Conceptual Reform in Economics Seven Big Ideas

As understanding of humanity's interactions with nature evolved and economic liabilities expanded, reformist economists have developed "corrective lenses" to shed light on the blind spots of the conventional economic worldview. At least seven key areas of revisionist thinking—scale, growth versus development, prices, nature's contributions, the precautionary principle, the commons, and women—are influencing economic theory and helping to turn economic activity in more-sustainable directions. (See Box 1-1 on the connections between these ideas and the issues discussed in the rest of State ofthe World 2008) Adjust economic scale. The economy's scale is its physical size—the sheer volume of its energy and materials flows—relative to its host, the ecosystem. An analogy might be a baby growing in its mother's womb; it is a subsystem of the mother, totally contained by and dependent upon her. Birth marks the point at which the baby has reached the limit of the mother's ability to host it. Further growth in the womb makes both baby and mother worse off.

Similarly, the global economy depends completely on nature for raw materials, energy stocks, and indispensable services such as water and air purification, soil fertility, and waste absorption. When the economy reaches a certain size, further growth makes both system and subsystem worse off, not better. In the language of economists, growth has become "uneconomic." At the extreme, an economy that tries to grow beyond a size the biosphere can support will simply destroy it. So there must be a limit on the size of the economy; its physical growth cannot go on forever.23

Positive signs are beginning to emerge of concrete efforts to restrain the economy's physical size. In February 2007, for instance, the leaders of more than 90 international

Seeding the Sustainable Economy

Box 1-1. Conceptual Reform in Key Sectors

The conceptual reforms discussed in this chapter are reshaping economics in a variety of ways that are described throughout this book. The key idea of the global economy's scale, for instance, is integral to the new yardsticks used by economists and others to assess human well-being and sustainability (Chapter 2). Economic scale also comes up indirectly when considering how to boost resource efficiency, reform food production, build a low-carbon economy, and reform the global trading system (Chapters 3,5,6,7, and 14). For example, huge livestock-raising and fish farming operations today create environmental and social problems unknown to earlier, small-scale efforts.

The role of prices in telling the ecological truth and nature's contributions to the economy are a key part of discussions on carbon markets, water, and biodiversity (Chapters 7, 8, and 9). The contrast between economic growth and true development is explored in chapters on new economic measures, consumption, and communities designed for sustainability (Chapters 2,4,and 11). Is it really "progress," for instance, when cities are transformed into sprawling metropolises, family farms are turned into agribusinesses, and rainforests become monoculture tree plantations, as Chapter 2 asks?

The precautionary principle informs much of the discussion of ways to make production safe and sustainable (Chapter 3). And issues of resource ownership and the property rights regimes that are suitable for a sustainable economy are part of any discussion of "the commons" (Chapter 10).

The value of women's contributions to economies is increasingly acknowledged both in community-driven development programs and in the expanding field of microfinance (Chapters 12 and 13). Women-centered grassroots development can improve the health of children and mothers, for instance, and even overturn centuries-old practices like child marriage, in the process releasing untapped skills and energy for economic development.

corporations, including General Electric, Volvo, and Air France, called on governments to set uniform international goals for reductions in emissions of the greenhouse gases that cause climate change. The initiative addresses one key dimension of scale: greenhouse gas emissions, which are too large for the global ecosystem to handle. On the government side, the entry into force of the Kyoto Protocol in 2005 and the launch of the European cap-and-trade system that same year are part of a landmark attempt to commit the world to the goal of slowing the rate of greenhouse gas emissions.24

Meanwhile, many businesses are finding ways to "dematerialize" economic activity, which can also reduce an economy's physical size. The movie rental firm Netflix, for example, began to offer its movies online in 2007, reducing the need for packaging, stores, and trips to a rental store. Waste minimization is another strategy to shrink physical flows through an economy. The Interface carpet company in the United States has adopted a "Mission Zero" waste minimization goal, aiming "to eliminate any negative impact our company may have on the environment by the year 2020." The company reports clear progress: manufacturing waste sent to landfills has fallen by 70 percent since the mid-1990s, which the company says has saved some $336 million in disposal costs.25

Waste minimization can be promoted through governments as well. In New Zealand, for example, some 70 percent of local councils have declared a zero-waste-to-landfills goal for their communities. The town of Opotiki, the first in the nation to set such a goal, has diverted 90 percent of its waste away from landfills each year since 1999, according to Zero Waste New Zealand. Spurred by national waste minimization legislation and using tools like extended producer responsibility laws—which require compa

Seeding the Sustainable Economy nies to take back their worn products or packaging—most communities expect to meet their goals by 2020.26

Shift from growth to development. What's an economy for? The conventional answer has long been: to produce ever-greater quantities of goods and services. But as just discussed, this goal is untenable in this "full world," so the growth mandate is giving way in some quarters to a new focus on development. Development is ultimately about improving human well-being—meeting fundamental human needs for food and shelter, security, good health, strong relationships, and the opportunity to achieve individual potential. Much of conventional economic activity is indifferent to this well-being focus: the $1.2 trillion spent on the world's militaries in 2006, plus the billions spent on emergency room visits, police, security systems, hazardous-waste site cleanups, litigation, and other "defensive" measures, are all major contributions to economic growth, even though they may have contributed little or nothing to actually improving people's well-being. 27

To be sure, improving well-being can involve growth: offering access to food and shelter for all, especially the desperately poor, will require economic expansion in some locales. And whether growth is involved or not, the poor need serious economic attention to advance their well-being. Initiatives from the Millennium Development Goals to grassroots campaigns led by End Poverty Now and other nongovernmental groups suggest a growing global consciousness around the need to help the poorest. And initiatives like microcredit seem to offer significant promise for the poor to increase their claim to a country's economic pie through provision of very small loans to the poor to build microbusinesses. The Microcredit Summit Campaign has involved tens of millions of families in microfinance and aims to extend its work to 175 million of the world's poorest families by 2015. While comprehensive studies on the impact of microcredit are yet to be done, initial research suggests that something valuable is being produced.28

The need to focus on well-being applies to wealthy people as well. A large body of research conducted over the past 30 years suggests that after a certain point, wealth does not generally increase happiness. (See Chapter 4.) Landmark studies done in the 1990s showed, for example, that self-reported levels of happiness in Japan were no greater in 1987 than in 1958, despite a fivefold increase in real income. Even in China, where real incomes grew by 2.5 times between 1994 and 2005, the share of people saying they were satisfied fell about 15 percentage points during this period, and the share saying they were dissatisfied rose by about as much. When economic growth no longer makes people any happier, it is beyond pointless—it is self-destructive.29

Efforts to advance human well-being within prosperous populations involve a wide range of initiatives, including campaigns for healthy eating, work leave for new parents, shortened workweeks, and encouragement of exercise. Promotion of cycling, for example, is on the rise, with recent initiatives in Australia, France, Taiwan, the United Kingdom, and the United States. Cycling and walking offer major health and environmental benefits, and they can be cost-effective: as the share of trips made by cycling, walking, and public transport rises, the share of the economy needed for transportation falls. While promoting cycling may seem quixotic, some European cities are inspiring models: in Amsterdam, for instance, some 27 percent of all urban trips are made by bike, compared with less than 1 percent in the United States.30

Seeding the Sustainable Economy

Some businesses are stepping up to the well-being challenge as well, by providing discounted gym memberships or by extending commuter subsidies to employees who bike or walk to work. The Sprint Corporation went a step further, designing exercise into its new headquarters. To encourage walking, its corporate campus was built with parking lots and food courts located far from offices, and with elevators deliberately designed to be slow—in order to encourage the use of stairs.31

Interest in ways to promote human well-being is widening among policymakers as well. Well-being is now a national policy goal in Australia, Canada, and the United Kingdom. And for the last 35 years, the Himalayan kingdom of Bhutan has made "gross national happiness," not economic growth per se, its official goal. (See Chapter 2.) Government policies there aim less at boosting raw gross domestic product (GDP) numbers than at raising educational levels and reducing poverty while preserving the country's environment and its cultural traditions.32

Make prices tell the ecological truth. Reformist economists have borrowed a principle from their conventional colleagues— "get the prices right"—and applied it to the effort to build sustainable economies. Environmental costs often go unrecognized by markets, as when costs created by carbon emissions are not included in the price of gasoline or electricity. These costs do not disappear, however, but are shouldered by bystanders, such as the poor in developing countries who pay to rebuild homes ruined by the storms or rising seas generated by climate change. Any economist will acknowledge that this sort of classic market failure sends distorted signals about the costs of economic activity and thus makes it difficult or impossible to achieve an efficient marketplace—the Holy Grail of conventional economics.

Governments are finding imaginative ways to include such costs, typically through taxes or fees. Ecotaxes, which in countries that belong to the Organisation for Economic Co-operation and Development provided 6-7 percent of tax revenues between 1994 and 2004, often involve shifting levies away from things valued by society, such as work, to undesirable things like pollution. Germany, for example, increased taxes on energy from 1999 through 2002 and reduced taxes on labor, resulting in lower emissions of carbon and the creation of 250,000 new jobs through 2003. Or consider feebates—a combination of fees and rebates—that subsidize the cleanest products or practices via a tax on the dirtiest ones. Sweden charged power plants a fee in the early 1990s for their emissions of nitrogen oxide—a principal cause of acid rain—and redistributed the revenues to the least polluting plants, providing a strong incentive for plants to reduce emissions. This led to a 34-percent reduction in the offending emissions in 1992 compared with 1990.33 Another example of a green tax is "congestion pricing" of automobiles entering urban centers. These charges are meant to raise the cost of driving, especially at peak hours, inducing people to shift to less-polluting public transportation. In Stockholm, a six-month congestion tax trial saw traffic levels fall an average 22 percent, personal injuries drop 5-10 percent, and ridership on public transportation increase some 4.5 percent. The trial was expensive, but the city estimates that if adopted permanently, the charge would produce 1.90 kronor of benefits for every krona invested, largely because of shorter travel times, increased road safety, and health and environmental benefits.34

Account for nature's contributions. Nature is a ready storehouse of the raw materials of civilization—food, fiber, fuel, miner-als—and the collective annual value of these

Seeding the Sustainable Economy goods is in the trillions. But the global ecosystem also provides many services that are the indispensable substrate of economies, including air and water purification, mitigation of droughts and floods, soil generation and soil fertility renewal, waste detoxification and breakdown, pollination, seed dispersal, nutrient cycling and movement, pest control, biodiversity maintenance, shoreline erosion protection, protection from solar ultraviolet rays, partial climate stabilization, and moderation of weather extremes.35

Far from being free, the value of ecosystem services is sobering. For instance, honeybees' work as pollinators is worth up to $19 billion a year in the United States alone. Farmers around the world spend $30-40 billion annually on pesticides to control crop pests, but the pests' natural enemies eliminate at least as large a share of the pest population—in fact, perhaps far more—and without them, expenditures on chemicals would be far higher.36 Fortunately, nature's contributions are increasingly being factored into economic decisionmaking through administrative and market mechanisms. In Costa Rica, landowners receive payments for preserving forests and their biodiversity, with the money coming from fuel taxes and the sale of "environmental credits" to businesses. In Mexico, water users pay into a fund that is used to protect upstream watersheds from exploitation, thereby helping to preserve water quality; nearly 1 million hectares are protected under the program. In the state of Victoria in Australia, landowners can bid competitively for government payments to conserve biodiversity and achieve other environmental benefits. (See Chapter 9.) These programs all assign prices to valuable natural services that have historically been taken as free—and therefore have been widely abused and degraded.37 Apply the precautionary principle. The precautionary principle is folk wisdom—Look before you leap, Mas vale prevenir que lamentar (Better to prevent than lament)—embod-ied in public policy. It is commonly defined this way: "where an activity raises threats of serious or irreversible harm to the environment or human health, precautionary measures should be taken even if some cause-and-effect relationships are not fully established scientifically." Put more plainly, traditional risk analysts ask, How much environmental harm will be allowed? Precau-tionists prefer the question, How little harm is possible? If safe alternatives to a product or substance exist, they argue, why use a product with even a small, highly uncertain risk?38

In Mexico, water users pay into a fund that is used to protect upstream watersheds from exploitation.

The principle reflects an understanding that the modern economy is highly complex, globally integrated, and capable of deploying immense technological powers, all of which create an irreducible level of potentially dangerous uncertainty. Critics charge that the precautionary principle will stifle innovation, because unknown dangers by definition cannot be prevented. But precautionists note that a set of clues can help investigators determine if an innovation is likely to pose a danger. If a new product or technology is likely to generate irreversible consequences, harmful persistent wastes, or a large-scale impact, it becomes a candidate for serious investigation regarding its potential for harm.39

Today, precaution is increasingly embraced as public policy. The 1991 Maastricht Treaty that created the European Union established this as the guiding principle for environmental policy. In 1998, the Danish Environment Agency banned phthalates, a softener, from plastic toys because of its con

Seeding the Sustainable Economy nection to reproductive abnormalities in animals, even though no danger to humans had been documented. Similarly, in 1999 the Los Angeles School Board chose to ban chemical pesticides in favor of a safer alternative, integrated pest management. And in 2003 San Francisco led U.S. cities in adopting precaution as official policy.40

The precautionary principle may evolve further to cover cases where unforeseen problems arise even after new products or processes have been deemed safe. In those cases, another mechanism—the surety bond— could mitigate the damage or compensate victims. A company wishing to introduce a new product would be required to deposit an appropriate sum, keyed to the best estimate of potential future damages, in an interest-bearing escrow account. The money would circulate and support other economic activity, just as other deposited funds do, and would be returned (plus interest) when the firm could show that the damage had not occurred or was less severe than estimated.41 Revitalize commons management. Human societies have evolved a wide range of institutions for the long-term management of natural resources, but today it is not unusual to hear it argued—especially in discussions of the so-called tragedy of the commons (see Chapter 10)—that private property is the only workable arrangement or that central government control is necessary. But some resources (such as the atmosphere) arguably ought to belong to everyone or are difficult or impossible to privatize. In any case, privatization is no guarantee against mismanagement or abuse. And government controls, while workable in some instances, have been shown to be inferior to private or user-group-sponsored systems in others.42 The most difficult challenge is posed by resources that are accessible to all and whose use by one party reduces the availability to other parties. Global examples include the atmosphere and open-ocean fisheries; regional examples include aquifers and irrigation systems. Unless there are agreed-upon and enforceable rules to control access (property rights systems), such resources are vulnerable to rampant exploitation and overuse. In fact, this is precisely what often happens in open access systems, in which anyone can use the resource with no restrictions—the very scenario that can give rise to the tragedy of the commons. The global atmosphere is only one vivid example of this; anyone can use it as a free dumping place for greenhouse gas emissions.43 An often-overlooked alternative to private or government ownership is group property systems, which assign the rights to a group that can deny access to nonmembers. For centuries there has been common management of irrigation works, forests, and pas-tureland in Spain, Switzerland, Japan, and the Philippines, for instance. (See Chapter 10.) Now the practice is being revitalized in other situations. The European Union cap-and-trade scheme for controlling greenhouse gas emissions, for example, is based on the principles that the atmosphere is commonly held by all and that access to its carbonabsorption capacity should come at a price— ideally and ultimately, a price high enough to hold carbon emissions to sustainable rates. 44 In Capitalism 3.0, Peter Barnes of the Tomales Bay Institute proposes that commons management systems be used as an alternative to government and private ownership of resources such as the atmosphere, the oceans, and great forests. Trusts would govern access to these commons, within sustainable limits, and would charge fees to those granted access. Revenues earned from the fees, in Barnes's vision, would be used to maintain the commons, with surpluses returned as dividends to the commons owners—all citizens. And because people would

Seeding the Sustainable Economy have a financial stake in a healthy commons, they would follow with interest the trusts' management of them.45

Barnes and his colleagues at the Institute monitor commons management on a smaller scale in their "report to owners" entitled Commons Rising. For instance, they cite a 40,000-member food cooperative in Washington state that formed a trust to buy critical farmland and thus prevent its "development" as a housing tract. The trust is designed to manage the property as farmland for generations to come. Another example is efforts to resist the increasing "enclosure" of the information commons— attempts to privatize all intellectual property and thereby profit from it; responses such as the Creative Commons licensing scheme have sprung up to allow creative works to be shared and modified freely without charge.46

Value women. "Most poor people are women and most women are poor," noted a 1994 U.N. report, yet "almost all low-income women are economically active." This is still true, and it follows that ensuring economic opportunity and equality for women is likely to give economies a major shot in the arm. Gender bias in everything from asset ownership to wage rates to credit access dampens economic activity.47

Most fundamentally, women typically are not paid equally for equal work. Women's wages in manufacturing as a percentage of men's wages, for example, are 78 percent in Costa Rica, 66 percent in Egypt, 60 percent in Japan, and 91 percent in Sweden and Myanmar. Many countries have passed some version of an Equal Pay Act, but discrepancies between men and women persist: the United States, for instance, passed its Equal Pay Act in 1963, but women still earn only 77^ for every dollar earned by men.48

Women also often lack access to land and credit. Women are responsible for 60-80 per cent of the world's food production today, yet they own less than 15 percent of the land in developing countries. Creative solutions include the Grameen Bank's initiative to set eligibility rules for housing loans that require that titles to land and houses be in the name of wives as well as husbands. Thus in a divorce a wife is legally entitled to her share of the couple's assets.49

Beyond issues of formal discrimination, women could be better supported in the often-disproportionate roles they play in child care, elder care, volunteer work, and other unpaid labor, which account for a substantial share of all economic activity. The Canadian government, for example, estimates that unpaid work is worth 31-41 percent of GDP. Some governments in industrial countries— where the single breadwinner is no longer the norm and where paid and unpaid work are often closely intertwined—are examining how to take women's unpaid work into account in policy development. By providing liberal parental leave, giving workplaces incentives to offer day care, changing the tax structure to benefit those caring for aging parents, and other similar benefits, governments are working to support the social and economic value of women's unpaid work.50

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