25 May RETHINKING THE GROWTH: THE NEED OF A NEW ECONOMY
UCLA and the Club of Rome
By Roberto Peccei.
For over 40 years, the Club of Rome is concerned with the problem of sustainability of our planet. The conclusion the famous first Club of Rome report, The Limits to Growth, reached, that the world was following an unsustainable path, was anticipatory and prophetic. Although The Limits to Growth caused much debate, after some initial interest, the message of the Club of Rome was largely ignored. Only now the message is starting to regain the attention it deserves, but we have wasted a lot of time.
Today, many people in the world understand that if we keep on the way we are heading, what people call “business as usual”, mankind will have to face enormous environmental, social and economic problems in the future. However, in truth, very few understand what must be done and what measures should be taken to avoid this situation. It is very clear that to understand mankind’s issues is not enough. Solutions have to be found and there must be the will to implement them.
It is worth reflecting on the reason why it is so hard to find a solution to the predicament in which humanity finds itself today. The Club of Rome and other like-minded organizations have been very effective to clarify the fundamental reasons why we are in this situation, which has its roots in the population growth and consumption in a finite world. The Club of Rome, and many other organizations and individuals have also been very apt to suggest practical ways to move towards sustainability through specific actions. In fact, the two most recent reports of the Club of Rome Factor 5: Transforming the Global Economy Through 80% Improvements in Resource Productivity, by Ernst von Weizsaecker et al, and The Blue Economy, by Gunter Pauli, suggest many practical ways to make the world more sustainable based on increasing efficiency and relying more on biomimicry.
But, as noted by Ian Johnson, Secretary General of the Club of Rome, what has been lacking in the Club of Rome’s work and that of others, is the development and elaboration of legal and social instruments that help linking theoretical understanding of the problem with practical actions, the whole based on a deep analysis and broad policy debates. This raises the question why it has it been so difficult to design these implementation instruments. In my opinion, the reason is very simple: It has not been possible to carry out this analytical and normative work using the current economic theory, because the underlying principle of this theory is economic growth. If one believes that the central issue today is that unrestrained population and economy growth is unsustainable in a finite world, then logically, one must develop legal and social tools that provide solutions to the predicament we are in, outside the current economic theory. What we need to progress is a new economic theory where sustainability, rather than growth, is the key concept. We still lack of this economic theory!
The world needs a paradigm shift in the economy, similar to what was experienced by physics to the dawn of the last century when quantum mechanics and special and general relativity were invented to understand new phenomena not explained by Newtonian mechanics or Maxwell’s electrodynamics. I think that economy today is poised for a similar paradigm shift. Modern economic theory is based on the principles enunciated by Adam Smith in his famous book The Wealth of Nations, 1776. Although the economy has evolved over the past 200 years, many of its fundamental concepts derive from that time. In those days, at the dawn of the industrial revolution, production capacity was limited. For that economy in which human capital was the main driver, the production of manufactured goods was synonymous with wealth creation. Then the nation-state was the basic unit, and one of Smith’s principles was that competition among nations led to economic advantages.
We live in a very different world, a world where services, rather than manufacturing, account for the bulk of economic activity. Today the economy is so globalized that the notion of nation-state economies has lost much of its meaning. In addition, financial transactions today, rather than a means for economic activity, have become an end in themselves. Given these new circumstances, it seems obvious that it would be important and necessary to reconsider the current economic theory.
However, in contrast to what happened in physics a century ago, it seems to be no sense of urgency among today economists to create a new economic theory to better reflect modern realities. A century ago, Einstein, Planck, Bohr, and many other young physicists, working in relative obscurity, modified Newtonian physics to include phenomena not explained by classical theory. We urgently need their equivalent in economics to build the new economy of the future, where natural capital is no longer an externality, and sustainability, rather than growth, is the basilar principle.
Gus Speth, a member of the Club of Rome and, until recently, dean of the School of Forestry at Yale University, has well described what features one wants this new economy to have. Let me quote what he said in this regard at the John H. Chaffee Memorial Lecture, which he presented to the Council for Science and Environment, in Washington in 2010;
“We must build what I call a “living economy” in which the first and top priority is to keep good custody of human and natural communities. It must be an economy where the goal is to sustain people and the planet, where social justice and cohesion are appreciated, and where human communities, nature and democracy flourish. His motto is care: We have to care for others, we have to care for the natural world, and we have to care for the future.” It will not be easy to build the new economy necessary for a sustainable world. One must be prepared to think boldly, clearly indicating what the objectives pursued are, and also be ready to get rid of old concepts. I would like to briefly illustrate this with an example, related to the interconnection between unemployment and economic growth. One of the difficulties of imagining an economy without growth is that, in classical economic theory, unemployment rises if there is no economic growth. This connection between growth and employment is known as Okun’s Law, named after the American economist Arthur Okun, who noticed, 50 years ago, an empirical relationship between gross industrial output (GIO) growth and changes in unemployment. In fact, there is a negative correlation between unemployment rates and GIO growth. In the United States, for example, unless the GIO grows by about (2-3) % a year, the unemployment rate grows. If there is no GIO growth, the unemployment rate goes up by 2%.
In the new economy, one must decouple unemployment growth. This is possible, but requires radical new ideas. Please, allow me again to quote what another member of the Club of Rome, Orio Giarini, says in this regard. In an article he recently wrote with others, under the title The Wealth of Nations Revisited, speaking about the new economy, these authors say:
“This requires the formulation of a new theory, not only to modify prevailing concepts. But there is no reason why one cannot formulate an economic theory based on the premise that all members of society have the right to employment, a theory which not only reaffirms the right but also presents and describes the necessary structures and processes for this to be achieved.”
In other words, in this new economy, one must strive to place the welfare of human beings ahead of good and service production. In principle, you can achieve a stable employment rate, even when there is no economic growth, if you can decouple the unemployment rate from GIO growth rate. This can happen if there is a transition to a different economy where there are more labour intense sectors, as two British economists Tim Jackson and Peter Victor recently suggested. This may occur as well (at least in some sectors) in what Gunter Pauli’s calls the Blue Economy, where one makes waste streams productive through biomimicry, creating new jobs where there were not.
A job-centred economy in a world of little or no growth is necessarily going to be very different from the current market-based economy. Its natural time scale is the productive life of human beings, rather than quarterly reports governing modern business, not to mention millisecond transactions that now appear to dominate the financial markets. In this human time scale, actions that incorporate the welfare of future generations preserving the environment are natural.
In any consideration of the future, it is very important to clearly understand what economic framework society will have. In my opinion, if we really aspire to a sustainable world, economic thinking must change radically. Consumption cannot be synonymous with wealth. Consumption increases current welfare at the expense of future welfare. Instead, wealth measures natural and social capital reserves that we are going to take for the future. If we raise the future society in an economic framework that puts human beings and nature in the first place, this will lead to sustainable scenarios for the world. Sustainability and the new economy are complementary and mutually reinforcing concepts.
Carrying out the transformations necessary to implement an economic structure based on sustainability and not growth, is a huge and very difficult task. In this sense, it is worth noting that, while it is desirable to move the whole world in this direction, it is unrealistic to think that this will happen suddenly and in the same way in different regions around the world. To move humanity towards a sustainable future, it is much more urgent to stop the growth fuelled by consumption in the developed world than in developing countries. It is also much more likely that the changes needed to move the world toward sustainability are made first in some countries or regions, where these ideas will find more fertile ground. In my opinion, in this sense, Latin America has great potential to play an exemplary role, because it is a region that is still not fully tied to a market economy based on consumption, as others, in other parts of the world, are. Will the new economy be first built on this continent? I do not know, but I eagerly hope so.