"Green Capitalism: the god that failed"

I just read this article forwarded by a friend by a person rather ironically named Smith. The premise of the article is succinctly stated in the following excerpt:

In short, for all the green initiatives, corporate business practices have changed little -- or the little they’ve changed has had no great effect. From Kyoto to Cancun, governments have all made it  abundantly clear that  they will not accept binding limits on greenhouse gas emissions. They will not sacrifice growth today to save the planet tomorrow. Europe’s cap and trade scheme, the first large scale effort, enriched traders and polluters but failed to put the brakes on the relentless rise of greenhouse gas emissions. What few carbon taxes governments actually imposed have likewise failed to stem emissions. At the end of the day, the project of green capitalism is in disarray.

 (emphasis mine)

The bolded line is the crux of this argument, but it could also be stated "They will not sacrifice growth today to save money tomorrow". I'm not of the school that saving the environment is the sole end of Natural Capitalism. I believe that Natural Capitalism's draw - for me at least - comes from the fact that it is an opportunity to force a paradigm shift on the market. The paradigm shift is that of increasing competitiveness in the market driven by innovation and efficiency rather than competition driven by hammering down the cost of inputs. It is a chance to end race-to-the-bottom economics and increase profit margins through improving the cost effectiveness of the processes rather than getting a lower price on raw materials and labour. It has been proven, time and time again, that efficiency and innovation can and do create savings over the long run, but the business cycle for shareholders is different from that of the business cycle for infrastructure. Shareholders do not appreciate opportunity costs. To shareholders looking at the quarterly report, an opportunity cost is just a cost; not a potential return over time. All one has to do to see the benefits of radical efficiency and waste reduction is read the case studies in Natural Capitalism, Cradle to Cradle, Factor 5, and The Natural Advantage of Nations, to see that real-world examples of massive long-term savings are wholly based in reality. Empirical evidence supports the claim that waste reduction and efficiency reduce costs, and cost reduction is a better way to increase margin because price to the consumer is not increased. The problem, as with so many things, is in the nature of the system. In that, Smith is partly correct. Capitalism itself is not to blame, though. It's that the way we run corporations is simply not set up for true long-term profit maximisation. I've already gone into this in a previous blog post, but I suppose I will go more into it now.

"CEOs might embrace environmentalism so long as this also increases profits but they’re not free to subordinate profit maximizing to saving the world because to do so would be to risk shareholder flight or worse."
This is perfectly true, and Smith uses this statement to exemplify why Natural Capitalism is a non-starter: shareholders demand growth, or they jump ship. To put it another way, CEO's will not sacrifice growth today to save the planet (or money) tomorrow. This is all about opportunity costs. While Natural Capitalism advocates state that there is an early adopter advantage, most corporate-minded business leaders would simply see it as an early-adopter risk. There are several reasons for this. Jumping to a new technology or process is an unknown, and CEOs are in the habit of managing rather than taking risks. Cost now for opportunity later could influence share price now, which reduces capitalisation now, which makes companies more risk averse the more capitalization they have tied in the stock market. Diminished capitalisation (or diminished ability to leverage perceived corporate profitability for capitalisation on the stock market) diminishes the ability of the company to pay its way out of a poor strategic direction. This creates a vicious circle: if we try something, it will cost us now, which will reduce our ability to raise capital, which will reduce our ability to get out of the mess if it fails, which will cost us, which will reduce our ability to raise capital... In this instance again, the quarterly report itself is in conflict with the long term viability of the corporation. This statement is correct, as is its corresponding thesis, because Smith is not actually talking about capitalism, he's talking about corporations. Corporations are motivated solely by share price. Sometimes altruism and profitability collide, but not always. Profit motive - or as I like to say, share price motive - is still king of the corporation.

The remainder of the assertions made in the paper under the "five theses" are, to put it bluntly, both putting the cart before the horse and confusing capitalism with the corporate system. Smith is presenting the idea that capitalism must be replaced because "capitalism is eco-suicidal". This is unsupported by the evidence in the paper. What is supported in the paper is that corporations, and perhaps more importantly, the investors who purchase shares in corporations, are interested in short-term return on their investments. This is a problem of not being specific enough: the problem is not capitalism, the problem is the timeframe on which investors expect a return on investment and their inability to suffer short-term loss for long-term gain.

But the problem is not just special interests, lobbyists and corruption.  And courageous political leaders could not turn the situation around. Because that’s not problem [sic]. The problem is capitalism. Because, given capitalism, it is, perversely, in the general interest, in everyone’s immediate interests to do all we can to maxmize [sic] growth right now, therefore, unavoidably, to maximize fossil fuel consumption right now – because practically every job in the country is, in one way or another, dependent upon fossil fuel consumption.

(italics mine)
If you replaced "capitalism" with "share-price motive" in that paragraph, and took out the italicised bit, you'd have a truism. The italicised bit is a facile overgeneralisation that sees the fossil fuels as a product and not a service. The economy is dependent on energy, but not all energy is fossil fuel based. I will come back to that later. As the quote stands, you have an overgeneralisation. Don't throw the baby out with the bathwater. Not even the ideas behind the corporation itself should be entirely scrapped; the ability of a group of people to pool their resources for the purposes of a business venture is very useful. The system that supports the capitalisation of business ventures, however, could afford restructuring. It's broken, but don't worry... a lot of the parts of the system can still be recycled. Furthermore,

Since no government is going to impose carbon taxes, the entire green tax strategy collapses because, as Hawken, Brown and Cairncross freely concede, profit-seeking and environmental protection are irreconcilably opposed. Yet the worst problem with the carbon tax idea is that even if serious carbon taxes were actually imposed,  there is no guarantee whatsoever that they would reduce greenhouse gas emissions because they would do little if anything to stop overall growth and consumption.

Hawken, along with Lovins and Lovins, in Natural Capitalism consistently stated that profit-seeking and environmental protection are complimentary. The statement that Hawkins concedes the opposition of environmental protection and profit-seeking is a patent falsehood, and draws hyperbolic conclusions from limited statements. As I've stated above, and has been proven by real-world results, profit motive goes hand in hand with waste reduction and efficiency, which is good for the environment. To state that a call for full-cost accounting - that would likely drive the coal industry out of business - is equivalent to stating profit and environmentalism can't coexist is extrapolating a great deal. A common example cited is that of the whale oil industry. Whale oil did not disappear because we ran out of whales. Whale oil disappeared from the market because a lower-cost alternative appeared. Smith's fallacy here is to assume that the death of an industry is the death of an economy. This reasoning is hyperbolic in the extreme. Sometimes industries simply pass away to new types of industry - but the demand remains. Coal fills a demand. Another substance can fill that demand. Given time, when coal becomes scarce and scarcity combines with carbon taxes to make alternatives more marketable, the coal industry will die - and yet, there will still be another industry to supplant it. More interestingly... there will still be coal in the ground when coal becomes irrelevant.

I could go through the paper at this point and examine it paragraph by paragraph, but the fact is that Smith repeatedly comes back to the basic point with which I agree, if defined specifically: corporations (not capitalism) are unable to sacrifice growth now for any gain (not just environmental protection) later. He also comes back repeatedly to one point that is simply incorrect, which is that environmental protection and profit motive are irreconcilable. Finally, he persists in making the hyperbolic claim that the death of fossil fuels is the death of the global economy. As for the first, we know I agree. As for the second, Smith extrapolates this "fact" from statements made by leaders in the Natural Capitalist camp that have been overextended through the use of his third point, which is, of course, hyperbole. Certainly, our environmental impact is huge, and there is a definite problem with our overconsumption of resources. Smith supports these statements (to a degree) with stats. I do not see any substantive support for his claim that the death of the coal industry would mean the death of the global economy. I realise I'm simplifying the claim, but there is not much more substance to it than "lots of jobs rely on carbon, and losing carbon would lose those jobs". Coal is simply one part of an ecosystem, and nature despises a vacuum. When the death of coal makes a niche in the economy, something will already be moving in to fill it.

Large corporations act like apex predators or climax communities in the global economic ecology. In a purely capitalist system where there are no controls, the system naturally moves towards monopoly, which is the natural climax community of unrestricted capitalism. Each new market would, just like the succession of seral communities, begin with small opportunistic pioneers (high-risk small-scale entrepreneurs), and proceed through to stable domination by a single main species. Species that become dominant develop strategies to protect their dominance in an ecology, just as large corporations do. They all seek to derive maximum energy (or profit) from the system through maintaining their central position in the ecology. This may mean spending some energy in fending off species that might encroach on their monopoly of a given source of nutrients/profit. The more we proceed toward an apex community of business, the more the business model is dominated by risk management than risk taking. Pioneers and many start-ups benefit from a highly risky environment precisely because they take that initial risk and are able to prosper in an area devoid of competition. Large companies are inherently cowardly, and prefer to allow smaller companies to take risks for them, and then acquire the smaller companies once they have proven their model to be successful. Global corporations inhabit this climax community of business where the dominant strategy for maximising returns is preserving the existing ecology.

I have a good friend who likes to say "Nature's smarter than you", and he's right. No matter how much I want to, I am not able to have much of an effect on how an ecosystem chooses to derive its nutrients from its environment. Something will always fill a niche and derive the maximum benefit possible from it. I can, however, make it tough for the stuff I don't want to live there and make it easy for the stuff I do want to live there. Nature does things nature's way, just like the business community does things the way it does. I've seen rampant capitalism here in China, and profit motive reigns supreme. A new regulation is simply a new chance to make a margin on something. Here, just as elsewhere, the market derives its nutrients from margins, and that simply is a fact of life that can't be changed about the market. What I'm trying to say is that the market, capitalism, is natural. Corporations are a mild perversion of capitalism that have shown themselves incapable of adapting to long-term profitability because they deny the true nature of the market: the market is about profit, not deriving wealth from share value. That disconnect is far more grievous than the straw man disconnect between environmental concerns and profitability. Perhaps the most grievous of all, though, is Smith's final recommendation, that:

The huge global problems we face require the visible hand of direct economic planning to re-organize the world economy to meet the needs of humans and the environment, to enforce limits on consumption and pollution, to fairly ration and distribute the goods and services we produce for the benefit of each and every person on the planet, and to conserve resources so that future generations of humans and other life forms can also live their lives to the full.

Central planning. All my talk about markets being nature? The concepts of central planning have been refuted by history precisely because they deny the force of nature that is the market. If you make a law against it, you don't create economic abstinence, you produce a black market. If you establish a cap, you simply create bribery cases against regulatory officials. I have seen it time and time again, and not only in China (though this is a superb example of an over-regulated market that heeds not its helmsmen). Market forces are immutable. Illegal drugs are still openly available even though there are rules against them. The best thing to do is to work with the forces of nature, guide the development of the market, perhaps remove a tree here or a shrub there to encourage new growth. I assure you, the patch of earth that is left behind will be a verdant green in a few months' time. Niches will be filled if they are profitable, and where there is a margin, there will be business. Policy must guide the type of "plant" that fills that niche, not tell the trees they can only grow so high. I assure you, no matter what you do, they won't listen.