An integrated model for societal exchange is grounded in two premises.

The first comes from the straw man argument against capitalism, which supposedly assumes that humans are homo economicus. This post will show that homo economicus and its rationality can be embedded in a broader, integral view of social value exchange.

The second reason is the apparent inability of Integrated Reporting theorists and practitioners to design and produce integrated reports for cities, communities, or states; for non-corporate civic entities.

Let me get straight to the point. Value creation for people, businesses, and other social structures is analogous to cellular respiration, ATP production, and energy exchange within the biosphere. Just as energy exchange is now clearly explained for plants, animals, and the biosphere as a whole (ecology), value exchange in the human memetic environment should not be such a difficult task. Companies are using the Integrated Reporting framework with increasing precision to explain their value chain and the added values (plural!) created for themselves and their stakeholders. However, it is time to outline initial blueprints for non-corporate civic structures.

The task for at least the first step is much easier than it seems. We follow the IR model, particularly its 6 capitals. Let me suggest what is at stake for a society with respect to each of its capitals. What are the elements of each of the six capitals at the societal level, and how are they exchanged in principle? Therefore, I will attempt to sketch a holistic model of societal exchange in the next few paragraphs.

Financial Capital

This one is simple. It is that into which homo economicus integrates himself. It comprises financial assets, financial shares, and debts, as represented by the balance sheet. In the financial value added reporting, we find income statements and cash flow statements. At the national level, we monitor financial value added alongside GDP and other financial KPIs. There is a direct link between corporate financial value exchange and individual financial value exchange, and both are linked to national GDP.

However, since GDP does not measure overall national sustainability, just as financial reports do not represent a company’s overall health, there is a clear need to present non-financial assets, stocks, and debts, along with a flow chart of how such stocks are exchanged. The value addition is what their flow is.

Bhutan GNP Digression

I was fortunate to tour Bhutan shortly after its former king, Jigme Singye Wangchuck, introduced the Gross National Happiness KPI in 2008. Although its methodology is not sufficiently transparent for practical use, it underscores the need to articulate, in material terms, what is truly important to a nation’s sustenance in IR. My experience in Bhutan was that people were proud of their king and lived sustainably, even if they did not understand it. They live sustainably, not because of the king’s concept, but because Western intellectuals and Harvard professors (in the terminology of N.N. Taleb) have not corrupted their embedded circular-economy model with monetarist, globalist, and other non-liberal foolishness.

Therefore, I outline five additional capitals and their elements that play essential roles in the national value chain.

Intellectual capital

I will not begin with social capital because it appears to be the most important, but it is, in reality, much subtler than it seems. Therefore, intellectual capital should come first.

The most prominent intellectual capital element is civilisation itself, encompassing the accumulated inventions and knowledge passed from one generation to the next. Civilisation is an asset and a form of capital that we value. We are accountable for it, so we need to invest in preservation, not just innovation. It takes some financial and human resources to maintain it. But when civilisation as social capital is put into productive human machinery with all the other five capitals, we gain much more than we invest in it.

But there is another aspect of civilisation, a set of nurtured elements in the past but no longer are, at least not in Western societies: traditions, myths, religions, and morals. They provide the glue that links other intellectual capital elements and the business model of all six capitals of society. A society that does not take care of its traditions falls apart. Such decay due to a lack of investment (attention) in traditions is evident in contemporary Western cultures. Therefore, other capitals still function there but are no longer sustainable.

Human Capital

This one should be simple. Owners of human capital are individuals who identify with the traditions of a particular community. They identify with families, local communities, and nations, among others, rather than corporations. They own their capital, but only if they are economically free. If a coercive force, such as a state, takes away some of their equity, they are not free to exchange their assets. The value chain is broken – as it is in any welfare state. This is another reason for the decline of Western societies.

Individuals typically act in their own best interests regarding their wealth. They learn, acquire know-how and other assets, and then freely exchange on markets with other individuals, companies, and non-entrepreneurial social units. They invest in themselves to create greater value in the social product. When part of their investment is stolen, they feel cheated.

Let me be precise. When we discuss the exchange, we examine exchanges among individual, corporate, and non-corporate social structures. The nation is the largest of these structures, comprising all individuals who identify with it. But suppose we are discussing a state redistributing equity held by individuals. In that case, it is straightforward to end up in a situation in which a coercive force, a state, appropriates all personal assets (material, intellectual…) for redistribution. Internal and external protection are clearly matters that the state can handle; anything else is not. A charity is a charity if it is based on my decision to redistribute my equity, not if some anonymous bureaucrats who have no stake in the game decide it.

Productive capital

Productive capital is all material goods produced as the end products of a user who uses them to produce his surplus-value or leisure. We can think of productive capital as material artefacts of our civilisation. When owned, it is an equity (balance sheet) and an asset that is further used to produce surplus value (income statement). The owner must maintain equity by allocating financial and other resources to it.

Natural Capital

Natural capital is a buzzword of today. The negative connotation reinforced the notion that we owe it more than we actually do. My point here is that the current political corrective regarding natural capital prevents us from valuing our surplus value and from measuring only what we take from nature.

The distinctive feature of natural capital indeed is that its equity does not belong to anyone. For this reason, it is often difficult to determine who bears the individual responsibility for maintaining their value. But it isn’t easy to decide only for intellectuals who want to impose a top-down distribution of responsibility. For a human being, i.e., a traditional farmer living with natural capital and not yet invaded by intellectuals (which is quite impossible nowadays), the question of reinvestment in natural capital was not an issue. It was not only part of the tradition and sacred (intellectual capital), but also of the common sense of its integral circular-economy model.

But is today’s society capable of reproducing such people with common sense and intuitive responsibility towards natural capital, even if they are not as closely connected to nature as previous generations were? The answer is a resounding yes. The path to such a yes lies in the philosophy of integrated reporting and in integrating its values into any personal business model.

Social capital

Let us conclude with perhaps the most fascinating point: social capital. It is fascinating because it seems that society is based only on social capital. However, such a notion is entirely false. As we have already seen, all the previously mentioned capitals make up society’s total capital, not just social capital. If financial assets form financial capital, social capital is defined by reputation. Social reputation is the sum of all individual reputations of all individuals, companies, and non-entrepreneurial social units of a society.

Stakeholders measure reputation. Material stakeholders carry greater weight in the overall evaluation than non-material stakeholders. Not only do they carry greater weight in valuation, but they are also “more expensive” in social exchange. All other capitals weigh more when exchanged by a social institution or individual with a higher reputation. Reputation is a measure of social capital. You must invest in reputation, like any other capital. One places one’s reputation in the marketplace in exchange for one or more other capitals.

It is not so difficult to see that the higher the exchange rate of (positive) reputations between different social units (stakeholders) of a society, the higher the value of that society’s total social capital. Consequently, if negatively valued reputations predominate, we obtain a society with an overall negative reputation.

The value and the price

Let us conclude with the most visible difference between financial transactions of finance capital and non-financial transactions of other capitals within a society. The surplus-value of financial capital is exchanged based on the agreed price, while other capitals are exchanged based on value. This is a catallactic exchange based on Ludwig von Mises’ concept. As you can see, I expand on his concept, as IR offers a more advanced assessment of how value is created and exchanged across all six capitals. Von Mises used catallactics only for money exchange. Had he been aware of all six capitals’ power, he would have applied this powerful tool much more broadly. But that is already a topic for a possible next post.