October 2007 - When is enough enough?

Growth is as natural as apple – or is it? Across business the green shoots of an alternative approach are visible.

Jack Welch, the former chief executive of General Electric was heading a round table of US chief executives at a recent conference in New York when one of them asked him about the limitations of continuous growth.

The executive had just visited an energy company in China. “The head of that company knows that his business running coal-fired power stations is unsustainable in the medium term. It has to change. What does he do?”

For once the man who sat at the helm of the world’s biggest company for 20 years was at a loss for words. So was everyone else in the room. The discussion throughout the conference had been about growth. The central message was grow and grow quickly.

America’s chief executives are facing relentless pressure for double digit returns year on year leading to talent-sapping drives for ever greater efficiency. The twenty year tenure of Welch would be unthinkable today in a business environment that seems intent on consuming itself.

Bob Nardelli, a contender to succeed Welch at General Electric, missing out on the top job by the narrowest of margins, spent the subsequent five years running Home Depot, America’s second largest retailer, taking annual profits from $2.8bn to $5.6bn in 2005. He was perceived, nevertheless, to have failed and forced to step down with a pay off worth $210m.

The leaving package reflected the kind of eye-watering severance clauses negotiated by top executives in the knowledge that the bar that measures their success is being raised ever higher by investment institutions.

But there are signs that even in the boardrooms of some of the world’s biggest companies the mood is changing. Among the towering salaries and unbridled wealth, some are beginning to question a hitherto triumphant system of economics that must learn to come to terms with a world of finite resources.

Is it a coincidence that a forthcoming book by Jim Collins, the author of Good to Great is entitled Great to Good? Collins is charting the modern phenomenon of businesses hitting the buffers in their single-minded fixation on short term profit-dominated growth.

In the late 18th century when Adam Smith began his Enquiry in to the Nature and Causes of the Wealth of Nations – the treatise that would become the foundation stone of classical economics, he began to place measurable value on labour that could be increased with efficiencies.

Starting with hunter-gathering he observed: “If it cost twice the labour to kill a beaver as it does a deer, one beaver would exchange for two deer.” Pointing to the efficiencies in pin factory production where people specialised in different parts of the manufacturing process, he concluded that the key to productivity was a division of labour.

What Smith never questioned and what has rarely been challenged since, is the desirability of productivity and the very need to create wealth. Entrepreneurs such as Henry Ford and Isaac Singer discovered that the production of goods went further than serving a need – it created desires.

Ford’s decision in 1914 to raise the wages of his car workers to an unprecedented $5 a day was condemned by the Wall Street Journal as “the most foolish thing ever attempted in the industrial world.” But the knock on effect of higher wages throughout industry enabled manual labourers to buy those same goods they were helping to create. This was a new consumer society.

Today what was once described by Thorstein Veblen as “conspicuous consumption,” a phrase originally targeted at those he identified as part of the “leisure class,” has become a defining behaviour in society. Consumption, perennially associated with comfort and enjoyment, has become an impediment within households satiated in material possessions. The stockpiling pressure arising from today’s shopping spree is relieved only by tomorrow’s ubiquitous car boot sale.

The shoe-collecting fixation of Imelda Marcos, widow of the former Philippine dictator, underpins a modern addiction to spending that has taken consumption far beyond the satisfaction of need and in to a wasteful profligacy fuelled by the marketing and sales policies inherent in the capitalist system. It is a system that seems incapable of practising restraint.

The limitations of resource-hungry manufacturing were highlighted by Ernst Schumacher’s 1973 book, Small is Beautiful, that pointed-out the risks of relying too heavily on oil-wealth concentrated in unstable regimes.

His legacy, embraced in what he called “Buddhist Economics,” was the promotion of self-reliant economies – what today might be described as sustainable societies – in the developing world.

Schumacher was one of the first economists to question the growth economics pursued by his mentor, John Maynard Keyenes. Ironically Schumacher was a champion of coal mining in the UK, what he regarded an appropriate resource because of the breadth and availability of worldwide reserves. But that was in a time before global warming when the mechanics of the greenhouse effect were barely understood.

He was also writing in a world that had yet to experience the forces of untrammelled globalisation sucking wealth from poorer economies towards richer elites. The way this works can be illustrated in Caribbean societies.

Take Antigua, an island paradise that in the 18th century became one point of the triangular trade in sugar, goods and people, where slaves from Africa were exchanged for liquid sugar from the very same plantations that exploited the slave labour.

Today the descendants of those former slaves are free to pursue their own aspirations but wages in most sectors of the Antiguan economy remain low and 90 per cent of the profits from the tourism industry – the new mainstay of the economy – flows out of the island within the accounts of its predominantly US hotel owners.

When slavery was abolished in 1833, the first reaction of many former slaves was to rest from their labours and subsist where they could on fruit. Most were driven back to the plantations by economic necessity but not before an apoplectic Thomas Carlyle had railed in his pamphlets against what he considered unforgivable laziness.

Here was exposed a clash between the religiously inspired European Protestant work ethic and the subsistence mentality of some tribal societies. When the anthropologist Richard Lee spent 15 months with a tribe of Kalahari bushmen he noted that the adults spent no more than two or three days each week finding food, devoting the rest of their time to conversation and dancing.

Such behaviour led Marshall Sahlins, another anthropologist, to describe hunter gatherers as the “original affluent society.” Everything they possessed, they needed. Conversely they had everything they needed and wanted for nothing. Today these same people are being shifted off their lands by a Botswanan government that human rights groups say is more interested in diamond mining interests than those of the indigenous population.

Growth and production-focussed economics deny the simple affluence described by Sahlins in a western industrialised economic system that venerates hard work as a virtue. Yet the long-hours culture of work has created its own unintended by-product in accumulating levels of stress.

While Schumacher economics has been ignored in Antigua and Botswana as it is in most other parts of the world, it is thriving within employee-owned ventures such as Mondragon in Spain and John Lewis in the UK. It is no co-incidence that Schumacher was a trustee of the Scott Bader Commonwealth, another employee-owned company.

The pursuit of self-interest, accepted by Adam Smith, and encouraged in growth economics, is at odds with joint-ownership based as it is in mutualism, collective endeavour and reward. This probably explains why such ventures have enjoyed little support within market economies – they deny the speculator an opportunity to make a Buck.

Is the western consumer glut reaching a stage where it is time to question the tenets of wealth creation? Or should it be considered a part of our natural state? In the early part of the industrial revolution when people were encouraged to formalise their working weeks around daily shifts the recognition of “St Monday” was widespread as many people chose to match the financial returns from their labour against basic needs for food, clothing and shelter.

Consumerism destroyed that equation since it created material desires that continue to fuel what dominant US thinking translates as the pursuit of happiness. It seems extraordinary in a world exposed to growing environmental threats that this equation should prevail without challenge. Where is the “economics of enough?”

Polly Courtice, director of the University of Cambridge Programme for Industry and co-director of the Prince of Wales Business and the Environment programme, argues the need for a new approach among companies to the way they grow their businesses.

“I think this is an underlying theme in the whole concept of sustainable consumption and production,” she says.

“I’m not saying that growth is not good but that we need to distinguish between good growth and bad growth. Too often growth is undertaken on the careless assumption that it will benefit others to a significant degree while demonstrating a degree of indifference to whether it actually does.”

“Unfortunately too many companies have been engaged in a kind of reckless growth over the past 100 years characterised by short term concerns.”

As Schumacher might have predicted, the new economics is appearing piecemeal within the broader capitalist system. It can be found in the designs and theories of Bill McDonough and Michael Braungart, authors of the book Cradle to Cradle that outlines an approach to design and living based on recycled resources using buildings and materials that are sympathetic to the environment.

McDonough, the US-born founder of McDonough design ,architects and community designers has teamed up with Braungart, a German chemist, to pioneer methods of clean production. One of their factory designs in Switzerland ensures that the water running out the factory is purer than that which went in.

McDonough has led the redesign of Ford’s River Rouge factory in Dearborn that is being revitalised in a $2bn makeover. Ford was already committed to exploring new ways of restoring its factory sites, many of which had contaminated soil. Instead of removing the soil in the traditional “clean up” approach, Ford looked at soil restoration using plants chosen specially for their ability to extract toxins.

Marshes are being created to absorb storm water, purifying the water biologically creating slow seepage rather than channelled run-off. Skylights have been installed, allowing natural light on to the factory floor and the factory roof is being planted with sedum to create a 10.4 acre “living roof”.

Somewhat grandiosely McDonough and Braungart describe their movement in transformational terms as “the next Industrial Revolution.”

McDonough has moved on with plans for an environmentally sustainable Chinese village, but building work has run in to problems and the first houses have struggled to attract buyers. His second revolution may be a step too far for a society still experiencing the first one.

Other companies are trying to create a virtuous circle of environmental understanding among employees that they hope may feed back in to the business. One of the most ambitious has been launched by HSBC bank that has just announced The Climate Partnership, a $100m package to combat climate change worldwide.

Part of the package, divided between four environmental groups, will be devoted to sending hundreds of bank employees on environmental and scientific study programmes run by Earthwatch International, an environmental charity. The idea is that the programmes will help employees become more engaged with social and environmental issues, creating a so-called “green taskforce” that will influence the way the businesses engages environmentally in business on an international scale.

Across business as a whole these are small steps, but they should not be dismissed as corporate pandering to the green lobby. HSBC Group Chairman Stephen Green is committed to integrating the programme in to the business. “Over the next five years HSBC will make responding to climate change central to our business operations and at the heart of the way we work with our clients across the world,” he says.”

Whether such moves are sufficient to change business and economic thinking in fundamental ways remains to be seen.

Policy Courtice believes that businesses need to regain a sense of perspective. “Growth is the most natural thing on Earth,” she says. “You can make the analogy of a tree. But even a tree reaches a natural limit. It’s difficult to take that analogy in to a company where it is difficult to know where its natural limits.”

She says that China has demonstrated how economic growth can lift large numbers of people out of poverty. But accompanying environmental degradation has counteracted the benefits.

Which brings the issue right back to that Chinese energy company. How should such companies respond?

Is the time ripe for a debate on the sustainability of Adam Smith’s economic model? How long can we continue promoting ever-fiercer productivity driven competition? Does the world business community need new definitions of economic growth? The questions need to be asked.

See also: The price of sugar