Toward a greener economy

Market bubbles occur when goods are traded at prices that greatly exceed real value. They burst when they grow so bloated that they become unstable. The current economic turmoil, widely viewed as the worst since 1929, is one example of what can happen when the difference between market value and actual value becomes too great.

Environmentally minded economists have long warned that equally burstable ecological bubbles can occur if humanity lives beyond earth’s capacity to regenerate. The problem, they say, is that we’re addicted to economic growth. Mainstream economics assumes that the economy, the engine of modern civilization, can grow perpetually.

But if growth means ever-increasing consumption of natural resources (and it has, since the start of the Industrial Revolution 250 years ago), then it can’t continue indefinitely. Earth and its resources are finite.

Herman Daly, an economist at the University of Maryland’s School of Public Policy in College Park, says that humanity is already at or beyond the point where economic growth is counterproductive, where the environmental and social costs more than cancel the gains.

“So-called ‘economic’ growth already has become uneconomic,” Professor Daly stated in a talk last spring. “The growth economy is failing.”

For some time, Daly and others have called for a rethinking and restructuring of our economy before nature restructures it for us. The notion of perpetual economic growth warrants scrutiny before it drives us over a cliff, they argue. The science of economics must be overhauled to better account for earth’s physical realities. Civilization won’t have to stop in its tracks, just shift emphasis, says Daly. The “steady state economy” he foresees emphasizes qualitative development over quantitative growth. “Growth is more of the same stuff,” he says. “Development is the same amount of better stuff.”

In his 2000 book, “Something New Under the Sun,” John McNeill, professor of environmental history at Georgetown University in Washington, D.C., tells how unprecedented the past two centuries of human history have been.

“Most economists are under the impression that 2 to 6 percent annual growth is a normal condition for human society,” says Professor McNeill. “A longer historical view would tell you such growth is a peculiar period in human society.”

Growth unprecedented in history
For the vast majority of human history, stasis was the norm. After AD 1, it took the human population 1,500 years to double in size to between 400 million and 500 million. But since 1820, population has increased more than sixfold, to 6.6 billion. That’s an incredible achievement for a species that, at the beginning of the agricultural revolution 10,000 years ago, was outnumbered by baboons, writes McNeill.

In the past 200 fossil-fueled years, the per capita growth of the gross world product (the total market value of goods and services) has far outstripped population increase. People are richer and live longer. But no one should overlook the cost, says McNeill. In that period – and especially during the 20th century – humankind has transformed the earth.

At the dawn of the Industrial Revolution in the late 1700s, English demographer Thomas Malthus foresaw problems with growth. If populations grew while resources remained constant – the tendency, he thought – there would be less for each person. Most people would end up poorer and more miserable.

That generally hasn’t occurred. On average, people are much richer. (In absolute terms, about the same number of people are poor today – 800 million – as in Malthus’s time.) Malthus failed to account for innovation and technology, which have let humanity squeeze more and more from the same quantity.

Or is it just ‘the new Malthusianism’?
For this reason, Pat Michaels, senior fellow in environmental studies at the Cato Institute in Washington, D.C., a libertarian think tank, dismisses any talk of the need for sustainable development as “the new Malthusianism.” The market will self-correct, he says. When materials become scarce, prices will go up. Consumption will drop. That will spur innovators to develop alternatives. It is this very dynamism that makes modern societies sustainable. “In reality, the development that we have is, ipso facto, sustainable,” he says.

Peter Victor, an economist at York University in Toronto and author of the forthcoming book “Managing Without Growth,” has a slightly different view. Yes, innovation theoretically could keep the economy humming along forever, he says. Unfortunately, that hasn’t happened.

“The pace at which we’ve become more efficient hasn’t kept pace with the rate of growth,” Professor Victor says. For example, prices for raw materials have gone down even as the environment has become increasingly degraded. This suggests a flaw in market pricing.

“We would have thought that the price system would have given us a signal that we were doing this,” Victor says. “And it’s not giving us that signal.”

This is a recurring complaint among environmental economists: The science of economics often treats economies as if they exist in a vacuum. Environmental costs – greenhouse gases, waste, overfishing – are rarely reflected in market prices.

That was fine in times past, when a large margin separated the edges of the human sphere from the limits of earth’s biosphere, says Robert Costanza, director of the Gund Institute for Ecological Economics at the University of Vermont, Burlington. But now the margin is much slimmer – perhaps totally gone – and omitting the true cost has become a liability.

“When the markets get out of kilter with reality, that’s what causes bubbles,” Professor Costanza says. He doesn’t advocate squelching the market, but guiding it – and not being guided by it: “The market is a good servant, but it’s a poor master.”

Ecological economists say we can start by examining economic yardsticks like Gross Domestic Product. GDP counts oil spills and other calamities that cost money to fix as additions, or positives. GDP has no way of counting important things like growth of leisure time or the contributions of stay-at-home parents.

“You get what you measure,” says Jim Barrett, executive director of the nonprofit Redefining Progress in Washington, D.C., which has developed an alternate Genuine Progress Indicator. “And we don’t measure things that matter.”

Shift tax from income to raw materials
Daly, a former senior economist in the World Bank’s Environmental Department, has other recommendations. Scarce re­­sources should be taxed at the point of extraction. Cap-and-trade systems should tax waste returning to the environment. Reduce personal income taxes to keep the overall tax burden the same. As Costanza says, “Tax bads rather than goods.”

These structures will drive the economy in the direction of frugality, which begets efficiency, says Daly. The economy’s emphasis will shift from production to service and maintenance, from “more and more” stuff to the same amount of ever-better stuff. In such an economy, companies would probably shift from selling products to leasing them. He points to Interface Inc., in Atlanta, a “closed loop” company that leases out carpeting and then gathers it for recycling when it wears out.

“We can’t live without polluting and depleting,” says Daly, “but it’s a question of keeping it within the limits of the biosphere.”

To this list Costanza adds the creation of new institutions to manage property owned by all, like air and sea.

“We need to develop new institutions that own global commons like the atmosphere,” says Costanza. “Right now, nobody owns the atmosphere, so dumping whatever you want into it is OK.”