We need a new economics – here’s how to create it

This post by the secretary general of The Club of Rome, Ian Johnson, examines how our current economic model could be re-engineered to meet the social and environmental challenges of the 21st century. It is an extract from his contribution to a collection of writings about the Earth Summit, Rio+20: where it should lead, published by Green Alliance and the RSPB.

High on the agenda of Rio+20 negotiators this month will be the green economy: the need to redirect our economies and economic growth towards sustainability. The wording of the negotiating texts will be vague enough to find political support almost anywhere and this will sit well with ministries of finance, most of which will not attend the meeting and will feel little or no real commitment to its outcome. A text will, no doubt, be drawn up with sufficient flexibility to allow for anything to pass for green growth. Everyone will leave happy and satisfied with the result: another tick in the box of environmental diplomacy.

Yet we face an enormous challenge: that of redirecting economic growth away from the current unsustainable models to new and daring approaches that are both human centric and explicitly recognise that the planet is finite. Rio+20 is another key opportunity to sort out the idiocies and contradictions of the economic growth model that we have pursued for the past half a century. But unless bold moves are made, that opportunity will be missed. A lick of green paint here and there, an increase in renewable energy targets and marginal efficiency improvements will do little to change our current economic paradigm.

The foundations for modern economics were built when the world was dramatically different from today. Current economic theory rests on assumptions that were made over 200 years ago and many are no longer valid today. It is timely to re-think and change our ways. Where might we start?

Recasting growth and wealth
Economic is based upon a false system of accounting that assumes all growth is good. Current measures regard the economic benefits of war, pollution, crime, rising oil prices, terrorism, natural calamities, water scarcity and deforestation as equivalent to activities that promote better nutrition, housing, education, healthcare, physical comforts, social harmony, recreation and enjoyment. National accounts need to be re-engineered to address this.

We could make a start by ceasing to recognise factors that most of us would deem undesirable, such as crime, as positive economic contributions and, in turn, recognise the economic value of factors that are perceived as highly desirable, such as the protection of natural habitats. It can be done and it should be done.

Valuing natural capital
The wanton destruction of the earth’s natural capital can be attributed in large measure to the fact that what makes short term financial sense makes no long term economic sense. The major challenge is to incorporate the value of natural capital into the public policy and investment decisions being made by the public and private sector.

Why not create Natural Capital Boards that could independently assess the real value to society of natural resources and then ensure that such values are used for all investment and policy decisions? The United Kingdom has made a promising start in this regard by establishing a Natural Capital Committee; an innovation that needs to be carefully reviewed in Rio.

The economics of pollution
Progress has been made over the past decade on integrating the cost of pollution into calculations of wealth, creating a precedent that efforts to value natural capital can build on. The health related impacts of pollution are now well understood and awareness of the associated economic impacts has also grown. This is having a significant effect on the calculations of real wealth in some countries. Indoor and outdoor air pollution in China, for example, was estimated to have increased morbidity rates and reduced real GDP growth by more than three per cent.

In contrast, climate change has been described as the largest market failure in our history. Correcting it requires enlightened global public policy at a level and sophistication never before seen in the world. Setting clear price signals for carbon has been absent from the agenda for some time: both a discouraging and ultimately foolish omission.

Beyond environmental economics
Our environment is precious but its management must be balanced carefully with the needs and aspirations of people. In other words, we must manage our natural, social and human capital in a manner that provides the basis for sustained prosperity and prudent management of the planet’s resources. Instead, we are witnessing a divorce that has disconnected the economy from the fundamental role it is intended to serve.

A new economy must heal these rifts. We need to question the assumptions that underlie current economics and alter the system of metrics by which we assess progress, ensuring that valuations reflect the real contributions and the full direct, indirect and inter-temporal costs to human and environmental welfare.

A new world
We need a new economy and new economics to guide us through the 21st century: markets that provide the real goods and services that people need and can reflect the full value to humanity of the natural capital we use and protect; economic activities that find meaningful, remunerative employment for all; enlightened public policy that embeds the value and public good of nature; and a society that sets priority on meeting needs, not through avarice, greed and speculation, but through enlightened self interest and progressive action. That is the economy of the future.

Those gathered in Rio to celebrate twenty years of change must reflect upon the seriousness of the challenges before them. A major overhaul to current economic thinking and a willingness to move to a new generation of enlightened institutions should be the agenda for Rio.

Sadly, it may not turn out that way. As governments haggle and wordsmith over well worn, meaningless texts, the opportunity will be lost once more. Those at Rio could announce the start of a new progressive dialogue on a new global economy and they could agree practical changes in that direction. It would be a start.

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