We should change policies to restore capitalism and make it purposeful, in line with our world goals as articulated in the SDGs. In our new vision paper ‘Turning the page – A radical agenda for economic transformation’ we describe how we propose to do this.
A broken model with devastating side effects
The global financial crisis of 2007-2008 was the economic landmark of the previous decade. In its aftermath, a broad consensus grew for the need for change: less financial risk, more connection with the real economy, stricter regulation for the financial sector. Yet despite the wide-felt need to do things differently, the same old remedies were advocated to solve the crisis: restore growth, create jobs, balance government budgets.
In the aftermath of the crisis, more and more people came to realise that our environment and social infrastructure are under enormous pressure. In 2015, the world community took two crucial steps to meet these challenges. First, in September, the Sustainable Development Goals (SDGs) were adopted. These 17 targets are the global policy strategy towards a more sustainable world. In December of the same year, world leaders gathered in Paris for COP21. The Paris Climate Agreement’s central aim is to strengthen the global response to the threat of climate change.
Considering the urgency felt back then, the last decade has been disappointing. We are hardly ‘doing things differently’, while risk-taking increases by the day in this ultra-low interest rate environment, in search for financial returns. The connection with the real economy has never really been repaired. On top of that, the sustainability and economic agendas seem to remain two separate entities, instead of being integrated. This is why we are nowhere near the goals we set five years ago.
There is only one conclusion: neither the financial crisis, nor the environmental and social challenges we’re facing, have led to the necessary fundamental change. The core of our economic system remains unchallenged in every respect. After more than 10 years since the devastating experience of the financial crisis, we are still stuck in an economic model governed by the ideas of the so-called Washington Consensus of free trade, free markets and deregulation. This model delivered growth right up until the financial crisis, but also caused it.
Instead, unintended effects, ranging from inequality to environmental damage, have come to overshadow the purpose of the economic model. And in addition, the current recipe of extreme accommodative monetary policy to bolster economic growth does not work anymore. We should even reconsider economic growth being the centrepiece of our policy goals. Developed markets are stuck in what we call a low-low nexus after the global financial crisis: low growth, low interest rates and few abilities to move the needle towards a more sustainable, inclusive society. Our economic model has become uneconomic anddoes more harm than it delivers prosperity.
Transition into transformation
We really have only one choice: change our current economic model and transform it into a model that delivers wellbeing for all. This requires far more than a few cosmetic changes. We need to make our economy less growth-dependent, less financialised and less harmful. And this means that we must get rid of our traditional reductionist economic approach and start looking at the economy for what it is: a complex, interdependent system firmly rooted in and part of our biosphere.
In our view, we need to look at economic processes from a holistic perspective: what do they deliver in financial, ecological and social terms? Economic processes can only be economic if the results are ‘net positive’ within ecological boundaries and social thresholds.
At the turn of the decade, we must make radical choices if we are to realise the ‘strategy of the world’ as formulated by the SDGs and to mitigate CO2 emissions in the fastest way possible. These choices must be made on a macroeconomic level, where we must change the current economic model and replace GDP growth as the central point of reference for policymakers with broader defined goals and acknowledge that our fundamental assumption is wrong; economic growth is not the same as an increase in wellbeing.
It is certain that if we take our planetary boundaries seriously the end of growth as we measure it will be the consequence. But degrowth, defined as trying to create an economy within ecological boundaries, does not necessarily imply no economic growth (after a reset) at all. Its composition will be substantially different in a more sustainable economy. We should shift our economic system from efficient production of goods, towards optimal use of products and extending their lifetime. This will result in less consumption in terms of GDP (less goods will be sold on markets) without losing any wellbeing (because the utility retrieved from goods increases). And this is probably not all. Redistribution within and between countries is also necessary to create a global sustainable economy.
A radical agenda for economic transformation
Transforming our economic system will not be an easy task. Gradually adapting the existing system is not enough. Radical change is required, yet in an evolutionary process. We do, of course, not pretend to have the ultimate solution, but in our view such a change encompasses a redefinition of progress, revaluation of the way we live, cooperate and communicate, and a redesign of our economy.
The transformation we envision, requires commitment on all levels. Policy makers will have to create the right institutional circumstances. Producers will have to change the way they do business, consumers will have to change their spending patterns. In our view, the financial sector plays a crucial role. Allocating the capital for change is a powerful and necessary task to realise real change.
Financing changes comes with two big caveats. Values and purpose must be aligned with sustainable goals. That counts for policy makers and business, but also for investors. Investors should align their values with those of their investees. That will be a huge difference for a lot of investors: long-term value creation within biophysical boundaries really is different than short-term rent seeking. In addition, investors may need to prepare for lower financial returns and a different sector allocation than they are used to if they do not invest in the right transitions. A true belief in the need for sustainability is necessary and this means putting impact first.
Ultimately, we must create a circular, carbon neutral and inclusive economy that is more regenerative by design. We should change policies to restore capitalism and make it purposeful, in line with our world goals as articulated in the SDGs.
A radical agenda for economic transformation
Read our vision paper ‘Turning the page – A radical agenda for economic transformation’ and learn how we propose to transform our economy.
Also read our white paper ‘Impact investing through listed equities and bonds’ and our vision papers ‘Towards a low carbon economy’ and ‘Towards ecologically and socially resilient food and agriculture systems’ for additional information on the multi-fold aspects of this transformation.