Part 1: ‘Out with the Old’
Businesses cannot become truly sustainable unless the system within which they operate is itself sustainable, and also supportive of the behaviours that enable sustainable business practice.
In this four-part feature, we investigate the limitations inherent within the current framework for capitalism, and explore what might be needed to promote a genuinely sustainable economy, the risks and opportunities for business, and how business leaders may contribute.
This first part considers the limitations of the old way, and the call for a new operating system.
With the collapse of communism and the disintegration of the old Soviet Union, just over twenty years ago, Global Capitalism had apparently triumphed. Economists point to declining growth rates, technological lag and general inefficiency of the Communist economic system, as the decisive factors in bringing the regime down.
An alternative argument suggests it was not so much an economic crisis that forced reform, as the drive for reform itself that created a political crisis. Whatever the reasons, the clash of ideologies appeared to be over, and Fukuyama declared, somewhat controversially, that this meant “the end of history”.
Since then western capitalism has, more or less, been the only-show-in-town; the best (or least worst) means of meeting our collective needs, for allocating scarce resources and distributing wealth. And yet its excesses are also blamed for their contribution to the global financial meltdown of 2007/8, which has led us into the longest and deepest global financial crisis in living memory.
Five years on, western capitalism is still creaking at the seams, suffering a crisis of liquidity, reliability and confidence – and is naturally undergoing a wise degree of introspection.
So what’s wrong with Capitalism 1.0? After all, it has delivered unprecedented growth and prosperity, hasn’t it?
Umair Haque, economist, author and blogger, points out in his excellent book The New Capitalist Manifesto, that true growth in the developed economies reached a negative inflection point decades ago, and has been steadily slowing for half a century. Perhaps we haven’t been doing quite as well as we thought?
David Korten, US economist, author and former Harvard professor, also shows us that any perceived growth has also been more of an illusion – what he calls unsustainable phantom wealth – based on financial bubbles, abuse of power by banks to create credit (money) from nothing, corporate asset stripping, baseless credit ratings, and creative accounting.
In his thought-provoking book, Agenda for a New Economy, Korten puts forward a very persuasive argument: that the real size of the economy should exclude the illusory growth fuelled by financial services – where money is written into existence, and moved around between parties without creating true value, handsome fees are taken, and where ultimately the debt pyramid collapses when borrowers can no longer find the means (within the real economy) to pay.
And that’s where the bailouts come in – to fill the void, that shouldn’t have been allowed to happen in the first place.
At this point, as many economic commentators point out, we then struggle with a huge market correction, or great contraction. The level of perceived growth just wasn’t real.
Korten goes further to show us that even with our economic growth, more limited in size than we perhaps realised, that also the trickle-down-effect has been just that – with prosperity reaching only a privileged few, and a decline in real income for the majority. From 1980 to 2005, the highest earning 1% of the US population increased its share of taxable income from 9% to 19%, with most of the gain going to the top one-tenth of that 1%.
The picture in the UK is worse still, with the fastest growing gap between rich and poor in the developed world. The system is designed to concentrate wealth.
But at least the shareholders have done well. Roger Martin, author of Fixing the Game, and Dean of Toronto’s Rotman School of Management, draws on the evidence to paint a very different picture – shareholder returns have actually been lower in the era of shareholder capitalism, than in the post-war decades when managers were accused of feathering their own nests.
Whichever way one looks, we have failed to create shared prosperity.
And we’ve not even considered the environment yet, although we must. As Jonathon Porritt and George Monbiot both remind us some of the most widely recognised causes of the crash in capital markets are also the principal, underlying causes of the environmental crisis we now face. Haque also creates an important linkage, with the idea of ‘dumb growth‘ – where the global poor subsidise the rich, in order to fuel over-consumption, while the natural world, communities and society are marginalised.
We clearly have to be mindful of the physical, as well as economic limits to growth, and the capacity of our planet to support our lifestyles. According to WWF, we are already using around 1.5 planets to maintain our current consumption patterns. Our combined ecological footprint – the demand people place on the natural world – has more than tripled since 1961. In the west, the picture is worse still; we are already living a three-planet lifestyle. Collectively, we will need two planets by 2030 – less than 18 years away.
And why are we chasing growth anyway? I love the Tim Jackson quote here, which simply highlights the madness of our current paradigm at a personal level: ”People are being persuaded to spend money we don’t have, on things we don’t need, to create impressions that won’t last, on people we don’t care about.” We are persuaded that growth is good, and without this we cannot be happy – our long-term national mood is not necessarily driven by the delights of short-term sporting events, but by the continued hope and expectation of good news concerning GDP and stock market performance.
And as we have already discovered, the macro level driver for growth is to avoid the catastrophic reality that our debt-based system of capitalism relies purely on continued economic expansion, otherwise it collapses.
So the current form of capitalism is found wanting on all there counts of performance – in terms of the benefits to our society, environment and our economies. The call for change is loud – from both within and outside the business world.
It is heartening to hear business leaders calling for a new economy; one that’s built around triple-bottom-line principles, including shared prosperity and environmental stewardship.
So what are the alternatives? How do we overcome the serious design faults now painfully exposed, in order to meet the rigorous challenges of our time, and enable business to survive and prosper in the 21st century, while ensuring we leave a positive economic, social and environmental legacy for the next generation?
There is some nostalgic debate on whether communism could make a come back. This might not be desirable, or even likely in the West, although it is somewhat ironic that global capitalism depends today on the existence of a Chinese Communist party that gives de-localised capitalist enterprises cheap labour to lower prices and deprive workers of the rights of self-organisation.
Of course, there is also the Chinese version of state capitalism, although this model still largely exhibits the same issues that the western model has, even if it is allows a longer-term perspective, and ideologically is unlikely to appeal to those with a disposition towards free markets.
The more likely scenario is for a modification of the current model – although views seem spread across a continuum of incremental versus more radical ideas. Jonathon Porritt articulates this scene quite nicely: “It’s pretty clear that this software package is not delivering what we need.
“For Occupy and other radical campaigners, the solution is obvious: ditch it in its entirety, and replace it with a new operating system, free of any corrupt baggage.
“For the all-or-nothing ideologues of contemporary capitalism, it’s equally simple: the software is basically sound – it just needs a bit of fine-tuning. For everyone else, repelled by both extremes, there are a variety of ‘optimising’ strategies, of a more or less radical persuasion.”
At this point Klaus Schwab, founder and executive chairman of the World Economic Forum, draws a useful distinction between the ideology of a social market economy, based on individual responsibility on the one hand, and the term capitalism on the other – being a component of an economic system that relates to the capital market. Schwab framed the debate at Davos this year, such that it was “not the end of capitalism as an ideology, but the issue of how capitalism’s technical components – which have come off the rails – can be reformed”. One up for the incrementalists.
In his excellent book Capitalism as if the Planet Matters, Jonathon Porritt takes a pragmatic view that capitalism is “now the only economic game in town“ and that all sides must find ways of making free markets deliver a more sustainable future, pretty quickly, otherwise the pressures will overwhelm our economies.
He rightly generates a sense of urgency. More recently Porritt has also called for co-operative capitalism – where we strive together to create a more sustainable economy.
To coincide with the Rio+20 Earth Summit, HRH Prince of Wales called for a “new economic framework that puts nature’s own ingenious economy and social well-being at the heart of our thinking”. In short, a call for Capitalism 2.0 – a vastly upgraded operating system.
This also builds on Al Gore’s definition of Sustainable Capitalism; a model that seeks to maximise long-term economic value by reforming markets to address real needs, while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.
Meanwhile, John Elkington calls call for breakthrough capitalism, a more radical approach that promotes: integrated company reporting; an end to quarterly earnings guidance; the redesign of incentive/reward structures to encourage longer-term behaviours; new forms of loyalty share and ownership structures; and a new focus on stranded assets, focusing investor attention on the current and potential future impacts of emerging natural resource and environmental factors.
Some inspirational statements and thinking going on; there is definitely something in the air.
But, what are the specific impacts for business? What will the business landscape look like going forward? What are the opportunities, risks, and challenges? What can business leaders do? And how will all of this change come about?
This article was originally published on the 2degrees network
2degrees is the world’s leading business community for driving growth, efficiency and profit through sustainability. More than just a technology platform, news site or network, 2degrees is a managed service for businesses and professionals: the most knowledgeable and active sustainable business community anywhere.
Michael Townsend is the Founder and CEO of Earthshine Solutions. He is passionate about promoting the benefits of sustainable business, and author of The Rough Guide to Sustainable Business (forthcoming). Michael is an engineering graduate and MBA: a business transformation leader with over twenty-five years experience in a range of sectors. Michael has developed “best in class” performance for a range of organisations, including Norwich Union (Aviva) Insurance, BAA, British Airways, Mace, The Home Office and Gazeley, amongst others.