Week 8 (Blog)

An issue to sink my teeth into... Much of this really sounds like nothing is being said. It's the same argument, we need to take externalities into consideration, the polluter's should pay so that the people can make better decisions (based on price instead of relying on each person knowing what the externalities are and relying on them to make a decision) and so that the world will be cleaner... But, hold on, we don't know what these things are worth... So now who do we value these things so that we can price them... This is a circle that has no end. At least the Chinese are doing SOMETHING while we sit around and scratch ourselves. The value of ecological services would be too tremendous to add up - we are not the only being who use these services, every living thing on the planet requires clean air, clean water, habitat, etc. and to value these things means its value not only to us, but to the life cycle as a whole. Humans are so arrogant to think that this is something they can measure. There is only ONE planet that we can live on. There is only ONE place we have to survive. We are destroying it. We need to stop. There is only a forward, there is no backward. Instead of talking, we should act. Act in small ways, act in ways to change our societies and our lives. Many people die in the US over worked and under socialized - we are going toward the wrong goal - this is the fast train to the wrong station. Wake up and smell the fair trade, something needs to be done. Something serious and something immediate and something radical. People and corporations fight policies designed to make us better off because they are afraid they will lose their business - lose their money - lose their place in society. People bitch about how low minimum wage is, about not wanting to raise minimum wage, but we put "famous people" up on pedistals and they get paid MILLIONS of DOLLARS for many of the things that they do and we say, "aren't they great?" Is that rational?!? We value someone who can write a TV show that makes the rest of the world insecure and belittled... And this makes sense? We have 12 year olds having sex, 8 year olds with eating disorders, news that showcases on the depressing side of humanity because that is what sells? We are sick and depraved and I am way off topic, but it was a nice rant and I feel relevant to the whole idea of our socioeconomic system.

Scott, I have a question about part of the post (green italic farther down) and I would appreciate it mightily if you would post a comment and shed a little light on it. Thank you.

Capitalism and Sustainability

Al Gore and David Blood discuss capitalism and sustainability and argue that sustainable economic development requires mechanisms to ensure that businesses fully internalize the social and economic costs they bring about. One mechanism to force businesses to internalize costs is government policy, but an emerging factor is consumer preferences for sustainable business practices:

For People and Planet, by Al Gore and David Blood, Commentary, WSJ: Capitalism and sustainability are deeply and increasingly interrelated. After all, our economic activity is based on the use of natural and human resources. Not until we more broadly "price in" the external costs of investment decisions across all sectors will we have a sustainable economy and society. ... Our current system for accounting was principally established in the 1930s by Lord Keynes and the creation of "national accounts" ...

While this system was precise in its ability to account for capital goods, it was imprecise in its ability to account for natural and human resources because it assumed them to be limitless. This, in part, explains why our current model of economic development is hard-wired to externalize ... costs...

Externalities are costs created by industry but paid for by society. For example, pollution is an externality which is sometimes taxed by government in order to make the entity responsible "internalize" the full costs of production. Over the past century, companies have been rewarded financially for maximizing externalities in order to minimize costs.

Today, the global context for business is clearly changing. ... and we think ... financial markets have a significant opportunity to chart the way forward. ... The interests of shareholders, over time, will be best served by companies that maximize their financial performance by strategically managing their economic, social, environmental and ethical performance. This is increasingly true as we confront the limits of our ecological system ... The "polluter pays" principle is just one example of how companies can be held accountable for the full costs of doing business. Now, more than ever, factors beyond the scope of Keynes's national accounts are directly affecting a company's ability to generate revenues, manage risks, and sustain competitive advantage. There are many examples of the growing acceptance of this view.

In the corporate sector, companies like General Electric are designing products to enable their clients to compete in a carbon-constrained world. ... Whole Foods and others are addressing the demand for quality food by sourcing local and organic produce. Importantly, the business response is about making money for shareholders, not altruism.

In the nongovernmental sector, organizations such as World Resources Institute, Transparency International, the Coalition for Environmentally Responsible Economies (Ceres) and AccountAbility are helping companies explore how best to align corporate responsibility with business strategy.

Over the past five years we have seen markets begin to incorporate the external cost of carbon dioxide emissions. This is happening through pricing mechanisms (price per ton of carbon dioxide) and government-supported trading platforms such as the European Union Emissions Trading Scheme in Europe. Even without a regulatory framework in the U.S., voluntary markets are emerging, such as the Chicago Climate Exchange and state-level initiatives such as the Regional Greenhouse Gas Initiative...

The investment community has also started to respond. For example, the Enhanced Analytics Initiative, an international collaboration between asset owners and managers, encourages investment research that considers the impact of extra-financial issues on long-term company performance. The Equator Principles, designed to help financial institutions manage environmental and social risk in project financing, have now been adopted by 40 banks which arrange over 75% of the world's project loans. In addition, the rise in shareholder activism and the growing debate on fiduciary responsibility, governance legislation and reporting requirements ... indicate the mainstream incorporation of sustainability concerns.

While we are seeing evidence of leading public companies adopting sustainable business practices in developed markets, there is still a long way to go to make sustainability fully integrated and therefore truly mainstream. A short-term focus still pervades both corporate and investment communities, which hinders long-term value creation.

As some have said, "We are operating the Earth like it's a business in liquidation." More mechanisms to incorporate environmental and social externalities will be needed to enable capital markets to achieve their intended purpose -- to consistently allocate capital to its highest and best use for the good of the people and the planet.

Mr. Gore, a former vice president of the United States, is chairman of Generation Investment Management. Mr. Blood, formerly head of Goldman Sachs Asset Management, is managing partner of Generation Investment Management, which he co-founded with Mr. Gore.

One note. I would have mentioned Simon Kuznets when discussing development of national income accounts, and noted that economists weren't always the obstacle in developing better measures of well-being:

EconLib: Simon Kuznets: In the late forties, however, [Kuznets] broke with the Commerce Department over its refusal to use GNP as a measure of economic well-being. He had wanted the department to measure the value of unpaid housework because this was an important component of production. The department refused, and still does. This is confusing... he broke with the CD because CD refused to use Gross National Product as a measure of economic well-being... but he also wanted the CD to measure the value of unpaid labor such as people working in their homes... Sounds like Kuznets wanted something more like the GenuineProgressIndicator and so did the CD... so where was the problem? Can you shed some light on this Scott?

Comments

The concept is beautiful. Too bad people have to be involved in it. Even in the formulation above the concept has already been degraded by political anit-captialism pollution. "Business" is portrayed as the source of pollution. In reality people, everybody, are the source of pollution.

I am sick to death of all of the hypocrital psuedo-environmentalists who blather on about what other people must do to "save the earth". Al Gore is a prime example, as is John Kerry. They drone on about what I must do while they keep there multiple SUVs idling in the driveway of their multiple mansions so they don't have to bother with the inconvenience of using their ignition keys. Will they can just stuff their grossly immoral pompous panderiing. And so can the people who follow along after them, licking up the droppings that they leave behind. But for all their licking, most of them cannot clean up after themselves. I have already done more than they can ever do to protect the earth.

The real results of their concepts can be viewed in the environment destruction left behind by the anti-captialistic regimes of the USSR and the Democratic Republic of Germany.

Woe to the comman man when he is ruled by despots with heads overflowing with brains.

Posted by: Don Kosloff | March 28, 2006 at 05:37 AM

Gore and Blood's goal is this:

"More mechanisms to incorporate environmental and social externalities will be needed to enable capital markets to achieve their intended purpose -- to consistently allocate capital to its highest and best use for the good of the people and the planet."

The assumption seems to be that human beings can know in advance what the "externalities" will be if we just have enough economists working on it. It sounds cumbersome and bureaucratic. Do markets really work that way?

Posted by: Duncan Brown | March 28, 2006 at 07:21 AM

Duncan -- Your question hits the nail squarely on the head. Can we do a better job of identifying externalities? Yes, probably, but it is questionable that we can identify them all (especially secondary, tertiary, quaternary "ripple" effects). Can we put a value on these externalities? This is much more doubtful.

While theory states that everything will be optimal by "simply" identifying and evaluating all costs and benefits, the reality of doing so is highly questionable I think. This then brings up the question of whether this paradigm will really work and whether we need a new paradigm. I think we're in a brave new world, and straight-up free market capitalism is going to have to see some major adjustments as an organizing paradigm and worldview (in my humble non-economist's opinion).

John Cobb's essay "Economism or Planetism: The Coming Choice" that is posted on the "rival" Ecological Economics web site has some provocative ideas along these lines.

http://forestpolicy.typepad.com/ecoecon/2006/03/economism_or_pl.html#more

David