“The Union of Concerned Executives,” The Economist, http://www.economist.com/displayStory.cfm?Story_id=3555194, 20 January 2005.
“Profit and the public good,” The Economist, http://www.economist.com/displayStory.cfm?Story_id=3555259, 20 January 2005.
As promised by the previous post on irresponsible CSR, a discussion on CSR’s harm to the environment.
This kind of argument is invoked to make sense of â€œsustainable developmentâ€ and the claims pressed on business by that idea. Prices are wrong, the argument goes, so markets are failing. Pollution, including the accumulation of greenhouse gases, is not priced into the market, so there is too much of it. Impending shortages of natural resources are not priced into the market, so those resources are consumed too rapidly. The value of wilderness, either for its beauty or for its stocks of endangered species, is not priced into the market, so too much of it gets cemented over.
Whether the pattern of consumption based on these false prices is sustainable is really beside the point. Some patterns of consumption could be indefinitely sustained but still be wrong, causing mounting damage as far ahead as one can see. Others might indeed be unsustainable, meaning bound to be halted at some point, yet not be wrong, as when the approaching exhaustion of a raw material leads to the invention of a substitute. â€œSustainabilityâ€ has a nice ring to it, but it is not the issue. The question is whether false prices are causing big economic mistakesâ€”and, if so, what might be done about that.
Many market prices do diverge from the corresponding â€œshadow pricesâ€ that would direct resources to their socially best uses. In many cases, the divergence is big enough to warrant government actionâ€”a point which all governments have taken on board, sometimes to a fault. All industrial-country governments intervene in their economies. In principle, much of this intervention aims to mitigate the misallocation of resources caused by externalities and other kinds of market failure. But it is important to keep a sense of proportion about the supposed unreliability of market signals.
So far as environmental externalities are concerned, most leading advocates of CSR seem to be in the grip of a grossly exaggerated environmental pessimism. The claim that economic growth is necessarily bad for the environment is an article of faith in the CSR movement. But this idea is simply wrong.
Natural resources are not running out, if you measure effective supply in relation to demand. The reason is that scarcity raises prices, which spurs innovation: new sources are found, the efficiency of extraction goes up, existing supplies are used more economically, and substitutes are invented. In 1970, global reserves of copper were estimated at 280m tonnes; during the next 30 years about 270m tonnes were consumed. Where did estimated reserves of copper stand at the turn of the century? Not at 10m tonnes, but at 340m. Available supplies have surged, and, it so happens, demand per unit of economic activity has been falling: copper is being replaced in many of its main industrial applications by other materials (notably, fibre-optic cable instead of copper wire for telecommunications).
Copper, therefore, is unlikely ever to run outâ€”and if it did, in some very distant future, it would be unlikely by then to matter. The same is true for other key minerals. Reserves of bauxite in 1970 were 5.3 billion tonnes; the amount consumed between 1970 and 2000 was around 3 billion tonnes; reserves by the end of the century stood at 25 billion tonnes. Or take energy. Oil reserves in 1970: 580 billion barrels. Oil consumed between 1970 and the turn of the century: 690 billion barrels. Oil reserves in 2000: 1,050 billion barrels. And so on.
Our oil surplus is old hat. But CSR’s twisted ecodestruction is news.
Still judging acts by their effects, as opposed to motives and underlying rationale, the most harmful kinds of CSR, however, are the â€œperniciousâ€ and â€œdelusionalâ€ sortsâ€”that is, policies and practices that actually reduce social welfare. How can that happen? All too easily.
Most CSR, in fact, is probably delusional, meaning that it reduces both profits and social welfare, even if the cost under both headings is usually small. Almost all CSR has at least some cost, after all, even if it is no more than a modest increase in the firm’s bureaucratic overhead. That cost subtracts from social welfare in its own right. So the kind of CSR that merely goes through the motions, delivering no new resources to worthy causes, giving the firm’s workers or customers no good reason to think more highly of it (perhaps the opposite), involves a net loss of welfare.
Or consider the current enthusiasm for recycling. No doubt there are cases where it makes good business sense to recycle. These fall under the â€œgood managementâ€ heading: they increase profits and (mainly for that reason) social welfare as well. But the point is that recycling is not free. Effort and other resources must be expended on it. Waste must be collected, transported and processed before it can re-enter the productive process. The costs can be substantial. If those private costs exceed the private savings, profits will sufferâ€”and so, most likely, will social welfare.
The trouble is, the notion that the market prices of commodities fail to reflect their scarcity is wrong. In commodity markets, prices reflect scarcity just fine. The long-term global trend of falling commodity prices, despite growth in the world economy, is not due to the failure of markets to reflect diminishing supplies and impending shortages. Commodity markets are for the most part efficient and forward-looking. Commodity prices, measured over recent decades, have followed a downward trend because innovation has brought about ever-rising productivity in the use of those resources. In other words, supply has outstripped demand. Where, unusually, it has not, prices have indeed gone upâ€”providing the signal that may make recycling in those cases commercially sensible.