Flourishing in a Not-for-Profit World

This week Donnie Maclurcan presented his view of the future at Leeds University as part of the CASSE autumn programme.

Donnie’s thesis is that all organisations will be, or should be, Not-for-Profit (NfP) by the middle of the century. He started by explaining the difference between NfPs and the third sector, which used to be almost totally dependent on handouts. Now, 53% of NfP revenue is self-generated and used for the organisations’ social purpose. By contrast, in Donnie’s view the traditional capitalist for-Profit (fP) businesses are socially divisive and exacerbate economic inequality. This is not due to paying exorbitant salaries, but results from capital gains, dividends and inheritance. Apparently, just 85 individuals in this world control wealth equivalent to that owned by 3.5bn people. The constant growth of fPs brings ecological devastation.

Donnie challenges the accepted wisdom that states that competition and self-interest are what make society work. He believes that the centralisation of wealth and power creates social and economic stratification and a compulsion to consume. He challenges the myth (the American Dream) that anyone can be wealthy. In fact only 5% of Americans ever move from their original social/economic position. 

What should be done? Central market regulation? Concentrating power in the hands of the state is no better than concentrating it in the hands of the rich, and the line between the rich and the state can easily become blurred. Strong regulation can stifle innovation. Growth continues. Self-regulating capitalism? Donnie does not believe that we can rely on fPs to innovate the world out of ecological disaster. From his work on nanotechnology he does not even believe that fPs could achieve decarbonisation in time to avoid disaster. Self-regulating capitalism is still capitalism; still reliant on growth.

The Alternative Solution is the Not-for-Profit Enterprise, where the organisation socialises its profits. In other words it either uses its profits to further its social purpose or donates its profits to organisations benefiting the community. There are no shareholders demanding dividends and no owners who can turn a profit by selling of all or part of the business. 

NfPs are better because NfPs can outperform traditional businesses. The example of the credit unions versus the banks in the US was quoted, although Donnie did admit that in the US credit unions get special tax breaks. NfPs use freeware rather than expensive mainstream software. Employees are more motivated, empowered, working in organisations with a flatter structure. NfPs create open source research rather than licensing their intellectual property (IP) in order to make money from users as the traditional fP would. The motivation and commitment from working for an NfP can lead to remarkable productivity gains. The quoted example was that car manufacturer WIKISPEED could develop in 8 days what would take Toyota 30 years. (The politest thing I can say about that statistic is that I don’t believe it. Let’s not overstate the case now.) Examples of NfPs are Mozilla, creators of the Firefox browser, and Wikipedia.

“Working together is better” There’s more concern about the origin of products. NfPs are more ethical and they never plan for obsolescence. The wide availability of digital resources means that the barriers to entry to many businesses are very low. Capital costs are falling and crowd-funding, a completely new source of finance, is widely used by NfPs. For larger investments shares should be replaced with community bonds as has been tried in Canada. Holders receive a fixed return but have no part in the ownership of the enterprise and no right to a share of the profits, (although they can lose their total investment if things go wrong.)

Profits should be a means to an end, not an end in themselves. For this to happen, for the world’s wealth to be equitably distributed, NfPs are necessary, although not sufficient.

What do I think?

Undoubtedly global inequality needs to be tackled, and at first sight universal Not-for-Profit seems an ideal solution. I have a number of concerns. In the traditional model a company borrows money to set itself up. Service companies, ideas companies, software companies can be set up for pocket money. Manufacturing companies, retailers, farms, transport, power generators and heavy industry need significant investment. Some is borrowed as fixed interest bonds. Interest is paid whether profits are made or not. If it all goes wrong, bondholders get part of anything that’s left: shareholders get nothing. Nevertheless, shareholders invest. They support the company, they take the risk. If there’s no profit there’s no dividend. If it goes wrong shareholders can lose their whole investment. They invest in the knowledge that they are taking a risk and they expect to be rewarded for that risk with dividends in the good times and increasing value of their shares. They share in the growth in the value of a business that they have helped create. All businesses are risky, some more so than others. We need innovation, but innovating businesses can be the most risky of all. If we go to a total NfP model, who takes the risk? 

If we’re going to convert existing businesses to NfP who is going to buy out the existing shareholders, and what will they spend the money on? And if we nationalise everything are we ready for the backlash?

Can every enterprise be a social enterprise? Will we find people who will be motivated by every occupation? Even the dirtiest jobs?

I asked what would happen to pensions if there were no more shares for pension funds to buy. Buy bonds instead, but the increasing reach of the social sector and growing support for the elderly will mean a reducing requirement for pensions. Really? Sounds like David Cameron’s Big Society. (RIP) If I have foregone consumption throughout my life to assure a comfortable retirement I expect to enjoy it in proportion to the savings I’ve made, not rely on universal handouts!

I think climate change, resource depletion and the whole range of sustainability issues are the crucial priority of the moment. Not-for-Profit may be a useful context, but it's only one aspect of the big and threatening picture.

Donnie’s presentation was delivered with clarity and confidence without a single note or slide and kept our attention throughout. Lots to think about. After a struggle I’ve pre-ordered his book: How on Earth. I look forward to reading it and learning more.

Energy and the Bubble Economy

On 20th May the Yorkshire Chapter of CASSE, Centre for the Advancement of the Steady-State Economy, presented this event at Leeds University Business School. I expected one session but there were two separate presentations.

Energy

Tiago Domingos of the University of Lisbon took the first module: “Can energy use and economic growth be decoupled?” Green growth is possible by reducing the energy/GDP ratio, and to do that we need to decarbonise the energy system. This proved to be a technical talk; knowledge of thermodynamics a distinct advantage. Apparently energy cannot be destroyed and in any energy transfer there are always losses. This is demonstrated by our present electricity generation process, where around 60% of primary energy is wasted in generation and transmission and only 20% of what’s left (Final Energy) is Useful Energy. The rest is dissipated as heat in the appliance. He claimed that an output of 0.02kWh needs an input of 25kWh, which seems to be overstating the case a bit, but even a loss of 90% is bad enough. We pay for final energy - and all the primary energy that goes into it - and waste most of it in inefficient appliances.

We now moved on to the thermodynamics bit and started talking about exergy. I hadn’t heard of it before, but this is what Wikipedia says:   

“In thermodynamics, the exergy of a system is the maximum useful work possible during a process that brings the system into equilibrium with a heat reservoir.[1] When the surroundings are the reservoir, exergy is the potential of a system to cause a change as it achieves equilibrium with its environment. Exergy is the energy that is available to be used. After the system and surroundings reach equilibrium, the exergy is zero.”

The professor then went on to propose that we should study exergy rather than energy, and gave examples of sources of exergy: electricity, coal, gas, biomass, oil, food. (Note that electricity is a source of exergy, but of course not of energy.) He stated that the important ratio is not energy/GDP but Useful Energy/GDP. There followed an analysis of energy statistics for Portugal since 1850 when the economy was agricultural, through industrialisation from 1920 and onwards. The Final Energy/GDP ratio dropped sharply and plateau’d from 1960. Useful Work/GDP was at the same level as 1850, although primary energy consumption went up.

Domingos quoted the economist, Nicholas Kaldor, who said that in the long term the wages/interest, interest/capital, capital/GDP and Useful Work/GDP ratios were constant in most economies. There are also thermodynamic limits to the efficiencies of transforming primary to final energy and final to useful energy. The whole thing seems to lead me to the conclusion that there is very little scope for decoupling energy from economic growth. What hope for growth? Having said that, surely it all comes down to efficiencies. And while electricity generation from coal, gas, nuclear and even biomass can have losses of as much as 70%, the losses in generation from renewables are less than 1%.

I found this on the internet: http://www.theguardian.com/news/datablog/2012/jul/06/energy-green-politics#zoomed-picture 

The Bubble Economy

Our second speaker was Robert Ayres (from INSEAD in France) who will shortly publish "The Bubble Economy: Is There a Sustainable Way Forward?”. 

This was a very different presentation, and referred to Tulip Mania, the South Sea Bubble, the Trust Bust, the Dot-com Crash and the Sub-prime Disaster, among many others which litter history. Apparently there is a plausible story and investors start to pile in. Rumour builds on rumour, possibly helped along, until every man in the street sees a golden opportunity and mortgages his house to buy in. Canny investors get out at the top, confidence evaporates, prices crash and small investors lose their houses. Ayres predicts another bubble, this time involving fracking. Presumably that will happen in the US. After this week’s report from the UK Geological Survey few people in this country will surely invest!

Since 2008 we have seen pressures in the economy from climate change and the end of cheap oil, leading to inequalities and a slow recovery. In 2008 the banking system was under such extreme stress that governments had no choice but to rescue it. Household net worth collapsed and the middle classes have still not yet recovered. Oil price rises are inevitable because the rate of new discovery of oil is not keeping up with production. Saudi Arabia continues to be a major global oil producer, but its recoverable reserves remain, and have remained constant since 1988. (This is apparently justified by improving extraction techniques.) The oil price affects the global economy, but Ayres claims that it is only recently that the IMF has included the price of energy in its models. We need to decarbonise our energy and this is becoming more achievable as the average cost of onshore wind has been falling annually by 14%. The price of solar PV is falling faster; not yet to grid parity, but arguably coal generation benefits from hidden subsidies in that it does not pay the true cost of pollution. The costs of renewables and hydrocarbons are reaching a crossover point as new technologies, experience and economies of scale drive down renewable costs. Could we create a renewables bubble? Ayres told us that there are substantial reserves held by US corporates in overseas banks and doing nothing. Let’s not have a bubble, but let’s have some solid investment.

The future growth paradigm will be based on energy efficiency, not demand.

Questions

Questions came thick and fast and this a summary of what I picked up. 

Why will energy costs rise? asked a former Shell executive. Because Saudi is running out and the projected reserves in the US have been overstated and we are using it faster than we’re finding new reserves. Well, when he was at Shell they tried predicting the oil price and got it totally wrong….

Can we really substitute electricity for oil? Yes, but it is difficult and time-consuming which is why the price of oil matters…Is 30% the maximum share of energy that the UK can source from renewables? I would have thought that was pessimistic, myself.

If the future is efficiency, what about user behaviour? The rebound effect means consumers can spend the same and use more. Prices must be controlled by governments to prevent this. A green levy could keep expenditure at constant levels and raise a fund for green research and investment.

Will lower-quality reserves demand more energy? Energy in for energy out is a problem with fracking...Timescales for decarbonising the economy are a concern. There are big opportunities for improving efficiency - notably transport and home heating (cars are still very inefficient) - but if we are serious about our 2050 targets we have a serious problem. Current policies - and politicians - do not recognise the extent of the challenge.

Education is lacking in high places.

And my conclusion? As always, spread the word. Make people aware that business as usual is not an option. Make them aware that big business has generally taken all this on board, but small business and the consumer need to follow on. It’s not about a lower standard of living, it’s about doing things differently and more efficiently. It’s about not sacrificing the long term for the sake of the short term. 

Please tell any politicians you meet.