How To: Become Healthy, Wealthy, and Wise Through Sustainable Business Practices

You’re an aspiring business person, your life goals are filled with traveling, leisure, early retirement, and success. You want to manage a business, something big, something small, but a thriving business all the same. You have been educated to varying degrees throughout your life and now you are ready for the position of a lifetime, something that will put you in the world of your dreams. Now this sounds great and all, but what will be your endgame? Could you manage a business that promotes profits and environmental degradation over environmental stewardship and social equity? This is the kind of question that you must answer not with spreadsheets or equations, but with philosophical integrity that incorporates the moral foundations of which we have been naturally engrained with. But first we must define some key terms that are imperative towards understanding sustainable business practices.

Catch-per-unit-effort Hypothesis: The assumption of a linear relationship between effort, stock, and harvest.

Net Present Value: The amount of money that if available today would generate the future stream of net income in question.

Total Private Cost: The cost incurred in the production process by the producer, including tax and profit margins that are anticipated.

Total Social Cost: The cost to society as a whole from an event, action, or policy change. Includes negative externalities and does not count costs that are transfers to others.

Natural Dividend: The unearned income from the harvest of renewable resources. As nature and not human industry produces renewable resources, all profits above “normal” profit (included in the total cost) are unearned, and the natural dividend is equivalent to the total return minus the total cost.

 Now that we have defined some key terms we may begin to discuss how managing a business through sustainable practices and a triple-bottom line (planet, people, profit) can lead to a successful long-term business that can make you healthy, wealthy, and wise.

To begin, the size of a business’s waste stream is a key aspect to how sustainable a business really is. Recycling material is one way of reducing your business’s footprint and it has a lot to do with the absorptive capacity. As a business grows their waste stream continues to grow as more resources are necessary for daily operations. So when a waste stream becomes too large it begins to interfere with the absorptive capacity of the Earth, which causes even more problems on the larger scale. With the absorptive capacity shrinking as the waste stream increases it is only logical for a business manager who wishes to continue operations uninhibited by environmental degradation to begin the process of decreasing the waste stream through programs such as recycling. This will ensure that the absorptive capacity levels remain constant and the business’s waste stream will decrease leading to future savings through decreased disposal fees and other positive effects. By recognizing and initiating change in the system it will also affect business profits in a positive manner, by cutting back on the waste stream through recycling a business will see more consumer support from the local population, which will lead to higher profits. Also the absorptive capacity around the area of the business will be thriving leading to decreased costs in environmental degradation mitigation and regulation fees from government environmental regulation policies.

Sustainable business practices can be complex and can lead to a lot of headaches due to the unsupportive nature of a majority of today’s business leaders. One example of the complexities is attempting to use a maximum sustainable yield model with common-property resources such as fisheries. The maximum sustainable yield model is quite complex when incorporated into common-property resources for many reasons. There is the fact that not every business in the fisheries market will practice MSY, for this reason any business that does practice MSY will see that the population of fish will continue to decrease due to fellow competitors exploiting the remaining population for further profit. Another complexity when attempting to practice MSY with common-property resources is the equal distribution of the resource. In the past competitors would simply maximize yields of resources to continuously stay on top of fellow competitors, this led to overshoots of resource exploitation and in the end population destruction. So the complexity is how to equally distribute the resource to all competitors as to continue practicing MSY.

With creative thinking and a mindset of business as UNusual it is possible to create a business that can operate sustainably and profitably, making you healthy, wealthy, and wise all at the same time.

Thank you for your interest, please comment and subscribe.

Onward,

Hayden van Andel

How Much Should Natural Resources Really Cost?

Do you ever consider how much you should really be paying for the goods and services we pay for? The clothes you wear, the electronics you buy, the cleaning supplies, the furniture, and the list goes on and on. There are so many more aspects that go into goods and services today than ever before. Now when we are to consider the “true” cost of the goods and services we purchase in our every day lives it is imperative that we understand some key terms that relate to the timelines our goods and services follow through extraction, production/manufacturing, consumption, and disposal.

Externality: An unintended and uncompensated loss or gain in the welfare of one party resulting from an activity by another party.

Hotelling Rule: States that at the margin, the rate of return from holding a resource in the ground (its expected price increase) must be equal to the rate of return from exploiting it now and investing the profits.

Price Elasticity of Demand: A measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as:

 Marginal External Cost: The cost to society of the negative externality that results from one more unit of activity by an economic agent.

Marginal User Cost: The value of one more unit of the resource in its natural state. In a perfectly competitive economy, marginal user cost would in theory equal the price of a resource minus its marginal extraction cost.

Now that we have defined the key terms regarding the process of identifying the true cost of natural resources, we can begin to discuss how we figure the costs of natural resources and the complicated world behind it.
Economic analysts frequently assume that the most easily accessible resources will be extracted first, this assumption is incorrect for a multitude of reasons. First, the extraction of the most easily accessible resources is inevitable, but the price will be a lot less than resources that are harder to extract simply due to the resources and time required to extract either resource. So the price that is set upon resources that are a lot harder to extract is a lot more expensive than the easiest extracted resources, because they are less cost effective to extract. So the logical economic decision is, if the technology is available, to extract the less accessible resource as the price may be set to incur a most profitable return. An example is the extraction of copper or silicon, to the extraction of gold, or silver. Copper and silicon do not yield profitable returns in small amounts, compared to the returns of gold and silver.
The real problem behind the prices set upon the resources extracted is the amount of externalities that are incorporated. This is usually the smallest amount possible, because as more and more externalities are added it becomes less and less economically efficient to extract these resources. So what system should we incorporate that identifies externalities, utilizes marginal external cost when considering the consequences of extraction, and implements marginal user cost when establishing a value for the natural resources when in their natural states.
The system that is implemented would reflect prices that are not based on scarcity or abundance, the prices would be set through all the above defined terms. If the extraction of gold is harmful to the environment then the negative externalities will be incorporated into the overall cost. If the marginal external cost is high for the extraction of a specific natural resource then the price will be set regarding that impact. So when we look at the prices of specific natural resources the prices do not reflect the scarcity of the resource, instead they reflect the true cost behind the extraction process.

The future of the planet's natural resources is certain, there will be continued extraction of them. The difference is that as the processes become more expensive and environmentally degrading the true costs of the resources will begin to be clear as mining companies are required by law to incorporate externalities, and regulate their marginal external costs and marginal user costs. When this happens we will begin to see prices that truly reflect what natural resources should really cost.

Thank you for your interest, please comment and subscribe.

Onward,

Hayden van Andel