Environmental economics and business ethics: ends by themselves or instruments of profit?

Environmental economics and business ethics:
ends by themselves or instruments of profit?
Dr. Árpád Baranyi
Introduction
Economy is embedded in society and society, in turn, is embedded in the natural
environment. However, businesses frequently tend to operate for the sake of profit regardless
of the social and environmental consequences. Companies often strive to externalise the social
and environmental costs caused by their operations. As a result, external actors (the public,
the natural environment, other companies, etc.) must bear the consequences of corporate
environmental pollution and the resulting welfare losses.
Environmental economics holds that the environmental problematique1 could and
should be solved by economic means. Traditional environmental economic theory holds that
environmental problems should be translated into economic (market) problems. This is to be
done by defining environmental problems as “external costs” to be internalised, for example,
by taxes or by applying cost-benefit analysis. Although this approach is useful in many cases,
striving to transform environmental problems (and nearly all social phenomena) into
economic problems is a wrong approach – insufficient at best and destructive at worst. Many
spheres of life and, to a great extent, also the natural environment are not of economic nature.
Therefore, regarding them purely as economic entities deprives them from their intrinsic value
assigned them by God, the Creator. To be sustainable the economy must acknowledge that
creation is not just about profits and dollars but, in the first place, beauty, dignity and value in
themselves, which need not justify their existence on economic grounds.
The dominance of economics over nature
Today’s widespread approach is that more intensive economic growth and technical
development will solve the majority of current problems ranging from extensive poverty to
the global environmental crisis. As Czakó ironically notes, “the challenges of our time are
economic by nature, the solutions alike, and their logical purpose is to transform the human
community into an economic entity, since our era is the Era of the Economy” (Czakó, 1995,
p. 18.). The present paper refers to this phenomenon as economism. As Röpke (1996) has put
it, “economism is the irreparable passion that uplifts means to be ends and which thinks only
of the bread but not of the other thing mentioned by the Gospel” (Röpke, 1996, p. 152)2.
According to the increasing number of warnings against economism, it is extremely
dangerous that the economy3 will not remain within in its own boundaries (i.e., allocation of
goods and resources efficiently) but the market strives to conquer all spheres of life4. Instead
of acknowledging that the economy is embedded in society, which, in turn, is embedded in
the natural environment, the economy tries to reverse this order by regarding everything as

1 By “environmental problematique” we refer to the whole array of environmental problems (from global climate
change, through sea and soil pollution, to desertification and waste problems, etc.). The expression implies a
very complex, interdependent set of problems, which varies in scale and space and by time.
2 Remarkably, Röpke mentions economism together with materialism and utilitarianism.
3 By referring to the „economy” or “market”, it should be borne in mind that it is people who stand behind the
economy (managers, politicians, academics, journalists, lobbyists, marketing professionals, etc.).
4 Cox (1999) provides a useful analysis of the market intruding all spheres of life.

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marketable goods. In many cases even politics has become a hostage of the economy and
society is often required to organise social institutions (health care, education, etc.) along the
principles of efficiency and competitiveness regardless of other aspects of the common good
such as equity. As a consequence, people and the natural environment are also regarded as
just another set of resources to be exploited for the sake of short-term financial profit.
Nevertheless, this in not a new phenomenon. R.H. Tawney noted already in 1926: „The
most obvious facts are the most easily forgotten. Both the existing economic order and too
many of the projects advanced for reconstructing it break down through their neglect of the
truism that, since even quite common men have souls, no increase in material wealth will
compensate them for arrangements which insult their self-respect and impair their freedom. A
reasonable estimate of economic organisation must allow for the fact that, unless industry is
to be paralysed by recurrent revolts on the part of outraged human nature, it must satisfy
criteria which are not purely economic.” (Tawney, 1926; emphasis added) Since, as a general
tendency, the market strives to subjugate all spheres of life, morality also becomes an
“economic phenomenon”. According to this approach, morality is necessary because (and
insofar) it is economically useful. In other words, ethics is necessary because it is more worth
to be moral than immoral. If you act in a morally right way, your customers will remain loyal
to you, you will not have to pay fines, no lawsuits will be filed against your company and so
forth. According to Christian logic, however, this is a perverse logic. Suffice to refer to the
teachings of Jesus saying: „when thou doest thine alms, do not sound a trumpet before thee,
as the hypocrites do in the synagogues and in the streets, that they may have glory of men.
Verily I say unto you, They have their reward. But when thou doest alms, let not thy left hand
know what thy right hand doeth: That thine alms may be in secret: and thy Father which seeth
in secret himself shall reward thee openly.” (Mat. 6.2- 6.4).
Furthermore, an even more dangerous approach also has arisen on the ground of the
abovementioned, perverted “morality”. E. F. Schumacher cites Lord Keynes who wrote in
1930: when everybody will be rich we shall “once more value ends above means and prefer
the good to the useful. But beware! … The time for all this is not yet. For at least another
hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair;
for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a
little longer still. For only they can lead us out of the tunnel of economic necessity into
daylight.” Schumacher comments that “In any case, the Keynesian message is clear enough:
Beware! Ethical considerations are not merely irrelevant, they are an actual hindrance, ‘for
foul is useful and fair is not.’ The time for fairness is not yet. The road to heaven is paved with
bad intentions. … but where is the rich society that says: ‘Halt! We have enough?’ There is
none.” (Schumacher, 1975; pp. 24-25). Thus, the only question is: once we have forgotten the
true meaning of morality for some decades, shall we be able to remember it when “the time
for fairness” has finally come?
The concept that “moral principles should be followed because it makes good
business” might be welcome as a beneficial move from the Keynesian approach towards the
right direction. However, this “better” position also forgets about the fact that ethics makes
good business only under certain circumstances, i.e., where stringent regulations, effective
law-enforcement, strong public scrutiny, NGOs and other factors force companies to act
“morally” or at least to observe the law. Remove these conditions and acting “morally” will
immediately turn uneconomical for businesses. In such cases it will make good economic
sense to relocate environmentally harmful technologies to, or to produce harmful products in
poor countries or to exploit workers. Economism denies the essence of morality by attributing

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only instrumental value to it but no intrinsic value (i.e., a value in itself). According to this
concept, “moral rule is only a decoration, which may enter into force only, if there is no
interest on the horizon. However, the very purpose of moral rules would be the judgement of
conflicts of interests. Moral beings, heros and saints can be recognised exactly because they
stand up against their so-called interests to defend their own ideals and they are willing to
take even the risk of getting pushed out of life, the risk of death” (Czakó, 1995; pp. 167-168.;
emphasis in original). Thus, the approach of “economic usefulness of ethics” confuses
consequences with motivations. Certainly, ethics may result in greater loyalty of customers
and higher profits but this is not the fundamental reason for acting morally.
By making a further step in the wrong direction our society has reached a situation in
which all beings (including forests, rivers, landscapes, health services, education, public
transport, and even people) must justify their own existence by economic argumentation. In
other words, economics “tends to absorb the whole of ethics and to take precedence over all
other human considerations. … The development of production and the acquisition of wealth
have … become the highest goals of the modern world in relation to which all other goals, no
matter how much lip-service may still be paid to them, have come to take second place. The
highest goals require no justification; all secondary goals have finally to justify themselves in
terms of the service their attainment renders to the attainment of the highest” (Schumacher,
1975; p. 69, 293). One of the tools of such economic justification is cost-benefit analysis.
Cost-benefit analysis and environmental protection
Cost-benefit analysis (CBA) is a methodological tool for considering, among other
things, the direct and indirect costs and benefits of investments. The main goals of CBA are as
follows:
1)
to account for the direct financial and indirect (external) social and
environmental benefits and costs of projects;
2)
to compare projects by their “economic”5 aspects;
3)
to facilitate the selection of financially, socially and environmentally optimal
projects.
To facilitate the comparison of different types of impacts CBA assigns monetary
values to the impacts. According to mainstream environmental economics, CBA should
consider and monetarily assess the following environmental values:
• personal use values:
o direct use values,
o indirect use values,
o options values;
• non-use values:
o bequest values,
o existence values,
o options values.

5 It is revealing that in CBA „economic impacts” include not only financial but also environmental and social
aspects.

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The relationships of the environmental values are presented in Figure 1.
1. Figure: Complete economic value of the natural environment
Complete economic value
Personal use values
Non-use values
Direct use values Indirect use values
Options values
Bequest values
Existence values
– food
– ecological functions
– biodiversity
– living beings
– living beings
– biomass
– protection against flood
– protected species
– irreversible changes – endangered beings
– recreation
– protection against stroms
– health

Source: Kerekes (1998)

CBA can be a useful tool within certain ethical and methodological boundaries but it
may turn to be harmful when applied outside of its sphere of competence. On Figure 1, by
moving from personal use values towards non-use values the assignment of monetary values
becomes more and more difficult. It seems obvious for everyday logic that, for example, the
existence of an endangered species or a unique landscape should very carefully (or not at all)
be evaluated in monetary terms. Somehow it feels bizarre to put a price tag on a whale
claiming: this is the whale’s value for the eco-system or for future generations of people. Yet,
this is exactly what traditional CBA does. As opposed to this, Shashi (n.d.) represents a
radically different position: „First, ecosystems cannot be commoditized. Second, ecosystem
capital satisfies differentiated needs, and, hence, gross substitution between different
components of ecosystem capital or between ecosystem capital and man-made capital is not
possible. Therefore, the rate of discount for ecosystem capital suggested on the basis of the
framework is arbitrary. In the context of international security, choices of ecosystem capital
are similar to the choices of military decisions. Similar to military decisions, ecosystem
choices should be made without discounting and prices. The neo-classical framework does
not have appropriate tools for such decision analyses, and other streams of economics,
specifically post-Keynesian economics, may help assist decision-makers in analysing
ecosystem choices without prices and discounting.” (Shashi, n.d.).
At a practical level, experts carrying out CBA decide what is good for society and for
the environment by using mathematical formulae and leaning on professional opinion. Thus,
experts substitute a great deal of moral and esthetical considerations and public debate with a
quantification method. Furthermore, at a theoretical level, the unquestioned application of
CBA strengthens the prevalence of economism by pretending that non-marketable beings like
landscapes, species, or human lives can (and should) be turned into market goods. Although,
in principle, CBA acknowledges the existence of intrinsic value, in practice CBA denies those
values by putting price tags virtually upon everything. As Schumacher (1975) notes, the
“logical absurdity [i.e., quantifying the unquantifiable], however, is not the greatest fault of
the undertaking: what is worse, and destructive of civilisation, is the pretence that everything
has a price” (Schumacher, 1975; p. 293). In his book written more than thirty years ago
Schumacher also notes that in economic thinking “everything is equated with everything else.
To equate things means to give them a price and thus to make them exchangeable. To the
extent that economic thinking is based on the market, it takes the sacredness out of life,
because there can be nothing sacred in something that has a price. Not surprisingly,
therefore, if economic thinking pervades the whole of society, even simple non-economic
values like beauty, health, or cleanliness can survive only if they prove to be ‘economic’”
(ibid., p. 45). This dangerous process is constantly strengthened by bureaucrats who require
the application of CBA under all circumstances (like in the applications for financial

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assistance in the European Union) and by experts carrying out CBA without questioning its
capability to grasp reality. Linegar (2005) notes that “[present] society is less conscious of its
roots and its direction. … [It] operates on essentially pragmatic and empirical
considerations: does it work, and how does it fit with our experience? ‘Computers,’ as a
Russian scientist remarked recently, ‘know no morality, only mathematics’. This matter-of-
fact approach stifles the voice of conscience just as the pragmatic (well it works this way,
doesn’t it?) approach drowns the directives of principle. Cost-benefit analysis shows how
foolish it is to waste time searching for one sheep when ninety-nine are safely in the fold. If
increased profits are the highest good, then the farmer who pulled down his barns and built
bigger ones was entirely right. Persuade myself that my unborn child is really part of my body
and I can justify abortion on the same grounds as changing my hairstyle. The constant
secular assumption is that there is nothing beyond the matter-of-fact; no one to whom we are
responsible except ourselves.” (Linegar, 2005)
Another problem with CBA is that its experts are inclined to disregard the distribution
of costs and net benefits among different stakeholders. What matters is maximising net
benefit, i.e., the difference between benefits and costs. But which groups will bear the costs
and the benefits? Do these two groups differ or do they overlap? If the latter, to what extent?
Moreover, stakeholders of projects include also future generations. In CBA it is meant that
their interests are accounted for by discounting. Related to discounting the following question
arises: is it right that the generally applied discount rate is higher than zero? A positive
discount rate means that the interests of future generations are regarded as less important than
those of the present generation. Some economists even suggest a negative discount rate
thereby assigning higher importance to future generations than to the present generation.
Political interests also support the prevalence of economism. Lohmann (1997) also
notes, “[there are] efforts on the part of the state and other agencies … toward widening
cost-benefit analysis (CBA) in a way which suggests it can become a surrogate for at least
some of the larger functions of practical reasoning. I’ve tried to suggest already some of the
attractions this strategy might have – helping to shift accountability onto supposedly
impersonal mechanisms, overcoming bureaucratic akrasia in a relatively open society during
a time of crisis. But it holds out several more utopian promises as well. One – for officials
who might genuinely believe in the usefulness of commensurating disparate alternatives – is
to summarize complex choices in a formulaic way. Another is to reduce the attention that
needs to be paid to income distribution. Still another is to transmute popular pressure and
political debate and conflict into quieter, office-bound operations performed on fixed and
agreed-upon preferences. Then there is CBA’s ability to suppress questions of who gains and
who loses, who dreams up a project and who opposes it, making historically-embedded
changes seem commensurable, as parts of a list to be summed rather than a story to be told”
(Lohmann, 1997). Therefore, the precautionary principle should play a fundamental role in
economic decisions. This principle “has much efficacy because it captures an underlying
misgiving over the growing technicalities of environmental management at the expense of
ethics and open dialogue; of environmental rights in the face of vulnerability; and of the
manipulation of cost-benefit analysis by powerful vested interests supporting development.”
(Jordan – O'Riordan, n.d.).
The simple calculation of the difference between benefits and costs implies that the
distribution of benefits and costs (both in time and space) is unimportant. Furthermore, the
simple “benefit minus cost” formula implicitly assumes that most types of environmental
harm can be compensated for by financial transfers or technical achievements. These
assumptions are obviously false. Certain elements of nature cannot be substituted by man-
made goods – just as an ancient forest cannot be substituted by a golf-course covered by

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quasi-artificial grass6. The existence of option values and existence values (see Figure 1) also
suggest that certain elements of nature cannot be substituted by man-made capital.
CBA is a proper tool to assess certain parts of the economy, however, its limits should
also be recognised so that the method will stay in its sphere of competence and used for the
right purposes. CBA is not the only tool to assist social decision making. Table 1 gives a
summary of certain participatory planning models7.

1. Table: Summary of participatory planning models
PARTICIPATORY PLANNING MODELS
TECHNOCRATIC/
LIBERAL/
RADICAL/
ECOFEMINIST
COMPREHENSIVE INCREMENTAL
ADVOCACY
BIOREGIONAL
CONCEPT OF
A generalised public
A market of
Under-represented
Humans in
COMMUNITY
interest determined by individual interests
groups threatened
complex social and
experts
and preferences
by development
ecological systems
FORM OF
Public consultation by Consumer choice
Development of
Team design
PARTICIPATION
experts
counter-plans and
process
offers
PLANNER'S KEY
Determine optimal
Determine public
Ensure equal access Facilitate
ROLE
solutions
preferences
to decision making
bioregional/global
perspective
PROCESS
Scientific evaluation
Democratic
Law-based,
Collaborative
representation
adversarial
FAVOURED
Cost-benefit based
Voting analogues
Educational and
Self-help and
METHODS
methods, EIA, etc.
e.g. survey,
adversarial
empowerment
participation
strategies
ETHICAL BASIS
Utilitarianism Liberalism Critical
theory
Feminist/biocentric
KEY ROLE OF
Input into scientific
Input into pluralist
Counter-plans,
Self-determination
COMMUNITY
process
process
protest, obstruction
GOVERNMENT'S
Weigh expertise and
Balance competing
Distribute wealth;
Meet basic needs;
IDEAL ROLE
other policies
interests
arbitrate
facilitate
PROJECT
Private or public
Private or public
Private or public
Community self-
INITIATOR
developer
developer
developer
reliance
PHILOSOPHICAL
Rationality
Procedural justice
Distributive justice
Justice; well-being
AIM

6 This is illustrated, for example, by the current controversial case of Verespatak (Romania) surrounded by
widespread international protest. The beautiful landscape would disappear forever as a result of establishing a
goldmine and an enormous sludge storage basin. The project would destroy 2 settlements, 5 mountains, 10
churches, 12 graveyards, 958 farms, and a unique national heritage (i.e., antique Roman underground mining
facilities, which are part of UNESCO’s World Heritage). The mine would use cyanide technology similar to the
technology that caused an environmental disaster in neighbouring countries in 2000 when a similar, huge sludge
storage basin in Romania was accidentally demolished by heavy rainfall. The sludge ended up in the River Tisza
and the very high cyanide content of the sludge killed almost all life forms in the Hungarian section of the river.
(Through time life has appeared again and the river has regenerated itself.) The currently planned new project
would involve a sludge basin forty times bigger than the one collapsed in 2000.
7 Of course, the different models of Table 1 do not necessarily exclude each another in decision making. For
example, governments may have to perform all four tasks in the four different columns. As for the project
initiator, the ideal case is when the community itself determines what should be done, however, sometimes the
principle of subsidiarity may require that a higher hierarchical level makes the decision.

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PARTICIPATORY PLANNING MODELS
TECHNOCRATIC/
LIBERAL/
RADICAL/
ECOFEMINIST
COMPREHENSIVE INCREMENTAL
ADVOCACY
BIOREGIONAL
COMPETING
Majority wins
Balance of interests; Equal opportunity;
Design for many
VALUES
trade-offs
fair game rules
parameters
PREFERRED
Transparency of
Deregulation and less More community
Systems change
REFORMS
decision making
government
power and
autonomy
Source: Birkeland (1999)
Christians should seek ways of more realistic assessment of the environment besides
trying to monetise almost all of its elements through CBA. Even if monetisation is applied, its
limitations should be revealed, for example, that monetary values should not be assigned to
everything. Numbers are useful tools to compare different options but the importance of
numbers should not be overestimated. Important non-monetary aspects may also exist by
which options should be compared. As seen above, approaches other than CBA are also
available to acknowledge and handle qualitative differences. In seeking different ways of
analysis “Christian should avoid double standards, and show integrity – in prayer, in obeying
the Bible rather than just hearing it, in actions rather than simply intellectual belief, in
control of the behaviour and speech, in avoiding social or economic injustice” (Linegar,
2005). The following section highlights some of the ecclesiastical documents aiding this
search for the whole (not just monetary) value of the natural environment.
Catholic documents on the environment
The importance of preserving the environment and the responsibility of man for creation
are emphasised by a great number of official Catholic documents including Gaudium et spes,
Octogesima adveniens, De iustitia in mundo, Laborem exercens, Sollicitudo rei socialis,
Message for the 1990 World Day of Peace, Centesimus annus, etc., and by other ecumenical
documents, for example, Joint statement of Pope John Paul II and Patriarch Bartholomeos of
Constantinople on environmental ethics; Charta Oecumenica, etc.
Catholic social teaching confirms that the natural environment has a value in itself
(intrinsic value) besides its instrumental value and the dominion of man over creation is
bounded, i.e., man cannot do anything with creation since he is responsible for it. „The
preservation and love of nature is not a secondary, utilitarian commandment but, like the
praise of God, man’s primary mission on this Earth” (Jávor, 2006). Following Lumen
gentium, Gaudium et spes also notes: “For by the very circumstance of their having been
created, all things are endowed with their own stability, truth, goodness, proper laws and
order. Man must respect these as he isolates them by the appropriate methods of the
individual sciences or arts. Therefore if methodical investigation within every branch of
learning is carried out in a genuinely scientific manner and in accord with moral norms, it
never truly conflicts with faith, for earthly matters and the concerns of faith derive from the
same God. … Indeed whoever labors to penetrate the secrets of reality with a humble and
steady mind, even though he is unaware of the fact, is nevertheless being led by the hand of
God, who holds all things in existence, and gives them their identity.” (GS #36; emphasis
added).
Centesimus annus explains the reasons for environmental destruction: „At the root of
the senseless destruction of the natural environment lies an anthropological error, which

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unfortunately is widespread in our day. Man, who discovers his capacity to transform and in
a certain sense create the world through his own work, forgets that this is always based on
God’s prior and original gift of the things that are. Man thinks that he can make arbitrary use
of the earth, subjecting it without restraint to his will, as though it did not have its own
requisites and a prior God-given purpose, which man can indeed develop but must not betray.
Instead of carrying out his role as a co-operator with God in the work of creation, man sets
himself up in place of God and thus ends up provoking a rebellion on the part of nature,
which is more tyrannized than governed by him.” (CA #37). The moral character of economic
activity is highlighted by Pope John Paul II, among other things, in Sollicitudo rei socialis:
“One can certainly speak of ‘selfishness’ and of ‘shortsightedness’, of ‘mistaken political
calculations’ and ‘imprudent economic decisions’. And in each of these evaluations one hears
an echo of an ethical and moral nature. Man’s condition is such that a more profound
analysis of individuals’ actions and omissions cannot be achieved without implying, in one
way or another, judgments or references of an ethical nature.” The Pope adds in Centesimus
annus: “even the decision to invest in one place rather than another, in one productive sector
rather than another, is always a moral and cultural choice” (CA #36; emphasis added).
Charta Oecumenica signed by the presidents of the Conference of European Churches
and the Council of European Bishops’ Conferences in 2001 also warns: „Believing in the love
of the Creator God, we give thanks for the gift of creation and the great value and beauty of
nature. However, we are appalled to see natural resources being exploited without regard for
their intrinsic value or consideration of their limits, and without regard for the well-being of
future generations” (Charta Oecumenica, Ch. 9; emphasis added).
The list of Christian reflections to the ecological crisis and the responsibility of mankind
could be continued. Suffice to say, as seen above, „The official documents of the Catholic
church clearly formulate the position of the church and the tasks of the believers in handling
the environmental crisis. According to [the Church], the world created by God is good and
man is invited to be a responsible steward of the world. The current ecological crisis stems
from man’s self-sufficiency and his alienation from the divine invitation. Participation in the
solution of the problems is a responsibility that no believers may refuse” (Jávor, 2006).
The application of moral principles in corporate environmental behaviour
A particular sphere where mankind’s alienation from creation is clearly traceable is
corporate environmental behaviour. Consequently, by today it has been widely recognised
that a holistic view and not just a monetary valuation of the natural environment is necessary
in business activity to ensure the protection of creation. Promising initiatives include, among
other things, moving from end-of pipe solutions towards pollution prevention (P2). P2
combines economic and environmental benefits by fostering preventive environmental
measures, for example, the application of new technologies, good house-keeping, etc.
Nevertheless, often P2 also remains within the economic paradigm basically resulting in
today’s global environmental crisis. As mentioned above, this paradigm is based upon the
following implicit premises:
• “all problems of society (environmental or other) are fundamentally economic and
therefore they must be expressed in economic terms, otherwise society will be unable to
solve them;
• as a consequence, all social and environmental problems are to be solved by economic
means;

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• economic goals are superior to all other societal goals; in other words, in order to be
justifiable, all problems should be subordinated to economic goals” (Baranyi, 2003).
The abovementioned economic paradigm prevents society from recognizing the genuine
(i.e., ethical) nature of environmental and social problems. Thus, all efforts to solve those
problems will remain particular at the best and destructive at the worst. A socially and
environmentally sustainable corporate culture should not be built only on profit motives but
also, and fundamentally, on serving the true purpose of businesses, i.e., the common good.
Common good includes not only satisfying the direct needs of people (food, shelter, etc.) but
also the preservation of the natural environment, which provides the fundamental
preconditions for human life both in material and spiritual terms (by providing leisure
opportunities, esthetical experiences etc.). To this end, not only goal-rationality8 but also
value-rationality (or a deontological approach) is necessary in decision making. In other
words, actions should be carried out because they are morally good not only because they
make profit (or they should be carried out despite they are unprofitable). Moral beings are
characterised exactly by their capability (i.e., willingness) to deny themselves and their
narrow self-interests for the sake of some greater good. The very meaning of morals is to help
to opt for the good in ambiguous situations. If morals fail to do so they are only a „decoration
on nothing”. The core of ethics is that its instrumental value is inseparable from its intrinsic
value. Due to this intrinsic value, morals cannot be reduced to a mere means of profit
maximisation. If one protects the environmental only for profit or to avoid punishment his
motivation will be insufficient at best and destructive at worst. In such cases the action’s main
motivation remains self-interest and environmental protection will not be an “organic” action
(i.e., stemming from one’s own conviction) but it will be forced upon the actors. Thus, actors
are not encouraged to become more ethical through time (moral development) but only to
maximise their private benefits or to fulfil outside expectations. This approach towards
environmental protection may turn to be destructive; if regulations turn to be less stringent or
public scrutiny becomes weaker, businesses will be inclined to apply environmentally harmful
technologies, to produce harmful products, or to foster environmentally harmful consumer
cultures in different countries. If the true meaning of morals remains fuzzy for, or even
regarded as ridiculous by, decision makers, they may easily cheat themselves and fall in the
same pitfall as apparently Lawrence Summers, former President of Harvard University,
former Treasury Secretary of the USA and former chief economist of the World Bank. “In
December 1991, while at the World Bank, Summers signed a memo written by staff economist
Lant Pritchett which argued among other things (according to its author; the full memo is not
public) that free trade would not necessarily benefit the environment in developing countries.
An ‘ironic aside’ made an argument that, in fact, the developed countries ought to be
exporting more pollution to those developing countries. This aside was leaked to the media as
a serious, standalone memo, and a public outcry ensued.”
(http://en.wikipedia.org/wiki/Lawrence_Summers#World_Bank_Pollution_Memo). Later on
Summers claimed that his “ironic aside” had been misunderstood by the public. In fact,
reading the infamous memo one cannot be sure whether it is just a bad joke or a serious,
horrible suggestion (see below).

8 Goal-rationality and value-rationality are the concepts applied by Weber (1968).

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The Memo
DATE: December 12, 1991
TO: Distribution
FR: Lawrence H. Summers
Subject: GEP
‘Dirty’ Industries: Just between you and me, shouldn't the World Bank be encouraging
MORE migration of the dirty industries to the LDCs [Less Developed Countries]? I can
think of three reasons:
1) The measurements of the costs of health impairing pollution depends on the foregone
earnings from increased morbidity and mortality. From this point of view a given amount of
health impairing pollution should be done in the country with the lowest cost, which will be
the country with the lowest wages. I think the economic logic behind dumping a load of
toxic waste in the lowest wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution
probably have very low cost. I've always though that under-populated countries in Africa
are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared
to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is
generated by non-tradable industries (transport, electrical generation) and that the unit
transport costs of solid waste are so high prevent world welfare enhancing trade in air
pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have
very high income elasticity. The concern over an agent that causes a one in a million
change in the odds of prostrate cancer is obviously going to be much higher in a country
where people survive to get prostrate cancer than in a country where under 5 mortality is
200 per thousand. Also, much of the concern over industrial atmosphere discharge is about
visibility impairing particulates. These discharges may have very little direct health impact.
Clearly trade in goods that embody aesthetic pollution concerns could be welfare
enhancing. While production is mobile the consumption of pretty air is a non-tradable.
The problem with the arguments against all of these proposals for more pollution in LDCs
(intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets,
etc.) could be turned around and used more or less effectively against every Bank proposal
for liberalization.9 (http://www.whirledbank.org/ourwords/summers.html)
The importance of personal moral values
The importance of the existence or lack of personal ethical principles and practice is
demonstrated by the above infamous memo. It is often told that financial motivations and
outside institutional control are sufficient to persuade (or force) businesses to operate in an
environmentally sound manner. This approach forgets the importance of the personal moral
values of managers and other employees. Certainly, many obstacles hinder corporate decision
makers in supporting the economic goals of their companies and, at the same time, acting in
an ethical manner. The dangers include, among other things, environmental problems being
translated by managers into “safe and understandable” business terminology. As a result, the

9 “After the memo became public in February 1992, Brazil’s then-Secretary of the Environment Jose
Lutzenburger wrote back to Summers: ‘Your reasoning is perfectly logical but totally insane... Your thoughts
[provide] a concrete example of the unbelievable alienation, reductionist thinking, social ruthlessness and the
arrogant ignorance of many conventional 'economists' concerning the nature of the world we live in... If the
World Bank keeps you as vice president it will lose all credibility. To me it would confirm what I often said... the
best thing that could happen would be for the Bank to disappear.’ Sadly, Mr. Lutzenburger was fired shortly
after writing this letter.
Mr. Summers, on the other hand, was appointed the U.S. Treasury Secretary on July 2nd, 1999, and served
through the remainder of the Clinton Admistration. Afterwards, he was named president of Harvard University.”
(http://www.whirledbank.org/ourwords/summers.html )

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