Over the last couple of weeks focusing on fitness and networking outings has again distracted from blog writing. Usefully so, because balance is critical, something confirmed in the pursuit of Tai Chi.
One networking event / learning opportunity I went to recently was a public forum on ‘Building a sustainable economy’ put on by the Centre for Policy Development. I was pleased to catch up with a couple of people who I had not seen since the early noughties and my time at CHOICE.
High above the city at Level 40 of Governor Macquarie Tower, in the finely appointed offices of law firm Minter Ellison, we listened to serious people discussing serious issues around the questions of socially inclusive, environmentally sustainable and economically viable futures, seriously. There was talk of the need for re-imagining the social contract for corporations and business in the transition to a sustainable economy, in which the roles of social, environmental and economic capital are recognised and balanced.
It was particularly interesting to hear Geoff Summerhayes, an executive board member of the Australian Prudential Regulation Authority (APRA), speaking about how the transition to a low-carbon economy is in motion, and that local companies can opt to float with the transitional current or fight against the rising tide.
APRA is taking seriously the need for insurers and other custodians of funds to factor in the risks of climate change to their deposit holders. Their foray are into this category of risk was flagged in a February 2017 speech by him: Australia’s new horizon: Climate change challenges and prudential risk. Apparently this did not meet with universal approval and there was suggestion at the time that APRA may have been moving outside it’s regulatory remit. A familiar problem for regulators in a difficult space seeking innovative directions.
There was a general sense in the panel discussion of industry and regulators making progress irrespective of, and to a large extent despite, the operation of politics as usual Some of the questions from the folks assembled on the 40th floor suggested that somehow an enhanced regulatory intervention is required to tie economic activity to sustainable practice. It was not entirely clear what regulatory body might be suitable vehicle for such intervention. But of course, that is only a preliminary and quite shallow problem in the proposition, which led me to a couple of reflections which I shared in conversation over drinks and canapes (I do love a good law firm hosted seminar!) after the panel discussion and Q&A.
Firstly regulators in today’s world cannot think of themselves as somehow ‘outside’ the system, looking in – that is the conceit of supervision. In an overwhelmingly networked world regulators of any domain a very likely to find themselves embedded within the network; as a privileged node with special resources and a necessary stance of independence but nevertheless interlinked and certainly with no monopoly of knowledge.
Secondly, and related to that final point, however well-intentioned, you cannot effectively regulate what you do not understand. That takes investment and resources – which tend to be thin on the ground for the average reglator! It also means knowing what you do not know, and many contemporary systems are so complex, and evolving so rapidly, has to be literally beyond comprehension – even by the direct industry participants, let alone supposedly aloof regulators sitting above the fray.
This is not a counsel of despair – there are effective avenues of intervention available that recognise and draw on the premises of complexity theory. These go beyond the simple proposition of unintended or perverse consequences and recognise the essential primacy of self-organization in complex systems. Hence an emphasis on the importance of self-regulation and the likelihood or perhaps even inevitability of sudden shifts (think Butterfly Effect, cascades and tipping points). It is also evident that complex systems are fragile, and the more complex they are the more fragile they are. Fragility requires increasingly large investments of information and energy to keep the complex system functioning and to reap the rewards of that complexity a potentially vicious circle for all concerned.
There was further commentary from the floor of the meeting which suggested an even deeper disillusionment with the viability of corporate moves to sustainability. There was a feeling among some that a sustainable economy was beyond the capacity of markets to deliver and that we were witnessing the failing of capitalism. To some extent these perhaps echoed the views recently reported of the former Greek finance minister Yanis Varoufakis, who has claimed capitalism is coming to an end, in his view because it is making itself obsolete with the rise of giant technology corporations and artificial intelligence. “And then what happens?” he is reported to have said – “I have no idea”, and of course that’s the thing, isn’t it, none of us do.
It’s fairly easy to conclude that the messy market system is failing because it’s not doing it exactly what you want it to do. At that point people’s thoughts turn inexorably to ‘command and control’ – let’s just tell people what’s good for them and what to do. I’m reminded of a timeless remark by one of the first systems analysts that I worked with 35 years ago: he would say “We wouldn’t have all these politics if people would just do what I say”.
We like to think that a sustainable economy will be inclusive and prosperous – however for me it is difficult to think of a better mechanism to achieve that than marketplace processes, subject to reasonable democratic control. Only the market can process the information, generate the wealth, encourage innovation and manage the risk necessary to sustain a complex society.
One thing I am certain of is that you cannot simply command yourself to be wealthy. That’s a difficult trick for an individual, let alone a complex society in a global context. It is a rule of thumb for regulators that you cannot create good behaviour by regulatory fiat. Markets can be messy and periodically interventions are required in an attempt to focus the minds of participants on the greater collective good. There need to be effective mechanisms to address complaints resolve disputes and settle grievances. That can certainly include trying to encourage good behaviour through education, guidelines and encouraging best practice – but you are never going to produce excellence, originality or innovation just because a regulator thinks it’s a good idea. Actually in my experience and from my time spent working and advocating in various regulatory context, regulators are as often moved by markets and the expectations of society and culture in general as the other way around.
Basically the goal to which regulatory energy is best directed is the mitigation of harms – that is stopping bad stuff rather than trying to induce the good stuff.
Those that command usually do just that and that has the real potential to deliver significant adverse distributional effects, far worse than free market excesses (which is why the prevention of monopoly is one unimpeachable goal for regulatory intervention). In these circumstances, channeling my friend the systems analyst, democracy may well prove inconvenient. Winners have a nasty habit of deciding who prospers, who the losers will be and what penalty they may pay – and indeed probably what counts as ‘sustainable’, and for whom.
This may well be a classic case of be careful of what you wish for, unless perhaps you expect to be an unprincipled winner. It may well be that there is a clear dynamic and perhaps necessity for the rewriting of the social contract between corporations, markets and society. It has to be fervently hoped that our democratic institutions and processes are even halfway up to the task, since the zombie which is likely to arise from the grave of capitalism will probably be a pale imitation of that which was joyfully interred, but yet have a potential to be far more fearsome.