Richard Heinberg lays out what policy makers, communities, and families can do to build a new economy that operates within Earth's budget of energy and resources.
Adapting to Our New Economic Reality
The End of Growth (New Society Publishers, 2011) proposes a startling diagnosis: humanity has reached a fundamental turning point in its economic history. The expansionary trajectory of industrial civilization is colliding with non-negotiable natural limits. Richard Heinberg's latest landmark work goes to the heart of the ongoing financial crisis, explaining how and why it occurred, and what we must do to avert the worst potential outcomes.
The past three decades, and especially the past three years, have seen an explosion of discussion about alternative ways of thinking about economics. There are now at least a score of think tanks, institutes, and publications advocating fundamentally revising economic theory in view of ecological limits. Many alt-economics theorists question either the possibility or advisability of endless growth.
The fraternity of conventional economists appears to be highly resistant to these sorts of challenging new ideas. Governments everywhere accept unquestioningly the existing growth based economic paradigm, and this confers on mainstream economists a sense of power and success that makes them highly averse to self-examination and change. Therefore the likelihood of alternative economic ideas being adopted anytime soon on a grand scale would seem vanishingly small. Nevertheless, alternative thinking is still useful, because as growth ends the managers of the economy will sooner or later be forced to try other approaches, and it will be extremely important to have conceptual tools lying around that, in a crisis, could be quickly grasped and put to use.
As noted in Chapter 1, conventional economics starts with certain basic premises that are clearly, unequivocally incorrect: that the environment is a subset of the economy; that resources are infinitely substitutable; and that growth in population and consumption can continue forever.In conventional economics, natural resources like fossil fuels are treated as expendable income, when in fact they should be treated as capital, since they are subject to depletion. As many alternative economists have pointed out, if economics is to stop steering society into the ditch it has to start by reexamining these assumptions.
The following four fundamental principles must be established at the core of economic theory if economics is to have any relevance in the future:
• Growth in population and consumption rates cannot be sustained.
• Renewable resources must be consumed at rates below those of natural replenishment.
• Non-renewable resources must be consumed at declining rates (with rates of decline at least equaling rates of depletion), and recycled wherever possible.
• Wastes must be minimized, rendered non-toxic to humans and the environment, and made into “food” for natural systems or human production processes.
Further, economics must aim for a dynamic balance between efficiency (maximizing throughput) and resilience (adaptability, redundancy, diversity, and interconnectivity) — whereas today economists focus almost entirely on efficiency.
The contributions of the alternative economists (via schools of thought known as ecological economics, environmental economics, and biophysical economics) can be divided into three broad categories: critiques of existing economic system, proposals for an alternative system, and strategies for making the transition from one to the other.
In his book Prosperity Without Growth, British economist Tim Jackson writes: “During the [period since 1950] the global economy has grown more than 5 times,” and economists expect it to quadruple again by mid-century. “This extraordinary ramping up of global economic activity has no historical precedent,” according to Jackson.
It’s totally at odds with our scientific knowledge of the finite resource base and the fragile ecology on which we depend for survival.... Questioning growth is deemed to be the act of lunatics, idealists and revolutionaries. But question it we must. The idea of a non-growing economy may be an anathema to an economist. But the idea of a continually growing economy is an anathema to an ecologist.... The only possible response to this challenge is to suggest — as economists do — that growth in dollars is “decoupled” from growth in physical throughputs and environmental impacts. But...this hasn’t so far achieved what’s needed. There are no prospects for it doing so in the immediate future. And the sheer scale of decoupling required...staggers the imagination.
The New Economics Foundation in London recently published a booklength study titled Growth Isn’t Possible, which asks whether goals related to mitigating climate change can be met in the context of continued global economic growth. Its conclusion: “Economic growth in the OECD cannot be reconciled with a 2, 3, or even 4°C characterization of dangerous climate change.”
Herman Daly, one of the pioneers of ecological economics (he published Toward a Steady State Economy in 1973 and Beyond Growth in 1996, and co-authored a textbook titled Ecological Economics in 2004), differentiates between economic growth and uneconomic growth. For Daly, uneconomic growth consists of GDP gains that are accompanied by staticor declining social benefits, as for example when a certain amount of shorttermgrowth is achieved by undermining ecosystems whose services have agreater long-term value.
In Europe, a “degrowth” movement has taken root, founded on the ideas of Mohandas Gandhi, Leopold Kohr, Jean Baudrillard, André Gorz, Edward Goldsmith, Ivan Illich, and Serge Latouche. The work of Romanian economist Nicholas Georgescu-Roegen (1906–1994) was especially pivotal in setting the movement on its path: his 1971 book titled The Entropy Law and the Economic Process pointed out that neoclassical economics fails to acknowledge the second law of thermodynamics by not accounting for the degradation of energy and matter. Georgescu-Roegen’s thinking had in turn been influenced by that of chemist-turned-economist Frederick Soddy (1877–1956), author of Wealth, Virtual Wealth and Debt (1926), which sought to bring economics into line with the laws of thermodynamics and which critiqued fractional-reserve banking. The French translation of Georgescu-Roegen’s book in 1979 under the title Demain ladécroissance (“Tomorrow, Degrowth”) spurred décroissance thinking and organizing that eventuated in the first International Degrowth Conference in Paris in 2008 and the founding of a French-language newspaper, LaDécroissance: Le journal de la joie de vivre, published in Lyons.
In the United States, the term “degrowth” is seldom mentioned; however, over the past twenty years a similar trend in thinking has spurred the “voluntary simplicity” movement, which questions the environmental, psychological, and social costs of ever-growing consumption. The movement has roots in the ethical beliefs of religious groups like the Amish, but also in the writings of philosopher Henry David Thoreau (1817–1862) and back-to-the-land pioneers Scott and Helen Nearing (1883–1983; 1904– 1995, authors of Living the Good Life). The books Voluntary Simplicity by Duane Elgin (1981), and Your Money or Your Life by Joe Dominguez and Vicki Robin (1992), and the documentary film “Affluenza” (1997) helped define this movement, which now also features magazines and newsletters to assist in the formation of local simple living networks. Many simplicity advocates promote Buy Nothing Day, which falls on the Friday following Thanksgiving Day in the United States, as an antidote to pre-Christmas shopping frenzy.
The US has also spawned systematic critiques of standard economic theory. Henry George (1839–1897) has been called America’s most important home-grown economist; his writings explored the implications of the principle that each person should own what he or she creates, but that everything found in nature, most importantly land, should belong equally to all humanity. Economist Thorstein Veblen (1857–1929) criticized the wastefulness of consumption for status. More recently, the book SmallIs Beautiful by German-British economist E. F. Schumacher (1911–1977) inspired Bob Swann (an American pioneer of land trusts) to found the E. F. Schumacher Society, which is now the New Economics Institute, one of several US organizations that promote a basic restructuring of the economy according to ecological principles.
If growth is impossible to sustain, what alternative goal should economies pursue? Herman Daly (who was a student of Georgescu-Roegen) has for nearly three decades advocated a “steady-state economy,” which he describes as “an economy with constant stocks of people and artifacts, maintained at some desired, sufficient levels by low rates of maintenance ‘throughput,’ that is, by the lowest feasible flows of matter and energy from the first stage of production to the last stage of consumption.” A steady-state economy would aim for stable or mildly fluctuating levels in population and consumption of energy and materials; birth rates would equal death rates, and saving/investment would equal depreciation.
The goal of a steady-state economy is now being actively promoted by the Center for the Advancement of a Steady State Economy (CASSE), headquartered in Arlington, VA, with chapters elsewhere in the country. The president of the organization, Brian Czech, is author of Shoveling Fuelfor a Runaway Train (2000).
In his 2007 book Managing Without Growth, Canadian economist Peter Victor presents a model of the Canadian economy that shows “it is possible to develop scenarios over a 30 year time horizon for Canada in which full employment prevails, poverty is essentially eliminated, people enjoy more leisure, greenhouse gas emissions are drastically reduced, and the level of government indebtedness declines, all in the context of low and ultimately no economic growth.”
Some critics of the steady-state economy concept have assumed that keeping consumption constant would require harsh government controls. However, Daly and others contend that such an economy could flourish in the context of a constitutional democracy with a common-sense mixture of markets and market regulations. Markets would still allocate resources efficiently, but some vital decisions (such as permissible rates of resource extraction and the just distribution of resources, especially those created by nature or by society as a whole) would be kept outside the market.
A few nations and communities are already moving in the direction of a steady-state economy. Sweden, Denmark, Japan, and Germany have arguably reached situation in which they do not depend on high rates of growth to provide for their people. This is not to say these countries have only smooth sailing ahead (Japan in particular is facing a painful adjustment, given its very high levels of government debt), but they are likely to fare better than other nations that have high domestic levels of economic inequality and that have gotten used to high growth rates.
Sweden is now home to a number of eco-municipalities. Inspired by economist Torbjörn Lahti and by Karl-Henrik Robèrt, founder of the Natural Step Movement, these formerly depressed industrial towns have made an official and deliberate commitment to “dematerialize” their economies and to foster social equity. Övertorneå, Sweden’s first ecomunicipality, saw a 20 percent unemployment rate during the recession of the early 1980s and lost 25 percent of its population (prior to becoming an eco-municipality), but now boasts a thriving ecotourism economy based on organic farming, sheepherding, fish farming, and the performing arts. The town has reached its 2010 goal of being a free of fossil fuels. Hällefors, a former steel town that also suffered from high unemployment 20 years ago, now has an economy based on renewable energy, organic farming, and culinary arts. Other eco-communities exist in Norway, Finland, and Denmark.
For the world as a whole, the transition from a growth-based economy to a steady-state economy is likely to be far more problematic than the examples in the preceding paragraph might suggest: ecotourism will never be the economic backbone of New York, Beijing, or Mumbai — though organic farming will likely be the main engine for a growing number of smaller communities.
Which raises the question: How do we get there from here? Aside from creating non-debt-based currencies (as discussed above), what strategies could help ease the way toward a healthy post-growth world economy?
Herman Daly and other steady-staters advise policies along the following lines:
• A cap–auction–trade (or cap-and-dividend) system for extraction rights for basic natural resources;
• A shift away from taxing income and toward taxing resource depletion and environmental pollutants;
• Limits on income inequality;
• More flexible workdays; and
• The adoption of a system of tariffs that would allow countries that implement sustainable policies to remain competitive in the global marketplace with countries that don’t.
One of the fundamental problems with markets, acknowledged by nearly all economists, is the tendency for businesses to externalize costs (“externalities,” in economic theory, are costs or benefits from a transaction that are not reflected in the price). For example, companies that burn fossil fuels — thereby releasing air pollutants — typically pass the resulting health bills and clean-up costs on to nearby communities, or the nation, or the world as a whole. It is possible to internalize such costs through laws and regulations. One strategy is to collect “Pigovian” taxes from businesses equal in amount to their negative, externalized costs to society. Another solution is to define property rights more carefully (e.g., the right of residents in a community to clean air and water) so that efforts to remedy violations of those rights carry legal weight. Many conventional economists believe that such measures will solve the problem of externalities without need for government intervention in markets, but Herman Daly and Josh Farley have argued that in reality such measures are only partly effective, as the interests of future generations are still not taken into account. One remedy that Daly and Farley suggest is making the rights of future generations to certain resources, such as to the ecosystems responsible for generating life-support functions, explicit and inalienable.
Henry George championed the idea of a “single tax” on the use of land (while accepting private ownership of land, he advocated the public capture of all value it generates), with the proceeds shared by society; this was a purist solution to the problems of economic inequality, monopolies, and environmental externalities. A partway measure in this direction consists of levying high taxes on land values. Pittsburgh, PA, did this in 1913 by instituting a high tax on unimproved land held for speculation, and as a result land values there have remained far more stable than in other cities. If the government captures any increases in land values, it eliminates speculative demand for land, thus avoiding speculative bubbles and keeping land cheaper for non-speculative uses. Land equity partnerships and land trusts (including agricultural land trusts) are other proven ways to overcome the landlord-tenant dilemma and remove land from the speculative market.
Futurist Hazel Henderson, author of Ethical Markets: Growing the Green Economy, advises governments to charge a financial transaction tax of one percent or less.
This would not affect the trades of 99.9 percent of all Americans. But it would put a major crimp in the games that the big boys play. Let the quants use their brainpower to cure cancer rather than to craft complex computerized trading systems that leave society with less than nothing. A small transaction tax could generate over a $100 billion a year from Wall Street — and in the process, bring those ridiculous bonuses and profits back in line with the real economy.
Henderson also advocates breaking up too-big-to-fail banks and businesses and fostering non-profit community development finance institutions (CDFIs) to address the capital needs of micro-businesses.
To discourage trans-border financial capital flows that exploit the labor and resources of less-industrialized countries, Daly calls for downgrading the IMF and World Bank into mere clearinghouses that collect fees from countries that run both surpluses and deficits in their current and capital accounts. Daly would also remove price barriers to “non-scarce” intellectual capital — including royalty payments to patent holders. Such barriers often prevent less-industrialized countries from developing the renewable energy technologies necessary to bypass fossil fuels.
One final requirement in the transition from a growth economy to a steady-state economy is the reform of corporate law. Corporations enable individuals to pool financial resources to pursue commercial interests under a legal structure that limits liability for employees and investors. In the US, corporations also enjoy the status and rights of legal persons. In effect, this gives them the financial resources to influence public policy, and to exploit people and nature, without moral or legal responsibility. In fact, corporate officers are virtually required by law to place value to shareholders above all other considerations. University of British Columbia law professor Joel Bakan describes the modern corporation as “an institutional psychopath”; in the documentary “The Corporation” (2003), he claims that if the behavior of corporations were ascribed to ordinary people, the latter would be considered to exhibit the traits of antisocial personality disorder. In that same film, former Republican Party candidate for Senate from Maine, Robert Monks is seen remarking: “The corporation is an externalizing machine, in the same way that a shark is a killing machine.” The environmental ethic inherent in the corporate legal structure could be summarized as: “Use resources as fast as possible until they’re gone.”
Alternative economists argue that the genuine benefit of corporations (their ability to pool capital to achieve socially useful purposes) could be better achieved through cooperatives — which have a long history of success. Credit unions are cooperative banks; some utilities operate as cooperatives; and there are also housing, manufacturing, and agricultural cooperatives. The following seven principles are central to the cooperative movement:
1. Voluntary and open membership,
2. Democratic member control,
3. Member economic participation,
4. Autonomy and independence,
5. Education, training, and information,
6. Cooperation among cooperatives, and
7. Concern for community.
Cooperatives have the potential to avert overuse of resources by placing other values, including the interests of future generations, ahead of profit. Indeed, the organization “Coop America,” which began as a sort of cooperative of US cooperatives, in 2009 changed its name to “Green America.”
Gross National Happiness
After World War II, the industrial nations of the world set out to rebuild their economies and needed a yardstick by which to measure their progress. The index soon settled upon was the Gross National Product, or GNP — defined as the market value of all goods and services produced in one year by the labor and property supplied by the residents of a given country. A similar measure, Gross Domestic Product, or GDP (which defines production based on its geographic location rather than its ownership) is more often used today; when considered globally, GDP and GNP are equivalent terms.
GDP made the practical work of economists much simpler: If the number went up, then all was well, whereas a decline meant that something had gone wrong.
Within a couple of decades, however, questions began to be raised about GDP: perhaps it was too simple. Four of the main objections:
• Increasing self-reliance means decreasing GDP. If you eat at home more, you are failing to do your part to grow the GDP; if you grow your own food, you’re doing so at the expense of GDP. Any advertising campaign that aims to curb consumption hurts GDP: for example, vigorous anti-smoking campaigns result in fewer people buying cigarettes, which decreases GDP.
• GDP does not distinguish between waste, luxury, and a satisfaction of fundamental needs.
• GDP does not guarantee the meaningfulness of what is being made, bought, and sold. Therefore GDP does not correlate well with quality of life measures.
• GDP is “Gross Domestic Product”; there is no accounting for the distribution of costs and benefits. If 95 percent of people live in abject poverty while 5 percent live in extreme opulence, GDP does not reveal the fact.
In 1972, economists William Nordhaus and James Tobin published a paper with the intriguing title, Is Growth Obsolete?, in which they introduced the Measure of Economic Welfare (MEW) as the first alternative index of economic progress.
Herman Daly, John Cobb, and Clifford Cobb refined MEW in their Index of Sustainable Economic Welfare (ISEW), introduced in 1989, which is roughly defined by the following formula:
ISEW = personal consumption + public non-defensive expenditures − private defensive expenditures + capital formation + services from domestic labor − costs of environmental degradation − depreciation of natural capital
In 1995, the San Francisco-based nonprofit think tank Redefining Progress took MEW and ISEW even further with its Genuine Progress Indicator (GPI). This index adjusts not only for environmental damage and depreciation, but also income distribution, housework, volunteering, crime, changes in leisure time, and the life-span of consumer durables and public infrastructures. GPI managed to gain somewhat more traction than either MEW or ISEW, and came to be used by the scientific community and many governmental organizations globally. For example, the state of Maryland is now using GPI for planning and assessment.
During the past few years, criticism of GDP has grown among mainstream economists and government leaders. In 2008, French president Nicholas Sarkozy convened “The Commission on the Measurement of Economic Performance and Social Progress” (CMEPSP), chaired by acclaimed American economist Joseph Stiglitz. The commission’s explicit purpose was “to identify the limits of GDP as an indicator of economic performance and social progress.” The commission report noted:
What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. Choices between promoting GDP and protecting the environment may be false choices, once environmental degradation is appropriately included in our measurement of economic performance. So too, we often draw inferences about what are good policies by looking at what policies have promoted economic growth; but if our metrics of performance are flawed, so too may be the inferences that we draw.
In response to the Stiglitz Commission there have been increasing calls for a Green National Product that would indicate if economic activities benefit or harm the economy and human well-being, addressing both the sustainability and health of the planet and its inhabitants.
One factor that is increasingly being cited as an important economic indicator is happiness. After all, what good is increased production and consumption if the result isn’t increased human satisfaction? Until fairly recently, the subject of happiness was mostly avoided by economists for lack of good ways to measure it; however, in recent years, “happiness economists” have found ways to combine subjective surveys with objective data (on lifespan, income, and education) to yield data with consistent patterns, making a national happiness index a practical reality.
In The Politics of Happiness, former Harvard University president Derek Bok traces the history of the relationship between economic growth and happiness in America. During the past 35 years, per capita income has grown almost 60 percent, the average new home has become 50 percent larger, the number of cars has ballooned by 120 million, and the proportion of families owning personal computers has gone from zero to 80 percent. But the percentage of Americans describing themselves as either “very happy” or “pretty happy” has remained virtually constant, having peaked in the 1950s. The economic treadmill is continually speeding up due to growth and we have to push ourselves ever harder to keep up, yet we’re no happier as a result.
Ironically, perhaps, this realization dawned first not in America, but in the tiny Himalayan kingdom of Bhutan. In 1972, shortly after ascending to the throne at the age of 16, Bhutan’s King Jigme Singye Wangchuck used the phrase “Gross National Happiness” to signal his commitment to building an economy that would serve his country’s Buddhist-influenced culture. Though this was a somewhat offhand remark, it was taken seriously and continues to reverberate. Soon the Centre for Bhutan Studies, under the leadership of Karma Ura, set out to develop a survey instrument to measure the Bhutanese people’s general sense of well-being.
Ura collaborated with Canadian health epidemiologist Michael Pennock to develop Gross National Happiness (GNH) measures across nine domains:
• Time use
• Living standards
• Good governance
• Psychological well-being
• Community vitality
Bhutan’s efforts to boost GNH have led to the banning of plastic bags and re-introduction of meditation into schools, as well as a “go-slow” approach toward the standard development path of big loans and costly infrastructure projects.
The country’s path-breaking effort to make growth humanly meaningful has drawn considerable attention elsewhere: Harvard Medical School has released a series of happiness studies, while British Prime Minister David Cameron has announced the UK’s intention to begin tracking well-being along with GDP. Sustainable Seattle is launching a Happiness Initiative and intends to conduct a city-wide well-being survey. And Thailand, following the military coup of 2006, instituted a happiness index and now releases monthly GNH data.
Michael Pennock now uses what he calls a “de-Bhutanized” version of GNH in his work in Victoria, British Columbia. Meanwhile, Ura and Pennock have collaborated further to develop policy assessment tools to forecast the potential implications of projects or programs for national happiness.
Britain’s New Economics Foundation publishes a “Happy Planet Index,” which “shows that it is possible for a nation to have high well-being with a low ecological footprint.” And a new documentary film called “The Economics of Happiness” argues that GNH is best served by localizing economics, politics, and culture.
No doubt, whatever index is generally settled upon to replace GDP, it will be more complicated. But simplicity isn’t always an advantage, and the additional effort required to track factors like collective psychological well-being, quality of governance, and environmental integrity would be well spent even if it succeeded only in shining a spotlight of public awareness and concern in these areas. But at this moment in history, as GDP growth becomes an unachievable goal, it is especially important that societies re-examine their aims and measures. If we aim for what is no longer possible, we will achieve only delusion and frustration. But if we aim for genuinely worthwhile goals that can be attained, then even if we have less energy at our command and fewer material goods available, we might nevertheless still increase our satisfaction in life.
Policy makers take note: Governments that choose to measure happiness and that aim to increase it in ways that don’t involve increased consumption can still show success, while those that stick to GDP growth as their primary measure of national well-being will be forced to find increasingly inventive ways to explain their failure to very unhappy voters.
Our Problems Are Resolvable In Principle
We’ve just seen how the economy could be put on the right track. But sorting out the economy is not enough to save the world; that would be just the first step.
The world’s environmental dilemmas are likewise amenable to resolution, at least in principle. As support for that statement one can point to piles of “how-to-save-the-world” environmental articles and books — in fact I can point to literal piles of such books here in my little home office. Which suggests a way to approach writing this section of the book: rather than painstakingly assembling a balanced overview of an immense and wide-ranging literature, perhaps all that’s really needed is for me to look around and grab a few titles off the shelves.
The first one that comes to hand is Lester Brown’s Plan B 4.0: Mobilizing to Save Civilization. In some ways we need go no further: Brown has provided a masterful overview of the world’s 21st-century threats (oil and food security, rising temperatures and rising seas, water shortages,etc.) and the ways to contain or overcome them — by eradicating poverty,conserving resources, reforming the world’s food system, raising energy efficiency, and developing renewable energy. There it is, folks: that’s all you need to know. Just go out and do it. (Brown’s very latest book, World on the Edge: How to Prevent Environmental and Economic Collapse, which I didn’t have at the time of this writing, appears to be an updated and improved version of Plan B.)
Reprinted with permission from The End of Growth by Richard Heinberg and published by New Society Publishers, 2011.