Is it possible for a green economy to have high economic performance?
From the perspective of a different economic model
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Philip Sutton
Director, Policy and Strategy
Green Innovations Inc.
Tel & fax: +61 3 9486 4799
Philip.Sutton@green-innovations.asn.au
15 August 2000
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by Philip Sutton.

Contents

  • Traditionally major trade-offs were assumed to be necessary
  • The conventional model
  • A different way of thinking about the economy
  • Finding a green development path & incremental change
  • Large scale structural change in the economy
  • An ecologically sustainable economy could have a high rate of growth
  • Fostering the dynamics of the information economy
  • Is economic growth desirable now and in the longer term?
  • Appendix: Factors promoting productivity growth and output expansion
  • Notes
  • References
  • Traditionally major trade-offs were assumed to be necessary Contents

    In the public mind, greenies and developers don't agree on much. However over the last two or three decades there has been agreement on one thing: that the more you do for the environment the worse off the economy will be or the more you promote development the worse off the environment will be. That is, major trade-offs are required between the two objectives and there is no possibility of significant win-win outcomes.

    The result of this shared belief is that governments, R&D institutions and firms have not been encouraged to explore economically feasible and desirable paths to an ecologically sustainable economy.

    There are however very strong grounds for believing that the traditional view of greenies and developers is wrong, that win-win outcomes are possible, even if society pursues the very strong environmental policies implicit in a commitment to ecological sustainability. In fact the experience of bodies such as the Rocky Mountain Institute (Ernst von Weizsäcker et al., 1997) is that when the right strategies are devised big environmental improvements are often cheaper than small scale environmental improvements. For example, designing production processes to eliminate the generation of pollutants is often much cheaper than cleaning up the mess once it has been created.

    The conventional model Contents

    Conventional economic thinking is based on the idea that the economy tends towards a single optimal equilibrium state [1] as a result of myriads of incremental decisions by autonomous entrepreneurs and consumers operating in the market place. According to this way of thinking, since economic planners cannot understand the whole economy nor can they control it effectively, they cannot guess where the optimal point is. The economy, driven by masses of trial and error experiments carried out by buyers and sellers as they endeavour to maximise their utility, unconsciously 'searches' for the optimum position and can do this, according to the conventional school of thought, far more effectively than any group of planners. So it is believed that, if governments (or massive monopoly firms) try to push the economy as a whole in a consciously chosen direction, they will inevitably move the economy further away from the ideal state and economic performance will decline. And this would of course occur of course in the convenetional model if there was any attempt to shift the economy to a consciously-chosen ecologically-sustainable structure.

    According to this mode of reasoning, environmental problems should be dealt with, not by central planning or by trying to drive the economy down an ecologically sustainable development path in some other coordinated way, but by identifying specific negative impacts of the economy and, after carrying out a benefit/cost assessment, deciding on corrective measures using an appropriate mix of market and command and control methods. With the right constraints in place the entrepreneurs will find the best way to respond.

    There are some significant elements of truth in this model of economics. The economy is in large measure a self-organising system that does have a tendency to work its way to a medium-run unstable equilibrium [2] since most entrepreneurial actions are designed to build on or complement the current shape of the economy thus creating a discernible trajectory. There are indeed significant limits to the effectiveness of comprehensive central planning as has been demonstrated in the countries where it has been practiced, with one of its worst effects being the way it depress creativity and innovation except in a comparatively limited number of consciously chosen areas.

    A different way of thinking about the economy Contents

    However, as with any model, the conventional economic model is not a completely accurate description of reality and its deficiencies are particularly significant when it comes to the issues of ecological sustainability and large scale economic transformation.

    While the economy does 'search' [3] for an equilibrium point (a 'local' optimum), it does not and cannot search for the single, ultimate equilibrium (the 'global' optimum)[4]. (See the Figure 1.)

    Figure: Local and global economic optima

    Figure 1. Local and global economic optima

    Entrepreneurs and consumers are aware of only the tiniest fraction of all the possible options that could be available to them. The perfect knowledge, infinite computing power and faultless modelling capability that would be required to make perfect awareness of options possible will never be available. And even with the limited knowledge, computing power and modelling capacity that we do have, no-one has the time or money to generate and test all the options that we have the practical capability to generate. This means that a restricted range of options, especially those that are currently in operation or are well promoted, dominate people's consciousness in a self-reinforcing way. Many good or even superior options that are less well known or less well supported fall by the wayside as a result. (Arthur, 1994).

    Furthermore, most entrepreneurial decisions are incremental in nature. This means that most new investments depend heavily on past investments to ensure their viability so the new investments tend to reinforce rather than radically disrupt existing development patterns. On top of this, entrepreneurs whose products are being challenged by superior products usually defend their market-share rather than voluntarily giving it up in the public interest.

    Thus while a typical market economy is quite open to small changes it is relatively resistant to large changes even if they would significantly improve the economy. The result is that the medium-term equilibrium position that the economy tends towards (the local optimum) is almost certainly a very long way away from any global optimum that might theoretically exist.

    Also, the decision-making culture of the society will strongly influence the optimality of decisions. Poor decision-making skills, decision-making based on irrelevant obligations and biases [5] and decision-making warped by corruption will all lead to inferior economic performance. No society is free of these problems so all real economies must be sub-optimal, but advantage can be gained by handling them better.

    So what are our chances of finding an economic structure and development path that is better environmentally and as good or better economically?

    We certainly have no chance of finding the global optimum - the 'one best economy' that is theoretically possible. The invisible hand of the market cannot do it and neither can any group of economic planners[6]. But the hope for improvement lies in the fact that real economies are likely to be so far from any ideal (the theoretical first-best option) that there is almost certainly a great deal of scope for finding a better economic structure, even if in theoretical terms it is still considered to be second best. And a very important side-effect of the fact that real economies exist far from a single theoretical global optimum is that it is highly probable that win-win options exist where multiple objectives can be significantly improved simultaneously, a possibility denied in simple interpretations of conventional economics[7].

    Finding a green development path & incremental change Contents

    How do we find a win-win economic structure and development path? One thing we can be sure of, it will not be sitting on the shelf waiting to be assessed and selected. So we really have to have an invention or design process, but a process in which most of the detailed design will have to emerge from the workings of the economy rather than from some central planning group.

    We can 'design' a vast proportion of the incremental changes in the same way as before, that is, by using the invisible hand of the market. Macroeconomic market-mechanisms, for example regulatory taxes and subsidies and tradeable permits, can be used to shift the incentive structure of the economy[8], and thus its focus, and then the inventers, entrepreneurs, and consumers can do the rest. Well almost. It is often useful to put in place reinforcing mechanisms such as:

    Public policies and infrastructure needs to be continually reviewed to see how well they fit with and support the new macroeconomic circumstances. This would generate an ongoing microeconomic reform agenda.

    As we live in a world in which it is not possible to do everything at once, the process of shifting the focus of the economy closes off some possibilities and simultaneously frees resources to devote to new possibilities that were previously not available. Provided that the suitability of available options is rethought and new options, designed to match the objectives of the new economy, are actively generated, and as long as the shift in focus is not targeted at a reduction in economic output, then there is an extremely high probability that economic output will not be reduced in the long run as a result of the change of focus[10]. In other words, the economy will perform, according to conventional criteria, as well as before.

    Large scale structural change in the economy Contents

    However by themselves, incremental changes will probably not be enough if the scale and speed of change has to be very great. And this is certainly the case if ecological sustainability is to be achieved before biodiversity is massively depleted and human societies are severely stressed. So we need to develop a method for designing non-incremental or leapfrog changes to the economy that do not involve any major trade-offs between ecological sustainability and economic performance and economy and society do not suffer from the 'dead weight' of central planning.

    To create a successful ecologically sustainable economy it will probably be necessary to:

    For a fuller discussion of this method of economic management see the paper on transformed market conforming planning.

    If a win-win outcome is to be assured in terms of achieving ecological sustainability without detriment to economic performance then both this goal need to be formally stated.

    These steps above need to be undertaken in such a way that the typical problems of central planning are avoided. (See the Table 1.)

    Table 1. Solutions to typical problems with central planning.

    Problems

    Some solutions

    • The planners try to control too much with the result that the task is beyond their capacity
    • The planners bet a large proportion of the economy on what might be a poor option
    • Do not try to rigidly control the economy across the board
    • Carry out trials and modelling before making large interventions
    • Seek wide consensus before making large commitments
    • The planners lack the competence to carry out their work
    • Take great care with staff selection - eg. draw on people with public and private sector experience
    • Improve training, including learning-by-doing in trial projects
    • Seek diverse advice and outside input
    • The planners prevent experimentation in favour of their limited number of rational choices
    • Encourage experimentation and adaptive planning
    • The state sees itself as a developer and becomes incapable of regulating its own activities in the public interest
    • The planners identify with the interest of rent seekers in the rest of the economy
    • Limit the role of central government agencies and Ministers so that they are not development advocates and ensure that they concentrate on broad policy and strategy development
    • Create open, public processes so that the community can be actively engaged in defining the public interest
    • Create arms-length public agencies to supplement the private sector as development advocates (they don't have to be the developers)
    • Require the public sector development advocates to advance the public interest and as a way of reinforcing this require them to consult widely with the public and, in making their case, demonstrate how their proposals advance the public interest
    • Create open public proposals for devising development options
    • Create strong, independent regulatory agencies
    • Create legal frameworks that allow citizens to challenge government decisions
    • Foster public spirited media that actively explores the public interest and encourages public debate
    • The planners and decision makers become corrupt.
    • As far as possible use rule-based decision making and require adherence to due process
    • Emphasise transparency of the decision making process
    • Justify decisions publicly
    • Emphasise the rule of law and ensure that governments and their officers are bound by the law
    • Strengthen enforcement and the criminal justice system
    • Foster a free, investigative and public spirited media

    An ecologically sustainable economy could have a high rate of growth Contents

    The steps set out in the previous sub-section for creating an ecologically sustainable economy without trading off economic performance are designed to maximise the chances of this outcome but they do not in themselves guarantee it. The outcome will only occur if it is technically and socially possible to create a win-win economy. How confident can we be that this is possible.

    The broad historical experience of the shift from hunter-gatherer, to agricultural mode to industrial mode of production tends to suggest that the growth of economic productivity has been closely linked to the use of more and cheaper resources. So there is a widely held view that any attempt to:

    must reduce productivity and total economic output.

    However, there is strongly suggestive evidence that this outcome is unlikely and indeed that a radically green economy, designed to achieve a high standard of living for all, might not only maintain economic output[13] at high levels but actually generate a higher rate of per capita economic growth than a business-as-usual economy.

    For at least the following three reasons the move to an ecologically sustainable economy is likely to have little or no depressing effect on the economy:

    But there is a strong possibility that the outcome will be even better than that. For at least the following two reasons an ecologically sustainable economy might have a higher economic growth rate than the business-as-usual case:

    Conventional environmental economics holds that conservation or substitution or structural adjustment is automatically triggered by rising prices generated by resource scarcity, rising cost of production of resources or rising externality costs. Unfortunately these real costs reduce the amount of capital available just at the point where new investments are need to solve the problems. If corrective investments are left until the cost of the environmental or resource problems are large in relation to the scale of the economy and especially if the environmental problems intensify rapidly, it is possible that there will never be sufficient free capital to get on top of the problems and the economy will go into a nosedive. However, the capital shortage induced by the environmental problems could be avoided if preventative action were taken before the damage and depletion started to impose significant real costs on the economy. Anticipatory R&D, facilitated product innovation[15], ecotaxes and regulations could be used to trigger responses at an earlier, more opportune time.

    Additional reasons why an ecologically sustainable economy could have a high level of output and growth are to be found in Appendix 1.

    Fostering the dynamics of the information economy Contents

    To create economic wealth with significantly lower physical resource inputs and environmental impact is going to require clever development. And clever development depends on a strong information economy. Skilled labour, sophisticated machinery and technology, and lots of top quality information will be needed. But once the information economy is boosted for environmental reasons, its enhanced capacity will generate increased economic output in many, many other ways quite unrelated to the environment.

    Given that in a modern economy it is the information rich elements that create most of the new wealth, then if the drive for ecological sustainability turbo-charges the information economy then the growth dynamics of the ecologically sustainable economy are likely to be noticeably better than the business-as-usual economy.

    Here are just some of the ways that the active promotion of an ecologically sustainable economy will force the pace of the development of the information economy:

    Is economic growth desirable now and in the longer term? Contents

    The previous two section have argued that an ecologically sustainable economy contrary to conventional expectations might actually experience a higher rate of economic growth than the business-as-usual scenario. Is this a good thing or not?

    Economic growth is an accountants' aggregate. In itself it is of no value to anyone. The reason why some people want economic growth is that it appears to be associated with conditions of the economy or the society that are of real value. For example investment opportunities and employment growth tend to be associated with increases in the rate of growth. And a high standard of living tends to be associated with an extended period of economic growth.

    Other people dislike economic growth because for over two centuries economic growth has been closely correlated with environmental damage and resource depletion and with incursions on indigenous peoples and reduced cultural diversity generally.

    But these correlations increasingly do not or need not apply. Careful analyses a economic growth and changes in human welfare have shown that since the early 1970s welfare for the average person seems to have declined despite continuing economic growth (paper by Clive Hamilton on the genuine progress indicator). Also the link between economic growth and increasing employment is weakening, with higher rates of economic growth now needed to achieve the same employment increase. And this paper has shown how economic growth can be decoupled from the creation of deleterious environmental or resource depletion effects.

    So should we promote or tolerate economic growth?

    A normal to higher than normal rate of economic growth will be needed at least for a while to:

    But what about the longer term future? Is economic growth possible forever and should we promote it?

    If the population does not grow, people's basic material needs have been met, the society lives on renewable resources and environmental impacts are capped at a level that ensures that ecological sustainability is achieved, and all further economic growth is qualitative (that is, it does not require the consumption of more materials), then economic growth could go on forever (although probably not at an exponential rate).

    Should it go on? Certainly not for its own sake. If changes in the economy improve human welfare and do not damage the environment, and if the accountants tell us that economic growth has occurred then we shouldn't care. Equally if real human welfare and satisfaction is improving and the environment is being truly sustained and yet the accountants tell us that there has been no economic growth then that doesn't matter either. It is after all what the real economy does that counts.

    Appendix: Factors promoting productivity growth and output expansion Contents

    Notes Contents

    1. The optimum state of course changes over time due to the technical and social evolution of the economy.

    2. The medium run-equilibrium position is not stable in at least two ways. The freedom given to economic actors, in order to foster long term development, means that in the short term there are inadequate buffering mechanisms to prevent over-reactions to current trends eg. the euphoria of booms and the gloom of recessions. These excesses are eventually corrected thus placing bounds on the oscillations. Secondly some entrepreneurial actions are deliberately aimed at overthrowing the current shape of the economy and putting it onto a new course so that the pioneers can tap commercial opportunities that were never there before. Once this happens the previously expected medium-run equilibrium position or the predictable development path, that the majority of trend-driven entrepreneurs were banking on, vanishes like a mirage to be replaced in time by a totally new medium-run equilibrium position. The evolution of the Internet as a tool for commerce is having this transforming effect on economies around the world, right now.

    3. The 'search' is an unconscious process driven by the incremental decisions of the economy's entrepreneurs and consumers.

    4. 'Local' and 'global' are not used in a geographical sense, but instead are systems theory terms.

    5. For example, decision-making favouring an in-group defined by race, the old school tie, religion, kinship, class, industry sector, etc.

    6. In a pluralistic society it is not even possible to decide on the trade-off criteria that would be used to define the one best economy, since it would not be possible to reach a consensus about a hierarchy of importance for major objectives. Generally a wide and robust consensus can only be reached if a range of major objectives are put forward that are to be pursued simultaneously with no major trade-offs eg. economic development AND environmental protection AND social welfare.

    7. After the Second World War the Japanese embarked on a crusade to lift the quality of their manufactured exports while holding or reducing prices with the intention of wresting a significant share of the market from the Americans and Europeans. Static economic analyses, relied upon by the Americans suggested that simultaneous gains in the areas of quality and price were impossible. But within a few decades of innovation driven by a superior quality paradigm (zero defects) the Japanese had achieved their objective.

    8. Law-based regulations will of course continue to be necessary to fine tune environmental outcomes.

    9. To maximise the chance that firms, especially the small to medium sized ones, use the serives of the consults, high quality advice on how to find the most appropriate consultants should be made available free.

    10. Economic performance might be reduced, for a time, if past investments are scrapped before the end of their economic life at a higher rate than usual (competition between firms always leads to some early scappage of investments) or plant utilisation falls as a result of a diversion of consumer spending. Immediate welfare might be reduced, for a time, if consumer income is diverted into R&D or other investments to facilitate the reorientation of the economy or if consumer income falls while the economy adjusts.

    11. A powerful way to spread modelling skills throughout society and to generate awareness of how the economy might be transformed into an ecological sustainable state would be to create a modelling game that was like a combined version of the popular simulation games, SimCity and SimEarth. The new version should allow advanced users to modify the rules and knowledge-bases driving the model and to create new technologies and public policies. These innovations should be exportable as self-contained software files for use in other copies of the game.

    12. The testing could be done via real life experiments or trials or via simulation modelling.

    13. Physical output, however, would intentionally fall.

    14. The rates of ecotaxes would grow over time to be very high but as a consequence the revenue from most ecotaxes in a mature ecologically sustainable economy would be very low since the taxes would have precipitated structural adjustments that minimised the impact of the taxes. So the ability to offset labour costs in a mature ecologically sustainable economy would decline. (The revenue from the alienation-from-nature tax which is designed to encourage the containment of human land uses would be expected to take a very long time to fall as the structural adjustments would be very slow.)

    15. See the discussion of the hypercar later in the paper.

    16. For example, the commercial success of Southcorp's 'Global' Dishlex dishwasher rests on the system-level improvements created by the products green designers.

    17. In the context of the needs of local and global communities, future generation and nature.

    18. Known in Europe as 'extended product responsibility'.

    19. Time Magazine, in its special issue for (southern) Summer 1997/1998, reported that Lucent Technologies was working on such a technology (p. 103. in Ivan Amato's article "Braving the elements"). Reusable digital 'paper' would be something like plastic sheets that behave like liquid-crystal displays on computers.

    20. Maintaining the incomes of the super rich is not seen as morally desirable or politically necessary.

    21. Through cleaner and leaner production - reducing virgin resource production, improving in-plant resource utilisation, reducing pollution processing costs, reducing public waste disposal costs.

    22. Through increased use of just-in-time hiring rather than product ownership.

    23. By improving public transport operating on its own right-of-way (eg. rail and sometimes buses and trams), by improving electronic communications where this substitutes for physical movements, and by reducing the use of roads thus making commercial movements faster where they do occur.

    24. Through carefully designed higher density and by reducing resource requirements per person.

    References Contents

    Arthur, W. (1994). Increasing returns and path dependence in the economy. University of Michigan Press: Michigan.

    DRI et al. (1994). Potential benefits of integration of environmental and economic policies. Graham and Trotman and Office for Publications of the European Communities: Brussels.

    Flavin, C. & Lenssen, N. (1995). Power surge: A guide to the coming energy revolution. Earthscan Publications: London.

    von Weizsäcker, E. Lovins, and A., Lovins, H. (1997). Factor four. Allen & Unwin: St. Leonards, NSW.


    Author:  Philip Sutton
    First posted:  1 September 1998
    Content modified:  15 August 2000
    Layout modified:  15 August 2000
    Feedback & Enquiries:   Philip.Sutton@green-innovations.asn.au


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