Sustainable Development and the Market
‘Capitalism, as practiced, is a financially profitable, non-sustainable aberration in human development. What might be called ‘industrial capitalism’ does not fully conform to its own accounting principles. It liquidates its capital and calls it income. It neglects to assign any value to the largest stocks of capital it employs – the natural resources and living systems, as well as the social and cultural systems that are the basis of human capital.’
Hawken, Lovins and Lovins (1999), Natural Capitalism, Boston: Little Brown & Co, p.5
Profiting from natural capitalism
For many of you, this unit will be of particular interest. Having devoted two units to the theoretical foundations of the sustainable development concept, this is where we start to focus on the ‘competitive advantage’ part of ‘Sustainable Development and Competitive Advantage’.
By now, you should have figured out that the general thrust of ecological economics is such that the very notion of sustainable development is largely incompatible with mainstream neo-classical economics. This does not mean, however, that sustainable development is incompatible with capitalism. The market is a powerful and dynamic mechanism that, harnessed appropriately, can be the catalyst for change. The challenge is to produce incentive systems that induce a change in the behaviour of economic agents such that economic activity proceeds along ecologically sustainable lines. What this unit aims to demonstrate is that this kind of economic activity can be financially profitable as well as sustainable.
The main aim of this unit is to clearly delineate the role of the market in sustainable development, and the supporting role that might be played by a society’s institutions. As this Unit will reveal, too large a market domain is likely to be inconsistent with sustainable development, but one that is too small and subject to too much bureaucratic influence may be equally as undesirable. The key factor is the extent to which private sector businesses find synergy with their natural environment.
By the time you have completed this unit you should be able to:
- Outline the significance of the role played by the market and society’s institutions in facilitating the movement toward sustainable development
- Explain how businesses can benefit commercially from making the transition from ‘industrial capitalism’ to ‘natural capitalism’ and how the role of ‘price-influencing’ institutions may grow less important.
Activity: A new form of capitalism?
Before commencing with any detailed study of the material within this unit, you may wish to peruse two survey reports; one from the perspective of business published by McKinsey, and one from the viewpoint of the consumer produced by Fleishman-Hillard in partnership with the National Consumers League (NCL).
What are the implications for business of the data contained within these reports? Discuss your thoughts with classmates.
3.1: What is the appropriate domain of the market?
As Lawn (2001, p. 135) points out, there are two extreme positions with respect to the role and ambit of the market. There is a strongly economic determinist view whereby everything is reduced to ‘the level of intermediates and relativities’ in order to obtain a relative price – what Lawn refers to as the ‘economic imperialist’ position. This is in stark contrast to the ‘market minimalist’ position, which views the market with suspicion favouring, instead, extensive intervention on the part of institutions.
Lawn (2001, p.136) sums up the situation thus:
‘Clearly, when it comes to ascertaining an appropriate market domain, both the conventional free market and minimalist market positions must be rejected. Because the former overlooks important moral, distributional, and sustainability considerations, and the latter the potential problems caused by allocative inefficiencies, neither can be relied upon to bring about an optimal macroeconomic scale …Only an appreciation of the important role played by both the market and society’s institutions, as well as the need to find a correct balance between the two will lead to a market domain best able to facilitate the movement toward SD’.
Lawn then continues (2001, p. 137):
Because belief systems vary between different societies and cultures, what is considered an appropriate market domain will differ from one society to another. Some will rely very heavily on markets while others will opt for a greater reliance on institutional and other non-price arrangements. Of course, no society will have the ideal market domain even if some have a more appropriate domain than others … belief systems always contain some erroneous beliefs, images and objective values. Thus, to ensure a more appropriate market domain, a society will need to take particular note of the messages and signals that feed back through its institutional structures and arrangements, including the market itself. Provided they are interpreted correctly and acted upon properly, a society should be well placed to suitably modify the balance between price-influencing decisions and price-determined outcomes and to endow the market with a more appropriate set of price-determining parameters. In doing so, it should ensure the gradual evolution of a more appropriate market domain.
Activity: Market forces or government intervention?
Reflect upon the content of the two paragraphs quoted from Lawn (2001) in section 3.1 with respect to appropriate domain of the market.
In the context of the progress made toward sustainable development in your own country (or lack thereof), is the market domain too small or too large? Or is it about right?
3.2 The sustainable development journey
The position taken by Lawn (2001) on the appropriate domain of the market fits with his conception of sustainable development as it was delineated in Unit 1. Ultimately, the scale of intervention on the part of institutions will be a reflection of the political economy in the country concerned. More intervention may be necessary in some countries compared to others, and some countries may have more intervention than is absolutely necessary. An important influence on the political economy and a determinant of the extent of intervention will be the ‘maturity’ of the market in the country in question, in terms of its ability to deliver ecological economic efficiency.
Reference to the ‘maturity’ of the market in this context deserves further explanation. In essence, it is to do with the level of ecological consciousness. The more mature the market, the more likely it is that businesses within that market will have made (or will be in the process of making) the transition from industrial capitalism to natural capitalism. The businesses that characterise this kind of market will not behave in a reactionary manner when engaging with the natural environment. On the contrary, they will be proactively seeking competitive advantage by going beyond compliance with environmental regulations, and reaping the economic benefits that sustainable development can bring. Quite clearly, state intervention is these circumstances would be unjustified.
Activity: Case studies: companies and ecological consciousness
Take a look at the website entitled The Sustainable Development Journey, part of Business and Sustainable Development: A Global Guide (published by the International Institute for Sustainable Development (IISD) in conjunction with Global Responsibility). BSDglobal.com is arguably one of the best resources on the web on the topic of business and sustainable development. This particular link provides an excellent account of the transition from industrial capitalism to natural capitalism described above.
It is a useful exercise to think about businesses you know of, and to contemplate where they are on their sustainable development journey. Are they in compliance mode? Showing some signs of being proactive through environmental risk management? Or are they building a corporate strategy founded on the principles of sustainable development?
3.3 The business case against sustainable development
What the ‘sustainable development journey’ shows us is that a commitment to sustainable development makes a lot of sense from the supply-side in that it can reduce a firm’s costs of production. Indeed, Hawken, Lovins and Lovins (1999) includes many examples to support this argument.
However, those in the business community who are unsupportive of sustainable development are sceptical. Instead, they argue that it is an expensive exercise, and a luxury that firms cannot afford in a competitive environment (e.g. Henry Bosch in Australia, David Henderson in the UK, and Steve Hanke in the US). The best-known critic of all, perhaps, is Milton Friedman, whose 1970 article in the New York Times Magazine, The Social Responsibility of Business is to Increase its Profits, is still regularly cited today in mounting the business case against sustainable development.
One point worth noting, however, is that the focus of the critics tends to be on corporate social responsibility (CSR) rather than sustainable development. Those who do not understand what sustainable development is tend to use the two terms interchangeably, but while there is some overlap, CSR (at least as it has been traditionally defined) is primarily based upon philanthropy with some broad notion that this will be to a firm’s advantage over the long term. There is some merit in the view (as we shall see in Reading 3.2) but CSR is not as structurally robust a concept as sustainable development.
Professor David Henderson
‘Within businesses its [CSR’s] adoption will almost certainly bring higher costs, managers have to take account of new goals and concerns and involve themselves in new process of consultation with stakeholders.
New systems of accounting, monitoring, auditing and accounting are called for. And on top of this the adoption of more exacting self chosen environmental and social standards is liable to add to business costs, all the more so if — as is actually required by CSR — firms insist on observance of these standards by their partners, suppliers and contractors.
All these cost increases will impact on consumers.’ (ABC Radio, 2001)
Activity: David Henderson on CSR
Discuss the grounds for David Henderson’s opposition to CSR. Do you think being opposed to CSR is the same as being opposed to sustainable development?
3.4 The business case for sustainable development
The World Business Council for Sustainable Development (WBCSD) is a coalition of 150 international companies, drawn from more than 30 countries, dedicated to the promotion of sustainable development through economic prosperity, environmental protection and social equity.
Formed shortly before the 1992 United Nations Summit on Environment and Development in Rio de Janeiro, the mission of the WBCSD is ‘to provide leadership as a catalyst to change toward sustainable development, and to promote the role of eco-efficiency, innovation and corporate social responsibility’ (WBCSD 2001, p. 13). It has done as much as any organisation to promote the business case for sustainable development.
Activity: Reading 3.1
Refer now to Reading 3.1 by the WBCSD (2001).
This statement was produced in the lead up to the 2002 Johannesburg Summit, and provides a succinct and easy-to-absorb account of the business case for sustainable development. From your reading and general knowledge, which companies are ‘walking the talk’ and applying these principles? Share and discuss this information with classmates.
Activity: Reading 3.2
Now refer to Reading 3.2 that first appeared in The Economist (2001).
This article maps out the ‘sustainable development journey’ discussed earlier, but this time, the emphasis is on the demand side of the market place, and how consumers, through ‘voting with their wallets’ can put pressure on companies to change their behaviour.
Do you ‘vote with your wallet’? To what extent do you believe social media has a role to play in this regard? Share your views and opinions with your classmates.
3.5: Case studies
Ray Anderson, former CEO of Interface once stated that there is not a single business on earth that is truly sustainable, and it was his stated objective for Interface to be the first. At the time of his passing away in 2011, he was pretty close to it, but the company still draws power from the grid, and a large part of this power will have been generated from non-renewable resources. This remaining hurdle aside, the story of Interface is an interesting one, given that, historically, the company was the antithesis of sustainability.
Image source: harc.edu
Activity: Climbing Mount Sustainability
Listen to Ray Anderson speak on bigpicture.tv.
What, if anything, do you find most compelling about Anderson’s views and experiences? Share your thoughts with classmates, and discuss the wider applicability of the Interface business model.
Return to the Business and Sustainable Development: A Global Guide website.
Spend some time exploring the section on markets. Click on each of the links in the left hand frame entitled: the eco-entrepreneur, green consumers, eco-labelling and raising money. These pages, which include references to numerous case studies, will be of particular interest to those of you who are considering new ventures based on sustainable development.
Contribute to a discussion on this topic. Was there a case study that you found especially interesting at this website? Or are there any other green businesses you know of that you would like to refer your classmates to? What is it about the case you refer to that is particularly relevant to what you have learned about in the module so far?
The main objective of this unit was to focus on the role of the market and how it might assist a society to move toward sustainable development. Society’s institutions certainly have a role to play, particularly if markets are relatively immature in ecological economic terms. As the evidence in this unit has shown, businesses have much to be gain from finding synergy with their natural environment from the both the supply side and the demand side. This adds up to an abundance of opportunities for eco-entrepreneurs.
Price-influencing decisions; price-determined outcomes; natural capitalism; industrial capitalism; sustainable development journey; corporate social responsibility (CSR).
References and further reading
Lawn, Philip A. (2001), Toward Sustainable Development: An Ecological Economics Approach. Boca Raton: Lewis Publishers.
Hawken, Paul (1993), The Ecology of Commerce: A Declaration of Sustainability. New York: Harper Collins.