In search of sustainable markets – look for interaction between market practice and policy practice

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Text by Lars-Gunnar Mattsson, Professor Emeritus in Business Administration, Stockholm School of Economics,  and researcher at Misum

Public and private concern for sustainable development is a megatrend. To what extent are markets part of the problem or part of the solution? Or maybe both? How can government policies aid or hinder development of sustainable markets? Such questions are fundamental but arguments are most often developed from a predetermined, or taken for granted political and/or theoretical standpoint about markets. My argument is that we need to know much more about how markets function in practice and about interaction between market practice and policy practice in order to better understand sustainable development in a market economy.

There is, surprisingly, hardly any conceptual discussion in the literature and no convincing empirical findings that identify a sustainable market! I argue that a market is sustainable if it in the long run substantially promotes achievement of sustainable development goals. Thus a sustainable market must be dynamic, adapt to new scientific findings, discontinue unsustainable practices, be effective as regards technical and social innovation and consider external diseconomies, and external economies. Thus, somewhat paradoxically from a linguistic point of view, to be sustainable, and keep sustainable, change is necessary. Markets are not a priori given. They are continuously shaped and reshaped by businesses and individuals involved in interaction as sellers and buyers and influenced by public policies. Thus, change is an inherent characteristic of markets.

To make my point, I will refer to the Paris climate agreement in December 2015.  The Agreement was, given earlier failures, seen as a remarkable political and policy achievement. It was based on natural science studies of eco-system processes, acknowledging that human activities cause green-house gas emissions that lead to global warming. The Agreement left it to each government to develop and implement climate mitigation policies.

Human activities affecting green-house gas emissions are, directly and indirectly related to production and consumption of goods and services. In market economies interaction and exchange between actors within a market, and importantly between markets, serve to coordinate and allocate resources, as well as to develop and co-create resources. As government agencies now develop and implement policies based on the Paris agreement, it is important to understand if and how these policies help to perform sustainable market practice or perhaps hinder it. For instance, rules for public procurement might present examples of both positive and negative effects on sustainability.

Policy practice has a content rich tool-box to select a policy mix from. Economic incentives/disincentives, regulations and norms of different nature, investments in infra structure, education and research, as well as in reorganization of policy agencies, information campaigns (“nudging”!), etc. Policies most often leave a considerable degree of freedom on how to comply with them in market practice, a fact that makes it even more important to study market-policy interaction.

With reference to the UN Agenda 2030, one of the 17 Sustainable Development Goals (SDG 13) specifically concerns climate.  To reach the objectives agreed on in Paris, due to the overarching influence of climate change, policy and market practice related interaction are particularly crucial as regards SDG 7 on Energy, SDG 9 on Innovation and Infrastructure, SDG 12 on Production and Consumption and SDG 17 on Partnerships.

Concern for sustainability has generated an increasing number of initiatives in business, civic society and academia. Individual business-focused sustainability initiatives are relevant for understanding interaction between policy practice and market practice. CSR, Corporate Social Responsibility, aims to counter-balance the rise of share-holder value as the prime objective of companies. CSR introduces stakeholder engagement and achievement of Triple Bottom Line results. It has stimulated a major and growing stream of research and practical implementation. CS, Corporate Sustainability, emanating more recently from business strategy literature argues that business practices should consider triple bottom line outcomes. Stake-holder engagement in the business is important. CSV, Creating Shared Value, is also an idea coming from business strategy literature. It suggests that a firm that builds social value propositions in its corporate strategic behavior, creates competitive advantage. According to CSV more public policy intervention in the market is not necessary, it might likely be harmful.

How do these acronym identified principles for individual corporate behavior in markets affect over-all market practice towards sustainability? How do they affect interaction between suppliers, customers and competitors?   If market practice becomes more concerned with climate mitigation, stimulated by the principles for individual firm behavior alluded to above, then policies concerned with the same problems might become more effective.

Interaction between policy practice and market practice is bi-directional. An example is the reshaping of the EU Emissions Trading System. The lackluster performance during the first periods have initiated substantial revisions of the system and it remains to be seen if the new EU policy will create a more sustainable market practice.  Policy-market interaction for sustainable markets is also dependent on sustainable policies.

Public and private actors interact in many cases as aspects of New Public Management. Recent examples in Sweden of out-sourcing of electronic services and public/private partnership demonstrate the problematic nature of creating sustainable markets and sustainable policies.

Research about sustainable development in general, and especially about climate mitigation engages researchers and research institutions in all natural, engineering and social science disciplines and their sub disciplines. In this context interaction between policy and market practice is an important phenomenon that should be studied in an interdisciplinary, and even transdisciplinary, perspective to better understand market economies from a sustainable development perspective.

Written by: Lars-Gunnar Mattsson, Professor Emeritus in Business Administration, Stockholm School of Economics, and researcher at Misum

 

 

 

 

 

 

 

 

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