Saturday, August 9, 2008

Creative Capitalism: Market-Based Social Change

To be sustainable a business must also be profitable. Readers of The Green Market know that I am an earnest advocate of viable socially responsible business. This philosophy is put into practice in my firm's Green consulting projects with the small business community. Implicit in this philosophy is the marriage of market forces and social responsibility.

This is not a new idea. Almost half a century ago David Rockefeller, the president of Chase Manhattan Bank, said, "The old concept that the owner of a business had a right to use his property as a he pleased to maximize profits has evolved into the belief that ownership carries certain binding social obligations." In recent years Microsoft's Bill Gates has joined the ranks of a growing number of people who share this view. For the past 20 years, Microsoft has used corporate philanthropy as a way to bring technology to people who don't have access. They have donated more than $3 billion in cash and software and perhaps most importantly shown people how to use technology to create solutions. In a January 24, 2008 speech at the World Economic Forum, Gates outlined sensible solutions to the challenges we face.

Gates used to believe that technology could solve all the key problems and although this is true for billions of people, "breakthroughs change lives only where people can afford to buy them—only where there is economic demand. And economic demand is not the same as economic need." Technological innovations are important but insufficient to address the myriad challenges we face. To truly improve the fate of the planet and its inhabitants we require what Gates has called 'system innovation'.

We have reason for optimism, we have seen significant improvements on many fronts from the status of women and minorities, to radicaly increased life expectancy. And political, social and economic freedoms have never been enjoyed by more people around the world. However, like Gates, I am an impatient optimist who seeks expedient solutions to the problems we face.

A major problem with capitalism is that market incentives often cause people and the environment to benefit in inverse proportion to their need. Capitalism that serves large corporations and wealthier people must be made to serve poorer people and the environment as well. We need to refine the capitalist system so that it benefits the environment and all its inhabitants. "The great advances in the world have often aggravated the inequities in the world. The least needy see the most improvement, and the most needy see the least. Not only do these people miss the benefits of the global economy – they will suffer from the negative effects of economic growth they missed out on. Climate change will have the biggest effect on people who have done the least to cause it."

Capitalism may be flawed in some important respects but they are fixable problems which do not detract from its many positive attributes. "The genius of capitalism lies in its ability to make self-interest serve the wider interest. The potential of a big financial return for innovation unleashes a broad set of talented people in pursuit of many different discoveries. This system driven by self-interest is responsible for the great innovations that have improved the lives of billions."

Capitalism harnesses self-interest in helpful and sustainable ways, but only on behalf of those who can pay. And environmental, philanthropic and governmental organizations are inadequate to meet the needs of the earth and its poor. We need a system that is capable of providing rapid improvements, a system that integrates creative innovation and market driven business.

A social mission is compatible with profits. In Gate's own words "To make the system sustainable, we need to use profit incentives whenever we can." When profits are not possible, recognition is a powerful market-based incentive for socially responsible businesses. "Recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to the organization. As such, recognition triggers a market-based reward for good behavior. In markets where profits are not possible, recognition is a proxy; where profits are possible, recognition is an added incentive. The challenge is to design a system where market incentives, including profits and recognition, drive the change." Consumers then reward companies who do good work by buying their products. To help us to recognize those who have made contributions to social causes like Green, we need to invest intellectual capital to find ways for businesses, governments, NGOs, and the media to develop tools to measure social responsibility. "[R]ecognition brings market-based rewards to businesses that do the most work."

According to Gates, "there are two great forces of human nature: self-interest, and caring for others. The system innovation proposed by Gates is nothing less than a paradigm shift. He calls this innovation creative capitalism. "This is an approach where governments, businesses, and nonprofits work together to stretch the reach of market forces so that more people can make a profit, or gain recognition, doing work that eases the world's inequities." Helping others and the environment is not as far removed from the core of capitalism as some might think. The father of capitalism Adam Smith opened his first book with the following lines: "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

"Creative capitalism takes this interest in the fortunes of others and ties it to our interest in our own fortunes—in ways that help advance both. This hybrid engine of self-interest and concern for others serves a much wider circle of people than can be reached by self-interest or caring alone." We must give our most innovative thinkers the time and resources to come up with solutions to the challenges of environmental degradation, poverty and disease. "This kind of creative capitalism matches business expertise with needs in the developing world to find markets that are already there, but are untapped. Sometimes market forces fail to make an impact in developing countries not because there's no demand, or because money is lacking, but because we don’t spend enough time studying the needs and limits of that market."

There are numerous examples of creative capitalism in the world today. One of the most accessible approaches employs tiered pricing. When the World Health Organization wanted to expand vaccination for meningitis in Africa, it first ascertained what people could afford to pay. Then they challenged their partners to meet this price. Another is Bono's RED Campaign which has demonstrated that people will pay a premium for the chance to be associated with a cause they care about. One of my personal favorites is Muhammad Yunus' now worldwide movement in microfinance. And cap and trade systems of greenhouse gas management are yet another well known example of creative capitalism. The potential ways in which creative capitalism can serve socially responsible causes are limitless.

Creative capitalism includes a direct role for governments in funding research and setting policy (legislation). Governments should disburse funds in ways that create market incentives for sustainable business activity. "What unifies all forms of creative capitalism is that they are market-driven efforts to bring solutions...As we refine and improve this approach, there is every reason to believe these engines of change will become larger, stronger, and more efficient. There is a growing understanding around the world that when change is driven by market-based incentives, you have a sustainable plan for change—because profits and recognition are renewable resources. These are not a few isolated stories; this is a world-wide movement, and we all have the ability and the responsibility to accelerate it."

There is a place for business, government and the non-profit world. Creative capitalism stretches the reach of market forces to help push things forward. From foreign aid to charitable gifts, we must find ways to put the power of market forces behind the effort to reduce our environmental impact.

We are living at a pivotal moment in human history, the paradigm shift proposed will enable us to find approaches that address the environmental and social problems we face. We need to understand that sustainable solutions entail projects that generate profits and where profit is not possible, recognition that enables consumers to reward these companies by buying their products. We can change the world and creative capitalism is key to the growth of socially responsible movements like Green, because there is no Green future without profitable Green companies.