Failed metrics ... high profits reported and value destruction unreported

Dear Colleagues

There are many commentators ... some very distinguished ... that are very much aware that there is a crisis of failed metrics. I see this mainly in the reality that high profits get reported and value destruction is unreported. This is, of course, an economic train-wreck waiting to happen.

We have already seen some evidence of this. The economic melt-down came about in part because the metrics failed ... but the problem is far deeper than simply that accounting for derivatives was weak and nobody seemed capable of understanding how deteriorated the value and what impact this was having on profit and capital adequacy. The failed metrics are much more about the fact that a business can report profit ... and at the same time nobody is reporting the social value damage associated with the company's operations, as for example when a company terminates employment in one location even though expanding employment in another. While corporate organizations report profit, nobody is reporting on the deterioration of national infrastructure ... or the cost of unsustainable use of natural resources. A complete list of value impacts is very long!

Relocating jobs from high wage areas to low wage areas is a very easy way to improve profits ... and a market economy driven by profit is going to do this. This is good for low wage China (for example) but not good for high wage Cleveland (say). There are huge social costs in Cleveland if jobs are terminated ... offset by social value gains in China. Decision makers ... that is stockholders ... should take into consideration not only the profit but also the social value issues associated with value loss and value gain as jobs are moved from Cleveland to China.

This is one of the metrics being developed by Community Analytics (CA) ... the present money profit accounting and reporting completely ignores the social impact question, and as long as this is the situation, the only metric that will be used to allocate capital and make decisions will be profit.

Tax is another area where the corporate goal of more and more profit is at odds with what society needs. Low taxes increase after tax profit and arguable increase stockholder value ... but inadequate government revenues means that some of the things that government should be doing do not get done. The incredible deterioration of the US public infrastructure over the past fifty years is a national disgrace ... but this deterioration does not appear anywhere in the commonly reported metrics of the society. The value destruction associated with the deterioration of infrastructure is very large ... and ignored in the prevailing failed metrics.

A market economy where the market determines how resources are allocated ought to work a lot better than the socialist alternative ... but its functioning depends on the metrics being used. As long as the only metrics that are universally used are those that relate to profit and those that relate to social impact are either non-existent or ignored, then the market is going to get things wrong. I argue that the market has, in fact, got things very wrong and nothing will change until there are more complete metrics along the lines of what Community Analytics (CA) is doing.

There has already been something of an economic train-wreck associated with the banking sector melt-down of 2008. There is already a worry that the public sector's money liabilities are now excessive ... but when taken together with the liability associated with the nation's infrastructure and items like unfunded pensions and other human costs ... the situation looks even grimmer ... or maybe not!

Maybe not depends on a full use of CA style value accounting in addition to corporate style money profit accounting. While the US has done a terrible job of allocating resources in the past, this could change and the latent value of the US society and the nation could be mobilized to great effect. The value waste associated with almost 10% unemployment is ludicrous ... with perhaps as many as 15 million people not doing work that is valuable ... a ridiculous outcome from a broken system of resource allocation called the capital market! The capital market can work ... but not until the failed metrics are fixed and both profits and value adding are reported routinely and universally.

Peter Burgess