reward those who preserve and enhance it. The Universal Commons would effectively solve the problem of creating a market in Social and Natural Assets. Or so I thought.

To my untrained mind, Simons idea was idealistic but not crazy. Despite a gentle warning from my wise son Oscar, I ignored the magnitude of the social and political challenges of creating the Universal Commons itself, and decided to use it as our anchor and our starting point.

Measurement and Markets

The Universal Commons only further underscored the importance of measuring the condition of the world’s social and natural resources, which I called Social and Natural Assets. So I spent months researching everything I could about the history, science and philosophy of measurement, and meeting with many of the world’s leading measurement experts.

My conclusions were encouraging. It seemed that measurement science had already solved many of the technical challenges in measuring the condition of Social and Natural Assets. In fact, the history of measurement showed that new and improved measurements have consistently unlocked value, increasing human welfare and prosperity. For example, more accurate measurements of air pressure vastly increased the efficiency of steam engines.

With better measurement of changes in the quality and quantity of Social and Natural Assets, and a functioning market of buyers and sellers, we could measure the value of a sustainable environment and of a healthy society. At last I had found a useful project that I could sink my teeth into!

My initial push was to create a measurement challenge prize that would award a substantial cash prize to the person or team that developed a “measurement framework for Social and Natural Assets”. I approached NESTA (National Endowment of Education Science and Technology), a London based innovation foundation, to undertake a research project on the viability of a Measurement Challenge. NESTA thought the idea had merit but questioned the broad scope of this Challenge. We agreed that they would limit the scope of their research to the measurement of clean air for human health.

The Market Design Project

Now that our contribution to humanity was under way, it was time to return to the question we had conveniently “solved” via the concept of the Universal Commons: who would be the buyers and sellers of clean air? What would a market for clean air actually look like?

I needed an economic evaluation of the Universal Commons Project, which brought me to a brilliant economist working at the London School of Economics, Reuben Finighan. Reuben’s economic evaluation was sobering. Whilst endorsing our aspiration to align profit with value, Reuben questioned the timing of the Measurement Challenge and encouraged us to think more deeply about the nature of markets and how they come into existence. He also raised a number of economic, social and political considerations that accelerated my late onset social and political awakening.

It was time for our first pivot.

It was time to cease relying on the concept of the Universal Commons as the panacea for creating demand and supply and return to the social and political elephant in the room: why would anyone invest in clean air when it is free and there is no-one to sell it to?

So we asked NESTA to pause their research and asked Gavin Starks, a London-based entrepreneur and environmental activist, to run a Market Design Project to answer the central economic questions of supply and demand.

The key output of the Market Design Project was the observation that people would only invest in externalities if they either volunteered to or were forced to do so. Some already volunteer to do so, such as philanthropists, Impact Investors and responsible corporations. But many don’t. The Market Design Project concluded that if the Measurement Challenge produced a good measure of clean air for human health, we could harness voluntary demand and develop at least a voluntary clean air market. We could offer this capability to cities, states and national governments for adoption and strengthening via regulatory reform.

Eric Beinhocker and CO2e

Before we had the time to evaluate this idea, it was derailed over a coffee with Eric Beinhocker, Executive Director of the Institute for New Economic Thinking at Oxford. After I described our Market Design Project and our hypothesis, Eric asked why we were creating a market to demonstrate how externalities could be internalised when we could just describe an already existing one for carbon dioxide equivalent (CO2e)?

Eric was right. The CO2e market is an emerging proof of concept of an externality being internalised. We would save a lot of time and money by telling the CO2e story rather than by recreating it using clean air.

The story itself is compelling. Around 250 years ago, global warming was not a concern, and CO2 was not an externality. Then 163 years ago the scientist Eunice Foote revealed that the world was warming and the cause was CO2. Her theory kicked off a long process, substantially confirming our clean air hypothesis. The first step was a scientific and social consensus around measurement of CO2e. Then the science connecting CO2e and global warming became widely accepted and a critical mass of people started to feel strongly enough to want to do something about it. CO2e became a negative externality. This led to a level of demand emerging, enabling the creation of voluntary markets for trading CO2e. The final step is slowly unfolding today, with governments responding to public demand and using the knowhow and technology of voluntary markets as the basis for regulatory intervention.

Although many despair that we are doing too little too late, there is little doubt in my mind that within a decade or two CO2e will no longer be an externality. The full cost of CO2e will be included in the profit of all corporations. Doing so will be “mainstream business.” Then, when it comes to CO2e and global warming, profit and value will be aligned.

For the Universal Commons Project, our ability to connect the CO2e story to our broader mission of aligning profit and value has been a breakthrough. We can see that focusing on projects addressing the scientific and technical challenges of measurement and market design is necessary but not sufficient. The CO2e story shows us that we have vastly underestimated the role of story-telling and consensus building, and the inevitability of political struggle.

The Fundamental Social Problem

Reuben also helped us take a big picture perspective on what we’re trying to achieve. He showed that the challenge of aligning profit with value is just a modern manifestation of what has been called by evolutionary biologist David Sloan Wilson the “Fundamental Social Problem.” This is the problem that all life has faced over the past four billion years, and all societies have faced over the last several millennia. At its core, it is the challenge of aligning individual benefit (profit) with group benefit (value).

He also gave us reason to be optimistic about our ability to advance our mission. In his words “we have the evidence necessary to tell a grand, unifying story about the history of life and society on Earth as being a 4-billion year search for mutualistic strategies”.

If you believe that we have progressed as a species, as I do, you must attribute it to our unique human ability to develop new institutions to enable ever greater spheres of cooperation and mutualism: from tribes to metropolis, from barter to money, from feudal societies to modern capitalism, from monarchy to democracy.

By aligning our mission and the Universal Commons with Reuben’s vision of a truly “Mutualistic Capitalism,” we were able to tap into a new, and academically rigorous conceptual framework. He also suggested that our strength was not necessarily in making incremental progress on the scientific and technical challenges, but rather encouraged us to invest in the transformative power of “big ideas, strongly articulated”. Change is only initiated when a critical mass of people recognise a challenge or an opportunity and wish to do something about it. And that change is made harder because those who benefit from free negative externalities are likely to resist paying for those externalities. So if we wanted to change the current economic system and its institutions, the starting point was changing people’s beliefs. This requires story-telling and consensus building.

Returning to the Universal Commons

I can now see that my intuition that profit must be aligned with value was a good one, but it fell far short of being a complete answer.

I can see that capitalism today is under siege because there is an emerging view that it no longer serves the common good. It has become what we call “Parasitic Capitalism.” I believe the Universal Commons can act as a powerful anchor for a new vision for Mutualistic Capitalism, one where profit can be earned, but not at the expense of the Universal Commons, and we must reward those who enhance it.

So now I believe we have a solid diagnosis of the problem (Parasitic Capitalism) and a good conceptual idea of what the solution would look like (Mutualistic Capitalism). We have also highlighted some key stepping stones to get there, like improving measurement standards, creating markets and improving institutions. The next step is to translate all this into concrete action. Our challenge is not finding something useful to do; our challenge is choosing the best thing to do with our finite resources. So stay tuned!

The Universal Commons Project has come a long way and we have a long way to go. We are approaching the end of the beginning. We are excited to get on with our adventure and to share the journey with you.

Alan Schwartz · Sep 16, 2019

What next for the Universal Commons

In my last blog I described my personal journey from profit to value. We now have a firm conceptual foundation for the Universal Commons project, which is to transition the economy to “Mutualistic Capitalism”, where profit is aligned with value and businesses can only make a profit when they simultaneously advance the common good.

The reason this transition is crucial is that while our current economic system has generated great wealth, it is failing both people and the planet. This is because the engine of capitalism – profit – doesn’t reflect everything that we truly value, like clean air, safe communities and a stable climate. As such, much economic activity can end up harming people and degrading the environment.

When profit is not aligned with value, we end up with “Parasitic Capitalism”, where businesses can make a financial profit while harming people or the environment, effectively making them “parasites” on society. We don’t blame businesses for this; they’re just following the economic rules that society has set for them.

One of the main reasons that profit is misaligned with value is the problem of externalities, which are byproducts of business that positively or negatively affect society. We believe that we can internalise externalities by changing the economic “rules of the game,” thereby realigning profit and value and moving from Parasitic Capitalism to Mutualistic Capitalism.

We acknowledge that changing the economic rules of the game will be a slow, iterative, multidimensional and complex process. However, the rules of the game in relation to carbon emissions are rapidly changing so that innovative businesses can make a profit while combating climate change. This can serve as a case study and model for other externalities.

We have decided to build on these foundations and spend the next 12 months focussing on communications outreach and commercial ventures.

Our communications activities will share my personal journey and spread the message of the Universal Commons to the business, investment, philanthropic and Impact Investment communities.

The core message is that we need structural reform to the “rules of the game” so that we can enjoy prosperity without degrading the Universal Commons, upon which we all depend. Our first published article was a response to the recent US Business Roundtable statement that business should shift from generating only shareholder value to generating stakeholder value.

While we endorsed the idea that business should consider the impact it has on a wide range of stakeholders, we argued that there is a broader issue at stake, which is the way we think about profit itself. If the underlying “rules of the game” are left unchanged, and profit is not aligned with value, then businesses that invest in stakeholders at the expense of profit will be at a competitive disadvantage to those that continue to focus exclusively on generating a financial profit. You can read the editorial, and accompanying interview, here.

The for-profit arm of our family office, the Trawalla Group, will pursue opportunities to invest in purely commercial ventures in the rapidly emerging markets for carbon emission reductions and clean energy. This will serve as a case study and a proof of concept for how to internalise externalities and align profit and value.

It will demonstrate how increasing levels of public and investor pressure, the emergence of voluntary markets, improved measurement and the prospect of future regulatory change are inexorably changing the economic rules of society so that an externality like carbon emissions is being internalised, making it possible for businesses to profit by investing in its reduction.

By investing in carbon emission reductions and clean energy, and achieving market rates of return, we hope to encourage others to follow. We also hope our carefully targeted investment will be an exercise in market transformation, helping to close the gap between the market of today and a future market where profit is closely aligned with value. We even hope to see the day when we need to exit this market because it has become too competitive and profit margins are being squeezed!

This 12 month focus is in no way a reflection of diminished ambition. Our long term goal remains nothing less than achieving transformative change in the way our economy works. Our mission remains unchanged: to help realign profit and value, and thus shift our economy from Parasitic Capitalism to Mutualistic Capitalism.

In future blogs we will share the fruits of our communications efforts, and subject to commercial confidentiality, sharing our mutualistic profit seeking activities. As always, we welcome your feedback.

Alan Schwartz · Dec 5, 2019

The Movement goes mainstream

Mid-way through this year, when my friends asked me “how is it going with the Universal Commons?” I would often feel a rush of anxiety. This was because the deeper I dug into the challenges facing our society and economy, the more gnarly the problem looked, and the more elusive the solution seemed.

But here at the end of 2019, I now feel differently. Here’s why: the key question I raised over two years ago – “what’s wrong with profit?” – has exploded into the mainstream in recent months. In August the US Business Roundtable caused a global stir when 181 CEOs signed up to a new Statement on the Purpose of a Corporation. This declared that business ought to serve all stakeholders, not just maximise shareholder return. This was effectively an acknowledgement by some of the most powerful and influential business leaders in the world that profit and value had become misaligned within our current economic paradigm.

Meanwhile, major media outlets, such as the Financial Times, have made bold statements about the need to reform capitalism and dedicated entire special reports to transforming business and investment practices to align profit with purpose. Similar discussions have appeared in The Economist, the Harvard Business Review and other outlets that can hardly be called radical, including a small contribution in the Australian Financial Review by myself.

The inability of our current political institutions and our current form of capitalism to address rising inequality, climate change and unsustainable production and consumption are forcing all of us to question these institutions.

These developments have enabled me to realise something incredibly important and powerfully motivating: I am not alone. Not only have I been able to join and contribute to a growing and vibrant “Movement” of people and organisations seeking to reform these institutions, but I also have powerful allies here in the form of Reuben Finighan, our chief economics advisor, and Tim Dean, philosopher and lead communicator for the Universal Commons.

We all acknowledge that systems change is a difficult process, requiring deep thinking, patience, flexibility, resilience and collaboration. Like all Movements, this one will unleash not only great thinkers, well-meaning contributors and collaborators but also fashionistas, opportunists and exploiters. There will be dead ends and there will be false paths. There will be breakthroughs and there will be setbacks. And there are no guarantees in life, let alone when it comes to reforming a system as complex as capitalism.

Still, we look forward to contributing to the messy and difficult process of systems change. After all, I don’t believe we have much choice. Every news headline about the growing climate crisis, about rising inequality, about the depletion of our precious natural resources, about poverty within the wealthiest nations on this planet all serve to sustain the fire that drives us to push for positive change.

As I communicated in an earlier blog, we have decided to focus on two things for the next 12 months. The first is seeking opportunities to invest in commercial renewable energy projects. I can’t help but to think of Noah, despairing that the rising flood waters would never recede, yet he sent a dove out to find land. The first did not return; neither did the second. But the third did return, and it had a twig in its beak. This was evidence that the waters had receded and there was land to be found.

Like Noah, we are looking for evidence of change in the world. If we can find purely commercial opportunities in renewable energy projects we will know that the social, political and regulatory environment is moving in the right direction. And the search for opportunities will expose gaps which we can describe in our writing.

The second focus is to continue to research and spread our message to the business community and the public. We hope to contribute by providing useful frameworks for the Movement that can bring clarity to the challenges we face, and help identify inflection points that can produce real change.

We are also aiming to offer commentary about individuals and groups who are part of the Movement. We will try to help identify dead ends and false paths, and we will celebrate breakthroughs and urge resilience during setbacks. We are looking forward to collaborating with fellow travellers, but we are also determined to preserve our independence, because the Movement will need a range of views.

So as this eventful year comes to a close, I want to thank you for following our progress. I wish you a peaceful and restful year end look forward to keeping you informed of our progress during 2020.