CORE CONCEPTS
QUANTIFICATION
QUANTIFICATION IS BEST DONE USING MULTIPLE UNITS OF ACCOUNT
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Accounting for the 21st Century - Metrics for profit, people and planet impact
Accounting for the 21st Century must include metrics that relate to the environment, society,
and the total economy rather than merely being for the organization. This is accounting for every
part of this amazing and complex system that is the environment, the society and the economy.
The TVM initiative for development of Multi Dimension Impact Accounting (MDIA) addresses these
problems. The goal is for MDIA to be an easy to use tool that will expand the capabilities of
conventional accounting so that the impact of economic activity on everything is brought into
account. Conventional accounting has a focus on a single dimension represented by money, while MDIA
accounts for not only money transactions, but also the impact of economic activity on everything
else … hence multi dimension and impact accounting. MDIA enables analysis that embraces
not only the impact that money profit has on financial capital, but how economic activity impacts on all the
other capitals.
MDIA aims to be a framework of metrics that can be used in many different situations. The same data and data
architecture works for a person, for a product, for a place and for the profit and impact of any
economic activity in any organization.
The logic is relatively simple … but as usual, the devil is in the detail.
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Quantification … Measures Beyond Money
MDIA will incorporate multiple units of measure … and use standard values for the accounting. Standard values are something like standard costs in cost accounting.
Money had its origins in being a measure of the price in an economic transaction. It facilitated
trade and was very much more efficient than barter. How money became a store of value is a
long story, and how money became a key component in money wealth creation an even longer
story. Money has its uses, but it is a very poor unit of measure for almost everything that is
important in the world we live in. The size of a money unit has no definition at all … it is
determined by a market that is also impossible to describe and replete with 'invisible hands' that
may or may not control everything.
The value of a product … goods or service … is not the amount that it can be bought or sold for.
That is a price. The value is what a product contributes … to a person directly and to society in
general and also taking into account the impact there is on natural capital. What this means is
that there is a need for several units of measure and related quantification along the following
lines.
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QUANTIFYING SOCIAL CAPITAL
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Quantification of HUMAN CAPITAL – quality of life
A unit of measure for quality of life may be driven by reference to the value of life itself. There is life, and there is quality of life. The value of life should not be directly related to a money unit, but be defined independently from money.
A standard life unit could be defined as 1 life = 1 million standard life units. Everything to do with quality of life is associated to this unit.
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Quality of Life
Quality of life is the underlying 'raison d'etre' for everything that goes on in our modern enviro-socio-economic system, but there is not a very good way of measuring the state and flows of everything that goes into 'quality of life. Much of the measurement of the performance of the global enviro-socio-economic system has been measured using a money metric which has been assumed to have a strong correlation with quality of life. There is some truth in this for the 'bottom of the pyramid' (BoP) but this does not work at all well in richer societies. There are many components to quality of life, and they must all be optimized ... and for this relevant measures are essential.
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The Individual, Family and Friends
The individual, family and friends are a key part of the ecosystem that enables a decent quality of life. What constitutes a good quality of life may be subjective, but there is a difference between a good quality of life and a bad quality of life, and these should be optimized. There are important differences in cultures ... but there are issues that are either good or bad with respect to quality of life. There are interactions between individuals, their families and their friends that all go into making up quality of life.
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Ability, Parenting, Education, Skills and Experience
An individual starts out with some ability that has genetic origins, and this can be developed during a lifetime by good parenting, education, skills training and learning from experience. An optimized life is one where these inputs result in making the very best possible use of an individual's inate ability.
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Health, Wellness, Food, Nutrition and Lifestyle
An individual starts out with some genetic conditions that influence health and wellness, but an optimized life is enabled by appropriate healthcare, good nutrition from food, safe water, good sanitation, and healthy lifestyles.
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Shelter, Stuff that is Needed, and Stuff that is Wanted.
Shelter and stuff that is needed are essential. A better quality of life becomes possible when shelter is better and there is more stuff that is needed and some stuff that is wanted. At some point a better quality of life is not achieved by more shelter and more stuff.
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The Surrounding Society
The surrounding society has a huge effect on quality of life. It is the surrounding society that makes many things that are important for quality of life to be possible or impossible. It is the surrounding society that delivers security of various sorts or not. It is the surrounding society that provides for rule of law and things like physical infrastructure that enable an efficient economy.
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The Surrounding Natural Environment
The surrounding natural environment may have a big impact on quality of life. It is the surrounding natural environment that makes many economic activities possible, whether this is agriculture because of fertile land, or commerce and trade because of navigable rivers, or mining and manufacturing because of mineral and energy resources that enable industry.
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Money Income and Wealth
Money income and wealth are not important to quality of life, per se, but the availability of money enables an individual or a family to buy things that are critical to the maintenance and improvement in quality of life. With money comes a freedom to do things that improve the quality of life for the individual, family and friends.
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QUANTIFYING NATURAL CAPITAL
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Quantification of NATURAL CAPITAL ... nature's resources
There need to be several units of measure within natural capital (NC) because of the many roles that natural capital plays in the success of everything. It would be good if these could be be summarized or consolidated into a single unit of measure of natural capital as a whole, but this requires more understanding of natural capital values than there is at the present.
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Water
The value of water should be related to the value of life more than to the value of money. The price or cost of water varies depending on the abundance of water and whether or not water
is renewable in the place where it is uses. The cost of water must include the cost of release of polluted water into the environment. The unit of measure for water could be that 1 liter of net
water consumption = 1 water unit. Many things associated with water and water pollution could be related to the idea that 1 liter of fresh water has a value of 1 (say).
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Land
The value of land should be related to a land value unit, and adjusted to reflect all the various uses there are for land, and not just those that a priced into money units as a result of
trade. There is value in land when used for eco-services (forests for carbon, wetlands for fisheries, wildland for bio-diversity, natural land for water purification, etc). The unit of measure
of land could be that 1 hectare of land = 1000 land units. Land use is constrained by a limited and fixed amount of land, and the value will change depending on the use being made of the land. Land may be used for urban development, suburban communities, rural agriculture, industrial use, tourism and various forms of ecoservice and habitat for bio-diversity. Many things associated with land and land use could be related to the idea that 1 hectare of undeveloped natural land equals 1000 (say)
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Minerals
Minerals are an essential raw material for many industrial processes that in turn produce the goods and services people need to support their standard of living and quality of life. As products move through the supply chain, the flow aspect of these economic transactions are reported using a money price, but the impact of the loss of the mineral resource is not accounted for in the state of the natural capital. The value of a mineral resource may not need to be quantified when it remains in situ, but when it is depleted the value must be accounted for based on the value the resource contributes to economic performance.
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Energy
Energy is the big driver of the modern enviro-socio-economic system. Energy is a critical input for almost everything that supports the high standard of living and quality of life that is now possible. There is a sophisticated framework for analysis of cost, price and profit within the energy dimension of the modern enviro-socio-economic system but only a partial framework for the analysis and reporting of the value and impact of everything related to energy in this system. Major investment has been made in technology to exploit carbon based fossil fuels but, until recently little has been done to exploit the massive flows of renewable energy that exist but have only been exploited on a very limited scale.
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Air Pollution
The atmosphere has been used as a waste dump for gaseous effluents since the beginning of time, but this became a serious matter during the era of industrialization and increase in energy use. Many noxious gases get released into the atmosphere by industrial processes and transport vehicles as well as particulates, all of which are detrimental to health and quality of life.
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Greenhouse gas emissions.
In addition to the air pollution referred to above, there is also the environmental degradation arising from the impact of greenhouse gas emissions on the atmosphere and the equilibrium of the weather. A unit of measure could be based on the idea that one metric ton of carbon dioxide emissions = 1000, and everything to do with air pollution gets related to this unit. Many things associated with atmospheric pollution could be related to a ton of carbon dioxide emissions where 1 ton of CO2e equals 1,000 (say).
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Ecosystem Services.
Nature is an amazing system. Even though there has been an immense amount of research and we know a lot, there is still a lot that we do not know. We do know that nature provides many services to maintain the quality of the environment and make it sustainable. These have huge value, but not included in conventional analysis of the socio-enviro-economic system
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QUANTIFYING ECONOMIC CAPITAL
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Quantification for MAN-BUILT STRUCTURES AND SYSTEMS (MBSS)
As TVM was developing, the concept that ALL the CAPITALS should be included in the accounting became quite clear. Initially the segmentation of this was as follows: (1) People; (2) Natural Capital / Environment; and (3) Man Built Structures and Systems (MBSS). Over time the wording has changed slightly, but the core ideas remain the same. The nomenclature has been changed in some part in order to be more congruent with other impact analysis initiatives that have been emerging.
There need to be several units of measure for all the components of all the capitals. Conventional money should NOT be the metric for everything, especially in the sense that a 'market' mechanism is often talked about as the way to establish this money quantification!
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Financial Capital
The money measure needs to be better understood. It is common to use a reference currency lije the US dollar, but local currency also matters, and there may be funding currency as well. Besides the US$, other reference currencies might be the Euro, Japanese Yen or Chinese Yuan
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Physical Capital
Physical capital includes products, the goods and services needed for people to have a decent quality of life, it includes buildings and infrastructure. Physical capital needs to measured both in static and in dynamic terms, and in terms of money units and in terms of various impact units. Of special note are products that flow through the enviro-socio-economic system delivering impact
in the form of quality of life and impact on everything else as they go through the life cycle.
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Institutional Capital
Institution capital has impact. There are money costs to support institutional capital and impact costs when institutional capital is inadequate. There is both a static and a dynamic dimension.
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Knowledge Capital
Knowledge capital is the enabler of a high performance enviro-socio-economic system. Knowledge may be thought to behave somewhat like energy ... potential energy, kinetic energy, heat energy and so on. Knowledge has money costs to support research and all sorts of impacts when knowledge is used, bot good and bad. There is both a static and a dynamic dimension.
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Social Capital
Social capital is the group version of individual human capital. Social capital has impact on individual human capital and individual human capital has impact on social capital. There is both
a static and a dynamic dimension.
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QUANTIFYING VALUE
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Standard value is key to efficient analysis
The core hypothesis that justifies the development and deployment of TVM is that money profit is not enough, there also has to be value. But value will never the there if value cannot be quantified in a widely accepted way.
If you do not measure it … you cannot manage it
The TVM solution to this problem is to make use of “standard values” rather like “standard costs” are used in cost accounting … but even this has to be done with care. Value is not a simple metric … but it is a very important one.
Value is subjective … and this is part of of its importance as a key metric of progress and performance. A simplified value construct will not work to guide society to its best performance … or even to know what best performance might be.
Ignoring value … which is essentially what has been done in money accounting and economics certainly simplifies analysis, but over time the result of this is increasingly poor allocation of resources. Value is subjective, and as such its quantification has to have an element of pragmatism in order to be practical.
One part of the solution is to have standard values for everything that is of value … in other words, for everything.
The idea of a standard value in TVM is similar to the concept of standard cost in cost and management accounting. Everything has its standard value computed, just as everything has its standard cost computed. Periodic comparison of actual cost to standard cost makes it possible to have standard costs that reflect the actual cost very closely. Routine management analysis may be done using the standard costs … and the answers are good enough for most day-to-day decisions. Similarly with standard values … they may be used in day-to-day analysis and the answers are good enough, and easy to get.
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Price should not be uses as a proxy for value
Price is often used as a proxy for value … because sometimes the price is close to the value. But this approach to value has many problems of which (1) price is determined in the main by the seller, and (2) the analysis going into determining price usually ignores almost all the elements of the value construct except what value a buyer might place on the item. In other words, you cannot set the price higher than the customer thinks the item has value if you want to sell the item!
This idea that price is best when the price of the item and the value of the item to the buyer is the same is an interesting dynamic … with the result that all value adding then becomes attributed to the business part of the value chain, and none for the consumer. In the end, a damaging economic idea.
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Value is everywhere... There are examples in every sector
A standard value needs quantification, but not as money value … not as a monetization of the value quantity … but using separate unit of account.
Value changes depending on whose perspective is being used … and these changes are complex and difficult to explain. They are not only based on simple economics, but there are cultural and social issues as well.
Every person has their own profile of values … many people may have similar profiles … and within a community there may be only one general profile … or a relatively small number.
There needs to be a large repository of value profiles so that what people think one value is relative to another value. Many of the value ideas will be different … many will be the same. When all the profiles get linked together relatively, it becomes possible to see the aggregate average value profile.
Housing has value … a house has value … part of the value is its role in sheltering the family … part of the value is being a home for the family, the social center of the family … part of its value is the image it gives of the family … part of its role is a contribution to the neighborhood as a whole.
An education has value … part of the value is the socialization learning that children and young people get at school and college … part of the value is what they learn … part of the value is learning how to learn … part of the value is the opportunity expansion that results from being well educated.
Infrastructure has value … part of it is to enable socio-economic activities to take place more easily … a bridge saves people time in getting from one place to another, or getting there at all … a road makes it possible for people and goods to move from place to place efficiently. The value arises because people save time and things can be more productive. In some cases infrastructure makes the community safer. In some case infrastructure makes it possible for a community to expand … or to build some new economic activity in the place.
Health has value … part of the value of health is that good health enables people to live their lives in a far better way than when they are sick. All the things that are possible when a person is health become compromised when there is debilitating sickness.
Low crime has value … quality of life is at its best with no crime, but becomes impaired when there is crime. Low crime has a big social value, that is lost when crime increases. Getting low crime is expensive … police, courts, prisons and remedial programs are high cost parts of the community fabric, but important.
Electricity has value … quality of life is improved with access to electricity … when used electricity is clean … though there are questions about how clean electricity is when it is being generated.
Jobs have value … to the employee, those that are remunerated have a value in the family that is big relative to the same person when they are unemployed and unremunerated. Jobs are interesting in that they are also of value to the employer … every job helps in the process of carrying out the mission of the organization … and build value for the organization.
Things that impact value are everywhere
Things that impact value are everywhere as well … so the framework of metrics needs to be able to handle the multiple characteristic of the value item and how issues impact the matter.
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Good health has high value
Good health has a high value … but this is reduced by the onset of illness. Being sick lowers quality of life. Being cured improves quality of life. Being in good health is the desirable norm in the quality of life matrix.
Health in GDP is nonsensical
With modern GDP metrics, the cost of treatment is captured, but nothing else. The erroneous supposition is that the more treatment there is, the stronger socio-economic performance. TVM disagrees profoundly and has a very different approach.
Good health is always desirable … but maybe good health has a different value at different points in ones life. This should be reflected in the way the value matrix comes together. Maybe health value is going to be different for different people who do different jobs. The details are tricky … and they should be respected … and also there should be some simplification so that the system stays workable.
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Low crime has high value
Low crime is very desirable and enhances quality of life in a community. In turn low crime has a favorable impact on the desirability of the neighborhood and house prices. Low crime reflects the people who live in the neighborhood and those that come into the neighborhood. Low crime also reflects the capability of the police and law enforcement.
In the quality of life measure, low crime should be the norm, and be a value component. All the various forms of criminality … anti social behavior … are negatives that detract from quality of life.
The cost of police and law enforcement may be needed to have a low crime outcome … but the costs are a negative in the quality of life. That money has to come from somewhere.
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Efficient public transit systems have high value
Efficient public transit systems have high value and should be the norm in a well measured society. If the value of having excellent efficient public transit systems is incorporated in quality of life as the default, then the various costs can be set off against this. If there is a good transit system there is a history of investment in the transit infrastructure and the equipment, and an ongoing cost of operating staff, operating costs and maintenance. There is also a cost of congestion that varies according to the state of the transport infrastructure and the performance of the transit system. With a good transit system the desirability of neighborhoods can improve … but not always.
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Urban and regional mass transit systems
It is difficult to imagine a modern city without a high performance urban mass transit system as well as regional mass transit systems. Most of these systems are run by government entities that use cash based money accounting, a system that fails completely to keep the value of past investment front and center of performance analysis.
The value of transit systems is a component in quality of life … not having one is a deficit .. and the cost of building one and the cost of running one is also a deficit … the cost of congestion is a deficit. The cost of building and running transit systems is substantial … and the matter of whether this is best paid through a public funding process … bonds, taxes, etc … or by user fees is an important question.
Not funding mass transit adequately, and having the system deteriorate is usually a value destroying outcome. At the same time, allowing high costs and low efficiency in the operation of the system to become the norm is also a value destroying outcome
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