Capitalism vs. environmental sustainability

Seminar Paper 2006 22 Pages

Business economics - Business Ethics, Corporate Ethics





1 Private Property

2 Needs and Wants

3 Market

4 Competition

5 Profit

6 Natural Capital

7 Sustainable Investment

8 Conclusion




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Capitalism is a relatively old system. It has existed since the 15th century. It also has experienced several different developments over time. As a result, there has always been a dynamic process, which has been influenced by changes in society, policies, and technology:

Beginning with the early capitalism, culminating into the exalted capitalism, then achieving the free market economy, and these days a kind of sustainable capitalism.

This paper concentrates on the relationship between capitalism and the environment. Since the 1970’s and the 1980’s experts have debated about this particular topic. Arguments range between views that are radical, romantic, rational, right-winged, and left-winged. When people are forming their views, they overlook that the generic conflict terms, “ecology” and “economy”, are actually similar. The part “eco” originates from the Hellenic word “oikos” (meaning “house”). The parts “logy” and “nomy” descend from “logos” (meaning ”doctrine”) and “nomos” (meaning “law”).[1] So, essentially people are talking and writing about a natural balance and operating efficiency. These are two similar goals. A company goes bankrupt when it does not meet its objects and so does the ecosystem. Although ecologists and economists often see each other very differently, they seem to have the same intentions regarding their systems. Instead of fighting against one another, they could learn from each other and realise economies (respectively ecologies) of scale.

Furthermore, this paper discusses the presumptions of capitalism in relation to answering the following question: is there a possibility for a co-existence of the environmental and the capitalistic systems? The aim is to figure out the needs for change and evolution in the existing framework. Traditional views shall be analysed and working mechanisms underlined.

1 Private Property

An economic agent is only able to maximise profits when he is in charge of any kind of ownership. That is the basis for a capitalistic economy.

There are some rights that an owner of property has. Only when all these rights are full-filled, the economic unit controls the property:

- the ownership is completely specified,
- the ownership is thereby also completely exclusive,
- the ownership can be transferred in a voluntary trade,
- and the ownership is legally protected (enforceable).[2]

These aspects make the difference in comparison to a centrally planned economy. The question is if this formal distinction is more efficient. In economical ways, the past showed that it is working better than anything else is.[3] In general, people are more motivated to accomplish actions, which is good for them and for the society as a whole.[4]

Decentralising duties and responsibilities can also be a way to solve environmental problems. However, critics often say that this causes the problems humankind is faced with. But, is this really true? In fact, people defend their property against unsustainable behaviour because this reduces their rent. As treasuries are empty - especially in Germany - the trend is going in the direction of privatisation. For instance, power authorities, social flats, and railway companies have already been privatised. Moreover, of course, it works better since they are nearer to the market, to their customers, and to the trends of their time. These companies have to be more efficient to stay in the market.[5] Nevertheless, why is that good for the environment? As Tab. 1-1 shows, the gross national product - analogue the gross domestic product nowadays - shows a positive correlation to the level of liberalism a society allows its members and the growth rate, which can be achieved.

Therefore, the correlation between freedom and income per capita is the logical result.[6] Statistics show that there is a positive correlation between rising prosperity and environmental sustainability.[7] So private property seems to get another dimension than traditional ecologists and left-winged activists would admit. Ownership in private hands is definitively more dynamic and produces disproportionately high social welfare. However, what is about the common goods?

Sceptics argue that there is no possibility to privatise common goods. Decades ago, the majority opinion was that ocean fisheries were part of the common goods framework and could not be privatised. Nonetheless, the idea of “Individual Transferable Quotas”[8] showed that even common goods could be privatised. It is only a question of research and development.

Air is also a common good. Actually, there exists a possibility to make the use of this good more efficient. The average volume of an adult human lung is circa three to four litres.[9] Advances in nanotechnologies unerringly will make it possible to count the litres different target groups (sportsmen, children, etc.) need to survive and this would be the basis for commercialisation.

Along the lines with the privatisation of air is the privatisation of the rain forest. The government could sell parts of the forest (perhaps to the farmers who burn them now). Then they could release “cut down certificates” to reach sustainable, calculated tree stock targets. Some farmers probably would sell their certificates to specialised lumber companies. But why should they? What could they do with the trees? They could produce oxygen for millions of people in the developed nations who are paying for this good.

Perhaps some people call this science fiction, whereas liberals picture the year 2026. Who knows?

2 Needs and Wants

For every company it is important to meet the needs and wants of the customer because otherwise it vanishes. Capitalism can only exist because the instruments for satisfying the desires of the customer are limited, but the desires are not. Although the needs and wants are not met for more than half of humanity, humankind was not at any time richer than today.[10] The problems are the many inequalities that have occurred over the last decades. Most notably, the “rich” nations are growing more rapidly than the “developing” nations.[11] One theory why rich nations are growing quickly is because the absolute income bases per capita of the First World countries are very high compared to developing nations. It should be noted that there are limits in growth processes. For example, trees do not reach the sky and everything will not continue to grow.

There seem to be several reasons causing the problem of inequality. First, the developing countries have a higher population growth. When this growth rate is higher than the GDP, the income per capita will fall; in the First World, it is the opposite. Secondly, it is also a question of compounded interest. This also affects both discussed groups. The problem of debts is shared by rich and poor countries. Nevertheless, the problem for developing countries is much greater.[12] However, debt relief cannot be the answer, not because it is too expensive, but rather because it is simply ineffective.[13]

Moreover, Third World countries are particularly vulnerable to moral hazard.[14] The risk that unsustainable structures stay unchanged is above average. Political and statutory general conditions have to change. Undemocratic and criminal behaviour have to be banned and prosecuted. Corruption is a pre-eminent challenge. If these problems remain unsolved, the growth issue will continue.[15]

As a result, investment quotas will not rise because companies and private business persons need a climate of security and faith. Thus, employment and prosperity will stay “foreign words” for inhabitants of developing nations.

On the other hand, developed nations have to be willing for a trade off. Governments have to reduce subsidies, especially ones agriculturally- related. David Ricardo once stated, “Free trade is not a one-way. Worldwide efficiency can only be reached off the beaten track.” However, what does this have to do with environmental sustainability?

It has been shown that a strong positive correlation exists between income and environmental performance. Therefore, nothing is closer - when facing environmental challenges - than solving social problems of countries with inversely proportional financial capacities. The only way to ensure that poor people care about the environment is to make them rich. The principle of “Maslows-Need-Pyramid”[16] explains why there is a positive correlation between income and environmentalism. The logic is clear; overall, to be an ecologist seems to be a deluxe behaviour. Therefore, the aim must be to provide avenues to as many people as possible into higher hemispheres, in other words, inside the pyramid. A father who is able to feed, house, and cloth his family will be more than willing to care about the biota.

Critics “…bemoan the fact that capital allocation is not geared to meeting needs, but rather to maximising rates of return?...”[17]. A homo oekonomicus[18] would handle the business this way. Generally, it is more important that a framework works and not if the ideas of it are compatible with romantic views of left-wing campaigners. The discussion does not reveal that millions of people are not provided with pharmaceuticals, food, and other necessities to survive. This is a question of market failure. On the one hand, subsidies and other deforming actions lower the demand (which arouses from income) of Third World countries and on the other hand, some regions naturally do not bear the costs which are produced by distribution. Therefore, western governments should discuss internalising external benefits.

Growing HIV infection and terrorist addiction rates could be slowed down by making unprofitable regions more attractive.[19]


[1] http://wikipedia.de

[2] Handout „Property Rights & Externalities“, p.1

[3] Tab. 1-1 shows the positive correlation betwenn liberalism and economic growth

[4] „The invisible hand“, Adam Smith

[5] for more information see chapter „competition“

[6] Tab. 1-2 shows the positive correlation between liberalism and income per capita

[7] Tab. 1-3 shows the positive correlation between income per capita and the Environmental Performance Index

[8] Handout „Renewable Common-Property Resources: Fisheries“, p. 30

[9] http://wikipedia.de

[10] Handout „The Environment, Population & Limits to Growth“

[11] Tab. 2-1

[12] Tab. 2-2

[13] this and some of the following arguments can be gleaned in this article: http://www.zeit.de/2004/42/IWF-Tagung?page=1

[14] http://www.jubileeusa.org/edpacket/odious%20debt.pdf - p. 3, “The Bataan Nuclear Power Plant - Philippines”

[15] Tab. 2-3 shows positive correlation between the GDP per capita and lowering corruption

[16] Tab. 2-4

[17] Jonathan Porritt, Capitalism as if the World Matters (London and Sterling, ²2006), 79 (2nd paragraph)

[18] the question is if a sapient like this really exists because sapient and homo oekonomicus are practically mutually exclusive

[19] Tab. 2-5




Title: Capitalism vs. environmental sustainability