Written by John Carbrey, in collaboration with Becky Cook.
My seven year old son loves math. The majority of his time is spent doing math problems on the computer, quizzing his family on new math problems he created, falling asleep at night after reading math books, and attending the Russian School of Math.
Although I don’t sleep and breathe math as much as my son, I know that one basic geometric truth that we all observe and are bound by is parallel lines: lines in the same plane that are equidistant from each other and never intersect. Imagine the chaos that would result on highways if the parallel lines defining each lane ever merged and crossed. Picture the unsteadiness of ladders and kitchen cabinets and bookshelves that don’t contain parallel lines.
In this series of articles on mutual economics, I am attempting to pull lines in the same plane that tend to run parallel and make them intersect. The lines are profitability and mutuality. Typically, businesses are seen as economic engines exclusively serving their shareholders (one line) with little thought given to how the business model and governing principles of a business can serve and benefit a larger ecosystem (the second line).
We’ve looked at some principles of business creation, asked provocative questions about power and profit, highlighted the power of non-financial capital, and argued for expanding a firm’s boundaries. Integrating these practices will ultimately position businesses to strengthen their ecosystem. creating benefit — rather than the alternative, in which businesses introduce instability through unnoticed or ignored negative externalities.
This current article will highlight many potential negative externalities that result when companies fail to fully engage the members of their ecosystem. In the next article we will explore how we can avoid these negative externalities by mapping them in the business creation process.
What are negative externalities?
An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer. Externalities can affect financial, social, natural and human capital. Consider the following business practices or occurrences that create negative externalities for each type of capital:
Financial Capital: Example Negative Externalities
Financial capital refers to measurable monetary assets a company utilizes to provide goods and services.
Exorbitant interest rates: These practices can lead to a cycle of debt for consumers, causing significant financial instability.
High-frequency trading: This business practice can contribute to market instability and flash crashes, negatively affecting other investors.
Predatory pricing: Temporarily lowering prices to drive out competitors can harm the market in the long run.
Planned obsolescence: This approach encourages consumers to replace products more frequently, leading to financial loss.
Property speculation: This practice can inflate property prices and create housing bubbles, negatively impacting affordable housing availability.
Social Capital: Example Negative Externalities
Social capital is the qualities of the social context within a company and the level of trust and perception of inclusion among its members.
Exclusive corporate cultures: These can erode social capital by creating an environment where only certain groups feel included, damaging trust and shared values among employees.
Lack of transparency in decision–making: This can lead to a breakdown of trust within the organization
Lack of conflict resolution mechanisms: Without proper channels to address grievances, interpersonal tensions can fester and reduce social capital.
Neglecting employee feedback: Ignoring employee input can lead to a feeling of exclusion, reducing the level of trust and shared values in an organization.
High employee turnover: If employees frequently leave the company, it’s hard to build lasting relationships and shared values, reducing social capital.
Natural Capital: Example Negative Externalities
Natural capital is the natural resources used in a production process, both renewable and nonrenewable.
Greenhouse gas emissions: Businesses emitting large amounts of greenhouse gasses contribute directly to climate change and environmental pollution.
Wasteful production processes: These can contribute to pollution due to high waste production and the use of harmful chemicals.
Unsustainable resource extraction: This can lead to deforestation, loss of biodiversity, and the depletion of non-renewable resources.
Emission of harmful substances: Practices causing soil, water, and air pollution degrade the environment significantly.
Over–extraction of water: This business practice can lead to the depletion of water sources and potential pollution.
Human Capital: Example Negative Externalities
Human capital is the collection of skills and experiences of employees.
Lack of training and development opportunities: Without opportunities to grow and learn, employees’ skills and experiences may stagnate.
Unsafe working conditions: These can lead to injuries or illnesses that reduce an employee’s ability to work and gain experience.
Excessive workload and burnout: Overwork can lead to burnout, reducing productivity and potentially causing a loss of skills and experience due to high turnover.
Limiting range of perspectives: A lack of diverse experiences and viewpoints can hinder innovation and problem-solving, preventing the full development of the organization’s collective skills and knowledge.
Poor management practices: This can stifle employee growth, hamper the development of skills, and lead to a decrease in the overall human capital of the organization.
Conclusion
This menu of negative externalities is not the end of the story. At FutureSight, we are gently pushing our co-founders to see the intersection of profit and mutuality, encouraging them to allow those lines to cross and merge. The goal is that their businesses become ventures that can be profitable for people and the planet. Our final article in this series will provide an “externalities playbook” that will illustrate processes useful for avoiding creating negative externalities.