Towards a market-based approach to balance people, planet, & profit
Humanity’s ability to model worldly phenomena in unprecedented: Grow the supply of money, and you spur economic growth, though at the risk of inflation. Get in line of sight of at least two GPS satellites, and you can accurately triangulate your location anywhere on Earth.
Here’s another one: Pump carbon dioxide and methane into the air, and the sunshine trapped under the atmospheric greenhouse thus created will raise global temperatures.
Ironically, despite all our modeling prowess, the path ahead in our next century will not be an easy one to chart. The very same advances in science, technology, and economics that give us the unprecedented ability to predict the consequences of our actions have also made our actions more consequential than ever.
Homo Sapiens has hitherto had the luxury not to mind the consequences of his economic activities too much, limited the scope of his impact as it was. That is not the case anymore. Our ability to change the world we share with flora and fauna is such that we can now cause irreparable havoc for ourselves. Irreparably, and for ourselves, because Mother Nature will eventually intervene, and she will succeed. She will repair Earth, but in the process, she may also weed out civilization as we know it from her new Garden of Eden.
By opening technology’s Pandora’s Box, we have unleashed its awesome powers. Will we wield them wisely, and continue to thrive in the gentle rise in quality of life for our species that has characterized our current industrial era? Or will we abdicate to its unintended consequences, oblivious to the destruction it visits upon the environment that underpins our way of life?
The tools we need are already at our disposal, if we heed the lessons of history.
Design with purpose
The profit motive powers the market, but as far as a source of meaning and purpose goes, an exclusive focus on profit condemns us to a nihilism even hard-nosed capitalists disavow. Just look at their businesses’ mission statements, charitable donations, and many other such declarations of a calling higher than the pure pursuit of profit.
There is no waste in nature. In a functioning ecosystem, one creature’s waste is another’s resource. Viewed in this light, our model of economic growth, reliant on the admittedly unintentional, mass by-production of waste, is well, rather wasteful. It is based on a linear, extractive process: We extract resources, transform, consume, and dispose of them, with waste accumulating in every step.
Economics is the science of allocating scarce resources to the activities where they are the most beneficial. And Design is creation with intent. It is time we start designing an economy with the intent and purpose of regeneration and zero waste.
The Market is Economics most powerful tool for optimizing resource allocation, which it does by harnessing the forces of demand, supply, and the profit motive, and bringing them to what economists call a state of equilibrium. But markets are not perfect. Sometimes, their point of equilibrium is not optimal. Pollution is a prime example of market failure.
On the demand side, we have population growth and this population’s rightful quest for a better quality of life. This increases consumption, compounding the stress that the wasteful and extractive production models that characterize our supply side put on our planet’s limited ability to regenerate itself while remaining hospitable for civilization as we know it.
It is time to design markets that enact our higher sense of purpose, and not that generate unintended consequences due to our inattention. Integrating the regeneration of the environment proactively into the way the market operates, rather than repairing damage that has already been done reactively. Waiting for charity that we hope will materialize after, if ever, our thirst for profit and consumption has been quenched.
Advocacies such as the Ellen MacArthur Foundation have advanced business-friendly frameworks aiming to transform the extractive, linear production models into closed-loops that minimize waste, and treat it as a resource for a renewed circle of value for society.
Thanks to these efforts, business organizations from Google to IKEA are committing to designing products, manufacturing, and distribution processes that will eventually bend their existing linear production and consumption models into Circular Economies.
The challenge is to balance three seemingly unreconcilable goals. Achieving an environmentally sustainable economy, continuing to improve people’s quality of life, and growing corporate profits. To simplify:
- and profit.
We say seemingly irreconcilable goals because they do not have to be so.
When moral philosopher Adam Smith first inquired into the causes and nature of the wealth of nations, he concluded that the free market’s invisible hand was the best mechanism for creating the wealth necessary to improve the lot of the masses. There was no intent for a bourgeoisie to exploit the proletariat. The focus was purely on the profit motive as a driver of progress. The Dickensian conditions under which the working classes lived during early industrialization were an unintended by-product of a model that viewed workers as a resource to be extracted, instead of part of an ecosystem that should be nurtured and regenerated. Much like we view the environment today.
As the shortcomings of unrestrained capitalism became apparent, societies started to design solutions that added the intent to explicitly address the needs of the people. These roughly fell in two categories. Command and control, and market-based. In balance, it is nowadays fairly uncontroversial to conclude that market-based approaches have the better track record in wealth creation. And that successful economies seek to temper the excesses of unrestrained capitalism through laws that protect consumers, workers, and unions. As a result, enlightened markets and the profit motive have lifted billions out of poverty, and improved the quality of life of more, and by more, than command and control ideologies ever could.
We are now at a new crossroads. While markets and the profit motive are by no means perfect, and more is to be done to address the people variable, it is now time to add Planet to the equation.
The precedent above is clear. If people, both employees and consumers, are an integral part of the business ecosystem, worthy of investment to protect and nurture, which ultimately benefits the market as a whole in the long run, so too is the planet.
People as Planet
As business see individual employees, and the communities in which they operate, as part of an ecosystem that merit investment for rejuvenation and growth, they should also invest in the protection and rejuvenation of their wider ecosystem, the environment.
There is substantial overlap between people and planet. For instance, the United Nations’ Development Programme has highlighted seventeen goals for sustainable development:
- No poverty
- Zero hunger
- Good health and well-being
- Quality education
- Gender equality
- Clean water and sanitation
- Affordable and clean energy
- Decent Work and economic growth
- Industry, innovation, and infrastructure
- Reduced inequalities
- Sustainable cities and communities
- Responsible consumption and production
- Climate action
- Life below water
- Life on land
- Peace, justice, and strong institutions
- Partnerships for the goals
These seventeen goals straddle people and planet concerns, which makes a lot of sense, as we have seen, once we adopt an ecosystem mindset.
People as Consumers
People have dual roles in the ecosystem. As employees, they participate in the creation of goods and services. As consumers, they are the customers whose custom, and cash, business vie to attract.
Businesses have multiple variables to persuade consumers to part with their hard-earned dollars and euros: Durability, convenience, status, quality, low-cost. In one word: Benefit.
While one can currently find sustainable goods available in the market, often these are regarded as more expensive and/or less adequate substitutes. Our research shows that a green agenda built on good intentions is not enough. For consumers to change their behavior at a scale that makes a material impact in sustainability, the sustainable alternative has to offer a clear benefit advantage over the non-sustainable one, if it is to successfully entice a change in behavior.
Heeding the lessons of history, business-friendliness will be crucial in the success of this endeavor. There simply isn’t enough money in government and charities’ budgets to make this happen, nor in shareholders for that matter. Only by tapping into the combined purchasing power of government, shareholders, and consumers, will we successfully meet this challenge.
The profit motive leads businesses, employees, and consumers to meet in the market, where they will ultimately co-create the new production and consumption behaviors needed to create the Circular Economy.
As we design this market-based solution, we will be confronted with two issues: Down-cycling, and the cost of re-use.
Central to a functioning circular economy, is the premise that, as in nature, someone’s waste is someone else’s resource. This is how recycling works. You take waste paper, mash it into a pulp, and make carton boxes. You then take discarded carton boxes, and press them into molded beverage holders. Or take PET bottles, which are recycled into carpets, then recycled into insulation foam.
The sharp-eyed reader may have detected one of the main problems with much recycling: It isn’t.
The term down-cycling, highlights the reality that with each successive cycle, in many cases, the raw material in question loses the characteristics that make it valuable and recyclable in the first place. So, they will eventually find their way into our landfills, water, or the incinerator, releasing their carbon content into the atmosphere. It sure beats doing nothing, but it only delays waste rather than eliminate it.
Cost of reuse
Another way we can delay waste is by promoting reuse. In the traditional end of the spectrum, we have our good old second-hand markets. On the sexy end, we have the realm of fancy neologisms such as the Product-as-a-Service (PasS) business model.
Based in our research, PaaS will likely work in the case of the assetization of high-value, low-utilization goods. Cars and Transportation-as-a-Service come to mind. But in many other cases, we have a hard time seeing how many PaaS efforts scale.
New products nowadays are standardized, flat-packed, and centrally produced and distributed, which contributes to logistical costs that are orders of magnitude cheaper for new versus used goods. You experience this problem when you get free delivery when you buy something new, but struggle to get rid of some of your old stuff even if you offer it for free. That is because the cost removal and transportation is often incommensurate with the value of a used good.
Several PasS initiatives we have studied start well-intentionally as sustainability value propositions. Only to end up consuming more energy and spew more carbon than the provisioning of the new good or service it is intended to replace, once all lifetime costs are accounted for. Or worse, they only achieve commercial viability by encouraging even more conspicuous consumption behaviors, which also defeats the purpose.
This double whammy: The erosion in value of the good to be reused or recycled, and the increase in the cost of maintaining said good in circulation, is the key challenge to solve on the supply side.
Simultaneously, on the demand side, so that consumers will switch to the new sustainable product or behavior, the new product or service needs to match or exceed the benefit delivered to its target market at a similar, or lower cost.
Yes we Can
A key for making this equation work is for the recyclable or reusable commodity in question to retain its value. Much of it comes down to design and the choice of material. A good case in point is that of the aluminum beverage can.
The aluminum in cans is infinitely recyclable, and retains its value throughout. Recycling them is so efficient that making a new can from recycled aluminum costs 95% less energy than making one of the same quality from virgin material. This confers real economic advantages, which is reflected in their market value. One ton of used aluminum cans is worth $1,210, versus -$21 for glass, and $237 for PET bottles.
Consumers voted with their feet. After the Coors Brewing Company first replaced iron/tin cans with aluminum ones that were lighter, more attractive, and less prone to leaking or imparting a metallic aftertaste to its contents, they flew off the shelves. Tin cans remained on the shelves, unsold, causing the whole industry to fully shift to aluminum in a few short years, despite initial opposition from the other players in the industry and even skepticism from academia.
Recognizing used cans as an efficient source of raw material, Coors designed its can to be recyclable, then introduced the Cash for Cans program. The precursor to the now globally popular practice of taking a recycling deposit for the aluminum can when you purchase a drink, effectively creating a market for the used cans.
The combination of recyclability by design, improved customer value, a raw material that retains its value, is easy to transport, and has an accessible market, firmly embedded recycling into how people normally consume canned drinks. The recycling rate of aluminum cans is about 46% in the US, contributing to more than 75% of all aluminum ever refined still remaining in circulation.
Pollution as a consequence of the market as it operates today is neither intended nor inevitable. We have tempered undesirable by-products of unbridled capitalism in the past, benefiting employees and consumers, while continuing to achieve ever higher levels of wealth creation. So, we can also design the regeneration of the environment into the market, without having to resort to a heavy-handed command and control economic planning tools.
People and planet are two facets of the same challenge: The market’s current failure is to recognize that the natural environment is also part of its business ecosystem (the irony!). The symbiosis between business and environment is similar to that between businesses and people, both as employees and as consumers.
As we design this market-based solution, our research point at some issues to bear in mind:
- Deliver customer value,
- design to avoid or mitigate the value erosion of the recyclable or reusable good in question,
- and mind the asymmetry in the cost of logistics for new versus used goods.
Luckily for us, we are not starting from scratch. There are many past innovations to draw inspiration from, such as that of the aluminum beverage can, which was introduced by a for-profit business.
Pollution is a bug in the market, not a feature.
Read the original article in Medium.