The real economy

green_economy.jpgRemember Enron?  Of course — who could forget?  The company that looked like it was on top of the world, growing and profiting like gangbusters — until the bottom fell out and thousands of employees and stockholders lost their shirts, not to mention their pants, houses, cars, and any hope of a civilized retirement.  All because the company used deceptive accounting principles that misprepresented the true nature and value of their activities.  What a tragedy.

There is a broader lesson here that hasn’t received much attention in the mainstream press. The world economy as a whole may be in a similar situation, for different reasons, on a colossal scale.  Ecological economist Robert Costanza of the University of Vermont argues in a recent article in the Encyclopedia of Earth that the classical economics that guides major decisions about national and international policy is full of the sorts of blind spots and misleading indicators that distort society’s sense of well-being. These flawed indicators may be leading us to the cliff’s edge of disaster.  This is largely because classical economics treats the earth’s natural life support systems as a homogeneous and infinite “externality” that never enters economic equations.  But if we have learned anything in the last few decades, it is that nature is neither homogeneous nor infinite.  

gdp_vs_genuine_progress_us_1950-2002.gifAs an example of the problem, take the familar Gross Domestic Product.  GDP is an index of economic activity that includes not only “good” growth like wealth creation through successful business ventures, but every other kind of economic activity — expenditures on hospital care for lung cancer patients, prison construction, stratospheric health insurance costs, and so on.  Is this really the kind of “economic growth” we want to maximize?  Clearly not.  Costanza and colleagues use instead the “Genuine Progress Index” (GPI), which uses the same personal consumption data as the GDP, but then adjusts for factors such as income distribution, adds others such as the value of household work and volunteer work, and importantly, subtracts factors such as the costs of crime and pollution.

The graph shows that the seemingly happy picture of the locomotive economy one gets from the GDP looks very different when we factor in the real costs of growth in terms of impacts on earth’s life support systems, human well-being, and long-term sustainability. Indeed the GPI has been stagnant during the last heady decades of “economic growth”. As Costanza says:

“In the U.S. while GDP has steadily increased since 1950, with the occasional dip or recession, GPI peaked in about 1975 and has been gradually decreasing ever since. From the perspective of the real economy, as opposed to just the market economy, the U.S. has been in recession since 1975. As already mentioned, this picture is also consistent with survey-based research on people’s stated life-satisfaction. We are now in a period of what Herman Daly has called “un-economic growth,” where further growth in marketed economic activity (GDP) is actually reducing well-being on balance rather than enhancing it. In terms of the four capitals, while built capital has grown, human, social and natural capital have declined or remained constant and more than canceled out the gains in built capital.”

Costanza asks: “How can we apply these lessons to get out of the real recession in human well-being at the national scale that many countries are now in? Several policies have been suggested that would help to turn things around:

  • Shifting our primary national policy goal from increasing marketed economic activity (GDP) to maximizing national well-being (GPI or something similar). This would allow us to see the interconnections between built, human, social, and natural capital and build well-being in a balanced and sustainable way.
  • Reforming tax systems to send the right incentives by taxing negatives (pollution, depletion of natural capital, overconsumption) rather than positives (labor, savings, investment).
  • Reforming international trade to promote well-being over mere GDP growth. This implies protecting natural capital, labor rights, and democratic self-determination first and then allowing trade, rather than promoting the current trade rules that ignore all non-market contributions to well-being.
  • Implementing strong democracy, as Tom Prugh, [Costanza], and Herman Daly have argued in [their] book The Local Politics of Global Sustainability. Strong democracy implies true participation of all in governance and is an essential prerequisite to building a sustainable and desirable future.
  • Increasing the size of the “commons sector” of the economy (as opposed to the private and public sectors) but creating common property asset trusts to “propertize” natural and social capital assets, as described in Peter Barnes’ book Capitalism 3.0.”

[The graph is from Redefining Progress.]

About Emmett Duffy

I am a Natural Patriot and an ecologist with expertise in biodiversity and its importance to human society. My day job is Professor of Marine Science at the College of William and Mary in Virginia.
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