The Four Horsemen of Economics
The Four Horsemen of Economics
LONDON: It has been a challenging summer for those of us who had hoped the economy would settle down to something like normality. A tropical storm hit New York, the euro has struggled to survive the European debt crisis, major British cities were the scene of rioting and looting, and millions in the drought-parched Horn of Africa faced starvation.
These may seem like very different events. Yet all of them, in their own way, are symptoms of the larger crisis testing our conventional understanding of how economics works.
A new economics, one that puts people and planet first, is necessary and also achievable.
The global economy as it has developed thus far has four systemic, interlinked problems, what I call the four U’s. It is unsustainable, unfair, unstable, and it’s making us unhappy.
Unsustainable: We are running out of planet. We face a serious risk of a temperature rise of 4 degrees Celsius compared to pre-industrial levels, with the extinctions of species and other problems that go with it.
The Millennium Ecosystem Assessment of a couple of years ago, which looked at trends in the various life-support systems of the planet, showed that 15 out of the 25 major ecosystems, the life-support systems the whole planet depends on, are in decline or serious decline. This includes fresh water, topsoil, pollination systems and many others. The problem is much wider than climate change.
If everybody in the world consumed resources at the rate that people do in the UK, we would need three planets to sustain them. If everybody lived at the US level, we would need five planets. Because we have only one planet, it is impossible for everybody to achieve these lifestyles. We must change. Unless we do, we can look forward to scarcities and ballooning prices.
Unfair: The second major problem stems from the first. At the beginning of the 20th 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 20th century, the ratio had moved to 75:1.
Richard Wilkinson and Kate Pickett’s book The Spirit Level shows convincingly that the biggest driver of many social ills – such as crime and drug use among many others – is not poverty or even unemployment. 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.
Neoliberal economists talk about wealth “trickling” down to the poorest as the economy grew. What we are seeing now is wealth being sucked up from all sections of society to the very rich.
Unstable: We need our economic systems to be both resilient and efficient,. Conventional economics is bad at delivering resilience – because the discipline lacks easy measures to the quality and therefore does not value it.
Because most developed nations have designed their economic systems largely around efficiency, they have minimized safety nets, buffers and fire-walls. As a result, the developed countries have systems that are neither efficient nor resilient because they keep on collapsing. The subprime crisis in the US housing market spread throughout the world and nearly brought down the banking system. There are similar crises in Greece and Portugal, and the frequency of unstable events is increasing.
Before the fire that destroyed San Francisco in 1906, all the fire hydrants in the city were filled from one place. Water in one central place flowed through to the different tanks. If there was a fire on Post Street, the water was right there. It was a cost-effective design. The trouble is that, in an earthquake, pipes rupture, the water flows out of the system, and fire spreads through the city. Now each tank in the city is filled separately. Economic systems require similar safety nets and firewalls.
Unhappiness: One of our advisors at the New Economics Institute, author and environmentalist Bill McKibben, said, “More and better are parting company. More income does not equal better lives any more.”
Worse, well-being is actually declining in many of the so-called developed countries. Mental-health problems are increasing rapidly in many places. In English-speaking countries, almost a quarter of the population will suffer some kind of mental 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, and causing huge instability and inequality, with all the associated social problems. We are not making ourselves any happier. It’s a stupid path, yet one that’s avoidable.
I am an optimist. There are ways through this conundrum, but they will require a systematic rethink of most of our economic orthodoxy, including new incentives, different ways of measurement, and other shifts as well.
Measurement can sound technocratic, but is central to solving the problem, because we tend to get what we measure.
British Prime Minister David Cameron said recently that economic growth was a means to an end, rather than an end in itself, which was in itself a fundamental shift in thinking. That is why his government is beginning to measure well-being, a more meaningful and effective goal for the economy.
Well-being means more than just measuring happiness. The officials we are working with also use the term “flourishing.” This includes not just happiness, but people’s relationship with others and, crucially, their sense of purpose in life. It is possible to be happy after taking an illegal substance but in no way is one flourishing!
No economic objective is as fundamental as the percentage of the population who are flourishing, and how that flourishing is distributed throughout the population. Putting those measures at the heart of the new economy means a major shift in what we are trying to achieve.
An economy that has well-being or flourishing at its heart requires two elements: One is the human systems and the institutions we need to make such goals possible, which will certainly include GDP. The other is the ecosystems, the resources those human systems require to achieve well-being.
That is the new economics of return on capital. And the new economic question for economies of the future is this: How much well-being can you achieve for each unit of natural resources?
This contrasts with the current focus on maximizing financial returns to financial capital. It will still remain necessary to provide sufficient returns to financial capital, but the key goal will become to maximize well-being while preserving national capital. Maximizing well-being will, among other things, involve providing sufficient good jobs and reducing inequality.
That question changes the economic fundamentals. That is why measuring the right qualities will lead to a fundamental rethink of economics and new goals.
Changes in economic understanding tend to go far slower than they should. “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist,” said John Maynard Keynes.
The sooner we free ourselves from the shackles of defunct economics, the better it will be for all of us.