Economics and Sustainability

One key aspect of a sustainability focus is explicitly recognizing that decisions are driven by three somewhat competing objectives: Profit - People - Planet.  Another way to say this is choices are determined by examining their impact on the business, society, and the natural environment.  A term coined to describe this tripartite is The Triple Bottom Line.   A picture of The Triple bottom Line (T-B-L) appears here.  What I find critically important is in the overlap between any two and all three goals.  This is interesting to me since it will be the rare circumstance when all three goals - environmental, social, and economic - sustainability can equally be met.


One implication of the T-B-L is that choice is no longer driven by economics alone.  The profitability of a particular decision is no longer the driving force behind the choice.  In one way. this is not path breaking news to real-world decision-makers.  For years now future leaders have been trained in multi-attribute decision-making (the balancing of multiple and at times competing objectives).  This is how most of us come to the choices we come to in life.  More narrowly, within the field of economics, what is said to guide a rational business is maximizing profit.  Likewise, what is said to drive a rational consumer is the maximization of satisfaction.  Then there are statutes that mandate Boards of Directors to make decisions based on maximizing shareholder value.  As one paper indicates, its not clear how shareholder value and corporate social responsibility can be in opposition versus be in alignment, and this poses a dilemma for leaders.

Within the economics profession, profit maximization is one of the Sacred Cows.  When one pre-eminent economist, William Baumol proposed that companies maximize revenue subject to some minimum rate of return, he was branded a heretic and set ablaze by defenders of the Faith.  There are a variety of tricks that can be played to argue that leaders are maximizing profit (or shareholder value) and still allow for objectives that are not so clearly consistent with profit maximization.  one such tool (trick) is to play with time, noting that the leader has a long time horizon and forgoes near-term profit to maximize long-run profits.  These kinds of arguments have been responsible for many a clear-cut forest!

In closing, I wanted to open the door to the broad issue of how sustainability (T-B-L variety) can be consistent with economics and obligations of the leader to maximized shareholder value.   This is  rather a bit of speculation on my part also.  I imagine that this must certainly create a good deal of ambiguity for leaders considering the potential for takeover and potential litigation considering legal their legal obligations.

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