Short Read

It’s the ecology, stupid

“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.”

Kenneth E. Boulding

Although global GDP has grown exponentially for centuries, researchers from MIT predicted nearly 50 years ago that if we continued as we were, such exponential growth would stall during the second half of this century.  During this time, climate change (and ‘pollution’ in general) would grow exponentially and the costs of these externalities would contribute to slowing and eventually decreasing economic growth (or ‘industrial output’).  So far, these predictions have generally proven accurate.

Figure 1: The ‘Unsustainable’ Scenario
Adapted from Meadows, D., Meadows, D., Randers, J., and Behrens III, W., The Limits to Growth (1972).

Climate change is just the next in a series of limits to growth that humanity has had to solve. In 1798, political economist Thomas Malthus worried about food being a limiting resource for growth of the human species. A “Malthusian catastrophe” was avoided via technological innovations fueled by capitalism.  A current catastrophe we are facing is the use of non-renewable fossil fuels, which has driven our industrial revolution(s) for the past 250 years, but which has come at a great cost to our climate, as harmful environmental externalities have not been properly priced in the market mechanism.

One of the 20th century’s most influential economists, John Maynard Keynes predicted and discussed the future limits to growth of the global economy in some of his lesser known essays: “Some Economic Consequences of a Declining Population” and “Economic Possibilities for our Grandchildren”.

“In the place of the steady and indeed steeply rising level of population which we have experienced for a great number of decades, we shall be faced in a very short time with a stationary or a declining level.”

John Maynard Keynes

Keynes explored the economic consequences of this state and offered possible solutions in which he advocated moving from economic quantity growth to quality growth, by maintaining standards of life and aggregate demand through a lower rate of interest and a more equal distribution of income, as he argued that the poor have a greater marginal propensity to consume.  While the global trend towards lower long-run interest rates is playing out as central banks have largely exhausted their monetary policy toolkit, Keynes’ other solution of more equal income distributions has largely yet to materialise.

“With a stationary population we shall, I argue, be absolutely dependent for the maintenance of prosperity and civil peace on policies of increasing consumption by a more equal distribution of incomes and of forcing down the rate of interest.”

John Maynard Keynes

Keynes’ ideas can be shown to have been modelled in the aforementioned MIT research, which also presented such a ‘sustainable’ scenario, in which the best efforts of investors, entrepreneurs, politicians and central bankers are used to mitigate climate change (e.g. via green funds investing in renewable energy technologies supported by carbon taxes/green subsidies and appropriate interest rates).  Although this would control climate change (i.e. ‘pollution’) and avoid the collapse of the global economy (‘industrial output’), long-term secular stagnation is the best outcome that can be achieved.

Figure 2: The ‘Sustainable’ Scenario
Adapted from Meadows, D., Meadows, D., Randers, J., and Behrens III, W., The Limits to Growth (1972).

Exponential economic growth and subsequent environmental exploitation has significantly contributed to climate change.  The world is therefore becoming an ecological desert as well as an economic ‘desert’ where economic growth rates are slowing.  As the global ecological/economic environment is evolving, so must our political economies.

Adapting to this ‘desert’ is proving difficult, especially for those ‘species’ or varieties of capitalism that have high growth rates embedded in their ‘DNA’, like the liberal market economies (LMEs) of the US and UK – the ‘thoroughbreds’ of the global economy.

Conversely, the ‘camels’ of our global economic ecosystem, those slower-growing, longer-term investing, top-down planning ‘species’ like the coordinated market economies (CMEs) of Germany and Japan, are better suited to thrive in this slowing growth ‘desert’.

Figure 3: ‘Species’ or Varieties of Capitalism
Adapted from Hall, P., and Soskice, D., Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (2001) and Piepenbrock T., ‘The Evolution of Business Ecosystems’ (2009).

By way of illustration, greenhouse gas emissions per capita, compiled by the World Resources Institute, are approximately twice as high for the average of advanced LMEs (e.g. US, UK, Canada and Australia) than they are for the average of advanced CMEs (e.g. Germany, France, Japan and South Korea).

Each ‘species’ or variety of capitalism has a comparative advantage regarding the much-needed innovation to tackle climate change, such as renewable energy or carbon capture technologies.  LMEs with their short-term-focused ‘impatient’ capital and flexible labour markets tend to produce more high-risk, radical or revolutionary product innovation.  To the contrary, CMEs with their long-term-focused ‘patient’ capital and protected labour markets tend to produce more low-risk, incremental or evolutionary process innovation.

“The institutional frameworks of liberal market economies provide companies with better capacities for radical innovation, while those of coordinated market economies provide superior capacities for incremental innovation.”

Peter Hall and David Soskice

CMEs’ long-term investment and subsidies help to drive the cost of green energy down, while carbon taxes help to drive the cost of non-renewable energy up. CMEs, like Germany and Japan, are among the world leaders in solar energy as a percentage of total electricity consumption, according to the International Energy Agency.

Conversely in LMEs, investment and subsidies in green technologies as well as carbon taxes remain relatively low, as they are being resisted by both short-term utility-maximising consumers and profit-maximising producers of carbon-based energy.  Entrepreneurial innovation is therefore required in the ‘creative destruction’ of these industries and technologies.

The diversity of our global economic ‘species’ currently drives ‘symbiotic competition’between the varieties of capitalism in our global ecosystem.  As we reach the limits to growth on our finite planet however, our political economies will likely evolve towards ‘symbiotic mutualism’ to leverage the strengths of each ‘species’ and thus solve the global problems that we have co-created. Evolutionary game theorists have demonstrated that such cooperation can evolve over time as an ‘evolutionary stable strategy’ even between self-interested political economies in the current anarchic state of international relations.

The global solution therefore lies in acknowledging and leveraging the strengths of each ‘species’ of capitalism.  To overcome our successive limits to growth and achieve sustainable global economic growth, it seems therefore that it is horses (or camels) for courses.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: