Toward A Living Economy: From Here To There

In this series I have been considering the idea of a living economy in an article by David Korten. He points to three rules or principles from nature that would shape such an economy: 1) Cooperative Self-Organization, 2) Self-Reliant Local Adaptation and 3) Managed Boundaries. In this last post I want to explore some ideas about how to get from here to there. Some of these thoughts are influenced by E.F. Schumacher and an article from the Center for the Advancement of the Steady State Economy (CASSE) “NWF adopts Key Element of Steady State Thinking” by Eric Zencey.

The first thing that must change is our obsession with GDP to some measurements of economic activity that more accurately describe and account for the totality of human life.

Every economics textbook warns that GDP is a poor measure of well-being, and yet by default it continues to be the indicator that economic policy seeks to maximize. GDP doesn’t measure well-being at all, but simply tries to tally the dollar value of final goods and services produced in the U.S. …By design, GDP also leaves out ecosystem services; if you hang your laundry out to dry, the sun and wind do the job, but if you throw it in the dryer you use electricity, increase your carbon footprint, and give GDP a bit of a bump. Ecological economists identify a dozen categories of ecosystem services, including climate stability, recycling of nutrients, creation of soil fertility, maintenance of a library of genetic diversity, pollination, purification and transport of water by the solar-powered hydrological cycle, flood protection services of marshlands and forests, and so on.

In some ways, this is a more radical shift than it appears. It’s not just that we should replace GDP with a better number and continue relying on only one measurement. At some point economics came to be commonly understood as a discipline that dealt with business and finance, which while certainly being important was not the totality of human life and existence. The reality is that economics is not somehow compartmentalized and segregated from those parts of our lives that economics accounts for and those it doesn’t.

GDP fails to measure things that concern well-being such as volunteer work and domestic production, ecosystem services, defensive and remedial expenditures. According to Zencey, “By some estimates, as much as one-quarter to one-third of our GDP consists of such expenditures.” On the other hand there are some interesting examples of things GDP counts as economic positives that most people would not.

GDP also misreads our level of well-being by treating defensive and remedial expenditures as positive economic activity. Remedial: the $12 billion that British Petroleum alone has spent (so far) in its efforts to clean up the catastrophic oil release in the Gulf of Mexico counts as an increase in GDP, though the expenditure comes nowhere close to putting things back to their pre-Deepwater state. Defensive: if someone breaks into a neighbor’s house and you decide to buy a burglar alarm, GDP goes up—but you probably don’t feel as secure as you did before the break-in.

There is an dark underbelly to the economics of our current incarnation of capitalism that depends heavily on defense spending and fancy accounting to make oil spills economically positive activities. I do see a lot of hope that economists (what little I read) seem to be moving away from the previous dependence on this one measurement. However, without a larger shift in thinking toward holistic approaches, I believe we will continue to fundamentally misunderstand the nature of our society. Zencey goes on to describe what he sees as the primary problem in our current economic understanding.

The root cause of our environmental problems—our ecological crisis—is infinite planet economic theory, the rules and axioms of a discipline that tells us that it is possible to have infinite economic growth on a finite planet…You can get to that conclusion only if you ignore the laws of thermodynamics. Economic production is, at bottom and unalterably, a process that relies on physical inputs. No amount of human ingenuity will ever let us make something from nothing or nothing from something. No amount of ingenuity will let us create energy out of nothing or recycle it to use it again.

In other words, economics must become more of a hard science than the soft science that it continues to be (regardless of what the mathematical geniuses that brought us the financial crisis tell you). Economics must have as its foundation in the science that is the basis for our understanding of how the world works, what is possible and what is not. If economics contradicts science in its assumptions, which one should we rely on? Should we alter the laws of thermodynamics to fit our economic theories? Sounds silly, but that’s the current state of our economic theory.

So, what’s the alternative to our current system?

The National Wildlife Federation did not specifically sign on to the steady-state vision; but by calling for an accurate measurement of the costs of economic growth, it has officially joined us on a path that can lead nowhere else.

Obviously the article comes from proponents of a steady-state economy. So, perhaps this kind of hyperbole is to be expected. I still think stating this “can lead nowhere else” is an exercise in the same narrow thinking that led us to bow down to the almighty GDP. For those not familiar with the idea of steady-state economics, it is perhaps most easily understood in contrast with the idea of a growth economy. My understanding is that a steady-state economy is not based on the growth of economic activity, but the health and sustainability of economic activity. In other words, if the economy is able to support all its members then there is no need for growth. There is a kind of recycling of funds as dollars circulate through many hands.

The main criticism that I have heard of steady-state economics is that is not a dynamic system (like an ecosystem) which is able to be flexible and adapt to a constantly changing environment. If a steady-state system simply fixes the amount of resources available to the economy at some predetermined (sustainable” level then it is not in reality the kind of living system that a living economy would demand in response to the living dynamics of the ecosystems on which all life is based.

Here are my three main conclusions from this thought exercise about what is necessary to move in the direction of a living economy:

1. Moving from narrow measures like GDP to more complex and holistic understandings of economics
2. Basing economics on science in two ways: First, acknowledging the implications of thermodynamics on the means of production. Second, returning to an understanding of economics as a discipline concerned with understanding human behavior and interactions more than how to do business, make money or simply understand the complicated system we have developed.
3. Find ways to experiment with other possibilities on local and regional scales, including steady-state principles and/or the idea of a living economy explored in this series. This can be done in small groups within churches or as congregations.

To expand slightly on #2, it seems that much of the energy of economists is spent on defining, studying, analyzing and understanding the complexities of the current system we have created. With complex financial instruments like credit default swaps and mortgage-backed securities it’s clear that just trying to understand the economic system as it exists and functions today can easily take up all the time, energy and brainpower of even the brightest economists (and it does). The problem is that this narrow approach to the field of economics is not capable of solving the economic and ecological problems that face us. Economics must return, as stated above, to its roots as a discipline that seeks to understand human behavior and interactions.

The origin of the word economics is the Greek word oikos, meaning “household”, which incidentally is also the root for the word ecology. In other words, these concepts of economics and ecology encompass all of life. Therefore if economics doesn’t account for a more holistic picture of human life and activity, particularly as it relates to the ecosystems on which we depend, then it has ceased to have an authentic relationship to its roots. Instead of segregating these fields of economy and ecology we must recognize their fundamental relatedness. With a broader scope environmentalism and business would no longer need to be mortal enemies, because both will recognize that they are kindred spirits and both are interdependent.

I tried to be as practical as I could, but this still seems somewhat abstract and theoretical. I’d appreciate any suggestions for practical application of these thoughts.