To understand the best use of a thing we must now consider the forms of capital. That is, the process of classifying things that store value in use into some kind of meaningful order.
However, like previous parts, I must begin by re-framing the forms of capital to align with the idea of value in use as opposed to value in exchange.
Over recent years, much work has been done extending the metaphor of capital beyond the traditional limits of financial assets and the means of production. New stores of exchange value have been discovered to compliment the old. In the Capitals Background Paper for <IR> the IIRC defined six capitals: financial capital; manufacturing capital; human capital; social and relationship capital; intellectual capital and, natural capital. Indeed, there has been an explosion in the capitals across economics and sociology. One study identifying more than 20 separately defined forms of capital.
However, the emphasis of the IIRC’s model and other similar multi-capital approaches is on the production of exchange value. For example, according to the IIRC “manufacturing capital”:
is seen as human-created, production-oriented equipment and tools.
The same production/commodity bias runs through their and many other schemes of capital classification. Directly or indirectly connecting each of the six capitals to their role in the production of exchange value. From a value in exchange perspective, only one of the three useful abilities explored in Part 10 matters - transferability. Moreover, the focus of these approaches tends to be on the increases and decreases in the private forms of capitals and the impact of the same on organizations and their stakeholders. Things that do not store value in exchange - the common or public varieties of the capitals - natural, social and intellectual capital are all but ignored. The purpose of expanding the number of capitals, from an exchange value perspective, is motivated by a desire to account for and report on the increases and decreases in the capitals themselves and the “rubbery” and ill defined correlation between the same and the subjective notion of value discussed in Part 1.
But, being interested in value in use, the forms of capital in exchange and their definitions are of no use.
I raise the metaphorical approach to the capitals only to highlight that the same labels can be used to describe stores of value in use. However, the focus is not on the ways in which the forms of capital are used to produce exchange value in the form of commodities and money. Rather, my focus is on the ways in which the same forms of capital are converted resulting in either an increase or a decrease in the value in use available to do the work of change. This is no metaphor.
In this regard, those familiar with the capitals will note many of the capitals described below are divided into common and private forms. This distinction is somewhat unique to value in use. Value in use is value in use whether it comes from the sun and is available to all or privately owned and exchanged for money. But those concerned with the value in exchange problem, being obsessed with things that can be exchanged, tends to ignore with more than a little hubris, those things that are useful but cannot be exchanged. The value in use production boundary includes common and private capital whereas the value in exchange production boundary tends to only see private forms of capital.
It is worth pointing out that the purpose of introducing the forms of capital to this meditation on value in use is to better understand how the conversion of the various forms described in this part can be used to explain the increase or decrease of value in use within systems and between systems. In other words, to identify how much work a system can do before or after a given change. Thereby implying the best use of thing from the perspective of a system. Concepts that will be developed in future parts. What is most relevant for this discussion is that a change approach to value in use seeks to analyse the differences in value in use that exist between forms of capital. These differences can then be used to better understand which combination of forms of capital and which types of conversion generate or destroy the capacity to effect change within a system. And, why it might make sense to convert a capital into one form but not another.
The following general principles might help get the gist of the above paragraph and the relevance of the forms of capital to the solution to the best use of a thing:
Value in use can be stored in each form of capital including natural capital; manufactured capital; human capital; financial capital; social capital; intellectual capital and promissory capital.
The amount of work each form of capital can do is a function of:
its “convertabilities” - can it be transfered? Can it be transformed? Can it convert capital? Does the capital have all three powers or just one?
its “exhaustability - the rate at which the form exhausts its value in use or its value gradient when exercising one of its convertabilities.
I call these properties “factors”
The presence of factors influence the scalar value in use available to do work associated with each form of capital. Put another way, a capitals factors help determine the work a given capital can do and for how long.
As a general rule, a capital can only exercise one power at a time. A capital that is transferred can not thereafter be used to convert capital. The choice of power “locks in” the value in use return on the specific type of conversion. Another conversion could generate more or less value in use implying the idea that there is an “efficiency” to the generation of value in use.
Availability does not mean accessible for use:
Each form of capital requires a compatible converter or engine. Without the compatible converter the value in use is trapped in the capital.
A capital may have more than one converter. One converter may turn a forest into financial capital and another into social capital. In this way, each of these capitals can be compared to determine which use of the forest generates the greatest value in use.
When a form of capital is converted from one form into another, the value in use available to a system (represented by the new or output capital) to do work increases or decreases.
Value in use retains its unitary character despite a conversion. Though capitals can be classified into multiple forms and one converted into another, each form possesses the same quasi value in use substance that upon entering or leaving a system. The increase and decrease of this substance correlating to a systems ability to generate change and over what time period. A single ruler to evaluate the best use of a thing.
Critically, the gross increase and decreases in forms of capital so important to accountants, matters much less than the increase and decrease in the value in use within and between systems. As we shall see in future parts, the paradox of value in use is that we can simultaneously measure within a system both an increase in exchange value and a decrease in value in use. For example, if a form of capital can do less work than the capital from which it arose, the net outcome is an increase in the form but a decrease in the substance responsible for change. Hardly an ideal outcome.
I appreciate this is a bit to absorb and hopefully it will come to make more sense in the future. For now, I’ll limit any further discussion to classifying and briefly describing the seven forms of capital that I’ll be using to explain the the ways in which value in use is generated. This classification is not intended to be exhaustive. Each form of capital is properly the subject of a book and not a paragraph. All I hope for is that I’m able to impart a sense that each of the capitals possess different abilities and value gradients. A theme I will continue to build on throughout this series..
The Physical Capitals
As the name suggests, physical capitals are made up of matter. Sometimes meaninglessly described by accountants as “tangible assets”, physical capitals do not generate value in use through the process of touch. Rather, the capacity of a physical capital to do work or store work for a future date is a function of the unique properties and characteristics of each of the three form of physical capital.
The characteristics of physical capitals include:
The ability to store use value in use for later use.
The ability to be converted through transfer and transformation.
The ability to convert other forms of capital to generate new varieties and new capitals Physical capitals are often converters that generate and dissipate value in use.
All physical capitals are subject to the laws of physics: humans age, commodities are sold, machines wear, and nature is in constant change. All physical capitals tend to exhaust their value in use through use (and non-use), though at different rates.
Natural Capital (Φ FC)
Natural capital is value stored in the natural environment in situ. Natural capital includes air, water, wind, sunlight, oceans and land in all their forms, flora and fauna and ecosystems.
There are two types of natural capital.
Common Natural Capital
Typically associated with the tragedy of the commons, common natural capital refers to value in use that is stored within the environment but is either not owned or incapable of ownership such as wind. A feature of common natural capital is that its embodied value in is available for use by a system without a reciprocal exchange. Common natural capital is what I describe as a high quality capital because the value in use of natural natural capital comes to us at a low cost. Neither the sun nor trees demand payment and yet we are able to convert sunlight into energy and oxygen into life.
Common natural is also the first, and most important of the prime movers or capital converters ( converters for short). It is the engine of all life. In this sense, common natural capital is, above all else, the archetype converter with the longest of gradients (or so we believed until we started converting natural capital into other capitals). What this means is that common natural capital has the ability to generate value in use and distribute across the planet at low cost and into perpetuity. For example, when we clear native forests we are effectively dismantling a means of generating value in use into the foreseeable future. All the value in use that this common natural capital would have produced in its role as a converter is lost and will never be available to do the work of change. The net effect is that the system we call the planet experiences an exponential reduction in value in use that would otherwise be available to power change.
Private Natural Capital.
Private natural capital refers to natural capital that can be used to the exclusion of others. Private natural capital maintains its character as a prime mover until transformed to produce commodities such as timber, processed fish, minerals, metal etc., which in turn are transferred in exchange for financial capital. Once private natural capital is transformed or transferred it cease to have value in use as private natural capital and becomes manufactured capital.
Manufactured Capital (Φ MC)
Manufactured capital is value stored in the built environment and includes commodities ( good and services) and objects used in the process of producing commodities. Raw and processed resources like stone, metal, timber, and certain physical energy forms are included in manufactured capital.
Manufactured capital can be transferred and converted into an unimaginable variety of manufactured capital. Manufactured capital can also be fashioned into prime movers - from sailboats, to combustion engines, to even shoes.
Human Capital ( Φ HC)
Human capital is value in use stored in a soul. Human capital is typically associated with an individual’s physical and intellectual ability to transform capitals.
Thankfully human capital can not be transformed or transferred (at least for now). Properly understood, human capital operates exclusively as a prime mover or converter of capital. Responsible for converting capitals into both types of value in use - physical and mental work and various stores of value in use. Both physical and fiat. From a value in use perspective, human capital is a high quality capital because:
its value in use is capable of not being exhausted through use (though sadly often is). Provided human capital is exposed to a steady value in use gradient, it is capable of converting, generating and dissipating value in use embodied in other forms.
the value in use embodied in human capital can increase through use through experience, learning etc.
But the value in use stored within human capital is fragile. The human capital gradient collapsing its value in use in seconds or available for decades. And like natural common capital, once the value in use in human capital exhausts it’s gone and can do no more work.
Fiat or Field Capitals
Fiat capitals are those stores of use value willed into existence by humankind. Again, unhelpfully described by accountants as “intangible assets”, fiat capitals derive their ability to do work entirely from human systems.
Fiat capitals share the common characteristic with physical capitals in that both can store value to do work later. For example, consider how an old brand can still transfer its value its value in use to a new product. However, the characteristics of fiat capitals are different to physical capitals in several important ways:
Fiat Capitals cannot be directly transformed into physical capitals but they can be combined with physical capitals to form novel stores of value in use.
Some Fiat Capitals have the power to be transferred. Others cannot.
Some Fiat Capitals operate as converters of capital that exist to produce value in use. These are the engines of social change. Others cannot.
But what really separates physical and fiat capitals is the relationship between some forms of fiat capitals and the laws of physics.
Whereas all physical capitals tend to exhaust their value in use through use, not all fiat capitals behave the same way. Consider two fiat capitals - financial capital and social capital (discussed in more detail below) in the context of a natural disaster. A survivor in need of shelter could use either. If she uses her financial capital, she has the use of the shelter but no longer the money used to purchase it. However, if she uses her social capital and a neighbor opens their home, she has the shelter and she retains both her financial capital and social capital (and the neighbors social capital increases). In this example, the work expressed in the form of accommodation is identical, but one was done with purchasing power that exhausted through use and the other was done with people power that increased through use. From a systems perspective, the conversion of financial capital into shelter led to a decrease in value in use available to the survivor to do work in the future. She no longer having the use of the money. But by using the social capital, the total value in use increased . The survivor retains her financial capital and has access to shelter and the neighbour’s social capital increased. The net outcome across both systems is an increase in value in use.
The example, illustrate a remarkable property of certain fiat capitals. First, that they can transfer their value to do work without diminishing the store of value in use. Second, and perhaps more importantly the value in use of these fiat capitals tends to increase rather than decrease through use. A unique property that helps us understand why some capitals can do more work for longer and therefore why they are able to do more work over time.
Financial Capital ( Φ FC)
Financial capital is value in use stored in money or money equivalents.
Financial capital is useful because it can be be transferred. Typically in exchange for other capitals. Financial capital has a steep value gradient. When financial capital is transferred all value in use stored therein is exhausted and cannot be used again. Likewise the value in use embodied in financial capital exhausts through non use through the process of inflation.
The primary converter of financial capital is the market.
Financial capital can not be converted into another form of capital. And despite the old saying that money makes the work go round, financial capital,is not in and of itself, a prime mover. Financial capital does not receive input capital and generate an output capital. Its value in use can only be realized when transferred in exchange for another higher quality capital.
Financial capital is a low quality capital for reasons that include:
it comes at a high cost;
only has the ability to be transferred; and
has a steep value in use gradient.
Social Capital ( Φ SC)
The term social capital has many meanings which I do not propose to recite. For the purpose of my work it is an umbrella term that captures the value in use stored in a kind of broad “field” that connects people to an enduring social structure. Social capital encompasses value in use stored in art, culture, institutions, laws and the relationship between persons human and otherwise. Reputation, brand and social license are examples of social capital.
Social capital can be “long lived” and store value in use for future use. In this sense, it can have a long gradient that reduces at the rate of individual and collective memory. But, social capital can be fragile too. A breach of trust and any value use collapses. For this reason, the gradients associated with social capital can be unpredictable.
For the purposes of my work, I distinguish between common social capital and private social capital.
Common Social Capital
Common social refers to value in use that is stored within the bonds that connect us. Like common natural capital is generally available to all and cannot be owned or alienated. And like, common natural capital, common social capital is primarily as a converter and liberator of value in use trapped in other forms of capital. Without common social capital the transfer and transformations of capital we take for granted would be inconceivable. Common social capital is that which sits between a buyer a money and seller’s commodity and converts one into the other. It is the converter and engine of this and countless other changes we experience everyday. However, like all converters it must be exposed to and consume flow value in use if it is to continue to convert capital and generate value in use. Common social capital must be fed!
We will return to common social capital and what happens to a society when value in use stored therein declines in later posts.
Private Social Capital
Private social capital is social capital that is associated with a class, individual, family, corporation or the like. Private social capital is most often converted into human capital associated with increased opportunity for education and work captured in the “old boys network”. Unlike common social capital, private social capital is transferable. For example, the value in use in a family name or status may be transferred and is available to its members. Likewise membership of a club might transfer value in use to a member that is not available to non members.
There are types of private social capital that operate as converters and engines. Most obviously corporate culture. I think the argument can be made that increases in value in use in corporate culture can be used to explain what economists call the “Solow residual” or that portion of growth in output which cannot be explained by growth in labour or tradeable assets . Economists put this down to technological innovation. But the same value in use (if not more) can exist within private social capital manifest as culture. Arguably corporation should therefore look to convert their capitals into the generation of private social capital as this can do the equivalent work (though in a markedly different and more efficient way).
Intellectual Capital (Φ IC)
Intellectual capital is value in use stored in explicit and tacit information. Like social capital it should be considered as a field having no mass but having the ability to bring about change.
Common Intellectual Capital
Common intellectual capital refers to information, knowledge and knowing that is neither owned nor capable of ownership. Common intellectual capital includes value in use embodied in written, oral and others forms. This includes myth and story, scholarship, recipes passed down through generations and all the works of the religious and spiritual traditions. The value in use in the story of Daedalus and his son Icarus, who overcome by the moment, flew too high has not been diminished despite countless tellings. Common intellectual capital is transferable, transformable and is an essential component of every prime mover.
Private Intellectual Capital.
Private Intellectual Capital is associated with intellectual property, such as know how and methods, trademarks, patents, copyright, confidential information and source code. Private intellectual property has all the powers of capital.
Like human capital private intellectual capital does not exhaust through use and can increase through use. But it has another remarkable property it can be transferred but the process of transfer does not exhaust its value in use. You will recall financial capital once transferred can no longer be used. But the nature of private intellectual capital is that its use can be transferred through say a license and still be available for use by the transferor. These qualities mark it as among the highest quality of all the capitals and explains the growth of many modern corporations.
Promissory Capital ( Φ PC)
Promissory capital is value in use stored in legally enforceable promises, covenants and contracts.
Promissory capital is not mentioned by the IIRC and, as far as I am aware, has not be accepted by the great community of scholars responsible for deciding what is and is not a capital. But based on my experience, its omission is inexplicable. In the course of decades practicing as a commercial lawyer, it is the promise which is most often transferred and which often has the greatest value in use. A promise conveys to the person to whom the promise is made the power to foretell the future (more or less). That on this date or when certain conditions are satisfied a change will occur and you can act on this knowledge with confidence. This unique property is an important reason why we seek to exchange promises and why it must be included in the forms of capital in use.
In the next part I explore the relationship between value in use and system theory.
Ever since I was first exposed to systems theory and thinking decades ago I have been troubled by what seems a mystery - the almost complete absence of the energy concept when the theory is transposed to explain human systems such as corporations. In the next part, I will explore the relationship between value in use, the capitals and systems. If value in use is energy its its social form can system theory help us decide the best use of the capitals and take us another step closer to solving the Millennia Challenge?