2.1 The Utility Theory of Value

The utility theory supplanted the labour theory of value in the late nineteenth century because it was able to address a number of scientific and political issues that had become associated with the latter. In terms of scientific issues, the labour theory could not explain why water, which is needed for life, is less precious than diamonds, which are not.Footnote ³² Nor could the labour theory explain why the price of some items, such as a rare coin or painting, did not depend on the effort of their production.Footnote ³³

In terms of political issues, it helps to be aware that the utility theory became prominent as a response to the Marxist critique that had been formulated in the second half of the nineteenth century. This critique built on ideas from classical political economists such as Smith and Ricardo.Footnote ³⁴ In particular, it adapted models based on three social classes (landowners, capitalists, and labourers) that Ricardo had created to calculate the distribution of profits, rent, and wages and used them to argue that the profits of capitalists and landowners were being made at the expense of labourers.Footnote ³⁵ This explained why the former were rich, and the latter were poor.

Marx’s arguments gained popularity in a context of mounting social issues and injustice, and fed into mounting levels of communist and anarchist political unrest around the turn of the twentieth century.Footnote ³⁶ This unrest spurred the adoption of socialist laws in numerous Western states. It also threatened to topple the system of economic liberalism that had been implemented broadly in line with the work of Smith and the other classical political economists.Footnote ³⁷

It is in this political context that economists were pressured on two counts. They needed new models, and a new theory of value, that did not build on or intensify social divisions. And they needed to defend the system of economic liberalism and competition, that was central to their discipline, from external interventions.Footnote ³⁸ Many economists were not unsympathetic to social reforms, but they were suspicious of those that might undermine the liberal economic system and the principle of competition.Footnote ³⁹

The remedy to these pressures was provided by the combined adoption of marginalist analysis and the utility theory of value. Marginalist analysis is a methodological approach that can be used to study changes, for example in utility or cost, when there are variations in the number of units consumed or produced (it studies changes ‘at the margin’). An example can help demonstrate:

Marginalist analysis was able to resolve the diamond–water paradox since it used a utility rather than labour theory of value.Footnote ⁴⁰ Water was plentiful, so consuming one additional unit would lead to limited additional utility. Diamonds are scarce, so a single unit can lead to considerable gains in utility. On this view, prices are an expression of subjective human desire and not objective labour. This also explains why items that require little or no labour time could still be valuable.

Marginalist analysis also counters the Marxist critique because it does not divide society into different classes. Instead, it assumes that society consists of equal individuals with certain preferences and a given distribution of wealth and goods, and then sees how these scarce goods are freely exchanged in order to maximise all individual, and thus total aggregate, utility.Footnote ⁴¹ Since peoples’ preferences and resources are individual endowments, there is no need or scientific scope within this framework to rely on social class as an explanatory factor for economic dynamics.Footnote ⁴²

It follows that value and profits are not made at the expense of labour but are a reflection of people’s willingness to pay. It is then not the capitalist or landowner who is responsible for the labourer’s low share of profits, but a combination of consumer preferences and scarce factors of production. And since capital and land are typically scarcer than labour, they receive a greater share of the profits. This converts inequality from being a product of social exploitation into a natural consequence of resource scarcity, individual preferences, and competition.Footnote ⁴³

Marginalist analysis and the utility theory of value are key developments in the ‘marginalist revolution’ that took place at the end of the nineteenth century. This revolution enabled the common use of differential calculus in economics and was accompanied by a paradigm shift in scientific ideals which suggested that economics could and should be a rigorous, empirical discipline based on the highest mathematical standards.Footnote ⁴⁴ These ideals remain prevalent today and the utility theory is still the dominant economic theory for explaining prices.Footnote ⁴⁵

An important corollary to the utility theory is that all economic value is embedded in exchange, and that no value is created without it.Footnote ⁴⁶ The reason is that prices are formed during exchange, i.e. at the intersection of supply and demand, as a trade-off between different outcomes. One example of this corollary is when economists try to value natural capital on the basis of peoples’ willingness to pay.Footnote ⁴⁷ They ask how much a person would pay to visit the woods or to have a natural park within a certain distance instead of not at all. The value is determined by the imagined ‘exchange’ that people make between the alternative scenarios.Footnote ⁴⁸

A second corollary is that all preferences have a price.Footnote ⁴⁹ We will later see that this is due to the nature of money as a unit of account (Section 4.3). For now, we can note that this pricing is especially evident in economic models based on game theory which assume that individual preferences are complete and transitive, i.e. that a person can decide between any two things or situations and rank them in relation to all other things or situations.Footnote ⁵⁰ Tadelis explains the importance of this corollary to economic modelling: “without such preferences we can offer neither predictive nor prescriptive insights.”Footnote ⁵¹

A third corollary is that only the preferences of human beings are a viable source of economic value.Footnote ⁵² This anthropocentrism mirrors the fact that only people can use money and excludes any possibility for society, non-humans, or the non-living world to have intrinsic value. These can only be included as an indirect expression of individual preferences.Footnote ⁵³ One example of this anthropocentrism is the nexus of contracts theory of the firm which sees organisations as a fiction, no more than a series of contracts and exchanges between natural persons.Footnote ⁵⁴ A second is that economic models for strong sustainable development are only able to grant nature-intrinsic value by fully excluding it from market dynamics.Footnote ⁵⁵

The utility theory of value plays a key role in the general constellation of economic ideas. It is linked not only to the rise of marginalist analysis and use of mathematical techniques but also to the creation of supply–demand models. These models have been used as the conceptual backbone for large-scale economic models for over 100 years. They are interesting for us because they help illustrate how value is created in an economic universe.

2.2 The Creation of Economic Value

Supply–demand models were pioneered by Alfred Marshall in 1890Footnote ⁵⁶ and are intended to represent economic dynamics in the market for a single good or service. They are central to economic education and foundational to General Equilibrium models that are used inter alia by the OECD, IMF, World Bank, European Commission, IPCC, and national institutions to develop economic scenarios, for example to estimate economic growth or evaluate sustainability policies.Footnote ⁵⁷

Supply–demand models consist of a supply curve, which captures the willingness of suppliers to sell a certain quantity at a certain price, and a demand curve, which captures the willingness of consumers to purchase a certain quantity at a certain price. Each respective curve aggregates the marginal utility curves of sellers and buyers in a given market. The point where the curves intersect is known as the ‘equilibrium point’ – it reveals the market price and quantity of items that is currently being traded (Figure 1).

Figure 1

The basic supply-demand model.

Figure 1 Long description

The left, vertical axis shows price and the bottom, horizontal axis shows quantity. The diagram shows the intersection of two lines - a downward sloping demand line and an upward sloping supply line. The point of intersection is the equilibrium point, at which the equilibrium price and quantity are sold.

Changes in supply and demand are reflected in the position of the equilibrium point. More demand causes the demand curve to shift to the right, resulting in higher prices and a lower quantity of items sold (Figure 2(a)). More supply causes the supply curve to shift to the right, resulting in lower prices and more items sold (Figure 2(b)).

Figure 2

Changes in supply and demand.

Figure 2 Long description

The graph on the left shows a change in supply - an increase which makes the supply line shift right, which results in a new equilibrium at a lower price with more goods being sold. The graph on the right shows an increase in demand, and its shift to a new equilibrium with more goods being sold at a higher price.

The shape of supply and demand curves is believed to vary between different goods and services. We do not need to consider these variations for our analysis. Instead, we can zoom in on the value creating aspects of these models as described by the concepts of consumer surplus and producer surplus.

Consumer surplus is “the value a consumer gets from buying a product less its price”.Footnote ⁵⁸ It can help to understand this statement from a marginalist perspective. Imagine three consumers looking to buy a good whose equilibrium price is €10. Consumer A is, in principle, willing to spend up to €20 for the good, B is willing to spend up to €14, and C up to €10. The difference in value between the maximum willingness to spend, and the equilibrium price of the good, is known as the consumer surplus.Footnote ⁵⁹ So consumer A has a surplus of €10 (€20 minus €10), B has a surplus of €4 (€14 minus €10), and C has no surplus (€10 minus €10). The aggregate of this situation is visually represented in Figure 3 by the consumer surplus triangle.

Figure 3

Consumer and producer surplus.

Figure 3 Long description

The graph shows how the area to the left of the equilibrium point, between the intersecting lines, constitutes the surplus generated by exchange. The consumer surplus is above the mid-level provided by the equilibrium point, and the producer surplus is below this mid-level.

Producer surplus is then “the price the producer sells a product for less the cost of producing it.”Footnote ⁶⁰ Again, the concept is best understood from a marginalist perspective. If producer X is willing to supply a good for €4 per item, Y is willing to supply for €7, and Z for €10, then the difference between their willingness to supply and the equilibrium price is the producer surplus. Using the same equilibrium price, X has a producer surplus of €6, Y a surplus of €3, and Z does not have a surplus. The aggregate situation is represented by the producer surplus triangle in Figure 3.

The supply–demand model directs that consumer and producer surpluses are maximised at the market equilibrium price, and that deviations from equilibrium will result in a lower level of aggregate surplus. Such a deviant situation is shown in Figure 4, which describes a market with suboptimal prices and quantities (P_sub and Q_sub).

Figure 4

Lost surpluses following deviation from market equilibrium.

Figure 4 Long description

In this case, the deviation is an increase in price that causes a shift in the position of the equilibrium point, so that it goes back 'up' the demand line. This higher price (Psub) leads to a lower quantity sold (Qsub) and has a smaller surface area than the equilibrium surplus. This lost area - which sits between the old and new equilibrium point - is known as the lost surplus.

The figure shows that market prices are too high so fewer consumer preferences are being satisfied (i.e. prices are too high for some consumers). This results in a smaller consumer surplus triangle. Part of the consumer surplus is being transferred to producers. They are able to charge higher prices, and some producers are benefitting more than they would have under conditions of market equilibrium. However, producers do not receive as much surplus as consumers would have, so the overall situation is suboptimal. The lost surplus triangle shows the amount of surplus (value creating potential) that is lost due to deviation from market equilibrium.

This model illustrates that deviations from free market conditions (from equilibrium outcomes) always result in a lower aggregate levels of consumer and producer surplus, and therefore also in less value creation. The implication is that free, competitive markets are universally desirable. As Colander explains:

A minor variation on this model is used to show that taxes are inefficient whenever they deviate from equilibrium outcomes. As shown in Figure 5, taxes result in higher prices and less consumer and producer surplus. They also generate a tax surplus that can be used by the state. However, this amount is always smaller than the lost amount of consumer and producer surplus. This lost surplus is referred to in economics textbooks as a ‘deadweight loss’.Footnote ⁶²

Figure 5

Deadweight losses caused by taxation.

Figure 5 Long description

The graph shows a tax increase resulting in a higher price (as in Figure 4). The area of lost surplus is known in economics as the deadweight loss. The amount of tax generated is the surface area that sits between the new, higher price of the tax (Ptax) and the lower quantity that is being sold (Qsub). The amount of tax surplus that is appropriated is less than the amount of surplus that would have been generated under normal equilibrium conditions (this difference between the two is known as the deadweight loss).

These models have been used since the Second World War to teach economists that free markets are universally desirable and that government taxes are economically inefficient except when designed to approximate free market outcomes. This commitment to liberalised markets plays an important role in the general constellation of economic ideas.

Relevant for value creation is that prices can, but do not necessarily, reflect the full extent of, satisfied preferences. The value of non-financial surplus created by a given exchange is either equivalent to its financial value (the price) or greater if individual preferences are satisfied in excess of market prices (whenever there is a customer or producer surplus). This means that the amount of money exchanged is the minimum amount of non-financial surplus value that has been created.

This can be visualised as an iceberg (Figure 6) whereby financial and non-financial value overlap and only the former is visible at the ‘surface’ in an objective, measurable form. As an aside, we can identify that the overlap between these kinds of value is made possible by the corollary, discussed in Section 2.1, that all preferences can be priced.

Figure 6

The iceberg relationship between financial and non-financial value.

Figure 6 Long description

The illustration shows the bulk of the iceberg underwater (shown by a line and shading). The part of the iceberg that is above the surface of the water is labelled as financial value, and the whole iceberg - both above and below the water - is labelled as non-financial value. The point is to show that non-financial value encompasses financial value, and that financial value only operates as a proxy for a (partial) measurement of non-financial value.

In theory, one could argue that the total value of money exchanged represents the minimum amount of non-financial surplus value that is being created by the economy. Indirectly, it is this surplus that is being measured by GDP figures, which aggregate the total amount of financial value of all exchanges.Footnote ⁶³ This helps explain why it is normatively meaningful in economic terms to measure and maximise this metric despite its widely recognised shortcomings.Footnote ⁶⁴

In terms of our analysis, it follows from this discussion that a commitment to value creation is synonymous with the pursuit of economic growth. More exchange, more satisfied preferences, more value created. The following section examines how these insights on value creation relate to the distinction between financial and non-financial value. This distinction plays a key role in discussions on corporate sustainability, governance, and regulation.

2.3 The Relationship between Financial and Non-financial Value

The previous section showed that value creation is maximised under free market conditions and that financial value can be used as an economic proxy to measure minimum non-financial value. Crucial for the discussion in this section is that the reliability of this proxy role depends on the quality of market conditions.Footnote ⁶⁵ More specifically, the relationship between financial and non-financial value is affected by deviations from ideal, free market conditions. As we will see, it is these deviations that inform the relative need for financial and non-financial measures of firm performance in discussions on corporate purpose and between shareholder and stakeholder capitalism.

Our starting point is to recall that, in economic terms, financial value is an objective and measurable proxy for the minimum amount of non-financial value that is created under free market conditions. In the context of business performance, this means that a focus on financial metrics is sufficient to assess both the financial and non-financial aspects of firm activities. Examples of such metrics include profit margins, gross margins, leverage ratios, inventory turnover, economic value added, return on investment, return on assets, and Tobin’s Q.Footnote ⁶⁶ None of these measures is accepted as the single best or ideal metric. They are all imperfect indicators for overall financial performance.

At first impression, it seems that the absence of a single, ideal measure undermines the effectiveness of financial value as a proxy for the non-financial value that is generated by firms. Note, however, that the use of financial value as a proxy does not depend on perfect metrics but on market conditions and the extent of market failures (if any). If market conditions are (near) perfect, then the utility theory of value advises that we can safely rely on imperfect financial measures to tell us about the performance of firms, for example when making investment or consumption decisions.

This line of reasoning is implicit in the traditional view, for example in banking and finance, that it can be sufficient to focus on economic fundamentals when deciding whether to invest in or lend money to a firm.Footnote ⁶⁷ It also underpins the view of shareholder capitalism advocates, such as Friedman, that concentrating on shareholder interests and financial performance is sufficient to serve the public interest.Footnote ⁶⁸ Both views assume that markets function perfectly well or as a close approximation thereof.

The situation changes if one considers that markets are not perfect, i.e. that there are market failures. These conditions make it possible for one party to generate an inefficiently high amount of value at the expense of another party.Footnote ⁶⁹ For example, picture a firm that pollutes at the expense of others and benefits from externalities, or one that benefits from information asymmetries to charge high prices. In both cases the firm creates financial value at the expense of a greaterFootnote ⁷⁰ loss in non-financial value. This kind of economic inefficiency is often criticised in debates on capitalism and corporate purpose as short-termism.Footnote ⁷¹ It reduces the total amount of value and undermines the reliability of financial metrics as a proxy for non-financial performance.

As a rule, the reliability of financial value as a proxy decreases with the extent of market failure. The worse a market functions, the greater the opportunity for market actors to inefficiently generate value at the expense of other parties. Using non-financial measures of firm performance and assets can, in theory, help compensate for this inefficiency by allowing other market participants to recognise and reward firms that are genuinely value-maximising and are not simply profiteering. It follows that non-financial metrics are needed to discern, in a context of market failure, between efficient and inefficient firms.Footnote ⁷²

There are various quantitative and qualitative non-financial measures of firm performance and assets, including CO₂ and other emissions, biodiversity impact, waste production, plastic consumption, water use, remuneration policies, lobbying activities, natural capital, and human capital.Footnote ⁷³ This information may be audited and is used by various parties, such as institutional investors, NGOs, academics, and sustainability rating agencies, to examine and compare the relative non-financial performance of firms and to identify trends and gaps.

It is widely known that an appreciation for the economic relevance of non-financial measures of firm performance is connected to the rise of CSR and ESG.Footnote ⁷⁴ Less known, however, is that this appreciation also reflects mainstream developments in economics in relation to market failures and environmental economics. Currently, it is a standard view in economics to consider that markets are imperfect and suffer from market failures that might need to be addressed. This view is foundational not only to environmental economics but also to law and economics, institutional economics, theories of the firm, and various other sub-disciplines and sub-fields. Many of these are enabled by the view that markets are imperfect and that market imperfections are essential to understanding economic dynamics and improving economic efficiency. They are united in their ambition that markets should, via regulation and other routes, be brought as far as possible in line with the free market ideal.

This unity is significant. It explains why advocates for both shareholder and stakeholder capitalism can coherently argue, based on economic theory, that it is important for firms to focus on financial and non-financial value creation. It allows Hart and Zingales to argue in favour of a shareholder welfare maximisation approach that focuses on both their financial and non-financial preferences.Footnote ⁷⁵ It allows Edmans to argue that ESG metrics are useful because they help firms pursue their purpose and thereby create indirect value for shareholders and society.Footnote ⁷⁶ And it allows Mayer, Sjåfjell, Mahonen, Eccles, Spiesshofer, the WEF, and others to contend that a focus on financial and non-financial performance is necessary to protect stakeholders and address externalities.

Also significant is that the primary purpose of non-financial metrics is not to create non-financial value but to address the shortcomings of financial metrics in a context of imperfect markets. The aim is to achieve, as nearly as possible, the outcomes that are supposed to obtain under free market conditions. A corollary to this point is that non-financial metrics are not intended to negatively impact financial performance but to provide a better picture of a firm’s ability to satisfy preferences.Footnote ⁷⁷ This limits the transformative potential of these metrics so they can do no more than achieve free market dynamics, at least insofar as their use is intended to be consistent with economics.

2.4 Section Conclusion

This section has shown that value may be understood in debates on capitalism and corporate purpose as an expression of utility, i.e. the amount of satisfied preferences as reflected in prices. We also found through an analysis of the economic utility theory that value is created through exchange and that surplus value is maximised under free market conditions. Notably, we identified that the utility theory does not imagine a trade-off between financial and non-financial value but sees financial value as an expression of the minimum amount of non-financial value that is created through exchange. This makes it possible for financial value to operate as a proxy for the creation of non-financial value, as we saw in the case of GDP.

It is only under imperfect market conditions, i.e. when there are market failures, that trade-offs arise and undermine the quality of financial value as a proxy for non-financial value. It is in this context that non-financial metrics are needed to inform the decisions of business, investors, consumers, and other market actors so that they can tend as closely as possible to the outcomes that are supposed to obtain under free market conditions. In theory, this makes it possible to address issues such as environmental pollution by addressing market failures in the form of externalities and information asymmetries. The logic is that economically efficient, free market conditions will result in win–win–win decisions between the various market actors and obviate the need for trade-offs, for example between sustainability and profit.Footnote ⁷⁸

These findings explain why it is possible for all firms, in all sectors, with all business models to create value as a kind of universal good. They are all in the business of satisfying preferences and trying to increase the amount of preferences being satisfied through their goods and services. Since the aim of economic theories of value is to explain prices, not ask where preferences come from, or if they are wise, there is no need to ask if firms can have antagonistic impacts. An increase in utility is an increase in utility, and it does not matter in an economic sense whether value is being created by private military contractors or by healthcare providers. Bereft of moral content, one could go so far as to argue that the social role of firms is to take inputs and exchange the outputs for a higher price.Footnote ⁷⁹

This analysis provides an outline of the nature and meaning of value in discussions on corporate sustainability, governance, and regulation. However, the satisfaction of preferences and increasing prices does not explain or justify how value creation became the widely accepted economic role of firms. If the point of trade is to increase utility, then why should we care about increasing prices? If we are concerned with individual preferences, then what is the relevance of firms? And why should firms have a value-creating role, instead of some other social actor? It is with these questions in mind that the next section will examine the relationship between value creation and the broader cosmology of economic theories.

3.1 Economic Theories of Money

Theories on money are an important, interesting, and controversial area of contemporary economic debate.Footnote ⁸⁰ In general, these theories frame how we think about the role of prices in the economy, how we allocate resources towards different activities, and how we think about value creation. There are two leading, competing, theories on money: the commodity theory and a convention theory of money that is known by various names (the state money or ‘chartalism’ theory, the credit theory of money, or modern money theory).Footnote ⁸¹

The commodity theory is the mainstream economic theory that has a keystone position in the broader architecture of economic ideas. It is deeply opposed to the convention theory which has a secondary but growing status in discussions on how to reform economics and make it more sustainable.Footnote ⁸² This stage of our analysis focuses on the first, mainstream theory and provides a general outline.

The commodity theory argues that money arose to facilitate exchange in a primitive barter economy. In this early economy, goods and services were exchanged directly for one another without the use of money as an intermediary. This resulted in high transaction costs because individuals are rarely able to barter their goods and services for exactly corresponding amounts. Therefore, it might occur that a shoemaker, wanting to purchase bread, finds that the baker already owns enough shoes and does not want to exchange.Footnote ⁸³ This was an inconvenience to traders and an impediment to economic activity.

The subsequent idea is that exchanging parties solved this problem by using certain commodities, such as precious metals, as a medium of exchange rather than exchanging goods directly.Footnote ⁸⁴ The special feature of these commodities, which made them suitable as money, is that they are durable, divisible, portable, and readily accepted for exchange by many parties. Their money value was determined, for example, by the quality and weight of their metallic content.Footnote ⁸⁵

Over time, central authorities in places such as Ancient Greece minted precious metals into coins with specific denominations. This helped provide a standard weight of precious metal for transactions and facilitated their use as a unit of account. A related development is that it became interesting for people to accumulate precious metals (and coins) and use them as a store of value.

It was against this backdrop that banks emerged to help individuals store their money in a safe place, and to facilitate liquidity in the economy by connecting lenders and borrowers.Footnote ⁸⁶ It was inconvenient and risky to transport precious metals in large quantities, so banks started to issue letters of credit to their depositors. These allowed the bearer of the letter to redeem a certain weight in precious metal from the vaults of bank branches in different cities.Footnote ⁸⁷ When commissioned by a reputable bank and held by reputable customers, it became possible for individuals to exchange these letters directly, provided they were depersonalised, as a form of paper money.

Bankers soon realised that their depositors rarely, if ever, came to collect all of their savings from the bank at any one time.Footnote ⁸⁸ This suggested that they could, through lending, issue many more letters of credit than the money value of precious metal in their vaults. The main accounting concern for such lending was whether the bank could cover the balance of daily/weekly/monthly gold withdrawals and deposits, not whether it could match all outstanding liabilities. This opened the doors for fractional reserve banking, in which banks would hold in reserve, for example, only 20% of the total money value that had been distributed through their letters of credit.

Fractional reserve banking fuelled an expansion in economic activities but also contributed towards financial instability. Different banks had different proportions of reserves, and different risk appetites and creditworthiness. The financial system was fairly stable when times were good but scandals, bank runs, and economic downturns created a systemic risk of financial contagion since only a small fraction of the money in circulation was actually backed by precious metal.Footnote ⁸⁹ It was in response to these risks and failures that governments stepped in and created central banks with responsibility for monetary policy. Eventually, governments adopted fiat currencies which are unbacked by precious metal but are accepted for exchange because they are trusted and mutually recognised as the national unit of account and taxation.Footnote ⁹⁰ One benefit is that the availability of currency would no longer be tied to the availability of precious metals.

In general, the commodity theory shows that money operates as a medium of exchange and is created through exchanges between market actors, especially via bank lending. One expression of this theory is the prevailing view that economic activities are needed to ‘make money’ and that the state obtains funding by taxing these activities.Footnote ⁹¹ As Thatcher remarked in 1983, “the state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings or by taxing you more … We know that there is no such thing as public money. There is only taxpayer money”.Footnote ⁹² Another expression is the EU Stability and Growth Pact which limits state spending to a percentage of GDP and generally establishes that it “has to be paid out of tax revenues”.Footnote ⁹³

The significance for our analysis is that value creation is needed for the creation of commodity money. This is consistent with Mayer’s remarks on profit: “It is the reason why business exists, what it is there to do, its reason for being, namely its purpose. Business exists to make money. Profit powers progress and progress produces prosperity.”Footnote ⁹⁴ And it connects to Edmans’ view that “financial wealth can be created” and that one risk of macroeconomic policy is that it “may reduce incentives to create wealth to begin with.”Footnote ⁹⁵ It follows that price increases are not only a reflection of satisfied preferences but are also required for optimal economic functioningFootnote ⁹⁶ and healthy state finances. Without this kind of value creation, it seems that we would still be stuck in a primitive barter economy.

3.2 Economic Theories of the Firm

It has often been remarked that the classical political economists had little to say about firms and did not develop a comprehensive theory.Footnote ⁹⁷ In fact, it was only in the wake of the marginalist revolution that this field of research came to life. The first major development was the 1930s equilibrium theory of the firm.Footnote ⁹⁸

The equilibrium theory assumes a free and perfectly competitive market environment. It conceives of the firm as a production function: an equation whereby production (output) is determined by marginal changes in capital and labour (inputs). This equation can be stated in terms of differential calculus and used in supply–demand models to estimate what a marginal increase, for example in a unit of labour or capital, will yield in terms of output.

The equilibrium theory remains influential todayFootnote ⁹⁹ but has an important theoretical shortcoming; it is unable to explain differences in firm size, their internal dynamics, or why they even exist.Footnote ¹⁰⁰ This inability arises because assumptions about perfect competition turn the firm into a ‘black box’ and nominal conduit for inputs and outputs in an idealised universe.Footnote ¹⁰¹ As Foss and Klein explain:

In the end, economists were only able to study firms in detail by opening the black box and departing from assumptions about perfect competition. The most important development in this regard was a 1937 article by Coase on ‘The Nature of the Firm’.Footnote ¹⁰³ Demsetz commented that this was one of only two works to have significantly altered the perspective of the economics profession on theories of the firm over the past 200 years.Footnote ¹⁰⁴

Coase’s key insight was to ask why firms would exist in a context of competitive markets.Footnote ¹⁰⁵ He argued that, if markets were indeed characterised by free competition, then we would see people trading on an individual basis instead of working in or trading through firms. His answer was to suggest that markets are not free, perfect, or frictionless and to highlight that “there is a cost of using the price mechanism.”Footnote ¹⁰⁶ These costs are known as transaction costs and arise, for example, because parties need to research market prices, negotiate, and sign contracts.

Next, Coase argued that marginal costs of production were likely to vary in line with transaction costs. It could therefore be cheaper to hire someone on a permanent basis than to repeatedly negotiate the costs of their labour. This meant that it could be economically rational to organise production within firms instead of relying on exchange. He then suggested that, “[a]t the margin, the costs of organising within the firm will be equal either to the costs of organising in another firm or to the costs involved in leaving the transaction to be ‘organised’ by the price mechanism.”Footnote ¹⁰⁷ In other words, he proposed that a dynamic market equilibrium exists at the shifting boundary of these costs, and that the position of this boundary could explain the existence and size of firms.

The significance of these arguments is that they made it possible to see firms as a product of imperfect exchange between individuals. This perspective has become ubiquitous in economic theories of the firm as numerous, successive authors expanded over time on the meaning of ‘imperfect exchange’.

The meaning of ‘imperfect’ was expanded to include not only transaction costs but also other sources of market failure such as information asymmetries, bounded rationality, externalities, and individuals wanting things other than financial gain.Footnote ¹⁰⁸ Information asymmetries are central, for example, to the team production models of Alchian and Demsetz, and Blair and Stout.Footnote ¹⁰⁹ Bounded rationality plays an important role in incomplete contracts and evolutionary theories of the firm.Footnote ¹¹⁰ The non-maximisation of financial gain is key to evolutionary and stakeholder theories.Footnote ¹¹¹ And the elimination of externalities is foundational to discussions on corporate sustainability, governance, and regulation.Footnote ¹¹²

The meaning of ‘exchange’ was also expanded over time to encompass all human interactions and not just those related to legal contracts or commercial interactions. This expansion was achieved most prominently through the development of principal–agent and stakeholder theories, the two theories that are central to respective arguments in favour of shareholder and stakeholder capitalism.

In a seminal article for principal–agent theories, Jensen and Meckling explain that agency relationships arise whenever the welfare of one party (the principal) is dependent on the activities of another party (the agent).Footnote ¹¹³ These relationships arise through bargaining in any social context and do not require any kind of legal arrangement or commercial setting. As Jensen and Meckling explain, “agency costs arise in any situation involving cooperative effort (such as the co-authoring of this paper) by two or more people even though there is no clear cut [i.e. formal] principal-agent relationship”.Footnote ¹¹⁴ It follows that agency relationships, including conflicts of interest between principals and agents, arise in all aspects of human collaboration.Footnote ¹¹⁵

Stakeholder theories exhibit a similar universalism in that they typically extend the notion of exchange to encompass all “groups and individuals who have a stake in the success or failure of a business”.Footnote ¹¹⁶ The concept of having a stake is broadly interpreted and refers to anyone who affects or is affected by the activities of the firm.Footnote ¹¹⁷ Given that firm activities are unavoidably linked to diffuse effects (such as CO₂ emissions, tax (avoidance), and advertising), it is difficult to draw a robust boundary between them and other human activities.Footnote ¹¹⁸ Again, the theory is all-encompassing.

The universalism of principal–agent and stakeholder theories of the firm is significant. It illustrates that discussions on shareholder and stakeholder capitalism are framed by an expanded notion of imperfect exchange which erases the boundary between markets and other areas of human activity. A corollary to this framing is a suggestion that human activities, and all problems of human activity, can be folded into a universe of imperfect individual interaction.

This universalism makes it difficult, if not impossible, to meaningfully distinguish between firms and other kinds of collective human activity. They are all expressions of stakeholder dynamics, principal–agent conflicts, or another kind of Coasean variant. This leads to a series of general inferences. First, that human activities can be universally described as an expression of imperfect exchange. Second, that all problems of human activity can be modelled as a product of deviations from perfect exchange, i.e. as being due to market failures. And third, that improving the economic efficiency of individual interactions is a panacea to solve all of these problems. This line of reasoning is a unifying thread in debates on corporate purpose and shareholder/stakeholder capitalism that transcends their apparent polarisation and diversity.

Returning to our discussion on value, the key economic insight is the idea that firms are a product of imperfect exchange between individuals.Footnote ¹¹⁹ It follows that firms are tools that our societies use (more or less effectively) to optimise individual interactions, address market failures, and attain economically efficient outcomes. As Moran and Ghoshal comment: “Exchange-enhancing institutions have evolved throughout history to help us cope with the frictions of exchange.”Footnote ¹²⁰ This role is explicit, for example, in the OECD Principles of Corporate Governance, which identify as their main aim to support “economic efficiency, sustainable growth and financial stability” and explain that

The optimisation of individual interactions is also evident in EU sustainability policies such as the Green Deal, Taxonomy, Corporate Sustainability Reporting Directive, Corporate Sustainability Due Diligence Directive, and EU Action Plan for Sustainability.Footnote ¹²² Whether by providing information, setting targets, granting subsidies, imposing taxes, or other means, the envisioned mechanism for change is to enable interactions between individual firms, investors, and consumers to transform the EU into a “modern, resource-efficient and competitive economy”.Footnote ¹²³

The use of firms as a tool to optimise individual decision-making and achieve win–win outcomes (as a synonym for ideal, free market results) is a common fixture in discussions on capitalism and corporate purpose.Footnote ¹²⁴ Edmans, for example, remarks that

Similarly, Mayer sees that “business is the most powerful instrument created for uniting the world”Footnote ¹²⁶ and argues that its benefits are best realised individually: “Let everyone pursue their own ambitions and dreams subject to one caveat and that is that they should not prosper or benefit at the expense of others but instead from promoting the prosperity and benefit of others.”Footnote ¹²⁷

The optimisation of individual decision-making is also central to criticisms of stakeholder capitalism. Bebchuk and Tallarita, for example, argue that stakeholderism is economically inefficient because it insulates corporate leadership from the value-maximising incentives of monitoring by shareholders.Footnote ¹²⁸ It leads to the ‘wrong’ kind of individual optimisation and risks undermining the ability of firms to help create value for society as a whole.Footnote ¹²⁹

A corollary to this is that it is not firms but individuals who are the ‘real’ source of value. Firms are there only to support the value creation of individuals by offering conditions that tend, as closely as possible, towards an ideal, free market benchmark. While the desired outcomes and design of this optimisation are hotly contested, the general consensus in discussions on corporate sustainability, governance, and regulation seems to be that it can and will lead to ideal (or at least the best possible) economic, social, environmental, and other outcomes.

3.3 Economic Theories of Society

A useful starting point – an insight from philosophy of science – is that we cannot define an ‘economy’ without simultaneously defining what it is not.Footnote ¹³⁰ This process of co-definition is immanent to scientific practice. It arises from the basic fact that scientists are required to make a selection between aspects of reality that are relevant or irrelevant to their analysis.Footnote ¹³¹

One consequence of this co-definition is that society cannot be meaningfully defined as that which is non-economic, i.e. it cannot be defined simply as whatever is beyond the scope of economics. This is because the non-economy vanishes as soon as it is explained in economic terms. Put differently, an economic theory which sees society as a residual ‘non-economy’ does not create a boundary between the economy and society. Instead, it sees society as latently economic, waiting to be explained in economic terms. This latent view leads to an unbounded conception of the economy and invites the unlimited application of economics. It follows that our economic theory of society should not explain society in economic terms but should rather be a meta-theory about the relationship between the two.

A failure to appreciate the significance of co-definition is evident in the economic tendency towards universalist analysis (i.e. towards the view that all human activities can be explained using economics). This tendency was already apparent at the time of the classical political economists. Mill, for example, lamented that his colleagues were inclined “to exaggerate the effect of competition, and to take into little account the other and conflicting principle [of custom (i.e. society)]”.Footnote ¹³² More recent complaints have been voiced by critics of economic imperialism, who accuse the discipline of going beyond its reasonable analytical scope and of ignoring the findings of other disciplines.Footnote ¹³³

While the desirability of economic imperialism is disputed, it is undeniable that economic analysis has been extended to many areas of social theory. Notable examples include economic theories on crime and public choice,Footnote ¹³⁴ and the research of Becker which expands economic analysis into topics such as discrimination and family relationships.Footnote ¹³⁵ Universalist ambitions are also evident in the popularity of game theory.Footnote ¹³⁶ As Heap and Varoufakis comment, this is often seen as a “unifying force able to bring together politics, economics, sociology, anthropology … under one roof and turn them into sub-disciplines of some broader ‘science of society’.”Footnote ¹³⁷ This has led Gintis to remark that game theorists act like the proverbial “man with a hammer” for whom “all problems look like nails.”Footnote ¹³⁸

The universalist impulse of economics is enabled by numerous elements in the discipline. The utility theory of value, for example, suggests that all human actions and intentions can be understood in terms of preferences. Economic theories of the firm blur the boundary between firms, markets, and other human activities. And the commodity theory posits that money was introduced through acts of exchange between individuals, thus ruling out the possibility that other actors such as the state might also have played a role. Without trying to be exhaustive, other enablers include game theory and the rise of mathematical formalism.Footnote ¹³⁹

What all these enablers have in common is that they expand the reasonable scope of application for methodological individualism, a conceptual approach that is foundational to the scientific practice of almost all economists.Footnote ¹⁴⁰ The basis of this approach is that scientific explanations of collective, social phenomena must be exclusively formulated in terms of, or as a result of, individual characteristics and actions.Footnote ¹⁴¹ As Arrow explains it:

The comparison with an atom is not incidental.Footnote ¹⁴³ Methodological individualism is closely related to methodological atomism, a parallel concept from the natural sciences which proposes that all natural scientific phenomena can be explained with reference to, or as resulting from, the characteristics and interactions of fundamental atomic particles.Footnote ¹⁴⁴

In general, one could argue that the idea of people as individual atoms, and of society as interacting atoms, is a plausible economic theory of society. This would be consistent with the quote from Arrow, and with the work of Austrian economists Hayek and Von Mises on spontaneous order.Footnote ¹⁴⁵ It also links to the work on political processes of public choice theorists such as Buchanan.Footnote ¹⁴⁶ Moreover, it would be compatible with the view of institutionalist economists such as North and Williamson that social institutions can be explained in terms of the transaction costs of individual exchange.Footnote ¹⁴⁷ And lastly, it reflects Thatcher’s famous quip that “there is no such thing as society.”Footnote ¹⁴⁸

However, our earlier insights suggest that the idea of society as individual atoms is less an economic theory of society than an economic theory of the non-economy. It does not explain society but extends economic reasoning to explain it away.Footnote ¹⁴⁹ We already saw an example of this issue in the universalism of economic theories of the firm and the way that it blurs the boundary between firms, markets, and other human activities. This invites us to look further than economics and to repeat our earlier point that we need to search for a meta-theory on the relationship between the economy and society.

To lay the basis for such a meta-theory we can identify that the separation between the economy and society has an ancient pedigree and was already evident in the work of classical political economists.Footnote ¹⁵⁰ Smith’s work, for example, contained within it

Next, we can identify that Smith was a liberal moral philosopher and that his Wealth of Nations (1776) rose to prominence at the same time as political events such as the US Declaration of Independence (1776) and the French and Haitian Revolutions (1789 and 1791). These events spurred the adoption of liberal constitutions by many Anglo-European states. They gained intellectual support from Smith’s writing which argued that societies could prosper more under conditions of economic liberalism than under the illiberal, mercantilist policies which, in his view, were dominant at the time.Footnote ¹⁵²

The core of Smith’s argument was that eliminating trade restrictions and preferential treatment would enable a system of ‘natural liberty’ that would maximise the wealth of a nation.Footnote ¹⁵³ He reasoned that citizens under liberalised economic conditions would maximally pursue “a certain propensity in human nature … to truck, barter and exchange.”Footnote ¹⁵⁴ This maximum pursuit of self-interest would then lead to the largest amount of total aggregate (national) wealth and prosperity. The invisible hand of supply and demand would regulate these activities and ensure their contribution towards the public good.Footnote ¹⁵⁵

Smith’s arguments are best understood as part of a broader constellation of liberal theories. The most important of these is the idea that individuals are born free, in the state of nature, and that these free individuals signed a social contract to create social and political structures.Footnote ¹⁵⁶ This theory adds an extra layer of reasoning to Smith’s arguments; it reveals that it is individuals in the state of nature who have a natural propensity to engage in trade.

One implication is that people would be freely buying and selling even if there was no social contract. A second is that they would be able to maximise their individual and aggregate wealth under these pre-state, pre-social conditions. It follows that free markets existed prior to state and society, and that markets operate best under pre-state, pre-social conditions. It also follows that economic freedoms refer to the capacity of people to buy and sell without ‘external’ interference from state or society.Footnote ¹⁵⁷

An additional proposition from these liberal theories is that people can exist, as coherent individuals, in the absence of state and society. This implies that both people and markets are pre-social and pre-state. It also suggests that ideal market dynamics can be explained with sole reference to interactions between pre-social individuals. This matches the methodological individualism of economics that we previously identified. In general, it seems that this individualism may be enabled by liberal theories on the state of nature and social contract. If that is correct, then economic universalism can be seen as an impulse, conscious or not, to extend the scope of pre-social individualism so that it encompasses all human activities and frames them as an expression of free bargaining in the state of nature (i.e. as not being a product of the social contract).

A last proposition from liberal theories is that the state and society are dependent for resources and money on the taxation of pre-social individuals. This taxation takes place according to the rules of the social contract.Footnote ¹⁵⁸ It follows from this dependence that individuals and markets provide the basis for, i.e. are fundamental to, the activities of state and society. This market fundamentalist perspective allows us to distinguish between a generative economy, which creates money and resources, and an appropriative state and society, which takes them away and consumes them. It is plausible that this distinction accounts for the general antagonism of economics towards the state.

Market fundamentalism and the idea of a generative economy are also evident in the notion that state funding is obtained by taxing an economy that makes money.Footnote ¹⁵⁹ Furthermore, it features in the work of prominent authors such as Smith, Hayek, Friedman, North, Nozick, Acemoglu, and Robinson,Footnote ¹⁶⁰ who suggest that free markets are a necessary pre-condition for, or are instrumental to, the development and thriving of civilisation.

In summary, we developed an economic meta-theory of society by integrating insights from Smith’s Wealth of Nations with liberal concepts of the state of nature and the social contract. This meta-theory suggests that the economy is composed of pre-social individuals and that society emerged alongside the state when these individuals entered into a social contract. Ideally, the economy operates under the principles of the state of nature while society is governed by the rules of the social contract. This distinction clarifies the separation between these two spheres of human activity and underpins the conventional economic view that the state and social interests should either support market dynamics or intervene as minimally as possible.

In relation to our overall analysis, we can now explain why value creation is deemed necessary to make money (as we saw in Section 3.1). This idea is consistent with market fundamentalism and the notion of a generative economy. Moreover, we can now explain why it is firms, and not some other social actor or the state, that have the primary responsibility for creating value. This is because firms emerged in a context of imperfect markets to make individual interactions more efficient, and to help them tend towards outcomes that would be obtained in an ideal state of nature. This gives firms a unique role relative to the state and society since the latter were formed through the social contract and did not arise to correct market imperfections. Unlike firms, the latter cannot facilitate value creation in the same pure and direct manner. Importantly, this special role of firms is not an objective, empirical reality but a projection of liberal political and philosophical thought that has become embedded in economic theory.

3.4 Section Conclusion

In this section, we explored the role of value creation within economic theories of money, firms, and society. Our analysis revealed that value creation is needed to generate commodity money, and that it thereby provides state revenues and supports healthy economic dynamics. This connection clarifies the relationship between value creation and prices, and adds to our earlier finding that financial value operates as a proxy for the generation of non-financial value.

We also determined that firms do not create value themselves but are tools to support individuals in their value creating endeavours. Their economic role is to optimise individual decision-making so that it tends as closely as possible towards ideal, free market conditions. This role grants firms the potential to eliminate the trade-offs that arise under imperfect market conditions and unlock win–win decisions. This perspective is echoed in the WEF Davos Manifesto 2020 which states:

Lastly, we found that firms, rather than other social or state actors, are responsible for value creation because this is consistent with how economics developed within the framework of liberal theories on the state of nature and social contract. Our analysis of this development revealed that free markets are a metaphor for free individuals trading under ideal conditions in the state of nature, in the absence of society and the state. This metaphor implies that markets are pre-social and pre-state entities that create the money and resources that are needed to support state and social activities. This generative economic activity is aided by the optimising tendencies of firms and threatened by the appropriative claims of society and the state over money and resources. This dichotomy is reflected in the following quote from Porter and Kramer:

In summary, this section revealed that ideas on value creation are embedded not only in a cosmology of economic theories but also in liberal politics and philosophy. This embedding is often implicit, but not always. For example, Mayer explains for his work that

And Henderson notes:

The deep relationship between economics and liberalism runs contrary to the paradigmatic view of economics as a rigorous, empirical science based on the objective analysis of price signals in a context of supply and demand. This invites us to be sceptical of economic claims towards objectivity, and suggests that we should see ideas on value creation as an expression of liberal-economic ideology. It does not follow that ideas on value creation, as grounded in economics and the utility theory of value, are necessarily incorrect. However, it does suggest that we should explore some counterarguments against the idea of value creation as the social role of business.

4.1 A Reflection on Economic Theories of Society

We previously identified that the idea of a separation between the economy and society is grounded in liberal allegories on the state of nature and social contract. These allegories suggest that individuals and markets are pre-social, i.e. they existed before the state and society (which are products of the social contract). It followed from this pre-social reasoning that only people and markets can be potentially free and that only they have the right, ‘free’ incentives to maximise economic value. We outlined that this reasoning is foundational to the methodological individualism of economics, and recognised that it facilitates a market fundamentalist dichotomy between a generative economy and an appropriative state and society.

As background, it helps to understand that the liberal allegories were intended as thought exercises and not as literal descriptions of human history.Footnote ¹⁶⁵ This was explicitly stated, for example, by Rousseau in The Social Contract.Footnote ¹⁶⁶ And as Schlatter explains more generally:

It is in the form of abstract principles that these allegories became naturalised in economics. They are expressed in the idea of a separation between the economy and society, and in the methodological individualism that economics uses to examine human activities. We discuss each expression in turn.

In relation to the separation between the economy and society, critics are correct to emphasise that people never lived as free individuals in a state of nature.Footnote ¹⁶⁸ This is shown, for example, by historical and archaeological research, which shows that human ancestor species, Homo erectus (estimated to have lived between 140,000 and 1.9 million years ago) and Homo habilis (between 1.4 and 2.4 million years ago), already used tools and lived in small groups. Since people have never been pre-social, it seems that there is no viable way to differentiate, in practice, between an economy based on free individual initiative and a society/state based on collective agreement. This means that we will never be able to realise, in practice, the perfect market conditions that are supposed to arise in the absence of state and society. It does not follow, however, that these allegories should never be used as abstract principles for the design of human arrangements; the principles could still be worthwhile even if they are unattainable and historically unfounded. This invites us to reflect on the limits of methodological individualism since it is the alternative expression of these principles.

For context, we can recall that methodological individualism is rooted in the methodological atomism of the natural sciences. Whereas the latter would impute atoms with characteristics such as charge, mass, and velocity, the former would endow them with assumptions about preferences, rationality, egoism, and maximisation. Both would assume that these internal characteristics were autonomous and ‘free’ from the existence and influence of other atoms. As Zwirn explains:

The radical separation that underpins the creation of these atoms has significant implications. It posits that they have no shared language, history, geography, education, family, or any other kind of relation that might constitute their internal characteristics.Footnote ¹⁷⁰ The strangeness of the resultant ‘person’ is well-captured by Veblen in the following caricature:

We can readily note that the radical separation of methodological individualism contradicts our social existence and that of our ancestors. We can add that it also neglects our biological connections to the environment, for example, in terms of clean air and water, the bacteria in our gut, and the genetic code we share with all life on Earth. It also runs contrary to research, for example by critical legal realists and legal institutionalists, which illustrates that law can have a constitutive role in relation to corporations and market dynamics.Footnote ¹⁷² These examples illustrate a presumably uncontroversial point, namely that people do not literally exist as independent atoms.

An evident criticism of atomism in economics is that we cannot, as human beings, be abstracted from our context without a fundamental loss of meaning in terms of what defines us. Comte, for example, remarks that a society is “no more decomposable into individuals than a geometric surface is into lines, or a line into points”.Footnote ¹⁷³ Moreover, there are many areas of Western scholarship which recognise that people are mutually constituted by relations to each other and their environment.Footnote ¹⁷⁴ This is also a common thread in indigenous cosmologies.Footnote ¹⁷⁵

The criticism that abstract individualism results in a loss of meaning is significant but does not provide, by itself, a fatal argument against its use as a scientific approach. It falls short of this purpose because of a more general fact – that all scientific practice is imperfect and relies on unrealistic assumptions.Footnote ¹⁷⁶ There is no science which takes into account everything, everywhere, at all times. Researchers must always make simplifying assumptions and select between aspects of reality that are ‘relevant’ and ‘irrelevant’ to their intended analysis. This selection occurs before a given analysis, moulds its content, and cannot be justified by the obtained results (since that would be self-referential).

A corollary to this point is that any given analysis is unable to prove, based on relevant material, that irrelevant material is truly irrelevant. Instead, it should be recognised that the initial selection is a leap of faith, a premise about the phenomena under investigation, that always results in a loss of meaning in respect of the fullness of reality. It follows that a mere accusation of unrealism is not a sufficient argument against methodological individualism in economics or elsewhere; the same argument could be made against scientific practice as a whole.

A more robust critique is that the discipline is not merely based on unrealistic assumptions but actively tries to enact these assumptions in the real world. This effort arises because individuals and markets can only be economically efficient to the extent that pre-social individualism is achieved or emulated in practice. In effect, this means that the successful application of economics is predicated on freeing people, as individual atoms, from the relationships that constitute their existence.

This aim can never be realised in practice, with the consequence that there will always be additional market failures and opportunities to promote economic efficiency. The paradoxical result is a recursive economic loop that, although it seems to promise infinite human progress, is actually predisposed to erode human relationships. This erosion is the wellspring of issues such as economic disembedding and short-termism.Footnote ¹⁷⁷ It is caused by methodological individualism and is unlikely to be compatible with sustainable, long-term human prosperity.

Another issue is that methodological individualism treats social phenomena as either illusory or as an epiphenomenon of individual interactions. It does not recognise that individual phenomena can be highly speculative or unobservable, or that some social phenomena can be readily identified. As Lukes explains:

Overall, it seems significant that individual characteristics such as preferences, which economists and psychologists have been unable to effectively isolate and describe for over a century,Footnote ¹⁷⁹ are treated as more real than social or environmental phenomena which can be meaningfully described (such as laws or biodiversity loss). Again, the problem is not that the selection of economic phenomena is imperfect or incomplete. Instead, the issue is that this partial selection does not provide a sufficient description of human activities that are significant for firms and markets (such as law, history, the environment, and the role of the state). The effective description of these phenomena is precluded by the separation between society and the economy, reaffirming the untenability of this dichotomy.

In summary, we found that the pre-social reasoning that underpins liberal allegories is historically and scientifically deficient. It does not justify the strict separation between the economy and society that has been naturalised in economics. Moreover, we saw that efforts to realise this separation in practice are destructive towards the relationships that constitute human existence. The crux is that people are not pre-social, so the aim of economic policy should not be to make them so. A related insight is that the pursuit of free markets is not rooted in an objective, scientific imperative about the efficient use of scarce resources but is rather an ideological commitment to liberalism and individualism. There are no ‘laws of nature’ which dictate that only economies are generative or that societies should arrange their market activities in accordance with the principles of economics.

In relation to value, these findings suggest that we cannot draw a hard distinction between the value creating roles of individuals and firms and the value appropriating tendencies of states and societies. Moreover, the mutual constitutedness of people through social and environmental relations suggests that it is not only individuals and firms who have an important value creating role. At a minimum, this invites us to rethink the utilitarian economic approach to value creation that features in discussions on corporate sustainability, governance, and regulation. The analysis in the following sections, and the issues that it identifies, is intended to help inform this rethinking process.

4.2 A Reflection on Economic Theories of the Firm

Section 3.2 explained that firms, as economic entities, are products of imperfect market exchange that arose to address market imperfections. Their general role is to optimise individual decision-making so that it tends as closely as possible towards perfect market conditions. We saw that this role has been expanded, through the universalist foundation of principal–agent and stakeholder theories, so that it encompasses all human activities. It is through this universal, optimising role that firms are imagined to contribute towards value creation in both shareholder and stakeholder capitalism.

Building on the previous section, we can challenge the conceptualisation of firms as economic entities. There is no fundamental separation between the economy and society, and it is implausible to imagine that firms are pre-social and existed before society and the state. By extension, it seems incorrect to argue, as Coase and his successors do, that firms are a product of imperfect economic dynamics.

Another notable issue is that the aim to optimise individual decision-making so that it tends towards perfection and solves market failures is indiscriminate and tautological. To illuminate the problem, it helps to reflect on what it truly means to solve market failures such as information asymmetries and transaction costs. To be perfectly informed is to be omniscient. To have no transaction costs is to be omnipotent. The underlying presumption is that we can solve economic problems by having God-like knowledge and power. This is true by definition; of course, we could solve all our problems if we had God-like abilities. Crucially, this line of reasoning fails to qualify as an adequate problem diagnosis – people are not Gods, so the problem cannot be that people are not Gods. Importantly, the universalist impulse of economics is empowered by this tautology. It has long been identified in the discipline as an issue, and described as the ‘Nirvana Fallacy’.Footnote ¹⁸⁰

The assumed viability of perfecting individual decision-making is not only tautological. It also crowds out research, for example in ethics, criminology, and social psychology, which shows that individual decision-making is influenced and may be impaired in an organisational context such as in firms. As examples, we can consider the effects of groupthink, role-based reasoning, and fractured autonomy.

Groupthink emerges, as Ripken outlines, because people want to conform to ideas that are present in the group and thus de-emphasise their own input.Footnote ¹⁸¹ Loyalty to certain group members can make it more likely that undesirable policies are continued. And socialisation in groups can lead to pressures that encourage dissenting members to change or stifle their own views. Additionally, role-based reasoning can lead to impaired morality because it encourages people to think in terms of the needs of their role instead of their values as a person.Footnote ¹⁸² As Tombs and Whyte explain, “managers within [a] firm, both senior and middle managers, [adapt] their own motives and responsibilities to the motives and responsibilities of the corporation”.Footnote ¹⁸³ Compounding these effects is that hierarchies often result in fractured autonomy – a separation between the decision for an action and its execution – that leads to morally deficient outcomes.Footnote ¹⁸⁴ As I summarise elsewhere:

The result of these and other organisational effects on individual morality and decision-making is that people are not simply ‘free’ to decide in firms. There are fundamental limits to the extent to which their decision-making can be optimised; it can certainly not be perfected.

It is worth examining the intellectual roots of this imagined individual perfectibility.Footnote ¹⁸⁶ It predates the liberal basis of economics and stems from earlier, Christian theological debates on free will.Footnote ¹⁸⁷ These debates have a significant influence on economics – as shown, for example, by scholarship on economic theologyFootnote ¹⁸⁸ – and challenge the popular view of this discipline as a secular science. While we will focus on economics, it should be recognised that other disciplines, such as law and political science, are also influenced by Christian theological ideas.

Especially relevant for us are Christian debates on theodicy, i.e. on how there can be evil and suffering in the world if God is good, just, and all-powerful.Footnote ¹⁸⁹ The problem may be cast as follows: If God is all-powerful, then He must be able to prevent evil and suffering. However, if evil and suffering still exist, then this suggests that He either wills them – casting doubt on His goodness – or is unable to prevent them – which calls into question His omnipotence, even if He remains good.

Nelson explains that the theodicy reflects a key dilemma in ethics, namely whether moral principles are made or discovered.Footnote ¹⁹⁰ If principles are made, then this maintains the sovereignty and power of God. It also means that might makes right and that whatever is good is simply God’s will. However, the omnipotence of God also implies that the world unfolds in a deterministic manner. This challenges the idea of individual moral responsibility since human actions are not their own but are determined by God.

If moral principles are discovered, then this imposes a limit on the sovereignty and power of God. Evil and suffering may be at least partially beyond His will. This creates conceptual space for God to be objectively good and for people to be morally responsible. It is this second approach to the theodicy that was ultimately adopted into liberalism and imported into economics. More specifically, it was presumed that God’s power is limited and that people have ‘free will’. The latter is a transcendental ability – beyond time, space, and God’s power – to make decisions without external influence.

Over time, the idea of free will was secularised and adopted into the liberal allegories so that freedom would become tantamount to being able to make decisions without external influence from society or the state. Significantly, it is free will which makes it feasible to imagine that individuals could lead a pre-social existence, and to imagine that they could exist in the state of nature without the presence of society and the state. Also relevant is that free will coheres with, and arguably paves the way for, the radical separation that enables the methodological individualism of economics.

You will not read it in an economics textbook, but it is in this transcendental realm of free will that the pre-social (economic) activities of individuals, firms, and markets are imagined to unfold. It is here that the economy ‘exists’, in a space that was invented to resolve issues of divine ethics. And it is here that we can situate the optimisation of individual decision-making in firms and the win–win solutions that are promised in discussions on corporate sustainability, governance, and regulation. Furthermore, it is the transcendental reasoning of this space, and its infinite scope, that paves the way for economic universalism and allows it to proliferate via the Nirvana fallacy. This reaffirms that the pursuit of free markets and economic efficiency is not a neutral imperative but an ideological commitment.

Building on the discussion in the previous paragraph, we can identify that optimisation of decision-making by firms is an attempt to realise, in idealised economic terms, the individual expression of free will. Put differently, economics uses the effective exercise of free will as a mechanism to achieve economic efficiency and maximise value creation. This dependence on free will explains why the discipline is fundamentally committed to free markets and why it cannot impartially assess other ways of thinking about markets that have been developed in other cultures.Footnote ¹⁹¹

If value creation relates, in economic terms, to the pursuit of maximum individual utility through the effective realisation of free will, then our analysis suggests that this is an unsustainable way to think about the activities of firms. As we have seen, the effective exercise of free will is contingent on radical separation, thus making it predisposed to erode the relationships that constitute human existence. This erosion invites us to think about the social role of firms in a way that overcomes the limits of economics, free will, utility, and the optimisation of individual decision-making. The rest of this section will take some exploratory steps towards this rethinking.

4.3 A Reflection on Economic Theories of Money

The mainstream view of money (Section 3.1) sees it as a scarce commodity with a special role to act as a medium of exchange for the trade of other goods and services. This commodity theory suggests that money was invented in a primitive barter economy in order to overcome the difficulty of bartering for exactly corresponding amounts. The theory is central to the orthodox view that money is scarce and needs to be generated through economic activities, and to the view that state revenues are dependent, via taxation, on this generated money.

A key issue with the commodity theory is that historians and anthropologists have been unable to find any examples of ‘primitive’ societies that rely on barter as an organising principle, or that later decided to introduce money to facilitate exchange.Footnote ²⁰² As Humphrey notes: “No example of a barter economy, pure and simple, has ever been described let alone the emergence from it of money; all available ethnography suggests that there has never been such a thing.”Footnote ²⁰³ Rather, research indicates that these societies are primarily governed by kinship, honour, patriarchal, or other principles that are not mainly commercial in nature.Footnote ²⁰⁴ The lack of historical support suggests that the commodity theory should be seen as a thought exercise, with the ‘primitive barter economy’ operating as an analogy for the state of nature. This analogical function is not coincidental; it ensures that the theory is coherent with pre-social reasoning.

The commodity theory is not only historically unsupported; it also seems unable to effectively describe how money operates in our societies.Footnote ²⁰⁵ For example, the Bank of England and Bundesbank explain that money is created as credit – not as a commodity – and that the ability of banks to lend out money has no relation to the extent of their reserves/deposits.Footnote ²⁰⁶ Furthermore, if it is correct that money is created through exchange, then where is this money supposed to come from? If I am buying bread, then neither I nor the baker have ‘made’ any money; it must have come from elsewhere.

An alternative explanation for money is provided by the view that it is created as a social convention by central authorities (the state). This convention view is consistent with historical and anthropological research. It is commonly known as chartalism, the state money theory, the credit theory of money, or modern money theory.Footnote ²⁰⁷ In general, this view holds that money was first introduced as a unit of account, i.e. as a governance tool to help with accounting and administration. It was only later, after an administrative framework based on the unit of account had been put into place, that money could be used as a medium of exchange.

The convention theory of money is controversial among economists and widely opposed by them.Footnote ²⁰⁸ In my view, this is because the theory presents an existential threat to their scientific practice. If the theory is correct, and the state has a constitutive role towards money, then it also has a constitutive role towards exchange more generally. This is fundamentally incompatible with pre-social reasoning, methodological individualism, and the pursuit of free markets. There is little that would remain intact, or could be salvaged, from mainstream economic theories if the convention theory of money would become dominant. Put simply, it seems that if the convention theory is right, then economics is wrong. These stakes make it interesting to examine the alternative history of money in some detail.

In general, the origins of money can be traced back to the accounting practices of Sumerian temples and palaces some 5,000 years ago in Ancient Mesopotamia.Footnote ²⁰⁹ This pre-dates the use of coins in Ancient Greece by more than 2,000 years.Footnote ²¹⁰ As background, Hudson explains that

It is in this context that Sumerian temples and Palaces

The designation of grain and silver as dual units of account, alongside the use of fixed exchange prices between these and other goods, was an important innovation. It allowed Sumerian administrators to integrate the resource flows of different items into a single summary. As Hudson outlines:

Incomes from harvest, trade, and other activities were often cyclical and subject to uncertainty. These fluctuations were smoothed over by extensions of credit from temples and palaces, given in the form of grain, textiles, silver, or other goods, and repaid with interest as an equivalent of grain and silver, in accordance with the bimonetary standard and centrally fixed prices.Footnote ²¹⁴

The historical record contradicts the mainstream view that money originated as a medium of exchange and commodity with intrinsic value. Instead, it shows that money was first introduced as a unit of account in order to facilitate governance and administration. Importantly, the acceptability of money as a unit of account, i.e. its popular rather than merely state administrative use, requires the diffusion of credit and liabilities throughout society.Footnote ²¹⁵ As Battilossi et al. summarise, money is

The diffusion of credit and liabilities by central authorities serves two, overlapping purposes. The first is to mobilise people and resources towards collective endeavours. The second is to operate, like sticks and carrots, so that people are encouraged to accept money. Sticks include the repayment of interest and debts towards the state such as taxes, fines, etc. Carrots include the option for people to purchase an attractive variety of items, for example from the temple or palace storage according to fixed prices.

This suggests that the primary role of taxation is not to generate monetary revenues for central authorities but to help animate currency so that it flows dynamically throughout society.Footnote ²¹⁷ This role includes supporting the integrity and stability of monetary dynamics, for example by encouraging the acceptability of money and ensuring the relative stability of prices (i.e. preventing too much inflation or deflation). This requires an appropriate, ‘Goldilocks’ level and distribution of taxation that is neither too heavy nor too light.

The administrative origins of money entail that money was introduced into society through the lending and spending activities of central authorities, i.e. in the form of state debt.Footnote ²¹⁸ Put differently, the credit of non-state actors (e.g. traders, households) depends on the prior creation of a corresponding liability on the accounting ledger of the state. It is only once this state debt enters into society, as money and via the diffusion of credit and liabilities, that it becomes possible and interesting for people to use it as a medium of exchange or a store of value.Footnote ²¹⁹ And it is only then that banks, with state tolerance and permission, can emerge, operate, and engage in fractional reserve banking.

Importantly, the size of state debt is constrained by the stability of monetary dynamics and not by the availability of money as a scarce resource.Footnote ²²⁰ In principle, the state can always issue further credits and liabilities so long as this does not lead to excessive inflation/deflation, cause people to lose faith in the currency, or otherwise harm its ability to financially animate and mobilise resources. Constraints on money creation include factors such as resource availability, population size, inflation, and inequality.

Kelton offers a useful distinction between states as currency issuers and the rest of society as currency users.Footnote ²²¹ Currency issuers cannot run out of money and can spend without having a budget surplus or borrowing money. By contrast, currency users are generally limited in their expenses by the amount on their bank accounts and whatever else they can borrow. Both currency issuers and users are subject to the stability of monetary dynamics.

The distinction highlights that it is wrong to draw a parallel between state finances and those of firms, households, or individuals. State budgets and lending are not limited like those of non-state actors, and state funding does not depend on the appropriation of money from other parties. Importantly, the distinction also shows that currency users cannot ‘make’ money; their exchanges are only able to redistribute money that has been created by currency issuers.

In terms of our overall analysis, this means that the social role of firms cannot be to make money or act as a revenue base for state taxation. This does not imply, however, that there is no need for firms to be financially viable or to pay taxes; money is essential for their continuity and taxation is necessary to sustain monetary dynamics. Instead, what this reveals is a divergence between the role of money from the viewpoint of currency issuers and users.

One way to understand this divergence is in terms of the distinction between value monism and value pluralism.Footnote ²²² Value monism is the viewpoint that there is one meta-value (power, money, honour, etc.) which transcends all personal and societal differences and can be used to discern, in all instances, between right and wrong choices. Such monism is evident in economics which, since the marginalist revolution, has been committed to the maximisation of individual utility and uses this as a meta-value to decide between more or less desirable, efficient outcomes.

Value pluralism, by contrast, is the idea that values may interact and overlap but are ultimately not reducible to one another.Footnote ²²³ A powerful example of this irreducibility is provided by Sen, who describes three children (Anna, Bob, and Carla) arguing over who should receive a flute.Footnote ²²⁴ Anna made the flute and argues that her labour entitles her to it. Bob is the only one who knows how to play the flute and contends that it should be his because he can make the best use of it. Carla has no toys and argues that fairness entails that she should receive it. Significantly, the claim of each child can be formulated independently, conflicts with the others, and can be legitimately defended.

Pluralism resists the premise that we can fold their claims into a single hierarchy and objectively decide between right and wrong outcomes and courses of action. It reflects the imperfect nature of scientific practice and the inability to develop a singular, perfect kind of reasoning to explain human existence. It recognises that decisions need to be made between conflicting, legitimate interests and that there are no universal, win–win–win solutions to complex problems such as climate change, biodiversity loss, and inequality. Since it does not aim for perfection, or claim that there is one ‘right’ way to do things, value pluralism is more flexible and able to respond creatively to sustainability issues. Moreover, it can adjust dynamically over time as new insights and issues arise. It pragmatically appreciates that people and societies can have different values, i.e. different conceptions of the desirable, in contrast to the timeless, transcendent reasoning of value monism.

Economic universalism is grounded in value monism and arises, importantly, as a projection from the use of money as a unit of account. As Graeber explains:

To use the terminology of philosophy of science, the use of money as a unit of account relies on the introduction of a fiction of commensurability.Footnote ²²⁶ It is this fiction that makes it possible, as Hudson showed, for accountants to condense information about non-identical items into a single summary. It also explains why money can be used to exchange things which are essentially different, such as goods, labour, information, and land.

In terms of the convention theory of money, we can say that prices exist because central authorities have created an administrative, one-dimensional monetary ruler that allows for the comparison and ranking of incommensurable things in terms of a relative numerical value. It is this ruler, alongside the dissemination of credit and liabilities, that enables the use of money as a governance tool to mobilise people and resources towards collective endeavours. One intractable feature of this tool is that it also, via the carrots it provides, mobilises people and resources towards ends that are personal rather than collective.Footnote ²²⁷ Another is that it promotes and rewards value monist reasoning, as reflected for example in the maximum pursuit of wealth and shareholder returns.

Returning to the distinction between currency issuers and users, we can suggest that the activities of currency users are influenced by the value monism that accompanies the use of money as a governance tool. To paraphrase, the use of money in society requires currency users to make financial decisions and think in terms of value monism; it has a direct impact on their reasoning.

The extent of this impact is likely to be strongest in societies where human survival and thriving are most dependent on access to financial resources (e.g. when people are poor and there are few social safety nets). It is also strong in the case of firms (and firm agents such as managers and employees) to the extent that their ongoing existence and activities are conditional on financial viability.

In general, we can see that using money introduces a constraint on people’s moral reasoning, both in firms and elsewhere. This supports our earlier argument that people are not, and cannot be, free and morally autonomous in the way that is presupposed by the pre-social foundation of economics.

Importantly, the moral constraint of money is not an argument against its use but a description of one of its intractable features. People are not morally perfect, and we cannot and should not try to make them so. Moreover, there are benefits to the use of money as a governance tool that can – and in my view do – justify the cost of moral impairment. The nuanced argument is then that this intractability needs to be recognised, included, and potentially compensated for in the design of social conventions.

Currency issuers are not similarly constrained by financial viability but are dependent on the stability of monetary dynamics. Their main concern is not how much money they have but how it flows through society. Their reasoning does not need to be influenced by value monism in the same way as currency users. Instead, they can administer monetary flows and pursue value pluralism using approaches that are unavailable to currency users.

In particular, this means that state policies can pursue social objectives, such as sustainability, without needing to generate financial returns, on condition that the overall stability of monetary dynamics is maintained. This makes it possible to mobilise people and resources for activities that do not have an inherent business case (e.g. education, defense, and ecology)Footnote ²²⁸ on condition that measures to stabilise monetary dynamics, such as Goldilocks taxation, are also applied. Crucially, this obviates the need to focus on state debt thresholds, or to use economic cost–benefit analysis to justify particular expenses.

The distinction between currency issuers and users presents a fundamental challenge to Adam Smith’s utopian view that the maximum, individual pursuit of self-interest will lead, in the aggregate, to the greatest wealth of nations. Smith’s argument assumes that money is a scarce commodityFootnote ²²⁹ and that optimal results can be obtained through trade liberalisation and the realisation of individual freedom. However, we have seen that money is a governance tool and that people are morally impaired, at a minimum due to the influence of money. And while it can make sense for people (as currency users) to pursue money, it does not similarly make sense from a social perspective since currency issuers do not need to make money. This divergence entails that the greatest wealth (i.e. prosperity) of nations cannot be achieved through the aggregate, maximum pursuit of self-interest. Free markets do not, by virtue of the invisible hand, lead to the greatest good for all.

For firms, this suggests that their financial viability does not need to be conditional on the competitive judgement of free markets and economic efficiency. Instead, the state has a legitimate role – through the careful design of social conventions – to ensure that socially desired firms and business models are supported in their financial viability. It can shape the sticks and carrots of money, i.e. the incentives of monetary flows, so that the mobilisation of goods and services is consistent with social values.

The shift is away from a direct focus on free markets, with the hope that realising individual freedom will provide win–win–win outcomes, towards a recognition that the existence of people, firms, states, and the environment is mutually constituted and needs to be dynamically tended, like a garden, in the direct and creative pursuit of socially desirable outcomes. It is then the social role of firms to enable people to engage in the organised provision of goods and services in ways that are consistent with social values.

This social role requires it to be rewarding for people to set up and work within firms in ways that are consistent with social values. This role cannot be fulfilled in isolation by firms; it requires cooperation with people and the state, and to consider their various intractabilities. This is not a call for complete state control but for creative and participatory state involvement that can address complex problems and goes beyond an impaired, appropriative relationship and the technocratic pursuit of economic efficiency.

4.4 Section Conclusion

Section 2 showed that there is no robust scientific evidence in favour of a distinction between society and the economy. It illustrated that people cannot be pre-social in the way that is needed to enable radical separation and the methodological individualism of economics. It subsequently argued that there is no way to adequately distinguish between an economy based on individual initiative and a society/state based on collective agreement. This distinction was revealed to be an item of faith – a creative expression of liberal ideas – and not a universal framework to understand human activity.

We also outlined that the pursuit of economic efficiency is predicated on making people act and decide as though they are pre-social. This aim cannot be realised in practice since people are not, and cannot be made, pre-social. We also identified that efforts to make people pre-social are determined to erode the relational nature of their existence. This revealed that the pursuit of free markets is a problematic objective; it is more likely to harm than benefit the long-term thriving of our species and environment.

In relation to value, we found that it is wrong for economics to rely on an implicit distinction between a generative economy and an appropriative state/society. The mutual constitution of people through relationships to other people, the state, and their environment makes it is incorrect to consider that only firms and individuals have a primary role in relation to value creation. Instead, it is more accurate to accept that these entities and relationships all contribute towards the satisfaction of human values.

The second section offered a critical reflection on economic theories of the firm. It argued against the view that firms emerged as economic, pre-social entities to minimise market imperfections. It also showed that the economic view of firms as tools to optimise and perfect individual decision-making is tautological and derives from Christian, theological debates on theodicy and free will. This led to the insight that economics uses the effective expression of individual, free will as a mechanism to achieve ideal, efficient results.

Importantly, the relational constitution of people means that the effective expression of free will can never be attained in practice. This means that economic attempts to pursue efficiency will never be complete, and that there will always be more market failures and opportunities to promote efficiency. The relational erosion that this generates is certain to create issues and invite the further application of economics.

This harmful, recursive economic loop has a corrupting effect on the efforts of corporate sustainability advocates to ensure that firms focus on long-term, sustainable value creation. It is inconsequential to ask whether value creation by firms should focus on fighting short-termism, solving human problems, or remaining within planetary boundaries. It also does not matter whether or how we define financial and non-financial value, or how we measure different kinds of human, natural, or other capital. These efforts cannot succeed in the effective governance of firms or achieving sustainability because their scientific foundation drives them to pursue a destructive, impossible economic utopia.

This false utopian pursuit reveals why many decades of effort to promote firm sustainability – through corporate social responsibility, ESG, corporate purpose, and stakeholder capitalism – are leading to suboptimal results even as global crises are escalating. It also explains why there is an impression of progress (more commitments, more reporting, more due diligence, etc.) even though there is only a tenuous link between these sustainability efforts and the issues they are intended to solve.

The unsustainability of economics invited us to rethink the social role of firms. We identified that free will is not only an ethical and theological notion but also a model of human cognition, and substituted it with an alternative, embedded model from cognitive psychology. The latter model recognises that peoples’ reasoning is constituted not only by idiosyncratic characteristics but also by relationships to other people and the world around them. This led to a fundamental shift in the focus of state activities; away from the realisation of individual freedom and towards a concern with human experience and constituting relationships.

An important insight was that it is not the infinite potential of freedom, but constraints on this infinite potential, which makes it possible for people to experience a true sense of agency. These constraints stem not only from social conventions – such as language and law – but also from intractable features of these conventions, of people themselves, of the state, and of the world around us.

We posited that the state, as the apex authority in society, has a unique responsibility for the design of social conventions in terms of their influence on human experience, resource use, environmental impact, etc. We also posited that firms are social conventions which enable people to engage in the organised provision of goods and services.

Section 3 critically examined the mainstream idea that money is a scarce commodity with a special role as a medium of exchange. It illustrates that this economic theory is contradicted by historical and anthropological research which indicates that money was introduced as a social convention, i.e. as a governance tool and unit of account to facilitate administration by central authorities. The alternative, convention theory of money explains that the use of money is enabled by the diffusion of credit and liabilities throughout society. This produces a monetary dynamic that mobilises people and resources through the use of financial incentives. Taxation plays an important and necessary role in safeguarding the integrity of this monetary dynamic; it is not primarily intended to generate revenues for the state.

An important insight from the convention theory is that money was first introduced as state debt and is not created as a scarce commodity by market actors. This gave rise to a distinction between currency issuers and currency users. It also led to the finding that exchange does not create money but can only redistribute it. We concluded from this insight that it cannot be the social role of firms to make money, as is presupposed in the idea that their role is to create value. To clarify, this does not mean that firms do not need to be financially viable, only that they do not themselves create the money that is needed for their viability.

Next, we explored how a values divergence arises from the distinction between currency issuers and currency users. In particular, we showed that the moral reasoning of currency users is impaired by the use of money as a governance tool. This impairment arises because the need to pay rent, buy food, etc. means that currency users must include the accumulation of money as one of their values (i.e. as one of their conceptions of the desirable). This requires and encourages them to think in terms of the value monism that is introduced by money as a fiction of commensurability.

This may be contrasted with the state which is a currency issuer, can create money, and does not need to accumulate it. It does not need to be beholden to value monism and can think pluralistically about the integrity of monetary dynamics and whether these dynamics mobilise people and resources in a way that is consistent with social values. This includes considering the broader social, environmental, and other effects of this mobilisation (e.g. advertising, health impacts, pollution, emissions), as well as the various intractabilities of our existence.

The capacity of the state to think in terms that transcend the value monism of money gives it a special, moral role that cannot be substituted for by the activities of market actors. This illustrates that states and firms have distinctive roles to fulfil that are legitimate and different. This challenges the common, ideological view that private actors have better incentives which make them inherently more effective than the state; the two are not the same, seeing one as inherently superior is like comparing apples and oranges.

The overall consequence of values divergence is that the invisible hand of supply and demand is unable to yield results that are in the social interest. Adam Smith was wrong, in this regard, to argue that the prosperity of nations is a function of market liberalisation and aggregate, individual optimisation. This optimisation fails to appreciate the relative roles of states and firms, and is unable to achieve the kinds of results that are available through competent state marketecture.

Overall, our analysis suggests that the state has more scope for creative policy and regulation than is currently permitted via the scientific foundation of economics. By extension, we also have more scope to experiment creatively with how to organise firms, support their activities, and ensure that their activities are consistent with social values. In particular, we can shape the incentives of monetary flows to ensure the viability of socially desired business models.

Furthermore, we can phase out firms that are heavily polluting and harmful towards the environment and human well-being. The key question is whether we can substitute or do without the goods and services of these firms, not whether we can do without their profitability or employment. After all, we do not need firms, such as tobacco companies, to make money or provide jobs.Footnote ²³⁰ Instead, it is possible to secure both healthy budgets and full, desirable employment through careful marketecture and the proper management of monetary dynamics.