Tuesday, July 12, 2011

Value social capital - don't put a price on it

Social capital is about the institutions, norms, laws and networks1 that help us to develop and also to develop the human, manufactured and financial capital. A very important aspect is that social capital is about trust between individuals. If trust is very low, it is hard to do even simple transactions. Do I dare to give you the money before I have the goods in my hand? Do you dare to give me the goods before you have the goods in your hand? It almost impossible to manage long-term businesses without trust. The transaction costs2 for even simple things become very high. Just think about the chain of trust (and supporting institutions) that is needed for cheques or credit cards to work. Not only do you have to trust that person, but also the banks, and within the banks each individual that has access to your account and the transaction and the whole legal system that is there if something is not right. Our political institutions and our trust in them is also an important side of the social capital. Another side of the social capital are the many civil society organisations which we establish to pursue joint agendas.. We create more social capital by working together and increasing trust and interdependency but also via the political system and the taxes we pay. A pension system is an interesting example of social capital. We put our future well-being into some kind of system where we will be dependent on the benevolence of future generations. Some might argue that this is about human capital but I would argue that the two most important functions of a pension system are that 1) there is a “contract" between the individual and society for the future livelihood of the individual and 2) that the people working today will take care of the pensioners of today. Those two components are exactly the difference between a pension system from the simpler and individually based idea of that I save for my future or that I raise enough kids to have my needs taken car of by them."Back of the envelope" calculations show that in 192 countries (except for a few raw materials exporters), human and social capital equals or exceeds natural capital and produced assets combined (Serageldin and Grootaert 1999).

I don't think the point in this is to try to "internalize" social capital losses and gains in prices of goods as little as I believe that this is doable for loss or gains in natural or human capital. And one can even take exception of the description of our human relations in terms of "capital" a term borrowed from economics. My point is just to show how extremely important our social relations are. And they are important for our economic activities, for our use of nature and even more for our well-being in general. Nurturing the social capital is taking care of our well-being. And in light of that, we should also be aware of that our society, through industrialism, consumerism and a capitalist ethic is replacing social capital with "things". But it is also interesting to note how popular new technologies are that are used for "relational" purposes. Just look at cell phones and facebook.

1My use of social capital is somewhat wider than often is the case as I include also most of the public sphere into the social capital, while some limit the meaning to refer more to civil society organisations. In my view, however, this is not correct. What is organised in the form of civil society, in the form of communities or by the state differs in different periods and culture and that the same institution, say upholding respect for business contracts, has been a regulated by civil society in one place and by law and the state in another doesn’t change its nature of being part of social capital. 

2A transaction cost is a cost incurred in making an economic exchange, i.e. an economic term, but it can be applied in a wider sense.

Monday, July 11, 2011

Power of the people or competition for votes?

Democracy as idea and phenomenon is often, by people who never studied history at least, explained as being part of the modern capitalist project; “democracy and market economy” was like a mantra in the end of the last century and a few years into this one. Sure, democracy is part of the “modern” project, but only partly in the way the proponents of capitalism want us to believe. The link between the emergence of parliamentary democracy and capitalism can be a coincidence. There are no democratic nation states that are not market economies, but there are market economies that are not democratic. The market economy and capitalism is also in some regards a competitor to democracy as in many issues there is a choice weather it will be settled by the political institutions or weather it will be settled by “the market”. 
 Democratic values and institutions did not arise as a direct contradiction of authoritarian forms of governance. Rather they emerged by a gradual change in the principles that governed the distribution of power in society. An oligarchy of military strength, divine right, aristocratic lineage and land gradually gave way to an oligopoly of wealthy merchants. The parliaments of the first stage were congresses of feudal lords. The parliaments of the second were assemblies of rich traders. The idea of universe human rights and freedoms which we now identify as the essence of democracy was at first cited as a justification for redistribution of power to the commercial class and only much later as a principle for extending rights and privileges to all citizens. This shift continues today in countries around the world and may not yet have reached its acme in any country....

The parliamentary state grew first not as a democratic institution, but as a power-sharing arrangement between different elites (see quote above) and there was nothing in capitalism that moved for universal suffrage, not for men and certainly not for women. Conveniently, the inventors of “democracy”, the Greek city states, with Athens at the fore, had perverted the concept already from the beginning by excluding both women and all the slaves. Real democracy could probably only be found in hunter and gatherer societies, where there was no property and no state. The new emerging democracy had exactly those twins as their hallmark.

The pressure on the social structure of the emerging capitalism was enormous. On the labour level people organised themselves in trade unions to balance the power of the industrial capitalist, but capitalism re-shaped all parts of society, so people also turned to the state for more influence over legislation and to develop new social institutions instead of the old ones that were collapsing under the pressures of the new system. Because of the growing individualism which was in a self-reinforcing relationship with capitalism, family institutions also weakened and society had to take over things previously managed by the family, such as learning, nursing children and elderly and health care. The emerging new institutions and the associated welfare state were not only a result of more real democracy, they also provided services which actually were needed for capitalism to work well, which the more foresighted liberals saw early.

The liberal thinker Schumpeter discuss democracy by first stating that it has often been conceived like this: “The democratic method is that institutional arrangement for arriving at political decisions which realizes the common good by making the people itself decide issues through elections of individuals who are to assemble in order to carry out its will”. 
In his classic style, he then slaughters this by attacking most of the assumptions. There is no way to determine the common good; what is good for one doesn't have to be good for the other, and even if there indeed would be a distant common good, opinions on how to reach there differ. Therefore, one can also not define the will of the people. He argues against those that claim that there can at least be a fair compromise by saying that that is perhaps possible when one discuss quantitative issues (such as which rate the income tax would be), but not when one discuss qualitative issues (such as if there at all should be an income tax, or if the country should go to war). Schumpeter launches another definition, which he thinks fits better: “the democratic method is that institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people's vote.” This is quite different from the first more romantic attempt, but a definition that stands the test of reality and certainly fits the institutions of political parties best and can explain why election campaign are held in the way they are. This definition coincidentally also aligns well with the values of capitalism.

And in a way, that Schumpeter is right is why democracy in our modern societies have been perverted, once more, to be about a fight over power between power groups and not about power of the people, by the people.

Sunday, July 10, 2011

The pot of gold at the base of the pyramid

A "supamarket" in Bujumbura July 2011
It is no longer at the end of the rainbow we will find the pot of gold - it is at the Base Of the Pyramid. To produce for the poor has become a much noticed market niche. The four billion people at the Base Of the (economic) Pyramid (Called BOP)—all those with incomes below US$3,000 in local purchasing power—live in relative poverty. Yet together they have substantial purchasing power: the BOP constitutes a $5 trillion global consumer market (WRI 2007). Most people, even the companies themselves, were utterly surprised by how rapidly cell phones spread in developing countries. Between 2000 and 2006, the number of mobile subscribers in developing countries grew more than fivefold—to nearly 1.4 billion. Growth was rapid in all regions, but fastest in sub-Saharan Africa—Nigeria’s subscriber base grew from 370,000 to 16.8 million in just four years (WRI 2007). One reason for this spectacular growth was of course that most African countries had failed to bring landlines to their population. Inspired by this success, many companies tailor-make products for the poor and innovations occur. One can transfer money quicker and easier in Kenya than in Sweden via the cell phones, an enormous leap in a country where normal bank transfer seemed to go with camel caravan, often got lost and fees of transfer were very high. As low income countries are not as stuck in infrastructure investments, we might actually see quicker uptake of some innovative technology, such as distributed power solutions, than in developed countries. Many of these products, such as cell phones, undoubtedly improve quality of life. And mobile banking certainly makes running a business both cheaper and easier. They are also to some extent "democratic" in nature, they reach many people and are not linked to a certain position, corruption or privilege. So this is all good.

Many of the "things" do take money away from local consumption though, as most of these products are imported, so it is not clear to me how they, if at all, can contribute to local economic development. Earlier, many of the poor countries could at least export agriculture products to pay for the imports, but now more and more poor countries are net importers of agriculture products. What is clear is that making people buy things is one of the most efficient strategies to integrate them into global markets. The increased need for money force people into money based employment or market oriented production.  

More people working for the Man, so to say.

Wednesday, July 6, 2011

How the best can be an enemy of the good.

"We’re moving towards not just the animal being organic but the animal’s parents and grandparents. It’s a way of going back up the chain to ensure a pedigree of organic."
"Sooner or later we’ll be looking at how much carbon have we actually managed the sequester in the soil, rather than simply looking, as a first stage, at encouraging the management practices we know will be good for the increasing soil carbon."

says Peter Melchett from Soil Association in an interview. 

None of the things he says is wrong as such. But once put into standards they can give totally absurd results. The organic sector is still suffering from rules about the use of organic seed implemented some ten years ago, and those were still only about the "first generation" seeds. If you extend this to the parent lines of seeds, organic farmers will be out of seeds totally. All this science, e.g. in measuring carbon, means that farms with a varied production systems will have to go through a lot more research than those that have simple systems with just a few crops. I am sure Peter and the Soil Association want to do good, but that are hopelessly stuck in the desire to be best. They sacrifice farmers for fundamentalism in my view. They are not alone though.

Producing meat (for export) or food for the people

Many see a contradiction between production of meet and producing food for the poor. I believe the issues are much more complex than such a simple either-or discussion.

I recently visited Namibia. Most of Namibia is too dry for crop farming. In addition, the rainfall is very variable over the year and between years, so the risk of total failure in farming is very high in most areas. Where crop farming is the best land use, it is already taken place. In the drier areas there is livestock production, and the rest is dessert.

But what about water use? We often hear that meat production needs a lot of water. Well it does need quite some water, but in the case of Namibia most of that water falls on the dry rangeland as pasture and only a smaller part is supplied as drinking water for the animals, and they use almost no bought in feed stuff. A borehole for cattle with a solar pump and a capacity of 2 m3 per hour (20 m3 per day) can service some 500 cattle. In reality this is often a bit less because of seepage, evaporation etc. so let us say 250 cattle. Those 250 cattle produce in the range of 75 full grown heads for slaughter per year which represent around > 20 tons of meat. The same water used for irrigating crops would be enough for irrigation of approximately a hectare of farm land (depending on natural rainfall pattern and temperatures). That hectare would produce considerable less food (say 8 tons of maize in good conditions, more realistically considering land quality 2-3 tons) and a lot less money. Of course, if one add all the rain that falls on the 1000 hectares of land that those cattle graze, the "water footprint" of the cattle production increases tremendously. If 300 mm of rain falls on 500 hectares that represents 1.5 million cubic meters of water, which would then correspond to 600 cubic meter per kg of meat. But this water has no alternative use, except for grazing by wild life.

Manufacturing, mining and tourism are potentially much bigger competitors for water for crop farming than livestock production. Each cubic meter used for agriculture purpose is estimated to produce a value of N$7 while manufacturing and tourism gain about N$272 and N$574 respectively (Atlas of Namibia 2002). Namibia has also invested money in two desalination plants to supply the uranium mines with water, while it simply doesn't pay to desalinate water for food production - it is cheaper to import food.