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Adrian de Groot Ruiz

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Paving the Way for a New Capitalism Based on True Prices

Posted: 01/27/2013 9:55 am

We are standing on the eve of a remarkable evolution of capitalism. A regulated market economy based on free price formation has its serious shortcomings but has long been the best we got. Now, a superior alternative seems to come quickly within reach: a market economy, for sure, but one based on true prices. The true price of a product is its quoted price plus the unpaid -- "external" -- environmental and social costs incurred in its production and consumption.

Just imagine what happens when in a few years' time all producers would provide transparency with regard to their true prices. In so doing, they would give consumers the benefit to take these true prices into consideration next to the actual prices. For instance, when shopping for a smartphone, you could see and come to realize the costs of restoring the harm done by your individual phone due to amongst others CO2 emissions, mineral depletion and possible underpayment of workers. If actual price differences are small, then you could opt to buy the phone with the most competitive true price. And many others could do so as well. All these individual choices would result in a terrific world. Progressive brands could set themselves positively apart by sporting products with low true prices, and no brand would like to have a reputation of high true prices. This creates competition -- the driving force in capitalism -- on sustainability, so that companies will start to find effective ways to avoid unpaid costs. And by keeping the environmental and social costs at bay, we conserve the planet for ourselves and our children, and allow people to have a decent job and life.

Far-fetched? You believe that these ideas come from dreamy greenies? Well, think again. Progressive companies are the ones setting the trend towards providing transparency about the external costs incurred in production and consumption. Pavan Sukhdev, a former banker at Deutsche Bank, led an influential UNEP study to value ecosystems and biodiversity (The Economics of Ecosystems and Biodiversity) starting 2008. Yvon Chouinard and Rick Ridgeway from outdoor clothing company Patagonia called for companies to monetize their externalities in the Harvard Business Review in 2011 (together with Jib Ellison). In that same year, sportswear brand Puma published the first environmental profit & loss (EP&L) account ever, showing how much costs Puma imposed on the planet. The so-called B-team, headed by Jochen Zeitz, former Puma CEO, and Richard Branson, founder of Virgin, want to take it one step further and will launch this year a coalition of companies to scale up the "EP&L." In sum, visionary business leaders are shaping this trend right now.

The critical question is how we can realize that companies not only show but actually improve their impact on society. At present only a fraction of all external costs can be internalized profitably. Hence, companies need their consumers to prefer products and brands with low external costs over those with high external costs. Otherwise the efforts of Branson and others towards monetizing externalities will probably remain an interesting intellectual exercise at the corporate level. It is therefore essential to create mainstream markets for products with competitive true prices. This requires progressive companies to go beyond corporate-level transparency such as an EP&L and involve their consumers in this evolving trend by showing the true prices of their products.

For now, keep an eye on the World Economic Forum meeting at Davos these days (January 23-27), where monetizing externalities is a hot topic. The buzz will undoubtedly accelerate the inevitable evolution of capitalism.

This post is part of a series produced by The Huffington Post and The World Economic Forum in recognition of the latter's Global Shapers initiative. The Global Shapers Community is a worldwide network of city-based hubs developed and led by young entrepreneurs, activists, academics, innovators, disruptors and thought leaders. Aged between 20 and 30, they are exceptional in their achievements and drive to make a positive contribution to their communities. Follow the Global Shapers on Twitter at @globalshapers or nominate a Global Shaper at http://www.globalshapers.org/apply.

 
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