The Economics of Sustainability – A Comparison of Economic Models
Our current economic paradigm is one in which the continuous acquisition of monetary wealth and material resources is both demanded and valued. In many of the wealthier nations economic growth has come at great cost to indigenous populations who were invaded and usurped, and to other nations who suffered the looting of their resources as they were colonized. In some cases populations suffered by literally being enslaved for the sake of generating further wealth for the already powerful owners of capital. Current statistics regarding the unequal distribution of wealth in today’s society indicate that little has changed since the days of the conquistadores and their ilk.
Disproportionate rates of poverty, unemployment and homelessness reflect the inherent inequalities that are built into a system based on violent acquisition of scarce resources. In order to understand how best to address the failings of our current paradigm it is necessary to examine the model and its alternatives.
The Economics of Today
Our current economic paradigm is one of continuous, unchecked growth with no commonly accepted notion of the point at which an economy has reached the level of ‘enough'. Growth in economic terms relates to increased capacity regarding the production of goods and services and is usually associated with technological development, which raises productivity levels while lowering the requirements for labour, capital, and energy. In comparing one country's economic growth to another, per capita GDP is the measurement of choice regardless of its lack of attention to the equity of distribution within any given country. It tends to be assumed that the higher a country’s per capita GDP is the higher the standard of living is for its population as a whole. However no state has yet achieved the ideal of a high standard of living for all people despite its economic successes.
Classical economics refers to theories surrounding the functioning of markets and market economies, developed in the 18th and 19th centuries by the so-called founding fathers of economics: Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill, whose emphasis on economic “freedoms” formed the basis of the system of free trade that characterizes contemporary economics. The paradigm began as the concept of "the wealth of nations" in which the development of a country’s economy beyond that generated by population growth and its implicit increase in labour and productivity were first considered.
It was Adam Smith who developed the paradigm beyond agricultural productivity to include the notion that manufacturing was central to a country’s economy. David Ricardo further developed the paradigm by introducing the concept of “comparative advantage” to complement this. Comparative advantage argues that trade is beneficial for economic growth because some products and services can be obtained more cheaply if imported rather than produced within a country’s borders. This theory became central to today’s argument that free trade is an essential component of economic growth.
Neoclassical economics is a more sophisticated development of the classical economic model and is a school of thought that that enjoys a near-monopoly over what is taught to today’s budding economists. The school of thought makes a number of assumptions that are disputed by some due to their failure to represent realistic situations. One example is the relationship of supply and demand to an individual's rationality and ability to maximize utility or profit. This assumption ignores the fact that people do not always behave rationally. Neoclassical economic theorists also claim that issues such as labour rights and standard of living will automatically improve as a result of economic growth, a claim thus far unsubstantiated.
Robert Solow and Trevor Swan developed the Solow-Swan Growth Model in the 1950s, which involved a series of equations demonstrating the relationship between labour-time, capital goods (means of production), output and investment. This model emphasized technological change as playing an even more important role than the accumulation of capital. An erroneous assumption of this model, however, is that countries use their resources efficiently.
The neoclassical model makes three important predictions based on the Solow-Swan growth model. The first involves the assumption that people will be more productive if given more capital, hence the prediction that increasing capital relative to labour promotes economic growth. The second prediction is that economies of poorer countries with lower per capita GDP will grow faster. This prediction is based on the assumption that each investment in capital produces higher returns in poor countries than in rich countries. The third prediction is that economies will eventually cease to grow due to diminishing returns to capital, thus leading to a ‘steady-state’ economy. This steady state, according to the Solow-Swan model, can be overcome by the invention of new technology, allowing for greater production with the use of fewer resources, thus allowing for further growth. None of these predictions are well supported by the evidence available, particularly the prediction that poorer countries will grow faster until the steady-state is reached.
Alternative Economic Models
Alternatives to classical and neoclassical economic theories are largely underrepresented by academia and are given little attention in the teachings of universities. For this reason there is very little awareness of their existence and their presence in public discourse is barely discernible. There are, however, a number of alternative models, each presenting its own solutions to issues perpetuated within the current system.
From classical economists to contemporary ecological economists the transition from a growth economy to a steady-state, as originally conceptualized by John Stuart Mill as an economy that is stable or only mildly fluctuating, has been considered a desirable goal. The expectation was that this steady-state would generally be reached after a period of economic growth.
In Adam Smith’s book The Wealth of Nations it was theorized that open-market trading would eventually lead to a Goldilocks-like production of just the right quantities of commodities, division of labour, wage-increase, and economic growth. Smith also recognized that such growth is limited as, in the long term, population growth would lead to declining wages, increased scarcity of resources, and ineffective division of labour. Smith predicted that a growth period could not exceed 200 years before it would become necessary to stabilize. Indeed, John Stuart Mill commented that such stabilization was, in fact, desirable as illustrated by his famous words:
“It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living and much more likelihood of its being improved, when minds cease to be engrossed by the art of getting on.”
John Maynard Keynes also advocated aiming for a steady-state economy in which society would be able to focus on ends, being happiness and well-being, and not simply the means of survival, as characterized by economic growth at the national level and pursuit of profit at the individual level. His almost utopian view is represented in his prediction that:
“The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behavior and religion.”
Keynes was, however, mistaken. That day has not yet come. We are still striving within a growth economic paradigm and have yet to reach this steady-state which was considered the end goal, in which humanity would be able to concentrate on creative arts and the pursuit of knowledge and well-being as opposed to the mere struggle for survival.
The arrival of an economy at a steady-state, although it theoretically follows a period of growth, may also follow a period of downsizing. This point is especially pertinent when considering that one of the defining factors of a steady-state economy is that it may not exceed ecological limits. This means that if an economy, whether local, national or global, has already reached or surpassed the carrying capacity of its landbase, a period of downshifting will be necessary in order to reach a sustainable steady-state.
For a steady-state economy to be feasible, according to the theory, it is necessary to maintain stable or only mildly fluctuating population, meaning that birth rates must not exceed death rates. In addition, the consumption of energy and material resources must remain steady - in that production and consumption rates must be equal to, and not exceeding, depreciation rates. Up until fairly recently economic activity functioned at a low enough level to avoid detrimental interference with ecological sustainability. However, the growth economic paradigm of the neoclassical era has upset this natural balance and has led us to the brink of environmental disaster without achieving economic stability for the majority. For this reason it is of urgent priority, according to steady-state advocates, that rebalancing the equation occurs.
Achieving the balance is not an easy task. There are cases in which the benefits of growth appear to outweigh the costs, for example, in situations where a population’s consumption is insufficient to meet its needs. In this particular case, reaching a steady-state may necessitate redistribution of resources in order to provide for everyone’s needs while maintaining ecologically sustainable levels of consumption. There are also situations in which an economy has overshot the carrying capacity of its landbase, meaning that downsizing will be necessary before a sustainable steady-state can be established.
It is clear from our experience thus far that economic growth cannot be relied upon to alleviate poverty. Our current paradigm sees the dual threat to environmental sustainability of the poor, who struggle to meet their basic needs, placing the environment lower down on the scale of priority, and the rich, who tend to consume resources far beyond the limits of sustainability. As economic growth and long-term sustainability are not realistically compatible it is necessary for an economy to distribute wealth more equally, as well as efficiently, in order to effectively reach a steady-state.
True Cost Economics
The true cost economic school of thought is one that is gaining traction during our era of increasing environmental awareness. This is a model that takes into account the cost of negative externalities, thus placing a higher price tag on goods and services that cause damage to the environment or any living being. There is also support within the true cost school of thought for the notion that any product or activity that causes harm to the environment or any living being, either in a direct or indirect manner, should be taxed in accordance with the damage incurred.
This increased emphasis on ethics can, however, have negative consequences for many, in that many of the items and services that most people, at least those in the developed world, take for granted are likely to be rendered unaffordable if their true costs are really taken into consideration. One example provided to demonstrate such costs is the price of a new car; with the externalities of air, noise and other kinds of pollution caused by both the use and manufacture of the vehicle taken into account, being estimated at $40,000 above that at present. Such cost increases effectively prohibit the closing of the gap in opportunities between the rich and the poor and perpetuate a cycle whereby resources are largely inaccessible for the majority while the minority may continue to consume and exploit at the level to which their swollen bank account permits.
A true-cost economic paradigm, although intended to encourage a more sustainable mindset and thus influence behavior via directly influencing pricing may, in effect, render an economy stagnant by inhibiting monetary circulation due to cost increases. If wealth is not distributed in a manner that facilitates access to resources for the majority then the majority will be unable to participate in the system in any meaningful way. Only a transition to genuinely more sustainable forms of production is likely to facilitate participation on a scale needed to maintain the feasibility of the system. Of course this is a possible scenario; however, the transition to such a system requires courage on the part of those with the political power to institute changes that are likely to be extremely unpopular at the corporate level, where the majority of the real clout lies.
Unlike the steady-state and true-cost models, participatory economics is the only alternative to classical economics discussed here that is not capitalist in nature. An anarchist’s near-utopian vision of a democratized economy, participatory economics, often referred to as parecon, was originally proposed by Michael Albert, an activist political theorist and Robin Hahnel, a radical economist. In the system of parecon decisions regarding the production, consumption and distribution of commonly owned resources are participatory, meaning that the decisions are made by those affected by their outcomes. The anarchist’s answer to centrally-planned socialism places not only the means of production in the hands of the population, but also the control over the direction the economy takes. Parecon intends to facilitate equity, solidarity, diversity and self-management, while maximizing efficiency. Central to the functioning of this system are workers' and consumers' councils which implement self-managerial methods for decision-making, balanced job complexes, remuneration for work according to effort and sacrifice made and participation in planning.
In allaying the fears that some might have about fully participatory planning it is important to mention that in the parecon system of self-managerial decision-making people have input to decisions in a manner that is directly proportional to the degree to which they are affected by them. This system is effectively parecon’s answer to the neoclassical concept of economic freedom within a market paradigm, which, as proponents of parecon argue, is a concept that has been co-opted and abused by capitalist ideologues.
Within a participatory economic paradigm, decisions affecting a number of people may be arrived at via a majority vote or via consensus. Depending on factors such as potential risk or harm, or the level of effort to be expended in order to accomplish a goal, some decisions may require a higher majority than others in order to be passed, or even total consensus. Such a scenario bestows the power of veto upon any individual who is greatly affected by the outcome of the decision. However, in cases where decisions are purely personal and do not affect others there is no need for collective decision-making or voting; these decisions are left up to the autonomous individuals affected by them.
With the balanced division of labour proposed by the parecon system the notion of economic hierarchy is theoretically absent with the goal being equity via the empowerment of all participants. As some tasks are clearly more comfortable and empowering than others, job complexes are balanced with each individual taking responsibility for a range of tasks, some of which are more empowering, some less so. This essentially dissolves the system of class stratification that characterizes our current economic paradigm in which an accountant or manager, for example, assumes an empowered role that facilitates the formulation of plans and ideas, while a janitors or shop assistant does not have either the capacity or training to be so empowered. Without balance those assuming less empowered positions have little to no genuine participation in decision-making, as is evident within our current economic paradigm.
As regards remuneration for labour this is calculated on the basis of effort expended and sacrifice made. Dangerous or uncomfortable work, for example, would be paid more highly for the same number of hours as more comfortable work in the parecon paradigm, allowing those making greater sacrifices the opportunity to work fewer hours for the same pay and enjoy more leisure time in return for their sacrifice. It is recognized, however, that not everyone has full capacity to work equally. Therefore remuneration of those with disabilities, the elderly, and those otherwise unable to work to full capacity is based on their level of need. Free health care, education and skills training are provided to all in the parecon system as there is no notion of profiting from providing for people’s basic needs.
Parecon gets particularly interesting when it comes to the concept of money. Instead of traditional currency, in the parecon system money would be replaced by a personal voucher system in which vouchers would be non-transferable and only usable to purchase goods from stores. Workers would be rewarded for their labour with electronic credits, which would be allocated in terms of the level of effort and sacrifice necessary to carry out their work. These credits could be shared and distributed among people in any way they wish. Accumulated credits would have an inflexible value, and once used for purchase they would be deducted from the individual’s total, and from the system, rather than being passed from one individual to another in the monetary rollercoaster-ride that characterizes a capitalist paradigm. There would be no banking system or any form of investment. For an individual to accumulate more credits they would simply have to work more, or carry out less desirable labour in which the remuneration is higher. It would, however, be possible to borrow credits if necessary, but this loan would be interest-free as there is no notion of profiting from the handling of finance within a parecon system. This extreme makeover of the monetary system is expected to have the effect, according to its proponents, of rendering bribery, corruption or even begging impossible. It is unclear, however, how a parecon country would trade with other non-parecon countries who may not agree to parecon terms of exchange. It is possible that a parecon country would either have to be self-sufficient, or accept the use of money exclusively for the purpose of international trade.
Within the parecon system, regular participatory planning events would be held in which participants would decide upon what and how much would be produced. Regarding decision-making at community planning level Albert and Hahnel proposed the creation and organization of consumer's and producers' councils. The proposed functioning of these is similar to workers' councils, but they are the decision-making bodies for the planning of consumption and production. Councils may operate on a variety of levels from local through to national, with regard to the scope of the decision to be made.
The management body for the consumers’ and producers’ councils is known as an Iteration Facilitation Board (IFB), and is responsible for decisions regarding economic allocation. These boards function by accepting a range of proposals for pricing regarding production and consumption, and operate at maximum transparency with limited powers of mediation. The result is a consistency of pricing and production quotas, and takes into account the social and ecological costs of production. Prices of goods that are harmful would be inflated in order to discourage consumption and redirect it toward more benign alternatives.
Critics of parecon tend to emphasize the perceived level of bureaucracy involved in lengthy participatory decision-making and ensuring administration is kept transparent. Such criticisms can also be applied, however, to other systems with heavy administrative loads shouldered by governments and corporations. What these critics often seem to overlook is that the overhaul of the monetary system frees up workers from the former banking and finance sectors, thus making them available for the tasks associated with facilitation boards, etc. Albert and Hahnel estimate no increase in the level of bureaucracy, nor the number of workers involved in it, from that of our current capitalist system.
Regarding innovation, parecon has an advantage of efficiency over the current capitalist system. Capitalism tends to attribute innovation to individuals and corporations with the process of applying patents and intellectual property rights and rendering the products or services unavailable for further development by the collective intelligence of the wider community. Industry structures and barriers to market entry within the capitalist system also reward some individual innovators while restricting others and limiting the availability of the full range of new technologies. In parecon all innovations would be made fully available in order to maximize efficiency and harness the collective intelligence of the community at large to achieve maximum potential.
Parecon also holds an added value over and above capitalism in that justice and fairness are qualities that are built into the system in much the same way as injustice and unfairness are built into the neoclassical system. A market economy only takes into consideration the interests of supply and demand, or of the consumer and producer. However, these are not the only individuals affected by a given transaction, with all others being excluded from the decision-making process. These others may, in some cases, bear the social or environmental costs of the transactions that others benefit from. Parecon does not unjustly thrust negative externalities upon individuals who have no part in decision-making, but empowers all who may be affected by a given decision with a right to input; thus the defaults of parecon include justice and fairness. In contrast, our market-driven capitalist paradigm accepts abuses perpetrated by corporations wielding hefty influence over government decisions, thus externalizing all negative costs onto society whilst perpetuating the upward flow of capital into their perpetual cycle of wealth-driven power.
A resource-based economy, or RBE, strives for a combination of the benefits of steady-state, true cost and participatory economic models, but does so within a governance system that is neither capitalist nor socialist in nature.
Like steady-state economics, an RBE seeks no economic growth, recognizing the necessity of remaining within the boundaries set by the carrying capacity of any given landbase. Within the RBE paradigm it is necessary to gain as full an understanding as is scientifically possible of exactly what carrying capacity entails. With a more holistic perspective it is understood that while carrying capacity does not change, efficiency and sustainable management of resources can be optimized to work in harmony with fluctuations in population, developments in the realms of science and technology, and with unforeseen circumstances such as natural disasters. The RBE paradigm does not advocate downshifting as a response to overshooting carrying capacity, but tends more toward applying technical solutions that can reinstate balance while continuing to provide a good standard of living for all. An RBE may be compared with a steady-state economy in the sense that its core principle is sustainability, although various other principles are also of great importance.
The value of true-cost is also implicit within an RBE in that the social and environmental costs of any endeavor are studied scientifically, evaluated, and applied to decisions regarding production, consumption and distribution of resources. However, as an RBE is a non-monetary economic paradigm the exploitation and destruction of resources is not mitigated by price controls, and the encouragement of more sustainable practices is not facilitated by cost-effectiveness. Instead, the complete elimination of the monetary system removes the incentive for exploitation and destruction while also facilitating the uninhibited development of technical solutions that ensure the sustainability of abundant resources. Sustainable practice therefore becomes the default while freedom from the restrictions of labour and cost necessitated by a monetary economic paradigm enables greater creativity and innovation for the continued development of society. An RBE consolidates the concept of true-cost in the removal of monetary value, recognizing that money is simply an arbitrary artificial barrier to sustainable access to resources.
The democratic involvement of the people as direct participants in decisions affecting their wellbeing is also implicit with an RBE, but operates on numerous levels. With the elimination of money and the socially stratified division of labour, like the parecon system, the default of an RBE is equality, rather than hierarchy and power-play. This equality is also present in access to education, healthcare and resources, and is a necessary prerequisite for equal access to participation in any system.
Ways in which the resource-based economic paradigm could be considered to supersede the benefits of even the participatory economic system include the automation of labour-intensive, repetitive, and also dangerous tasks. This freedom from such work, coupled with access to resources without the barrier of trade of any sort facilitates the steady-state vision John Maynard Keynes predicted of liberation from the struggle for the means of survival followed by the opportunity to pursue the ends of creativity and well-being. The emphasis on intrinsic motivation over extrinsic reward and punishment allows for work to be carried out for the love of it, for the sense of purpose it stimulates, and for the challenges and opportunities for development that may be presented. Value placed on the understanding of social structures, sociology, psychology and learning process intensifies the capability of an RBE to cater to the needs of all in a way that values the individual intrinsically and stimulates the maximization of human potential.
The concept of decision-making within the RBE paradigm is, however, quite different from that of parecon, or indeed any other. Transparency and access to information and education form the basis of understandings, which are valued more highly than beliefs. The traditional process of deciding upon a course of action is unavoidably influenced, often with the potential for negative outcomes, by beliefs, emotional responses, ego-driven power-play between dominant personalities and suppression of more passive personalities.
A resource-based economic paradigm advocates the implementation of the scientific method in all areas of society, and planning is no exception. Instead of being vulnerable to personal whims, personality and ego-battles, decision-making within an RBE is a process of empirical investigation, presentation of evidence and arrival at the most logical conclusions. Rational consensus can be reached within this paradigm due to the requirement of evidence for all claims, which supersede any individual’s opinion. In cases where specialist knowledge is necessary certain decisions are the domain of entrusted experts who have the knowledge base required to arrive at such decisions expediently. In certain situations there would be no decision-making process at all, with actions simply being automated based on calculations. Such situations may include the production and allocation of resources which, in order to be both sustainable and equitable, must not be influenced by personal bias or vested interest, and can, therefore, be better achieved by a computer than by a boardroom full of politicians and lobbyists.
It is thus that an RBE is governed not by politicians or corporations, nor even by popular opinion, but by its core principles as upheld by the equal participation of its members, assisted by the objective process of the scientific method as applied to human and environmental need. When the attributes of a range of economic alternatives are weighed up the resource-based economic paradigm presents an innovative and holistic response to the needs of humanity and the planet which sustains our very existence. This radical paradigm based on the principles of sustainability, equality and liberty is one that deserves to be at the forefront of contemporary economic discussion.