The Green Gap

In the Cold War, we feared a Missile Gap was a strategic weakness. Nowadays, we must awaken to the fact that the Green Gap is true strategic weakness: the nations whose economies will thrive in the coming years will not be those with the biggest factories, but those with the most sustainable, efficient, and ecological markets. What we require is a Strategic "Green Reserve" of ecological design to weather the coming changes that both climate and resource scarcity will force on the international economy.

Saturday, 30 April 2011

Capitalism at the Crossroads

Back on to my reading binge, and I've had the luck to have been put on a surprise assignment in Kuala Lumpur, which means five hours of flying time in which to read stuff. I just about finished Capitalism at the Crossroads by Stuart L. Hart. His arguments are reasonably straightforward, and targeted on one main idea: business can and should be the way to help the "bottom of the pyramid". The bottom of the pyramid is conceived as the 4 billion people who are in developing economies. Most economic models eliminate them as consumers of any importance. The economic models that DO include them as important consumers tend to be exploitative. It's a real nasty situation.

Hart's contention is that capitalism is best placed to create the solutions to the world's problems because of its nimbleness and capacity to self-organise. I agree he has a point. He has to admit, however, that by writing a book geared at making businesses realise that uplifting the poor is good business practice, he has undone his own contention. If business has to be told to do the right thing, then is business capable of solving these problems on its own? Hart's work is a clarion call pointing out to businesses that helping the poor is an exercise in research and collaboration that will pay off dividends in future when corporate projects go mainstream. He shows how established businesses block innovation in mature markets (much as I explained here) and how it is possible to develop disruptive strategies in Base of Pyramid (BoP) markets then bring them to disrupt higher value markets.

But if he had to go to all this length just to make businesses do what is in their interest, is capitalism, by itself, really capable of doing the right thing?

I'm two things: a firm believer in capitalism (primarily because it's a natural force, like wind or rain) and a firm believer in democracy (and all that that entails, read the Charter of Rights and Freedoms for further information). Hart can say that capitalism is the right tool to do the right thing for the poor, and he would be correct on that count. It is unquestionably the most versatile tool for solving the problems of distribution of the world's wealth. The past 50 years have shown us, however, that capitalism isn't interested in helping the poor. It's just a force, for good or ill. Capitalism can redistribute wealth all over, but left to its own devices, the free market's Nash Equilibrium is monopoly. We have antitrust laws not because we think monopoly might possibly occur, but because it has, and it isn't good for the economy. Business has done lots of bad stuff to make money, and some regulation and direction is necessary to make it toe the ethical line.

And that's where democracy comes in. No, I am not talking Truth, Justice, and the American Way kind of democracy, I'm talking Peace, Order, and Good Governance kind of democracy. You know, Canadian democracy, fundamentally founded on the rights of the individual to self-actualisation within the framework of the Rule of Law. As my parents used to say, the difference between the West of Canada and the West of the US is that in the US, the settlers came first and the law came after. In Canada, we had the March West to break up the whiskey trade, then the settlers came in earnest. To separate a country of the Commonwealth from its tradition of the Rule of Law would be to deny it a fundamental and foundational part of its character. The Rule of Law is why people keep coming to Canada to make a new life - precisely because the Rule of Law is actually a rarity only a minority of the population of the world actually get to enjoy.

What I'm trying to say, then, in what turned out to be a rather rah-rah flag-waving way, is that unless the raw force of capitalism is put in a space where it's useful, it can be a force for evil just as much as it can be a force for good. Corporations, due to the share value motive, will not do what is right or even what is in their own best interest unless pointed in the right direction. This is why we need to cross the Jacobsian divide between the governmental and corporate paradigms. Systems of Survival was not necessarily correct in saying that the two worlds shall never agree - each side has to recognise its strengths and weaknesses. To get to the point, here's what those strengths and weaknesses are:

1) GOVERNMENT - is good at oversight and enforcement; it has the capacity to be the morality of a civilisation. Specifically under a functioning democracy, where the Rule of Law is respected and the rights of the individual within that Rule is recognised, the government is forced to (hypothetically) represent the will of its people or be kicked out. Government is NOT good at micromanaging, solving local problems, distribution of goods and services, and should never be trusted with setting prices for stuff.

2) BUSINESS - is really good at solving local problems and redistributing goods and services to those who need them. It encourages a kind of semi-chaotic self-ordering that simply cannot be imposed by fiat. So long as there are minimal interferences with the flow of commerce, and information is readily available, the market is the perfect place to make sure everyone has the opportunity to get their fair share. It's also good at setting prices for stuff. Business is NOT good at self-regulation or policing, and given enough leeway, will pursue only profit. Business has the potential to be completely amoral with inadequate guidance.

To create an analogy, government puts up the post and frame, business fills in the walls, windows, roof, doors, etc. The government alone would create a very cold house, and business alone would make a pile of siding and rafters. The two, working in harmony in their own jurisdictions, work great. That's why policy is key. We must trust that business will do what business does, and that business does it better than government... but business must accomplish the aims of government to provide for the people of the nation and operate sustainably such that it can continue to provide for many generations to come. Both business and government have the capacity to save each other from themselves if they take the time to understand one another.

I'll make one more point about something Hart was mentioning in his book. The fact that BoP markets are great places to test disruptive technologies because established businesses in mature markets can price such disruptive technologies out. I think we are all on the same page regarding disruptive technologies: they are an unmitigated good. They need to happen. Personally, I would prefer they happen in my country rather than elsewhere. This is but a little warning sign that the creative edge of the established economies is being diminished by the anticompetitive properties of its constituent megacorporations. Why should government offshore innovation? Isn't that supposedly the last thing the developed economies have left?

As I've already said, we need a way to stop the runaway leader problem and allow for disruptive technologies to take hold at home. The shocks these technologies provide are good for the economic system as a whole, and better to have first mover advantage when a disruptive tech emerges than follow the crowd. This is even more reason to push for policy that a) gives business enough breathing room to do what it's good at, yet b) doesn't allow it to do stuff that holds back the development of the national economy as a whole. We can do it, we just need to create the policy space for it to happen.


  1. What is your view on the human factor in capitalism? It would be nice to think that Big Business and democratic governments can act objectively and naturally allow everything to fall into place, but it seems impossible to happen in reality until everybody (or at least a great majority) are on the same logical path.

  2. You're right, and the key to both good government and good capitalism is one thing and one thing only: feedback.

    Systems too easily can stumble into decline due to lack of appropriate feedbacks. I will be talking more about it in my self-indulgent ongoing series on business and governance, but the only good democracy is a democracy that has more feedbacks than simply elections; the only good market is a market that has price information determined by real, internalised costs rather than distorted by patchworks of wrongheaded incentives and subsidies.

    People will do good when it is no less advantageous than doing bad. I have faith in humans that way. But if humans routinely see themselves put at a natural disadvantage in the market due to their morality, they will generally rationalise themselves out of that morality. It's the same issue that causes the Tragedy of the Commons... while we only take what we need, others gain by taking more than their share; we rationalise that "the resource is going to disappear anyway, I may as well get the most while it lasts".

    In short, the structuring of incentives and the use of feedbacks to reinforce those incentives is the key to, to use the Canadian Army's definition, "manipulate human behaviour in order to accomplish" the mission of sustainable society.