By Richard Irving, Ph.D., Associate Professor(retired) Schulich School of Business, York University, May 8, 2021
I recently finished reading Mark Carney’s 600-page book and wanted to share some thoughts. First, some thoughts on the text and generated by the book are presented, followed by a summary of the main sections of the book based on what I took from it. Since I made about 50 pages of notes, I will not bore the reader with everything but will give you a flavour of the book and encourage you to read it yourself.
Overall Thoughts
I found it quite an exercise to read this book and make notes. It is reasonably clearly written, but the volume of material makes it hard to digest for a non-specialist. The massive nature of the task will deter many who should read it; however, it is worth the effort. Having finished the book, I think a second, abridged version of about 200 pages that summarizes the main themes and ideas would be worthwhile and more accessible to the general public. In its current form, I am not clear about the audience – academics, policy wonks, the general educated public, prospective clients, as a profile enhancer, or all the above?
The main theme though is clear. We have allowed the concept of market value to erode our societal values, and we need to change course. For example, we think we know how to value labour and can readily assign a dollar value to it. The amount typically reflects a market value, which is why a garbage collector earns much less than a pro basketball player. The societal value of the two is quite different. If the basketball players go on a national strike, so what? If the garbage collectors go on a nationwide strike, we have a severe problem. Similarly, raising children and housework are not valued because they are not priced in the market, but no one doubts both the short-term and long-term value to society of these activities.
Part One of the book makes a case for the erosion of societal values and their replacement with market values. Part Two illustrates this by analyzing three crises – the Financial Crisis of 2008, the Covid Crisis, and the Climate Crisis.
Part Three presents recommendations for the way forward. While detailed, they are very high level. Partly this is of necessity otherwise, the book would be 6000 pages. However, after reading numerous lists of actions for governments, society and corporations, I was left a bit cold. It is one thing to make high-level recommendations; it is quite another to implement them. And the devil is always in the details.
The focus of this book, value and values, is echoed by other contemporary authors. For example, in ‘The Tyranny of Merit’ (Farr, Straus and Giroux, NY 2020) the author Michael Sandel argues that a focus on a meritocracy has generated a culture of ‘winners’ and losers’ and that this has had dire consequences for the US (and other countries). These sentiments are revealed in a recent article in the Atlantic by Daniel Markovits entitled ‘How College Became a Ruthless Competition Divorced From Learning’.
Other authors have tackled the issues raised by Carney. In ‘The Metric Society”, (Goeth Institute, UK, 2019), Steffen Mau examines the societal distortions that occur when we rely too much on purely statistical indicators. This reflects the issues raised by Carney regarding the difficulty of quantifying social values. Mau identifies the pernicious impact of inappropriate quantification, reflecting Carney’s argument that market value has tended to replace social values. Finally, in ‘Post-Truth (MIT Press, 2018) Lee Macintyre details the tactics used by various individuals and groups to replace truth with alternative facts and how this has undercut public trust in institutions and professions. Carney argues that this lack of confidence must be addressed for our financial, governmental, and organizational institutions to function effectively.
Why This, Why Now?
So why now? Why are the issues of value, values, metrics, truth, and institutional trust on the minds of so many academics, government leaders and citizens?
Perhaps the main reason these issues are front and center for many of us now lies in the social disruptions of the last 20 years. Between 2000 and 2020, the internet had gone from an entertaining novelty to a necessity and ushered in the Fourth Industrial Revolution (4IR).
Can you imagine how we would have faired during the pandemic if many of us had not had reliable and extensive internet service? Video conferencing, which had been just over the horizon for 40 years, is now an integral part of our daily lives in the form of Zoom and other services. But this 4IR is only part of the disruption. We had the financial meltdown of 2008, and while we may have recovered financially, emotionally, our levels of trust in financial institutions still need repair. Simultaneously, since 2000 the Climate crisis has grown in the public imagination. Certainly, some disregard the evidence (alternate facts and post-truth?), but the societal consensus appears to be that we need immediate action to protect future generations, if not ourselves. Finally, there was the shock of the pandemic, which has affected all 7.8 billion of us. Small wonder then that we are intensely stressed.
In his book ‘Work on Myth’ (MIT Press, 1985), we are in a situation that Blumenberg calls ‘The Absolutism of Reality.’ This is a situation where you can’t fight, can’t hide, and there is nowhere to run. In these situations of intense stress, Blumenberg argues that myth develops to protect us from an overwhelming reality. Replace ‘myth’ with ‘alternate facts,’ and here we are. Faced with a lack of trust in our governmental and financial institutions and the uncertainties generated by a pandemic, it is not surprising that some of us turn to the fantasy of QAnon and other fictions, believing that false hope is better than no hope at all.
What Carney attempts in this book is to provide a fact-based intellectual framework for reforming our institutions and building trust, transparency, and fairness and a hopeful, trusting society.
The book is divided into three roughly equal parts. Its central theme which is developed throughout, is that we have gradually lost sense of our social values in our focus on market value and that we need to reincorporate them into our institutions and governments. Specifically, Carney argues that seven values and beliefs underpin a thriving economy, and these are dynamism, resilience, sustainability, fairness, responsibility, solidarity, and humility.
Part One (Ch 1-6) provides a primer on economic thought.
It shows how the evolution of economic thought about value and values from the objective value school to the subjective value school has transformed our society into a market society. For those readers who are economists and who are knowledgeable about the role of central banks in the global economy, this part can be skimmed. For those of us who are neither economists nor bankers, Part one provides a helpful review of economic thought from Aristotle through Adam Smith and Marx to neo-classical economic thought, the rise of subjective value theory and the belief that the market determines the value and reflects values.
In chapters three, four and five, Carney examines, historically, how our changing concepts of money has reflected our changing concepts of value. Chapter five ‘The Future of Money,” explores how financial technology (Fintech) holds the promise to revolutionize banking and financial services. Carney comments on digital currencies; Cryptocurrencies (e.g., Bitcoin); Stablecoins (e.g., Stable Unit) and Central Bank Digital currencies (e.g., the digital Renminbi). Overall, Carney, while admitting that stable coins and cryptocurrencies such as Bitcoin have a place in the market, tends to favour central bank digital currencies. CBDCs are backed by a central bank and are thus less volatile and more reliable than cryptocurrencies such as Bitcoin, which are not backed by anyone, and stable coins, which though backed by various real resources, are not fully regulated and supported. The advantage of Stablecoins and CBDCs is that they lower the transaction costs for both national and international transactions, speed up the processing of transactions and provide secure transaction platforms.
This discourse sets up chapter six to make the argument that our tendency to confuse market value with social values is breaking down the social contract between governments and the governed. He argues that this process of tending to define social welfare in terms of market value has led to three crises of values which he discusses in Part Two.
Part Two (Ch. 7-12) discusses the Global Financial Crisis, the COVID Crisis and the Climate Crisis framed in Value and Values.
Carney begins a discussion of the Financial Crisis with a short history of the role of Central banks in the global banking system and the rapid expansion of ‘pseudo’ banks. He summarises the proximate causes of the crisis as New Age thinking. i.e., things are different this time; excessive leverage; and misaligned incentives promoted very short-term thinking. He also discusses the role of a laissez-faire approach to financial management and greed. The three lies of finance are summarized as 1) this time it is different; 2) Markets are always transparent; and 3) Markets are moral.
Carney describes G20 reforms designed to make markets safer, simpler, and fairer to address these lies. Among the 12 reforms I counted are, aligning compensation with values, increased management accountability, merit-based compensation, and ensuring proper allocation of capital and risk. The details are found in Chapter 8, pgs. 180-210 and are worth a careful read. All twelve make sense, but how they are implemented and enforced across countries will make all the difference in their effectiveness.
His analysis of the COVID crisis extends his analysis of the distinction between values and value. Specifically, Carney argues that one reason for the crisis was an undervaluing of resilience in the market. This led to countries not stockpiling protective equipment, hospital supplies, etc., even though health experts warned of impending pandemics well before the current crisis. Some time is spent in a technical analysis of how we value life and a discussion of how most governments and citizens made decisions based on core values and not financial optimization when faced with a crisis.
Carney believes that there are five likely outcomes to the COVID crisis. First a fragmentation of the global economy where local resilience is preferred over global efficiency. Second much of corporate value will be taken up by debt. Third, experience with both the global financial crisis and the pandemic will change how companies balance risk and resilience. Fourth, economic narratives will change. Fifth, the tendency to move from a market economy to a market society is likely to change as social values will be given precedence to value. He concludes that one other outcome of the pandemic is that the global financial system has worked. Personally, I agree, but I think this conclusion is about 12 months premature.
The last section of Part Two deals with the climate crisis. Much of the information and arguments Carney presents will be familiar to many readers, so I will skip directly to his recommendations. Carney sees carbon pricing as only one policy instrument to deal with this crisis. He suggests that three technologies can help solve the climate crisis: engineering technologies, political technologies, and financial technologies. The engineering technologies include developing green electricity, decarbonizing transport and reducing industrial emissions. The political technologies include sustainable development goals and the spread of climate activism globally. They are essentially valuing the future and caring for future generations. The financial technologies include a partnership between the public and private sector because of the enormous transition costs, mandatory financial reporting, risk assessment and measurement of returns related to climate impacts. Fundamentally, those organizations which through their actions have contributed to the climate crisis must contribute to solving it.
Credible, climate policies must be acknowledged by politicians across the political spectrum (good luck with that), be action-oriented, make clear which actions will not be tolerated in a net-zero world and reflect a successful climate policy track record. Clearly, these are neither easy nor quick.
Part Three (Ch 13-16) focuses on reclaiming our values.
Chapters 14, 15, 16 of Part Three deal with Leadership, How Companies Create Value, and How Canada Can Build Value. The book concludes with a chapter on humility. Much of what he writes on leadership and values would be familiar to anyone with an MBA, but it is a good refresher, nonetheless. This chapter concludes with key dimensions of leadership in a disruptive age. These dimensions are: determining your purpose and sticking to it obsessively, bringing diversity and inclusiveness to your team, engaging issues with evidence’ using intuition and empathy’’ applying ethical leadership’’ and leading with humility, humanity, and hope. I would like to see a process for developing, selecting and electing leaders that embody these dimensions.
In discussing the issue of how purposeful companies create value (Ch 14), the key questions for any organization are ‘what is its purpose?’ ‘What does it stand for?’, ‘what does it do?’ and ‘what should it be trusted to deliver?’ These are questions of value and values.
While discussing the role of various stakeholders, Carney makes the point that shareholders are not owners in the traditional sense. Instead, they are stakeholders who get paid after everyone else. While acknowledging that shareholder primacy is deeply rooted in corporate law, he argues that enlightened shareholder value, which allows for the consideration of other stakeholders, is still a form of shareholder primacy. The solution to incomplete controls and imperfect incentives is to build a strong corporate culture of integrity and trust. A clear sense of purpose can create social capital, generate a focus on customer service and focus the company both internally and externally. Of course, this assumes that executives want to do this and can implement these actions.
He concludes the chapter by recognizing that the main challenge for corporations is to translate purpose into practice. However, evidence shows that purpose and practice can strengthen the bottom line and a dynamic purpose can strengthen innovation. – Doing well by doing good! Personally, I would like to see a better roadmap for achieving this; but recognize that there is only so much one can do in 600 pages.
Chapter 15 is devoted to the problem of investing for value (s). In other words, what metrics do we apply to ensure we are investing in organizations that create value for us while reflecting our values. ESG (Environmental, Social, and Governance) investing can guide stakeholder value creation. This is investing that measures social and environmental outcomes as rigorously as financial outcomes and can be either finance first or impact first value investing. The chapter focuses mostly on finance, first investing doing well by doing good. Apparently, sustainable investing strategies outperform traditional strategies. He also makes the point that taking social factors into account does not violate fiduciary duties and that the general management trend is toward responsible investment.
There are three approaches to applying ESG factors, ratings-based, fundamental value and impact assessments. Carney discusses all three and notes that while there are emerging standards, the core challenge of value investing is to place value on things that are hard to value. Stefan Mau’s book makes a similar point from a sociological perspective.
The chapter concludes with a discussion of making a transition to net-zero. It makes macro recommendations, such as using metrics that identify the percentage of assets with a net-zero plan, the percentage of the portfolio that is net-zero aligned, the percent deviation from a target, and portfolio warming – an assessment of potential global temperature rise for a given company or portfolio.
Overall, I found the recommendations helpful but hard to implement. It will be instructive to see how sustainable value investing develops over the next few years.
Chapter 16 focuses on how Canada can build value. It is a call to get off our asses, or as Carney puts it more eloquently on pg. 455 “We need to combine our values of compassion, responsibility and solidarity with a new dynamism to achieve prosperity for all.”
Part of the chapter discusses the previous Industrial Revolutions and then develops the effects of the 4IR (fourth industrial revolution). According to the sources, Carney quotes, overall, 10-50% of all employees could be affected by the 4IR, while the expectation is that in advanced economies, 10-15% of jobs will be at risk.
On the positive side of the 4IR, Carney suggests that there will be more jobs requiring EIQ, originality and social skills; more jobs caring for an ageing population; new forms of bespoke mass creativity (Customized 3D Printing?) and new jobs that we can’t imagine yet.
On the downside, 4IR can cause mass inequality, depressed labour markets, education that can’t keep pace with changes, and an escalation in inequality due to greater global interconnectedness.
However, assuming that this industrial revolution is similar to the previous three, eventually, the 4IR will boost productivity and wages. The question of course, is how long the transition will take and the magnitude of the disruptive transition period.
One effect of COVID has been to intensify the pace of the 4IR. He notes that there has been a contraction in supply and that demand has fallen worldwide by about 10% by the middle of 2020. However, Canadians paid down substantial debt, and savings rates shot up. As the shutdown persists, it will be harder for the unemployed to retain their skills and acquire new ones. Consequently, the risks to the economy are rising.
He recommends that governments split their spending plans into three portions: emergency COVID spending, current spending on ongoing programs, and capital measures to boost long-term productive capacity in the economy.
Carney presents a 10 point plan for governments to manage the transition. This plan includes:
- having clear goals to move from the old to the new economy;
- setting clear rules on spending and borrowing;
- tapering the emergency;
- maximizing government investments to support both short and long-term economic activities which support the new economy;
- concentrating new budget measures on green activities that are job heavy;
- using regulatory policy to establish future directions for the new economy;
- providing financial sector policies to drive the transition to net-zero;
- providing a disciplined approach to developing resiliency in the economy;
- tracking the sustainability of current spending; and
- developing new institutions for how we will work tomorrow.
Carney sees strong institutions as the basis for creating opportunity for all and returns to the original seven values of solidarity, fairness, responsibility, resilience, sustainability, dynamism, and humility as the way to achieve this.
For example, under ‘solidarity,’ he recommends that we support workers, not jobs, by guaranteeing employability and that companies must take more responsibility for this. My example for this would be when the previous Ontario Liberal government implemented an apprenticeship program, and many employers were reluctant to take them on as trainees and preferred to hire foreign-trained employees. Under Carney’s vision, these employers would participate in these programs and support them, realizing the long-term benefits of having well-trained home-grown workers. Some realignment of thinking by employers is necessary.
Under ‘fairness and responsibility, he notes that these are central to the market and that there cannot be one rule for the elites and another for the rest of us. He also notes that we must rethink the gig economy. To build ‘resiliency,’ he recommends, among other things, that we identify systemic risks, plan for failure, build and use buffers and promote diversity. To address ‘sustainability,’ he notes that efforts must be tangible, predictable, and equitable. ‘Fiscal responsibility can be achieved by investing in short-term public goods while setting the long-term direction for the economy by providing green energy incentives and developing policies to move us to net-zero. To achieve ‘dynamism’ in the economy, Carney makes six recommendations which include using policy to unlock digital competition, having a solid intellectual property framework and a tax system that rewards or at least does not dissuade wealth creation, among others.
Details of the recommendations are worth a careful read.
The chapter ends with a discussion of values-based globalization. Carney recognized that globalization had brought both prosperity and misery. He recommends cooperative internationalization based on outcomes-based measures; one that is flexible and involves multiple stakeholders; that works with multiple political systems, and which is inclusive, involving all citizens.
Carney believes this is an arena where Canada can operate very well, given its history. I would like to believe that this is possible, but I wonder about the global impact of bad-faith actors and how long it will take.
The book concludes with a chapter on humility. He emphasizes that the future is always uncertain, that we can’t predict everything, and that chance plays a significant role in both success and failure. Consequently, we need to plan for all foreseeable outcomes and recognize that we never have complete control of events. Humility also recognizes that those who reap great rewards must take great responsibility—a good thought on which to end.
© R. Irving May 2021