Ideas about how the world works that don’t accord with reality can be unhelpful. That’s especially true about mainstream economics, which is based in part on ideas that made a lot of sense at some point in the last 250 years but that have outlived their time and usefulness. These ideas—such as the reliance on GDP as the key index of general wellbeing—still dominate assumptions and thinking about economic matters in the media, governments, businesses, and popular consciousness.
But in recent decades, economics theoreticians and researchers have suggested a variety of reforms that would make economics truer, greener, and more sustainable. My colleague Gary Gardner and I describe seven of these in Chapter 1 of the Worldwatch Institute’s latest report, State of the World 2008: Innovations for a Sustainable Economy:
1) Scale. How big is the global economy relative to the global ecosystem? This is crucial, because the economy resides totally inside the global ecosystem—the ecosystem gives the economy a place to operate, supplies all of its raw materials, and supports it with many critical services. In physical terms, economic activity is basically converting bits and pieces of the ecosystem to human uses: trees and forests into lumber and houses, grasslands and other habitats into farms to feed the billions of humans, and so on.
We’ve gotten really good at economic growth. Since Adam Smith’s time, the number of people in the world has exploded from about 1 billion to nearly 7 billion. And in the last 200 years, Gross World Product has risen by nearly a factor of 60. The ecosystem has suffered as a result, hence the headlines we see every day: climate change, species extinctions, dwindling rainforests, water shortages, and all the rest.
Piecemeal, we’re starting to get the message about the economy’s scale. For instance, we know that there’s too much carbon floating around for the system to handle benignly. Last year, more than 90 major corporations, including General Electric, Volvo, and Air France, called on governments to set goals for reducing greenhouse gas emissions, and the European Union has set up a carbon cap-and-trade system.
Waste minimization is another way to reduce scale. Every year we dig up and process more than half a trillion tons of raw materials—and six months later more than 99 percent of it is waste. That can be fixed too: Ray Anderson’s Interface carpet company is a leader in this area, reducing manufacturing waste by 70 percent since the mid-1990s and saving over $300 million while doing it.
2) Stress development over growth. That is, make the economy better at satisfying human needs, not simply bigger.
This is partly about eco-efficiency. It’s now cost-effective to boost resource efficiency by at least a factor of four—and possibly by a factor of 20. And given the need for billions of people to grow their way out of dire poverty, we have to pursue these gains.
But it’s also about asking the question, what is an economy is really for? Not only can the global economy not keep growing forever, growth isn’t even working for many of us in wealthy nations anymore: U.S. per-capita income has tripled since 1950, for instance, but the share of Americans who say they’re very happy has dropped over the last 30 years. Studies in hedonic psychology reveal that higher incomes only improve life satisfaction up to a point. The research also says that the more materialistic people are, the lower levels of happiness they report. And it says that there appears to be a correlation between rising consumption and the erosion of the things that do make people happy, especially social relationships, family life, and a sense of community.
In response, a lot of people are rejecting the competition and get-ahead mentality of consumerism. They’re downshifting and pursuing voluntary simplicity all over the globe, and they’re taking collective action via campaigns for healthy eating, work leave for new parents, and shortened workweeks. The governments of Australia, Canada, and the United Kingdom have made wellbeing a national policy goal, and there is a lot of interest in indicators that measure wellbeing more directly than GNP.
3) Make prices tell the ecological truth. Cheating a bit here—this isn’t really a conceptual reform. Every economist knows that markets fail when prices don’t reflect actual costs. The reform would be actually applying this rule to the ecosystem. For instance, climate change is arguably the result of failing to charge for dumping carbon dioxide into the atmosphere. Another example is human-caused species extinction. We’re basically dismantling our life-support machinery, and by and large until recently nobody paid for it. Fortunately, governments and business are beginning to experiment with carbon markets, water pricing mechanisms, and conservation banking. Carbon market trading was worth $59 billion in 2007, and there are now several hundred wetlands and species banks in the United States alone.
4) Account for nature’s services.This is closely related to #3. In the United States, the pollination performed by honeybees is worth about $19 billion per year. There’s also air and water purification, soil generation, pest control, seed dispersal, and nutrient recycling, among the many other services that nature provides. Tearing up ecosystems undermines these services, so some countries have begun trying to value them properly. Costa Rica, for example, pays landowners to preserve forests and their biodiversity, with the money coming from fuel taxes and sale of environmental credits to businesses. Mexico and Victoria, Australia, have also set up systems to assign values to formerly free services.
5) The precautionary principle. This is just the age-old wisdom of “first, do no harm” and “look before you leap,” but applied to public policy toward new products (like chemicals) and technologies that could pose serious risk. Ordinary risk analysis asks, “How much environmental damage will be allowed?” But the precautionary principle asks, “How little damage is possible?” Today we’re seeing the principle adopted more and more widely. The Maastricht Treaty that created the European Union in 1991 puts the principle at the center of its environmental policy, and San Francisco made precaution official policy in 2003.
6) Commons management. People generally believe that there are only two workable regimes for managing resources: private property or government control. But commons management regimes are a third way, one that taps the strong human impulse toward cooperation and the common good. Commons management has proven itself over centuries of experience—there are collectively managed irrigation systems in Spain that were begun in the 15th century, for instance, and other commonly managed forests and pastures in Switzerland, Japan, the Philippines, and Indonesia that are centuries old. Commons management lives and thrives today in such things as Wikipedia, community gardens, and farmers markets everywhere. The writer and entrepreneur Peter Barnes has suggested that the atmosphere, which everyone ought to own, could be successfully managed and protected via a commons regime. Ocean fisheries might be as well.
7) Value women. Economic systems ought to be gender-blind but they’re not. A UN report in the 1990s noted that “most poor people are women, and most women are poor.” All over the world, women earn less than men for equivalent work, they lack access to land and credit, and they do more than their share of child- and elder care, volunteer work, and other unpaid labor. There is evidence that this gender bias actually suppresses economic activity. In response, a few governments in industrial countries are trying to develop policies that take unpaid work into account. Muhammad Yunus’s Grameen Bank in Bangladesh is using the terms of its loans to help to ensure that wives are legally entitled to their share of a couple’s assets. And the microfinance movement appears to have given millions of women a valuable economic boost.
These seven ideas are hardly the only changes brewing in economics, but the innovations described in State of the World 2008 can generally be traced to one or more of them. Hopefully, they are on the way to transforming economics from “the dismal science” into more of a delightful one—or, to paraphrase E.F. Schumacher, into an economics as if people and the planet mattered.