The Triple Bottom Line Might Fix Capitalism
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” -Adam Smith
Adam Smith is known as “The Father of Capitalism.” He published his seminal work “An Inquiry into the Nature and Causes of the Wealth of Nations” in 1776, which laid the formal groundwork for what became the dominant theory of economics through today.
One of the basic tenets his work is that when people are free to pursue their own economic interests, then the market will naturally correct itself for the better. That is, when people are free to pursue profit and free to choose where their money is spent, then it creates an ideal meritocracy, in which the best naturally rise to the top, benefiting all of society.
Smith was also among the first to realize that wealth is not zero-sum. There is not a limited amount of wealth, and increasing wealth does not only come from taking it from someone else. Instead, wealth can be multiplied through economic cooperation. An overly simplified example is if I put $10,000 dollars in the bank, then the bank can loan it out to someone to buy a car, who can then get to work where he or she earns money, which can be used to buy products, thus keeping other stores open. Through savings and investment, the economy has grown–or “A rising tide raises all boats.”
In an ideal world, this would happen. But, in today’s world, Adam Smith’s free market capitalism has turned into something he would have never predicted, leading some to call for something different.
The Good the Bad and the Ugly
Imagine 10 pie shops in the pie district of Bakersville. All of them compete to make the best pie at the cheapest price. Through hard work, innovation, talent, and education, the shops will naturally produce different quality pies at different prices, causing some shops to get more customers than others. Over time, some will close, leaving only the ones that can best meet the needs of the consumers.
In this example, everyone benefits. The customers get quality pie at a cheap price. A solid customer base gives the shop security, allowing the owners to hire employees, expand their business, develop relationships with suppliers, etc. In the end, the economy grows, people get jobs, and customers get quality products.
However, this is not how it plays out in the real world. What tends to happen is that the shops look for cheap labor and hire illegal immigrants. Maybe they look for cheap ingredients and mask their taste by adding in high fructose corn syrup and unnatural amounts of salt. Some of the shops might invest in advertising that misleads their customers. Some might save money by ignoring environmental regulations. And so on.
In this more realistic example, who benefits? Sure, the owners have increased their profits and some people have jobs. However, in the end, the “invisible hand” of the market has not chosen the business that makes the best product. It has chosen the business that is the most profitable, by any means necessary, even at the expense of the public it is supposed to be serving.
“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” -Adam Smith
Fast forward the above example 30 years. One of the pie shops got an injection of cash from a venture capitalist, used that money to lower their prices beyond what is sustainable, and drove everyone else out of business. Once the market was wide open, they raised prices well beyond what they had originally, as customers had no other choice than to pay it. With their soaring profits, they lobbied the town council to make pie a part of every school lunch and to relax costly anti-dumping laws.
The end result in this example is not much different than what is going on today in the US. The average school lunch is a joke, clean air and water laws are being rolled back, large corporations have their favorite politicians on speed dial, and far more than I care to list here.
Take a step back and ask yourself if this is what Adam Smith was talking about. Don’t get me wrong, the free market is great. Even writing this article is an exercise in capitalism, as I’m competing with other writers to get customers for the end purpose of making money. However, something is different about what Adam Smith explained and what is going on today.
Accounting for Something Different
“To feel much for others and little for ourselves; to restrain our selfishness and exercise our benevolent affections, constitute the perfection of human nature.” -Adam Smith
The Triple Bottom Line (TBL) was first proposed by John Elkington in 1994. He defines it as a “sustainability framework that examines a company’s social, environment, and economic impact.” It’s really that simple. So instead of a company assessed based solely on its profits, it would also be judged by how it affects other people and what it did to the environment.
Of course, the problem with this idea is measurement. The rules for assessing the financial strength of a company are well established, even though some people get creative/fraudulent. But how do you quantify societal and environmental impact? One answer is to use one of the many sustainability reporting tools that have been developed in recent years. Each of these provides a framework for companies to account for a myriad of factors related to both the environment and society.
Hopefully, if these catch on, corporations and the public will be more aware of their impact on their surroundings, prompting a quick and decisive change for the better. On a positive note, some companies are already doing it, such as Ben & Jerry’s, LEGO, and Patagonia.
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