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.

A non sustainable model

I spent last weekend in Kyoto, a place where I go to relax and enjoy the full Japanese experience. My ryokan was in Higashimaya, a lovely pedestrian area close to temples, shrines and tea houses. On Sunday morning, I took my usual walk up to Kiyomizu temple.
Kiyomizu means clear water, or pure water. The temple is in fact named after the waterfall within the complex that comes out one of the nearby hills. People today still queue to wash their hands and drink the pure water.
I was enjoying the view when I took this picture:

The temple dates back to 798, and its present buildings were constructed in 1633. Not one nail is used in the whole temple, that is built in perfect harmony with the surroundings, using only natural elements such as wood and stones.
From the same spot I turned slightly on the left and took this other picture of modern Kyoto:

Trees and rivers replaced by concrete and asphalt. I could not help asking myself: when did it all go wrong?
Life on our planet dates back 4 million years, during which a complex, delicate, interwoven and perfectly balanced ecosystem was formed. Our current civilization is only 200,000 years old. If life on Earth was a 70 years old lady, we would be a 3 and half years old baby. Certainly, for a 3 and half years old we did a lot of good and bad.
Our ancestors respected the delicate balance inherited from Mother Nature and lived their lives in harmony with the elements, we unfortunately are not doing the same.
We all agree that in the last two centuries our civilization has made huge progress and scientific and technological advance led us all to live better and more comfortable lives. The biggest problem is that we are not doing that in a sustainable way, but we are in fact destroying the very same environment we live in that has taken 4 million years to form.
Sustainability to me is a very simple concept. Any system takes resources as input and produces output in form products and waste.
Without being an expert, my simplistic definition of a sustainable system is of one that:

• Use resources in a way that the same resources are not depleted over time, therefore assuring its very own survival. Imagine a rabbit in a island where there is one carrot field: if the rabbit eats carrots at a rate faster than the average carrot growth rate, the rabbit is doomed to starve over time. It may take one week, one month, one year or one century, depending on how hungry the rabbit is and how fast carrots grow, but math assures us without any shadow of doubt that the rabbit will starve sooner or later.
  
• Produce products and waste that can be re-used by the system itself or other systems as inputs. If the same rabbit waste (those little balls you may have seen on carrot fields) could not be transformed as soil, the ground would soon become unsuitable to grow carrots  and again the rabbit will starve sooner or later.
  

The main difference between natural ecosystems and man-made ones is that the first are cyclical and sustainable, the latter are not.
Plants take energy from the sun, transform it into life (the plant grows branches, leaves, fruits) and release carbon dioxide in the atmosphere. Checking against my simple definition:

1. Use resources in a way that the same resources are not depleted over time, therefore assuring its very own survival.
   Answer: Yes. Solar energy is renewable and will never be depleted (or to be precise the moment the sun dies our entire solar system will be dead).
   
2. Produce products and waste that do can be re-used by the system itself or other systems as inputs.
   Answer: Yes. Fruits and vegetables feed other forms of life, including ours. Carbon dioxide released in the atmosphere makes our planet warmer therefore assuring the survival of other species, including ours. When leaves fall in autumn, they fed micro-organisms that transform them into soil, which in turn is the bed where new form of lives begin.

Your car uses fuel, transforms in kinetic energy (the car moves and take you where you need to go to) while producing waste in form of gasses that come out of the car exhaust pipe. Let's apply the same test:

1. Use resources in a way that the same resources are not depleted over time, therefore assuring its very own survival.
   Answer: NO. Fuel comes from oil, which is a non-renewable resource. At some point oil will be gone, some say within the next 10-30 years.
   
2. Produce products and waste that can be re-used by the system itself or other systems as inputs.
   Answer: NO. Gasses emitted by our vehicles are highly polluting and cause damage to human beings and the environment. They are not absorbed by the environment and not currently utilized in any other process. Basically we let those polluting gasses go in the air and stay there to increase illness on humans and global warming of the environment we live in.

When humans are involved in the process, I would also add a third ethical criteria to the sustainability definition:

•  Assure long-term well being and prosperity of the people involved in the process.

Unfortunately also this does not apply to our processes. For instance, corporations produce their products in low-wage developing countries, where they can get cheap labor. People in these countries are starving, cannot feed their kids and welcome as blessing big corporations who give them the minimum to survive. A girl in El Salvador gets paid 74 cents to produce a jacket that is sold in the US at 170 dollars. The same girls gets 3 cents to produce a shirt that sells at 15 dollars in the US.
Those little money will not allow the girl to go to school, to look after her health when she needs, to plan a future, but will assure her bare survival. The same corporations that are exploiting cheap labor from desperate people are instead turning over billion of dollars and singing the praise of free market economy.
Imagine a poor girl from El Salvador or China knocking at your door. She is desperate, is starving and cannot cater to her basic needs and she asks you to give her 3 cents in exchange for a shirt so that she can buy food. What would you do? Will you give her 3 cents or perhaps think you should give her more, pay for her tuition fees at school, buy her books, try to help her as much as you can within your affordability limits? To me the answer is obvious.
Corporations though, although legally treated as individuals, do not have feelings, ethical concerns are not mirrored in their income statements and they are only driven by profit. Ethic and common sense would suggest that instead of turning over 10 billion dollar per year and exploiting cheap labour from poor countries, companies like Nike could turnover perhaps 8 billion or even 9 billion and re-distribute part of their wealth to the people who are producing the goods that are making their shareholders rich. How much difference would 1 billion per year make to those corporations and how much to the poor people in Honduras, El Salvador, China that are exploited daily?

So to go back to Kyoto's pictures and my original question: when did it all go wrong?

It looks like it all started with the Industrial Revolution.
From Wikipedia: "The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, and transport had a profound effect on the socioeconomic and cultural conditions in the United Kingdom. The changes subsequently spread throughout Europe, North America, and eventually the world. The onset of the Industrial Revolution marked a major turning point in human history; almost every aspect of daily life was eventually influenced in some way.
Starting in the later part of the 18th century there began a transition in parts of Great Britain's previously manual labour and draft-animal–based economy towards machine-based manufacturing. It started with the mechanisation of the textile industries, the development of iron-making techniques and the increased use of refined coal. Trade expansion was enabled by the introduction of canals, improved roads and railways. The introduction of steam power fuelled primarily by coal, wider utilisation of water wheels and powered machinery (mainly in textile manufacturing) underpinned the dramatic increases in production capacity. The development of all-metal machine tools in the first two decades of the 19th century facilitated the manufacture of more production machines for manufacturing in other industries. The effects spread throughout Western Europe and North America during the 19th century, eventually affecting most of the world, a process that continues as industrialisation. The impact of this change on society was enormous.
The First Industrial Revolution, which began in the 18th century, merged into the Second Industrial Revolution around 1850, when technological and economic progress gained momentum with the development of steam-powered ships, railways, and later in the 19th century with the internal combustion engine and electrical power generation."(see full article at http://en.wikipedia.org/wiki/Industrial_Revolution).
The Industrial Revolution certainly improved significantly certain aspect of our daily lives.
The picture below is a graph showing the World GDP per capita up to year 2003.

World GDP was pretty constant up until the late 1700, when the Industrial Revolution began. Since then has kept increasing, with the last 50 years representing the fastest growth. That is good.
Productivity increased in any sector, from manufacturing to agriculture and transports. However that meant also tha what used to take the work of ten farmers would now require one only. Therefore lots of families went broke and were forced to move to the cities, starting a trend that still continues today that has led to the formation of urban conglomerate of tens of million people. Today over half of the world population live in cities.

What started in the late 1700s is still continuing today at faster and faster rate.
We have replaced natural cycles with human processes for mass market production of more or less useful goods at the cheapest cost.
Forests have been replaced by endless fields and greenhouses where equally sized vegetable and fruits are grown using pesticide and fertilizers before they get shipped to supermarkets all over the world.
Grain is mass-produced using machineries that we could not even imagine one century ago that allow production  in USA only that could feed 2 billion people. Most of it though is used for live stock feed and biofuel production.
Growing need of meat is met by massive, concentration-style cattle farms where no grass grows and cattles are fed grain, protein and soy transported from far away by fleet of trucks.
The result of all of this is that it takes

- 100 liters of water to produce 1 kg of potatoes
- 4000 liters of water for 1 kg of rice
- 13000 liters of water for 1 kg of beef

without taking into consideration the huge amount of oil-produced energy involved in the production and transportation processes.
This combined with global warming causes one out of six people on this planet not have access to fresh water, one out of ten major rivers not to reach the sea any longer. Water is quickly becoming a scarce resource people around the world will be fighting for. Governments again are acting quickly but not in favor of the thirsty masses. In many countries water is now in control of multi-national corporations, who control and set prices for this vital resource. World Bank and IMF lending criteria usually include privatization of public resources such as water, that end-up in the hands of corporations again. Realizing that this vital resource is getting scarcer and scarcer businesses around the world are trying to get control over it to reap as much profit as possible, at the expenses of often times already poor people who have nothing, but the bare essential to survive, not to live.

Is all of this sustainable? The answer is clear to me: NO.

Our social-economic model is ill-designed and based on profit at all costs. The model forces corporations to generate as much revenue as possible with the least possible cost returning the highest possible profit to the shareholders without taking into account impact on people and environment.
This will not last forever as the model itself is not sustainable destroying the very same resources it's based upon at faster and faster rates.
While corporations are benefiting from profits, they are not incurring any of the costs related to damaging the environment and other people lives.
I believe a serious paradigm shift is needed, whereby whoever causes a problem pays the cost. If a factory pollutes a river, owners of the factory should also bear the cost of cleaning-up the river to restore its natural habitat, the cost incurred by the fishermen who are not able to live out of fishing anymore and the healthcare cost people eating polluted fish will incur.
Those cost are currently born by society, by the taxpayers, but not by the corporations who are the actual cause of them. If business had to bear them, they'd have to make a choice to either increase their prizes (which will get them out of business) or to re-design their processes to be environmental friendly and respectful of other people well being and lives therefore guaranteeing the sustainability of the model. Technology is already available and many examples exist where this is happening already. All we need is government regulations to enforce basic common sense rules to make sure we can guarantee a future on this planet to our kids and future generations.