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.

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