Failing in Fundamentals

GDP is dead. It’s time to measure what matters.

It’s not the stock market that we need to be concerned about right now Honestly. The market will stabilize eventually because that’s how cycles move in the long run.

In the short term, the market for goods and services has changed dramatically, but that’s temporary, and will return to a new normal once this virus has been subdued. What’s more important to watch right now is not what’s happening in the stock market but in our neighborhoods and local economies.

Financial Quarantine

When we stop moving, we stop making lots of daily financial transactions, and that slows the economy from Wall St. right down to Main St. USA. We call it a multiplier effect when we talk about the influx of cash into a local system from outside. If someone spends a dollar at a food truck, the owner spends it later at a restaurant, then the waiter spends it at the bar after work and so on. The multiplier effect happens in the inverse as well. Take the dollar out of circulation, and several transactions don’t take place. The absence of small daily transactions that our communities rely on to function is extremely disruptive to the lives of our most financially vulnerable.

And, while our vulnerabilities are exposed, we can see where our current systems are brittle. A community that demands people work while they are sick will not remain healthy for long, and an economy that demands the same operates in direct opposition to public health and wellbeing. Businesses and governments are meant to support human prosperity, not the other way around. Choosing profit over people isn’t just anti-social. It’s myopic, and it can’t sustain in the long run.

Grow Smarter, not Bigger

Today, the primary measure of economic value and success is growth. Year-over-year growth is the single-most cited measure of fundamental value, whether we are talking about company shareholder value or a country’s GDP. However, using growth as our primary metric of success is misguided.

Growth is an important developmental process, but anything in nature that continues to grow indefinitely is a threat to the larger systems, not a boon. Cancers, viruses; we inherently know that unbounded growth of one entity is a threat to others in the system. Again, growth is an important developmental stage, but eventually, living things shift from increasing in growth to increasing in complexity and maturity. It is these later stages of development where real, lasting, regenerative value can be cultivated, but if companies continue to chase 6-month shareholder growth as their only measure of success, we all fail.

Likewise, governments that continue to rely solely on measures of GDP to prove economic strength are out of touch. An economy needs to do more than grow-no-matter-what. It needs to support human thriving, which includes quality of life and meaningful occupation as well as generating renewable value within the bounds of our natural resource limits.

Internalizing the Externalities

In an interconnected world, we can no longer wave our hands at non-living wages, colossal pollution, or demands on productivity that promote illness among workers and call these things ‘externalities’ that don’t belong in the calculus of business finance. They do. Draining resources (human and natural) is a real cost of doing business, and we need to bring these ‘externalities’ into our business accounting practices, or we face a future where public funds are increasingly used to clean up and heal the damage done by private enterprise.

The current public health crisis and the ensuing fallout for businesses everywhere clearly demonstrates how our natural, human, and economic systems are woven together. Businesses need healthy workers to function properly, and economies need solvent citizens to keep money circulating. It follows that the basic health and financial security of the labor force is a fundamental concern for any economy.

Our growth-oriented metrics in business incentivize a race to the very bottom of our planet’s resource pool that simultaneously pits the private and public sector against one another, and the casualties of that struggle are human life and wellbeing.

Investing in the Future

In the 20th century, we were taught that capital is neutral. Essentially, the philosophy was that you should earn large returns without worrying about the business practices or cost to people and planet because when you cashed in you could donate part of your wealth to charity, and that would take care of it.

Today, we recognize that our systems are interconnected, and that capital is not neutral. As one astute investor put it, “Why would I give five percent to specific causes if the other ninety-five percent is creating the problems I’m trying to solve for? I’m not about to enable a power structure I fundamentally don’t believe in?” (Harness the Power of the Purse, 2017, p. 28).

The rising generation of investors know that today’s capital supports the economy of tomorrow. That economy needs to be lower carbon, higher tech, more hyper-connected and more transparent than any we have seen. It will need to stand up to the challenges of pandemics, mass movement, and extreme weather, and it will need to be resilient to sudden changes. The answer to that challenge is not growth but resilience, adaptability and sustainability.

Better Measures, Better Decisions

Value investing is an exercise in long-term thinking. An investor in his 40’s with decades until retirement shouldn’t be as concerned with what the economy is doing today so much as what the economy will be doing in 30 years. When I bought my house, for example, I didn’t just check the flood zones as they are today, but I looked up maps of where the water tables are predicted to be in 25 years, assuming 3 degrees increase in average global temperatures. This wasn’t doomsday planning or worst-case scenario thinking. It was long-term fundamental value estimation using readily available data to guide my analysis.

We have today an ocean of under-utilized data and techniques for estimating the costs and benefits of ecological, biological, and technical consumption. We also have a much richer understanding today of how complex, adaptive systems like governments, economies and ecologies behave, and what ripple and butterfly effects small changes to fundamentals can have on the longevity and health of the system. To ignore the depth and breadth of this data in favor of chasing endless growth would be irresponsible.

“Indeed the most profound act of corporate responsibility for any company today is to rewrite its corporate by-laws, or articles of association, in order to redefine itself with a living purpose, rooted in regenerative and distributive design, and then to live and work by it.”
― Kate Raworth, Economist, Oxford University

There is much work to be done to bring our methods of fundamental business analysis up to date with the times. We have the data and we have the genius of the human mind. What we need now is widespread cooperation between government, business, and academia in order to establish even better standards for measuring economic strength and long-term viability.

Two weeks ago, I was cynical that we could ever create such partnerships for this purpose. Today, after watching the world choose life over profit, I think that — just maybe — we also have the courage.