Economics: Summary and Review

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I have devoted many posts over the past few months describing how the economy operates as one of the determinants of human destiny.  You will recall I called this the second of five Es affecting our common future on Earth, the first being Energy.  Before proceeding to the third E, Ecology, I thought I should give a summary and review of what has been said about economics.  Hopefully, this will help to keep in mind the salient points we need to consider as we journey forward together into the 21st century.

A Human Invention

 Perhaps the most important thing to remember about the economy is that it is a human invention.  In all countries it was created over a few centuries by incremental human decisions.  As such it can be changed by human decisions about what we value.  If we therefore change our minds about what we value, we can decide how to change the economy to reflect these values. It’s not impossible to do—just very hard.  For this reason most people are inclined to leave it to others to make the changes, even in a democracy.  The major problem with that is it leads to control by a relatively small group in whose hands more and more wealth is concentrated.  That is the dangerous situation in which we find ourselves today.  Hence, the need for all of us to become better informed about economic issues and more involved with efforts to move the operation of the economy away from its present non-sustainable trajectory.

The Economy Is a System

 The next point to remember is that the economy is a system and was invented by humans to operate within another human system, society, both of which are nested within the natural ecosystem of the planet.  Early economists either did not think about the economy in this way, or deliberately chose not to acknowledge it, because it did not fit well with their mathematical models.  To a tragic extent, this same blind spot still persists in economic thinking today among those who should be leading us in a different direction.

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 The diagram above—drawn from Peter Victor, Managing without Growth (2008)—shows the important relationship we need to keep in mind.  The economy is an open system, nested within another open system, society, both of which are nested within the closed system of nature.  This means we take inputs from the natural world, process them, and discharge outputs as waste back into the natural world, the biosphere. Because the biosphere is essentially a closed system (except for energy coming in from the sun) it can eventually be overwhelmed by human activity, if the sum of the world’s economies becomes too large. This is the situation in which we find ourselves today after about three hundred years of industrialization.  For our grandchildren to have a viable economic future, radical changes have to be made to bring human activity on the planet into balance with the natural world.

The Foundation of Capitalism

The predominant paradigm guiding economic thought and action around the world in the 21st century is broadly known as capitalism.  It had its foundation in the writings of a moral philosopher, Adam Smith, in late 18th century Britain—The Wealth of Nations (1787).  Smith described how the primary wealth of nature could be converted into secondary wealth in society by productive labour based on knowledge and specialization utilizing markets and free trade.  Unfortunately, since the time of Adam Smith, economic thought has followed an exploitative bent along a developmental path in which the availability of so-called cheap energy from fossil fuels combined with a growing population and human ingenuity for innovation enabled productive capacity to increase enormously, so that the human ecological footprint on the planet has become larger than the Earth can sustain very much further into the future.

Sustainable Capitalism

The issue for us today, therefore, is how to turn an economic system of non-sustainable capitalism into a system of sustainable capitalism.  Awareness of the importance of this issue goes back several decades into the 20th century when voices like that of E.F. Schumacher in the 1970s were raised against the prevailing orthodoxy of economic thinking.  Schumacher nailed the human predicament 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.”—Small is Beautiful (1973).

Schumacher was an early environmental economist. He has been succeeded by others like Herman Daly whose chart depicting the flawed thinking of today’s mainstream economists is shown below.

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 The economy is viewed as an isolated system with no dependency on the natural world.  How is such a view still possible when we know what we know today about the impact of human activity on the environment? It is a classic example of the inconsistency of human thinking that this worldview still lies at the heart of policies that favour economic development.  Humanity got onto this wrong path when it substituted the acquisition of wealth or material abundance as a proxy for happiness or well-being.  Our ability to measure quantitative growth and our difficulty to assess qualitative improvement leads us to favour the former in economic planning and leave the latter to never-ending debate.

Sustainable Development

Herman Daly asserts that what we need to be focused on in economic planning is sustainable development NOT economic growth, because in a finite world continuous growth is not sustainable.  Eventually the world gets filled up with the growth of human activity, and then there is nowhere left to grow. He shows this in his Empty-World Full-World diagram below.  We are rapidly approaching the full world condition.

 004Daly further clarifies that it is not growth itself that is our problem, but growth of throughput.  In our modern industrialized economies we have too much throughput:  too many materials and too much energy being converted into too many commodities and producing too much waste for the planet’s health and our own good.  What we need are policies that favour a low throughput economy so that we can live more lightly on the planet (walking in the forest rather than roaring down the highway in a car powered by an engine of several hundred horsepower).  It comes down to adopting an ethic—a central organizing principle of society—that will guide our actions to embrace fairness, justice and compassion while we live within the scientifically verifiable limits of the natural world.

The End of Growth

Given the reality of a finite world already almost filled with human economic activity, it seems certain that our grandchildren’s future will be defined around arguments about how to handle growth.  Canadian economist, Jeff Rubin uses the provocative term, The End of Growth, as the title of his 2012 book to argue that in the near future the kind of economic growth we have known in Western industrialized countries will stall because the energy from fossil fuels on which it has depended will become too expensive.  This means that the policy of job creation through continuous economic growth will have to be rethought and replaced with policies that make the existing amount of work stretch further through job sharing and other approaches.

Essentially what economists like Jeff Rubin and Herman Daly are forecasting is a transition from economies based on continuous economic growth to “steady-state economies” characterized by job sharing, vibrant local economies, fewer government services, and a commitment from people to live less energy-intensive lives in communities based on mutual self-help.

Prosperity NOT Growth

What we are looking for in policy terms is a shift in thinking away from a fixation on growth and wealth as the solution to economic problems, to a focus on the idea of what it means to build prosperous societies in the 21st century.

Writers like Tim Jackson in the UK—Prosperity without Growth (2009)—and Peter Victor in Canada—Managing without Growth (2008)—describe how measuring well-being or prosperity using the concept of Gross Domestic Product (GDP) is a defective idea.  Broadly speaking, GDP measures the total spending by households, governments, businesses and other investments in the nation.  Spending is taken as a proxy for satisfaction.  The higher the GDP, the more money being spent, the more people are supposed to be satisfied with their lives.

But there are several problems with this view of societal well-being.  For one thing GDP includes spending on undesirable activities like combating crime and cleaning up pollution or recovering from natural disasters.  It also omits contributions from voluntary work, unpaid housework, leisure time, damage to the environment and the depletion of natural resources.  What this means is that you could have a country running flat out with high GDP while it is using up natural resources, destroying its ecosystems, and spending massive amounts of money on cleaning up the messes it has created, while corruption and crime are in high gear.  Is this a prosperous society with high life satisfaction enjoyed by its people?

What might we substitute as a vision of a prosperous, flourishing society?  Surely it would include assurance that the place where you live is safe with ongoing access to clean water and air, and nutritional food at affordable prices.  You would want to see the natural environment protected and feel confident that the activities in which your society is engaged were not disrupting weather patterns that have sustained life for thousands of years. Affordable housing, equity, relationships of trust, meaningful work and a sense of contributing to a greater whole—all these would be part of a prosperous, flourishing society.

To get to such a vision means that we will have to address what Tim Jackson calls “an urgent need to fix the illiterate economics of relentless growth” and learn to manage our societies without a dependence on economic growth.

Managing without Growth

From what has been said above it is clear that if we are to address successfully the existential challenges facing us as a global civilization, we must change the operating system of the economic machine driving human activity.  To do so we need some concepts to guide us.

Richard Heinberg in The End of Growth (2011) offers the insight that we are facing what he calls the “fifth great turning in human history.”  Following the harnessing of fire, the development of language, the creation of agriculture, and the invention of industrialization, we are participating, says Heinberg, “in the turning from fossil-fueled, debt-and-growth based civilization towards a sustainable, renewable, steady-state society.”

Environmentalist Gustave Seth in his book, The Bridge at the End of the World (2008), says we are between two worlds: the one we have lost and the one we are making.  In focusing on the latter, Seth tells us that we must be very mindful about the damage we can continue to do if we don’t overhaul the operating system of “modern capitalism” that has been highly destructive of the environment.

Economist Peter Victor in Managing without Growth (2008) offers some concrete evidence that a modern industrial economy can run effectively on a “low growth alternative.”  He and his associates built an interactive computerized model of the Canadian economy called “LowGrow.”  Based on the data from his modelling, Victor argues that an economy like Canada’s can do well if “a reduced rate of economic growth is cushioned by using the government’s tax and expenditure system in various ways.”  However, we have to muster the political will to make the changes, which depends ultimately on an informed public demanding that it be done: no democratically elected government could implement the required policies without broad-based public support.

In broad terms, what we are facing is a need to manage the contraction of industrial economies and to redefine progress.  This need not mean undue hardship or turmoil if the process is managed well.  Richard Heinberg argues that “if we aim for what is no longer possible we will achieve only delusion and frustration.  But if we aim for genuinely worthwhile goals that can be attained, then even if we have less energy at our command and fewer material goods available, we might nevertheless increase our satisfaction in life.”  We won’t measure such satisfaction with the clumsy, blunt and misleading index of GDP, but with other indicators like the Genuine Progress Indicator (GPI), the Gross National Happiness measure, or the Happy Planet Index—all of which are under development and receiving increasing validity in various parts of the world.

Money and Sustainability

If the requirement for a sustainable future is to get off the treadmill of continuous economic growth, and, as Gustave Seth says, to change the operating system of modern capitalism, then we need to re-engineer a key component of that operating system: the money component.

The problem with the money system is that it has a structural flaw built into it, which guarantees that it will never work well for the benefit of humanity as a whole.  The evidence of this structural flaw is seen in an astonishing number of financial crises over the past forty years culminating in the worldwide recession of 2007-2009 featuring massive bank failures and extraordinary bail-out measures by governments thereby increasing sovereign debt to a level where even the Bank for International Settlements warns that the path being pursued “by fiscal authorities in industrial countries is unsustainable.”

Since the days of Adam Smith who wrote about the primary wealth of nature being converted into secondary wealth by human enterprise, a third component of tertiary wealth (also known as “phantom wealth” or “a global casino”) has been created, in which massive amounts of money transactions take place with little or no benefit to the mainstream economy.

At the heart of the problem is what a 2012 report by the European chapter of the Club of Rome (Money and Sustainability: The Missing Link) calls “a defective meme” in collective human consciousness: that the only way to operate the money system of the industrial world is with national currencies in which 97% of the money supply is created by private banks as debt added to the bank accounts of their customers, which they are then required to repay plus interest.

There is a conceptual explanation as to why a system like that is guaranteed to work against sustainability.  It is described by the Club of Rome report mentioned above, and entails a new definition of sustainability as a balance between a pull towards efficiency on the one hand and a pull towards resilience on the other hand.  The theoretical basis of this view of sustainability comes from research in natural ecosystems, where it is found that nature always favours high resilience in order to ensure that ecosystems survive setbacks that occur naturally from time to time.  Diagrammatically, this view of sustainability can be seen in the following figure.

 004At the top of the curve is the point of optimal balance between resilience and efficiency, when sustainability is high.  Around this point is a window of viability.  When systems (both natural and human-made) get outside this window by emphasizing too much or too little efficiency, then sustainability goes down.  The problem with the human-designed money system is that it is pushing continuously towards greater efficiency (by inventing all kinds of new schemes for creating tertiary wealth), so that it is now outside the window of viability on the right hand side of the curve.  Moreover, it keeps on reinforcing its error every time a crisis occurs by propping up the existing system with public money.  The solution, according to the authors of the Club of Rome report, is to increase resilience by creating what they call “an ecosystem of complementary currencies” in which financial transactions are made without using the national currency.

Reform of the Money System

The problem with the money system is explained conceptually above as a fundamental flaw in design, but in practice the way it works against sustainability is more obvious.  The money system acts as a large scale unconscious programming tool that encourages aggressive competitive human behaviour where little or no thought is given to the sustainability of the system as a whole.  Self-interest is at the top of the agenda and the future of coming generations can go hang!

All of the money created as debt by the private banks requires continuous expansion of the economy so that money can be earned to pay back the debt plus interest.  All of that new money stays in the system causing it to grow continuously.  Individuals, businesses and government struggle to out-compete each other in order to pay down debt.  Natural resources are used up, pollution is allowed to run rampant, and human-induced climate change goes unchecked.  As if this were not bad enough, an added problem is that the system is designed to transfer money to those who already have a surplus (banks and other wealthy creditors) from those who are struggling to make a living.  This has resulted in today’s massive financial inequity, captured in the slogan that the 1% of the world’s super rich are dispossessing the 99% of the rest of us.

So how might the system be reformed?  One school of thought reflected in the work of UK reformer, James Robertson—Future Money: Breakdown or Breakthrough (2012)—would have government take over control of the money supply by giving national banks the sole responsibility for creating money so that government could spend it into circulation through services and a citizen’s income.  This approach would be combined with reform of the tax system by moving taxation away from incomes and profits towards things and activities that subtract value from common resources—like land speculation and use of environmental resources.

As mentioned above, a different approach from Robertson’s is favoured by the authors of the Club of Rome report—Money and Sustainability: The Missing Link (2012)—who argue that if lack of resilience is the problem, then efforts should be made to augment national currencies with an ecosystem of complementary currencies that would encourage resilience through the proliferation of local economies.

A similar aversion to control of the money supply by government is shared by US reformer, Thomas Greco—The End of Money and Future Civilization (2009).  Beyond the idea of local currencies he looks forward to using modern electronic communication technology to create a system of “cashless payment based upon direct credit-clearing among buyers and sellers.”

There is no doubt that reform of the money system is required if other changes to decrease dependence upon economic growth are to be effective.  Without these changes there is little likelihood that sustainability can be achieved and humanity is heading for a crash beyond anything we can currently imagine.  All things considered, I am inclined to think that the best prospects for the future will come if we, the people, push both for institutional reform of the money system by government and for creative initiatives at the local level to put new systems in place.

The Moral Dimension

I argued at the beginning of this summary and review of Economics that a key point to remember is that the economic system is a human invention and as such can be changed by human decisions.  I have outlined what the changes need to be: away from the illogical notion that economies can expand forever along an exponential growth curve; towards a redefinition of prosperity as qualitative improvement rather than quantitative expansion; incorporating reform of the money system to provide a foundation for achieving sustainability.

None of these arguments are particularly new. Variations of them have been discussed for decades.  But fundamental changes are not made, which leads one to conclude that there is a moral failure within the human condition when it comes to collective action for the common good.

Several writers reviewed in this blog have commented on this moral failure.  Grigor Yavlinsky—Realeconomik: The Hidden Cause of the Great Recession (2011)—asserts that it was moral laxity on the part of the public and regulators that allowed frauds and crooks to precipitate and profit from the worldwide economic recession of 2007-2009.  Chris Hedges—Empires of Illusion (2009)—has penned a tirade of criticism against the American populace who prefer to bask in the illusion of celebrity wonder rather than face up to the hard truths of a failed economic system and an eviscerated governmental system that can no longer protect their rights.  Bruce Nixon—A Better World Is Possible (2011)—condemns the current of global events over recent decades to be an outrage that the people allowed to happen through moral laxity, and he calls for a mass movement to “save our planet Earth.”

A Shrinking Global Pie

Two of the final writers reviewed in the Economics segment of this blog—Dambisa Moya, Winner Take All: China’s Race for Resources and What It Means for the Rest of the World (2012), and Fred Pearce, The Land Grabbers: The New Fight over Who Owns the Earth (2012)—foreshadow a global future of increasing shortages of resources with the potential for conflict as nations, corporations and individuals scramble to position themselves for best advantage.  Sadly, in this context, a Nobel Laureate economist, Paul Krugman, sets his sights on the illogical notion of a rejuvenated American economic colossus living on borrowed funds—End this Depression Now (2012).

Conclusion

What we are left with at the end of this review is the disquieting prospect of the world’s collectivity of nations continuing to jockey for position on a limited and already damaged Earth with outworn policies promoting economic growth and neglect of the global commons.  It is not a happy prospect and it is given explicit description by Jorgen Randers in his forecast of what he expects 2052 to look like—2052: A Global Forecast  for the Next Forty Years (2012).  What he expects to see forty years from now is a world more ecologically diminished and ravaged by the consequences of climate change.  Some progress will have been made on implementing necessary changes in how humans live on Earth, but not enough to avert the threat of more severe conditions in the second half of the century. 

But it does not have to be this way.  With courageous and enlightened commitment from a well-informed public in all of the world’s great nations a new zeitgeist can take hold to preserve the planet and foster a human presence based on an ethic of sufficient good for all.

Exploring the dimensions of this changed human perspective will be the focus of forthcoming posts.

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