Monday, March 27, 2006

Turner, the stakeholder model, and the environment

In the conclusion of Just Capital, Adair Turner argues against "stakeholderism".

"... as a guide to practical policy it is best a cul-de-sac, at worst dangerous. It sounds attractive to ask corporations to think through the wider social 'balance of gains and losses' but in practise it is an almost totally inoperable principle. Corporations can just about imperfectly identify the complex set of actions which will maximise their own profit within given constraints, but they are ill-equipped to calibrate the second, third and nth order social consequence of their actions and lack the legitimacy to make the trade-offs involved. Is it better socially to downsize rapidly to preserve the remaining business and to free up resources for work elsewhere, or to keep workers in existing jobs at the expense of the firm's long term prospects and the productivity growth of the whole economy?"
"Adam Smith's great insight, indeed, was to identify that the complexity of economic interfaces is so great and their number so numerous and each of us so dependent on the behaviour of others, with only a few of whom we could ever hope to have bonds of friendship rather than contract, that we have to construct a system which makes self-interest compatible with civilized behaviour, rather than relying on a generalized disposition to benevolence."

The stakeholder model is further condemned for the weakness of the policy prescriptions that actually arise from it. How then has it gained so much currency? Turner again:

"For while socialism has lost the great ideological battle of the twentieth century, and most former socialists ... accept the power of the market, that acceptance has not come easily, at least at a philosophical rather than a practical level. For socialism was a creed which sought to praise and promote the intrinsic noble purposes ... its roots were both Marxist, and in Britain Methodist, its natural tone messianic. Socialists therefore respond uncomfortably to the prosaic rationality and empiricism of liberalism. More fundamentally still, they respond uncomfortably to the idea that we should accept the significant role of individual self-interest, even if we can demonstrate ... wider social goals."
Now Turner has written a chapter on the environment, arguing well that regulation, eco-taxes and spending on environmental goals are proper social choices, and do not have to be sacrificed on the altar of competitiveness. However, he does not revisit the issue here. But what is the implication for the environment of this rejection of stakeholderism?

The conclusion is that vague admonitions to corporate responsibility do not work, and that we should focus on structuring the system to civilise self-interest. This seems rather a painful pill for the environmental movement to swallow, trading as it does, almost entirely in admonition - that is in promoting "personal responsibility" for the environment. It is hard to blame Turner for ducking at this point.

Now I will admit that individuals are not quite the same as corporations. Individual behaviour is driven rather more by values and preferences, and less by a fiducary responsibility to oneself. So exhortation and example-setting may not be pointless, but nonetheless the difficulty of judging environmental consequences remains, and a system which integrates self-interest and the environment may simplify that judgment.

It is also politically difficult. People are happy to vote for admonition because they can ignore it. Stakeholder environmentalists believe it will work. Environmental contrarians will settle for a policy of admonition because it won't work. So there is an alliance between bascially left-wing environmentalists who believe in the stakeholder approach, contrarian right-wingers who don't, and those indifferent to environmental issues who will go along with the easy option. The liberal environmentalist risks condemnation from all sides, for the crime of supporting measures that will actually do something for the environment.

And it should be said that sometimes the contrarians will be right, and in many cases there is just received wisdom on both sides, and no compelling evidence. Many will dismiss arguments like this out of hand as industry lobbying, but the case should be answered before considering a plastic bag tax. If indeed the opposition is largely justified, then we have an example of a liberal measure, using a market mechanism - price - to use self-interest in the common good, failing because the good has been incorrectly identified. If this sort of thing is likely to happen much, this will be another reason for concern over environmental measures that do more than plead.

There is a mountain to climb here. I have explained the obstacles, but I do not suggest we give up. Firstly we need to focus policy on the most urgent and cast-iron scientifically supported cases, and leave the marginal and arguable ones for later. The mantra that environmental thinking must pervade all corporations and all government departements, as I said here can be dropped in favour of being more specific, and less reliant on other people believing what we think they ought to believe.

Second we need to point out to enviromentalists that 20 years of admonition has done very little. A handful of people have internalised the values coherently, and the rest of us make token efforts, or freeload entirely. By all means they may continue to admonish, but that should not be seen as a political process. Governments should set the rules, expecting self-interested behaviour, not spend my taxes campaigning at me. If environmentalism becomes the new socialism, it will go the same way as the old.

Tags: Adair Turner, Environment, Stakeholder

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