Economics for the twenty-first century

“Economists who thought they could analyse the economic world as if it were separate from the physical world may have a hard time finding work in the years ahead,” says Christopher Flavin, president of the Worldwatch Institute. In the Washington-based environmental think-tank’s State of the World 2008 report, focusing on progress toward a sustainable society, Flavin warns that the economic model that grew out of the late-eighteenth-century Industrial Revolution will not survive the twenty-first century.

“In a physically constrained world,” he writes, “material growth cannot continue indefinitely, and when that growth is exponential—and involves mega-countries like China and India—the limits are reached more abruptly and catastrophically than even the best scientists are able to predict.” At a time when, in Flavin’s words, “the ecological systems that underpin the global economy are under extraordinary stress” – when water tables are falling, fisheries are collapsing and oil prices are rising – continued human progress “now depends on an economic transformation that is more profound than any seen in the last century”.

What’s required, he says, is a shift to “the emerging field of sustainable economics, which embraces many of the principles of market economics, including its ability to allocate scarce resources”; simultaneously, however, sustainable economics explicitly recognises “that the human economy is but a part of the larger global ecosystem”. This new field, Flavin adds, “goes on to analyse the economic limits imposed by the physical world, and proposes a range of innovative ideas for bringing the economy into balance with the global ecosystem.”

Flavin and his report-writing colleagues – expert authors who examine topics such as energy, industrial production, agriculture, species conservation, property regimes, investing for sustainability, and measuring wealth and well-being – came away from the 2008 project “with a strong sense that something large, perhaps even revolutionary, is struggling to be born, as business leaders, investors, politicians and the general public create the architecture of sustainable economics”.

Responding to climate change and other environmental problems, the Worldwatch document – subtitled “Ideas and Opportunities for Sustainable Economies” – asserts that pioneering entrepreneurs, NGOs and governments are testing out a range of innovations that may well provide opportunities for long-term prosperity. They include the billions of US dollars invested in renewable energy; the explosive growth in carbon trading; breakthrough environment-friendly production initiatives (and shifts in attitude) by major corporations; the plethora of new environmental and energy hedge funds; the investment of venture capital in “clean technology”; and a lengthening list of banks endorsing the Equator Principles. Launched in 2003, the principles are a banking industry framework for addressing environmental and social risks in project financing.

“Once regarded as irrelevant to economic activity,” say Worldwatch project co-directors Gary Gardner and Thomas Prugh, “environmental problems are drastically rewriting the rules for business, investors and consumers, affecting over $100 billion in annual capital flows.”

Just as some scientists have suggested that the Holocene epoch – encompassing all of recorded human history – has ended and that mankind is now in a new time period, the Anthropocene — in which human industrial processes have transformed the planet on a colossal scale — Gardner and Prugh see a similar economic impact. Radical physical and philosophical differences in the world today “make key features of conventional economics dysfunctional for the twenty-first century” and “signal the close of one economic era and the need for a new economic beginning”, they contend.

So, what has changed? Over the last 200 years, in their view: “humanity’s relationship to the natural world, the understanding of sources of wealth and the purpose of economies, and the evolution of markets, governments and individuals as economic actors”. The world has been operating with an outdated economic blueprint, says Worldwatch. The “assumed independence of economic activity from nature, always illusory, is simply no longer credible,” write Gardner and Prugh, adding that “resource scarcity has made ‘natural capital’ an increasingly vital consideration in economic advance.” Ocean fish, forests, water and other key resources long relied on all are dwindling.

In their chapter on “seeding the sustainable economy”, Gardner and Prugh take issue with other shaky, “outdated tenets”: that growth ought to be the primary goal of an economy; that markets are always superior to government spending and policies as economic tools; and that self-interested individual actions are the economic motivator behind positive collective outcomes.

Despite “cornucopian prosperity and opportunity for people in dozens of countries” – on a planet where 40% of the population is racked by poverty – “troubling numbers began to appear in environmental and societal balance sheets” as the twentieth century wore on. These imbalances, the writers argue, suggest that “what is called ‘economic growth’ entails significant losses – of species, healthy ecosystems and a stable climate, for instance”.

Global economic stability, say Gardner and Prugh, is in danger of being undermined by the liabilities of modern economics. Such “self-subversion”, they add, is illustrated by three issues: climate change, ecosystem degradation and wealth inequality. The steep cost of mitigating climate change by reducing greenhouse-gas emissions — estimated at around 1% of gross world product (GWP), or US$650 billion in 2007 alone – will be a bargain compared with the cost of doing nothing. Worldwatch cites former World Bank chief economist Nicholas Stern’s 2006 report for the British government, in which Stern concluded that inaction could dampen global economic output by 5 to 20% annually over the course of the twenty-first century.

On degradation of ecosystems, State of the World 2008 notes that “comprehensive data on the economic value of ecosystem services are scarce”, but the emerging research picture suggests that “these services are of major, though often hidden, economic importance”. Loss of forests, mineral and energy sources; depletion of fisheries; pollution of air and water; and a decline in biodiversity all carry economic costs.

“A lack of hard data regarding the actual value of the services of particular ecosystems,” says the report, “hampers the incorporation of value into business and government decision making.” Also, the authors say, there is little incentive for involved companies or individuals to care for a species or ecosystem whose benefits accrue to society as a whole, rather than to themselves; furthermore, “the net value of converting an ecosystem may be artificially skewed by subsidies, tax breaks and other government-sponsored incentives”.

Gardner and Prugh note that “reformist economists” are taking another look at the conventional worldview, with new thinking in such areas as economic scale, growth versus development, environmental costs in pricing, nature’s contributions, the precautionary principle, commons (public assets) management and the value of women’s work all helping to turn economic activity in “more-sustainable directions”.

“Some analysts,” they say, “believe the innovations fueling sustainable economics are spawning the sixth major wave of industrial innovation since the start of the Industrial Revolution” – surges that have stretched from the steam engine to biotechnology and information networks, and that have opened new eras of material prosperity. “The sixth wave, which taps green chemistry, bio-mimicry, industrial ecology and other sustainability innovations, offers the promise of breakthroughs in using natural wealth efficiently, wisely and equitably.”

And by using social and institutional innovations as well, “this new wave provides leadership roles for consumers and nongovernmental groups, businesses and governments”. Examples include consumer-driven “market muscle” in favour of “green” products, socially responsible investing that can reshape industries for decades to come, and governmental use of “regulatory and market-shaping powers” to move away from fossil fuels.

Gardner and Prugh, after examining ways of “seeding the sustainable economy”, reached an optimistic prognosis. “Societies worldwide stand poised to rewrite the ongoing human drama of economics with a new chapter: the sustainable wealth of nations”, they assert.

Other chapters in State of the World 2008 – written by other authors — address a range of issues of vital interest to anyone with an interest in “economies that operate within ecological boundaries to advance genuine human development” as the twenty-first century unfolds. Topics include sustainable lifestyles, the resource-use costs of meat and seafood, building a low-carbon economy, engaging communities for a sustainable world, the “parallel economy of the commons”, new approaches to trade governance and investing for sustainability. A special section on “paying for nature’s services” delves into the specific challenges of improving carbon markets, water in a sustainable economy and protecting the planet’s biological wealth.

The challenge to the earth as a whole is growing along with China and India and their carbon footprints. As Tim Jackson, professor of sustainable development at Britain’s University of Surrey puts it in the Worldwatch report: “How is it going to be possible for … one billion Indians and great numbers of Chinese (not to mention people in Africa, Latin America and the rest of southeast Asia) to achieve the standard of living taken for granted in the United States—and still ‘solve the problem’ of climate change? How can a world of finite resources and fragile environmental constraints possibly support the expectations of nine billion people in 2050 to live the lifestyle exemplified for so long by the affluent West?”

Christopher Flavin is encouraged by “how much innovation has been unleashed by the wave of concern about climate change that has broken across the world in the past year”. He notes that “innovative ideas and big money are a powerful combination—and the sums now moving in a green direction are eye-popping. Billions of dollars have been invested and pledged over the coming decade by international financial organisations such as Citigroup and Goldman Sachs, for new energy technologies.

“Both in China and the United States, ‘clean technology’ is now the third-largest sector for venture capital investment,” writes Flavin. “More momentous still are innovations such as China’s new renewable energy law and Europe’s carbon emissions trading system, which ensure that these kinds of investments will continue to flow for many years to come.”

Still, shifting to an ecological, sustainable economy “will require years of change on many levels – from classroom theory to business practice and governmental policy. … Sustainable economics will need to meet human as well as planetary needs if it is to prevail.”

“Proponents of market economics and globalisation often point to the 300 million people who have escaped from poverty since 1990—most of them in China and India,” says Flavin. “This still leaves more than a billion desperately poor people in today’s world, and the developing countries that have not yet benefited from the immense growth in the global economy over the last century are determined to close this gap in the decades ahead. … With so much to do in such a short time, efficient allocation of resources and motivating people to action are more important than ever. But twenty-first century economics must be grounded in a more realistic understanding of the physical and biological world on which we depend.”

In sum, Flavin recommends the wisdom of the physicist Albert Einstein to those in economics classrooms, corporate boardrooms and legislative chambers around the world: “We can’t solve problems by using the same kind of thinking we used when we created them.”