When a business seeks to implement an ethical change then there will be some different types of economic impact that it will experience.
In summary some key elements of these delineations include:
• win-win versus win-lose (i.e. whether, at the same time as ethics ‘win’, financial considerations ‘lose’);
• within win-lose (which implies that consumers will now be paying more for their products), those situations where businesses can keep their profit margins intact versus those situations where those profit margins dip.
Win-win versus win-lose situations
Win-win situations are on the face of it straightforward for business as ethical and profit considerations are aligned. We would argue this is where most progress has been made by voluntary Corporate Responsibility initiatives over the past 25 years.
However, situations that are win-win in the long-term may be win-lose the short-term. This creates a tension between the interests of those involved in the business (investors and employees) on long-term versus short-term bases.
There may also be a necessity for joint research by businesses to achieve the public policy objectives on a win-win basis (which if not handled carefully could come up against competition law information exchange restrictions).
Elasticity within win-lose situations
Win-lose situations are less straightforward than win-win ones. This is because it may or may not be possible for businesses to pass costs onto consumers, depending upon considerations of the price elasticity of demand. We need to consider two situations:
• In some situations there is ‘price inelasticity of demand’.
• For example, for medication, demand will generally not be particularly affected by the price.
• Pharmaceutical companies will be able to pass to consumers the cost of ethical choices by the business, without consumption dropping and profits thereby being dented. This will be possible if they are in a monopoly position in the relevant market.
• This means that they will require a much reduced incentive to make such changes.
• In other situations (‘price elasticity of demand’).
• For example for leisure air travel, spirits, coca-cola, cars businesses will be able to pass to consumers the cost of ethical choices by the business.
• Price shifts by the business may result in more modest air travel or car choices, for example.
• So businesses will have a disincentive to making ethical choices, even if they are in a monopoly position.
Note that competition law, as it is presently regulated in the UK and EU, might be a barrier to businesses collaborating to achieve ethical ends. For a fuller discussion of this area see ‘Article 81 EC and Public Policy’, Christopher Townley, Hart 2009.
It is argued here that it is not feasible that regulators would have the capacity to oversee all ethical issues within the economy, and therefore that crowdsourcing of such issues is necessary – see big society, and e-community. e-community could also have elements enabling businesses to participate in self-regulation, subject to other parties (individuals, NGOs or the media) also being involved in the process in order to avoid cartel behaviour.
Overall impacts of such initiatives
Of course, the overall effect of our thinking is the internalisation of externalities throughout the economy. This constitutes a ‘bad news message’ for the economy overall – certainly if one is looking at things in a short-term, profit-based manner. Similarly this is a ‘bad news message’ for any area or nation that has previously had the ability to externalise costs to other areas or nations.
However, our thinking is a ‘good news message’ inasmuch as it represents the emergence of an economy with the facility to prioritise in a balanced way objectives of all kinds. Furthermore, although the project outlined here can be seen in isolation as one entailing overall the internalisation of externalities and therefore decreasing global productivity, the picture is different when one factors-in ongoing technological advancement and innovation (including that enabled by information technology (IT) that allows much of the change we advocate) and the resulting growth. With that wider picture then the outlook can still be for growth, just in a newly responsible fashion.
1) It is worth reiterating the implausibility of all positive social and environmental agendas in life might correlate to positive profit outcomes, amongst all the other possibilities. Therefore there will have to be a balancing between profit and other objectives in numerous areas.
2) Due to the elasticity/ inelasticity arguments above essentials should be less affected than luxuries by the introduction of e-community. This is because businesses involved in essentials can, under suitable conditions, more easily adapt their ethical position without it affecting price.
3) Elasticity considerations tie in very powerfully with market definition.
4) It may be beneficial for markets to work together if they currently share the same environmental/social harm or can achieve the same benefit.