The FAIR rules act as an overflow valve, to redirect excess accumulation of unearned income back to the pond.
Fig 1. Finance works by taking profits from the commons to use for taking more, an escalating drain on freely circulating funds. In times like these, the FAIR rules ask investors to spend 10% a year of accumulated profits on societal needs, giving back while and doing good, and sustaining the profitability of a world in trouble. Spending accumulated profits on good works both relieve the increasing drain of profit-taking from the commons helps forestall our fast-growing tragedy of the commons.
[See also the Medium article on FAIR, “Call it a great act of Love“]
Date 2020 – 5/25/, 6/30, 7/26
Title Principles of Fiduciary Asset Investment Restraint (FAIR), simple rules to restrain the compounding of unearned income to reverse present worldwide tragedy of the commons.
Topic Compound investment (adding profits to investments) is required to get any enterprise going, but if overextended multiplies the investors power over others and extraction of wealth from the commons, turning the gift of innovation into a profound tragedy.
Pitch Flatten the curve of growing environmental and cultural exploitation, to reach a thriving peaceful economic climax.
Fig 2 The universal pattern of emerging systems that sustain their climax
Draft Simple Excel Model: FAIRtestModel.xlsx
Statement The world financial system has but one value, to use the earth and human societies to use for maximizing the growing concentration if financial wealth, without any primary concern for the resulting depletion of natural capitals or disruption of human societies. To secure the wealth of nature and humanity we must then have fair Fiduciary Asset Investment Restraints to prevent the rapid decline of whole system value.
FAIR is an appealing, comprehensive, and eminently fair way to rebalance the compounding of profits with the long term needs of the rest of the earth and humanity. As part of everyone’s shared duty to serve common interests. That would include correcting the natural long term imbalance between steady earnings from work and the compound growth of earnings from finance generated by adding investment profits to investments. FAIR calls for limiting not eliminating that imbalance, not to stifel individual financial creativity but limit the global scale of its demands on nature and society. Spending a fixed annual share of accumulated savings from profits in times of need, like today, would in effect use global indicators to internalize harmful global societal and environmental economic externalities.
A portion of business or individual investment assets accumulated from profits (the part that grows exponentially) would be annually spent on qualified impact investments for relieving the excess burdens compound investment. It’s actually a strategy that originates with the suggestion of JM Keynes in Chapter 16 of his General Theory. Interpreting it as an “overflow valve” to relieve burdens on the anthropic earth system was devised to make the macro-economic effect understandable, reducing or slowing the growth to relive the whole economy’s pressure on all its planetary bounds.
The level of relief from increasing demands on the system would be based on experience, for argument sake starting at 10% of accumulated profits a year. That would be adjusted to gradually stabilize the economy’s impacts on earth and society at a comfortable level. In the end, finance would stabilize and generate steady profit for priority needs, as a kind of continually creative cash-cow business. In Hardin’s Tragedy of the Commons, the equivalent would be for the rich farmer to see the error and use the excess cattle to relieve community suffering, such as using the surplus for periodic feasts to save the community and the commons, becoming a welcomed hero rather than the devil himself.
Need Even ignoring the COVID pandemic, the world faces a considerable growing plague of plagues from centuries of growth putting excessive demands on societies and the environment. A sobering list of The Top 100 World Crises Growing with Growth illustrates the problem. While mainstream finance is starting to recognize the need to not just maximize profits at any cost, so far that has largely been only to factoring the risks to ever-growing profits, not harm to our future. Since maximizing the compounding of profits seems to be the real problem, a new way to do it doesn’t really solve the core problem. It also ignores the very numerous other global crises threatening our future, exposing the grand “tragedy of the commons” of global overinvestment for which we are responsible.
Is that partly a matter of the kind of investment we built civilization with? Of course. A tree can’t change its own trunk, roots, and branches though, only potentially reinforce some and shed others to halt destabilizing overgrowth. So we should expect a version of Fiduciary Duty for investors and businesses to make decisions to the best of their ability in both the near and distant common interests. That is a way for responsible investing to become universal without expecting investors and businesses making their decisions to understand all the up and downstream impacts on others or the system’s pressures on its whole range of planetary boundaries. In a way both forgiving and frustrating, the research (Henshaw 2011 Systems Energy Assessment) strongly suggests that causation for whole system impacts is so widely distributed it’s generally necessary to consider them as equally distributed per share of the economy, like today’s nominal world CO2 Emissions of 0.26 kg (0.6 lb) per $ GDP PPP, the global average.
The main determinant of success for a FAIR spending of accumulated profits is not just the natural relief of systemic pressures on the global commons that would bring. What matters is whether the money is spent well, and delivers “good works” of systemic value. The expectation is that people with accumulated profits to distribute would have an “eye for value” as to what the world needs to be successful comparable to the “eye for value” that made them successful. It’s the same kind of creative problem looked at in a new way. FAIR spending is an investment decision for the system as a whole, that will be returned with new value you couldn’t buy if successful, the same way a family benefits from educating its children. It is money well spent. In the same way FAIR spending to advance childhood education on patterns of growth in nature and in life might be returned many fold. It’s a question of “feeding” something, not “controlling” something.
Because the FAIR spending of assets is something of a new investment field it would need guidance and support from economic research and modeling along with social networking of practice communities, as a guide to creating lasting value. Initially, it would be a voluntary adherence to a community principle, and then later formalized to be more widely applied. With new proposals for expansive strategies the devil is generally in the details so serious economic modeling and rulemaking study to explore options, the scientific study of the coupling of growth and its planetary impacts, and reliable sponsorship and teamwork to start building the social movement are all critical. The hope is that the principles are practical and clear enough that they could spread naturally and become socially expected. Given that even the idea that growth is responsible for our problems continually racing out ahead of solutions there would need to be a global IPCC-like scientific network focused on systemic research, perhaps called the IFIC (International Fiduciary Investment Council), to guide national organizations on rating impact investments for the commons. Someone will need to attempt to “qualify” the likely impacts of different kinds of for-profit and non-profit grants and investments. That coupled with each investor’s eye for value is what would be relied on to steer the economy through its many present crises, including COVID, to a thriving and lasting climax.
That said, the first conference presentation of the FAIR principles is expected to be Sept 9 2020, so there is much to learn about how it will be best received. If it is well received, a globally circulated statement of principles for endorsement and a network of people experimentally learning how to follow it might follow. Real work would begin with either a spontaneous or sponsored team forming.
Challenge: This proposed “human duty” (to go along with our “human rights”) for investors to devote a share of their unearned assets to serving the common interest seems simple enough to define and discuss in principle. What’s harder to define is how much time we have to avoid the next wave of crises as unimaginable to us now as the present ones were before. We should “Build Back Better,” and with an eye to economic, planetary, and environmental justice. Restoring the economy to maximize its long term growth is the most dangerous course of all, inviting a crippling systemic response like the delayed responses to COVID-19 caused many nations. For restarting the growth economy already severely weakened you might expect the kind of failure at the limit shown by the light blue upper curve (Fig 3). That choice amounts to no response in the end and leads to system failure. We seem already well beyond the sustainable limit and only have a last-chance response to turn toward the sustainable limit, the purple curve.
Once the world realizes that businesses and investors do really have a natural duty to steer the world economy in the common interest we’ll find more ways to do it. The physics of responding to natural limits (Fig 3) shows that early responses to natural growth limits don’t significantly delay the approach to the limit. It is mainly delayed responses you need to worry about. FAIR principles are likely to be the only option for making that transition without major disruption.
Fig 3, The high risk of delay in responding to exponential threats. From Models Learning Change (Henshaw 2010)
Origin of the FAIR Concept: A series of tweets 05/24/20 … and historically, from the work of JM Keynes, 1935 General Theory, Chapter on “Sundry Observations on the Nature of Capital” Chapter – 16 III & IV, describing why the natural financial climax of the economy requires financial savings to climax to prevent the very worst effects of capitalism, implying that the wealthy need to learn to spend rather than save their profits to make the system as a whole sustainably profitable.