Redesigning Capitalism

On January 10^th, I watched a thought-provoking webcast from the Yale University School of Forestry and Environmental Science (http://som.yale.edu/our-approach/edward-p-evans-hall/opening-events/business-society-leadership-increasingly-complex-world/path-resilient-prosperity).  It was a panel discussion moderated by Bradford Gentry, a professor at the school, and featuring three experts in the area of sustainable development:  Peter Bakker, President of the World Business Council for Sustainable Development; Frances Beinecke, President of the National Resources Defense Council; and Pavan Sukhdev, CEO of GIST Advisory.

Sustainable development – i.e., improving the human condition over time in a manner which can continue indefinitely into the future – is a phenomenally complex endeavor.  As Sir Peter Crane, the Dean of the School of Forestry and Environmental Science at Yale said when he introduced the panel, managing human requirements on a finite planet requires knowledge of anthropology, biology, business, climatology, ecology, economics, forestry, geology, and oceanography (and probably a few more –ologies, too).

I believe this complexity is why so many people simply refuse to discuss the tradeoffs society is going to have to make if we want future generations to live at least as well as we do.  On one side, people oversimplify the problem down to “We need to stop consuming natural resources immediately,” and on the other side, people oversimplify it into “We’ve been doing this for several hundred of years now, and disaster hasn’t happened yet; we can obviously continue to do it for several hundred more.”  This latter crowd also seems to believe that the natural, inevitable order of things is that future generations will always be wealthier and better off than we are, regardless of what we do.  I touched on these two camps in my blog posting of November 17th, 2013, entitled, “Tradeoffs.”

However, complexity needn’t be paralyzing.  Increasingly, people are realizing that the only workable way forward is to find an approach to development and improvement of the human condition which is sustainable in the long run.  Our current mode of commerce as spawned by the Industrial Revolution most certainly is not.  More and more businesses are realizing this fact and are taking action.  The February 2014 McKinsey Quarterly article, “Remaking the Industrial Economy,” gives a snapshot of what some of the more progressive companies around the world are doing in order to transition from a Linear Economy (take resources; make stuff; use and consume stuff; throw stuff away) to a Circular Economy (take resources which can be replenished; design stuff for ease of reuse ,recycling and regeneration; use stuff; re-use stuff; break stuff down into re-usable components and reuse them; recycle non-reusable stuff; throw away only that stuff which can be absorbed, neutralized, and/or regenerated).  It makes for interesting reading; some of the companies involved are not the ones you would immediately expect. (http://www.mckinsey.com/Insights/Manufacturing/Remaking_the_industrial_economy?cid=manufacturing-eml-alt-mkq-mck-oth-1402)

This isn’t a new concept.  Back in 1993, Paul Hawken wrote The Ecology of Commerce, in which he describes how if industry wants to continue sustainably into the future, we must learn to mimic the cycles of the natural world.  Nothing is wasted; one species’ waste is another species’ food.  Hawken points out that if you clear-cut an area in a forest and then watch it for a few years, one will see extremely rapid growth initially as plants and animals swoop in to claim the space and resources as their own.  But that rate of growth cannot continue indefinitely.  Eventually, that plot of land will become old-growth forest – a dynamic, living ecosystem, but one which is not characterized by unfettered growth.  The challenge for us (according to Hawken) is to transition from the immature, fast-growth economy of the Industrial Revolution to a sustainable-yet-dynamic “old growth forest” economy which can continue to provide benefits far into the future.

This is what the Yale webcast was about.  Mr. Bakker starts by pointing out that capitalism is a wonderful system for spurring creativity and efficiency in an economy.  The problem is there are three kinds of capital:  financial, natural, and social.  Our current approach to capitalism recognizes and values only financial capital.  Natural capital (mostly in the form of natural resources) is generally taken for granted and assumed to be available indefinitely; if one critical resource gets used up, it is assumed that a suitable substitute will always be available.  The capacity of the Earth to absorb our wastes is considered to be infinite, and this service is assumed to be free.  Social capital – the value of improved quality of life and longevity, of healthy societal systems, etc. – is generally ignored, or is seen only through the lens of how such developments affect measures of financial capital (like gross domestic product – GDP).  Mr. Bakker suggests that we must redesign capitalism to properly account for all three forms of capital if we want to build a sustainable economy.

This is not going to happen by executive fiat; Ms. Beinecke predicts that it’s going to be a lot of small efforts, not one huge initiative, which will get us to where we need to be.  The difficulty is going to be getting large numbers of people to change their behavior.  As Ms. Beinecke says, “We used to go after the polluters; now, we are all the polluters.”  Most people bristle at be described as polluters, but what she means is that these days, the vast majority of environmental degradation comes not from gratuitous-and-easily-halted releases of toxins, but from important industrial processes which provide us with a comfortable standard of living.  The challenge is to find a way to maintain a comfortable standard of living while ceasing to degrade our bank of natural resources.

For those who may consider all of this to be a pipe dream, I recommend reading Ray C. Anderson’s book, Business Lessons of a Radical Industrialist.  Mr. Anderson founded Interface, a company which manufactures carpet tiles.  Carpet tiles!  Not exactly a resource-neutral product.  Nevertheless, from 1996 to 2008, Interface reduced their greenhouse gas emissions by 71%.  Renewable energy now provides 89% of their electricity.  They reduced their scrap for landfills by 78%.  They eliminated the use of toxic glues to hold the carpet in place.  Oh – and their sales increased by 60%.  They’ve never been more profitable.  As Mr. Anderson says, if they can do it, anyone can do it.

Not that they haven’t run into problems.  The McKinsey article talks about converting products into services – i.e., having the manufacturer continue to own the product while you just lease it.  This ensures that when the product is worn out or obsolete, the manufacturer has a strong incentive to reuse or recycle as much of the product as possible, and as little as possible ends up in a landfill.  At the right price point, it makes excellent sense – after all, people lease cars all the time.

Well, Interface tried to do that with carpeting.  Most of the wear and tear on carpet occurs on just 20% of the surface; the other 80% is just fine when the carpet is torn up and replaced.  Interface came up with a plan in which they would maintain the carpet for the life of the agreement, replacing tiles as needed, and recycling the entire lot when they finally did wear down (Interface designed machines specifically to separate the carpet into component parts for recycling).  The customer would have no up-front capital cost, but rather would pay a monthly fee as part of their operating budget; Interface would have a steady revenue stream and guaranteed feedstock for their recycling machines.  It was an obvious win-win.

But IRS regulations wouldn’t allow the arrangement to be recognized as a true lease, which messed up the economics from the customer’s point of view.  So our legal system needs to be revamped, too, to encourage sustainable business practices, not discourage them.

But progress is being made.  The McKinsey article is very encouraging, and both Hawken and Anderson end their books on very optimistic notes.  Young people are understandably concerned with what kind of shape the planet will be in in fifty years, and as they replace old-school thinkers, fresh ideas will emerge.  Redesigning capitalism is an exciting challenge.  I’m looking forward to seeing – and helping, where I can – the creative thinking that will get us there.