Why we should review economic growth: the consequences of flying too high
Kate Raworth, economist and creator of ‘Doughnut economics,’ is not convinced. “ It is time to think again…” she says “because today we have economies that need to grow whether or not they make us thrive, and what we need are economies that make us thrive whether or not they grow”.
The Airplane analogy, by W.W. Rostow, illustrates how societies shape economic growth through time. First, a resting plane presents traditional societies focused on agriculture with limited technology and production. Then, technology transforms production methods leaving behind agricultural subsistence. Gradually, they prepare for the airplane’s takeoff with already altered institutions, technological innovations, ideas of expansion, and financialisation of economies. Takeoff begins, and economies embrace a journey of growth, where modern societies engage in industrial expansion and exploitation of finite natural resources until they reach the last stage: the era of mass consumption. The airplane symbolising our economies is in the last stage, where businesses are rewarded and driven to grow endlessly, despite the social and environmental cost.
Why don’t we stop flying?
The analogy of the plane represents a default assumption: that growth is going to continue indefinitely due to the growth model and how it incentivises short-termism. This model has placed the shareholder in a privileged position where their interests dominate the decision-making process because their funds and capital are necessary to remain competitive in the market. Managers or CEOs are hired and rewarded for pursuing revenue maximisation. In most cases, returning funds and investments can create considerable pressure on CEOs. Evidence of pressure levels is reflected in a survey conducted by McKinsey and Company, where 65% of the CEOs started feeling increasing pressure to deliver short term results, and 87% reported feeling pressured to achieve those results in less than two years.
Pressure, incentives and rewards encourage managers to show value maximisation results in a short-term period. This dynamic is potentially problematic since managers can adopt unsustainable practices to show short term results and ultimately obtain rewards or avoid the risk of losing their job. Regarding rewards, shareholders rationally expect revenues from their investment. Consequently, boards representing shareholders, tend to incentivise CEOs through compensation packages such as bonus salaries or stock acquisition to secure revenues. Incentives can reach significant sums, for example in 2017 private high size companies, CEOs received approximately between $100 and $250 million in compensations. In terms of CEOs´risks, an alternative method to aligning CEOs is firing them when they stop showing constant growth. A study that tracked 2,000 CEOs over ten years concluded that the main reasons for CEOs to be fired were poor business performance (30%) and with misalignment with the board (26%).
When CEOs face the risk of losing their job or are rewarded with large sums to maximise profit, some can make unsustainable decisions that harm livelihoods and contribute to climate change. An example of an unsustainable short-termism approach was the fast-fashion company H&M. From 2015 to 2018 the company’s shares fell around two thirds. The CEO Karl-Johan, son of the founder Stefan Persson, experienced heavy pressure by shareholders to present results of profit maximisation. During his time holding the CEO position, H&M was linked to labour exploitation in Indian and Cambodian factories, where workers reported excessive hours and unfair wages. Additionally, the company was accused of heavily polluting nearby residential areas and the air, with chemical products necessary for garment production. These unsustainable practices were aiming to maximise profit by cutting costs of production and wages.
What are the problems of flying too high?
As the shareholder model explains why we do not stop flying, it is time to explore the implications of flying too high: social inequality and climate change. Companies can be agents of social inequality by cost reductions and benefiting a single small group. The shareholder model establishes that returns must be a priority, but this cannot occur unless companies grow revenue to maximise the investment. Nevertheless, to increase revenue, managers have to reduce costs. They can do so by cutting costs in production, materials, employee numbers, wages and benefits such as health insurance. This happened during the pandemic, where companies facing revenue reduction due to the economic crisis had to reduce costs. Four hundred million jobs were lost globally, and 5.4 million people lost their jobs with no health insurance in the US.
The negative impact of the growth model in climate change is rising consumption of oil-based products. Hence, since 1985 demand has had steady growth and consequently increasing returns. The 100 leading companies satisfying increasing oil demand for the last decades, and especially the ‘Oil Majors’ (ExxonMobil, Shell, BHP Billiton and Gazprom), are responsible for 71% of industrial greenhouse gas emissions since 1988. Big oil companies have shown few compromises to cut production except for the pandemic, where they made the most significant cut in history. However, the damage is done since they have released more CO2 and GHG emissions in the last 30 years than in 237 years. They have been hesitant to reduce production due to the high cost of closing high-flow oil wells ($900 hundred million) and transitioning into renewable energies (trillions of dollars). Although the oil industry is in a difficult position, climate change is a pressing reality. More than 1 million animal species could face extinction, 20 million people have been displaced over the last decade due to extreme weather, the temperature has risen above 1.62 F degrees, and the sea level has increased 8 inches during the past century.
How do we land?
Unsustainable growth models are showing pressing consequences. Nevertheless, Corporate Sustainability (CS) is an alternative model that directs action on creating long-term value for society and the environment rather than just benefiting a single group of shareholders and CEOs. Currently, the global workforce is calling for a change since 50% are seeking jobs that grant them a larger sense of purpose than just profit maximisation. Contrary to previous examples, B corporations are businesses that embrace CS values such as high standards of social and environmental performance, transparency and legal accountability of balance between profit and purpose. Their main objective is to create a new conception of growth that transcends profit maximisation, where businesses are agents of prosperity for the people and the environment. Although there are 3,499 B corps, present in 74 countries and 150 industries, there is still a long way to go, considering that the US alone accounts for 18 million companies.
Endless growth, as we have been conducting it, is a risk for human existence and prosperity. Businesses play an important role in how the future is going to look like since 69% of the world’s 200 wealthiest entities are corporations and the rest are countries. A significant responsibility rests on corporate hands and how they incentivise more sustainable models. If they continue incentivising value creation for a small group of privileged shareholders and CEOs, environmental and social issues will continue escalating. But if they incentivise sustainability and a balance between profit and purpose, the plane can be landed.
