THE WORLD'S gone upside down. First, there's David Cameron championing the public sector ethos and suggesting there's more to politics than economic growth then last week 14 of the UK's corporate great and good, including establishment firms such as Shell, Tesco, B&Q and Standard Chartered Bank, trooped along to Downing Street to lobby the government for tougher targets on greenhouse gases. Something wrong, surely. Shouldn't it be the government that's the guardian of the greater good, while business resists any limitation on its ability to make profits?
The CBI, which always predicts disaster if business is obliged to take responsibility for its externalities, certainly says so. But that, just like the government's chronic reluctance to take a lead on the environment, is based on a misunderstanding of business's real functions, which has become so ingrained that last week's initiative came as a shock, albeit a welcome one.
A correspondent attributes New Labour's target obsession to a cultural cringe towards business coupled with some extremely unrealistic mental models of what it actually consists of - a fatal combination. These models have proved unshiftable in the face of incontrovertible evidence that they are wrong. This is behind the disastrous misapplication of 'efficiency' and 'performance management' concepts to schools and universities for example (see last week). But it is also to be seen in oversimplified attitudes to business itself, and especially, as in the environmental paralysis, the inability to understand the relationship between organisations and markets.
Companies and markets form a system: companies innovate and markets provide feedback. Markets can't innovate because they are blind: they don't have conscious purpose. Their function is to identify winners and losers. Organisations on the other hand are intentional entities - purpose is their point. They can choose, for example, to forego a part of present profits to develop new products. Consider the semiconductor industry. For the past 30 years, it has been powered by fierce competitive innovation in which companies (usually Intel) race to introduce new generations of microchips for which they charge premium prices. Eventually other companies catch up and competition between them - 'the market' - erodes the premium. There's no problem with take-up of new technology, even though it is initially expensive, because everyone has wanted faster computers (at least salespeople have convinced us that we do).
Environmental products are a different market. Customers won't buy them if it's cheaper to offload their environmental costs onto society as pollution. There are no rewards for good behaviour. The 14 companies that went to No 10 last week were asking for government to correct this market failure with sticks and carrots: strengthening the EU's existing emissions trading scheme, making building regulations stricter and cutting business rates for energy-efficient buildings.
James Smith, the chairman of Shell UK, said: 'We need EU governments to set clear targets to 2025 so that our businesses can have the confidence to make long-term investments in reducing emissions.' They want the government to create a larger, more vibrant market.
Breaking with other lobby groups, they argue that such regulation will not damage the economy - in fact the reverse. This is because they understand how powerfully the market ecology works. They have confidence in the power of competitive innovation to lower costs (which curiously the lobby groups always deny), and they know that creative regulation can generate very large individual markets. The environment is now a pounds 25bn business. But not least because the UK has dithered so long over regulation, we are not among the world leaders in this growing and possibly planet-saving industry. Danish and German companies lead in wind turbines the US and Japan are ahead in solar.
When in the name of 'the free market' lobby groups campaign against society-friendly regulation and governments back off from taking tough decisions, both are denying their proper roles and acting against their own (as well as our) interests. As my correspondent helpfully noted, there is actually no such thing as 'the' market. There are markets , each with its own frameworks which can be shaped by society. Thus there are tighter rules for selling financial services than semiconductors. We don't allow an official market in slaves or violent pornography - although we do in footballers. By contrast 'the' market is an ideological fiction, used very successfully for the past 25 years to paralyse politicians and prevent them creating or reshaping the framework of markets , such as those for environmental products.
In this case, big business has got it right, as Friends of the Earth, for one, has recognised. 'This is exactly what is needed if we are to tackle climate change and ensure the British economy reaps the rewards of going green,' it said last week. It is business's responsibility to help save the planet - it's time that government decided to let it.
The Observer, 11 June 2006