Self-organized gaming: an evolution of two car games

On November 20^th, a group of students voluntarily gathered to play two simulations or car games designed to let students experience an evolutionary process in relation to industrial ecology. Here I will shortly explain how and why the original games evolved from their original descriptions, evaluate the success of each game in the light of their learning aim, and offer improvements for both games.

1.    Evolutionary Mastermind

We first played a Mastermind-type game as described by Jorinde Vernooij, with certain alterations. We did not play the three rounds as prescribed, and values earned after guessing the code were not shared between the teams because this part of the game was not as clear from the description. Furthermore, we only had four teams competing. That we did not exactly follow the game as it progressed across three stages, because we quickly got tired of the game and wanted to try something else.

Although the guessing part of the game was fun, it overall seemed random and without a clear purpose. The learning aim of the game was threefold; to understand (1) the impact of rules on firm behavior, (2) the effect of uncertainty of future events and particularly consumer behavior, and (3) the challenge of sustainability in the context of evolutionary processes.

The first aim was reached: the impact of rules on firm behavior quickly became clear. However the random nature of the rule (whatever the facilitator picked randomly wins) did not lead to the development of clear ecological strategies or routines. Variation occurred only through randomly chosen strategies by firms in the first round. In the second rounds, after firms received feedback on their chosen combination, problem solving did occur upon confrontation with unwanted results (few points) and firms changed strategies. Such variation is a form of blind variation, meaning that the firms do not know which of the variants they choose will be selected.[1] Firms did not collaborate, because sharing their feedback from the facilitator would only be advantageous to others without gaining themselves. Therefore the first aim could be improved upon by making it compulsory for firms to share their results so that competition, collaboration, and imitation would also occur. One way of doing so is by using a similar principle as in the Mastermind game, by awarding every firm with key pegs giving more detailed feedback on the right code. Additionally, difficulty could be added by requiring a fourth variable and leave the ordering of the variables up to the firms, while requiring them to put them in the same order.

The second aim of experiencing the uncertainty of future events became especially clear, even without having played the part of the game where the dice is introduced. The players can feel the anguish each round of not knowing whether their guess is remotely correct. Uncertainty decreased with the feedback, but remained high. The game also shows path dependency, how the choice that the firm made initially explains the set of decisions they make after receiving feedback.

The last aim, however, became less clear because we did not play the second round where the use of the sustainability factor is rewarded. Because the use of this variable is not incentivized or disincentivized in any way, there is no reason for using it and it does not become clear how sustainability is a challenge in an evolutionary context.

Overall, the game would have benefited from a clearer explanation of the learning aim. If firms are supposed to just enjoy the fun of guessing then the game can be entertaining, but as players were looking to learn something and not finding much other than random assignment of values they quickly lost interest. Setting the right expectations at the beginning of the game, together with starting the next rounds before players get bored, will strongly improve this game. Lastly, direct and more specific feedback mechanisms will also motivate players and increase the learning opportunities.

2.    Evolutionary Car Game: producers gaining consumer loyalty

Next we played the evolutionary car game as explained by Marco Meloni. This game is an evolution of an earlier version proposed in class and was immediately more interesting to the players because winning seemed less random and more based on the strategic choices of the firms.

The learning aim of the game was to show how evolutionary mechanisms shape the characteristics of cars. The game was quite successful in attaining this aim, albeit in unexpected ways. In the following graphs we can see the evolution of the three different companies. Unfortunately, only the number of points earned was recorded and not what characteristics the firms choose to award points; something for the future to allow deeper analysis.

This game clearly shows that not every type of selection pressure is towards ecological strategies; although Audi tried to win over consumers by focusing on reliability and attractiveness, it experienced selection pressure. The game also shows how it is nearly impossible to predict the PCS in terms of ecological strategies or selection pressures, but it does allow explaining of the evolution in the PCS after the fact. Again variation is blind, firms do not know which variables will be rewarded, although it does become more certain with the feedback given by customers through their purchases each round. Variation soon became guided as actors searched for novelty by solving problems based on perceived opportunities as indicated by consumer preferences.

Selection pressures could be less randomly determined. There was no way to know what consumers would prefer or to what extent they would remain loyal to a certain brand and on what basis. Because all players knew each other, this was the perfect place for favoritism or nepotism to come into play, which happened during the game. Although this is still an interesting phenomenon in studying evolution, a weakness of the game was that the consumers had no specific aim and could not earn or loose points. They could only choose to buy a car each round and the basis of their choice was completely whimsical.

Firms could always try to win the favors of their consumers, by considering their feedback and improving their distribution. In this game routines developed as firms learned within the direction dictated by customer preferences (maintain high sustainability at the cost of attractiveness). Succesful characteristics were retained and others transmitted to other firms such as Audi who had made loosing choices; Audi then tried to get ahead by imitating the winning firms.

Selection quickly and clearly took place due to competitive selection pressure; those firms that satisfied consumer preferences clearly outperformed those who did not. Interestingly, it was almost impossible for the firms who started out weak to come back to full strength because each round the winning team would earn more points to distribute and could make the better car. To give the loosing firm somewhat of an opportunity to come back to strength, as there would be in the real world through random events such as natural disasters or financial crisis, we introduced the rolling of the dice. However, this did not fundamentally alter the landscape of the game. Although this development was frustrating for firms such as Audi it was a solid lesson in evolution on how hard it is to get to the top if you start out with arrears.

Overall this game achieved its learning aims by giving its players a general idea of several evolutionary mechanisms. The strategic aspect of the game made it more interesting than the mastermind game.

[1] F. Heylighen, “The Principle of Blind Variation,” Principia Cybernetica Web, November 1991, http://pespmc1.vub.ac.be/blindvar.html.

Externally controlling LCA use: difficult but lucrative?

How can the government increase the use of the Life Cycle Assessment (LCAs), a tool for assessing the environmental impact of products by evaluating their whole lifecycle? Governments coordinate social systems by setting and enforcing rules either through external control (system controlling the social system) or setting boundary conditions (rules that change incentives).[1] External control can occur through rule setting, setting the scope for control, monitoring and sanctioning. Setting boundary conditions occurs through altering market conditions, available information or physical conditions, resulting in selection pressures for companies to use LCAs. I shall offer four ways in which the government can increase the use of LCAs and use Sabatier’s conceptual framework to evaluate the potential effectiveness of external control measures in comparison to the options that set boundary conditions.

Overall, incorporating LCAs will increase a resource-based view of businesses as advocated by Hart; acknowledgement that a firm is dependent on its biophysical environment in creating competitive advantage and social legitimacy.[2] To improve the use of LCAs and thereby ultimately decrease the environmental impact of products, I propose the following four measures:

1. Local governments can directly require for new companies that deliver a final product to the market to perform an LCA that complies with the ISO 14040 standards as well as fine those companies who fail to meet those standards (external control through rule setting, monitoring and sanctioning)
2. Government can demand the use of LCAs in the tenders it sets out (public procurement) in sustainable purchasing (setting boundary conditions)
3. Government can require labels on products describing the impacts the product has and how to use the products in order to reduce the impact (setting boundary conditions by changing available information)
4. Subsidize research of LCA (setting boundary conditions through altering market conditions)

According to Sabatier’s framework, the effectiveness of these policies can be evaluated using three variables: (1) tractability of the problem, (2) ability of the statute to structure implementation, and (3) non-statutory variables affecting implementation, which influence the five stages of the implementation process as can be seen in the following diagram:

Figure 1 Sabatier’s conceptual framework (Sabatier & Mazmanian 1980)

1. Tractability: can the problem be tamed?

Concerning the tractability, or manageability of the problem, the availability of valid technical theory and technology is the same for the four measures. In general, performing an LCA is a time-consuming, costly process that requires specific expertise and that despite international standards by the International Organization for Standardization and the Society of Environmental Toxicology and Chemistry, is a tool much in need of improvement.[4] This obstacle can result in the failure of the policies to meet their objective to reduce the environmental impact of problems. More specifically it limits the aim of measure 3 to equally compare products on their environmental impact, since the LCAs are limited in their impact assessment and interpretation phases which uses subjective values. However, the fourth measure aims to improve the availability of technical theory and technology by subsidizing research into the matter.

The diversity of the target group behavior, the more diverse the behavior, the more difficult it is to regulate. The four measures mostly target company behavior, expect for the fourth measure which impacts universities, but only by incentivizing behavior. However, the companies in the Netherlands producing final products do behave differently. Some will produce only one final product, while others produce many. This will all have to be incorporated into precise regulation and sometimes require ad hoc negotiation, leaving some discretion to the companies themselves.[5] Although companies form a rather large percentage of the population, making mobilization of political support in favor of the measures more difficult, they are clearly definable, making success as well as monitoring and sanctioning an easier task.[6]

The greater the extent of behavioral change required, the more difficult implementation will be. The least change is required by the fourth measure, and the most by the first measure. Therefore the effectiveness of the first measure might be the least compared to boundary setting measures.

2. Coherently structuring implementation: setting clear goals and ways to attain them

Even if the required behavioral change is extensive, objectives can still be attained by adequately structuring implementation: setting clear and ranking of objectives, relating behavioral change to these objectives through a valid causal theory, and then offering structures to obtain the behavioral change such as the ISO standard. The financial resources required for implementation are likely the most for the external control measure and the least for demanding LCAs in procurement. Both obliging LCAs as well as labelling will require monitoring and sanctioning as well as development of regulations and administration. We can assume that the commitment of implementing agencies to objectives as well as perhaps the most decisive factor for evaluating effectiveness of our measures is the hierarchical integration among implementing agencies together with the location of the burden of proof. The first measure requires the most implementing agencies to work together, complicating implementation. However, shifting the burden of proof for compliance as much as possible to the companies makes it more likely for agencies to make similar decisions in coherence with the objectives.[7] Overall, coherent structuring of implementation is the easiest for the fourth measure and the most difficult for the first.

3. Non-statutory variables: how much support do LCAs enjoy?

For implementation to be effective, the policy needs to receive sufficient political as well as public, NGO, media and sovereign support. In general environmental problems are receiving increasing attention from media, civil society, government and companies. However, economic considerations often triumph environmental concerns, for all groups involved, except for perhaps environmentally-oriented consumers, NGOs and businesses. Making LCAs and labelling mandatory (measure 1&3), will require the broadest support among different groups that is not always there, and will therefore be most difficult to implement. However, once support is generated these measures will have the largest impact.

Overall the external control measure is more expensive and difficult to implement compared to those setting boundary conditions. The subsidizing of LCA research is relatively the easiest measure to implement. However, if some of the challenges faced by external control can be effectively overcome, the impact of this measure will be the widest. It may be difficult, but could be highly lucrative, especially considering that green measures are expensive and economically oriented companies need strong incentives to take them.

Conclusion: policy implementation is complex

Overall, there is no clear-cut or standard solution to setting such rules as seemingly sound decisions can lead to unexpected, unwanted consequences due to the reciprocal selection that occurs between the policy system and its environment.[8] These effects would need to be further investigated taking selection pressures, determining the attractor basis, taking feedback loops, path dependency, and embeddedness into account.

Furthermore, the analysis presented here is only limited and mostly ignores that the policy system is polycentric; consisting of relationships among multiple authorities with overlapping jurisdictions.[9] As Ostrom argues regarding common pool resources, sophisticated governance system does not choose between setting boundary conditions or external control measures, but recognizes the need for both multilevel governance arrangements and policies that expect or encourage self-organization.

[1] Frank Boons, Wouter Spekkink, and Wenting Jiao, “A Process Perspective on Industrial Symbiosis,” Journal of Industrial Ecology, 2014.

[2] Stuart L. Hart, “A Natural-Resource-Based View of the Firm,” Academy of Management Review 20, no. 4 (1995): 986–1014.

[3] Paul Sabatier and Daniel Mazmanian, “THE IMPLEMENTATION OF PUBLIC POLICY: A FRAMEWORK OF ANALYSIS*,” Policy Studies Journal 8, no. 4 (January 1980): 538–60, doi:10.1111/j.1541-0072.1980.tb01266.x.

[4] John Reap et al., “A Survey of Unresolved Problems in Life Cycle Assessment,” The International Journal of Life Cycle Assessment 13, no. 5 (2008): 374–88.

[5] Sabatier and Mazmanian, “THE IMPLEMENTATION OF PUBLIC POLICY,” 543.

[6] Sabatier and Mazmanian, “THE IMPLEMENTATION OF PUBLIC POLICY.”

[7] Ibid., 546–7.

[8] LASSE GERRITTS, “A Coevolutionary Revision of Decision Making Processes: An Analysis of Port Extensions in Germany, Belgium and the Netherlands,” Public Administration Quarterly, 2011, 309–41.

[9] Krister P. Andersson and Elinor Ostrom, “Analyzing Decentralized Resource Regimes from a Polycentric Perspective,” Policy Sciences 41, no. 1 (March 2008): 71–93, doi:10.1007/s11077-007-9055-6.

Network Analysis: The Hierarchical Industrial Complex of the E.ON MPP3 Power Plant

The MPP3 Power Plant

On the Maasvlakte 2 in Rotterdam the German E.ON MPP3 Power Plant towers over the harbor. This new, ultramodern hard coal steam unit is part of a regional network of production, which for the purpose of this analysis I define to include the E.ON MPP1 &2 (coal-fired power plants), MPP3 power plant, German Lyondellbasell Maasvlakte Petrochemical plant (producing mainly propylene oxide & styrene monomer), Dutch GATE (LNG) terminal, and Finish Neste oil (renewable diesel refinery). This area of production is part of a larger industrial cluster of the Port of Rotterdam, as you can see in the image below:

Overview of the MPP3 regional production network embedded in the Maasvlakte area [12]

The linkages in the network are as follows:

• Lyondellbasell uses steam and electricity from E.ON. In return EON burns their wasteproducts which saves E.ON coal and Lyondellbasell the construction of an expensive flare-off installation

Linkages between the firms [13]

• Neste Oil uses steam and electricity from E.ON. In return Neste Oil delivers biopropene to E.ON which they co-fire with their coal
• GATE Terminal uses E.ON’s warm cooling water to heat the LNG so that it can be supplied to the normal natural gas grid.

These linkages most likely have been established through self-organization, without the threat of external control by government (private interest organization), extensive rule formation, monitoring and sanctioning by the private actors (self-governance) or explicit involvement by the government (government). Instead the linkages emerged without external control and is characterized by multiple exchanges between organizations at a certain price mainly in the interest of reducing costs and perhaps also to increase legitimacy by improving on their corporate social responsibility (CSR). The role of the Rotterdam Harbor Authority in the creation of the co-siting is not clearly documented in literature available to the public. Their involvement influences the extent of the self-organization significantly.

Robert Burt argues there are four different types of network structure, (tightly coupled, clique, centrality, bridging a structural hole).[1] The linkages that have currently been established suggest a centralized and therefore hierarchical network with E.ON as the mediator for all interactions. The network is characterized by a large and sparse, abundant structural holes (single linkages between networks) and low redundancy providing information and control benefits, anchored by E.ON. Hierarchy provides an alternative to density for network closure. However, closure is not a source of social capital, instead the ability to bridge structural holes between companies that are individually pursuing profits is. In hierarchical networks social capital is borrowed from an insider’s network that spans structural holes as we see in this network of production. High network centrality often implies high resource dependency, meaning that organizations need each other’s resources to achieve their goals. Firms always aim to minimize dependency through prevention strategies and coordinative arrangements such as identifying alternative resources or gaining control over the resources.

These strategies are influenced by the linages with non-local actors. Firstly, the network is linked to the Dutch and German national government as recently became apparent with both the Dutch SER Energie Akkoord and the German Energiewende. The German Energiewende has finally lead E.ON to completely split off its fossil fuel division from its renewable division.[2] The Dutch Energy Agreement includes the closure of five coal-fired power plants including the old E.ON MPP1 & MPP2 to achieve renewable energy goals set by the European Union, which are currently delivering 18% of E.ONs profits in the Benelux.[3] Because of the high resource dependency or interwovenness with the neighboring companies, the closure of E.ONs power plants are scheduled for July 2017, a year later than the other three plants scheduled to close. The cancellation of the contracts by E.ON could costs thousands of Euros.

But how high is this resource dependency really? GATE Terminal says its operations are not endangered by the closing of E.ON because there are sufficient alternative suppliers of heat in the area.[4] However, GATE paid for the construction of the pipeline across the canal to E.ON and continually pays for the cooling water even though this is a mere waste product. If E.ON falls away, GATE would potentially need to construct a new and longer pipeline as well as go through the process of brokering structural holes with other firms to obtain their heat.
Neste oil says resource dependency is low since it can continue to obtain electricity and steam from as well as deliver biopropene to the MPP3 plant. In addition, the demand for biopropene is high enough to prevent negative impact on the sale of their waste product.[5]
High resource dependency is suggested by Lyondellbasell who for reasons of competition does not want to react to the news. However, the association of chemical companies of which Lyondell is part, does say that they are part of the Energy Agreement and will therefore honor it.
In conclusion, even though the members of the network make resource dependency seem lower than it gets credit for by the Dutch government which is extending closure for another year, resource dependency is high for both GATE and Lyondell who will need to make significant costs to alter their flows and contracts. This is less so for Neste Oil. Finally dependency is also relatively high for E.ON who will need to pay to cancel contracts and receive less renewable inputs into their ovens.

Second, for the construction of the physical connections between the firms, the regional network is also linked to non-local actors. For example, the technical project management company Mainconsult that operates nation-wide was responsible for constructing the process flow tubes from E.ON to Neste Oil for the transfer of electricity and biopropene.[6] Since the number of these types of contractors is high, the firms are not highly dependent on one particular firm to construct these connections.

Third, the network is linked to non-local NGO’s such as Greenpeace as well as the Nature and Environment foundations (stichting natuur & milieu) that are heavily campaigning against E.ON’s construction of the MPP3 plant. Several NGO’s have bundled their strengths and taken the Dutch province of South-Holland to court to dispute every permit that they issued to E.ON. Although all of Greenpeace’s charges were rejected, except for one that is still in court. Although E.ON has already obtained the permits for construction and production, which will therefore not be stopped, the legal process takes considerable time and money.[7]^,[8] Furthermore, the campaigns by the NGOs damage the corporate image of E.ON which has the potential to decrease the legitimacy of the production network and thereby hamper the creation of values.

“They continue to be dirty coal-fired power plants” (Spokesperson Greenpeace)[9]

E.ON, as well as the other companies, has however made an effort to increase the value creation and their legitimacy in times of transition to renewable energies. For example the new MPP3 plant has an efficiency of 46% (against 35% in the MPP1&2), uses seawater cooling, nitrogen, sulphur and fly-ash are mostly caught and filtered by high-tech systems, is capable of co-firing with bio-mass of up to 30% and is CO₂ capture ready. E.ON is currently experimenting with storing this CO₂ in empty gasfields under the North Sea under the project ROAD (Rotterdam Storage and Catching Demonstration project) which is heavily subsidized by the Dutch Government. During the construction of its MPP3 plant, it build a special visitor center in which people could create their own energy mix which was then evaluated by experts to demonstrate that we cannot transit to renewable energy from one day to the next, in the hope to increase the legitimacy of their coal-fired plants. However, at the end of the day E.ON is engaged in some greenwashing since its power plant continues to run on coal and does heavily pollute the environment despite its efforts to reduce this.

The regional MPP3 network enables actors to achieve coordination by providing linkages through which resources, in this case mostly materials can flow. In terms of Gordon & McCann’s types of regional clusters[10], the network can be characterized as an industrial complex. The network is a privately organized system consisting of identifiable and stable relations, constructed mainly to profit from co-location or cost-saving from production links is are more or less symmetrically distributed amongst actors. Thus material loop closing is enabled primarily by physical proximity as well as cost-saving decreased waste and resource consumption. Further opportunities could be created by setting decisive boundary conditions thereby increasing selection pressure by the government combined with postponing and withholding external control through the development of a vision.[11] Such actions would make the network less hierarchical and more tightly coupled.

However, the network also constrains what actors can achieve, because some paths are easier to walk than others. One such constraint is the resource dependency as we have seen above. Another is the high network hierarchy, with E.ON as the mediator that will be closing two important factories within a matter of years.

Overall, there is much more to be said about this complex regional network of production, but this post provides some initial analysis.

[1] Ronald S. Burt, Research in Organizational Behavior: An Annual Series of Analytical Essays and Critical Reviews., ed. Barry M. Staw and Robert I. Sutton, vol. 22 (345-423, 2000).

[2] Renée Postma, “Energiereus Eon Schakelt Volledig over Op Duurzame Energie,” NRC Handelsblad, December 1, 2014.

[3] Renée Postma, “De dagen van de oude kolencentrale zijn geteld,” NRC Handelsblad, August 17, 2013, http://www.nrc.nl/handelsblad/van/2013/augustus/17/de-dagen-van-de-oude-kolencentrale-zijn-geteld-1281765.

[4] Ibid.

[5] Ibid.

[6] “Mainconsult – Referenties,” Mainconsult – Advanced Technical Project Management, accessed December 27, 2014, http://www.mainconsult-nl.com/referenties.html.

[7] David Dijnmayer, “Kolencentrales Maasvlakte Zijn Bijna Af, Maar Vergunningen Nog Altijd Niet Goed,” Energei Energienieuws, October 30, 2013, http://www.energeia.nl/preview/1990-Kolencentrales-Maasvlakte-zijn-bijna-af-maar-vergunningen-nog-altijd-niet-goed.html.

[8] E.ON, “Maasvlakte Power Plant 3 Press Info for Franziska Krasnici,” February 2012.

[9] Postma, “De dagen van de oude kolencentrale zijn geteld.”

[10] Ian R. Gordon, Philip McCann, “Industrial Clusters: Complexes, Agglomeration And/or Social Networks?,” Urban Studies 37, no. 3 (March 1, 2000): 513–32, doi:10.1080/0042098002096.

[11] F. A. Boons, “Self-Organization and Sustainability: The Emergence of a Regional Industrial Ecology,” Emergence: Complexity and Organization 2, no. 10 (2008).

[12] Facts & Figures Rotterdam Energy Port and Petrochemical Cluster (Port of Rotterdam, April 2010).

[13] Jaap Jelle Feenstra, “Mainport Rotterdam and Circular Economy” (presented at the Port of Rotterdam, Rotterdam, January 2013), http://www.slideshare.net/hcss_hsd/port-of-rotterdam-16216997.

Changing the world by creating the illusion to be clean

“How much do we want to change the world? Or do we want to make illusion that we are clean?,” asks a Nokia manager during a CSR meeting. Whether Nokia is sincerely committed to high ethical and environmental standards, is an open question that remains unanswered. What we know is that Nokia, as well as its suppliers are, like any other organization, striving for the grail of legitimacy, activities that are “desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.”[1] Legitimacy is a crucial resource and motivator for organizations, arising from external market and institutional pressures, as well as the strategic advantage of management control.[2]

Nokia is striving for legitimacy as a, Northern European, socially conscious company with socially conscious customers, meaning they cannot simply ignore human right and environment violations. Nokia’s supplier, as a European company operating in China has Nokia with its social awareness as its customer and will need to satisfy some of its customer demands, as well as expectations from locals such as their workers to obtain legitimacy. Therefore both companies balance their motivation to increase profits[3] with the threshold in increasing efficiency that is eventually reached beyond which the adoption of practices that makes them more legitimate is what improves performance. [4]

In order to achieve this “social fitness”[5] both will have to adopt higher ethical and environmental standards. Nokia, faced with ‘unmanageable interdependence’[6] is using the “greater power of the larger social system and its government” to get the supplier to comply with legal standards, such as demanding the supplier to have contracts that are in compliance with the law. They are furthermore subjecting their subsidiaries to standardized reporting mechanisms.

Nokia, having a broad customer base, is also aiming to increase its legitimacy are adopting innovations such as the audit shown in the documentaries to demonstrate that ‘they are at least trying to improve working conditions,’[7] a form of mimetic isomorphism. This effort improves legitimacy regardless of whether working conditions are really improving at the factory – the auditor Kaskinen leaves Nokia frustrated with at least Nokia is giving off a sign to its customers, shareholders and competitors that it is making an effort to balance profit-making with social morality.

The supplier is striving for legitimacy by allowing their auditors onto their premises, but also by setting higher standards prior to as well as after the audit, such as by increasing the wages and removing toxic chemicals from the area where tea is drunk. However, since the firm is in China, where standards of living are lower and people less socially conscious, the supplier can get away with lower standards of legitimacy; they can increase wages merely for those on the Nokia supply chain and move the chemicals just to the kitchen. Thus listening to their auditors to gain legitimacy, but not making substantial changes. In the end the supplier did make changes to be in compliance with the local laws, another way to gain legitimacy both from Nokia as well as from its workers.

Since Nokia and their supplier are dependent upon one another, isomorphic change will take place, meaning the organizations will become more alike.[8] One result is that the supplier will introduce some standards that are held by Nokia, and Nokia in turn might lower some of its standards in order to keep their supplier. In its early stages of its lifecycle the supplier operates quite differently from Nokia, but as it becomes well established it also pushes for homogenization with the other organizations in its field such as Nokia.

• Is the approach taken by Nokia an effective way of diffusing sustainability criteria?

Whether Nokia’s approach of diffusing sustainability criteria is effective, depends on Nokia’s aim for adopting such standards. Given that “corporate environmentalism, or a pervasive rationale for it, ultimately follows the economic bottom line”[9] it is likely that ultimately they are increasing standards merely to gain legitimacy amongst its customers, and how effective the changes are for the environment only takes second place. Thus I shall analyze effectiveness only in terms of the image Nokia creates for its customers.

Nokia’s approach to diffusing sustainability and ethical criteria is to send over a team of two business ethics advisors to examine the supplier’s working, safety and living conditions, payroll records, and potential environmental hazards through an inspection of the plant guided by its managers and short interviews with its workers. They provide a final report to the supplier’s managers as well as Nokia managers back in Scandinavia, [10] but how much action they take towards the supplier in terms of coercive or power-processes methods[11] is unclear from the documentary. Since the auditing team does not have much ability the influence outcomes in the wake of opposition from the supplier, I shall look at only at the leadership-based processes used by Kaskinen and Jamison during the audit, looking at how managers play a key role in creating and modifying policies, taking the individuals of the firm as the “ultimate (but not the only) unit of analysis”.[12]

Leadership-based processes are more likely to succeed if policy-supporters have expertise in the area. The consultants have elaborate expertise in the area of environmental and ethical business standards which lends their opinion and comments greater authority, but the supplier executives do not have a similar expertise in the area, making change harder yet again.[13] Furthermore, there is a stark gender divide, with female workers and investigators on the one hand and male managers and executives on the other. Non-verbal communication during the meetings indicates that it is hard for the female investigators to be taken completely serious and convince the male managers of their ethical standpoints.

We must furthermore keep in mind that the supplier will be opposed to any change, unless there is a compelling argument to do so. The level of opposition depends on the extent of organisational change required to implement a policy; they have no problem moving it to the kitchen, but doing something different entirely might induce opposition. Policies concerning business ethics, which involve significant costs to implement and create only diffused benefits, are likely to be opposed and thus unlikely to be adopted through leadership-based or consensus-inducing processes, but only through coercive power based measures.[14] In the documentary it soon becomes evident that Nokia is facing similar limitations with its chosen method for diffusing change. They do not even get to tackle underlying problems such as indentured servitude of the women, forced abortions and other blatant human rights violations. Instead Nokia can focus only on discussing type 3 and 4 type policies[15] that are in accord with local laws, such as minimal wages and written contracts, but not on other measures that make ethical sense but are formally “beyond compliance.” Since the managers have conflicting preferences and standards, only policies that are supported by more powerful (hierarchically superior managers, are up for discussion. And even the discussion of those standards in a leadership-based process, I consider rather weak. Despite all the violations, the overall tone of the final report to the firm seems rather positive, applauding honesty, openness and efforts made, while these are really quite limited. No formal demands are placed on the firm, and topics that are beyond compliance remain off-limits.

Overall the strategy taken by Nokia to diffuse change is not very effective. It would have been more effective to send male investigators for a leadership-based process as well as more firm demands and indications from Nokia as to what it would like to see change and how much the supplier still has to do to realize that.

• How could another coordination mechanism improve on this?

As suggested above, Nokia could rely more on power-based processes to also put “beyond compliance” type 1&2 policies on the table which includes goodwill benefits that are more difficult to quantify[16]. Nokia could use such a power-based process to require its supplier to get an EMS or ISO 14001 certification. Such coordination mechanisms would ensure substantial legitimacy, not just an illusion of legitimacy since it will put mechanisms in place that require the system to become more sustainable. There are many coordination mechanisms part of an EMS, but one example is the providing of providing structured processes such as requirements for formal employee training programs, which on the one hand improve the sustainability of the system, while also instilling environmental awareness amongst employees.[17]

Alternatively Nokia could set up and elaborate “professional networks that span organizations and across which new models diffuse rapidly,”[18] inducing a type of normative isomorphism. Nokia’s current efforts of audits are happening in an “organizational vacuum.”[19] For example the supplier only raised the minimum wages for the workers in the Nokia supply chain (two weeks before the arrival of the auditor) and did not extend improvements to other workers as well. If the auditors would develop the audit into a standardized practice that is not only done within Nokia, but across the organizational field, this will increase the sustainability of suppliers across the board.

Other sources:

Banerjee, Subhabrata Bobby. “Managerial Perceptions of Corporate Environmentalism: Interpretations from Industry and Strategic Implications for Organizations.” Journal of Management Studies 38, no. 4 (2001): 489–513.

Dargis, Monohla. “When Preaching Globalized Ethics Is Just Corporate P.R.” The New York Times, June 29, 2005. http://www.nytimes.com/2005/06/29/movies/29dece.html?_r=0.

Howley, Kerry. “Market Failure or Marketing Failure?” Reason.com, July 5, 2005. http://reason.com/archives/2005/07/05/market-failure-or-marketing-fa.

MacDonald, Chris. “Movie Review: ‘A Decent Factory.’” The Business Ethics Blog, July 6, 2006. http://businessethicsblog.com/2006/07/06/movie-review-a-decent-factory/.

[1] Mark C. Suchman, “Managing Legitimacy: Strategic and Institutional Approaches,” Academy of Management Review 20, no. 3 (1995): 571–610.

[2] Ruihua Joy Jiang and Pratima Bansal, “Seeing the Need for ISO 14001,” Journal of Management Studies 40, no. 4 (2003): 1047–67.

[3] Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” The New York Times Magazine, September 13, 1970.

[4] John W. Meyer and Brian Rowan, “Institutionalized Organizations: Formal Structure as Myth and Ceremony,” American Journal of Sociology, 1977, 340–63.

[5] Paul J. DiMaggio and Walter W. Powell, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields,” American Sociological Review, 1983, 150.

[6] Ibid.

[7] Ibid. p. 151

[8] Ibid.

[9] Subhabrata Bobby Banerjee, “Managerial Perceptions of Corporate Environmentalism: Interpretations from Industry and Strategic Implications for Organizations,” Journal of Management Studies 38, no. 4 (2001): 507.

[10] Jiang and Bansal, “Seeing the Need for ISO 14001,” 1062.

[11] Aseem Prakash, “Why Do Firms Adopt ‘beyond‐compliance’environmental Policies?,” Business Strategy and the Environment 10, no. 5 (2001): 286–99.

[12] Ibid.

[13] Ibid. p 195

[14] Ibid.

[15] Ibid.

[16] Prakash, “Why Do Firms Adopt ‘beyond‐compliance’environmental Policies?,” 290.

[17] Jiang and Bansal, “Seeing the Need for ISO 14001,” 1049.

[18] Paul J. DiMaggio and Walter W. Powell, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields,” American Sociological Review, 1983, 152.

[19] Ibid., 158.

Optimizing the IKEA Forestry SES according to Friedman

Panarchial connections (Holling 2001)

We might use Friedman’s principle, that the social responsibility of business is to increase its profits,[1] to improve the current panarchal connections that makes up the forest SES. Under this principle we should not expand IKEA’s social and legal responsibilities beyond increasing its profits for its shareholders, but instead create incentives for the corporations to behave in ways that supports a sustainable SES. Thus we must not demand that IKEA comes up with more rigorous agreements than the ones it already has, but instead society should “create boundary conditions that create unsustainable economics.”[2]

One such measure could be limiting physical input to the economy which can be done in different ways. First, fee and tax structures can be increased. This could be done by local and national governments and forest authorities. Lobby efforts from corporations might make such reforms more difficult, but overall this is an efficient way of limiting physical input.[3] Secondly, a less efficient option would be to increase the use of regulatory bans and limits. Such regulatory bans would also be most effective if posed by government. Any governmental measures will benefit from broad support in civil society that can then push government to take more drastic measures.

Another measure that could be taken is to optimize market information mechanisms (such as the rainforest certificate and forest tracking), that (un)intentionally elicit sustainable corporate behavior. Currently IKEA’s positive forest effort rely almost entirely on its relationship with one firm, FSC, while worldwide only 7% of the forests are FSC certified, causing a supply problem.[4] Furthermore, considering the forest as a whole as a SES there can be a more internationally coordinated effort that is supported by grassroot NGOs that can check the corporations on a local level. Additionally, the market information mechanisms could be more substance specific, the FSC accreditation could be made more stringent so that it is no longer criticized by the conservation community as being fundamentally flawed.[5] One such measure is the FSC ‘controlled wood’ system which allows companies to mix non-FSC wood with FSC wood as long as it is sourced from “non-controversial” places. This leads to corporations using non-FSC certified wood to still get the FSC label. Without standardized risk assessment to determine which areas are “non-controversial” such efforts are not an improvement to the system. So efforts to standardize risk assessment and further certify the forests by a more diverse group of certifiers rather than relying on just one, can all be optimizations of this SES of which Friedman would approve.

[1] Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” The New York Times Magazine, September 13, 1970.

[2] Braden R. Allenby, “Environmental Constraints and the Evolution of the Private Firm,” The Industrial Green Game: Implications for Environmental Design and Management, 1997, 101–13.

[3] Ibid.

[4] Annie Kelly, “Ikea to Go ‘Forest Positive’ – but Serious Challenges Lie Ahead,” The Guardian, December 14, 2012, http://www.theguardian.com/sustainable-business/ikea-sustainability-forest-positive-karelia.

[5] Catharine Grant, “Resolute’s Flawed ‘Controlled Wood’ Threatens FSC’s Credibility,” Greenpeace International, August 29, 2013, http://www.greenpeace.org/international/en/news/Blogs/makingwaves/resolutes-flawed-controlled-wood-threatens-fs/blog/46425/.

The IKEA Forestry SES: self-organizing or not?

All human resources are embedded in Complex Social Ecological Systems (SES). To understand why one SES is sustainable, whereas others collapse is a core challenge of Industrial Ecology. Nobel laureate Elinor Ostrom developed a general framework for analyzing the sustainability of complex SES which helps identify and analyze the relationships among the multiple levels of SESs at different spatial and temporal scales.[1] In this post I shall use Ostrom’s framework to analyze the wood used in my IKEA dining       table.

Since this system is large and complex, I shall only provide a comprehensive list of the first-level core subsystems, not an exhaustive one.

1. Resource systems (RS): Forested areas approved for wood cutting
2. Resource units (RU): Trees, shrubs
3. Governance systems (GS): IKEA Group, IKEA Industry (Swedwood & Swedspan), FSC Forest Stewardship Council, Rainforest Alliance Smart Wood Program, national, regional & local government and forestry authorities.[2]^{, [3]}
4. Users (U): IKEA suppliers and subcontractors that chop the wood, recreational

In turn, each core subsystem is made up of multiple, second-level variables (e.g. size, mobility, knowledge), which are further composed of deeper-level variables. Whether an SES can avert a tragedy of the commons such as deforestation, depends on whether the expected benefits of managing the forest exceed the perceived costs of investing in better rules and norms. Ostrom has identified ten second-level variables that positively or negatively affect the likelihood of successful management of the SES.

1. Size of resource systems (RS3): Ikea uses 13.56 million cubic meters of solid wood and wood-based board metals every year (excluding packaging & paper) and the forests where this wood is gotten from are large and spread all over the world. Monitoring these resource systems is expensive, driving down the likelihood that the forest can be monitored effectively. Yet for monitoring IKEA is replying only on one global certification scheme, the FSC, rather than multiple agents, making it more difficult to effectively monitor the forests. Currently only 7 percent of the world’s forests are FSC certified. Behind this system it is easy for companies like IKEA to hide behind and smaller NGO’s, such as the Swedish Protect the Forest, are needed to monitor whether the company is actually sticking to its promises.
2. Productivity of system (RS5): The forests are not yet completely exhausted, yet there is an awareness across all sectors that trees are getting more scarce and something needs to be done to forest more sustainable. IKEA’s ambition to become “forest positive” by 2020, meaning it aims to have a positive effect on the world’s forest, despite increasing demands for timber, is an example of the fact that there is an awareness of scarcity, motivating companies, NGO’s and governments alike to design policies to preserve the world’s forest.
3. Predictability of system dynamics (RS7): forests have a relatively high predictability, which increases expected benefits. It is generally known how long trees will take to grow and thus what would happen under particular foresting rules. However forestry ecosystems “are complex, so an appearance of something is not necessarily a bad thing.” (Jiang & Bansal 2003) It therefore requires experts to manage the system. Other less predictable factors consist of emergency situations and natural disasters such as a fire.[4]
4. Resource Unit Mobility (RU1): tress are stationary units, less mobile and therefore easier to observe and manage, lowering perceived costs.
5. Number of users (U1): IKEA and its subsidiaries use about 1% of the forest’s wood and they can more easily mobilize necessary labor and resources as a large group to take care of these large resource systems.
6. Leadership (U5): IKEA has great entrepreneurial skills and market authority, when  they make the commitment to shifting to responsible foresting, it is likely for other members of the industry to follow. However, since IKEA is a large, multinational corporation, with vested interests, it makes them more risk averse and less likely to make entrepreneurial, innovative efforts or hide behind false promises to just make themselves look good.[5] The Rainforest alliance and FSC are similarly leaders which set the benchmark for the whole industry. They can set higher standards, because they have no profit motives. Yet they also have to take many different parties into account, which can make their standards less rigorous. Both organizations have been accused of green washing. The system also has more local leaders, such as the small NGO’s (Protect the Forest and others) which can check more easily what is happening on the ground. However, non-profit organizations have no formal way of holding all parties to the standards, making self-organization more difficult. Government leadership is largely absent.
7. Norms/social capital (U6): although IKEA has received public endorsement for their efforts to make their foresting more sustainable by organizations such as the WWF, thus increasing trust and social capital in the system, there have also been some challenges decreasing this trust. Swedwood Keralia LLC, IKEA’s subsidiary in Northern Russia, was suspended by the FSC following the identification of six major non-conformances, all of which are systemic that occur over a long period of time or with significant damages.[6] Such incidents decrease the trust in the system and the value attributed to promises by companies. The recent reinstatement of IKEA’s license contributes to restoring such trust.[7]
8. Knowledge of the SES (U7): A forest regenerates slowly, while demand for wood is only increasing as global wealth rises. However the users understand the carrying capacity to the extent that they have taken action to make the system more sustainable. However, the exact carrying capacity of the system remains unknown and tragedy of the commons is likely to occur if no strict measures are taken which are also supervised.
9. Importance of resource to users (U8): Users are highly dependent on wood and thus the value attributed to the sustainability of the system is quite high. Needing almost 3.65 cubic meters of solid wood and wood-based board materials a year to make its furniture, wood is an essential resource. Furthermore consumers and NGO’s are placing increasingly higher value on the sustainability of the forestry system, giving corporations such as IKEA an increased incentive to ensure its wood is sustainably sourced.
10. Collective-choice rules (GS6): IKEA has the autonomy to set some of its own rules and standards, as it did in their IWAY code of conduct as well as in their new strategy People and Planet Positive.[8] However, they are also limited in their approach by international standards and conventions and not entirely free in their approach.

All things considered, the system is quite likely to self-organize. The question remains whether the standards that are drawn up will actually be met by the users and whether the rules that are drawn up make the system sustainable enough. It is important that measures taken do not just look good on paper, but are also rigorous in practice and put to use. It is easy for IKEA to hide behind great promises and rules that in reality masque a harsher reality in which primary forest is being destroyed at a rate that exceeds the carrying capacity of the system. To ensure that measures are taken and met the system requires a panarchy[9] with more effective surveillance methods and adaptive cycles at different levels of the hierarchy such as global and local NGO’s and government.

[1] E. Ostrom, “A General Framework for Analyzing Sustainability of Social-Ecological Systems,” Science 325, no. 5939 (July 24, 2009): 419–22, doi:10.1126/science.1172133.

[2] IKEA, “Forestry and Wood,” IKEA, http://www.ikea.com/ms/en_IE/about_ikea/our_responsibility/forestry_and_wood/index.html.

[3] The PPI Network, “IKEA Industry Group,” The PPI Network, 2014, http://theppinetwork.com/about/clients/ikea-industry-group.

[4] K. Malarz, S. Kaczanowska, and K. KułAkowski, “Are Forest Fires Predictable?,” International Journal of Modern Physics C 13, no. 08 (October 2002): 1017–31, doi:10.1142/S0129183102003760.

[5] Raz Godelnik, “IKEA Faces Criticism Over Use of FSC Certification,” TriplePundit People, Planet, Profit, December 18, 2012, http://www.triplepundit.com/2012/12/ikea-facing-criticism-fsc-certification-become-forestry-positive/?doing_wp_cron=1414928695.7831790447235107421875.

[6] Rainforest Alliance, “The Rainforest Alliance Lifts Suspension of FSC Certification for IKEA Subsidiary in Russia,” Rainforest Alliance, May 14, 2014, http://www.rainforest-alliance.org/ikea-swedwood-fsc-suspension-lifted.

[7] Jennifer Els, “Rainforest Alliance Reinstates IKEA’s FSC Certification,” Supply Chain, March 14, 2014, http://www.sustainablebrands.com/news_and_views/supply_chain/jennifer_elks/rainforest_alliance_reinstates_ikeas_fsc_certification.

[8]Annie Kelly, “Ikea to Go ‘Forest Positive’ – but Serious Challenges Lie Ahead,” The Guardian, December 14, 2012, http://www.theguardian.com/sustainable-business/ikea-sustainability-forest-positive-karelia.

[9] C. S. Holling, “Understanding the Complexity of Economic, Ecological, and Social Systems,” Ecosystems 4, no. 5 (August 1, 2001): 390–405, doi:10.1007/s10021-001-0101-5.

Ruihua Joy Jiang and Pratima Bansal, “Seeing the Need for ISO 14001,” Journal of Management Studies 40, no. 4 (2003): 1062.

Business of business 2.0: are corporations selfish artifical persons or supercooperators?

On October 9^th Lego ended its partnership with Shell dating from the 1960s following Greenpeace’s campaign against the oil giant’s plans to drill in the Arctic using a video[1] that went viral saying: “Shell is polluting our kid’s imaginations.”[2] A movement saying that it is unethical to associate with an industry such as fossil fuels which is harming system earth is winning influence. Besides Lego, the University of Glasgow, Stanford University, the Rockefeller Family, and 800 other global investors are all divesting their fossil fuels.[3] Although this is not a purely ethical decision – in the long run there are powerful financial incentives as well – morality plays a strong role. How can Friedman explain these kinds of movements?

Friedman cannot explain such movements; all he can say is that the CEOs of such corporations are acting unethically, because they are stealing their shareholders money spending it on good causes at the expense of diminishing shareholders’ profits. Furthermore, Friedman argues that businesses should not have social responsibility beyond the “basic rules of society,”[4] because businesses are only “artificial persons” and cannot be said to have responsibilities as such. Yet the US Supreme Court holds corporations as persons falling within the scope of the 14^th amendment, entitling corporations equal protection under the law with all other persons. This has allowed for corporations to become so powerful, because they can deflect most civil lawsuits to the corporate treasury, and engage in criminal activity while individuals never become responsible. In the US, Thomas Jefferson and other agrarian republicans dreaded the corporation so much that they left their creation to the states.[5] CEO’s are shielded by corporate personhood, allowing the corporation to grow bigger and bigger without accountability or checks and balances. CEOs are not held responsible for corporate actions, while Friedman argues on the assumption that the CEO is solely responsible for the decisions made by the corporation and therefore cannot take socially or ethically motivated action. I could even argue that the multinational model would not even be possible if CEOs were indeed held personally responsible, because the public would demand accountability and social responsibility as they did in the case of Lego.

Last June the SCOTUS ruled in favor of Hobby Lobby, allowing closely held for-profit corporations to be exempt from a law its owners religiously object to,[6] allowing corporations not to comply with the law on religious grounds. Allowing corporations moral agency and religious conviction, annuls Friedman’s argument that corporations only have limited and artificial responsibilities; practice shows a different reality.

Furthermore, Friedman believes that corporate decision-making is a fully rational process of finding an optimal choice that maximizes advantage. Although this may be true in theory, in reality we are only boundedly rational individuals[7] which have also been found to often “consider the welfare of others as a value in itself.”^[8] Simon argues as far back as 1979 that boundedly rational decision-making is perhaps best proved by computer simulation.[9] This approach was taken by Martin Nowak, a theoretical biologist and expert in evolution and game theory, making a compelling case that corporation, not competition as a race to the bottom, is the defining human trait. His argument is based on the prisoner’s dilemma (if both players are rational actors they will defect), using computer simulations to show that selfish strategies are beaten by cooperation, “Generous Tit for Tat” – “never forget a good turn, but occasionally forgive a bad one”, is most effective.[10] Although his models are only as good as his assumptions, they shift the paradigm from Friedman’s rational actors that selfishly search for the bottom line, to the possibility for morality and social responsibility to be successful decision-making strategies, as “evolutionary spinoffs of the fundamental need of social creatures to cooperate.”[11]

We are moving into a new paradigm in which practical observation of which decision-making strategies are most successful takes precedence over theoretical models. People demand social responsibility from their corporations which follow suit as in the case of Lego and Rockefeller. We become aware of the damage done by treating corporations as artificial persons, allowing them to evade the responsibility they have. And we realize that a corporation taking up this social responsibility is not just better for the people and the planet, but also for the profit in the long run. Friedman’s argument no longer fits such a paradigm.

[1] 1. Greenpeace, LEGO: Everything Is NOT Awesome. – YouTube, 2014, https://www.youtube.com/watch?v=qhbliUq0_r4.

[2] “Lego Ends Shell Partnership Following Greenpeace Campaign | Environment | Theguardian.com,” accessed October 17, 2014, http://www.theguardian.com/environment/2014/oct/09/lego-ends-shell-partnership-following-greenpeace-campaign.

[3] Suzanne Goldenberg, “Heirs to Rockefeller Oil Fortune Divest from Fossil Fuels over Climate Change,” The Guardian, September 22, 2014, http://www.theguardian.com/environment/2014/sep/22/rockefeller-heirs-divest-fossil-fuels-climate-change; Noami Klein, “Climate Change: How to Make the Big Polluters Really Pay,” The Guardian, October 17, 2014, http://www.theguardian.com/commentisfree/2014/oct/17/climate-change-make-big-polluters-pay-fossil-fuel-industries.

[4] Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” The New York Times Magazine, September 13, 1970, p. 1

[5] 1. THe Daily Bell Staff, “Economist Wins ‘Nobel’ for Tinkering at the Edges?,” The Daily Bell, October 14, 2014, http://www.thedailybell.com/news-analysis/35725/Economist-Wins-Nobel-for-Tinkering-at-the-Edges/.

[6] Provided there is a less restrictive means of furthering the law’s interest.

[7] Herbert A. Simon, “Rational Decision Making in Business Organizations,” The American Economic Review, 1979, 493–513; Bryan D. Jones, “Bounded Rationality and Political Science: Lessons from Public Administration and Public Policy,” Journal of Public Administration Research and Theory 13, no. 4 (2003): 395–412.

[8]Bryan D. Jones, “Bounded Rationality and Political Science: Lessons from Public Administration and Public Policy,” Journal of Public Administration Research and Theory 13, no. 4 (2003): 395–412, p. 402.

[9] “By converting empirical evidence about a decision-making process into a computer program, a path is opened both for testing the adequacy of the program mechanisms for explaining the data, and for discovering the key features of the program that account, qualitatively, for the interesting and important characteristics of its behavior.” Herbert A. Simon, “Rational Decision Making in Business Organizations,” The American Economic Review, 1979, p. 508.

[10] M. A Nowak and Roger Highfield, Supercooperators: Altruism, Evolution, and Why We Need Each Other to Succeed (New York: Free Press, 2012).

[11] Oren Harman, “Book Review – SuperCooperators – By Martin A. Nowak,” The New York Times, arpil 2011, http://www.nytimes.com/2011/04/10/books/review/book-review-supercooperators-by-martin-a-nowak.html?pagewanted=all.

Air France: Rational or Boudedly Rational?

In September of 2014 the pilots of Air France-KLM went on a two-week strike, the longest airline strike in 20 years, costing up to half a billion euro, to protest management’s plans to break into the European airline budget market. The airline’s decision was to announce a billion-dollar plan to build up a European Transavia, a low cost-affiliate using more flexible pay and working conditions in other jurisdictions.

Air France-KLM’s decision to announce this project, can be explained as a result of rational decision-making, meaning the corporation acted as if balancing costs against benefits to arrive at action that maximizes profit.[1] The project required $1.3 billion of investment over 5 years, acquiring 50 new aircrafts and 250 new pilots by 2017.[2] The reason for the decision to focus on low-cost carriers is because competing budget airlines like Ryanair, Easyjet and Norwegian have been rapidly growing expanding operations at a rate of 54% over the past five years. Europe’s international airlines such as Air France have only grown by 3% and their short haul services within Europe have become unprofitable. Around 5.5 million more people annually fly on budget airlines than on European international carriers which offer more generous salaries and benefit packages. To best cut costs and increase profits, the rational decision is to come up with the construction in which Air France can reduce salaries and benefit packages (closer to) the level of those of low budget airlines, so they can compete on the same level, increase the number of passengers and thereby their profits. The plan would also go together with better service on long-haul carriers, a refocused cargo policy aimed at using excess storage rooms in passenger planes, and alliances with other airlines. On paper, considering all the information simultaneously, this plan might be the best thing the company could do to maximize its profitability and is therefore rational. Furthermore, the corporation was able to effortlessly make the trade-off of the benefit of paying lower wages to the cost of lowering working conditions and creating inequality amongst Air France personnel. The following payoff function applies:

υ (build Europe Transavia where pilots and staff get lower salaries and lesser benefit packages) > υ (a different plan in which pilots and staff are paid equal salaries and benefit packages)

An alternative, equally plausible account of Air France’s decision would be that it’s only boundedly rational, which means that Air France was only seeking a satisficing solution instead of an optimal one given it only has limited information available, finite time and limited cognitive capacity. Bounded rationality examines the process of decision making based on observation and experiment, rather than the outcome based on the “postulation and deduction characteristic of theoretical economics.”[3] First, intended rationality played a role in the decision-making. Even though Air France intended to find a solution that would maximize profits, specifically by competing with low budget carriers, other things in the complexity of their environment interfered with this goal-directed behavior, such as pressure experienced by decreasing profitability of short-haul flights and increasing competition. Second, the principle of adaptation was at play, the thinking of Air France took on the “shape of the task facing it”, in this case evidenced by the fact that they thought in terms of decreasing wages and benefits for pilots, mirroring what their competitors had done. Thirdly, Air France struggled with uncertainty and tradeoffs in this case of how pilot unions would react to the new measures taken, especially given that contracts were in place to first confer with the pilot unions before decisions of this nature were taken. Air France decided against doing this and take the bet that pilots would just swallow the decision, but as evidences by the two week strike costing half a billion euro, Air France did not correctly calculate probabilities nor successfully trade off the benefits against losses when making its decision. Finally, bounded rationality acknowledges that “[b]oth individuals and organizations are disproportionate information processors when they ignore many signals in the environment until they must overreact.” This was clearly the case for Air France, since they ignored signals from their pilots that would disagree with a decision that makes wages and benefits unequal within the company and would outsource jobs to other countries.[4]

Thus we can give an equally plausible account of Air France’s decision, both from rational choice theory and bounded rationality.

[1] Milton Friedman, Essays in Positive Economics (University of Chicago Press, 1953). P. 15, 22, 31.

[2] Benjamin Zhang, “Air France Pilots Strike Continues,” News, Business Insider, (September 27, 2014), http://www.businessinsider.com/air-france-strike-implications-2014-9.

[3] Bryan D. Jones, Politics and the Architecture of Choice: Bounded Rationality and Governance (University of Chicago Press, 2001).

[4] Ibid.

Other sources consulted:

BBC News. “Air France Pilots End Long Strike.” BBC News – Business, September 28, 2014. http://www.bbc.com/news/business-29401056

Jones, Bryan D. “Bounded Rationality and Political Science: Lessons from Public Administration and Public Policy.” Journal of Public Administration Research and Theory 13, no. 4 (2003): 395–412.
———. Politics and the Architecture of Choice: Bounded Rationality and Governance. University of Chicago Press, 2001.

Michelson, Marcel. “Can Pilots Cause Air France KLM To Crash?” Forbes, September 25, 2014. http://www.forbes.com/sites/marcelmichelson/2014/09/25/can-pilots-cause-air-france-klm-to-crash/.

Simon, Herbert A. “Rational Decision Making in Business Organizations.” The American Economic Review, 1979, 493–513.

The business of business is to exchange goods and services

Fundamentally the business of business is to exchange services or goods with consumers and clients. There are different types of businesses; for-profit, not-for-profit, publicly owned, privately owned and so on. Although all of them are concerned with self-preservation and a form of sustainability to make the exchange meaningful requiring customers and investment, not all are equally concerned with making profit as their core business. Not-for-profit and social enterprises do not just have making profit as their aim, but are (also) explicitly committed to finding solutions to social problems, sometimes sacrificing profit to achieve their aims. Greenpeace states its goal is to “ensure the ability of the Earth to nurture life in all its diversity,” not to make profit.

Although non-profit organizations might say their business is not to make profit, in practice many of their decisions are still informed by financial considerations. FSC put their “business interest” first when allowing Swiss-German timber group Danzer back into its system, allowing little time to implement measures to address Danzer’s previous violations [1]. Like any business the FSC and the Danzer group had to consider its profits, which in the current market are strongly tied to FSC approval for its products. When it comes down to the hard decisions, businesses need to make profit in order to continue its existence. Although the profit is an important consideration, it is not always all consuming. For example the encrypted email service Lavabit, used by Edward Snowden,

Lavabit

suspended its operations, at the cost of its profit, after the US government ordered it to turn over its SSL private keys. Lavabit was a private company, aiming to make profit, but more fundamentally to offer a service which it upheld at the cost of its own profit and even existence.

One might argue these examples are exceptions to the rule; most publicly traded companies, such as Nike, Starbucks and the Blackstone Group, have making profit for their shareholders as their business.  Why do they aim to make profit? To increase their market power so they can make more profit, which in turn gives them more market power, which offers a certain stability or certainty of profits and influence. There are many nuances to business, and the business of one might not be the business of another. There are overarching characteristics of businesses such as the necessity to be sustainable which requires making profit, but not all types of business have making profit as their main aim. Even the capitalist businesses, infamous for just caring about their bottom line, have power as a more important aim than profit. Therefore, given that generating profit is an important part of business, it is more inclusive and therefore accurate to say that the fundamental aim of business is to exchange goods or services. The next step can be to divide this over several types of businesses, some who make profit, others who want to achieve a social goal and others that want to achieve power.

 

Energy Taxation: why not regulate resource scarcity through price?

How do we realize a sustainability transition? One way would be to increase the price of energy and primary materials yearly in correlation with the rate of efficiency gains to incentivize resource productivity as proposed by professor Robert U. Ayres. Such measures have proven effective for example in the labor sector. First labor productivity increased because of technological and organizational innovations, which led to increased wages that incentivized firms to increase labor productivity to keep labor costs down. Why are we not using similar measures to combat climate change, pollution and resource scarcity? Labor is taxed, even though labor is not a scarce resource and its tax only contributes to unemployment. Why do we not instead tax scarce resources such as energy and raw materials that actually need regulation through pricing?

The explanation for thus puzzle can vary from institutional, political, economical to psychological perspectives, all of which represent different factors that create barriers to policy proposals that regulate scarce resources through pricing.

One psychological dimension of this puzzle, is loss aversion: people’s tendency to strongly prefer avoiding (short-term) losses to acquiring (long-term) gains of uncertain magnitude. Given the fact that we are short-sighted as human beings, it is easier to see the initial costs of taxing energy instead of labor than the benefits over the longer term. For humans that which is spatially and chronologically closer takes precedence.

This collective inertia could be overcome through strong political will and courage. Tackling resource scarcity through drastic policy measures requires clear policy focused on the long term, with a high speed of change propelled by decisive and strong political leadership. However, there is a current lack of such political will. This can at least in part be explained by the fact that political parties are only in office for a limited time. When political parties take measures that are unpopular amongst the people (who would rather avoid short term loss than gain in the long run), they run the risk of losing the next elections and thus their influence. Thus is remains easier for politicians to postpone the problem than to deal with it now.

Furthermore, taxing energy threatens the multinational energy companies who are currently making great profits from fossil fuels and other (soon to be) scarce resources. A tax on such resources will greatly affect their business and profitability. Because these companies, such as Shell and Exxon, have huge market power and therefore also enjoy great lobbying power. One example of such a successful lobby of the energy industry, was against president Clinton’s BTU energy tax on all fuels except renewables which was introduced in 1993 but was never accepted.

Sources:

1. Ted case studies, “Case Study – US BTU TAX,” American.edu, accessed September 18, 2014, http://www1.american.edu/TED/usbtutax.htm.
2. Jeroen C.J.M. van den Bergh, “Robert Ayres, Ecological Economics and Industrial Ecology,” Environmental Innovation and Societal Transitions 9 (December 2013): 1–7, doi:10.1016/j.eist.2013.09.008.
3. Daniel Kahneman, Thinking, Fast and Slow, 2011, http://www.amazon.com/dp/B00555X8OA/ref=pe_245070_24466410_M1T1DP.
4. Victor Lipman, “Why A Tax On Carbon Can Help Climate Change – And The Economy,” Forbes, September 8, 2014, http://www.forbes.com/sites/victorlipman/2014/09/08/why-a-tax-on-carbon-can-help-climate-change-and-the-economy/.