What Does a Better Economy Look Like?

SUBHEAD: A book review - "Prosperity Without Growth: Economics for a Finite Planet". And, can we have it? By George Mobus on 16 December 2010 in Question Everything - (http://questioneverything.typepad.com/question_everything/2010/12/what-does-a-better-economy-look-like.html) Image above: Woodworking shop of Andrew Lunn where he makes custom saws. From (http://woodtalkonline.com/blog/35/entry-721-woodworking-spotlight-andrew-lunn/).

We are currently stuck in the zeitgeist that holds prosperity can only come with growth. Growth is defined as the period-to-period increase in Gross Domestic Product (GDP). The question is: Is it true that prosperity only comes from growth in economic output (production of wealth)? Or might there be some other form of economic activity able to sustain a sense of well-being, prosperity, that is not dependent on wealth production in the sense we generally think of it? These are the key issues that Tim Jackson is addressing.

Every living thing starts out small and grows larger, that is, increases in biomass. They grow until either they are bounded from without by things like competition for resources, or from within by growth regulation mechanisms. The latter evolved within individual metabolic regulatory subsystems to prevent runaway expansion. Outside of individuals, say at the population level, we see no such regulation as a rule, because these systems invariably are limited by resource access restrictions.

Either other species compete for the same resources, or consider members of the population as a resource (predation). Even so there have evolved limited forms of self-regulation at the level of ecosystems that are mature and at what is called the climax state. One might also argue that there are some forms of population self-regulation as when some species demonstrate infertility increases under stress from increased population density.

Evolution provided these regulatory mechanisms where needed simply because unlimited growth would eventually destroy life. The artificial case of yeast fermenting sugars to produce alcohol in wine is a case in point. As yeast life goes, they are likely quite happy with their situation at first. Seemingly all the sugar they could ever possibly want to consume. They happily bud off offspring who proceed to gobble up sugar. At first the concentration of alcohol, an excretion by the yeast, is minimal, more of an annoyance than a threat. But then the miracle of compound interest, or rather exponential growth, produces a completely different end. With nowhere left to excrete their wastes (for our happy imbibing) and no more sugar to eat, they all die and sink to the bottom of the barrel. Poor yeasts.

Cancer is another case where runaway growth causes death. This time it is because of a failure of the internal regulation mechanisms that allow cells to proliferate and rob healthy tissues of their nutrients. Any biological system in which the constraints have been removed will do what it is programmed to do and attempt to grow, consuming necessary resources and excreting waste products. Exuberant growth is often taken as a sign of health in the young (children or jungles). We have a word for healthy growth. It is called flourishing. If a population grows we tend to think of the individuals as flourishing. The same applies to us humans. We have pockets, geographical areas, where populations have and continue to flourish. And, apparently without constraint.

Jackson, Economics Commissioner on the Sustainable Development Commission in the UK and Professor of Sustainable Development at the University of Surrey, has tackled what may be the toughest problem of our age. The human economy represents a biological system where external constraints seemed to have been removed by technology and where no internal self-regulation mechanism is in place to bring growth to a halt once the population size and consumption rate per individual reached the limits of the planet's ability to provide. We find ourselves facing the same conditions that the yeast faced. I wonder if the yeast, toward the end, kept thinking that surely someone will discover a new source of sugar, and somehow we can get rid of this noxious waste product. Oh wait. Yeast don't think, as far as we know.

The problem Jackson tackled, summed up in the title, is this: Is it possible to have something (an economy) that we all could agree felt like prosperity but would not be growing in its size and the throughput of finite natural resources? I won't go so far as to say he has definitively found an answer. There are still many unanswered questions. But he certainly hits on the right aspects of the problem and that has to be a first step in finding a solution (if one exists).

To be fair, Jackson does outline the steps to a possibly feasible solution in his last several chapters (see below). That work is generally based on Herman Daly's notions of a steady state economy (Daly wrote one of the four forewords). Jackson's thesis summed thusly:

"An economy predicated on the perpetual expansion of debt-driven materialistic consumption is unsustainable ecologically, problematic socially and unstable economically... Changing this requires the development of a new macro-economics for sustainability...: an economic engine that doesn't rely for its stability on relentless consumption growth and expanding material throughput. Building that new framework is an urgent priority."

The First Problem — Limits to Growth

Growth is linked to human acquisitiveness. On the face of it we seem to like to get stuff. To consume, or not to consume? That is the question.

The argument for growth and consumeristic behavior is that jobs ultimately depend on them. If customers don't buy goods and services, and use them up over time (so they will need perpetual replacement), then there will be no need for companies to produce them. Then there will be no need for employees. And then the people who might have earned a wage with which to buy goods and services can no longer do so. Which puts us right at the beginning of this paragraph. A vicious cycle, according to neoclassical economics.

Or is it?

What about the argument that there are natural, real physical limits? Can GDP grow indefinitely into the far future? Proponents of growth claim that it will be necessary if for no other reason than to help developing countries rise out of subsistence living conditions and enjoy the benefits of a materially advanced economy. They argue, too, that growth is actually good for the environment, pointing to instances where increased wealth per capita has resulted in more of that wealth being routed toward mitigation of environmental degradations. Yet it is now becoming quite clear that two things are overtaking the production of wealth. One is resource depletion; even supposed renewable resources like soils and forests are being depleted because the rate of extraction far exceeds the rate of renewal. The second is the rising accumulation of non-recyclable and toxic wastes, again a problem due to the rate of production versus the rate at which nature could absorb and detoxify them.

Jackson examines this question and also analyzes the typical economist response that GDP, in dollars, can decouple from material throughput (the production that crashes into those limits). Economists measure things in dollars, not in mass, density, or joules of energy consumed. And they are quick to point out that for the last several decades of the 20th century the ratio of energy or materials to GDP has been in decline, suggesting that the efficiency of the economy has been going up. The problem with this argument is that the denominator (GDP) has indeed been rising faster than the measures in the numerator, but because the denominator is greatly inflated by the fact that most of the expansion has come from the so-called financial sector. Every time banks created credit, every time house prices 'appreciated', every time stocks or bonds were sold on speculation that they would be worth more in the future, the GDP rose. Worse yet, every time expenses for a funeral for an American service person killed in one of our two wars were paid, the GDP rose. The government's purchases of goods and services aimed at purely defensive activities, or recovering from natural disasters, counts toward GDP.

The argument that resource intensity (the ratio of resource to GDP) has gone down, indicating that the money economy is decoupling from the material economy, falls to shambles on this account alone. But Jackson goes further. He notes that the decoupling that economists typically refer to is only relative. In order to avoid the limits (well too late for that) we have to decouple absolutely. That means that at a steady-state throughput that is 'coupled' appropriately with nature's ability to supply resources and absorb wastes the GDP can still rise without limits. I suppose that means that when we are all bankers or Wall Street brokers we can all enjoy rising bonuses each year and buy houses in the Hamptons. Oh wait! Building those houses takes resources. Feeding all of those bankers means somebody has to run the farms -- maybe robot farmers. As Jackson points out there are many logical fallacies buried in the assumptions of growth. He examines some of these pointing out the various 'impossibility theorems' that attend such thinking.

We now have some real-world experience with the interplay between the real material- and energy-based economy, which continued to grow on a global basis, and the financially inflated economy. The Great Recession of 2009 demonstrated in stark relief that a growing GDP does not translate into real wealth. We are fooled into believing it because for so long we were able to purchase real goods and services with money and for most people in the developed world — the so-called middle class — their wages seemed to be increasing over time.

Jackson does an excellent job of teasing apart the interrelations between debt, income, savings, productivity, and a host of economic variables as they play out in a growth scenario.

Without specifically blaming democracy along with capitalism for the basic problem, he notes that the dynamic between these two, which many others besides myself have recognized, traps us in a downward spiral now that the limits are breached. Our political leaders depend on votes to gain power. We vote for whoever promises us the most material prosperity; in other words, whoever promises us growth of the economy. They then need to find any way necessary to keep the GDP numbers growing. One clever way to do it is to take the leashes (regulations) off the financial sector and allow them to expand their contribution to GDP by selling increasingly risky instruments. If there has been any 'decoupling' going on it is between the GDP as a measure of wealth and our true well-being. The growing disparity between the really wealthy (in dollars) and the poor, along with the decline of the middle class should provide the strongest evidence of this fact.

This is another impossibility theorem — a double bind. We want the freedoms afforded by both democratic politics and free market capitalism, but at, and beyond, the physical limits these very freedoms threaten to cause us all to suffer the greatest constraints imaginable in the near future. It is a conundrum and a paradox. How can maximum personal freedom lead to the minimum ability to exercise that nominal freedom? This is perhaps the most difficult conundrum for the general public to get their heads around. They will deny it. They will ask why now? They will, in general, relegate the notion to the doom-and-gloom crowd (in the derogatory sense). They will not accept that this generation of human beings will be the first to experience the beginning of restrictions on freedoms.

Of course, my own view is that if things get really bad in a worst-case scenario they will be more willing to accept an authoritarian solution. History has shown that this is a common response to clear crises.

A Way Out? A Way Forward?

Drawing from a variety of disciplines and traditions, Jackson sets about trying to envision alternative definitions of prosperity to the prevail consumeristic-growth version so operative in the world today. Borrowing a framework for categorizing concepts of prosperity from Amartya Sen (1984, “The living standard”, Oxford Economic Papers 36, 74-90) he examines the ideas of prosperity as 1) opulence; 2) utility; and 3) capabilities for flourishing. Opulence captures the prevailing notion that prosperity is about material wealth. Little more need be said about this and Jackson spends little time on it as he had previously made the case that it is a huge mistake to think so. Utility requires a little more unpacking. This is the classical economics version of why a rational agent decides on this purchase versus that one. The rational agent supposedly gets more marginal utility (whatever that is) from the first, according to the theory. But Jackson rapidly dispatches this idea as he points out how flawed utility is if it is meant to actually be some kind of measure of “satisfaction” or “happiness”. There is a large and growing body of literature both in and out of the burgeoning field of behavioral economics and psychology to show that neither agents are rational nor are they necessarily happy with their purchasing decisions; at least they are not as happy as they would have predicted they would be (a very readable book on this is Daniel Gilbert's “Stumbling on Happiness”, 2006, Alfred Knopf, New A. York).

That leaves prosperity as the capacity for flourishing. Here Jackson explains that what makes people truly happy and well off is the ability to meet their physical and social needs, with or without physical opulence. This version is near and dear to my heart. I have explored what this means in practical terms in a series of blog postings starting with “What is a feasible living situation for future humans” (http://questioneverything.typepad.com/question_everything/2010/02/what-is-a-feasible-living-situation-for-future-humans.html).

I started with the requirement that people need to be able to lead lives in which they are first and foremost able to achieve what Abraham Maslow called self-actualization, the top level in his hierarchy of needs (physical needs being at the base level - see: http://en.wikipedia.org/wiki/Self-actualization). This state of self fulfillment, what we can more reasonably consider as happiness, is possible, according to Maslow, when all lower-level needs are met and it doesn't matter how in terms of having material goods. One does not require the latest product from Apple Computers in order to achieve self-actualization. Indeed there is evidence that the counter is true: that if you think you need the latest such product to be happy then you are probably not a candidate for being self-actualized!

A sense of prosperity, then, is tied to a sense of self-worth and actualization even if you have to do a lot of manual labor to sustain a capacity for flourishing (being well and producing healthy offspring that you can readily raise to adulthood, should you choose). This really makes sense. For the vast majority of human history most people have flourished in this sense. Otherwise, we wouldn't even be here. The problem is that we have flourished all too well.

We have gotten into the habit of unbounded growth not recognizing that it was made possible by virtue of our continuing to find and exploit new and better sources of energy. But beware. That we have succeeded doing this in the past is no guarantee that we will do so in the future. Jackson addresses the sad reality that many of us have been cautioning about for years. So-called alternative energy sources (e.g. solar and wind), while likely necessary in the age of depleting fossil fuels, will never provide the kind of energy density (power) our modern industrial economy thrives on. This bodes ill for thinking that the future economy (and population) will be anything like the current (dying) one has been.

The answer to the central question depends on how we construct an economic system that recognizes the fallacy of growth, especially based on increasing consumerism, and works within the limits of nature. That is no mean task. Getting to this core issue Jackson dispatches a few widely held but fallacious notions about restoring an economy based on growth and consumption (programs every current politician and media talking head seem to agree needs to be done), even one that consumes green products. Growth, no matter how you cut it is a blind alley for sustainable prosperity.

So what would a prosperous, sustainable economy look like? For this vision Jackson turns rightly, in my opinion, to the field of ecological economics, which models the human economy using principles from systems ecology. The central point is that nature figured out how to construct sustainable economies long ago through the process of evolution, natural selection. Ecological economists seek to mirror this design pattern in human economies.

A major concern for ecological economics is how to match the inputs to the human economy to the resource production rate of nature and the outputs from the human economy to the uptake and detoxification rates of natural sinks. Right now these are horribly out of correspondence. But such a matching is no easy task. Indeed, some of us claim it is impossible with the size population we have now (on the planet) at consumption or throughput rates that come even a little bit close to those needed to allow every human the capacity to flourish.

But also, in my opinion, Jackson doesn't go far enough. Owing to some dissatisfaction with ecological economics getting hung up on ‘pricing nature's services’, some folk have spun off a newer version of economics based on ecology (most of this work started with Howard T. Odum's work in systems ecology applied to economics; (http://en.wikipedia.org/wiki/Systems_ecology).

Charles A. S. Hall (who was a student of H. T. Odum's) has organized a group around the term ‘biophysical economics’ (http://web.mac.com/biophysicalecon/iWeb/Site/Welcome.html). The central tenet of this approach is that energy flows are the key to understanding economics better than any other physical phenomenon. This follows from the same tenet in systems ecology that investigates the complex interrelationships between all species in an ecological system on the basis of who eats whom, when, etc. as well as where does the driving energy inputs come from (primary producers use sunlight) to where does the final waste heat dissipate to.

Jackson acknowledges the special role of energy flow to some degree, but most ecology-aware economists are still too tied to the kind of thinking from neoclassical economics where they picture energy as just another kind of commodity. Unfortunately, the Second Law of Thermodynamics precludes treating energy in this way. That is another, and longer story. So I will leave it at that. The real point is that until economists understand the primacy of energy flow and real work there is little hope of finding an economics that is truly ecological in the sense that Jackson and many others seek.

Is This Possible???

What I like about this book is that Jackson has taken the arguments about the failures of capitalism, consumerism, and democracy much further than any other author I have read (there certainly may be others out there that have gone as far or further). He doesn't just wave his arms about these problems, he dissects the arguments (both pro and con) and derives supportable positions from the evidence and logic. I also like that he at least tackles the solutions head on in his closing chapters.

He assembles a myriad of arguments along the line of: if this is the problem then the way to solve it is... What I'm afraid I don't like (but this isn't really Jackson's fault nor speaks to any shortcomings) is that like so many authors before him the solutions he suggest are indeed arm waving. Invariably these arguments boil down to: If we would only change our minds/habits/ways, etc. then we could solve these problems. He lays out a perfectly reasonable argument for how to construct an alternative economy, but it depends on people redefining, in their own minds, what prosperity really means.

It depends on politicians, to some degree, becoming altruistic and stopping the worry about how to win the next election. It depends on one hell of a lot of attitude adjustment, especially among the portions of the population that are most likely incapable of adjusting (see below). Logically we could transition to an ecological economy. A number of people have worked out a lot of the details. The problem is that we, as a species, really aren't logical.

Alas, we humans are very good at solving the problem of how can we organize matter in such a way that we maximize the current flow of energy to support our desires for stuff. We are a clever species. In fact, if I had my say we would be called Homo calidus, man the clever, instead of Homo sapiens, man the wise. Collectively and individually I don't think we are very wise at all. Wise thinking is strategic, that is long-term and wide area, thinking. It is systemic thinking. And it is moral thinking — what is the best for the greatest number? Very few of we humans display this kind of thinking. And those that do are so vastly outnumbered by those who can't even comprehend what that means that their voices are drowned out by the clamor for lower taxes and higher pay by the masses.

This is why, in the end, I am a pessimist when it comes to ideas like Jackson's thoughts about a transition to a sustainable economy that provides the capacity to flourish. Don't get me wrong. I think there will be such a transition, but only after a major and probably very painful calamity and only if the wiser voices succeed in surviving and positioning themselves to have more influence in some future time. Big ifs probably.

In spite of my doubts, I still think Jackson's book is worth the read. If nothing else it will get you thinking and with any luck you and other readers will find ways to prove my doubts and cynicism unfounded. That would be a great outcome. I would very happily eat crow!


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