Economics: Sustainable Capitalism

This blog is essentially concerned with the question, What can grandparents, parents and friends of children do to maximize the potential for future generations to enjoy a prosperous and good life on our planet?  The temptation is always to think that the question is too broad, the problem too vast for any individual, no matter how well connected, wealthy  or powerful—let alone those who feel they are not any of those things—to be able to do much about it. 

 I argue that the truth is different.  Each one of us has potential for influence, particularly if it is towards a life-giving, life-enhancing purpose.  I believe, and the best of our science and philosophy confirms, that we live in a universe that is predisposed toward the creation and nurturance of life.  On our own planet the archeological record confirms that through past ages of tumult, upheaval and destruction, life always emerged triumphant and proliferating.

 We are now living in a time when the evidence is disturbingly negative about the potential for life to flourish in the future as our human activities on Earth are such that they are exceeding planetary capacity to sustain them.  However, we also live at a time when the capacity for each individual to reach out and touch the minds and creative imaginations of others all around the world has never been greater.  Think of the unprecedented opportunity that the Internet and the social media it has spawned have given each one of us to be in touch with others—to read, learn and process what they have to say, as well as offer our own views, information and perspective on any topic.

 Understanding this reality of modern life—both towards negative destructive prospects and unlimited potential for communication and influence—points the way clearly for each one of us individually and all of us collectively to contribute to and support the life-enhancing forces of the universe.  True, there will be those who do little or nothing in this regard, and others who appear to, or actually do, work at cross purposes for the enhancement of the good.  But they are in the minority.  The vast majority of us are concerned with life promotion, not life destruction.  What we must therefore be focused on is how to collectively enhance our efforts through cooperation and like-minded action.

 In previous posts I have made suggestions of how grandparents can influence the thinking of their grandchildren in the “right” way to enhance future human prospects on the planet.  This is important to do, for ultimately it will be those young people grown older who make decisions about their own collective future.  However—and this is where I come to the point of this particular post, and all that I will have to say about Economics—it is vitally important for all of us to act now to turn the workings of our industrial economies away from the non-sustainable trajectory on which they are headed.  That requires collective action, but all such action is inspired and carried forward by individuals.  Our duty and responsibility as grandparents, parents and friends of children is to be one of those individuals who is finding a way, first to understand as comprehensively as we can, then to act with others on seeing that necessary corrections are made in time.

 With that in mind I turn now to address what is implied in moving towards economies based on the concept of sustainable capitalism, as distinct from the non-sustainable capitalism embraced by all major industrialized societies today.

 Wealth and Happiness

 In the previous post I described how the capitalist concept of production was first presented as a clearly defined way of creating wealth in society by Adam Smith in 1776 in his book generally known by its abbreviated title The Wealth of Nations.  From the foundation described by Smith and further developed by David Ricardo in the 19th century a set of principles for the governing of industrialized economies emerged.  This is known as classical economic thinking, and its understood purpose by these early writers was the pursuit of happiness.  In general, the means to achieve overall human happiness in society was assumed to be the cultivation of right relationships while people were engaged in productive labour.

 However, all of this was considered to be rather intangible by succeeding theorists who moved economic thinking toward a focus on the material requisites of happiness.  Influenced by the prevailing worldview that emphasized the value of scientific measurement, these later generations of economists shifted their discipline in the direction of measuring human well-being or happiness by using mathematics and statistics.  In this way the maximizing of wealth, which could be measured mathematically, was determined to be equivalent to the maximizing of well-being.  This line of emphasis encourages the belief that the pursuit of individual wealth is the way to happiness.

 The outcome in today’s industrialized societies, as described by John Ikerd in Sustainable Capitalism (2005), is that “the pursuit of individual wealth [leads to] the exploitation of others for individual gain and thus degrades the integrity of personal relationships.  Accordingly, the pursuit of individual wealth quite logically might be expected to diminish social happiness.”  Speaking of his own country, the United States, Ikerd asserts that “since the 1960s there has been little societal or political restraint to the unbridled pursuit of individual economic self-interests . . . Americans have succeeded in extending their lifespan, but they have failed to sustain their quality of life.  The United States has become a nation of greater wealth, but also a nation of growing social unhappiness.”

 All of this speaks to a considerable literature that points out that beyond a certain level of individual affluence, people don’t necessarily feel or report that possessing more wealth increases their overall happiness.  Obviously wealth is important, but an economic system that places undue emphasis on this one aspect of human life is likely to distort reality. Even more significant, it puts pressure on the extraction of resources to produce an ever increasing level of material wealth for more and more people, which has led in our own time to major concern about sustaining such economic activity into the future.  This concern is exacerbated today by distortions to the original premises of classical capitalism, and it is to this aspect of needed reform that we now turn.

 Taking Back Control over Our Economic Future

 John Ikerd in Sustainable Capitalism (2005) describes how the distortions and changes in economic thinking have come about over the centuries since Adam Smith wrote The Wealth of Nations (1776).  In the following paragraphs I will briefly summarize his assessment.

Adam Smith and his followers in the 18th and 19th centuries argued for a capitalist system in which the individual was sovereign to make choices about buying and selling in an economic climate where prices would rise and fall according to the operation of free markets.  This works well when markets are small, as they were in Smith’s day, and when the individual has full information on which to make his choices about what to buy, and when sellers can easily move in and out of markets according to whether they are profitable or not.

 “Obviously,” says Ikerd, “none of these characteristics exist in the dominant capitalist economies today.  Most major industries are dominated by a handful of corporations at national levels, and domination by multinational corporations is growing even at the global level.”  This is supported by an advertising industry designed more to create wants than to provide information.  With regard to societal well-being, which was the purpose of capitalist economies according to Smith, the important point to appreciate about modern day capitalism is that “there is no assurance that economic resources will be guided towards the good of society. . . The invisible hand of Adam Smith’s capitalist economy is no longer capable of transforming individual self-interests into societal well-being.”

 The same concerns apply to the classical concept of free trade and the idea of comparative advantage, where a country could produce the commodities for which it was best suited and exchange them for commodities of other countries.  In today’s world money and technology can move rapidly from country to country, distorting the ability of a country, particularly a smaller one, to exploit its own natural advantages.  “Indeed,” Ikerd says, “there are logical reasons to believe that free trade as is currently being promoted, would lead to further exploitation of the people and the natural resources of the weak by the strong among nations and to further exploitation of the weak by the strong within nations.”

 Most seriously, the transformations described here have led to emergence in today’s world of a phenomenon known as corporatism, which is defined as “the organization of a society into industrial and professional corporations serving as organs of political representation and exercising some control over persons and activities within their jurisdiction.”  In Ikerd’s words “corporatism means that we let someone else make our economic and political decisions for us.”  The natural trend in such a system is the removal of “all social and ethical constraints on a company’s pursuit of ever greater profits and growth.”  Under a political system of corporatism governments will remove restraints on the private economy and lose their ability to protect natural resources and workers from corporate exploitation.

 The most serious implication of this drift towards corporatism from the perspective of future generations, who are the main focus of this blog, is that “any system that naturally encourages the exploitation of nature and of people is incapable of protecting nature and people from its exploitation.” (my emphasis). Understanding this point must encourage those of us who are concerned about the future well-being of our grandchildren to focus strategically on how to move the political systems under which we live to regain their ability to protect our grandchildren from the excesses of a non-sustainable capitalism and corporatism now in full flight.

 Ikerd sums it up this way: “Our pursuit of happiness has degenerated into a pursuit of wealth, the invisible hand of Adam Smith’s free market capitalism is no longer capable of transforming the pursuit of individual greed into societal good, free trade is no longer free because too few are free to not trade, and free market capitalism is being replaced by centrally planned corporatism.”

 So the issues run very deep.  It is going to take a concerted effort by those who care deeply enough about sustainable relationships to ensure that their pursuit is put front and centre in the decision-making process.  Ikerd argues for the triumph of common sense over political or economic ideology.  “Our common sense tells us that our life is made better by [right] relationships. . . by ethical and moral rightness in our thoughts and actions.  We know intuitively that an economic system that relies on exploitation of the earth and of people is fundamentally incapable of sustaining human happiness.”  This is a serious structural flaw in the current economic/political system governing industrialized nations.  We will need to think long and hard about how to restructure the economic system and revitalize the political system if our grandchildren are to have any decent chance of a good life in a sustainable economy.

 A Different Way to Look at Things

 A good place to turn for alternative ideas on how to structure a modern capitalist economy is the work of an economist whose ideas received considerable attention in the 1970s but fell into neglect under the onslaught of neoclassical economic thinking in the 1980s and 1990s.  This is E.F. Schumacher whose major economics text, Small is Beautiful (1974), is considered a classic among those who look to ways to design a sustainable economic system.

 Schumacher began with what he calls “the problem of production” and asserted that “One of the most fateful errors of our age” (he was writing in 1974, almost 40 years ago) “is the belief that ‘the problem of production’ has been solved.”  He was referring to the widely held belief of the time that the industrialized rich countries were on a trajectory to an “age of leisure” and what the poor countries needed was “transfer of technology.”  However, this belief was built on an illusion “based on the failure to distinguish between income and capital where this distinction matters most. . . namely, the irreplaceable capital which man has not made, but simply found, and without which he can do nothing.”

 Schumacher was referring to the capital provided by Nature, which is far larger in the economic system than the capital “provided by man,” but we do not even recognize it as such.  “This larger part is now being used up at an alarming rate” (in 1974, remember) “and that it is why it is an absurd and suicidal error to believe, and act on the belief, that the problem of production has been solved.”

 Given his use of such strong language opposing the ideas of his fellow economists of the day, it is easy to understand why Schumacher’s views were not welcome among the people then guiding the industrialized economies.  Nor had much changed on that score by the end of the 20th century when Herman Daly was writing in 1996 in Beyond Growth.  Daly is well known as the most forthright economist writing today about the need to shift to steady-state rather than growth economies.  In 1996 he had just left his post as a senior economist with the World Bank and was highly critical of the view of many of his fellow economists who saw the macro-economy “as an isolated system (i.e., as having no exchange of matter or energy with its environment).” Daly shows that view in the simple diagram below.

The economy as an isolated system

(Original chart in Herman Daly: Beyond Growth (1996), page 47)

There is no recognition anywhere in this model that human economies are nested within and dependent upon the larger ecological system. How is such a view possible, one might ask, when it is so obvious that the human economy is heavily dependent on inputs from Nature?  It’s a complicated story that has to do with the economic theory of substitution, about which I will have more to say later.  More succinctly, Schumacher nailed the problem when he said: “Modern man does not experience himself as a part of nature, but as an outside force destined to dominate and conquer it.”  It goes back to the worldview articulated by Bacon, Descartes, Galileo and Newton in the 17th century.  So firmly entrenched is this idea in the thinking of mainstream economists even today that they don’t count what is our most obvious dependence on natural capital, fossil fuels, as capital at all, but rather as income.  Here is Schumacher again:

“No one, I am sure, will deny we are treating them”(fossil fuels) “as income items although they are undeniably capital items.  If we treated them as capital items, we should be concerned with conservation; we should do everything in our power to try and minimize their current rate of use; we might be saying, for instance, that the money obtained from the realization of these assets—these irreplaceable assets—must be placed into a special fund to be devoted exclusively to the evolution of production methods and patterns of living which do not depend on fossil fuels at all or depend on them only to a very slight extent.”

If the industrialized world had followed Schumacher’s advice back in the 1970s we would be in a much different place today.  We would have invested in alternative renewable sources of energy so that close to 100 percent of our electric power and most of our transportation energy would now be coming from renewable sources, and we would still have vast reserves of easily accessible oil available for uses that it is uniquely best able to provide.  We would not be as nearly concerned as we now are about global warming and green-house gas emissions and climate change.  Our economies might be smaller, but they would be more sustainable, and focused on recycling as we saw the other resources we extract from nature (such as metals) also as capital to be preserved, rather than as income to be used up.

In his own time of the 1970s Schumacher raised the question of why it is “that terms like pollution, environment, ecology, etc. have so suddenly come into prominence.” I personally remember those days very well, for in 1972 I was writing my PhD thesis at the University of Alberta using a futures perspective and taking note of the fact that the first departments of the environment were appearing in governments around the world, and the first United Nations conference on the environment was held in Stockholm, Sweden, in 1972, where concern was expressed that acid rain resulting from industrial pollution was adversely impacting on the forests of northern Europe.

Schumacher points out that there had been an industrial system for many years and that humanity had “been living on the capital of living nature for some time, but at a fairly modest rate.  It is only since the end of World War II that we have succeeded in increasing this rate to alarming proportions.” If Schumacher thought that what was happening in his day was alarming, what would he conclude 40 years later after the huge discoveries of North Sea oil have been practically pumped dry and oil companies are now drilling for oil many kilometres under the sea bed and in the Arctic in ecologically sensitive places?  What would he have to say about the threat of industrial economies that have more than doubled and doubled again, and about the economic power houses of China and India that have taken off at even faster rates?

All of this has led to incomprehensibly large quantitative expansion as well as huge qualitative improvements in the lives of millions of people around the world.  But at what cost to the store of natural capital as we still forge ahead using the same flawed economic model as Schumacher condemned in 1973?  Schumacher actually provided the answer to this question 40 years ago as though he could foresee the predicament we face today: “Fossil fuels are merely a part of the ‘natural capital’ which we steadfastly insist on treating as expendable, as if it were income, and by no means the most important part.  If we squander our fossil fuels, we threaten civilization; but if we squander the capital represented by living nature around us, we threaten life itself.” (emphasis added).

Knowing this, and knowing that those of us who are grandparents lived most of our adult lives in the 40 years since Schumacher identified the “collision course on which we are moving with ever increasing speed,” how can we live in quiet denial of what is surely going to descend with a vengeance on our grandchildren if we don’t force the decision-makers of today to make the decisions that the decision makers of yesterday refused to make?  That is why I am writing this blog.  I am trying to set the evidence out as clearly and dispassionately as I can because I believe that the best decisions are made when you have good evidence in front of you.

But I cannot be dispassionate when I think of the vulnerable little ones whom we are sending innocently into a hotter, damaged ecological future because of our refusal to make the necessary adjustments to the economic system today.  If we sit in quiet complicity and let the system unravel into inevitable chaos, confusion and hardship for all, we are guilty of the most monstrous example of mass human apathy the world has ever known.  On the other hand, if we act now with fortitude, goodwill, empathy, determination and love for the most vulnerable among us, we have the opportunity to participate in the most important movement for human welfare in history.

There is still much more for us to learn as each of us considers what part we might play in this great movement.  In future posts I will continue to bring you information and good strategic advice from many people who are already acting to bring the necessary change. In the meantime, I encourage you to read widely beyond what I am bringing you.  Talk to your family, friends and neighbours about what you might do in the communities to which you belong.  Have fun and enjoy life as you do this.  You will find satisfaction in knowing that you are participating in collective action far more important than anything we can do individually.

If we keep the smiling, trusting, innocent faces of the little ones before us, we will never doubt why we must do what we can for their future.

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4 Responses to Economics: Sustainable Capitalism

  1. Sarah Taylor says:

    I am moved beyond words by what you has written here. My whole body mind and soul were undeniably screaming “YES!”, to every word as I moved through this piece.

    This is right on track and has lit a fire for me. I will b sending it to many. Sarah

  2. Geraldine Schwartz says:

    AS you set this out dispassionately and provide the information we need to make good decisions I wonder with all my heart how this information can be ignored by the leaders we elect to represent us? I am hoping to learn as you proceed how we may not only act ourselves but how we can join with others to influence our leaders of every political stripe and ideology to act with simple common sense for the nations as they would for their own families and grandchildren to save their future. I am a firm believer that the mosaic of actions for good will win the day and so much more powerfully so if we act with common purpose and intent. TO do so we need not information but Education . Thank you Desmond for the teaching. I remain open hearted for the rest…

    Gerri Schwartz

    • Dear Gerri:

      Thank you for another heart-felt comment. Yes, understanding and education are the first requisites for strategic action. As we build up knowledge about current reality and alternative prospects, we will be strenthened for what we must do together for our grandchildren.

      Desmond

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