Wednesday, June 9, 2010

Capitalism and the stable state

Problem: economic growth + population growth + finite resources = crisis, somewhere along the line

Solution: reduce the aggregate requirement for economic growth by enabling businesses to profit from resource reduction instead of top line growth

As any school-kid knows, capitalism rewards individuals for making and selling things. To form capital and reward entrepreneurs there must be constant economic expansion. Business schools teach that growth is an elixir for turning ambition into production and ultimately wealth. This is so widely accepted it is part of our identity. Meanwhile, the human population continues to grow in all but the richest countries, while demand for natural resources is growing so fast that some are bound to run out. What gives?

If the problem looks like this:

Economic growth + population growth + finite resources = crisis
then the next question must be what can change. Natural resources are finite, no arguing with that. Population growth is changeable, but usually in response to multiple circumstances or force and out of reach for any (democratic) leader. That leaves economic growth.

So far things have not been too bad. Environmental damage must be seen in the context of the billions of people lifted out of poverty. Future generations will expect the same, rich and poor alike.

We may one day find the marginal cost of producing certain raw materials too high to justify using them in the same way. For example, oil may one day become too expensive for people to run petrol cars and the rare earth metal neodymium too expensive for people to buy electric cars (good news for bicycle makers) or to make batteries for throw away gadgets. In both cases, market forces will simply abandon the unsustainable and we will move on, with any depleted resources being consigned to history with the dodo.

This is fine as long as the depletions don’t create “systemic risk” in the way we live and feed ourselves. Assuming this is not the case, or that ecologists will tell when it happens (ahem), the problem remains that as each resource is depleted we will have to settle for lower economic growth or fewer people, or both. Logically, this is inevitable. The timing and manner of arrival of the change are anyone’s guess but may depend on the pace of technology and the impact that human activity and the environment have on each other. One hopes the transition will be peaceful and slow.

To help make it so, there is one part of the equation worth looking at again: the need for economic growth. The movement for Steady State Economics, advocated by the New Economics Foundation (nef) and inspired by former World Bank economist Herman Daly, are chief proponents. A report called "Growth Isn't Possible" by the nef policy director Andrew Simms proposes switching to a non-growth economy. Borrowing from the world of ecology, he rejects the Darwinian analogy of economic competition in favour of more stable systems found in nature, such as symbiosis, collaboration, co-evolution and diversity.

He says the result could be called “dynamic equilibrium”, in which economic effort is directed at being better instead of bigger, collaborative not combative, making the same with fewer resources instead of always making more.

Sounds great, but is it a bit utopian?

Simms believes that some fundamental assumptions about the economy could, if we really wanted, be changed. These include the idea that public finances should assume economic growth, that stock markets need companies to be progressively more profitable, and that our credit economy needs economic growth to support interest payments. “These things are the result of cultural and political choices, which can, if necessary, be changed in the light of necessary and urgent circumstances,” he writes.

His suggestions on how to achieve this are not always compelling. Simms argues that quantitative easing and bank bail-outs prove that governments can create money anytime; a view that takes no account of inflation. Similarly, his notions that public services could be co-produced with the public, or that highly progressive taxation would lessen the need for growth-oriented saving products, are way too optimistic about human nature. His point, recycled from Herman Daly, that a non-growth economy could achieve full employment by replacing machines with human labour is plain scary. Dark satanic mills, anyone?

Some ideas, though, are worth dwelling on. A shorter working week to tackle overwork and unemployment would be a relatively small cultural change and would free up time for people to “do things for each other, and reduce the need for paid services”. It might not work for everyone but as a principle, who wouldn't want to work less and chat more? Switching some business activity into alternative forms of ownership, such as mutuals and co-operatives, would also be consistent with a no- or low-growth outcome. Finally, alternatives to normal money could be explored for different types of exchange, such as time-banks or non-interest loans for public infrastructure projects.

While some of these ideas might work, I struggle to imagine a world without economic growth. There is no serious alternative yet to our growth-led economic infrastructure and no better mass motivation for putting food on other people’s tables than profit. I could imagine, however, a world with less growth or in which profits could be earned other than by consumption pumping.

Perhaps we could use the tax system to reward entrepreneurs for saving resources as much as from exploiting them, or create financial incentives to generate the same output with less material.

Business efficiencies, for example in manufacturing, are normally captured by producing more for less, the more the merrier. Since businesses concentrate on sales as well as margin growth, efficiency gains alone cannot be relied on to save the planet.

Reversing this means overturning some common assumptions. People might be rewarded for what they don’t use instead of paying for what they do; just as electric cars in London don’t pay the congestion charge, consumers could pay more VAT on goods with non-biodegradable packaging than on goods without, and so on. Or corporate tax rates could be linked to the volume of raw materials consumed or pollution emitted, and taxes at large companies linked to growth as well as profit; both of these would reward innovations that reduce resource consumption and encourage savers to invest in industries with the most potential to cut their inputs.

Admittedly, these interventions are only fiddling with the edges but they might start to change attitudes to growth, without anyone going back to the mills.

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