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Monday, August 17, 2009

That's Deep: the Anti-MBA View of the Economy

At the end of my summer reading list post (or for 1st year MBA's, their "move to a new state and try to understand statistics on 4 hours of sleep" reading list post), I mentioned that I was starting to read Deep Economy: the Wealth of Communities and the Durable Future. It's about how to think of economics in terms of sustainability and climate change rather than just economic growth and return on investment.

As I have mentioned before (and probably not a surprise given the Grateful Dead song references on my right hand navigation bar), prior to an MBA, I was a long-haired, tofu eating, knitting, frisbee-playing, hippie who wanted to give everyone health insurance. Actually, the only thing on that list that has changed is that I cut my hair. However, post-MBA my mindset changed and I've presented a lot more business cases to CFO's. As a result, I initially found some sentences in the book to be appalling.

The principle offensive phrase was repeated a few times when a group from Vermont (where the author lives) commented that they would like to build a small scale tofu maker or oat grinder but they can't find anyone who will accept a return of 3% instead of 15%. A return of 3% is appropriate for very low-risk investment like government bonds but high risk investments like a community grain grinder do not. That's not a reasonable request of an investor.

The author also rails against the efficiency of larger farms or other large companies since they only make us marginally happier. The happiness of buying $5 eggs from a local farmer and being able to discuss the names of his chickens is greater than the happiness of 99 cent eggs at WinCome and Go super market. That's because after a certain level of income, social interactions make us happier than having more money. I'm a regular at the farmer's market and there's only so much meaningful conversation you can have about strawberries when there's a line forming.

Additionally, he loves the local Vermont radio station of WDEV that plays everything from left and right wing talk radio to girl's basketball to jazz to stock car racing. The author holds up that radio station as a perfect example of community since you get to hear all aspects of the community. I call it a perfect example of something that will cause me to change the channel 4 out of 5 times.

The author's final dogma is around local farming and growing food locally. I've occasionally helped out on small scale farms in South America and it is tough work. I lasted half the day during the sugar cane harvest. There is not a lot of the population that can physically be a small scale farmer.

I was almost done with the book and discussing how I thought that Howard Dean was no longer the craziest person in Vermont with my father in law. My father in law teaches classes on sustainability and gave my rants a skeptical look as though he was trying to remember why he thought his daughter had any taste in men. In response to my comments about how the author is anti-economic growth, he simply said, "The planet can't take too much more economic growth."

I thought about it. There has been enough scientific research about our unsustainable impact on the planet and climate change that it doesn't need any further explanation. However, economic growth models call for the GDP of all countries to grow and move up the value chain of production. China started out with cheap manufacturing than will move into more specialized technologies and Vietnam will become the source of cheap manufacturing jobs. As a result, incomes will rise in countries and eventually more people will be able to afford cars and air conditioners. But the connection between with climate change and stability is what will turn this model on its head.

When the middle class composition of China alone reaches a level of consumption that matches the western countries, there will not be enough oil and steel on the planet to support it. For every growth there is a plateau. While I generally skimmed the author's accounts of the history of oat grinding in Vermont, I understand his connection between economic growth and climate change. We cannot continue to grow anymore economically without changes.

Now those changes could be an increase in the price of cars, gas, and air conditioners so they are still out of reach of the developing nations' middle classes. But that price shock would hurt everyone so the other option is incorporate sustainability into the economic process. My favorite study the author was mentioned was that for the world population on average, money has a direct correlation with happiness up to $10,000 in annual income. For example, someone is very happy when they have enough money for food, then more money for meat, and finally some money for shoes. However, after $10,000 there is no longer that direct correlation with happiness. That extra money just buys stuff and at that point social interactions or community are bigger drivers of happiness (I would include street drugs in some cases but that's a bit off topic).

The idea of limiting economic growth is a paradigm shift for how I would think of the economy. Every party has been sold on the idea of growth and you need the economy to grow with the population. Once I got over my irritation with some of the author's stories, I began to understand the connection between sustainability and economic growth. That connection is counterintuitive to my business-case driven MBA thinking. Ways to change my thinking could be to have a sustainability discount factor that could factor in paying for pollution licenses in a cap and trade program. The sustainability question may replace the outsource question for Venture Capitalists' assessments of business plans. Right now, the bigger question on sustainability is "What's the ROI on that solar panel?" I realize that question may no longer be relevant at our current pace which is the antithetical to the frameworks that MBA's use.


Yvette said...

I have an MBA, and a childhood raised by 60s freethinkers, so I can understand your attempt to merge two different worlds.

I'd say the modern era does need growth, but it needs growth that does not poison the water/air/food.

Some industries focus only on ROI of cash, without costing out longer terms expenses - which are nearly impossible to measure so who could blame them?

Ideally, we would improve the water/air/food supply AND turn out widgets that the consumer would be willing to pay big bucks for.

My few cents.

Deadhedge said...

Hi Yvette,
It is good to hear from other MBA's with more non-traditional backgrounds.

I remember there has been some work on Social ROI in order to show the societal benefit. I was thinking that model could help with sustainability so it's at least reviewed as a positive rather than as an additional cost. Or there is something to balance out the additional cost.

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