André Reichel | Sustainability Research

The other day I was teaching an introductory course on Sustainaibility Management to PhD students (mostly Engineers, some MBAs, some Computer Scientists). This is always an exciting experience, many different rationalities and perspectives on the issue. We discussed a case study, the sustainability report of BMW, and some important realities of corporate sustainability became clear to me.

First, for some companies, sustainability provokes some kind of “organizational schizophrenia” i.e. they refer, in the same paragraph, to sustainability and ecological awareness as well as to the overarching goal of earning profits with even the most unsustainable products. The schizophrenia is only resolved on operational levels, where a first-order logic of observed systems is employed i.e. how to reduce waste, safe energy, substitute harmful input materials and the likes. On the strategic level, however, where a second-order logic of (self-)observing systems is needed, the schizophrenia with sustainability shows. How can this be solved or better: dealt and lived with? Maybe a polyphonic organization (Kornberger et al. 2006; Andersen 2003; Hazen 1993) is needed for standing this schizophrenia. A polyphonic organization is able to cope with and react to demands from different parts of society, not only from those it primarily deals with (e.g. a company with the economy). See also my papers on the Next Organization.

Second, one student remarked, that at the end of the day BMW would need to be able to pay off all costs. (At the end of days we are all dead, paraphrasing Keynes, and if we cannot make the turn for sustainability no one will be able to pay for anything anymore!) The funny thing with sustainability is that people seem to think that in order to take it serious companies would have to become charities and give away sustainable poducts for free (or at least for less than they cost to produce). This is of course rubbish! In a sustainable economy, the minimum condititon for economic well-being of a company still holds: to maintain its ability to pay off all capital costs at all times i.e. maintain its liquidity. But not necessarily more! That is the whole issue: earning decent money to stay in businss is in line with sustainability. To have more than that is only sustainable if corporate activities stay within ecological limits. Any profit beyond that is excess profit and no one was able to tell me up until now why a return rate of 18 (the desired rate of Volkswagen by 2020) or 25% (the present target rate of Deutsche Bank) is needed to stay economically well. This really is only excess, fueled by institutionalized greed as could be exhibited in the recent financial crisis. For sustainable economics, Ghandi’s insight holds: there is enough for anyone’s need but not for anyone’s greed.

In a recent blog entry, Saamah Abdallah commented on some remarks made by Duncan Green on the Oxfam blogs, as regards degrowth policy. Duncan’s original post was critical on the practical conclusions of a workshop on degrowth in London earlier this year. Myself, I was giving a talk there on “Degrowth and the Firm” and tried to give some empirical substantiations as what a degrowth business model might look like.

Saamah gives three direct policy implications for degrowth:

1. Reduction of working hours.
2. Non-shareholder forms of corporate ownership.
3. Alternative wealth measures beyond GDP.

I’d like to focus on the first to implications, because these are important for degrowth as a firm policy. As I pointed out in my talk in London, degrowth does not mean that businesses go out of business. The minimum condition of economic well-being, the ability to discharge liabilities at all times and to pay for all capital costs (including employers salary and things like R&D investment and so on), still holds in a degrowth economy. I also stressed that degrowth does not imply becoming unprofitable. There is nothing in the way of a degrowth firm to have its profits. The question is more on the right size of the profit, as it is general the question what is the right size of production capacities, employment levels, market share and customer size. These are all questions concerning sufficiency issues, what is enough — and how to make the customer accept this?

For a degrowth company, the right size of profit means, that it would not grow beyond that limit in real terms (sans inflation). Any technological progress made, e.g. reduction in production costs or increase in product quality = higher prices, would need to be canalized by two means:

1. Reduction in working hours (with same salary) in order to keep employment at the same level.
2. Reduction in “excess profit” by “doing away” with it without investing it inside the company (R&D) nor outside of it (capital market).

While a reduction in working hours is a means well understood and used by companies today, the second point seems a bit awkward at first glance. “Excess profit” is in fact everything beyond the firm’s ability to pay its capital costs. The notion of excess profit is not new, in fact it was Aristotle who distinguished between oikonomía and khrematistiké as two forms of acquisition. Whereas the former is ‘the “normal” way of making money, i.e. by producing and exchanging real goods, the latter is the “abnormal” way: speculation and lending money (nominal goods). In degrowth terms, excess profit is profit that would endanger ecological sustainability and social well-being of the firms environment. The calculation might be tricky, however there are methods like ecological footprinting that enable firms to look more carefully at their impact on the natural environment. The measuring of excess profit is clearly on the research agenda for corporate degrowth and I would be happy to throw in my two cents!

Regardless of that, the question remains, where “to do away” with excess profit. You could argue that there should be an excess profit tax and actually there have been taxes like that in the past, although not with a sustainable impetus. However, my standpoint here is aiming at Saamah’s second point. What we need in my opinion is a restructuring of ownership beyond the shareholder model. Just let our thoughts play for a second. If a company with its profit goals, organized legally as a limited e.g., is owned by a foundation with social-ecological goals, the excess profit would be transferred to that foundation, enabling it to sponsor e.g. projects in local neighbourhoods or in developing countries, improving both ecological sustainability as well as social-well being. Excess money would then benefit society not by inducing economic growth but real growth: growth in environmental standards, growth in empowerment of people, growth in community spirit. “Elevating the universal lot” as John Stuart Mill said, this then would resemble what can be termed a “Civil Economy”, moving profit organization along the continuum towards not-just-for-profit organizations.

These are just some fleeting thoughts and I invite anyone interested to join the discussion, write a paper with me or make a degrowth project proposal. Then we probably can satisfy Duncan’s demand of giving real practical solutions. It is about time!

I was just reading an article in the newly established Ecological Economics Review on economic growth, written by Peter A. Victor. In this article, Victor is revisiting Kenneth Boulding‘s remarks on the economy of the coming spaceship Earth, focusing on economic growth and environmental impact.

He defines the concept of green growth as an economic state in which the rate of reduction of environmental impact per unit GDP exceeds the rate of increase in GDP. This is distinguished from “brown growth” where reduction of impact is positive but smaller than increase in GDP, and “black growth” where reduction of impact is negative and GDP increases. Analyizing the US economy over the last 20 years, Victor shows that only brown growth can be observed i.e. although environmental impact per GDP is decreased, the increase of GDP in total is increasing environmental impact in absolute terms.

This so-called “rebound effect” or Jevons paradox, is not a surprise. William Stanley Jevons wrote about it in 1865 in relation to coal, as he found out that an increase in efficiency e.g. a more economic use of a resource does not lead to less use of that resource but acts similar as a price cut which c.p. causes the demand for that resource to increase.

Victor continues to compare annual growth rates and annual changes in environmental impact per GDP of high income countries (HIC) between 1966 and 2005. His findings are questioning the assumption that faster rates of economic growth are better for bringing more environmentally efficient technologies and lowering impact than slower rates: “Broadly speaking, in the 40 years from 1966 to 2005 slower rates of economic growth in the HIC were, on average, associated with greater reductions in CO2 intensity and greater reduction in energy intensity.” (Victor, 2010: 243)

This got me thinking a bit, as I am especially concerned with issues of degrowth on a corporate level. If you start crunching some numbers on an Excel sheet, you can very easily see that given a constant rate of economic growth of 3 percent — which still is the goal of the European Union as layed out in the Lisbon Agenda — and a constant rate of efficiency increase of the same size will not do much about total impact. Below there is a table in which I calculated total GDP, impact per GDP and total impact on the environment from 2010 to 2050. A constant growth rate of 3 percent expands total GDP over a 40-year-period more than three times (2010 = 100 GDP, 2050 = 326.6 GDP). At the same time, technical progress in efficency helps to bring down impact per GDP to less than a third in 2050 compared to 2010. For Germany e.g. this would be the necessary size of “degrowing” physically: we consume about 10.8 tons carbon dioxide per capita and per year, whereas the sustainable yield would be around 3 tons. However, as total GDP increases, total impact is only being reduced by around 1.7 percent by 2050. The large efficiency gains are “eaten up” by growth.

This is irritating, as the rate of efficiency increase or the decrease in impact per GDP is, with its 3 percent, higher than the average rate over the last 10 years in Germany. Energy efficiency increased well below 2 percent per annum whereas material efficiency increased at about 2.7 percent per annum. We would need an instant doubling of efficiency increase from 2011 onwards to meet the necessary reduction in total impact by 2050. This is however not very realistic. Starting with an average efficiency increas of 2.5 percent in 2010, which might be a realistic starting point, and a slow increase by .1 points per annum throughout the 40-year-period would leave total impact at around 52 percent compared to 2010. So, even with an ongoing increase in efficiency, which might be just as unrealistic as doubling it in one year, the necessary reduction in total impact cannot be met by any means.

The only scenario in which this is possible is when growth is decreased slowly between 2010 and 2050. For ease of calculation, in the 2010s an average growth of 3 percent has been taken, in the 2020s it is 2 percent, and from 2030 onward 1 percent economic growth per annum. With this “degrowth scheme” total impact is decreased by 2050 towards 32.4 percent compared to 2010. Whatever the growth rates might be, or the efficiency increase rates, if we don’t want to leave the grounds of realism the only way to achieve the necessary reductions in environmental impact is a combination of efficiency increase and growth decrease. This is clearly not a call for shrinking the economy, at least not within the next decades, but for a “smart degrowth”, reducing economic growth to a sustainable size so that efficiency gains can benefit our natural environment.