Mark Carney on 'Value(s): Building a Better World for All'
Updated: Oct 4, 2021
We were delighted to be joined by Mr. Mark Carney, the UN Special Envoy for Climate Action and Finance and Prime Minister Johnson’s Finance Adviser for COP26 and Former Governor of the Bank of England.
Mark began his talk by telling attendees that he believes we need social values to support market functioning. He says that market fundamentalism can help undercut society's values, but if properly organised, markets can help deliver social values and he believes that can happen with regards to the climate.
Mark tells us that his book, Value(s): Building a Better World for All, covers a series of crises. He said that the whole time he was a G7 Governor, there seemed to be a series of crises. The first crisis was the global financial crisis and subsequently, we have suffered from COVID and as such, he was keen to assess what the deeper issues underlying these crises were.
His book begins in Glasgow, home to economist Adam Smith, at the height of the 18th century Scottish enlightenment period. He tells us that this era marked the rise of the market economy to many and how the invisible hand works through markets to create prosperity.
Mr. Carney tells us that he believes that COP 26 is an opportunity to turn the world into a sustainable revolution, because he believes that concepts of value are rooted in philosophy and narrowly in economic and financial theory. He does not think that value is necessarily constant; rather it changes depending on the time and situation. For example, the relative value of water compared with diamonds changes if you are in a desert.
He then goes on to tell us that over the century, there have been two broad schools of thought on what determines economic value. Those two schools of thought are objective and subjective.
This is a theory which believes that the underlying value of a product is how it is produced and how that in turn affects wages, profits and rent.
The last three of the classical economists who believed in this theory lived through urbanisation, globalisation and industrialisation. As such, they squarely put the distribution of value on those technological changes. All three would have found the view that economics can be pursued in isolation of these values, as alien.
Adam Smith, the father of laissez-faire, published two magisterial works, including one which first mentioned the idea of the invisible hand. The central concept that links all of Smith’s work is that continuous exchange is what forms part of all of human interaction - the exchange of goods, the exchanges of meanings in language, the changes in regards of esteems in social norms.
Smith believed that we form our values by wishing to be loved and lovely (thought of or regarded as well). This feedback creates an incentive to create a mutual sympathy of sentiments leading people to develop habits and principles of behaviour.
Mr. Carney believes that the central argument is that moral sentiments are not inherent. To use the modern terminology of Richard Dawkins: 'They are social memes that are learned, imitated and passed on (usually that’s the case), but like genetic genes, they can mutate'. Similarly, Smith talks about his conceptions of markets and as viewing markets as living institutions embedded in culture and traditions of the day. Those markets determine the distribution of value (which he believes is derived from labour).
The neo-classicists launched an upheaval in value theory. They shifted the axis of value theory from the objective to the subjective. They believed that it is only because people value specific goods that the influence that goes into making them has value. They disagreed that labour gives goods value; rather, they believe that labour is valued because the good that it creates, is valuable. Value is in the eye of the beholder.
Since then, this subjective value theory has gone mainstream, and it is thought that all market outcomes equal value creation and through them, the growth of wealth and welfare nations. This shift led to an imbalance between the relationship between states and markets.
Then the Thatcher / Reagan revolution fundamentally shifted the dividing line between markets and governments. This change of direction was long overdue at the time. The fall of communism and the spread of the market began to grow unchecked.
Mr. Carney tells us that when he joined the G7 in early 2000, the conventional wisdom of market efficiency remained supreme. It was believed that policymakers had nothing to tell the market - policymakers only had to listen and learn. It was firmly believed that the market was always right.
However, as the Italian Finance Minister at the time noted:
‘When we grant an entity infinite wisdom, we enter the realm of faith’.
In the book, Mark argues that this faith is what led to the financial crisis. He believes there are 3 risks that the combination of subjective value and market fundamentalism can encourage:
1. Market Failures
There are many cases that can drive a wedge between private and social values. These are monopolies in a certain industry, or externalities such as when individual action drives social disaster, like the climate crisis.
2. Human Nature
The second set of risks relates to our human nature. We are far from perfectly rational when making good decisions. We are irrationally impatient, and it is in this context that it is important we remember that subject values are time and situation specific. For example, ice cream is more valuable on a summer’s day and ventilators are more valuable in a pandemic.
If we value the present much more than the future, we are much less likely to make necessary investments today to reduce risks tomorrow. Despite a history of financial crises, banks did not build adequate rainy day buffers in a global financial crisis. And similarly, despite overwhelming evidence that society has been underinvesting in climate change and that we know action today against climate change would be far less costly than those required in the future, we have not. Most recently, we have received reports that despite ample and varied warnings in advance, we did not invest adequately in healthcare capacity for a pandemic. These are tragedies of the horizon that won't be addressed by fixing market imperfections alone.
3. Moral Sentiments
The third and most profound set of risks that arise are moral sentiments to market sentiments. Markets do not exist in a vacuum. Markets are social constructs which work partially dependent on the state and partly on the values of society. It requires not just the right institutions, but also a supportive culture and the maintenance of social license. Values of trust, integrity and fairness are critical to market confidence. These values were increasingly taken for granted.
‘A corporate executives' responsibility is to make as much money as possible while conforming to the basic rules of society, both those embedded in law and in ethical custom’.
Mr. Carney says that he would argue that the expansion of the market that Friedman helped unleash has changed the social contract under which it has been based. The emphasis of the individual over the community, our selfish traits over our altruistic ones, imperils both the market’s effectiveness at determining values and ultimately society’s values.
The ethical customs that Milton Friedman assumes can change. Indeed many of those necessary to support market functions are corroded as financial terms become disembodied from other stakeholders.
People form their norms and values by wishing to be well thought of or well regarded. Yet increasingly, the value of some act or someone is equated with monetary value - a value determined by the market.
Standard economic reasoning is that the spread of market exchanges increases economic efficiency without moral cost. Most mainstream economists treat civic and social virtues as scarce commodities, ignoring extensive evidence that civic virtue and public spirit grows like muscles with regular exercise.
As Aristotle observed:
Virtue is something that we cultivate with practice.... We become just by doing just acts, temperate by doing temperate acts, brave by doing brave acts.’
Mr. Carney believes that these observations are demonstrated in the civic response to COVID. No one paid the groups that spontaneously decided to sew and donate makeshift PPE. No citizens drew on government payment to help the homeless in their community. Rather, the solidarity that existed during the first COVID lockdown was contagious.
Mr. Carney believes that the final corrosion in the move from moral to market sentiments was how the spread of subjective value flattens values when we make decisions. In other words, it turns into a utilitarian focus. An advantage of this subjective approach to value is that it is neutral because most things can be compared by a common, widely available standard - the market price.
The disadvantage is that it sets in progress a way in which welfare is interpreted as simply the sum of all prices and this encourages a trade off between growth today and crises tomorrow, of health and economics, of planet and profit. The challenge is to decide where to create a hierarchy of values so that resilience, sustainability are at the apex and putting the market, with its dynamism, into their service.
Mr. Carney then goes on to link the aforementioned thoughts to the climate agenda. He reminds us that 5.5 years ago in Paris, Governments agreed to try to get on the path to stabilise temperatures at 1.5 degrees. Since then, there has been uneven progress and emissions need to fall at least 7% every year over the next two decades to be on track. If we succeed, every citizen today will have a personal carbon budget over their lifetime, equal to 1/8th of their grandparents.
The effort for Glasgow at COP26 is to bring together companies, countries, citizens, to manage that global ecosystem and to develop a consensus for sustainability that unleashes the dynamism of the private sector to put value in service of values.
The key point is that if society sets a clear goal, it will become profitable for society to become part of the solution and increasingly costly to remain part of the problem and Mr. Carney believes that that is what is beginning to happen.
When the UK assumed the COP presidency at the start of 2020, 30% of global emissions were covered by some form of net zero pledge. In most cases, those pledges were not as robust as the UK’s legislation, but nonetheless a pledge to achieve net zero.
Those now cover about 75% of global emissions and those commitments are cascading down to companies and through the run up to COP, to the financial sector. This is making the challenge of shifting our economies to net zero carbon, an enormous opportunity and one that will involve every country, every sector, every economy.
Mr Carney believes that this is what we need from an economic perspective - these measures of what is required to move to net zero will be capital intensive, after a long period when there has been too little investment everywhere. It will be job heavy when there will be pressure on employment.
He goes on to say, in order to seize this opportunity and to solve the climate crisis there are 3 challenges that need to be addressed:
Engineering Political Financial
With time and massive investment, the orders of increased investment globally are on the orders of magnitude of an additional 1- 2 trillion pounds per annum (almost doubling the scale of energy infrastructure investment for decades).
Mr Carney believes that we need that scale of investment in order to power green investment. We need to electrify everything and turn the generation of electricity, green. The good news is that the technologies which make that possible, when applied at scale, can economically reduce about 60% of man-made emissions which keeps the world on track with net zero emissions consistent with 1.5 degrees. But we don’t yet have commercial technology to cut the balance of emissions and we’re going to need greater investment and innovation in critical technologies such as hydrogen, carbon capture and storage and sustainable aviation fuels.
The more credible our Government’s commitment to net zero, the more investors will pour money in anticipation of these changes creating a virtuous cycle. Therefore, politics is the second challenge and the importance of a very strong bipartisan consensus to break the tragedy of the commons on the horizon.
Mr Carney reminds us that 130 countries that now have net zero targets. He also says that having been in a position where he has observed policies globally, he tells us of the importance of some UK innovations, like the climate change committee. He believes this committee is fundamental in fulfilling an objective assessment of both the progress, but also, the gaps that still remain. He believes that there is critical importance of having a carbon budget, to not just help, but to demonstrate consensus and establishing credibility that will build bigger private sector investment.
Mr Carney tells us that finance can play a decisive role. The more the financial sector is focused around a transition to net zero, the more that new technologies will be financed in anticipation of climate action. In other words, in anticipation of what Parliament will do and will need to do to keep the UK on track to meet its objectives.
The more finance is focused on net zero, the more savers and investors will be able to track whether their investments are consistent with their values and the more sustainable investment can move from the fringes (where it has been up until very recently) to the fore, fast moving and this way we can have values drive value.
Mr Carney tells us that that’s why the objective for COP26 is for private finance to put in place the information, the tools and the market so that every financial decision takes climate change into account. In other words, a financial decision where climate change is much a determinant of a company’s value as changes in the company’s credit worthiness or changes in interest rates.
A few things that are critical here:
1. Mandatory Climate Disclosure - (TCFD) was a concept floated at Paris. Mandatory adoption was pioneered by the UK last November. It has now been endorsed by the entire G7 and the G20. There are also other mechanisms that are helping to apply this through the IRFS (International Financial Reporting Standards Foundation).
2. Risk - In parallel, we have grown a group of central banks led by the Bank fo England, the Banque de France, the Peoples’ Bank of China. There were 8 founding members 3 years ago. There are now 90 central banks responsible for at least 80% of global emissions that are all part of the same grouping and they are in the process of stress testing their banks and their insurers of their readiness for climate change and this is explicitly pulling the future to the present through climate stress tests.
3. Commitments - The last element of this is to get commitments from the private financial sector and the mainstream financial sector. We won’t get to net zero in a niche. A few months ago at President Biden’s climate summit, there was something formed and launched something called the ‘Glasgow Financial Alliance for Net Zero’ which is a grouping of banks, insurance companies, asset managers, pension funds, which are specifically committed to net zero. The important thing is the quantum (the balance sheets of these entities) comprise over 80 trillion dollars of assets which is an enormous number. It is anchored in something called the race to zero - the gold standards for these commitments. This is where we get the intersection between public policy (regulatory policies, tax measures, spending measures etc) particularly those which provide credible forward commitments for tougher climate policy and financial commitments today to shift towards net zero and the prospect of pulling that forward.
Mr Carney concludes by saying that the message the book tries to convey around climate is a positive one about how we can put value (the market, service) in society’s values.