February 21, 2010

The New Business Agenda (2): The Need for New, True Pricing Paradigms

Fundamental to the new agenda for business is the willingness to invest in long term gains for the collective over short-term returns.  One of the key elements of classic economics is the fact that we have accounted for natural capital at its extraction cost, not at its renewal or replenishment cost.  Depletion costs are an externality in this analysis and thus the cost of natural resources is set to be at or near zero, essentially free.  

True pricing includes these externalities whether they be applied to forest, land use, mineral or oil reserves, appropriately requires that a new perspective on discount rates also be incorporated into the new business agenda.     One can argue that typical (under 10%) discount rates do not fairly value the future and lead to decisions that favor short term profit maximization.  Therefore, true discounts rates are in fact much higher.

Getting the pricing right may in fact be possible for assets where there are clear property rights, the the asset is owned or controlled by individual or corporate entities.  The issues gets much muddier when dealing with the commons where pricing mechanisms or markets don't exist and complex issues of social equity/justice become large considerations. These factors are what makes the issues of climate change, conservation and environmental stewardship so complex.

The need for new pricing paradigms is not universally accepted, this change will not come easily.  Over the next 5 years, I expect continued economic and social turmoil along with moves toward both significantly increased balkanization along with increased rhetoric toward multilateralism without much progress toward resolution. During this period of turmoil in another 5 years or so when the consequences of inaction are more evident will our collective behavior change.  Hopefully, it will happen before the tipping point is reached.  

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