Markets ... are they an efficient way to allocate resources?

Dear Colleagues

I have done assignments in communist economies where the transactions of the economy were controlled by "apparatchniks" ... and have seen the economic devastation which over time completely wrecked production and created poverty. I have memories of stores where nothing was on the shelves ready to be purchased ... absolutely nothing.

The contrast between these empty stores in the communist economic model and the overflowing abundance of the shelves of supermarkets and the hypermarkets that are common in the capitalist market economies is worth having in mind as one discusses the performance of the modern global economy.

In other words ... allocation of resources by bureaucrats is not a great solution ... much better to have a market mechanism to be invoked to get a good allocation of resources.

Having said that, whether markets are allocating resources efficiently is still a legitimate question ... and for me, the answer to this question is clear. Markets are allocating resources efficiently but badly. Because markets are working with an inadequate set of data about economic performance ... a set of data that has a lot to do with corporate profit, and almost nothing about social well-being ... markets are optimizing resource allocation to maximize profit and not taking any notice of the way society as a whole is being gutted!

Essentially no market metrics take into account the importance of taking care of the human resources and the natural resources ... and the commons! Corporate infrastructure that makes profit is in play ... but public infrastructure that deteriorates and falls down is not part of the market that ought to be allocating resources well.

It would not take a lot to have the people who talk about corporate profits, and stock market prices and GDP growth to also talk about the value adding for society that is associated with corporate activities. A lot of work has been done on the double bottom line and the triple bottom line ... but nobody is taking any notice. Why is this?

I do not know the answer to this question, but I have some thoughts! Maybe it is because some of the very profitable organizations are achieving much of their profit from actions that have a huge impact on society ... a huge component of value destruction for society. There are big money profits to be made by moving corporate production from a high wage location to a low wage location ... and the profits are on the record, but the value proposition from the perspective of society is ignored and not part of any routine reporting framework.

Another thought! Part of the reason why the double and triple bottom line reporting methodologies are ineffective may be that they have no focus. When there are multiple measures, a person with a decision making responsibility has to choose the one that is the most important in the day to day work ... and profit performance is the one that must get primary attention inside the corporate structure. However, if the reporting about social impact was based on impact in a specific community, with the community as the reporting entity, the issue of impact is now very clear. Whether or not the corporate entity makes profit becomes secondary.

Another issue is that there is a disconnect between the profit proposition that drives activities within a corporate environment and the impact on society. This has become especially evident in the banking and financial services sector ... where corporate profit and staff remuneration is very important ... and the value proposition for society has no role at all.

What exists at the moment does not work. The data about social impact performance is missing from the dialog ... the data are missing ... the analysis is missing. With social impact not part of the data that is driving markets, it is very clear that there is going to be a good outcome for profit, but a bad outcome for society.

As an accountant I see a systemic problem in much of the data and analysis ... transactions that earn fees are good because the fees seem to be legitimate profit contribution for the organization. But in reality the fee is merely reducing wealth somewhere ... maybe it is in the organization's balance sheet, but more likely it is in someone else's balance sheet. This is what happened with the sub-prime lending spree ... everyone was earning fees ... and in the end the balance sheets of both the original client and the top-of-the-pyramid financial institution had toxic balance sheet damage!

This would not have been possible if the accountancy profession had done its job ... but it would appear that the accountancy profession has been to sleep along with a lot of other people who should have been engaged.

Accountancy is at the center of the data problem ... but data must now include the value dimension. This is what Community Analytics (CA) starts to do ... and why the CA methodology needs to be widely embraced. Corporate leadership and market makers have to be accountable for more than merely making profit ... they are also responsible for the society in which they live and work.

With both money profit and social value data markets will be efficient and do good resource allocation. This is what markets do. They can handle a lot of chaos and a lot of options and a lot of data and analysis ... and in the end people do their best to figure out something that seems to make sense. There may be tension between corporate profit and social good ... but data and analysis about BOTH will end up giving good outcomes.

Peter Burgess