Impact, or wellbeing, involves more than economic growth: it is also about biodiversity, health or companionship. This sustainable development should, moreover, not just extend to the current generation, but also to future generations and people all over the world. Remarkably, we are seeing a gradual shift in who is talking about this and what is being said. Until a few years ago it was mainly members of the sustainability community and a select group of scientists who urged for a broader concept of prosperity. Nowadays you will also find arguments for such a shift in policy notes from organisations such as the European Union, the UN or the OECD. In ‘Reset the economy – Reset the reset’ we concluded that, despite good intentions, we remain stuck in the paradigm of short-term economic growth and profit. Will 2021 see the final breakthrough of a broader concept of prosperity that at long last goes beyond GDP?
Reset the economy - Investing in radical change
In the coming months, in a new series of articles and podcasts, we will explore the contours of such an economy, and the ways to get there. Join us in building the economy of the future.
GDP is not wellbeing
The basis for the success of GDP as a proxy for wellbeing was established after World War II. During the post-war reconstruction period the focus was mainly on the production of goods and services. The newly established institutions, including the United Nations, not only spread prosperity around the world, but also the accounts system for economic growth: the system of National Accounts. At the time it was an excellent proxy for wellbeing, a concept for which a solid statistical basis had thus far not existed. Economists have also long shared the view that economic growth is an imperfect measure of wellbeing.
Simply put, economic growth mainly measures (market) transactions during a specific period (for instance a year) in a certain region (a country). All the other factors, from inventories and distribution to the negative impact on the living environment, are not measured. In addition, there are many other challenges that stand in the way of an accurate measurement of transactions - for instance, how should price trends be accounted for?
Indefinite growth is impossible
In a system that has natural limits, nothing can grow forever. Already in 1972, the Club of Rome made clear that growth jeopardizes the sustainability of our economic system due to an underlying problem: exponential growth of the use of energy, materials and commodities, and industrial production, as well as exponential population growth (Meadows & Meadows, 2007).
Technological innovation can only to a certain extent help to make the economy more sustainable. But so far, all that progress has not helped to slow down the speed at which we are approaching the limits of our ecosystem. Quite the opposite, in fact. The more energy efficient combustion engines that we have developed, for example, are being used to power heavy SUVs. And if we manage to save energy by improving the insulation of our houses, we react by turning up the heat. Due to these types of rebound effects, sustainable innovations often do not have a sustainable impact on a macro level.
With a lot of effort, we may be able to spirit away the emission of greenhouse gases through a combination of market stimuli (tax on greenhouse gases) and technology (capturing and storing greenhouse gases) without hitting limits to growth. For the loss of biodiversity, the depletion of materials, or exhaustion of agricultural land, however, such solutions are very few. With no positive trends in that respect and the rebound effects outweighing the impact of conservation and environmental policies, we ultimately reached the limits to growth. Rather than being the solution to the biggest challenges of our time, growth is the underlying problem; it fuels inequality and increases the ecological crisis.
The monetary concept of wellbeing is so deeply ingrained in our economic thinking, that time and again it is reduced to market transactions and growth. To really change this, we need a complete paradigm shift. And no matter how tempting this may seem, we cannot make do with an alternative yardstick or dashboard. The fact alone that there are literally dozens of alternatives says it all: this is not about a simple number that is reported; it is about a paradigm, the set of rules for the game and how we - individuals, companies, the government - deal with those rules. Replacing GDP by an alternative, without calling the institutions, ideology, and assumptions into question, is not enough. What is needed is a system change.
Such a shift starts with the mindset and actions of individual people. From that, new initiatives - grassroots movements – follow. These initiatives are the fuel for changing rules and metrics. And changing the rules - the paradigm shift - is a messy exercise, with front-runners showing what is possible, and laggards desperately trying to hang on to the status quo, usually motivated by self-interest.
Steps in a system change
A system change requires both small and big steps. Every complex system, such as our economy, has several points where relatively small changes can have huge consequences. These so-called leverage points, formulated by Donella Meadows (1999), allow us to determine where certain steps may have the largest effect. A system change is shown here as a lever. Voluntary changes in behaviour, for instance, may lead to modification of a system, but not necessarily to real change. This requires a paradigm shift, a modification of design and intention.
1. A system change begins with a voluntary behavioural change, for example from companies and consumers. Consumers could radically choose a more sustainable way of life by buying only organically produced food. This implies that they explicitly ignore price signals: they do not choose the cheapest, but the most sustainable option. Companies could be looking for ways to realise energy savings by improving the efficiency of their production. Rather than focusing on profit only, they also aim for sustainable business models, for example by signing covenants and voluntarily developing standards to enhance sustainability. All this on a non-mandatory basis, inspired by their own motivation.
2. The second step is to change the flows within the economy. This goes beyond behavioural changes and other intentions. It is about making different choices on a systemic level, for example governments and companies implementing sustainable purchase and outsourcing policies. More sustainable business models may emerge, such as product-as-a-service models. Recycling is increasing and the useful life of products is being extended. The rules of the game are still the same, but awareness is becoming more collective and is no longer restricted to the individual ‘idealist’.
3. On the third level, the system change becomes visible: the rules of the game are modified by changing the design of the economy. For instance, by introducing taxes on pollution (e.g. a greenhouse gas tax) and setting ‘true’ prices (i.e. prices that also reflect the non-financial impact), or through compulsory ‘comprehensive’ reporting by companies on financial as well as sustainability aspects. But also, by new forms of partnerships between consumers and companies aimed at creating value that started to develop in phase 1 but are now becoming more mainstream.
4. It is not until we get to the final level that the focus is on changing the intention: a different mindset and ultimately also a different paradigm. This should also include a shift from growth to a broader indicator, or set of indicators, to measure wellbeing. This could be a dashboard or a number with a wide range of underlying indicators but should at least offer a broader spectrum of dimensions that reflect wellbeing as the explicit yardstick for and assessment of how a society is doing. But just a new yardstick is not enough. What is also needed is a fundamental overhaul of institutions: an economy that collapses if it stops to grow is not fit as a steering mechanism for wellbeing in a broader sense. This means that government revenues and the labour market must also become less dependent on growth. This might be achieved, for instance, by improving social security (some form of basic income), by creating an economy with larger buffers (which would also make lower growth less of a problem for companies). Government revenues can be made less dependent on growth by reducing taxes on flow variables, such as wages and profit, and by increasing taxes on stock variables, such as land and capital. Changes happen without a particular order on all four levels. Something can occur on level four (with a large leverage effect), while less has shifted on the lower levels. But the general rule is that a real system change can only occur if the paradigm also shifts. And that takes more than just a few individuals changing their behaviour.
Year of the reset?
With the COVID pandemic slowly abating, the calls for a sustainable recovery - to ‘build back better’ - are becoming more subdued. In the panic to control the pandemic, many people have lost sight of the fact that COVID-19 has exacerbated long existing problems. But implicitly there has in fact been a remarkable change. In Europe, economic activity has actually been made subordinate to health. This may also have been inspired by our level of wealth (we can afford to), but it also proves that there has been a shift in our thinking on growth.
Up till now, the ‘reset’ has been disappointing. Maybe it was also a little too much asked: being in the middle in the COVID-19 crisis, policy makers were too busy with combating the crisis. And although it would have been wiser too start looking forward to building back better instead of trying to rescue the old system, it is not too late.
Now that the end of the pandemic is approaching, we have the chance to adjust the course that we are sailing. It would be a missed opportunity if we would not reconsider our current economic theory and think about broadening our concept of progress.
And there are plenty of opportunities. Given the big issues that we are currently facing (from climate change and loss of biodiversity, to rising inequality), we would do better to aim for wellbeing in a broader sense than in the narrow concept of wellbeing. More and more private individuals, companies and governments are active on the various leverage points.
Regarding a number of issues, we could see some very rapid shifts in 2021:
- The range of sustainable products and services is growing, as is the number of companies offering them and the number of consumers buying them. Moreover, the number of companies explicitly adhering to a sustainable business model and practices and consumers to a sustainable lifestyle is also expanding. These companies and consumers are acting on their own initiative.
- The pricing of greenhouse gas emissions is also seriously gaining traction, partly due to the ongoing price rises for emission rights in Europe. This may help to speed up the energy transition. The discussion about ‘real’ prices in general is intensifying around the world. What could help here, is that the deluge of reports on sustainable effects is slowly becoming more standardised: the introduction of more standards for sustainability effects in 2021 will make the pricing process easier. In many countries, recovery policies therefore focus on more factors than just economic growth. The European Green deal, for instance, has a very strong focus on contributing to the climate transition. This policy therefore also requires different indicators.
- The discussion about ‘beyond GDP’ has been going on for years. With international organisations such as the OECD and the UN engaging in this discussion, and financial sector regulation increasingly requires standardized reporting on both the positive and the negative impact of business practices, this discussion may finally move forward and shift from growth to wellbeing. But that is only the beginning. What is also needed is a discussion about social security systems (basic income?), the unequal distribution of wellbeing and ecological limits. But perhaps even more important, is the moral discussion about wellbeing: what do ‘we’ as a society find important? Was this even discussed during the pandemic when the economy was sacrificed to health? Why were we willing to do that, but is asking for economic sacrifices to facilitate the energy transition quite pointless? Without that discussion, any alternative indicator for wellbeing will remain an empty shell.
Really moving beyond GDP, and economic growth, constitutes a reset. And that will only happen if the pressure points in the system are pushed on all levels. Tipping points generally occur in reaction to a shift in technology or a turnaround in terms of ideology. Technological progress makes it possible for us rich Westerners to focus on more than just material wellbeing. Ideological shifts often occur after major social events. While the growth paradigm was established in the post-WW II period, the years ahead may likewise bring a shift to a more contemporary concept of wellbeing and more focus on achieving this.
Fischer, J., M. Riechers (2019). A leverage point perspective on sustainability. People and Nature, 1, 115-120.
Kuznets, S. (1937). National Income, 1919-1935. NBER, National Bureau of Economic Research, 66 (September), 1–16. Retrieved from http://www.nber.org/books/kuzn37-2
Meadows, D. H., Meadows, D. L., Randers, J., & Behrens, W. W. (1972). The Limits to Growth. Chelsea, 205, 205. https://doi.org/10.1111/j.1752-1688.1972.tb05230.x
Meadows, D. H., & Meadows, D. (2007). The history and conclusions of the limits to growth. System Dynamics Review, 23(2–3), 191–197. https://doi.org/10.1002/sdr.371
Meadows, D. (1999). Leverage Points Places to Intervene in a System. The Sustainability Institute, Hartland
In our next blog, we will look at resetting our economy from the perspective of the financial markets.
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