Why Capitalism Has the Wrong “Loss Function”

Capitalism is an economic system that is driven by profit and growth. In this system, companies are incentivized to maximize their profits and shareholder value, which can sometimes come at the expense of other important factors such as social and environmental sustainability.

The “loss function” refers to the way that companies measure success and make decisions. In traditional economic models, the loss function often entails minimizing costs and maximizing profits. However, this approach can lead to negative externalities, such as environmental pollution, social inequality, and other harms that are not accounted for in the calculation of profits.

Here at Planet Price, we believe that capitalism has the wrong loss function because it focuses too much on short-term profits and growth, and not enough on the long-term sustainability of the economy and the well-being of people and the planet. In our view, capitalism needs a new loss function that not only takes profit into account but also these broader considerations, and incentivizes companies to act in a more socially and environmentally responsible way.

There are several viable alternatives to the traditional loss function inherent in the current capitalistic system, including “triple bottom line” accounting, which measures a company’s success in terms of its social, environmental, and economic impact. Or the “doughnut economics” approach, where the goal of “middle of the doughnut sustainability” is to find a way to achieve both environmental sustainability and social equity, while staying within the planetary and social boundaries represented by the doughnut. More on doughnut sustainability model can be found here. This means ensuring that everyone has access to the resources they need to thrive, while also reducing the impact of human activity on the planet.

Industrial supply chains play a large role in this and need to be a key focus of any effort to balance access and impact. Scope 3 emissions – the result of activities from assets not owned or controlled by an organization – can represent up to 80% of an organization’s impact, and therefore Scope 3 emissions are critical to include in the efforts to minimize impact and create more sustainable supply chains. This is a key challenge that Planet Price is addressing.

The concept of middle of the doughnut sustainability has gained popularity in recent years, as more people have become aware of the need to address the environmental and social challenges facing the world today. It is seen as a more holistic and inclusive approach to sustainability, which takes into account both environmental and social concerns, and recognizes the interdependence between the two.

Overall, the debate over the loss function in capitalism is part of a larger conversation about how to create a more sustainable and equitable system that takes into account the needs of all stakeholders, not just shareholders. Through our sustainable procurement analytics platform (link to Platform page) and Planet Price metric approach (link to Methodology page), the team here at Planet Price is committed to doing our part to calculate the real cost of everything – and thereby helping to advance the adoption of a more accurate and meaningful “loss function”.