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Sustainability Under Under Scrutiny

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Discussion paper 01 /11

SuStainability under Scrutiny real ValueS and their role in Promoting 1 the new economicS of growth  Ian Johnson , Johnson , Secretary General, Club o Rome.

The Club of Rome,


introduction The Club o Rome was the rst and, or many years, the most infuential thinker on long-term uture issues. In 1972 “Limits to Growth” 2: the rst book to the Club o Rome and a pioneer work at the time “kick started” the environmental movement that was to ollow, infuenced thousands o people into thinking about our natural environment and shaped some o the more en-lightened policy-makers o that time. In many ways, the genius o Limits to Growth was the act that it asked the right questions; it posed the dilemma as a problem in search o a solution (all too oten this is reversed!); and it ocused us all on the longer term. Intellectually Intellectually it also s tressed the importance o systems thinking. And it coined a new term: “The Problematique”. There was intense debate around Limits to Growth, especially amongst the technological optimists and those who mistakenly understood the book as a series o predictions rather than a refection o outlooks and scenarios. Over Over the course o the next two decades many ne books rom eminent researchers were prepared and submitted as reports to the Club o Rome. They were ad hoc in nature but o high quality and great relevance.

1 This paper is based upon a series o speeches given to the Spanish As sociation o the Club o Rome: “Conerencia: El Club De Roma Hoy Y Su Vision Del Futur Humano”, 26 de Abril 2011, Caixa Forum, Barcelona; to the EU Chapter o the Club o Rome as part o the 77 th Aurelio Peccei Lecture, Brussels, 26 May, 2011; and to the Japan Chapter o the Club o Rome, Tokyo, Tokyo, 31 May 2011.

2 See Donella H. Meadows, Dennis L. Meadows, Jorgen Randers and William W. Behrens III, Limits to Growth, Universe Books, New York, 1972.

The Club of Rome,


Some our years ago, the Club moved towards an integrated work pro-

Limits to Growth: Focused largely on bio-physical limits and the

gramme: “Pathways to World D evelopment”. This allowed us to revisit

identication o key global problems (“the Problematique”). 4

the “problematique” and to state it in a more contemporary setting where we had already witnessed the realities o “Limits to Growth” and

Pathways to worLd deveLoPment: Included social and economic

where new ndings and new res earch had provided us with new insights.

actors, as well as biophysical, and stressed the inter-connectedness o

The “Pathways” work programme ocused on ve interlocking themes:

ve clusters o issues.5

Environment and Natural Resources, Globalisation, International And, as I discuss in this paper, a urther evolution towards:

Development, Social Transormation, Peace and Security. Although not quite complete (it will be completed this year) our eorts have already provided valuable insights to move towards a new phase or the Club o

new economics, Growth and reaL vaLues: An exploration o the

Rome which ocuses on the systemic or “root” causes o the problems

underlying causes and their remedies.6

we ace and on identiying potential solutions. This paper presents my own thinking o how we must build upon the ne

The world  in 40 years

One important hallmark o the Club o Rome is its willingness to think orward. And to move into the substance o my paper I would like to do

legacy o the Club’s work and move it orward towards a new and

the same. As we celebrate orty years o “Limits to Growth” it is worth

emerging set o issues that relate to addressing the underlying causes

considering lie orty years onwards. I have chosen 2050 as a convenient

and to seeking solutions to address the most pressing global issues we

place to reset our global clock; to consider how the world may dier


rom today and as a convenient time rame through which we w ill have to have in place a new planetary order i we are to satisy our dream o

So let me recap: We can see a clear evolution o thinking in the Club o

a saer and airer world.

Rome over the past orty years although we have held on to our basic belies and principles: that o global relevance, a systems-oriented per-

So what might we expect between now and 2050?

spective, o integrated thinking and o a longer term perspective 3 that has evolved rom:

today’s PLiGht? I start with our current situation and some o the warning signs beore us. Within the rst decade o this Millennium we have seen ve crises 7: Poverty: We are witnessing the moral crisis o a Planet with plenty,

yet shared with so ew. It remains indeensible that more than one third o our ellow humans remain in dire and absolute poverty. At the turn o the Century our world leaders pledged to hal world poverty by 2015. These goals will not be met. 3 The Articles o Agreement o the Club o Rome now cover the ull range o perspectives and are governed by the ollowing principles: “(i) The need to adopt a global, systems-oriented perspective in examining the issues o the modern world, with the awareness that the increasing interdependence o nations and the globalization o problems pose predicaments beyond the capacity o individual countries; (ii) The need or coherent, integrated thinking to achieve a deeper understanding o the complexity and connectedness both o contemporary problems and o practical solutions – political, social, economic, technological, environmental, psychological and cultural-which the Association terms “the World Problematique”; (iii) The need to emphasize the trans-disciplinary and longer-term perspectives which are too oten neglected by governments and other decision makers and to ocus on the choices, policies and actions which will determine the destiny o present and uture generations so as to stimulate public interest and to provide responsible leaders with a sound basis or the ormulation and implementation o utureoriented policies.”

4 See Donella H. Meadows, Dennis L. Meadows, Jorgen Randers and William W. Behrens III, Limits to Growth, Universe Books, New York, 1972. 5 See Club o Rome, Work Programme: A New Pathway or World Development”, 2008. 6 See Club o Rome, “The New Economics o Growth, Wealth and Real Values: Towards a New Economics or a Global Society”, Speech by Secretary General to the Club o Rome, Winterthur, 2010. 7 See Ian Johnson, The Perect Storm, Volume 1 Issue 2 CADMUS, The Wealth o Nations Revisited, April 2011.

The Club of Rome,

Finance: We remain in the midst o a global nancial crisis; one that


and tomorrow’s worLd?

has aected millions o people throughout the world. What started as a series o largely containable national and regional banking crises rom

And as we refect upon the observations o this past decade it is worth

the 1970s onwards has transormed itsel into a global crisis in the real

considering or a moment the world o tomorrow. I we look orward to

economies o the world. Improved management and oversight o our

2050: as I have already noted, well within our children’s lietime, we can

nancial systems has started but the pace is glacial and the eorts

envisage a number o signicant changes:

remain woeully weak and sporadic. • Population will likely grow from close to 7 billion to perhaps 9.5 bil Food: We have witnessed a ood crisis as a result o the rapid growth in

lion (current estimates range rom around 8 to 10.5 billion).

ood commodity prices, and their impact on poor countries and poor people. It resulted in many being pushed below the poverty line.The ood

• Current estimates of global GDP are around US$ 60 trillion and even

crisis was due to many reasons: historic low prices that couldn’t continue,

at modest per capita growth rates in the emerging economies o the

technological plateaus in productivity and competition or land use.

world to meet poverty targets we could easily see a world (as we conventionally measure it today) of closer to US$ 200 trillion. Three

ecoLoGy: We have a global ecological crisis that aects us now and

worlds sitting on our present one world but s tretched to the limits with

well into the uture and the consequences o not repairing and then eec-

regard to consumption and production patterns.

tively managing the Planet’s stock o natural capital will lead to

unknown but potentially very dangerous ou tcomes. Fortunately climate

• The current sharing of global wealth in w hich 80% of the world’s

change has now moved to centre stage: so much so that it is easy to

population account for only 20% of the global wealth is unsustainable.

ignore other ecological issues such as the loss o orests, sheries and

While this ratio has been consistent or the past two decades it is

biodiversity; all being lost at historic and unprecedented rates. To be

starting to s hit.The year 2010 represents an interesting watershed in

sure climate change will make matters worse yet, hopeully, it also

terms o aggregate wealth: on a global GDP/Power Purchasing Parity

provides us with a greater sense o urgency to take action.

(PPP) basis, the emerging economies are roughly now equal to the rich world. A signicant geo-economic shit and potentially an impor-

work: An unemployment crisis o global proportions is upon us now.

There is uncertainty about the uture levels o unemployment, currently estimated globally at over 200 million, with perhaps up to a billion people under-employed. Our inability to create jobs will consign many millions to poverty, induce social and political unrest, and will undermine any hopes or a more secure and sustainable world. Unemployment remains the single largest global ailure.

tant geo-political shit.

The Club of Rome,


• Demand for goods and services are set to increase dramatically driven

The wealth o our nations is changing dramatically; the shits in wealth

by population, rising per capita income, and the shit rom current low

are reshaping our global body politic; those let behind are growing in

per capita income consumption patterns. Demand or ood is likely to

numbers and strength; and the search or prosperity has all too easily

more than double by 2050 and energy needs increase threeold.

become a search or economic growth on the assumptions that growth alone would solve our problems.

• Demand for clean water will rise to meet the needs of the present one

billion plus people who have no access to potable water or decent

As we consider the uture, let’s also not orget that we are wis er, more

sanitation and to meet incremental demands rom a growing popula-

inormed, better able to communicate with one another at speeds that

tion. Water resources will continue to be stretched, although globally,

could not be considered even twenty years ago, we have a world o bright

water per se will not be sc arce. However the costs o harnessing water

capable minds who will want to contribute to a better world and we

will rise exponentially and discontinuously and place huge scal and

understand the potential but also the limitations o technological devel-

economic burdens on countries to deliver water.Together with the pro-

opment. There is much to build upon even as there is much to do.

vision o potable water, dramatic increases (ourold or more) in water eciency in the agricultural sector will be needed.

So where might we start?

• It is estimated that 27% of the world’s population is under the age of Real and Equitable Prosperity

teen: or the uture a large, capable and ready work orce in the making? Perhaps? Or a major source o social unrest? Possibly, indeed likely? Future numbers are unknown but on current trends it is possible that around three billion young people will be job seeking by


the middle o this Century. Unemployment uels discontent and social


turbulence and perpetuates poverty, misery and disenranchisement. A sustainable uture is a job-ull uture. A job-ull uture is a saer and more secure uture.



New Economics


Institutions or Delivery


In this paper I discuss three inter-related issues that orm a stable oundation rom which to build and where I believe we can make a start: Values, Economics and Institutions. I will make the case that the interconnected global challenges o ecology and employment are essential to long term stability and sustainability. I believe that by the middle o this century we will need to have made signicant progress to re-align our economies to meet these challenges.

The Club of Rome, 11

The Club of Rome, 13

The larger question is, o cours e, how such values are transormed into real change. At the turn o the Millennium the United Nations made a bold attempt to rearm those rights in the context o the Millennium Development Goals: a mix o (sometimes overlapping) social and eco-

ValueS, economicS & inStitutionS

nomic goals aimed at reducing poverty in the emerging world. Sadly, progress on meeting these goals has been slow and sporadic. Others have ocused on what might be termed common values or humanity. They centre around saety, community and relationships (oten termed social capital); decent living conditions and an ability to earn sucient money to more than cover basic needs (wealth); and a cleaner and saer environment (ecology). My point in this paper is really not to dwell on a philosophical discourse on values 9 but rather to state the obvious: there are reasonable values that most people adhere to. Most value honesty over dishonesty; ethical behaviour over unethical behaviour; a decent lie or themselves, their amily and their children; decent health and education aorded to all; a cleaner and saer environment within which to live; a level o prosperity that takes them out o poverty; a sense o belonging to community; a strong sense o social capital and purpose in lie. The list could go on but I hope that I have made the

vaLues lie at the heart o who we are and what we do. Values shape

general point.

cultures, organisations, politics and policies. Values are more oten described at the individual, religious, tribal or national level. A question

The key, o course, is whether we are able to translate such values into

arises as to whether there are sets o global or universal values and, as

tangible actions.This brings me to the next point o discussion: Economics.

we move to a more inter-connected and globalised world, whether they are sucient in scope and detail. To some extent the answer is clear:

economics and economic policy are the backbone o public policy

universal values, rights and reedom ar e enshrined in the c ontext o the

decision-making. Economics is important as it helps establish the prices

United Nations but these are state centric and state “negotiated” rather

or goods and services in society; it is the cornerstone o our market

than individual or “citizen values”. Nevertheless, the Universal Declara-

economies and o our banking and nancial systems; and it helps us

tion o Human Rights has now been accepted widely as a basis or

establish priorities or investment and policy-making. Economic growth

national legislation and the Charter o the United Nations itsel repre-

is the metric by which we measure the wealth o nations and the changes

sented an important point o r eerence in determining universal values. 8

in such wealth are important components o international relations and negotiations.

8 For a useul description o the application o universal rights declaration see, Ko Annan lecture at Tübingen University, Germany, “Do we still have Universal Values?” 12 December 2003. See also, Richard T. Kinnier, Jerry L. Kernes, Therese M. Dautheribes, A Short List o Universal Moral Values, Counselling and Values, October 2000, Volume 45. This paper analyzes values that have consistently appeared throughout history and across religious and secular organizations.

9 However, this would be an important area or urther work within the Club o Rome.

The Club of Rome, 15

The oundations or modern economics were built when the world was

More generally, economists need to also turn their attention towards a

dramatically dierent rom today. Current economic theory rests large-

better understanding o normative values; as well as ensure that societal

ly on assumptions that were made over 200 years ago but many are no

values that are unmeasured and thereore largely ignored by economists

longer valid or today’s world. Shits in liestyles, communications, pro-

are brought into the mainstream o economic policy.The continuance o

duction and consumption patterns have been suciently large as to call

economic policy to ignore real societal values remains a central

into question the validity o current economic theory. It is based on a

barrier to addressing the global humanity challenges we ace.

time when physical capital was scarce and natural capital abundant; when global population was a raction o w hat it is today; when econo-

As economics grew more s pecialised it also lost much o its philosophi-

mies were agriculture based and services o little importance; when

cal underpinnings. Ends gave way to means. Finding equilibrium be-

global public goods were unheard o; and when public policy was limited

tween supply and demand dominated economics thinking while maxim-

or non-existent.

ising human welare or minimising human suering was relegated. We lost sight o the real purpose o economics. Market outcomes that cre-

These acts have been recognised by leading thinkers and economists

ated surplus money were celebrated even i they resulted in lost jobs,

and there is now a nascent movement to review the underpinning o

lost homes and increased personal misery. It is time or economics to be

economic theory as well as to begin using economics to measure many

re-engineered and made t or purpose.

goods and services that have hitherto remained unmeasured, including natural resources.

The need to rethink economics is gaining currency. A number o leading economists, both within the Club o Rome and external to it, have ques-

Economics exists also in a wider spectrum o human societal activities:

tioned the ecacy o our economics thinking. Forty years ago leading

ecological, political and social, and increasingly the lines between disci-

academics began to lay the groundwork or a discourse on the uture o

plines are blurred: witness, or example, the growth in ecological eco-

economics. “Limits to growth” was the rst to postulate that, in the

nomics and the valuation o natural capital.

absence o remedial action, natural limits would begin to impose constraints on economic growth. Daly et al 11 promoted the concepts o eco-

Indeed, economics has also become both more specialised and more

logical economics and the need to balance economy with ecology. Dur-

inter-disciplinary. The simple micro and macro schism o the past no

ing the last twenty years environmental economists have attempted to

longer seems valid.The branches o economics have grown considerably:

measure real wealth; assess genuine savings12; ecologically adjusted

monetary, scal, growth, nancial, market, development, sector (energy,

growth rates; and place economic values on natural resources.

industry, health, agriculture), climate (adaptation and mitigation), inormation and environmental to name a ew well established streams; and others emerging that directly link psychology with economics such as the economics o happiness or o social capital 10. Yet all appear to have one thing in common: a sense o unease that the economics o today is unt or purpose. It neither appears to address the real issues o today’s world nor does it measure the things that really matter to people. Economics has lost its way. It may not yet be broken but it needs a serious overhaul.

10 See or example, Andrew Caplin and Andrew Schotter, The Foundations o Positive and Normative Economics, March 2008.

11 Herman Daly,“A Steady-State Economy: A ailed growth economy and a steady-state economy are no t the same thing; they are the very dierent alternatives we ace.” Sustainable Development Commission, UK (April 24, 2008). Daly, Herman E. & Cobb, John B. Jr. (1989), For the Common Goods: Redirecting the economy toward community, the environment and a sustainable uture. Boston: Beacon Press.orHerman Daly, E. 1984. See also A Economia do Século XX I. Porto Alegre R.S., Brasil, Mercado Aberto Editora 116 p. 12 Kunte, Arundhati ; Hamilton, Kirk ; Dixon, John ; Clemens , Michael “Estimatin g national wealth: methodology and results”, World Bank Departmental Working, Paper1998/01/31 Report Number: 18257.

The Club of Rome, 17

More recently, the Stern Report on Climate Change 13 ocused on the

And yet or all o its faws it remains s tubbornly the most quoted metric

concept o global public goods and global market ailure. Others such as

o economic achievement and o measuring relative economic peror-

Joseph Stiglitz 14 have ocused on the role that asymmetric inormation

mance17.The use o national income accounting metrics to ass ess wealth

plays in undermining the eciency o markets as well as the broader

and social progress is more outdated today than ever beore. And as we

propositions o reorming economics and Amartya Sen 15 has ocused on

look to the uture, with a rapidly changing global economic structure, a

economics, ethics and inequality.

world where complexity is increasing, where services are rapidly replacing manuacturing, and in a world where many people are beginning to

Economics is neither supporting real wealth creation in the 21st Century

question the extent to which economic policy and markets has ailed to

nor is it acilitating the creation o the kinds o markets, policies and

bring about real, sustained and lasting welare, it is timely to not only

instruments that will guide us towards long-term sustainability. It is

revisit our measurements o wealth but actually change them into some-

timely to re-think and change our ways.

thing meaningul or the 21 st Century.

Let me now turn to s ome key issues w here, I believe, economics has be-

Today’s growth perpetuates over-consumption. As growth weakens, gov-

come divorced rom “real values”:

ernments promote consumption (to get companies back on their eet and to provide governments with more revenue). The act that more

the economics oF Growth and weaLth: The limitations o the

consumption is part o the problem and not part o the solu tion escapes

classical measurements o national wealth have been well documented

all but the clear minded. It may also lead us to a point where we experi-

ever since the creation o national accounts and their use in determining

ence, on a large scale, the phenomena o what Herman Daly has called

relative wealth16. GDP has long been the most quoted and least under-

“uneconomic growth”, where the extra costs o a unit o GDP growth

stood metric o economics. It is a fow measure most oten quoted as a

are more than the benets. 18

stock. It excludes a great many actors that are o vital importance to the ull unctioning o society. In many cases, it manages to include, as

Economic growth has been o concern to economists or many years

a positive contribution, actors that most o us would deem undesirable

both as a measure o how wealth was changing and also as a measure

(crime, social unrest and war) and exclude actors that are perceived as

o economic and social progress. Growth was expected to be linear and

highly desirable (the protection o natural habitats, orests). In par ticu-

non-binding: technology and human ingenuity would provide the buer

lar, national wealth calculations ignore the eects o the depletion o

against any limits to growth. This was rst questioned by the Club o

natural capital, such that the destruction o orests and other natural

Rome in its seminal report “The Limits to Growth” 19 which postulated

capital are a net asset contribution to wealth. Finally, it ignores eco-

that, in the absence o orward thinking policies, the world could go into

nomic externalities such as the social costs o unemployment; the posi-

unsustainable “overshoot” with dire consequences to growth and wel-

tive benets o unpaid work; and the distributional eects o income.

are. Remedial actions would be suciently costly to negatively aect economic growth. This view, contentious at the time, is looking increasingly valid with time.

13 Nicholas Stern , The Economics o Climate Change: The Stern Review, Cabinet Oce - HM Treasury, January 2007 14 Proessor Joseph E. Stiglitz, Proessor Amartya Sen, Proessor Jean-Paul Fitouss, Report by the Commission on the Measurement o Economic Perormance and Social Progress, Paris, 14 September 2009. 15 Amartya Sen, On Economic Inequality, Clarendon Press, Oxford 1997; The Idea of Justice, Harvard University Press, 2009. 16 Almost all textbooks on national income accounting include summaries o what is let out o national accounts, especially subsistence agriculture, housework, voluntary work etc.

17 While still the case in the popular press, economists such as Stiglitz and others are promoting change. See Stiglitz: op cite. 18 See Daly op cite. 19 Donella H. Meadows, Dennis L. Meadows, Jorgen Randers and William W. Behrens III, Limits to Growth, Universe Books, New York, 1972.

The Club of Rome, 19

Ecological economics was, to a large extent, born out o this debate. The

the economics oF naturaL caPitaL: When ecologists began work-

link between geo-physical assets and human welare spawned concerns

ing with economists an important alignment was ormed: ecologists

over the earth’s carrying capacity. Demographic projections and income

worried about the physical depletion o the natural resource base o our

requirements o the poor par ts o the world re-enorced this view.20 It is

planet and economists worried that it was being accounted or as a

important not to lose sight o the issues o both limits to growth and the

positive contribution to wealth and growth. Theoretically, the depletion

limits o growth in meeting the needs and aspirations o humanity. In-

o natural resources has been well documented23 and case studies have

deed, an emerging body o economics literature is posing the question o

been developed24 or several sectors. A literature exists on the value o

whether urther growth is possible: they make the case that limits have

biodiversity. 25 The major challenge has been to incorporate such values


into public policy. Robust economics work in this domain has or too long sat on the shelves o academia, rarely made it into ministries o

The issue o inequity lies at the heart o a airer and more just world.

environment and almost never into ministries o nance. And yet the

The poorest 40% of the world’s population account for only 5% of

consequences o using incorrect economic values o natural resources

global income. The global assets o the wealthy have multiplied expo-

can be considerable: the under-pricing o water leading perhaps to the


largest single global economic subsidy in the world today. The manage-

Development economists have been at the oreront o arguing both the

ment o our water resources represent an interesting case o rising costs

moral and economic case or high growth and redistributive policies. In

and increasing scarcity o capital. The economic cost or “real value” o

an increasingly connected world in which “overshoot” conditions arise,

water is rising rapidly and discontinuously in many countries. This rep-

the issue o global production and consumption patterns have become

resents a nuanced view o “limits” where the physical limit o resh

an important element o economic discourse.

water is not reached but the massive and discontinuous costs impose a

nentially, from $ 12 trillion in 1980 to almost $ 170 trillion in 2006.

signicant real bind on economic growth. An associated environmental issue relates to the negative costs associated with pollution, what environmentalists oten reer to as the “brown agenda” to distinguish it rom the erosion o natural capital. The health related incidence o pollution is now well understood and documented. In some countries it can have a s ignicant impact on the calculations o real wealth.

20 Robert Costanza , John Cumberland, Herman Daly, Robert Goodland , Richard Norgaard, An Introduction to Ecological Economics, The encyclopedia o Earth, October 2, 2007. 21 New Economics Foundation, Growth isn’t possible, January 2010; Sustainable Development Commission, UK, Prosperity without Growth? – the transition to a sustainable economy; and see also a paper prepared by Herman Daly or the Sustainable Development Commission, A Steady S tate Economy. 22 Giarini, Jacobs and Slaus in “An Introductory paper or a Programme on the Wealth o Nations Revisited”. They also note that income inequality continues to grow, rustrating the rising expectations o the world’s poor, and increasing the propensity or social unrest, crime and violence.

23 P. S. Dasgupta, G. M. Heal, Economic Theory and Exhaustible Resources, Cambridge University Press, March 31 1980. 24 See or example: Pearce, D.W., and Warord, J.J., 1993. World withou t End: Economics, Environmen t and Sustainable Development, Oxord University Press, New York. M. Munasinghe, Environmental economics and sustainable development. World Bank, Washington, 1993. 25 See or example: David William Pearce, Dominic Moran, The economic value o biodiversity, Earthsca n, 1994. David William Pearce, R. Kerry Turner, Economics o natural resources and the environment, Johns Hopkins University Press, 1990. Paulo Augusto Lourenço Dias Nunes Nunes, Jeroen C. J. M. van den Bergh, Peter Nijkamp,The ecological economics o biodiversity: methods and applications , 2003.

The Club of Rome, 21

Climate change has been described as the larges t market ailure in our

unemployment, dramatic shits in distributional outcomes, displacement

history. The Stern Review 26 has documented the economic issues raised

through poor decisions on the value o natural capital and massive

by our concerns with climate change which provide new dimensions to

wealth gains amongst the very ew, can all lead to high social capital

our tasks o applying economics to an environmental “bad” that is inter-

costs which, in turn, lead to high and negative economic impacts. On the

generational, requires long-term investment, a global public good and

positive ledger, research is being undertaken on the economics o happi-

raises issues o generational and spatial equity. It also raises questions

ness: the bridging o economics and psychology. To some, happiness ap-

o equitable treatment o nance or both mitigation o, and adaptation

pears to be a rather esoteric concept or economists to grapple with.

to, climate change. Much o the literature has ocused on the costs o

However, surely everyone on earth aspires to a happier and more con-

addressing climate change. The counteractual case is rarely made: that is

tented lie: a lie o strong social capital where welare is maximised

what benets to economic welare does long-term and early action bring.

and security assured. The economics o happiness is non-trivial.

the economics oF sociaL caPitaL: The pioneers o economics

Economics needs not only to refect on natural and social capital but

largely considered a single orm o capital, man-made. Labour-capital

also explore whether other orms o separable capital exist. Cultural

ratios would nd the correct optimum between the cost o physical cap-

capital, human capital, technological capital and knowledge are des erv-

ital and the price o labour. Our world is now signicantly more complex

ing o attention. How the various orms o capital relate to each other

and other orms o capital are beginning to be recognised as potentially

and how they drive us towards real wealth creation remain an area or

binding and important to our understanding o economics. Natural cap-

urther consideration.

ital has been discussed previously and has led the way in terms o a more inormed understanding o its potential binding constraints on economic

the economics oF time: High discount rates together with political

development and growth.27

myopia have long produced a tendency to ocus on the shor t term. High discount rates and short political terms o oce have become the enemy

Social capital has been largely untreated by economists and yet it may

o sustainability, marginalising long term gains in sectors and activities

provide a better understanding both o the purpose o economics as well

that require long term planning and nurturing and encouraging markets

as a more prac tical understanding o how economies work. Social capi-

to capture short term protability and ignore long term nancial sus-

tal may be described as the range o social interactions that can add

tainability. A sustainable world is one that is capable o managing assets

value to our contentment, happiness, and eelings o sel wor th. It has to

over time, restoring them and nurturing them or uture generations.

do with how secure we eel within our amilies, our communities and our

Many have argued that high discount rates have had a negative eect

cities, and how sae we eel or our children and their uture. The deple-

on natural capital and long term management o global commons issues

tion o social capital can extract a very high economic cost as social

which require thinking in terms o generations28. The debate on the issue

disruption, violence, destruction o physical assets, crime and vandalism

o inter-generational equity exceeds the remit o this paper although

increase. Given our presumption that economics should be about max-

there is a persuasive moral argument or such considerations. The time

imising human well-being it is remarkable that social capital has taken

dimension o economics remains an important issue.

a back-seat. Economics that leads to incorrect market signals, increased

26 Nicholas Stern , The Economics o Climate Change: The Stern Review, Cabinet Oce – HM Treasury, January 2007. 27 See Donella H. Meadows , Dennis L. Meadows , Jorgen Ran ders and William W. Behrens III, Limits to Growth, Universe Books, New York, 1972; which rst postulated that natural capital constraints would need to be actored into the pace at which economic growth could continue.

28 Economic literature is replete with examples o economic discounting and its eects on cos t benet analysis. A more interesting debate is the extent to which a zero discount rate should be applied to natural capital stocks such as atmospheric change due to climate change: an issue o s tock depletion and repletion. The argument has been made that i a country has an obligation over say a thirty year period to reduce its contribution to the stock o greenhouse gases it may be indierent as to the precise timing o when it takes actions do so; at the extreme all in Year One or in Year 29 and hence there is an argument or applying a zero discount rate.

The Club of Rome, 23

the economics oF the unknown: In an uncertain world where non-

institutions are all too oten thought o as organisations. My deni-

linear events are possible, where booms and busts are common-place,

tion o institutions is much broader: it embraces all structures, ormal

where civil strie and economic asset destruction can occur at any time,

or inormal, that provide or social order and cooperation including cus-

the role o risk and uncertainty becomes an important parameter or

toms, behaviour patterns, codes o conduct, religions, legal systems,

nancial and economic decision-making. Recently, climate change has

trading and marketing systems as well as more ormal structures o

ocused our attention increasingly on probability theory and the man-

governance 30. Institutions matter to the conduct o our uture aairs.

agement o non-linear events. Yet economics has, to a very large d egree,

They shape the values and provide legitimacy to the rules we need to

remained deterministic in nature. We need to upgrade our economics

ensure social cohesion and social progression: without them we cannot

thinking to embrace risk and uncertainty in a more rigorous and sophis-

take collective actions or the betterment o society. Institutions are the

ticated manner. Least risk may need to replace least cost planning. Op-

delivery mechanisms we rely upon.

tions theory may need to replace deterministic planning. It is an area where economics has been historically weak and, as we move into in-

In this paper I will ocus on our inter-related “institutions” to make my

creasing uncertainty, never more important. 29

point about the need or re-alignment, new values and new economic thinking. The rst is that national policies must be realigned to refect

 Risk management  needs to be implemented 

Risk management also has its practical aspects when applied to inra-

the realities o a new and rapidly changing world.The second is the Role

structure investment. The scope or new and additional investment in

o Markets and the need or markets to deliver a new generation o

climate-adapted inrastructure may simultaneously provide additional

goods and services essential to our uture in a manner that is both e-

employment, lower social and natural capital risks while also providing

cient, transparent and air. The third refects the increased inter-

opportunities or new insurance protection (or homes). Integrating so-

dependence o our world and the inability to tackle global problems in

cial and environmental standards into public investment decision-mak-

the absence o more creative and ocused approaches to global govern-

ing lowers implementation risk, improves the quality o the built envi-

ance. Individual behaviour at the household or local level will also be

ronment and may reduce other environmental risks. Such standards now

required and the role that local communities play is central also.

need to be explicitly recognised in a risk management ramework and, where societal risks are lowered, rewarded. How to link economic risk more ormally with social and environmental quality improvements remains an open ques tion. In addition, the issue o how sys tems o publicgood risk, time-dependent risk (especially inter-generational) and private risk co-exist needs attention. Much o my paper to this point has ocused on how values and economics are inter-twined but, unless we transorm our measurements o values into tangible outcomes, we will not succeed in our journey to a secure 2050.

29 Those in the insurance and re-insurance industry as well as in the nancial economics sector would undoubtedly disagree. However, application in other economics domains such as the economics o sustainability and natural resource policy is weak.

30 See or example, North D.C (1990), Institutions, Institutional Change and Economic Perormance. Cambridge University Press, Cambridge.

The Club of Rome, 25

nationaL PoLicies: Local and central governments will need to play a

the roLe oF markets: Markets remain the cornerstone o neo-clas-

central role in the design o new economic instruments and policies and

sical economics and are an essential aspect o our lie. Our banking

most importantly introduce institutional arrangements that transcend

systems are based on the development o money markets now so large,

short-term political mandates. A detailed assessment o national and

complex, multi-national and interwoven that many observers believe

local options or the kind o changes that are needed is beyond the scope

that markets have become separated rom economics and have begun to

o this paper. Nevertheless, a start could be made to introduce real value

lead a lie unto them-selves. The current recession has also highlighted

estimates into all public and private investment decisions and to ensur-

the values and ethics that underpin nancial markets and the banking

ing high standards o transparency and ethical behaviour into banking

sector. Our economist oreathers believed in markets as being the most

and nancial decisions, including reasonable caps or bonuses. Fiscal

ecient means to match supply and demand or goods and services and

policies need to be evaluated not in terms o classical economic or nan-

to nd a reasonable price between the two. Money, the currency o trade,

cial eciency but in terms o refec ting employment needs and striking

was a means to the end o satisying human needs in a air and transpar-

the right balance between the real costs o production between labour

ent manner. The de-regulation o markets in almost all economic elds

and capital. Local and national legislators need to play a stronger role

provided a platorm that moved markets, poorly regulated at best and

in establishing a new generation o “rules o conduct” on ethical behav-

un-regulated at worst, towards speculation and shortly thereater into

iour in the nance and banking sec tors and to ensuring that institutions

avarice. Risks and consequences have been disproportionately shared.

are built to withstand political intererence yet retain the trust o

Property markets originally designed to nd housing or those in need o

people. More creativity is required to test out new institutional arrange-

a home ound their way into speculative bubbles, producing massive

ments: ones where all stakeholders can assemble in decision-making

negative equity or millions o home owners. Massive bank bailouts us-

ormats, where decisions made transcend immediate political considera-

ing taxpayer unds have been accompanied by bankruptcies and oreclo-

tions and where decisions or the uture are perceived to be on the basis

sures that have required government support and the payment o social

o objective and robust assessment.

saety nets: a double negative public dividend. Greed and extreme bonus payments have all added to a growing sense o anger, disillusionment

Political leadership at the national and global level is ess ential yet con-

and distrust. Markets shited out o the real economy and into “illusory”

spicuous by its absence. Few politicians appear interested in anything

wealth creation31 with disastrous results or all but a handul o lucky

other than the next election, ew are willing to lay out the nature o the

speculators32. The market had become a casino: where ew win and most

challenges we ace, ew are willing to make the case or dramatic changes

lose. There is a need to reposition economics as an important driver o

in the way we live, the levels o consumption we must adjust to, nor the

air, equitable and ecient markets.There is an urgent need or an e thi-

sharing o wealth that will truly be required to reduce global poverty.

cal code o conduct that goes well beyond what is on the books today.

More promising is the growth in local political leadership, community and local government leaders willing to drive new agendas and create space or new ideas.

31 See David Korten, Agenda or a new Economy: From a Phantom wealth to real wealth, 2nd Edition, Beret Koehler Publishers, 2010. 32 These gains can be very large indeed. The top 25 hedge fund managers “earned” $22 billion in 2010 and one fund manager was able to take home a b onus during that year of $4.9 billion (appeared in a New York Times article, 2010).

The Club of Rome, 27

In addition, markets will need to play a new role in acilitating the und-

Markets need to be re-oriented to ensure that real economic values are

ing and delivery o a great many services that will be required or a

refected ully in market d ecisions:

2050 sustainable world including ecosystems services and carbon reduction. New markets will also increasingly display both a public good and a private good character suggesting that new orms o risk-reward

• Moving wealth into productive and sustainable investment opportuni -

ties and measuring real gains.

rameworks will be needed to ensure that both streams are served and provided appropriate returns.

• Developing new market mechanisms that can better realise the real

value o all as sets, including social and natural capital. Four sets o questions need to be addressed: • Substituting opaqueness for transparency to reduce nancial risks. • What form of national and international regulation and oversight can

provide the correct balance between protability and public good con-

• Substituting prudency and predictability for the kind of “casino bank -

cerns? What levels o transparency protect the common good yet pro-

ing” that has produced such s pectacular ailings and human misery.

vide the incentives or nancial accumulation. What is good governance and how can it be rewarded?

There are ew who do not now believe that our market systems and the banking and nancial services that underpin them are in need o atten-

• How can markets be developed that provide the goods and services

that are commensurate with the need or a sustainable planet? How

tion. Failure to correct the excesses o the past decade will decrease trust, increase social disharmony and lead to undesirable outcomes.

do we lengthen the nancing horizon to ensure that long-term sustainable investments in orests or in climate change can be realised? How

GLobaL Governance: The world has rapidly become a smaller place:

do we develop markets or global and national public goods in which

the exponential rise in, and access to, electronic communications as well

air economic returns can be provided to the public good and air

as low transportation costs has resulted in a better awareness and a

nancial returns to the private sector? Where do the most promising

more inter-connected world population than at any time in our global

markets or sustainability lie (carbon, orestry, ecological services,

history. We have also witnessed a massive rise in interconnected issues

jobs, social outcomes)?

requiring management and common policies. Furthermore, each and every one o us is a global citizen: what we do aects our planet and

• What is the correct role for the public sector in a world where public

and private returns will be co-mingled? What is enlightened public policy and what role should it play in creating markets or uture goods and services with a high public good content? • Is there an ethical base that accompanies the economics of markets?

Does the corporate and private sector have a moral duty to serve beyond the “bottom-line.” And i so, how?

what happens to our planet aects us, no matter where we live, no matter what our income is.

The Club of Rome, 29

Indeed the uture o sustainability depends critically on how well we

LocaL communities: Individuals and local communities can and do

manage “issues without passports”. Recent literature has ocused on

make a dierence. Actions at the local level do address many o the

three groups o global issues that now require our urgent attention 33:

issues outlined in this paper. Individual behaviour and actions make a di-

The rise o “global commons” issues such as climate change and the

erence. Recycling, once considered the preserve o only a ew dedicated

loss o sheries and oceans damage; a strong “global conscience” that

environmentalists, is now a standard and accepted practice in millions o

has turned attention to world poverty, hunger and security; and a dra-

households. Personal choice on decisions to improve household energy,

matic rise in establishing “clear global rules” that make each o our

reduce personal and household carbon ootprint has had an eect.

lives saer, more predictable and protected. Global rules on common

Individual commitment and behaviour to a changed and better world is

standards o air saety, accounting standards, and on the conduct o war

undamental. Providing the opportunity, aligning the correct policies,

have been in existence or many years. New considerations are required

introducing the appropriate incentives are all important and yet it is at

or nancial and banking transactions, environmental goods and ser-

the individual and local community level that we will see real change.

vices, human tracking and on many more issues. Yet despite the de-

This suggests that individuals and their communities will need the inor-

mand or such services, the world has struggled to nd the correct insti-

mation to act; that schools should ensure that children are made aware

tutional and governance rameworks that can cost eectively and

o the world they will grow up in. Inormation and education are indis-

eciently derive new standards and provide the means or eective

pensible requirements to ensure people have access to the changing

implementation. The reasons or this are varied and complex but in-

world they live in.

clude: lack o political will and myopic leadership, ineective and underunded institutions such as the United Nations, undemocratic and

Major changes in the speed, cost and quality o inormation as well as

non-representative global institutions (such as the Breton Woods or-

more recent changes in scale economies in the energy and other sectors

ganisations), the inability to nd institutions that are multi-stakeholder

suggest that it may be easible to scale down to the household and com-

at a time when s tate-centric policies require broader legitimacy and the

munity rather than scale up to large point sources. The case or increased

marginalisation o the emerging economies in key global decisions. The

attention to “the rule o subsidiarity” is clear. Local community organisa-

spectacular ailings o the climate change meeting in Copenhagen

tions and local administrations will rise in importance over time.

brought it home to many: when consensus becomes the agreement o the least committed with the least interested we know we have an issue in global problem solving. As global citizens we deserve better. We deser ve a voice in global decision making and greater accountability. Global governance remains an issue or serious attention. Fortunately, a ew progressive governments and researchers are now beginning to explore whether new orms o global governance and associated institutions could provide broad-based support to implement progressive and equitable global policies.

33 Based on personal conversation with Jean François Rischard, ormer Vice President, World Bank.

The Club of Rome, 31

The Club of Rome, 33

It can be debated as to whether ecological damage (including climate change) or unemployment represents the most important global issues to be addressed i we are to move towards a sustainable world. Unemployment, o course, is more than an economic issue 34. It lies at the

emPloyment and ecology: the twin challengeS for humanity

heart o the problem o poverty; it uels discontent, alienation and a sense o hopelessness and this is oten transormed into social unrest. To some, it remains a undamental human right, a question not o whether economic growth can produce jobs but a re-tting o economics to assure that everyone has the right to employment. The employment dilemma lies at the heart o the essential debate about new economics and markets: • It raises a fundamental philosophical issue of e conomics. Should eco -

nomics set as its primary goal the ullment o human aspiration by ensuring that every human on this earth o employable age should have a right to a job? Those in avour argue that economics needs to be re-engineered to drive such a policy goal. Thus neo-classical economists whose denition o ull employment requires some level o unemployment remains undamentally fawed. 35 It asks the question what is the real value o unemployment, based upon the misery it produces, the social dislocation it erments and the contribution to society it denies. In some cases the real value o unemployment has been estimated to be signicantly higher than the cos t o employment. • The porosity of borders and the mobility of labour suggest that we

need to take into account the global nature o employment and the global social costs o unemployment.

The nal segment o this paper takes us right back to the beginning: the challenges we ace and the need to imbue these challenges with a new sense o values, a new and updated application o economics and a sense that new institutions will be needed to guide action.

34 There is a large body o literature related to the gender dimensions o employment, human capital ormation, and social consequences o unemployment. 35 For a more comprehensive review o the theoretical faws o economic theory with respect to employment see Orio Giarini and Patrick M. Liedtke, (2006 2nd Ed.) The Employment Dilemma and the Fu ture o Work, Report to the Club o Rome, Geneva: The Geneva Association.

The Club of Rome, 35

• The mispricing of certain forms of capital may well distort labour capi -

An emerging theme or some economists 37 is what happens i job secu-

tal ratios and provide a disincentive or employment-creating economic

rity cannot be assured or at least contemplated. How will we unction in

activities. Furthermore, the externalities associated with unemployment

society where unemployment or partial employment is the expected

are not actored into relative input prices. A change in policy is urgently

norm? The world has become suciently technologically developed that

required: rom taxing employment (as many countries do) to taxing

it could probably produce all the material goods required with a small

non-sustainable or non-renewable consumption. Placing people at the

raction o the population. What social and institutional structures

centre o new economics would increase human capital ormation on the

could support such outcomes in a manner that provides or sustainable

one hand and, on the other, lower discrimination o labour costs.

societal benets? Can we live in a world without jobs and i so with what distributional, poverty and social capital consequences. I do not believe

• Technological substitution may reduce employment opportunities,

that we can.

even where overall economic eciency is improved.The shit towards service and inormation based sectors as well as increased mechanisa-

I have chosen Ecology (or our planet’s natural capital) as the twin

tion in historically labour intensive sectors such as agriculture has

global challenge because our natural capital will be both a binding issue

certainly aected employment opportunity. Finding the appropriate

as well as a dening issue or our uture. Daly has suggested that while

balance between technical and labour substitution remains a chal-

we once lived in an “empty world” with ar ewer binding constraints we

lenge that now needs to actor in the ull range o economic costs and

are now moving towards a “ull” world38.

benets. • Green growth has been heralded as a “win-win” strategy by politicians

and some economists. The hypothesis is that the new economy based on green growth and renewable energy is a win or the environment as well as a win or jobs. However, this has yet to be tested through serious research and enquiry. The link between growth, green or otherwise, and jobs is central to long term sustainability and poverty reduction. • The large scale global and national demographic shifts anticipated

will have proound impacts on the location and demand or labour, and this in turn, will aect the nature o economic, political and cultural lie in many countries. 36

36 For example, as populations age in a number o rich countries they are likely to require an increase in labor rom other countries to maintain their levels o economic growth. Estimates or Europe and Japan are that close to 70 million and 25 million people respectively would be needed.

37 See Anna Coote, Andrew Simms, Jane Franklin, 21 hours: Why a shorter working week can help us all to fourish in the 21st century, New Economics Foundation, London, 13 February 2010; which makes the case that in the UK under any plausible scenario there will be insucient jobs or all to work ulltime. 38 See Herman Daly op cite.

The Club of Rome, 37

First, it will impose limits – not always nite but moving us to new and

The twin challenges o addressing employment and ecology are daunt-

unheard o cost levels to manage. We are already witnessing examples

ing but essential. They are within the realm o possibility by 2050 but it

o this:

will require a new ethos, a new economics and new understanding o prosperity as well as a deeper and more proound understanding that

• A single tuna sh was sold recently in a Tokyo market for over Euro

social and economic equity is an investment or sel preser vation, peace

300,000 suggesting that we may well be reaching a level o unsustain-

and security. It will require new institutions built or purpose with greater

able depletion39.

transparency, a new ethic and a new mandate: to produce the policies, goods and services that provide or a new humanity.

• The costs of exploration and delivery of water in some parts of the

world are higher than the costs o oil.

As noted earlier, we are living well beyond any reasonable limits o our planet to regenerate and change towards a more ullled and happier

• The ballooning costs of d elays in addressing climate change and mov -

ing to a no carbon global economy.

place. The evidence is clear and the warning signs are obvious. Unless we recognise that our global economy is bounded by ecosystem limits we will neither produce sustained growth nor sustained prosperity42.

Second, our natural capital will shape our uture. It will shape where we live, how we live and what we build. Our energy systems will need to be

It is clear that i we do nd jobs or those in need and i we run down

transormed through changing the way in which we consume energy 40

our global ecology we ace a world o low r esilience and high social ten-

and to an almost complete turnover o our energy capital stock. Even

sion. It is not a world most o us would want or our children or grand-

under conservative estimates o climate change and our desire to be


below dangerous levels o emissions build up (and to manage the transition rom oil as we approach peak oil) 41 we will need to be essentially carbon ree by 2050. And who knows, perhaps even nuclear ree? Our transportation and housing systems will need to be made resilient to the vagaries o changing weather patterns. Investment in agricultural research (especially in the tropics) will need increasing in order or it to be more resilient and more productive and our global sheries restored to a point where we sustainably harvest the sheries o-take. The management o our global ecology will require a dramatic increase in nancial resources but deployed eectively will provide outstanding societal (and nancial) returns.

39 For example, see: Guardian.co.uk, “Huge Bluen etches £250,000” – w hich notes that “Japan has not lost its appetite or endangered species”. 40 See or example, Ernst von Weissacker, Factor Five, or an excellent example o just what is possible to achieve in energy eciency. 41 Ian Dunlop, presentation to the Club o Rome, 2010.

42 For an excellent example see, Herman Daly, Ten Policies or a Steady-State Econo my, AAAS Annu al Meeting, February 2011, Washington DC. Daly notes that “In the empty world o yesterday growth economics was a triumphant success; in today’s ull world it is an obstructive nuisance”. He goes on to note that “…well beore reaching the biophysical limit we are encountering the orthodox economic limit in which the extra costs o growth become greater than the extra benets, ushering in the era o uneconomic growth.”

concluSion And so we have come ull circle. We need a change o direction based upon new and enriched values. We need a more human centred economics where real societal values are refected in public and private decisions and we need new institutions that guide us towards a more stable and secure uture. It would be easy to provide a long list o global problems: none more important than addressing the crippling poverty we see in the world today. However, i we do not nd a way to ensure ull employment and i we do not protect the very scarce natural capital we collectively steward and i we have not completed the bulk o the adjustment by 2050 our children will not look back with any sense o pride or grateulness.

We are at an infection point in global aairs. We have seen ve global crises this decade: not one has been managed with great skill or political determination and the remedial measures have been non-commensurate to the tasks at hand. The ault lines were clear. Yet none have explicitly recognised that these crises have common roots and need common actions.

We are entering into unchartered territory where non-linearity, shocks and surprises will become the norm. A world where shiting power bases, growing aspirations and demographic upheaval will shape uture agendas but where creative and enlightened public policy and ar-sighted corporate actions can move us towards a uture o which we can be proud. The Club o Rome has an opportunity to shape an agenda and to encourage a global public discourse on issues o proound importance to ourselves, our uture and our humanity. We can, by 2050, have built a brave and better new world. The choice is ours .

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