Natural Capitalism (1999)

 

The environmental movement and the capitalist agenda have traditionally appeared to be natural adversaries; at the very least, uneasy bed partners.  However, Natural Capitalism is a compelling and detailed read on how this is a fundamental misunderstanding of the solution to modern environmental problems.

Written in 1999 by Paul Hawken, Amory Lovins (who is the founder of the Rocky Mountain Institute – one of the best environmental research organisations in the world, if you haven’t heard of them) and L. Hunter Lovins, Natural Capitalism is a blueprint for how capitalism can evolve to properly respect the environment while at the same time harnessing the unquestionable dynamism and individual autonomy of free markets.

The authors make the convincing argument that there is no need for a retreat from capitalism to heavy-handed regulation (not to discount the beneficial role of smart regulation that properly defines the appropriate level of risk we are willing to accept in free markets).  Recent economic experience has taught the lesson that the market feedback loops, that supposedly keep capitalism on a self-correcting course, are failing to work.  This is epitomised by the idea that, “For all their power and vitality, markets are only tools.  They make a good servant but a bad master and a worse religion.”  Just like a thriving democracy, capitalism requires responsible and informed citizens.

Unfortunately, factors such as oil, coal and natural gas subsidies, unaccounted for externalities (such as cost of addressing pollution and climate change), the avoidance of transparency, monopolization of markets, lobbying for private benefits and capital concentration amongst the world’s wealthiest have led to a gross distortion of global energy and resource markets. 

Consequently, it is time we abandoned our trajectory toward economic fundamentalism, in which the tax payer is left to pick up the bill for environmental degradation, and re-imagined the driving ambition of commerce, where we “take nothing, waste nothing, do no harm and do well by doing good, not at the expense of the planet but of less alert competitors.”

As a starting point, the authors outline the basic rules or assumptions governing our current economic system and the economic theory that underpins it:

·         Free-market systems reinvest profits to make labour and capital increasingly productive.

·         The maximization of total output (usually measured in GDP) maximises human well-being.

·         Any resource shortage that may occur will elicit the necessary development of substitutes.

·         A healthy environment is balanced against the need for economic growth.

·         Free enterprise will allocate people and resources to their best use.

In contrast, the vision of Natural Capitalism posited by the authors, works around the following adaptation of the rules, as if living systems mattered:

·        The environment is the primary factor of production (before human, manufactured and financial capital) as it is “the envelope, containing, provisioning and sustaining the entire economy.”

·        Future economic progress best takes place in democratic, market-based systems of production and distribution where all forms of capital (manufactured, financial, and especially human and natural) are fully valued.

·        Human welfare is best served by improving the quality and flow of desired services, rather than increasing total output.

To begin to shape this new economy the authors focus on four principles:

1.       Radical resource productivity

2.       Biomimetic production

3.       A solutions economy, and

4.       Reinvestment in nature.

Read as a list this is a pretty abstract plan and one that does not really jump off the page.  Consequently, I want to take the time to discuss some of the ideas contained within this book that I think make it one the most innovative and important books I’ve read.

Radical resource productivity is all about using what we have more efficiently.  This has the benefit of slowing the rate at which we deplete our resources and emit pollution.  The authors take the time to document the plethora of ways in which nearly all environmental and social harm is a by-product of wasteful use of human and natural resources. 

A central tenet of resource productivity (and the book) is the idea of “Factor Ten” improvements – a 90% reduction in energy and materials intensity – and how they can be applied to almost every business, everywhere.  To do so, the authors explain the power of “thinking backward” and how this can lead to “tunnelling through the cost barrier.”  To think backward is the idea that when you envision a way to make a process more efficient you think downstream to upstream because when you save one unit of energy furthest downstream (closest to the finish) you avoid the need to generate energy earlier in the system.  These savings multiply as they are traced back as energy is always lost in transmission downstream (e.g. friction).  This can apply to manufacturing just as naturally as it can to human work flow.  Working in this direction, successive components become simpler, smaller and cheaper.  This leads to what is known as “tunnelling through the cost barrier” which describes the phenomenon in which you receive diminishing returns on your efforts to improve efficiency until a certain point when you realise that you don’t have to pay for capacity you do not need (see the diagram below for help with visualising this). 

 

For example, imagine a system pumping water through pipes: you start downstream by using a pipe that reduces friction, then you straighten the pipes’ layout as much as possible so you don’t unnecessarily lose momentum and also improve the sealant at all the joints so you don’t have so much transmission loss.  Then the ‘eureka’ moment comes when you realise your efficiency gains mean that you can use a smaller generator to pump the same amount of water as before, thus drastically reducing your energy use.  That is tunnelling through the cost barrier and the authors do an excellent job of explaining how this type of thinking can be used in many contexts.

This kind of holistic systems approach regularly leads to unintended benefits; the authors conclude by noting “You know you are on track when your solution for one problem accidentally solves several others.”

The second factor is biomimetic production, which is a fancy way of saying that you should always endeavour to turn waste in value.  This is accomplished by removing waste from the system and closing the resource cycle (upcoming reviews on the books Biomimicry and Cradle to Cradle will greatly expand on these ideas if you’re interested).

The father of such thinking is Taiichi Ohno who created the system of “Muda” (Japenese for waste/futility) at Toyota in the 1940s in which any activity which absorbs resources but creates no value is eliminated from the system.  This approach primarily applies to manufacturing but can be deployed in all economic sectors: retail, design, customer services, etc.  The focus is simply that value continually flows at the pull of customers – nothing is produced upstream until it is requested downstream.

This approach was brought to the U.S. by James Womack and Daniel Jones in their adaptation, Lean Thinking.  The approach concentrates of seven sources of waste:

·         Transport

·         Inventory

·         Motion

·         Waiting

·         Over Production

·         Over Processing, and

·         Defects.

Having a father who works as an engineer, I’m assured that this kind of thinking has been common place in manufacturing for many decades.  A quick search of systems thinking like Kaizen, Six Sigma and Just-in-Time Manufacturing reveal the broad application of such practices beyond the factories of Ford and Toyota.

Consequently, it would appear that radical resource productivity and biomimetic production have been understood and applied for some time; the challenge is expanding the scenarios in which they are used and encouraging people to consider these principles in everything they do.  In this respect the authors are asking for an evolution of current practice.  Where the book really comes into its own, and introduces what I consider to be revolutionary idea, is the solutions economy.

The solutions economy is a fundamental shift in the way we buy and consume goods and services.  Instead of buying the physical item, the authors advocate the idea that we should regularly contract for the service it provides instead.  This was best illustrated by the example of air conditioning.  When you buy an air conditioning unit to cool your home or office, you don’t really want to own the metal box of components; you want the benefit of being cool. 

This shift, from possession of goods to utility of services, will incentivise the provision of the most up to date technology by your service provider (because it will be the most cost effective and therefore leaves the provider with a higher profit margin once the cost of providing the service is subtracted from the agreed service price – which of course will be renegotiated down at the end of the term of the contract as the service has become cheaper to provide).  Furthermore, when selling a service, the business retains ownership of the input and you encourage retrieval and reuse of the raw materials and remove the inconvenience of disposal and recycling from the consumer.  This way, you align customer and provider objectives creating lifelong customers, instead of repeated disposable purchases with unnecessary waste.  You probably already have a contract for your phone, why not for your computer, your car or your furniture? 

The authors reference textiles company, Interface, as great example: they produce carpeting and then contract the service of continual floor covering (because you don’t really want to own the carpet), replace the carpet whenever you want, and then reuse all the materials.  This has led to a situation in which they barely use any new materials now and have reduced their energy input by 97% while still providing a great product and improving profitability.  “In an economy of service and flow, an entire company may end up owning little or nothing but accomplishing more, while being located nowhere to sell everywhere.”

Lastly, Natural Capitalism would not be complete if it did not advocate closing the loop and reinvesting in nature.  After all, nature truly does determine the limits of own our growth and we must recognise this truism if we are to avoid the ultimate Malthusian dilemma. 

The authors present an intriguing study in which scientists attempted to quantify the value of the abundant eco-system services that nature provides by setting up a biosphere in which all of nature’s services had to be recreated to support eight scientists for two years.  The bill for replicating nature for two years, for eight people: $200 million!  Just a few of the services they highlighted include:

·         The production of oxygen

·         The purification of water and air

·         The regulation of the chemical composition of the atmosphere

·         Natural pest and disease control by insects and birds

·         Flood prevention and regulation of runoff

·         Storage and recycling of nutrients.

In my opinion, the case for reinvesting in our natural capital is as simple as the principle that you replace what you take and you appreciate the richness that is brought to our lives by the fecundity of nature.  However, if you’re more of a numbers guy, consider that the study calculated the value of 17 eco-system services provided worldwide to be $36 trillion – the Gross World Product, when this study was conducted in 1999, was $39 trillion.

It may be perhaps overstating the obvious at this point, but I learnt a lot and was truly impressed by this book.  It may be a bit on the technical side for the casual reader, but as a tool for educating business leaders and government regulators what an economy that properly values natural resources, addresses pollution and respects free markets would look like (all without taxing carbon!), this book is going to be your first port of call.

When design works with nature and not against it, when resources are used frugally, new technologies are adopted and broken loops are closed, toxicity is designed out and health in.  Even though most global economies have started to recover since the crash of 2008, we still face a fundamental problem with their design.  I hope that our economy recovers strongly and we can get back to focusing on long term environmental issues but, moving forward, let us not forget that just because we have the ability to accelerate a car that is low on petrol does not mean that the tank is full!

Score: 92/100