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| Version | User | Scope of changes |
|---|---|---|
| Oct 27 2007, 6:07 PM EDT (current) | laschmitt | 19 words added, 2 words deleted, 1 photo added, 1 photo deleted |
| Oct 27 2007, 6:03 PM EDT | laschmitt |
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How many times have you heard the refrain ‘If it made economic sense, companies would do it. The Government doesn’t need to step in’. This statement is commonly made by ‘free marketers’ who bemoan the ‘restrictions’ that laws and regulation place on commerce and capitalism. This perspective has been espoused by pundits and reported on by main stream media that the California regulations to limit greenhouse gases were just a way to get around the fact that California can’t impose its own CAFÉ standards.
The fact of the matter is that the refrain ‘If it made economic sense, companies would do it.’ is rarely accurate or true when it comes to common goods. There are two reasons for this. The first is that companies frequently make decisions based on non-economic factors. Company ‘strategy’, inertia, core competencies, marketing and just plain human decision making all factor into what a company ‘does’. Anyone who studies innovation knows about the poor track record of corporations in trying to figure out what they should do.
The second fact is that companies rarely factor in externalities or, as they say in the system dynamics world, exogenous, factors that represent the true costs (or benefits) of their actions or products. This is the ‘tragedy of the commons’ at the corporate level. A totally ‘free’ marketplace will inexorably result in local (i.e. individual corporate) decisions being made that create costs that all have to bear. In these cases the Government MUST step in and make the corporations see the true economic reality of their decisions.
A curious outcome often occurs when this happens. Despite all of the moaning and gnashing of teeth about how much a new regulation will cost and the exorbitant estimates of pain it will cause, companies often find that they can actually make MORE money by being aggressive in pursuing the objectives of the regulations (e.g. lower greenhouse gases, higher MPG, less waste etc.). There have been recent examples where companies have been ‘surprised’ that by taking aggressive actions that, on the surface, would clearly be seen (and analyzed by traditional economic models) to cost a lot, actually end up saving a lot AND, at the same time, result in more sales. This fact has started to be talked about. Even BP has claimed that they have experienced this in their ‘green’ efforts and has been publicizing how pleased and ‘surprised’ they were at the economic results.
What does this then say about our standard economic analyses? That they are at best incomplete and at worst misleading. What is likely happening is that the economic ‘position’ of a company is not a linear curve as most economic models would suggest but is more likely a non-linear system with multiple equilibrium (see Butterfly Economics by Paul Ormerod). The following diagram illustrates how a complex system can have more than one 'equilibrium'.
If you just analyze just one equilibrium solution,solution (as most do), you will miss the other, potentially better, one. This is what happens to companies time and time again and, it is one of the barriers to being innovative. The disruptors are those who have figured out that there is an alternative equilibrium and how to get there.
The fact of the matter is that the refrain ‘If it made economic sense, companies would do it.’ is rarely accurate or true when it comes to common goods. There are two reasons for this. The first is that companies frequently make decisions based on non-economic factors. Company ‘strategy’, inertia, core competencies, marketing and just plain human decision making all factor into what a company ‘does’. Anyone who studies innovation knows about the poor track record of corporations in trying to figure out what they should do.
The second fact is that companies rarely factor in externalities or, as they say in the system dynamics world, exogenous, factors that represent the true costs (or benefits) of their actions or products. This is the ‘tragedy of the commons’ at the corporate level. A totally ‘free’ marketplace will inexorably result in local (i.e. individual corporate) decisions being made that create costs that all have to bear. In these cases the Government MUST step in and make the corporations see the true economic reality of their decisions.
A curious outcome often occurs when this happens. Despite all of the moaning and gnashing of teeth about how much a new regulation will cost and the exorbitant estimates of pain it will cause, companies often find that they can actually make MORE money by being aggressive in pursuing the objectives of the regulations (e.g. lower greenhouse gases, higher MPG, less waste etc.). There have been recent examples where companies have been ‘surprised’ that by taking aggressive actions that, on the surface, would clearly be seen (and analyzed by traditional economic models) to cost a lot, actually end up saving a lot AND, at the same time, result in more sales. This fact has started to be talked about. Even BP has claimed that they have experienced this in their ‘green’ efforts and has been publicizing how pleased and ‘surprised’ they were at the economic results.
What does this then say about our standard economic analyses? That they are at best incomplete and at worst misleading. What is likely happening is that the economic ‘position’ of a company is not a linear curve as most economic models would suggest but is more likely a non-linear system with multiple equilibrium (see Butterfly Economics by Paul Ormerod). The following diagram illustrates how a complex system can have more than one 'equilibrium'.
