Sustainable Market Economy (SME)
By César Reyna Ugarriza, consultant in economic, political, and social issues. Email: cesarreyna78@gmail.com
The Sustainable Market Economy (SME) represents a paradigm shift in the way economics is conceived and practiced, moving away from the traditional focus on economic growth and profit maximization towards a more holistic approach that takes into account the social, environmental, and ethical dimensions of economic activity. By integrating sustainability principles into the market economy, a more equitable, inclusive, and resilient economic system can be created that meets the needs of present and future generations while safeguarding the planet and its resources for future prosperity. The transition to a Sustainable Market Economy requires collaborative work and commitment from all stakeholders, including governments, businesses, civil society organizations, and individuals.
The principles and actions presented below are fundamental to advancing towards a more sustainable and equitable economy that promotes human well-being and environmental stewardship. The Sustainable Market Economy (SME) represents a multifaceted approach that seeks to integrate economic, social, and environmental considerations into all economic decisions and activities, with the aim of ensuring a prosperous and sustainable future for present and future generations.
Main tenets of SME:
I. Protection of Individual and Collective Interests [1]: In the Sustainable Market Economy (SME), both individual and collective interests are taken into account, whereas in a free-market economy, the focus is mainly on individual interests. In the sustainable market economy, the importance of balancing the individual interests of businesses and consumers with the collective interests of society is recognized. This involves considering not only private economic benefit but also the social and environmental impact of economic decisions. For example, the contribution of companies to social welfare and sustainable development is valued, as well as their responsibility to the communities in which they operate and the environment. On the other hand, in a free-market economy, the emphasis is on maximizing individual freedom to make economic decisions without interference from the state or other institutions. While this approach can foster efficiency and innovation, it can also lead to social inequalities, negative externalities, and environmental problems if not properly regulated.
II. Responsible Consumption by Economic Agents Seeking to Reduce the Social and Environmental Impact of Their Consumption: Responsible consumption in the SME seeks to promote a more sustainable lifestyle, taking into account not only individual benefit but also the impact that individual consumption decisions have on the environment and society as a whole.
III. Sustainable Production: This concept involves controlling and reducing the social and environmental impact before, during, and after the production process. This entails ensuring sustainable value chains, including the consumption of inputs, materials, raw materials, energy, water, and other natural resources. It also involves improving working conditions, ensuring inclusion, and maintaining meritocracy. Additionally, responsibility and suitability in marketing, advertising campaigns, protection of personal data and sensitive information of customers and suppliers, and promotion of the circular economy to deal with waste or by-products of the production process and the sale of goods produced. Production seeks to transparently meet human needs, and there are mechanisms for being accountable to the market and stakeholders.
IV. Sustainable Market: This primarily refers to an economic system that promotes the production and exchange of goods and services in a way that meets present needs without compromising the ability of future generations to meet their own needs. This type of market seeks to integrate economic, social, and environmental considerations at all stages of production and consumption. It values not only short-term economic profitability but also the social and environmental impact of commercial activities in the medium and long term. This implies adopting responsible business practices that minimize waste, reduce pollution, promote social equity, and respect human rights. The goal of this type of market is to promote sustainable development [2].
V. Market Optimum Is Achieved When Social Benefit Exceeds the Social Cost of Producing Goods and Services: Therefore, equilibrium is achieved when social benefit equals social cost, an undesirable or only temporarily acceptable situation toward a truly sustainable economy. The central objective is for the difference in value between social benefit and social cost for the goods produced and marketed to be greater so that society can enjoy more benefits from the sustainable economic growth model, while costs decrease or tend toward zero, which would be a utopian or impossible value to achieve until the economy reaches net zero [3] or sustainability, which means that the conditions of the system itself allow it to sustain itself autonomously without compromising the enjoyment of resources.
VI. Wealth is Generated from the Interaction of Eight Types of Capital [4]: These are human, natural or environmental, productive, financial, social, cultural, institutional, and technological. The exploitation, promotion, and sustainable management of these eight forms of capital are essential to promote equitable economic growth, socially inclusive, and environmentally responsible. Each type of capital represents a fundamental resource or asset that contributes to human well-being and the sustainable functioning of society as a whole.
VII. Recognition of Seven Dimensions of Sustainability: These are environmental, social, cultural, justice and human rights, economic, institutional, and governance (corporate governance). These help to calculate whether there is greater social benefit than social cost, which is the rule that ultimately determines whether the production and introduction of certain goods or services into the market are convenient. Therefore, market equilibrium is not based solely on the prices and quantities of goods and their associated economic costs, but also on the resources used in the production of the goods themselves when considering their impact on society. On the other hand, in this type of economy, there is a coincidence of general or higher interests among producers or suppliers, consumers, demanders or clients, and market regulators, so the rules, institutions, transactions, needs, rights, and interests are aligned or find a minimum consensus on the responsibility and role that each agent plays to ensure the sustainability of the economy [5].
VIII. Competition for the Sustainability of Productive and Economic Activities and Not Only for Profit Maximization: Economic benefit generated for shareholders is as a rule supplemented by the progressive reduction of social and environmental impacts and the generation of greater social benefit for the community. So competition in the market and in front of consumers, governments, and society becomes for the sustainability of operations, which must be demonstrated through reporting, transparency, accountability, and business conduct itself.
IX. Incorporation of the Sustainability Approach Produces Quantifiable Financial Returns for Business Organizations and Their Respective Value Chains: These returns or results are measurable in practice through various quantitative instruments developed by universities, private consultants, and research centers. Demonstrating that sustainability strategies and plans are profitable facilitates the adoption of the SME as a model [6].
X. The Role of the State is to Promote an Increasingly Sustainable Economy Without Affecting or Sacrificing Long-Term Economic Growth: Through the introduction of new and better standards and policies, it seeks to make economic agents more efficient and sustainable in the development of their productive activities. Its goal is to ensure that economic growth does not occur at the expense of the depletion of natural resources, environmental degradation, or exacerbation of social inequalities. Therefore, it seeks to promote a more sustainable and equitable economy in the long term. To achieve this, it can implement policies that encourage investment in clean technologies, environmental protection, promotion of fair labor practices, and development of sustainable infrastructures.
Additionally, it can offer reasonable economic and fiscal incentives to promote the adoption of sustainable practices by companies and individuals, and finance and support new sustainable business models.
XI. Mixed Regulation by the State and Market Actors: The trend within the SME is towards self-regulation, where the voluntary adoption of standards by corporations, business associations, and consumer associations is more relevant or prominent than official regulation, which must be flexible, effective, consistent, and promote sustainability and the growth of economic activities.
XII. Banking, Multilateral, and Commercial Financing Conditioned on Compliance with ESG (Environmental, Social, and Governance) Standards: Financing is also conditioned on due diligence regarding human rights and other national or international regulations ensuring sustainability in production and consumption in markets, as well as the periodic submission of sustainability reports verified by authorized third parties. This implies that more sustainable companies will have access to credit with more favorable interest rates than less sustainable ones, and the granting of financing depends on having internally adopted the sustainability approach. Financing includes mechanisms such as carbon bonds, funds for conservation, initiatives for plastic reduction, and subsidies for sustainable transportation, among others.
XIII. Market-Governed Pricing: Goods and services become increasingly accessible to vulnerable groups or low-income socioeconomic strata due to technological intervention, production process optimization, and producers’ self-interest in expanding their market or target audience.
XIV. Companies Taking on the Role of Agents of Social Change: This implies that they are considered and consider themselves as partners in the development of the communities where they operate. This is materialized through the adoption of approaches such as shared value, corporate social responsibility, and the sustainability paradigm to generate greater social benefit for the community while reducing social risks and impacts. In this sense, it adds the Conscious Capitalism approach. This aligns with the principles of the SME, as it emphasizes the role of companies as forces for positive social and environmental change. It also advocates for companies to go beyond profit maximization and consider the broader impact of their operations on all stakeholders, including employees, communities, and the environment [7].
Under this postulate, companies would not only complement the State’s task in providing social goods or essential public services but can fully replace it in coordination with the State itself and the beneficiary communities (under governmental authorization and social consensus). In this regard, mechanisms such as service taxes could be used, whereby instead of paying a percentage of annual taxes, companies can offer basic services in vulnerable areas affected by inequality and poverty through third parties in areas such as health, education, and nutrition. For the execution of infrastructure, there is the mechanism of works for taxes, in order to reduce socioeconomic gaps in areas inhabited by vulnerable populations.
XV. Alignment of States, Business Associations, International Organizations, and Civil Society with the United Nations Sustainable Development Goals (SDGs) to address the global challenges that are part of the UN’s 2030 Agenda. These are commitments that a large number of economic agents have already voluntarily assumed and implement through mechanisms such as multi-stakeholder groups, the application of sustainable and territorial development approaches, the execution of social responsibility and shared value programs, among others.
XVI. Taxes on More Polluting Activities: This involves applying a higher tax burden to polluting or socially and environmentally costly productive activities. This implies the elimination of national subsidies for such activities. The goal is to discourage the consumption of hydrocarbons and coal, industries harmful to the environment and life on the planet. The idea is to bet on energy transition, which means investing in the development of renewable, clean, and sustainable energies, and using these resources to channel them into research on new sustainable technologies and sources.
XVII. Greater Private Sector Responsibility in Incorporating Climate Risk: Private sector should incorporate climate risk within their policies, plans, and protocols regarding their operations and surroundings, in order to adopt a series of timely and necessary measures in coordination with other actors such as states and communities.
XVIII. The use of technology would be further leveraged to enhance economic efficiency and sustainability. For example, artificial intelligence (AI) could be utilized to optimize production processes, modernize markets, and reduce waste associated with the production process. The role of the circular economy could also be significantly expanded.
XIX. The circular economy is a model of production and consumption aimed at minimizing waste and maximizing resource efficiency. By adopting circular economy principles, companies can effectively reduce their environmental impact and save money. This leads to greater profitability in the medium and long term.
XX. It emphasizes the importance of social justice and human rights. Companies should not only concern themselves with their environmental impact but also their social impact. They should strive to create adequate, inclusive, and equitable workplaces, and respect the rights of their workers and communities.
Benefits of the SME:
I. Reduction of environmental pollution and promotion of a better quality of life for humans and other living beings. It seeks to minimize the negative impact of economic activity on natural resources and mitigate the effects of climate change.
II. Increase in social benefits of various types and magnitudes for communities. It aims to provide basic social goods and services, decent employment, and equitable access to economic opportunities.
III. Greater economic and social stability through the control of imbalances generated by the production apparatus (reduction of carbon footprint). It reduces vulnerability to economic and social crises, strengthening the resilience of the economic system.
IV. Better addressing of economic and social inequalities without sacrificing economic growth.
V. Consideration of all interests at stake (from all parties). VI. Ordered growth of the economy without generating negative externalities.
VI. Greater tendency towards self-regulation (voluntary standards) than towards the predominance of government regulation.
VII. Promotion of technological and business innovation oriented towards sustainability to drive the development of innovative solutions to address environmental and social challenges, creating economic opportunities, and improving people’s quality of life.
Notes:
[1] Sustainable market economy seeks to balance individual with collective interests to promote sustainable development, whereas free-market economy primarily focuses on maximizing individual freedom without necessarily considering the general welfare of society.
[2] Sustainable development was defined in the 1987 Brundtland Report as “development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs.” As the concept of sustainable development evolved, it shifted more towards economic, social, and environmental development for future generations (United Nations General Assembly, 1987). Sustainable development was first institutionalized with the Rio Process initiated at the 1992 Earth Summit in Rio de Janeiro, Brazil. In 2015, the United Nations General Assembly adopted the Sustainable Development Goals (SDGs) (2015 to 2030) and explained how the goals are integrated and indivisible to achieve sustainable development globally. The 17 goals address global challenges, including poverty, inequality, climate change, environmental degradation, peace, and justice (Purvis, Ben; Mao, Yong; Robinson, Darren — 2019).
[3] Net zero emissions describe a state in which human-caused greenhouse gas emissions are balanced with the removal of those gases from the atmosphere. This means that the amount of greenhouse gases entering the atmosphere is no greater than the amount being removed. Key aspects of net zero include: a) Human-caused emissions: Refers to greenhouse gases released into the atmosphere due to human activities such as burning fossil fuels for energy, industrial processes, deforestation, and agriculture. b) Greenhouse gases: These are gases that trap heat in the atmosphere, contributing to global warming. Examples include carbon dioxide (CO2), methane, nitrous oxide, and fluorinated gases. c) Removals: Encompasses processes that remove greenhouse gases from the atmosphere. Natural processes like trees and other vegetation absorbing CO2 through photosynthesis are some examples. Technological solutions like carbon capture and storage (CCS) can also contribute to removals.
[4] Human capital refers to the knowledge, skills, and health of the population. It includes education, training, health, and other resources that contribute to economic growth and social well-being. Natural capital represents natural resources and ecosystem services, such as clean air, water, land, biodiversity, and renewable energy resources. Sustainable management of this capital is crucial to ensure its availability for future generations. Productive capital comprises physical assets such as real estate and furniture used in the production process, such as machinery, infrastructure, technology, and physical capital in general. Investment in this type of capital drives productivity and economic competitiveness. Financial capital refers to financial resources available for investment and economic development. It includes banking capital, capital markets, loans, and other financial instruments that facilitate investment and economic growth. Social capital explains social networks, norms, values, and institutions that facilitate cooperation, trust, and collaboration among individuals and communities. A high level of social capital can enhance resilience, social cohesion, and responsiveness to economic and social challenges. Cultural capital includes cultural heritage, traditions, arts, cultural expressions, and other aspects that contribute to the identity and cultural diversity of a society. Preserving and promoting this capital is important for cultural development and emotional well-being. Institutional capital refers to the set of rules, laws, regulations, political systems, and governance that govern economic and social activity. The effective functioning of institutions is crucial to ensure political and economic stability, social justice, and the fulfillment of human rights. Technological capital implies the knowledge, innovations, and technologies available to improve production processes, efficiency, and quality of life. Investment in this type of capital drives innovation, competitiveness, and technological progress.
[5] The environmental dimension focuses on the impact of business operations on the environment, including natural resource management, emission reduction, and biodiversity conservation. The social dimension refers to the impact of business activities on local communities and society at large, addressing issues such as fair employment, gender equality, job security, and investment in community development. The cultural dimension considers the respect and preservation of cultural diversity, as well as support for local cultural expressions and promotion of cultural heritage. The justice and human rights dimension assesses compliance with human rights and equity in all business operations, including respect for human dignity, equal opportunities, minority rights, and access to justice and fair remedies. The economic dimension analyzes the financial viability and economic impact of productive and commercial activities, including job creation, sustainable economic growth, and wealth distribution. The institutional dimension consists of the quality of institutions and legal frameworks regulating business activities, including transparency, accountability, and anti-corruption efforts. The governance dimension (corporate governance) studies corporate culture and governance structure, including shareholder engagement, business ethics, risk management, and corporate social responsibility.
[6] A study completed by Deloitte and the NYU Stern Center for Sustainable Business pointed out that sustainability strategies add financial value to productive activities. Additionally, the Stern School introduced a methodology called “ROSI” (Return for Sustainability Investment) applied to the food and agriculture sector to make measurements that demonstrate the profitability of sustainability plans in different segments of the value chain. This methodology allows companies to make better decisions to achieve greater economic value generation when managing ESG issues.
[7] Conscious Capitalism serves as a valuable framework for operationalizing the principles of Sustainable Market Economy (SME). By adopting shared value creation, integrating CSR into business strategies, and embracing sustainability as a guiding paradigm, companies can embody the essence of SME and contribute to a fairer, more equitable society, and a sustainable future. The principles of Conscious Capitalism align perfectly with the basic principles of SME: a) Balance of economic, social, and environmental goals: Conscious capitalism emphasizes the need to balance profit-making with social responsibility and environmental management, reflecting SME’s holistic approach to sustainable development; b) Stakeholder engagement: Conscious Capitalism advocates for active engagement with all stakeholders, including employees, communities, and the environment, a cornerstone of SME’s collaborative approach; and c) Long-term perspective: Conscious Capitalism promotes a long-term vision that prioritizes sustainable value creation over short-term profits, aligning with SME’s emphasis on intergenerational equity and future-oriented thinking.
