Monday, November 12, 2007

Back to basics (8): Schumpeter's disequilibrium today

Another often quoted economist and political scientist is Joseph Schumpeter (1883-1950). He was actually born in Moravia, became Austrian and then left for the US where he taught in Harvard, an interesting career. In his book “Capitalism, Socialism and Democracy” (1942) Schumpeter introduced the concept of "creative destruction" in which the old ways of doing things are endogenously destroyed and replaced by the new. He described that the real driving force of capitalism is “disequilibrium”, opportunities coming up by new (today: global) demands, inspiring innovation, a recipe to also avoid monopoly power. He also warned governments not to protect certain markets or organizations that were unable to succeed in transformation processes. One could argue that this is pure Darwinism for economy dummies.

Those who understand sustainability as the roadmap to successfully implement globalization should nowadays find Schumpeter quite inspiring because his baseline for a healthy capitalism is very much in line with what is really needed now: we are facing the fact that we need to overcome several divides between the global North and South (e.g. market divide, digital divide, education divide, etc.), dematerializing by at least factor 10 until 2050, while another 3 billion people will join us until then, the majority of them in the developing and emerging market countries. The ecological footprint (a methodology to measure the planet’s biocapacity that is already used up, invented by several institutions now captured in the “Global Footprint Network”) tells us that we have already overstretched the global capacity by 20%, growing to 100% until 2050, meaning we would need TWO planets if we allow business as usual. What else than “creative destruction” can be the way forward to successfully integrate countries into the global world markets?

We already see first successful examples of creative destruction in countries like India, Mexico and Brazil, wonderfully captured by C.K. Prahalad in “The future at the bottom of the pyramid”; completely different business models that absorb the needs and adapting to the infrastructural shortages of differently developed markets. Some global companies are amongst these examples, but most of the innovative ones are rooted in developing or emerging market countries. The title of this book already indicates the failure of any “top down” approach, just exporting Northern business models to the global South in an attempt to just simply copy what has worked in the global North.

Interestingly, the year 2000 Lisbon EU strategy for innovation explicitly mentioned Schumpeter’s creative destruction as a way forward to foster innovation, enabling social and environmental renewal. It broadly aimed to make Europe the most competitive and the most dynamic knowledge-based economy in the world by 2010. Not too much has been achieved since then, so one should not wonder that companies from developing and emerging markets that have successfully tested their business models in their local markets now start to also take over their Northern competitors that are stuck in a protective political climate, trapped in existing infrastructure and sunk capital investments. To sum it up, Schumpeter’s ideas today seem to better work in the bottom-of-the-pyramid context where opportunities are just simply taken when they arise, no foot on the brake. If Schumpeter would still be alive he might have again packed his bags, heading towards India or Brazil!?!

Thursday, November 01, 2007

Back to basics (7): Recalibrating the "invisible hand of the market"

The critics of the concept of sustainable development and CSR always argue with Milton Friedman’s famous quote that “the business of business is business” and also refer to Adam Smith’s theory of the “invisible hand of the market”. They see especially CSR as an attempt to more regulation through the backdoor and a way to restrict the market power and the players within their specific markets; overall CSR is bad for modern capitalism. Even worse, these two famous quotes seem to permit amoral behaviour if there are no laws against certain ways to pursue self-interest.

But wait a minute! When Adam Smith published “An inquiry into the nature and cause of the wealth of nations” in 1776, partnerships were the dominant form of enterprise in which ownership and management meant the same thing. Adam Smith was against the idea of corporations, or "joint stock companies." Why that?

Sad but true, most lobbyists of the "invisible hand of the market"credo are not aware that Adam Smith did also publish “The theory of moral sentiments” in 1759, where he explains that the self-interest of the market players (buy and sell side) needs to be pursued by people of conscience and with a clear moral capacity; he argues that sympathy is required to achieve socially beneficial results. The self-interest he speaks of is not a narrow selfishness that allows whatever market transaction, but something that involves sympathy. He regards pure selfishness as inappropriate, if not immoral, and that the self-interested actor has sympathy for others. He continues that the self-interest of any actor includes the interest of the rest of society, since the socially-defined notions of appropriate and inappropriate actions necessarily affect the interests of the individual as a member of society. This context is useful to understand why Adam Smith was against the idea of corporations or joint stock companies, where he already envisaged the problems of a disconnect between ownership and management.

I would argue that Adam Smith’s idea of the self-interested market player that has developed a moral capacity and can make informed market decisions in the aim to achieve socially beneficial results will find a lot of merit in integrating sustainability thinking and CSR as a tool to implement that thinking into his/her understanding of necessary fair market conditions: a better understanding of the needed changes in legislative frameworks (and its enforcement) to support sustainability as a means for fair markets, a changed mindset about the basic role of a company (counterpoint to Milton Friedman), the need for broader education on sustainability issues in all economic curricula (to disable amoral behaviour and enable Adam Smith's concept of "sympathy"), and a broadly developed set of indicators of economic, environmental and societal impacts of the transactions of the organization and of the individual (to increase the available information to make good market decisions). Needless to say, GRI plays a crucial role to achieve continuous improvement of some of these mentioned points through its multistakeholder global platform for dialog, its guidelines and sector supplements. GRI’s learning services add to solving some of the educational challenges.

Adam Smith, a sustainability activist more than two centuries ago - a very different take on his legacy? At least he was somebody sustainability advocates of today can lend more credit from than the narrow-minded lobbyists of modern capitalism who haven't got the whole story about Adam Smith.