The systems symbol
So far in the Millennia Challenge Series the focus has been on the foundational concepts of value in use, the capitals and the ways in which capitals are transformed to generate more or less value in use.
This highly theoretical work might seem academic. Disconnected from any obvious practical application you could be forgiven for thinking that understanding the theoretical best use of thing sounds vaguely interesting but so what? And you’d be right, except, being made of energy, value in use is naturally affiliated with the scientific concept of an open system. The science used to understand chemical reactions, cyclones, biology and human life itself. And if value in use is found in the various capitals , the broad range of theories and methodologies under the umbrella of open systems can now be used to better understand the role and behavior of the capitals within corporations and the economy more broadly.
I’ll restate. Properly understood, Aristotle’s concept of value in use directly connects cutting edge work in accounting and science - the capitals and energy flows within complex systems. Providing an inherently generative or sustainable basis for accounting and corporate law grounded not in neo-classical exchange value but in the science of value in use. Mark my words. If the idea that value is energy in its social form is validated by science or accepted as a norm, the implications will be Copernican - elegant, profoundly accurate and vehemently denied by academia for a century.
Introduction to Open Systems
Open systems theory, first proposed by Ludvig von Bertalaffy, is a popular methodology employed in a variety of fields including physics, biology, environmental science, management science, economics and even corporate law. In practice, open systems theory has been applied to any system in which multiple elements interact with each other over time to achieve certain purposes or functions.
But outside the physical sciences , systems theory and the thermodynamic concepts upon which systems approaches were initially based are all largely employed by way of analogy, or as a metaphor. Consequently, while routinely employed by economists and management theorists to explain the behavior of corporations and economies, being based on a loose metaphor there can be little ontological confidence in their conclusions.
The paradox is that whilst the social sciences are attracted to the idea that “systems theory” and “systems” thinking” can be applied as a design and assessment methodology to anything that has the appearance of a system, there is almost a complete neglect of the one idea that historically unites and organizes systems theory into a useful domain -the energy concept. In large part, the social sciences have tended to focus on things that look like system and the interaction of elements within the same but ignored the thermodynamic principles that underpin those interactions.
Public companies in particular can be viewed as complex systems in which multiple elements (e.g., financial capital, physical capital, human capital) interact to perform a variety of desirable functions (e.g., providing not only investor returns but also goods and services, employment opportunities, and tax revenues) under uncertain conditions and over time
Belinfanti and Stout
As I will explain if future parts in this series, public companies are not abstract open systems comprising multiple interacting elements. They are closer to natural open systems because these elements are engaged in a process of maintaining existence through the transformation of energy in its social forms - value in use.
Economics and corporate law have a blind spot when it comes to energy.
The social sciences associating the energy concept with physical forms of energy, their sources and prime movers. Energy largely confined to things like electricity, the means of generation and their fuels or primary renewable or non renewable primary sources solar, wind, nuclear, fossil fuels etc.
But, as discussed throughout this series, energy is literally “the ability to do work”. Whenever we witness positive social change, some work is being done. Most of the time in the absence of the forms of energy which are traditionally thought of as energy. The source of that change and the energy required to do the work must therefore exist in a broader category things or as I have argued capitals. I propose that these capitals store energy in its social form - value in use. And, as outlined in previous parts value in use shares many of the same properties as energy ( with some notable exceptions).
Being made of energy, value in use is therefore naturally affiliated with the scientific concept of an open system. A concept fundamental to our understanding of chemical reactions, cyclones, biology and human life itself. Over the course of the next parts in the Millennia Challenge Series I begin the process of uniting corporate law with the theory that explains how and why open systems exist, grow and die. But not as a poor metaphor or analogy, but enlivened by the energetic concepts of capital and value in use, as the application of well understood scientific principles applicable to all energy systems and structures.
However, if you’re new to the idea of value in use I strongly recommend reading this summary before continuing.
The Basics of Open Systems
Von Bertalaffy distinguished between closed and open systems. A closed system is where no material enters or leaves it. An open system imports and exports energy in its material and non material forms. Von Bertallaffy described living systems as open systems, maintaining themselves in exchange of material with environment, and in a continuous process of building up and breaking down their elements.
In an open system, and especially in a living organism…the organism feeds from negative entropy, importing complex organic molecules, using their energy, and rendering back the simpler end products to the environment. Thus, living systems maintaining themselves in steady state by the importation of materials rich in free energy, can avoid the increase of which cannot be averted in a closed system.
The biologist identified open systems based on their boundaries, environment and the ability to exchange matter and energy with sources of the same with the environment.
There are of course a fourth and fifth element implicit in open living systems theory. In order for an open system to maintain its existence over an extended period of time it requires a means to store energy for future use and means to transform that stored energy to do the work of existence or what I call a prime mover.
The key to understanding the behavior of real open systems or energy structure is that there behavior is driven by the second law of thermodynamics re-framed as the motive force of entropy. Put in the context of value in use, social systems such as corporations maintain their existence by exploiting capital gradients with the system and by importing and exporting capitals to their environment.
Open Systems and Value in Use
To help explain the relationship between value in use and open systems theory I’ll focus on the idea of the corporation as an open system. I’ve adopted the symbol >Φ< to represent a social system that transform capitals to maintain existence.
While the application of systems theory to “corporations” is not new, these studies tend to use the expression corporation as a simile for the “enterprise”, “organization” or “business”. For reasons that shall become clear, it’s important to note that my analysis only applies to the modern post 1855 limited liability company.
First, let’s divide the world into corporations (the system under examination) and their widely understood but poorly termed “stakeholders” that play the role of the “environment or surroundings”. To be clear, from a systems perspective, the expression stakeholder is misleading. What brings a stakeholder and a corporation into a relationship is not a moral or other “stake” but the promise of value in use. With exceptions, corporations and stakeholders are not drawn together by duty or responsibility, but by the inevitable pull of entropy or what Adam Smith called, self interest rightly understood. Each exchanging or radiating value in use in the direction of the other in order to deny entropic fate.
The division is not arbitrary. Corporations are separated from their stakeholders by a real boundary.
In biological open systems delineating the systems boundaries is relatively easy, but the exercise has proven extremely difficult (if not impossible) when considering social systems. In large part, the problem stems from the arbitrary nature of drawing a circle around what is a metaphor or an analogy. However, the modern corporation is somewhat unique in that the characteristics that define a natural open system are largely identical to the fundamental characteristics of a modern corporation.
The ability to own things, the ability to buy, sell and gift, the ability to maintain a prime mover or business model that maintains existence by generating value in use by transforming capital all make the modern corporation a candidate for a real open system. All re-enforced by the 19th century legal innovation of limited liability that wrapped corporation in a kind of Markov Blanket. Separating the capitals of the corporation from those of the shareholder giving exclusive use to the corporation to sustain its existence.
Make no mistake, this is nothing short of a horror to exchange value theorists who have spent the best part of the 20th century convincing lawyers and policy makers that corporations have no existence. Nominalizing the corporation to suit their domain assumption that corporations have no welfare interests other than to maximize profits and minimize transaction costs. A double punch to civil society that serves no good purpose other than to float the boat of economists who need this to be true to keep their jobs and maintain their disciplines pernicious influence over just about everything and underwrite share based business models.
Indeed, it will be no surprise that if one day it is revealed that the modern corporation is one of mankind’s greatest accidental scientific discoveries. Though the accident happened in the 19th century and the realization of what had occurred in the 21st century, I have no doubt that the Victorians had managed to harness the the second law of thermodynamics to not only to power the steam engine but also to power the corporation. Perhaps even creating a curious form of non carbon based life without anyone noticing for hundreds of years.
But that exciting discovery is for a future part in the series.
For now I propose that corporations are best understood as real open systems. Capable of maintaining their existence by exploiting capital gradients within the corporation and its environment based on four propositions:
the ability to store capital within the corporation (Endogenous Capitals.)
the ability to access Endogenous Capitals or available capitals in the environment form stakeholders (Exogenous Capital). Both Primary Input Capitals.
the ability to access prime mover (s) or the means of transforming Primary Input Capitals into new available and accessible Endogenous and Exogenous Capitals ( “Output Capitals”).
the ability to access to Endogenous and available Exogenous Capitals required to “power” the prime mover (Secondary Input Capitals).
Corporations maintain their existence by employing prime movers to transform lower value in use primary capitals (or higher entropy capitals) into to higher value in use product capitals (lower entropy capitals). Either within the corporation through a process of converting capital from one form or another or importing exogenous capitals from stakeholders typically through a process of exchange.
But unlike living systems that, as Von Bertalaffy argued rendered back to the environment simpler end products to the environment (high entropy capiotals), the corporation is capable of both maintaining its existence and exporting or dissipating to the environment capitals that possess more complex and higher value products to stakeholders (low entropy capitals).
Through a process that can best be described as the co-ordination of entropy, corporations and their stakeholders are able to swap capitals based on symmetrical disequilibrium. That is, each counterparty can generate greater value in use from the others capital than they can their own. Provided their is mutal disequilibrium it is in each parties interest, measured in terms of the drive to exist, to exchange their capitals. That is, for each to capitalise.
This may seem counter intuitive from an exchange value perspective. Afterall, first law of thermodynamics metaphor of equilibrium is key to understaning how things get their price. But from a second law, value in use perspective, what drives corporations and indeed capitalism is Carnot’s principle - wherever there is difference there is the opportunity for motive force. Disequilbrium drives the generation of value in use. And available value in use is the best predictor of existence and flourishing.
Moreover, this difference in value in use does not imply inequity. Rather, as will be discussed, it is the recognition that capital is relative to both the systems and the means to transform that capital into value in use. In simple terms, Because individuals are made of matter and corporations are not, what is a higher entropy capital (low value in use) for a corporation may be a lower entropy capital for an individual ( higher value in use). It is what I describe as corporate social purpose without social responsibility. A corporation governed and directed through the lens of value in use can naturally and obliquely dissipate value in use to stakeholders though this forms no part of its intention. Thereby capitalisng society. If this sounds familiar, it’s because Adam Smith said something similar in the context of exchange value. He had the right idea but the wrong theory of value. However, a corporation governed through the lens of value in exchange will not disipate value in use. In fact, as we are discovering, maximizing profits is the bestvway to decapitalise corporations, individuals and society.
For now, the important thing to remember is that if after any process the value in use stored across all product capitals is greater that the value in use across all Primary and Secondary Input Capitals expended in the process of transformation, the corporation is more likely to maintain its existence as system. But if the process yields a value return on investment of less than 1, the corporation closer to non existence. See part 14 for a discussion on VROI. Again, corporations sustain their existence as distinct system separate from their environment through a complex process of transforming capitals into greater value in use.
The following schematic captures the relationship between value in use, capital and open systems:
Capital systems flow model
simplified into the following building blocks:
The capital systems flow model is an early attempt to open the black box . Capturing the flow of capitals ie social, intellectual financial etc within a corporation and with stakeholders by focusing on:
Primary, Source or Input Capital - A form of capital that is transformed by a prime mover into a product capital.
Secondary Capital or Intermediate Capital - A form of capital consumed by a prime mover to transform the primary capital into a product capital
Product Capital or Output Capital - The product or output capital resulting from the transformation of a primary capital
Private Capital - Exogenous capitals under the exclusive use or control of another system within the environment
Radiating Capital - Exogenous capitals that are available for use by a system without the exchange or loss the use of a primary capital. Referred in other fields as the “commons”.
Endogenous Capitals- Forms of capital sourced from within the system
Exogenous Capitals - Forms of capital sourced from the environment
Available Capitals - Endogenous or exogenous forms of capital that exists and could be used by the system
Unavailable Capitals - Endogenous or exogenous form of capital that cannot be used by the system and in some cases the systems and the environment
Accessible Capitals - Endogenous or exogenous forms of capital that are compatible with a specific prime mover. That is the prime mover can transform an available primary capital into a product capital.
Inaccessible Capitals - Endogenous or exogenous forms of capital that are available for use can’t be used by the system because the system does not have access to a compatible prime mover.
In future work, using the VROI methodology discussed in part 13 of this series, my hope is that we can one day calculate (or at least approximate) whether a given system or prime mover is generating less or more value in use based on the above concepts. By following the flow of capitals with in the system and environment and imputing the value in use of a specific form of capital involved in a given process ( based on the entropic properties of capital discussed in this series and their availability and accessibility) we may be in a position to answer the question of what is the best use of a thing from the perspective of each participant in the process. In other words, whether after a given process they have more or less ability to bring about socially beneficial change. Afterall, what is the point of an economic theory if it does not lead to overall empowerment?
Open Systems and Exchange Value
Unlike value in use which, being made of energy, is naturally affiliated with the concept of an open system, exchange value can be somewhat antithetical to maintaining a systems existence.
Though beyond the scope of this part to deal exhaustively with the problem, the above schematic can help understand two of the big mistake exchange value theorists make.
The Prime Mover is Not the Source of Value
Exchange value theorists tend to confuse the prime mover for the source of value - the primary of source capital. It is the capital that is transformed by the prime mover to generate value in use. logically, without the primary capital is nothing for the prime mover to transform into value in us.
Marx believed the source of value what human labor. Whereas, the neo-classical collective believe the source of value to be somewhere near a perfect market. Both labour and markets are examples of prime movers.. A “technology” that transforms one form of capital into the other. Human labor transforms natural capital into commodities. Markets transform those commodities into financial capital. The primary capital or source of value remains the capital that is transformed by human labour or the market.
But due to their pre-analytical sin, what the classical and neo classical economists can’t see is that value in use is always generated from a primary or input capital. That is an endogenous capital that has either been stored for future use or an exogenous capital that is available in the environment. Either as a private form of capital typically procured through exchange or alternatively a“radiating capitals.
A radiating capital is a class of capitals that exist in the environment that radiate value in use in the direction of a system but without the need for exchange. The value in use in the radiating capital is available for use by the system without any expenditure of a primary capital. The only cost is the expenditure of secondary capitals associated with the prime mover that transforms the radiating capital into another capital. Example of radiating capitals are various forms of natural capital, public social capital, laws and their enforcement etc.
Confusing the prime mover for the source of value is a big mistake for a couple of reasons:
Markets are great at transforming all capitals into things that can be brought to market and financial capital. Markets are not good at replacing those primary or source capitals because that’s not what they do. Nor are markets good at generating capitals that don’t come to market because again, that’s not what they do. Markets are not even particularly innovative. Markets tend to generate what consumers want ( or are conditioned to buy). Despite the potential of the primary capital to be transformed into things that can do far more work, markets are slave to the limits of consumer imagination.
Markets are not the prime movers that generate radiating capitals. Though radiating capitals provide enormous value in use to individuals, corporations and societies, they and the means by which they are generated are ignored by economics. Indeed, some neoclassical economists possessed by the idea that markets are the only prime movers that matters, actively discourage the investment in other prime movers that generate radiating capitals such as government and social institutions.
Markets are not the only prime mover. Its just the dominant prime mover at this time. But by confusing the prime mover for the source of value we ceased to innovate when it comes to prime movers. Worse still we have pressed existing prime movers such as universities into the service of the production of exchange value. The generation of value in use in intellectual capital secondary to the generation of spare parts to ensure markets work efficiently. And perhaps worse of all, indifferent to the potential of primary capitals to be transformed into things other than commodities and cash, we have destroyed all the value in use that could have been had economists not confused the prime mover for the source of value.
There’s More Than One Prime Mover
As noted above, there is more than one prime mover. But, if you ask an economist, a corporation can have any prime mover provided its purpose is to make the most profit within the law.
In a corporation, the role of the prime mover is typically performed by the business model. Osterwalder and Pigneur declaring their belief that “a business model can best be described through nine basic building blocks that show the logic of how a company intends to make money”.
The advice consistent with the exchange value mantra that corporations should maximise profits or financial capital.
The problem with this description is that if a business model only describes the logic by which the corporation transforms manufactured capital into financial capital, the prime mover will not generate other vital capitals.Absent the necessary prime mover, the other capitals will either not be generated or will be generated accidentally by the universal prime mover - human capital. Despite the best efforts of management consultants, people remain excellent at accidentally transforming capitals to generate value in use. Particularly intellectual and social capital.
From a value in use perspective, a prime mover that prioritizes the generation of financial capital over capitals that can do more work than financial capital is probably a value sink. Generating more money but less value in use distributed across all capitals required to maintain the corporations existence. I describe this as the equivalent of Cotard’s syndrome.
To be clear, I’m not suggesting that corporations don’t need money. It’s an essential secondary capital required to pay employees, suppliers, governments, shareholders etc. However, it’s high entropy qualities means its a low quality capital when it comes to value in use. If a company requires value in use to maintain existence, once it’s need for financial capital is satisfied, it is in the iterest of the corporation to pursue high quality/lower entropy capitals.
The point is that a corporation needs as many prime movers as there are capitals that it requires to maintain its existence. For example, a corporation that requires social license to operate manifest in the concept of social capital, requires a means of transforming it’s other primary capitals into social capital. Thus enabling the corporation to access the value in use embodied therein. The problem is that if a corporation only has prime mover that generates only one product capital - financial capital - it will tend to
engineer the prime mover to use the least financial capital - cutting costs etc.
transform all input capitals that can be transformed into money. The prime mover will even consume vital social capital for the sake of a few extra dollars.
Implications for Deciding the Best Use of a Thing
So far in this series, I’ve considered the question of how to determine the best use of a thing by focusing on the objective characteristics of capitals and their relationship. This introduction of the open systems concept connects value in use to the other great unsolved problem of our time - what is a corporation and why do they often behave like psychopaths.
To get there, I’ll need to expand in parts 16 and 17 our understanding of prime movers and then the relationship between prime movers and available and accessible endogenous and exogenous capitals.