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The case for private-sector collective action

Jul 14, 2022 | Public | 0 comments

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Over 50 years ago, Milton Friedman wrote an article that sustainability advocates like myself love to hate. He wrote that the social responsibility of business is “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” (My emphasis.) Friedman recognized that for capitalism to work, it requires a basic substructure of rules and ethical norms.

In its recent West Virginia vs. EPA ruling, the conservative majority of the U.S. Supreme Court undermined that basic substructure.

Some might argue that the practical effect of the ruling will be minimal. It threw out the Obama-era Clean Power Plan that the Trump administration had overruled and the Biden administration did not reinstate, but that is precisely why it is important. The Supreme Court reached out to take on a case it could have ignored to reject its previous 1984 doctrine of “Chevron deference,” which deferred to the interpretation of experts at federal agencies.

What’s at stake is not the competitiveness of one or another individual company; it is the legitimacy and viability of capitalism in the societies where it operates.

Instead, the court held that federal agencies need a clear, specific mandate from Congress. The ruling applies to an unused regulation, but it sets a precedent for challenges to future regulations by the U.S. Environmental Protection Agency and other agencies, including, for example, Securities and Exchange Commission climate disclosure requirements. This is a summary of the decision.

We might be suspicious of “faceless bureaucrats” arrogating power to themselves. I disagree. Before working with private-sector companies, I spent nearly two decades working as a consultant to EPA and other federal agencies on the design of environmental regulations.

The regulation design system was cumbersome, but it worked. Agency experts were sincere public servants who listened to the concerns of communities, businesses and NGOs. They sought to design regulations that were “cheaper, cleaner, smarter.” What worked for a large company might not work for smaller entities; behind the statistics were real communities and real families whose livelihoods would be affected; some approaches would inhibit innovation while others would promote it; technical assumptions, for example, the selection of an appropriate discount rate, could bias the results.

Importantly, they devised voluntary programs as complements to regulations in areas that were not covered by congressional mandates. The process was not perfect. We often quipped that if EPA was not sued by both sides, it had done something wrong, but it is difficult to see how a fractious and divided Congress could address the issues better.

Some in business might welcome the Supreme Court’s decision as a relief from what they consider an excessive regulatory burden, and perhaps even as a business opportunity. To them, I recommend the book “Capitalism at Risk,” written by three prominent Harvard Business School professors as their school sought to understand the key trends that it should prepare its students to face in the decades ahead. Based on workshops with global alumni, the authors came to a startling conclusion in 2011: If capitalism did not change within the next 25 years, it would face a “rocky road.” Nine years later, the same authors wrote in the 2020 revised edition of the book:

We had hoped that in calling attention to these problems (in the 2011 edition) we would spur leaders in government and business in the United States and abroad to take action. Since that time, the problems we wrote about have worsened and efforts to address them have fallen far short of what’s needed. Today, the very foundations of the capitalist system are under threat by an array of demographic, environmental, political, economic social and technological forces around the world.

For those of us who believe that, for all its flaws, market capitalism is the best system yet devised to meet human needs, reward human endeavor and risk-taking, and allocate social resources, this is a serious challenge. What is at stake is not the competitiveness of one or another individual company; it is the legitimacy and viability of capitalism in the societies where it operates.

The legitimacy of capitalism (or any other institution) in society is what economists call a “common pool resource” subject to a tragedy of the commons. It occurs when, without rules, the rational private actions of individual users of a shared resource destroy its value for all who depend on it.

These resources are in economist’s terms “rival” (they are diminished by overuse) and “non-excludable” (it is difficult to prevent users from accessing them). We think of common pool resources as renewable natural resources (shared pastures, fisheries, aquifers), but the same principles apply to social institutions. So-called “free riders” benefit from the existence of a functioning capitalist system but their actions ignoring Friedman’s “basic rules of society” diminish capitalism’s legitimacy.

The Supreme Court’s West Virginia decision is most concerning because it undermines those “basic rules.” We need, to quote the exhortation that Harvard Law School makes to each of its graduating classes, “those wise restraints that make men free.”

The fundamental challenge facing private companies may well become, “What do we do when government fails to (or cannot) set and maintain the ‘basic rules’ on which the legitimacy of capitalism depends?” A starting point might be Elinor Ostrom’s “Governing the Commons.” In it, she summarized her work studying hundreds of instances of successful, decentralized “collective actions” by users of shared resources (for which she won the 2009 the Nobel Prize in economics).

These rules provide a framework that we can adapt to develop rules of collective business action. Following Ostrom’s framework will require uncomfortable decisions by many businesses, but what’s at stake is nothing less than the future of capitalism, our children and grandchildren.

The post "The case for private-sector collective action" appeared first on Green Biz

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