We can find different types of economies in almost every society. A private business economy; a public purpose economy (governments and their agencies, as well as not-for-profit and international institutions acting for some broader good than their own profit or enrichment – though they may differ widely in their definitions of what is “good”); and a core economy where households and communities carry on their internal activities of production, distribution and consumption. The core economy’s justification and purpose is the survival and well-being of its members. It is located in home, family, and neighborhood; places that function as markets for emotional, social, and civic transactions.
Dangerous imbalance among the three human economies
There are many ways of describing what is wrong with our society today. One view is that the private business economy is dominating the other two economies to excess, and in unhealthy ways. The simplest, single way to describe why this is bad is to note the effects of corporate management pursuing short-term profit regardless of the cost to society, now and in the future.
Problems for society exist not only in the relations among the three economies, but also within the private business economy itself. These include concentration of power and resources, and destructive and demoralizing relations between owners of capital on the one hand, and workers and communities on the other. More broadly, there are powerful business actors that, significantly more than actors in either of the other economies, are creating massive, global externalities that seem likely to be destructive of human civilizations, human wellbeing, and ecological stability.
Concentration of market power in firms is a problem that has a well-known textbook solution: Governments should regulate industries to preserve the competitive character of markets, in order to maximize efficient use of resources and minimize costs to consumers. In cases where economies of scale make it inefficient to have more than one or a few firms in a given industry, then the monopolistic or oligopolistic firms must either be owned and managed by government, as representative of the people and their welfare, or else strictly regulated so that they serve the public good without extracting excessive profits.
Comparing the textbook solution to today’s reality is laughable; over recent decades government bodies designed to regulate industry had been defunded, stripped of power by changes in policies, and increasingly peopled by individuals who openly represent the interests of the industries they are supposed to regulate.
There is not, by contrast, a standard textbook solution to destructive relations between corporations and their employees or neighbors. These malign relations include norms of compensation such as the grotesque differential between compensation paid to workers and that received by CEOs. They also include norms of decision-making about layoffs as well as plant locations and closings entirely based on calculations of profit, without consideration for human impact. These issues are not covered in standard economic discourse (as exemplified by mainstream “neoclassical” textbooks), since they are outside of the assumptions of competition, which is supposed to result in “fair” compensation. More broadly, neoclassical economics has depicted the market economy as a freestanding entity, neither affecting nor affected by its social or its physical environments.
Some types of corporate malfeasance occur where major harms are created in the course of the production process. Examples include manufacturing systems where competitive pressure in the absence of offsetting norms or regulations result in terrible abuses of workers; or various extractive industries (e.g., mining, and other competing uses for land) where an industry (often with the backing of foreign money and power) takes control of land and resources through violent means. There are other cases where the main harm is caused by the product itself; for example, the financial industry, which created complex financial products that were a major cause of the crash of 2008. This example is of special interest, because such a large proportion of global financial capital is tied up in the financial system, where it is often not producing any real goods or services, but is simply enriching a small group of individuals, contributing to growing wealth inequality around the world.
These bare descriptors – unproductive uses of capital, and growing inequality – point to a host of deep social ills related to incentives and value systems in the private business economy that promote anti-social, anti-future behavior.
The global externalities created by the private business economy may be called meta-externalities, insofar as they emanate from – and ultimately affect – the whole system as well as individual actors in it. Meta-externalities are unwanted side effects of the whole economic system on its physical and social contexts – side-effects in which the economic culture fouls its own nest, if the “nest” is understood broadly as all the contexts in which we humans live. They include the social ills of inequality and anti-social behavior, as well as the environmental disasters of global climate change; depletion of stocks of fish, forests and other biota; depletion and/or degradation of fertile soil and clean water; and the toxins and non-biocompatible wastes that are building up in huge quantities throughout all the Earth’s ecosystems.
Consider the incentive structure for a producer of oil or gas. Their short-term interest is obvious: at any time, they will maximize profits by putting off the transition to a time when less of their products are used, overall, due to increased efficiency and conservation – that is, by putting off the transition to the post-carbon world of solar, wind, tidal, hydro and geothermal energy. In the meta-context, the longer the world relies on carbon fuels, the worse will be the effects of climate change. We no longer need to stretch our imaginations very far to look ahead to environmental refugees, hunger, poverty, sickness, and war. These things are seriously bad for business. Almost all business, that is; there’s always someone who can make a killing from disaster.
Considerations of this sort are the crux of the shareholder engagement activities I have been involved in, with many others, over recent decades: trying to persuade the directors of oil companies, in particular, that they are so seriously fouling their own nest – the world – that they will suffer not only losses but serious retribution. The requirement that is emerging from macro disasters, like global recession or climate change, is the need for investors to think systemically about how business in general is affecting the world of the future. Unfortunately, such shareholder activism has had minimal impact on most of the targeted companies. While public opinion in general is beginning to connect the dots between corporate selfishness and social/ecological problems, still in the short term, while the music is playing the CEOs continue to dance, arrayed in their huge profits.
Of course, not only the private business economy and private actors are implicated in the terrifying meta-externalities of the 21st century. While the private business economy is the basic source of these meta-externalities, consumer behavior in the core economy has carried out much of the private business agenda, while corruption in government has failed to block it.
It is normally in the core economy that human values, such as concern for others, and for the future, as well as biophilia (as described by E. O. Wilson), are developed. Unfortunately there is a feedback loop between private business and the core, wherein the formation of values is strongly affected by the omnipresence of commercial images of what to admire (the richest person, the most extravagant life-style) and what to strive for (material possessions, and status that is closely tied to ownership of things). The replacement of thrift with conspicuous consumption, and of concern for integrity with concern for winning, are examples, in the cultural context, of meta-externalities that emanate from the economic system we now have.
From a sales point of view, the short-term self-interest of business is served by a consumer-oriented culture of instant gratification and simplified thinking that urges material purchase as the answer to any discomfort. Sales are increased through advertising that promotes selfishness, short-term thinking, cynicism, and impatience with complexity. Responsibility is not high among the values that look cool and appealing in modern advertisements; but productive enterprises need a workforce that can defer gratification, think creatively, and be honest and responsible. This is the cultural nest that is being fouled by businesses that ignores the fact that consumers and workers are mostly the same people.
The public purpose economy has also been corroded by private business dominance. Standard economic doctrine says that governments and non-profit organizations act like players in the private business economy – for example trying to base all decisions on monetary cost/benefit calculations, requiring an attempt to quantify unquantifiable inputs and outcomes. At the same time, the ability of governments, in particular, to fight back against corporate overreach has been severely reduced by loss of funding and popular respect, as social goods and services are increasingly farmed out to for-profit corporations.
For much of history, humans lacked the power to overstep nature’s limits; in those instances where, for example, destruction of soil fertility doomed farming systems, those civilizations simply disappeared, leaving no obvious record of what had gone wrong. Over recent decades, however, as even establishment groups have joined a virtually unanimous scientific community in warning that global climate change is likely to be the worst environmental crisis ever faced by humanity (e.g., the 2006 Stern Review on the Economics of Climate Change), ignorance can no longer explain the failure to take appropriate action. Just as the tobacco companies successfully fought for 30 years to hide the health effect of their products, the fossil fuel companies have known since the 1970s about the disastrous climate consequences of continued use of their products; yet over several decades they mounted a successful campaign to confuse the public about this subject. Other examples abound, of corporations continuing to market products whose overall effects are far harmful than beneficial. Many sugary food additives, agricultural chemicals, and chemicals designed for other uses, fall into this category.
A possible future
We face disasters on every front—political, environmental, social—but, as was long ago remarked, nothing so concentrates the mind as the prospect of hanging. The public purpose economy is staggering under the need for reform in education and politics, while the core economy is suffering from the lack of decent, secure jobs in a market economy whose inequalities belittle all but the very few who can think of themselves as the winners. But the gathering tide of despair seems to be morphing into activism. The time may have come to be, if not exactly cheerful, at least grimly determined, knowing that you are in good company. If we, individually and together—economists, as well as parents, women in general, and all people who care about the future—recognize the deformation of the private business economy as a central piece of dangers facing us, we will be better able to know where to direct our actions.
And of course, if the three human economies can’t reorganize themselves to respect limits, then the outcome will be decided by the economy of nature. One way or another—by design or by disaster—there will be dramatic shifts in the coming decades in the relationship between the human economies—especially that of private business—and the natural world. Changes in patterns of production, consumption, and the use of energy and natural resources will either be adopted by plan or be forced upon us.
Let us, then, imagine ourselves at a time where the major elements of the transition to a post-carbon economy have taken place, along with significant institutional experimentation and reform, and we have settled into a less turbulent period. What might it be like?
If corporations have not managed to redesign themselves toward the promotion of human well-being, then the corporate form will have been replaced with other modes of production: co-operatives, local trusts, various not-for-profit organizations, and with other forms that are designed, from the start, to recognize externalities and to serve public well-being, while also earning enough income to survive. Paven Sukhdev, in his book Corporation 2020, cites as examples of a better corporate form the Tata Corporation in India, Banco Santander in Brazil, and, the early Ford Motor Company in the U.S. A number of non-profits are coming from the other direction towards such a possibility, as they find ways to support their essential mission through earned income, while keeping income-generation secondary to the mission. (Not all have succeeded in maintaining these priorities.) A strong revulsion over the degenerate form of a now decaying civilization could result in the creation of clean governments that have not been captured by corporate interests but are devoted to the good of the people. A renewed and reinvigorated public purpose sector could seriously address inequality and global as well as local poverty.
The great realization, which could in the present time become a groundswell of hope and cooperative activity, is that, badly as we humans have treated the planet, all is not lost. Efforts at ecological restoration working effectively here and there—in forests in Brazil and Finland, in farms in the U.S. and South Africa, in botanical gardens and nature reserves in Hong Kong and Canada—are showing that nature responds positively to intelligent efforts at restoring ecological quality. Many such efforts include the ability to store atmospheric carbon in soils, plants and water—providing a significant boost for efforts to keep the warming of the planet within less-than-cataclysmic bounds.
Ecological repair activities are sometimes based, at whatever remove, on modern science, and sometimes on older knowledge, often that held by indigenous peoples. There is a growing move towards global expansion and sharing of all knowledge about what works to rebuild the health of soils, waters, forests, and even the ecosystems coincident with cities. Not all that has been lost can be regained, but almost everywhere it is possible to recover some degree of ecosystem functionality and resilience.
This is a hope for the future that will necessarily engage all three economies working together. Governments will need to create supportive regulatory environments. As it becomes increasingly clear how much money can be saved, and earned, by restoring the natural capital on which humans and other species depend, actors in the private business as well as the public purpose economies will be motivated to invest in ecological repair. As the evidence grows for the strong positive linkages between human health and well-being on the one hand, and healthy ecosystems on the other, individuals, families and communities in the core sector will take pleasure in participating in local restoration activities.
As new and rediscovered knowledge makes ecological remediation, regeneration, and restoration increasingly possible, such work is arising as the most positive opportunity for reversing some of the negative trends of the modern era. It seems not unreasonable to hope that, as all human economies move together to work on recovering the balance of human and natural economies, the three human economies will also find opportunities and means to redress the balance among them, reducing the now-overwhelming pull of the profit motive, and better aligning them all toward human well-being and ecological health.
Co-Director Global Development and Environment Institute, Tufts University, MA, USA
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