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“The Environmental Responsibility of Business is to Increase Its Profits” (Pierre Desrochers on capitalism & environmentalism)

[Editor note: This review was completed before the BP oil spill. To the extent that cost cutting was responsible for the Deepwater Horizon rig blowup and the uncontrolled oil spill, it was a monumental miscalculation under profit/loss accounting.]

A hallmark of the “sustainable development” mantra is the notion that business’s pursuit of profit maximization must necessarily lead to environmental degradation and the depletion of “non-renewable resources,” and that such activities must be closely regulated by government. However, this assessment does not square with the historical environmental record of market-based industrial progress and it ignores basic economic concepts.

Pierre Desrochers, Ph.D., Associate Professor of Geography at the University of Toronto, maintains, “It is unfettered governments that are no friend to the environment.” An expert in economic geography with specialization in the study of the history of technology, Desrochers provides an abundance of historical evidence to substantiate his position.

North American and British industrial history is replete with examples of profit maximizing firms practicing “sustainable development” long before the term was in vogue and distorted by modern day environmentalists, he documents. It was through the discipline of free market competition and the profit motive that a lengthy history of “green” innovations were realized, significantly predating the modern environmental movement.

The Canadian geographer provides a much needed dose of historical perspective, currently lacking in the sustainable development debate, through a comprehensive, scholarly body of work detailing the history of business innovation and its positive ecological track record. In the academic journal, Industrial and Corporate Change, [link, sub. requ.] The environmental responsibility of business is to increase its profits (by creating value within the bounds of private property rights) — Desrochers 19 (1): 161 — Industrial and Corporate Change, Desrochers meticulously details the history of how the free enterprise system, under its basic tenets of free and voluntary exchange, strong private property rights, and pursuit of profits functioned in the pre-regulatory era, delivering positive ecological benefits over time.

 Markets or Central Planning – Which is More Environmental?

The defining analysis revealing the detrimental effects of top-down, government regulation recommended by sustainable development advocates is demonstrated by comparing the environmental records of markets vs. those of centrally-planned economies. The record clearly shows environmental damage was more severe in the absence of markets or where private property rights were either nonexistent or poorly defined.

The former Soviet Union is the poster child example of the environmental destruction wrought by central planning. Desrochers explains, “The benefits of economic planning were pursued in the Soviet system without using prices and profit incentives which are the market’s key mechanisms for coordinating resource utilization. Not surprisingly, the Soviet Union intentionally obliterated property rights, common law protection, and market competition – exactly the institutional arrangements that enable the market’s invisible hand to allocate resources efficiently – because they were incompatible with the planning mechanism. Indeed, the institutional framework of the Soviet system was intentionally hostile to precisely the kind of innovation that wages an unrelenting war on waste.”  Forget “Unfettered” Markets… | c2c Journal

Further, when the Iron Curtain was finally peeled back in Eastern Europe, the level of environmental degradation was startling. Why, then, would some seek to implement such central planning measures in light of the unmitigated and well documented failures of such regimes to protect the environment? Politics and pursuit of power by bureaucratic elites, perhaps?

 The Free Market’s Record in Eliminating Waste and Inefficiency (a.k.a. “Sustainability”)

Desrochers states, “Historical evidence suggests that the profit motive has long acted as a powerful incentive to progressively increase efficiency of material use.” Many of the earliest examples of efficient resource utilization were the result of firms seeking to minimize waste from production processes or, often the case, creating valuable by-products out of production residuals.

Citing processes referred to in the academic literature as “dematerialization” (increased efficiency) and “transmaterialization” (resource creation), early industrial development frequently confronted waste from production as an excess cost and liability that needed to be resolved, not because of altruistic motivations, but rather because a firm’s very survival often depended on finding a solution.

Desrochers explains that according to analysts of the era, two main incentives rewarded by-product development. First was the desire for increased or constant profitability – the survival motive previously noted.  Second was the necessity of preventing damage to the property of others.  He emphasizes it is this second incentive that is rarely addressed in the sustainability literature, pointing out, “market economies were not only based on voluntary exchange and prices, but also on a system of privately ‘owned’ property rights based on common law doctrines of trespass and nuisance.” Property rights and the laws that protected them acted as a clear incentive to avoid polluting thy neighbors’ property because of the stiff legal and monetary consequences.

The Empirical Evidence Abounds

Two historically noteworthy examples of by-product development highlighted by Desrochers come from vastly different industries: oil and cotton.

1. Oil

In the late 1800s, employees of Standard Oil Company were confronted with the problem of what to do with the “sticky” and “slimy” residual of oil refining. After various disposal options were unsuccessfully attempted, Desrochers explains, “Company executives then sought the help of chemists to develop a satisfactory disposal method. Almost simultaneously, however, a process was being developed through which this refuse could be converted into paraffin…” This ultimately led to the development of kerosene as a safe, low odor heating fuel, “alongside some 300 other by-products” including gasoline, which was previously discarded as a waste by-product. These discoveries made Standard Oil hugely profitable beyond its core oil refining business while simultaneously helping the environment.  

2. Cottonseed

According to Desrochers, “cottonseed [which] typically accounted for between two-thirds and three-fourths of the weight of the cotton as it was picked in the 19th century United States was considered an unmitigated nuisance…” Rotting cottonseed was considered dangerous to the health of humans and animals alike and was so problematic that in the early 19th century its disposal was overtly regulated by a number of states. However, with the application of human ingenuity and know-how it became a valuable input in countless products.

Desrochers references the work of H.G. Kittredge (Census Bulletin 109, June 16, 1902; p.18) who wrote, “Cottonseed was a garbage in 1860, a fertilizer in 1870, a cattle food in 1880 and a table food and many things else in 1890.” These by-product innovations proved lucrative to the industry and, according to Kittredge, “nothing but the utilization of cotton-seed waste saved the industry from bankruptcy…”

Laissez-faire’s “Green Thumb”

Invoking Adam Smith’s infamous “invisible hand” analogy, Desrochers concludes that market-based competition implicitly includes a “green thumb” component arguing that as businesses act in their self-interest to improve their own well-being, the benefits to society invariably extend to the environment, as well. Others have convincingly suggested that the Wealth of Nations was probably the world’s first call for sustainable development. (See: Sustainable Development: Common Sense or Nonsense on Stilts? | The Freeman | Ideas On Liberty)

Desrochers concludes, “the profit motive wages war on wasted resources and what is pollution but wasted resources? Far from being a response to the modern environmental movement, dematerialization and transmaterialization were logical outcomes of market incentives that unintentionally benefited the environment.”

Conclusion

The many historical examples documented by Desrochers reveal that the combination of the profit motive, price signals derived from supply and demand, and private property rights all served to create an environment in which industry sought to improve its bottom line and, in so doing, also improved the well being of the environment and public health.

Ultimately this is a battle between competing ideas of how best to bring about environmental improvement: market-based solutions or top down centralized government planning and regulation. Today’s sustainable development advocates would do well to review the historical evidence of both western industrial development and the dismal environmental track record of centrally planned economies. The conclusion seems obvious.

5 comments

1 Andrew { 05.04.10 at 5:49 pm }

Regarding the note about the oil rig incident-the real problem is that drilling closer to shore is very restricted. The safety mechanisms don’t work as well in deep water. Naturally those on the left say that the government should require that people-who they have forced to go way out into the ocean to drill-use better fail-safes. I say if they were drilling closer to shore-which they aren’t allowed to do-the incident wouldn’t have happened.

2 The_Orlonater { 05.05.10 at 10:33 am }

Andrew, do you have any resources on this matter that you can link to? I’m quite interested in reading about it(note: I’m not being sarcastic or skeptical).

3 Steve Burrows { 05.05.10 at 1:27 pm }

I agree, as waste is lost profit or opportunity any entity attempting to increase profit will spend considerable effort to reduce waste of all kinds. Even this recent example is small on the scale of mishaps from the past, and the resources available from the profits BP has made can be used to mitigate the damage. If BP had not been subject to competition and the requisite need to constantly improve, things would be much worse, for BP and the environment.

4 Andrew { 05.06.10 at 5:59 pm }

2-I read about the problems with the safety devices in the Wall Street Journal, on the third, a little bit under a blurb for an article on A4, A5:

Regulators learned in a 2004 study that a vital piece of safety gear may not function in deep-water seas but didn’t bolster industry requirements.

Unfortunately the story is not available on wsj.com, so I can’t provide a link.

5 pama { 06.15.10 at 5:22 pm }

On the editor’s note…just makes me laugh. Those whoe defend free market as a solution for everything only do it untill the reallity beats their arguments. Free enterprise in a market based economy might has been the source for environmental innovation and footprint reduction in many cases, as those exemplified by Desrochers, but he doesn’t say anything about the other thousand cases where profit driven companies have and still do damage environemntal resources.

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