Is the price right?..

Do we need a completely new economy?

Everyday shopping for food is a vivid way to illustrate many fundamental principles of the social market economy in a liberal society. As consumers, we are free to choose between a specialist shop, a supermarket or a discount store or to order our goods online. Companies, in turn, opt for those distribution channels that suit them best. In the wings, the state regulates the balance through legislation and regulations, prevents monopolies, defines specific aspects of food law or lays down rules for occupational health and safety.

However, this type of economic system expedites anthropogenic climate change. This is because environmental pollution, for example in the form of greenhouse gas emissions, soil sealing and groundwater contamination as well as decimated biodiversity as a result of industrial agriculture, is practically free of charge for the polluter. For the German Environment Agency, this negative development over decades stems from the simple fact that abstract costs generated by environment-related health issues, crop failure or damage to ecosystems are offloaded onto the community as a whole.

That is why the agency is generally in favour of passing the costs of environmental pollution on to the polluter. Accordingly, an energy producer, farmer or driver of a car with a combustion engine would not only have to pay for their raw materials and fuel, but also a price for the environmental pollution they cause.

Stick to tried-and-tested principles

A price approach that additionally reflects the ecological costs also matches the expectations of Professor Markus Beckmann, Chair of Corporate Sustainability Management at FAU. ‘The price mechanism is a very powerful lever. In view of the urgency of the climate crisis, it would be irresponsible to exclude this lever and other principles of our economic order when searching for a solution.’ In a social or even socio-ecological market economy, the problems of climate change caused by markets can be solved with the same market principles. This also includes market decentralisation. ‘The system is very adaptable here.’ On the basis of their previous experience and preferences, buyers think about what they want to pay for or where they can save money. Suppliers, in turn, try to adjust their product range accordingly. There is a highly complex system in decentralised markets behind this, with many interactions where supply and demand change in small steps – if the price is right.

Asked whether a new economic order is necessary in view of the challenges facing us, Beckmann replies: ‘Yes and no.’ He agrees not only that the economic system so far needs to be fundamentally transformed but also that the market cannot master this transformation from within. But he warns against going to extremes and recommends sticking to tried-and-tested market economy principles, ‘at least as long as we haven’t found better alternatives that also actually work’.

‘Markets are oblivious to climate targets.’ That is why a political framework is required so that the market adjusts itself according to Germany’s climate targets. Beckmann explains: ‘The socio-ecological market economy is not a natural plant, but instead a cultivated one that must be tended and trimmed into shape.’

More specifically, suppliers of goods and services must be charged directly via a CO₂ price for the costs of environmental pollution left out of the equation until now. Otherwise, in Beckmann’s view, the economic system will head in the wrong direction. ‘It’s only because the price of meat or air travel does not include the cost of damage to nature, society and the future that they can be so cheap.’ Were prices to reflect the actual ecological costs, however, they would additionally give consumers a new level of transparency. Today, someone buying an apple is unable to tell whether the CO₂ footprint in the spring of an apple from Lake Constance stored in climate-controlled conditions is better than that of an apple from South America.

Economic order leads to prosperity gap

The discussion surrounding a new economic order is also fuelled by a lack of distributive justice. Although prosperity on our planet is increasing overall, the Global Hunger Index deplores growing hunger above all in the Southern Hemisphere. For some years now, the number of people in need has started to rise, of late to about 811 million worldwide.

Despite trillions of dollars in aid, the economic system till now has not been able to close the prosperity gap between North and South. The Atlas der Weltwirtschaft 2020/21, a report on the status of the global economy, calculates ‘purchasing power parities’ (PPP), for example a per capita PPP of 4,273 US dollars in 2019 for the sub-Saharan countries. In comparison: German PPP per capita is 53,557 US dollars. Stronger economic growth in the Northern Hemisphere thwarts the goal of distributive justice.

‘The goal of reducing dependencies on financial transfers and establishing autonomy on a large scale in a country’s own development has largely failed,’ observes Professor Fred Krüger from the Institute of Geography at FAU, whose main research interest is development studies in the Global South.

Krüger’s assessment of the transposition of Western economic systems to date is divided. By imposing conditions for multilateral development cooperation, such as rule of law, democratic structures or reliability, donor nations enforce their values on the beneficiary states, he says. For example, ingenious solutions are worked out on the ground for practicable land access routes, which are traditionally regulated by tribal chiefs but not entered in the land register as formalised Western types of land access. On the other hand he can understand the wish to find calculable and globally standardised structures at local level as the basis for transferring finance and knowledge.

One way or another, some economic rethinking needs to take place. Tanzania, for example, simply lacks the money to establish an economically reliable infrastructure. ‘Its financial resources are insufficient.’ Added to this is the tremendous pressure from population growth, which hampers any targeted market planning and development. Dar es Salaam, Tanzania’s largest city, has grown from about four to around seven million inhabitants in the last ten years. At this rate, the public sector can only intervene and control affairs to a limited extent.

Instead of a single solution for Africa, urban development in the sub-Saharan region needs to be considered on a more local and individual level. ‘This can’t be done with classic concepts of urban research and urban policy.’ Since state resources are no more than rudimentary, local markets organise themselves through apparently disordered development logics with new networked infrastructures. In this informal sector, in which people organise their lives from the bottom up, they at the same time produce creative structures that support society and the state. For the most part, the significance of such activities is completely underestimated in the Global North.

Step in the right direction

Krüger is critical of the economic commitment of some states or financially strong companies. An inadequate framework, for example due to a lack of legal clarity or contradictory laws, makes it possible for them to secure water or land rights and in so doing cut off the local population’s access at the same time.

The new Supply Chain Act aims to close this regulatory gap in future. The intention is to ensure compliance with human rights, such as minimum living wages or non-discriminatory labour, on global procurement markets as well. In the process, it introduces a new element into economic order here at home because it assigns binding due diligence and reporting duties to companies with their headquarters in Germany and over 3,000 employees from 2023 onwards, and one year later to firms with more than 1,000 employees. They are obliged to conduct a risk analysis and take preventive action, for instance in the event of human rights violations along the direct supply chain. The results of the risk analysis and countermeasures must be documented, updated on a regular basis and published. Companies must also install a complaints procedure, similar to a whistleblowing system.

In addition, due diligence is extended to indirect suppliers. In the case of commonly known facts, such as working conditions in African mines, for example, companies are obliged to take action. In conjunction with this, the Federal Office of Economic Affairs and Export Control, as the supervisory authority responsible, will be given inspection and sanctioning rights and can impose penalties. Not foreseen in the Supply Chain Act, however, is any civil liability for corporate entities.

Changed purchasing process

For Professor Markus Krajewski, Chair of Public Law and Public International Law at FAU, the act is ‘an important step in the right direction’. Although he had campaigned for stricter regulations in a report before the act was passed, the compromise at least makes plain the obligations the business community now has. New for companies is that they must not only keep their own house in order but also have a duty beyond Germany’s borders.

However, the Supply Chain Act will not turn the whole world upside down from one day to the next. In Krajewski’s opinion, predictions that companies, for example German machine manufacturers, will now be obliged to withdraw from certain countries are also premature. These are processes that happen over years, and ending a business relationship is only the last resort.

It is just that companies should not simply withdraw from a location or country if there is a problem. ‘The whole logic of corporate responsibility with regard to their supply chains is based on the assumption that they are important players for social change,’ he explains. This can be criticised as neocolonialism, but for Krajewski it is ultimately a matter of enforcing fundamental human rights, that is, making sure that workers are treated and paid fairly, for example. ‘This can in part lead to improvements in our economic system.’

Before it was passed, the Supply Chain Act was the subject of heated debate. Business associations maintained that companies would comply with requirements voluntarily. In practice, however, it was evident that for the most part the principle of voluntary action does not work in our economic system. An evaluation of the ‘National Action Plan for Business and Human Rights’ (NAP), the precursor to the Supply Chain Act, revealed that after four years only about 20 percent of companies had put the ideas into practice on their own initiative.

Krajewski expects that in practice the purchasing process will change perceptibly. It is unlikely, for example, that last-minute orders for T-shirts from a garment factory in Pakistan will continue to be placed without due diligence. Rather, buyers will have to convince themselves that the workers there are not struggling day and night to meet the tight delivery deadline.

T-shirts, the embodiment of a throwaway society anyway, number among the most problematic products. Gaps in the regulatory framework make it possible to avoid offloading the costs of environmental pollution onto T-shirt production. That is the only reason why a market for fast fashion on this scale is possible at all. Here, the cultivation of cotton and other fibres for the global textile and clothing industry alone leads to enormous water consumption – also in regions where water is scarce.

Better option: circular economy

The EU has explicitly pointed out this disturbing situation and as a consequence is working on an action plan for a carbon-neutral, environmentally sustainable and toxic-free circular economy. ‘With the kind of economic activity we have now, in 2050 humanity would need the resources of three Earths to cover the demand for production and disposal,’ warns Professor Evi Hartmann, Chair of Supply Chain Management at FAU.

Her colleague Dr Hendrik Birkel also finds the vision of circular supply chain management convincing. ‘The circular economy is the first vital step towards real sustainability.’ This means rethinking the linear process from raw material cultivation to processing, consumption and landfill. Ideally, a product’s components are fed back into the manufacturing and procurement cycle as raw materials for new technical production. Analogously, natural components return to the biological cycle.

This is easier said than done. Steel, for example, can be recycled and reused very efficiently, depending on the quality. Cardboard boxes used to ship bananas around the world are also easy to recycle, but each time they are reprocessed the paper fibres shorten, which steadily reduces the number of times they can be used again. In the case of electronics and batteries, it is comparatively difficult, from a technical perspective, to re-introduce the individual materials into the cycle.

In Birkel’s view, a more important step is to already start thinking about and include future reuse or material processing in a product’s design phase. ‘This is where over 70 percent of environmental impacts and life cycle costs are decided.’ From a scientific point of view, other materials would have to be used and right to repair predefined over the longer term. Some mobile phone suppliers make it possible not only to replace the battery in line with the modularity principle but also to easily retrofit other hardware components, such as the camera.

For individual companies, however, this means that they would have to redesign their entire product portfolio. Added to this is the effort needed to find new suppliers of the required quality, as the case may be, and thus possibly to establish a completely new supply chain, including new manufacturing processes. ‘That costs a lot of time,’ says Birkel, putting it succinctly.

At the same time, he highlights the social change already initiated, which is bringing about a more sustainable consumption culture. Small forms of a sharing economy, for example, dispense with sole ownership and endeavour to share cars, garden machines or other products. For Birkel, product price is a useful incentive. If the price of a T-shirt were to mirror the consumption and pollution of water, in addition to manufacturing costs, then more sustainable (because reusable) products would be cheaper.

Practical alternative?

Clearly our economic system requires a ‘polluter pays principle’ implemented within a regulatory framework. Consumption and pollution of what are ultimately scarce environmental resources, such as water, air or land, must be reflected in the price of products and services. This would make establishing resource-efficient cycles and coming closer to the goal of a decarbonised economy worthwhile. A product’s price would give consumers and suppliers a clear indication of how climate-friendly and thus also human-friendly it is. However, if this transformation does not succeed at national, European and global level, the present economic system will be doomed to failure. And no practicable alternative is in sight.

FAU research magazine friedrich

This article first appeared in our research magazine friedrich. You can order the print issue (only available in German) free of charge at presse@fau.de.