Change the Economy – Save the World

by CFI | January 6, 2015 1:21 pm

By Christoph Greil, PhD student of public international law at the University of Vienna.

A call for a more social and ecologically sustainable economic system: Capitalism does not offer a way to achieve the Sustainable Development Goals (SDGs). Therefore, a fundamental change needs to be made to the values and rules of our economic system. Most of all, corporate practices and objectives need to be brought into line with the SDGs and effective mechanisms must be devised to ensure that companies conduct their business in such a way that social and environmental goals are met.

The Economy for the Common Good is a new alternative concept of free market economy which ensures that those companies which behave in a socially and environmentally responsible way, gain an advantage. This takes much more than traditional measures of corporate social responsibility.

Currently, the world’s biggest problems are growing poverty levels and the systematic destruction of nature. The latest scientific wake-up call concerning the social drawbacks of our global economic system is Thomas Piketty’s Capital in the Twenty-First Century. In this hefty tome, the French economist shows with shocking empirical clarity that wealth in the hands of a small minority is growing exponentially while an increasing number of people no longer derive a decent standard of living from income generated by their labour. Also, a sizeable group of people is becoming marginalised and completely isolated from economic benefits.

“The Economy for the Common Good is a new alternative concept of free market economy which ensures that those companies which behave in a socially and environmentally responsible way, gain an advantage.”

Mr Piketty’s book is rather heavy stuff for devotees of capitalism, economic deregulation, and free trade in its current raptorial neoliberal appearance. In order to shrink the growing wealth gap within states and between states, Mr Piketty suggests measures of redistribution such as a global wealth tax, progressive income taxation, a comprehensive welfare state, as well as stronger regulations of the financial sector.

While these measures would increase distributive justice, and therefore reduce poverty, the Piketty-recipe does not alter the structural tendency – inherent to capitalism – towards unequal distribution, nor does it address global environmental challenges. A valid economic system does not only need to ensure a fair distribution of wealth, but must also respect the environmental boundaries of our planet.

Overshoot Day

On August 19, Earth Overshoot Day was reached – the day mankind has exhausted this year’s ecological budget. We need to reduce our ecological footprint and global resource consumption by half in order to be sustainable. As a matter of principle, ecological boundaries are of an absolute nature and not compatible with the capitalist paradigm of infinite economic growth.

Most economic transactions involve the consumption of resources. Indeed, we need to significantly decrease the size of resource-intensive economic branches in most of the world’s industrialised regions in order to stay within the planetary boundaries. Although a switch to green energy is inevitable, we should not rely too much on technological progress for the required reduction of our ecological footprint.

This challenge is at least as much about reducing our usage of resources and energy. Earlier this year, I met with a member of the Austrian parliament who had participated in a high-level meeting organised by the Inter-Parliamentary Union a few years ago. The main task of the discussion group was to find out which political measures are needed in order to achieve the UN Millennium Development Goals or the subsequent Sustainable Development Goals.

Remarkably, most participants concluded that it is practically impossible to achieve either of those goals within the capitalist economic system. I agree. The values and rules of capitalism are not compatible with the social and environmental goals we so urgently need to achieve.

The paradigms of capitalism – infinite economic growth, profit-maximisation, and fierce competition – result in a strong incentive for companies to reduce costs (…no matter the cost…) in order to survive. Distributive justice and ecological sustainability will always be of secondary or lesser importance. We can see the results: A growing gap between rich and poor, on both a national and a global scale, and the collapse of nature.

Defenders of global free trade argue that poverty is being eliminated as the number of people having less than a dollar a day to spend shrinks. However, such claims distort reality and say little about global poverty overall. The broader picture shows a growing divergence between rich and poor in absolute numbers.

It is quite ironical that business-as-usual will destroy the vital planetary eco-systems life depends on, while politicians of all ideological stripes clamour for more economic growth as the end-all-be-all of poverty reduction. Some believe that all problems produced by the current economic system may be solved by regulation.

Half the Battle

However, regulation can only restrict the economic playground. This is only half the battle. It is equally important to change the rules of the game. As long as profit-maximisation remains the singly-most important corporate motivator, companies cannot be expected to strive for environmentally sustainable production or to care excessively for the well-being of their personnel.

If the SDGs are to be attained, we must fundamentally change the values and rules of doing business and must effectively ensure compliance of all economic actors with social and environmental goals. An answer may perhaps be found in a new and aspiring economic concept called Economy for the Common Good.

This approach aims to change the goals of doing business: Cooperation instead of competition; maximisation of the common good, instead of mere profit-maximisation; and the assumption of an optimal company size, instead of the limitless growth. Moreover, Economy for the Common Good provides a clever mechanism which ensures corporate compliance: It changes the framework of incentives.

On the basis of an annual compulsory assessment, companies receive points for socially and ecologically responsible behaviour such as, for example, horizontal and vertical cooperation with other business; ensuring proper payment and working conditions for all stakeholders; maintaining sustainable production and resource usage processes; renouncing excessive production levels; avoiding immoral marketing practices; and refusing the manufacturing and sale of unnecessary or unhealthy products.

This is eco-social behaviour that goes far beyond the traditional concept of corporate social responsibility. Transparency of the criteria employed is ensured by the establishment of a democratically legitimate Matrix for the Common Good which defines the socially and ecologically acceptable corporate behaviour that begets points. Companies that act in socially and ecologically responsible ways obtain more points than those that fall short and will therefore receive fiscal and legal benefits that allow for a competitive edge vis-à-vis businesses stuck in classical capitalist ways. Appropriate eco-social behaviour – the common good – becomes the goal of doing business. It pays for companies to act responsibly.

Aligning corporate objectives with eco-social goals is the only effective way to achieve the Sustainable Development Goals, especially those concerning distributive justice and environmental sustainability. Beside this, regulation, taxes, the reallocation of existing wealth from rich to poor and to the state, limits on income and inheritance, and other measures ensuring the required reduction of pollutant emissions and resource usage may be necessary. It may be necessary to set up an international authority to oversee the distribution of pollution and resource usage permits per region and economic sector.

Financial Reform

Furthermore, the current financial, banking, and monetary systems stand in need of reform. The financial system – which has developed into a cancer-like structure over the last decades – needs to be shrunk and brought back to serve its original purpose of providing money for the real economy through the granting loans to responsible projects or by liaising with investors.

All forms of gambling are to be done away with. Purely speculative investments like complex financial products and high-frequency trading should be abolished. A mere financial transaction tax is not enough to accomplish this. The minimum holding period for shares in a company should be synchronised with the production cycles of the real economy. Stocks should be traded on a purged type of stock exchange. Each company should undergo a compulsory eco-social check before being listed.

The fiat money system should be abandoned as well. This allows banks to create money out of thin air when loans are requested. The granting of loans should only be undertaken by banks that have a 100% capital cover. There should be strict eco-social project assessments before any loan is granted. Interest rates should be low too – just in an amount to cover the bank’s administrative efforts.

Money should only be issued by a state-owned central bank to a degree that allows for the payment of products and services supplied to the state by private companies. New money is brought into circulation at a rate equal to the absolute growth of the national economy. If the state’s expenditure is higher than the estimated economic growth in absolute numbers, the state will have to use its own means of covering the deficit. It will do so mostly through taxes. On an international scale, compensation payments for countries with aggressive export-strategies could encourage economic balance. Finally, it is self-evident that tax havens need to be closed.

In 2015, three international conferences of the utmost importance will take place: On climate change, Sustainable Development Goals, and on the financing of development. Whatever the SDGs will look like in their final version: The success of this concept will depend not so much on the concrete number of goals formulated, but rather on the clarity and effectiveness of the policies adopted for their implementation. Any post-2015 agenda for the SDGs that does not include a fundamental change in the economic rules is destined for failure.

It is necessary to align the objectives of business with the social and environmental goals we now need to achieve and to ensure that companies act far more responsibly than they have over the past decades. The three international conferences scheduled for 2015 offer a golden opportunity to obtain a strong political commitment in terms of achieving global distributive justice and ecological sustainability.

Response: The Danger of Good Intentions[1]

Source URL: https://cfi.co/finance/2015/01/change-the-economy-save-the-world/

---