Restorative Economy

This post is trying to answer one question: what can we do to stop the degradation we are currently in and make the plane flying again or at least try to have a soft-landing?
The pessimists say it is too late already; we have reached a tipping point and the processes we have initiated are irreversible.
The optimist instead believe there is still room for hope.
Whichever category you belong to, there is no excuse for not trying. Ethic imposes us to do the right thing, which often is not the easiest one. We can try and fail, but at least we'll have done our best to preserve ours and future generations well being.
Many solutions have been discussed on how to address the current problems affecting our society and environment.
In a perfect world, where people act based on what is the best for themselves, other people and the environment we all live in, the answer would be simple: just do whatever is right. If you have a choice between making 100 million while polluting a river and exploiting child labor, or making 50 million while preserving the environment and lifting living standards for people who work for you, the choice should be obvious (make 50 million!).
Unfortunately we live in a less than perfect world, run by corporations and governments whose main goal is to generate as much profit as possible. A pragmatic approach dictates that it's easier not to change the current social-economic framework, but instead work within it and adjust it to address the current issues we are facing.
That is the reason why I found very interesting the concept of Restorative Economy illustrated by Paul Hawken in his book "The Ecology of Commerce"(see the "Want to know more?" section of the blog).
The concept of restorative economy is based on the internalization of costs that today are not taken into account into companies income statements and balance sheets.
To make it simple, corporations today are measured on profits they make. Profits determine how much their stock is going to be worth, how much investments they are going to get for expansion and how much shareholder value they can create.
In a very simplistic way, profits are calculated as follows:

Gross Profit = Revenue - Variable cost - Marketing cost - Fixed Cost

Net Profit = Gross Profit - Taxes

This is a very simplistic approximation, but it's good enough for this discussion. All public companies have to publish their financial data and you can have a look at websites such as Google Finance or Yahoo Finance for full details (click here for the full Nike Income Statement as an example).
Let's have a look at how corporation profits are calculated:

1. Revenue: this is the revenue derived from selling the goods. If your t-shirts sell at $10 per piece and you sell 100 t-shirts, your revenue is $1000 ($10 x 100).
2. Variable cost: this is cost that varies with the quantity of goods sold. If to produce your shirts you outsource part of the production process to partners and pay them $1 per shirt, your variable cost for 100 shirts is $100 ($1 x 100).
3. Marketing cost: this is the investment you make to let people know about your shirts across different channels, such as TV, radio, print, on-line, mobile, etc.
4. Fixed cost: this is cost that does not vary with the quantity of good sold. Typically this include personnel cost, office rentals, equipment you need for production, IT cost, travel cost, compliance costs, legal costs, etc.

In order for corporations to maximize profit, they are forced to maximize revenue while minimizing cost. That is, they try to sell you as much as possible, while reducing cost of personnel, cost of compliance to health and safety regulations, cost of employees benefits scheme (e.g. pensions, insurances), payout to partners, etc. They even play with legal cost. If the cost of implementing a certain regulation is higher than the legal cost the business would incur in case they got caught, business mandate not to implement the regulation and in fact breaking the law. In countries such as US, legal cost incurred by corporations are tax deductible by the way. This is a privilege that is obviously not granted to private individuals.

As you can see there is no entry that take into account the impact businesses have on the environment and people.
That does not mean that there is not such a cost. This cost exist and in most cases can be quantified. It is just "externalized", that is the corporation does not care about it.
For instance, if as part of your t-shirts production process you pollute a river, without being an expert I can think at least of

• Cost to reinstate the river original ecosystem (that is to clean-up the river)
• Cost suffered by local fishermen who cannot rely on fishing any longer to sustain themselves and their families
• Health care cost born by the people who live in the vicinity of the river, who may be drinking polluted water and breathe not clean air
• Health care cost born by people who eat the polluted fish

There is also another cost to take into account, which is the cost to future generation. If your production process increases the density of CO2 and causes global warming, future generation will suffer and incur cost.
This applies to all production/consumption systems.

"For example, in an economic study of the costs associated with cigarette smoking born by Californians, the University of California at San Francisco identified $7.6 billion in yearly expenses, mainly in lost wages and higher health care cost. This was equivalent to $3.43 for every pack of cigarette sold." - "The Ecology of Commerce", Paul Hawken

Who born the $3.43 cost for each packet sold? Not certainly the tobacco multinationals who are the actual cause of the cost. They reaped the revenues, but let society and tax payers bearing the cost of their output.

Restorative economy proposes that those costs are "internalized", that is incurred by the individual businesses who are causing them.

"One of the most effective ways for government to accomplish the task is with cost/price integration. The pioneer for this idea was A. C. Pigou, an English economist who published the Economy of Welfare in 1920. Pigou argued that competitive marketplaces would not work if producers did not bear the full costs of production, including whatever pollution, sickness or environmental damage they caused". "The Ecology of Commerce", Paul Hawken.

If governments enforced this type of economy, business would be left with only two options:

1. Increase the retail price of their goods to cover the additional costs and keep current profit levels, or
   
2. Re-design their processes to minimize or eliminate totally costs related to impact caused to the environment and people

As the costs associated to environment and social damage may be too high (how much is the cost of burning coal, causing global warming and threatening the same existence of future generations?) and in a competitive environment where prizes have to be kept low in order for consumer to be able to afford goods, most corporations will be forced to go for option 2, with obvious benefits to the society.

In today's free market economy, business who want to be ethical are penalized in the market as cannot be as competitive as others that instead are using polluting processes and exploiting cheap labor.
Competition should not be between companies destroying the same planet we all live in (including their shareholders, managers and employees) versus ones who are trying to save it.
Cost/price integration would enable a marketplace where competitions occurs between companies who are behaving ethically and are trying to improve everyone's quality of life while preserving the environment. As corporates are playing bigger and bigger roles in our society, it is just logical that they should do the right thing and governments should enforce the framework and control measures to make sure that happens.