Chapter 1: Economic Challenges
The Economy
The economy refers to the system of production, distribution, and consumption of goods and services within a region or country. It encompasses various economic activities, such as manufacturing, trade, finance, and services, and is influenced by factors like government policies, consumer behaviour, and global economic trends. The economy plays a significant role in shaping the overall well-being and prosperity of a society.
Source: Investopedia. (2021). Economy. Retrieved from: https://www.investopedia.com/terms/e/economy.asp
In the intricate web of society, firms play a significant role that extends beyond mere profit-making. As businesses strive to maximize profits and achieve success, they become woven into the fabric of social and economic interactions. But what does this mean for society and its well-being?
The pursuit of profits can sometimes drive decision-making, leading to complex ethical dilemmas. It becomes crucial to consider how a firm’s actions impact not only its bottom line but also the communities it operates in. This calls for a thoughtful examination of the social consequences of business operations.
Time and media also come into play, shaping economic behaviours and influencing public perceptions. The constant flow of information can sway consumer choices and investor sentiment, impacting economic trends and market dynamics. As stakeholders engage with firms, understanding these dynamics becomes essential for fostering responsible and sustainable business practices.
In the realm of risk management, firms must walk a tightrope between stability and innovation. Striking the right balance ensures longevity and adaptability in a dynamic world while avoiding reckless actions that could jeopardize societal and environmental well-being.
The assumption that capitalism is inherently good or bad, and that continuous growth is always preferable, requires critical examination. Evaluating the implications of economic growth on resources and ecosystems is essential for fostering sustainable development.
As we navigate this intricate web, it is imperative to reevaluate the firm’s role in society and embrace a holistic perspective that prioritizes both economic prosperity and societal well-being. By doing so, businesses can contribute to a more sustainable and equitable world for us all.
Take a look at an example of a firm prioritizing both economic prosperity and societal well-being.
Our Changing Climate. (2017, February 24). Patagonia: The paradox of an eco-conscious company [Video]. YouTube. https://youtu.be/FaK3koLyChE
Economic Growth vs. Sustainability
Arguments for Economic Growth:
- Poverty Reduction: Growth creates jobs and increases income.
- Investment in Technology: Fuels innovation, potentially addressing sustainability.
- Government Revenue: Higher economic activity leads to more tax revenue for social and environmental programs.
Sustainability Concerns:
- Resource Limits: Continuous growth may deplete finite natural resources.
- Environmental Impact: Growth often leads to pollution and climate change.
- Social Inequality: Benefits may not be evenly distributed, exacerbating inequalities.
Tragedy of The Commons
The tragedy of the commons is an economic concept that describes a situation where individuals, acting in their own self-interest, overuse and deplete shared resources, leading to long-term negative outcomes for everyone. In a business context, this can happen when companies or individuals overexploit common resources, such as clean air, water, or fisheries, without considering the environmental or societal costs. The idea is that, without regulation or collective agreement, the pursuit of short-term gains by each person or business can lead to the depletion of the resource, harming the entire community and future generations. In sustainable business, this concept highlights the importance of balancing economic activity with environmental responsibility to ensure the long-term viability of shared resources.
HBS Online. (2022, August 17). What is the tragedy of the Commons? | Business: Explained [Video]. Retrieved from https://youtu.be/JuP-virEK0g?si=kgkC4Wf-O13PX3qs
Planned Obsolescence
Planned obsolescence is a business strategy where products are designed to have a limited lifespan, prompting consumers to replace them sooner than they might naturally do.
Types of planned obsolescence:
- Technical obsolescence: Products become outdated due to advancements in technology.
- Style obsolescence: Changes in fashion or design make older products seem less desirable.
- Functional obsolescence: Products are made incompatible with new standards or systems.
When examining the effects of planned obsolescence, it’s important to consider its broad impact on consumers, the environment, corporate strategies, and the growing pushback against this practice. The following points outline these key areas:
- Consumer Impact:
- Encourages constant purchasing, which can lead to financial strain for consumers.
- Contributes to a culture of disposability, increasing waste.
- Environmental Concerns:
- Accelerates e-waste and contributes to pollution as discarded products accumulate.
- Challenges sustainability efforts by promoting short product life cycles.
- Corporate Strategies:
- Companies may reduce product durability or functionality to increase sales.
- Marketing tactics can create a perception of inadequacy in older products, driving demand for new ones.
- Legislation and Response:
- Some regions are introducing laws aimed at promoting product longevity and reducing waste.
- Consumer advocacy groups are raising awareness and pushing for more sustainable practices.
- Counter-Trends:
- Repairability movements and right-to-repair initiatives encourage consumers to fix rather than replace.
- Brands focusing on sustainability and durability are gaining popularity among eco-conscious consumers.
Economic Feasibility
Economic Feasibility
Economic feasibility is the assessment of whether a proposed project or initiative is financially viable and worthwhile, considering its costs, benefits, potential revenues, and overall impact on resources. It involves analyzing the financial aspects to determine if the expected returns justify the investment and if the project aligns with broader economic and sustainability goals. Economic feasibility in sustainability assesses whether sustainable projects or initiatives are financially viable while also considering environmental and social impacts.
Below are some aspects of economic feasibility that we should be aware of when making decisions for ourselves, businesses and society.
- Cost-Benefit Analysis:
- Costs: Identify initial investments, operational costs, and potential environmental impacts.
- Benefits: Estimate savings from energy efficiency, waste reduction, and potential revenue from sustainable practices.
- Long-Term Savings: Highlight how sustainable practices, like renewable energy and waste minimization, can lead to lower operational costs over time.
- Government Incentives: Research available grants, tax credits, and subsidies for sustainable projects that can enhance economic feasibility.
- Market Demand for Sustainability: Analyze growing consumer preference for sustainable products, which can increase profitability and market share.
- Risk Management: Consider environmental risks (like climate change) and regulatory risks that could impact project viability and costs.
- Community Engagement: Assessing the social aspects of projects, such as community buy-in and potential job creation, can enhance both feasibility and sustainability.
Knowledge Check!
Resources
- Humanity 2.0. (2019, July 17). Part 1 – Are corporations good or bad for humankind? The role of business in the 21st century [Video]. YouTube. https://youtu.be/WhvRcuCbijI
- Humanity 2.0. (2019, July 17). Part 2 – How corporations are shaping the future [Video]. YouTube. https://youtu.be/oL5Q69OY8Zo
- El-Katiri, L. (2023). How climate change makes the case against perpetual economic growth. How climate change makes the case against economic growth | World Economic Forum (weforum.org)
- Our Changing Climate. (2021, January 15). Planned obsolescence sucks. Here’s why it still exists [Video]. Retrieved from https://youtu.be/wzWU7D0S9_8?si=Ot4L-1mIpxRkAUqf
A firm is a professional services organization that offers consultancy, accounting, law, and other specialized services. A company, on the other hand, is a legal entity that is formed to carry out a business activity, like selling a product or service.
Source: Finance Reference
Risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions.
The tragedy of the commons is an economic problem where the individual consumes a resource at the expense of society.
Amendolare, N. (2017, November 21). What is the tragedy of the commons? [Video]. Ted-Ed. https://youtu.be/CxC161GvMPc