Why there is an urgent need to transform economic thinking and practice and our responsibility to lead this transformation.
By Stewart Wallis
Antwerp, Belgium, September 2011
Fritz Schumacher was unequivocal about the evils of modern industrial society, whether capitalist, socialist or communist. He thought it guilty of ‘four great and grievous evils’
- Its vastly complicated nature
- Its continuous stimulation of, and reliance on, the deadly sins of greed, envy and avarice
- Its destruction of the content and dignity of most forms of work
- Its authoritarian character, owing to organisation in excessively large units.
He went on to say that modern industrial society should fail because, inter alia, it was depleting and polluting the earth’s resources, degrading human moral and intellectual qualities and breeding violence – a violence against nature which, at any time, could turn into violence against fellow humans.
I want to show today how true his insights were and why we are now in a situation where we face a number of systemic and interlinked crises of unimaginable proportions.
I will argue that there are ways through these crises, but only if we take responsibility ourselves for leading a transformation of our current economic system – a system which is morally and intellectually bankrupt. Fritz Schumacher’s brilliant insights and moral courage can help show us the way.
Four systemic interlinked crises
I believe that there are four systemic, interlinked problems with the current global economy – I call them the four U’s or the four horsemen of economics. Our economy is unsustainable, unfair, unstable and is making us unhappy.
Unsustainable: We are running out of planet. We face a serious risk of at least a 4 degree Celsius temperature rise compared to pre-industrial levels, with all the extinction of species and other problems that go with it. We are well on track for that. We are running out of much else as well, which is not widely known. The Millennium Ecosystem Assessment of a couple of years ago, which looked at the various life-support systems of the planet and the ecosystem services that flow from them, showed that 15 out of the 25 major ecosystems, the life support systems the whole planet depends on, are in decline or even serious decline. This includes fresh water, topsoil, pollination systems, fish, etc. So the problem is much wider than climate change alone. People haven’t grasped that, but they need to grasp it.
The fundamental problem is not population—although the growing population is not helping—but rather overconsumption. The pervasive social modelling of “I want more” provides incentives to acquire more stuff. Let’s be clear what the issues are and how fast the situation is worsening. There is a measure called the global footprint, which basically assesses whether we are living within the planet’s resources or not. Back in 1980 the population of the planet was living within just about one planet’s worth of resources, a sustainable state. In the space of 30 years we have moved to consuming 1.3 planets’ worth of resources every year. If you consider how long human beings have been on the planet, this statistic shows that in the space of just 30 years we have moved to overshooting the planet’s carrying capacity by 30 percent. The trend will become worse if we continue on the path we’re on now. If everybody in the world lived at the level we do in my country, the United Kingdom, we would need three planets. If everybody lived at the US level, we would need five planets. Because we have only one, it doesn’t work for everybody to aspire to our lifestyle. We have got to change. We are also running out of scarce materials, not just ecosystems. Aside from oil, look at the mineral shortages we face. The discovery and extraction rates can’t keep up with the consumption rate, which inevitably leads to wider scarcities or ballooning prices.
Unfair: The second major problem is illustrated by growing inequality, and the two are systemic and linked. Here I think people tend not to be aware of how fast this has changed. At the beginning of the twentieth century the richest 20 percent on the planet were between five and seven times richer than the poorest 20 percent. At the end of the twentieth century, the ratio had moved to 75 to 1. A dramatic change. A book I highly recommend to you, The Spirit Level by Richard Wilkinson and Kate Pickett, shows convincingly that the biggest driver of the social ills we face isn’t poverty per se, isn’t necessarily even unemployment although that is a major factor. It is inequality. The degree of inequality in a country corresponds closely to all sorts of social ills within that country, from the prison population to the number of unwanted teenage pregnancies to drug use. In the USA, 80% of the new wealth created between 1980 and 2005 went to not the top 50% of the population, not to the top 25%, not even the top 10%, but unbelievably to the top 1%
Economists used to talk about wealth “trickling down” to the poorest as the economy grew. What we are seeing now is wealth being “hoovered up” from all sections of society to the very rich.
Unstable: We need our economic systems to be both resilient and efficient, the way ecosystems are. Economics is terribly bad on resilience, which it does not have easy ways of measuring. Because we have designed our economic systems only for efficiency, we have minimized safety nets, buffers, and firewalls. As a result, we have systems that are neither efficient nor resilient because they keep on collapsing. For example, the subprime crisis in the US housing market spread throughout the world and nearly brought down the banking system. There is no resilience built into the system. You can see the same thing happening with currency crashes in Ireland and Greece. All across the world the frequency of unstable events is increasing.
Do you know why San Francisco burned down in 1906? Before 1906 all the hydrants in a city were filled from one place; they were all connected by pipes. Water in one central place flowed through to the different tanks. If there was a fire on Post Street, the water was right there. A cost-effective design. The trouble is that when an earthquake comes along, the pipes rupture, the water flows out of the system, and fire spreads through the city. Now each tank in a city is filled separately. We need to design not only for efficiency but for resilience as well.
Unhappiness: As Bill McKibben beautifully said, “More and better are parting company; more income is not equalling better lives anymore.” Furthermore, well-being is declining in many of the so-called developed countries. What I think most of us don’t realize is that mental health problems are increasing rapidly in many places. In “advanced” English-speaking countries, it is now reckoned that close to one out of four people is suffering from some kind of mental health problem or illness. We are not happy people.
Putting all four problems together, it is clear that we are running faster and faster in the direction of unsustainability. We are burning up the planet, we are causing huge instability and inequality (with all the associated social problems), and we are not making ourselves any happier—if anything, less happy. Isn’t that stupid? Moreover, and I don’t want to make you feel too gloomy, but to add just a little bit more gloom, these problems are interconnected.
About five years ago we calculated how much the global economy would need to go up if those who are now living on one dollar a day were to have an additional dollar. You need to raise the GDP of the whole world by $166 a day to in order to add one more dollar for each person now earning one dollar a day. It’s ecologically impossible to keep doing that. If you want to have everybody on the planet earning $1000 a year, which is $3 a day, and you keep global income distribution as it is and keep the resource intensity of output as it is, you need fifteen planets’ worth of resources in order for everybody in the world to make $1000 a year. We haven’t got fifteen planets. So the need for transition is overwhelmingly clear when you start looking at these simple facts that can be figured out on a slip of paper.
The Underlying Causes
Let’s look at the underlying causes of our predicament. I believe that much of economics, as it is now taught and practiced, is both intellectually and morally bankrupt. That’s a strong statement for me to make, but I think this is much truer for economics than for many other disciplines. So much of what we base our thinking on are old myths and half-truths in addition to some new myths that have developed. The renowned economist Maynard Keynes said, “Practical men who believe themselves exempt from any intellectual influences are usually the slaves of some defunct economist.” I think that statement applies to many politicians and leaders today.
There are three pervasive economic myths that have been around for a long time. The first is that markets are fair. Markets do not provide the right outcomes for the benefit of the most people. Sometimes this myth is linked to the idea of “the invisible hand.” Well, Adam Smith did mention that invisible hand once in The Wealth of Nations when he was talking about a bakery. But the situation on which he predicated it was that there were large numbers of buyers and sellers, none of whom could influence the price and furthermore that those actors were behaving in a moral way. Now neither of these assumptions applies. We see huge concentrations of power in many markets. There are four or five companies that control 80 to 90 percent of the world grain market; the same is true for numerous other markets. And look at the purchasing side: do people have equal purchasing rights? No, they don’t. The richest 1 percent of the people in the world earn as much as the poorest 57 percent. That doesn’t come close to resembling a level playing field.
What happens to markets where power balances aren’t equal? It’s fairly simple. If you go into a market with more power than the other players, you don’t end up with the same amount of power but rather with even more power. The idea of self-levelling simply doesn’t apply. We need to remember that Adam Smith also wrote The Theory of Moral Sentiment in which he argued that markets work only if the actors are moral—and of course they’re not.
Now, let me be clear. I am pro-markets; I am pro-profits and pro-companies. I think they play a critical role. But markets and companies are social and political entities we have created, not some mysterious black box. They need to be managed by us. I certainly don’t recommend a planned market like the Soviet Union’s, but I do believe that we need to start managing markets for the wider good. Environmentalist and energy-efficiency expert Amory Lovins put it very well when he said, “Markets make a good servant, a poor master, and an even worse religion.” What we have now are markets as religion, and let’s not be surprised that we are suffering the consequences.
The second of the three myths is that prices tell the truth. Prices don’t tell either the social or the environmental truth. Øystein Dahle, vice-president of Exxon Mobil from 1985 to 1995, said: “[Communism] collapsed because it didn’t allow prices to tell the economic truth. Capitalism will collapse because it doesn’t allow prices to tell the ecological truth.” At the moment, prices don’t tell the ecological truth at all, and in a whole range of cases they don’t tell the social truth either.
The third myth is the one I’ve already touched on—that more income equals more happiness. For many people in the world it does not. It probably holds true only if you’re poor.
The new myth is that we can continue growing forever. Economist and systems theorist Kenneth Boulding said, “Anybody who believes that we can have infinite growth in a finite world is either a madman or an economist.” What he perhaps should have added was that there are quite a few who fall into both categories. Present company excepted of course. Much of economics is morally and intellectually bankrupt because so many people cling to the old myths. Clearly, it suits the most powerful people to keep perpetuating these myths. But it’s important for us to know that they are not valid; otherwise we won’t tackle the resulting problems effectively.
Most of the philosophical underpinnings throughout much of human history are based on two types of view. (And forgive me for giving short shrift to a big subject for lack of time.) There are the utility theories of Jeremy Bentham and others that promote the maximum benefit for the maximum good, and don’t worry about those who are left behind. This has been the prevalent attitude in economics. But many in this room, including me, identify much more strongly with the individual-rights-based view that we each have a whole series of rights. The trouble with the individual-rights-based approach—and there are many different variations from Kant to John Rawls—is that it doesn’t fully apply anymore. We might individually be acting ethically and according to our rights, but if the collective outcome is that we consume more than our fair share of existing resources at the expense of other people on the planet or we consume resources that then are not available to the next generations, this is not moral behaviour. Thus, we don’t even have a common moral framework anymore, with the result that our operating systems, philosophically and economically, are broken. It’s critical that we rebuild them, because without them we won’t get where we need to go.
I’ll end this part on economic myths by telling you what President Clinton should have said instead of “It’s the economy, stupid.” He should have said, “It’s the economy that’s stupid, stupid.”
A Great Transition
First, let us be clear what type of economy we should be trying to build. Let’s dream a bit, because it is possible to make some dreams come true.
We need an economy which has, as its main goal, to improve human needs, not wants. This economy needs to create and support sufficient good jobs and good work, and to do so in a way that is much more equitable – both between peoples alive now and between current and future generations. It needs to be an economy that recognises that it is but a subset of the ecosystem and which therefore works within planetary limits. Perhaps above all though, it needs to be an economy constructed with a bio-centric view of the world, not an anthropocentric one. We need to move from being consumers to stewards. Such an economy must also factor in the spiritual, the aesthetic and the symbolic.
Dream-on say most economists. Many economists believe that we will solve the environmental limits and climate change problems by human ingenuity and technology – heroic technological advances and social changes are needed for this to happen – neither facts nor human history back up their thesis. Others see an unsolvable problem – carrying on as we are is totally unsustainable, but putting the brakes on consumption will throw millions out of work, and cause further great recessions!
We are the New Economics Foundation – nef – believe that this latter problem is solvable. It is possible to live within planetary limits and create enough good jobs for all. We are building an economic model that demonstrates this. But to make it happen will require a transformation of our current economic thinking and practice. A Great Transition.
What does this mean? It means starting to measure, at the national level, the real goals of society. We are nef, amongst others, have played a role in getting the current British Government to commit to measuring national well-being.
It means a shift in societal values – including from being consumers to stewards. It means radically changing incentive systems, regulation and taxation systems. It means governments starting to ensure that markets are our servants, not our masters. It means reforming the financial and banking systems to ones that are stable, fair and socially useful. It means stopping the creation of money by commercial banks for non-productive and speculative purposes. It means Governments ensuring much greater equity within societies and much fairer distribution of not just incomes, but wealth, land, natural resources and time. It means companies moving from a prime purpose to make money for shareholders to ones which have a wider social purpose benefiting a wider group of stakeholders and which need to make more money to achieve this. It means much greater devolution of economic power and activity to the local level and many of us becoming food growers and renewable energy producers, whether individually or communally.
It means radically rethinking economics. For example, the productivity function needs to move from ‘measuring returns to financial capital’ to creating maximum well-being per scarce unit of national resource.
How will all this happen? It will happen if enough of us start to live differently; to buy differently, and above all, demand that our politicians change the ‘rules of the game’ and the incentive structures. At the minute the problem is that we are still playing our different instruments to different scores in different orchestras. We need to start playing our different instruments to one broad score in one orchestra. If we fail to get our voices heard and the necessary changes made then the world is heading for disaster of one kind or another. Perhaps those disasters will bring people to their senses, but they could equally do the opposite.
We at the New Economics Foundation can provide much of the ‘what needs doing’, but we cannot make it a reality on our own. There is a fearsome responsibility resting on all of us that have been inspired by Fritz Schumacher’s work and life. We cannot say we did not understand. His insights, 100 years after his birth, are like a lighthouse illuminating the path forward. We need to draw on his wisdom and courage and together follow this path.