Living Capital Metrics

Irving Fisher is one of several economists who are together largely responsible for our common assumption today that markets consist of the aggregate of all of our individual private trades and exchanges, which, taken altogether, set prices (Boumans, 2001). Rasch's separability theorem may be indebted in some as yet unknown way to I. Fisher's separation theorem, since the latter was a close colleague of Ragnar Frisch, one of Rasch's teachers and a winner of the Nobel Prize in Economics. In addition, both I. Fisher and Frisch were involved in the founding of the Cowles Commission, where Rasch was a scholar in residence in 1947, in Chicago. At the very least, one might expect that the force of Frisch's reaction to Rasch's "disappearing parameter" (Andrich, 1997; Wright, 1980) might have been less vigorous if he had not already been exposed to the idea in I. Fisher's work.

One interpretation of the widespread successful application of Rasch's models could be that the market principle does in fact function in the economies of a wide variety of other forms of capital, such as human, social, and natural (W. Fisher, 2002), contrary to the esteemed opinions of others unfamiliar with these applications (Arrow, 1963). As the long-term profitability of socially responsible investing and environmentally sustainable management practices becomes increasingly apparent (see recent issue of Business Week, the Economist, and others for more information), so also will the need to expand local economies of scale-dependent metrics to regional and global economies of invariant reference-standard metrics.

As De Soto (2000) shows, the mystery as to why capitalism works in some countries and not others has a great deal to do with the existence of legal and financial infrastructures that universally recognize and accept certain instruments, currencies, and other forms of transferable representations (titles, deeds, etc.) as valid conveyances of value. Trillions of US dollars of value lie unusable and dead globally within various national economic systems lacking the appropriate infrastructure, though this is changing as the World Bank, governments, and non-governmental organizations mount programs for building the needed institutions and processes.

Manufactured and liquid capital, and property, have successfully been brought to life in Western economies, but human, social, and natural capital remain dead, or as yet unborn, tied as they are virtually everywhere to nontransferable representations-scales with values that change depending on local particulars.

Because of the inexorable force of economic globalization, the day is inevitably approaching when measures built from Rasch models will be incorporated in the definitions of every kind of fungible human, social, and natural capital metric. In much the same way that price and value information have been used for centuries, these living capital metrics will be used by consumers to make purchasing decisions, by investors to make financing decisions, by executives to make resource allocation decisions, by managers to make quality improvement decisions, and by accountants to make earnings and profit statements.

To appreciate the scale of these applications, consider the fact that some estimates of today's currently existing human, social, and natural capital resources put their value at 99% or more of the global economy. Though there may be something humorous about assigning monetary value to the air and water purification services essential to life, the value of the ongoing services provided by natural capital alone every year is estimated to be about equal to the annual gross world product (Hawken, Lovins, & Lovins, 1999, p. 5). If the value produced by natural capital were interest paid on invested assets at the rate of 10% annually, the world's natural capital resource stock would then have a value ten times the value of the annual gross world product.

Similarly, the World Bank estimates the sum value of global human capital to be three times more than the existing capital values included in standard accounting balance sheets (Hawken, Lovins, & Lovins, 1999, p. 5). The bottom line is that the current state of capitalism is so incomplete that its accounting methods are dealing with only a tiny fraction of the actual value of the available resources, and almost all of that is in the form of manufactured and financial capital and property.

And all of this comes to bear as many sectors of the economy are struggling to find new untapped sources of inefficiency that could be mined for profits. Given the seemingly endless inflationary spirals in the economies of education, health care, and social services, being able to grow living human, social, and natural capital in socially responsible ways will likely open up huge new markets with potentials defined less by short-term profiteering than by long-term sustainability.

When this happens, research and technologies that respond to the demand for what Irving Fisher called numerical indexes conforming with his separation theorem, or what Rasch called measures conforming with his separability theorem, will be in the mainstream of research in the human sciences, instead of at the periphery, where they are today. The shift from today's scales defined from within the positivist statistical paradigm of descriptive models to those defined from within a post-positivist measurement paradigm of prescriptive models will reach its tipping point when investors, accountants, managers, and consumers all take for granted metrics capable of functioning as common currencies for the exchange of human, social, and natural capital.

If history is any guide (Latour, 2005; Rabkin, 1992), this shift will not take place as a result of academic exercises in theory or research. Instead, it will take place only as a result of the accumulated production of actual value, when the repeated utility of separable parameters in the measurement of living capital really facilitates improved quality of life and enhanced accountability. And when these kinds of desired values are reliably reproducible, then, and only then, will there be a decisive shift in the laboratory values that are incorporated into research designs (Daston, 1992; Hunt, 1994; Schaffer, 1992) and in the review criteria applied to publications and funding awards.

The key factor lies in making any given unit of measurement seem natural, as a property of the thing itself, instead of as an artifact of a particular methodology, person, organization, or nationality. And nothing, absolutely nothing, can exert as much power in this regard as a standards laboratory (Latour, 1987, pp. 247-57; Schaffer, 1992). Metrologically equating all brands or configurations of instruments that actually measure the same thing so that they do so in the same unit has historically been the means by which our conception and perception of the naturalness of nature has been socially constructed.

We now have the means for reproducing in the social sciences the successes of the natural sciences in this regard (Fisher, 2000). History can provide another lesson concerning the consequences of efficient capital measurement. Europe rose to global power between 1250 and 1600 by unifying mathematics and measurement in a quantitative model of the world. Because of this model, Europeans "were able to organize large collections of people and capital and to exploit physical reality for useful knowledge and for power more efficiently than any other people of the time" (Crosby, 1997, p. x). In the coming age, the dominant power in the world will be the one that learns to organize human, social, and natural capital more effectively and efficiently than others. Whether this will be done in a manner that respects human rights and democratic principles remains to be seen, but it will be done, in any case.

William P. Fisher, Jr.

References

Andrich, D. (1997). Georg Rasch in his own words [excerpt from a 1979 interview]. Rasch Measurement Transactions, 11(1), 542-3.

www.rasch.org/rmt/rmt111d.htm

Arrow, K. J. (1963). Uncertainty and the welfare economics of medical care. American Economic Review, 53, 941-73.

Boumans, M. (2001). Fisher's instrumental approach to index numbers. In M. S. Morgan & J. Klein (Eds.), The age of economic measurement (pp. 313-44). Durham, North Carolina: Duke University Press.

Crosby, A. W. (1997). The measure of reality: Quantification and Western society, 1250-1600. Cambridge: Cambridge University Press.

Daston, L. (1992). Baconian facts, academic civility, and the prehistory of objectivity. Annals of Scholarship, 8, 337-363. (Rpt. in L. Daston, (Ed.). (1994). Rethinking objectivity (pp. 37-64). Durham, North Carolina: Duke University Press.)

De Soto, H. (2000). The mystery of capital: Why capitalism triumphs in the West and fails everywhere else. New York: Basic Books.

Fisher, W. P., Jr. (2000). Objectivity in psychosocial measurement: What, why, how. Journal of Outcome Measurement, 4(2), 527-563.

Fisher, W. P., Jr. (2002, Spring). "The Mystery of Capital" and the human sciences. Rasch Measurement Transactions, 15(4), 854

www.rasch.org/rmt/rmt154j.htm

Hawken, P., Lovins, A., & Lovins, H. L. (1999). Natural capitalism: Creating the next industrial revolution. New York: Little, Brown, and Co.

Hunt, B. J. (1994). The ohm is where the art is: British telegraph engineers and the development of electrical standards. In A. van Helden, & T. L. Hankins (Eds.), Instruments [Special issue]. Osiris: A Research Journal Devoted to the History of Science and Its Cultural Influences, 9, 48-63. Chicago, Illinois: University of Chicago Press.

Latour, B. (1987). Science in action: How to follow scientists and engineers through society. New York: Cambridge University Press.

Latour, B. (2005). Reassembling the social: An introduction to actor-network-theory. Clarendon Lectures in Management Studies. Oxford, England: Oxford University Press.

Rabkin, Y. M. (1992). Rediscovering the instrument: Research, industry, and education. In R. Bud & S. E. Cozzens (Eds.), Invisible connections: Instruments, institutions, and science (pp. 57-82). Bellingham, Washington: SPIE Optical Engineering Press.

Schaffer, S. (1992). Late Victorian metrology and its instrumentation: A manufactory of Ohms. In R. Bud & S. E. Cozzens (Eds.), Invisible connections: Instruments, institutions, and science (pp. 23-56). Bellingham, WA: SPIE Optical Engineering Press.

Wright, B. D. (1980). Foreword, Afterword. In Probabilistic models for some intelligence and attainment tests, by Georg Rasch (pp. ix-xix, 185-199.

www.rasch.org/memo63.htm


Living Capital Metrics. William P. Fisher, Jr. … Rasch Measurement Transactions, 2007, 21:1 p. 1092-1093



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