Part 1 - Two Critiques of Capitalism towards a regenerative economy
Capitalism has not failed the climate, we have failed capitalism. New Zealand has averaged 2.9% annual economic growth over the last 20 years (1). Most countries aim for around 2% annual economic growth. Historically economic growth, resource use and ecological degradation have been directly correlated. At 2% annual growth our economy doubles in approximately 35 years, and with it an inherent doubling in consumption and ecological degradation. New Zealand is currently at twice our carrying capacity or using twice the resources that our country can sustainably provide annually (2). This resource use will double with growth to take us to a rate of consumption 4 times our carrying capacity in 30 years. In this essay I suggest two solutions to the market system in the face of the climate crisis and collapse of global biodiversity. A) We must urgently replace economic growth targets with economic efficiency targets and B) we must do a better job of including externalities into the market.
A - Economics is the study of how to allocate scarce resources more efficiently. Why then, is growth or the size of the market our main economic measure of performance instead of resource allocation efficiency? Increased resource use is part of the present nature of economic growth (3). We are therefore presented with two options to stop the overconsumption of resources. Either uncouple the relationship between growth and resource use or set measures for an increase in economic efficiency instead of growth. Clearly, the pursuit of economic growth with its inherent resource degradation is not viable.
Economic efficiency increase must be our measure of economic performance, not economic growth. Economic growth is the most common term we use in today's politics and conversation. The government and public figures in banking and finance need to start using an increase in economic efficiency to measure economic performance. Where growth is uncoupled with resource consumption, it has been described as ‘green growth’. However, to have any chance of averting the climate and biodiversity crisis we must have ‘degrowth’ of natural capital consumption, given consumption of the global market far exceeds our planet's carrying capacity. Society can’t have green growth because it will be difficult to simultaneously have the necessary degrowth of natural capital consumption to remain within our planet's ecological boundaries. Because ‘degrowth’ will be linked to the devaluation of assets, we must have economic growth as we know it reduce to 0% and in synergy have the value of assets come from an increase in economic efficiency, with a green transition away from our previous consumption. By this logic, growth must go as it relates to GDP, and must be replaced by efficiency increases, which is where our value creation will come from. Value creation can also come from growth of other capitals like social and intellectual capital. For this reason, we need to change the rhetoric to set measures for a targeted increase of 2% in economic efficiency annually rather than an increase in economic growth.
Another way of looking at this is in the context of the relevant stocks and flows of capital. Here the value a state holds is in its total stock of capital. A state can withdraw natural capital to bolster GDP and does not become any richer despite GPD rising. Which is one of the fundamental reasons GDP and inherently economic growth as it is linked to GDP is a terrible measure of a state's welfare. Importantly natural capital is finite in size but other stocks are not, like social and intellectual capital. To take into account the true value a state holds we can measure all capital via an integrated reporting accounting framework (4), which I suggest should be adopted at a state level. If this framework was adopted, states would aspire to only withdraw from finite stocks like natural capital at the rate that is sustainable. Additionally we would place value on restoration of ecosystems as it improves the value of our natural capital.
B - The state must integrate all reasonable externalities into market transactions. It is the job of the state to ensure all transaction costs are included in the market. The perfectly efficient free market system still has a state, where they measure externalities and include them into market transactions. If all transaction costs that are reasonably priced to measure externalities, (using a proxy or pseudo price) are incorporated into the market, in theory we should have a perfectly efficient economy. However, the state has in most cases failed to incorporate externalities into market transactions with significant third party spill over, (Resulting in climate change, plastic pollution and other ecological disasters). Assuming we could with a high degree of confidence (for example as can be done by carbon pricing), pseudo price all our externalities, and the state then incorporate them into business transaction costs, we should eliminate overconsumption of resources and eliminate the impact of externalities. This is of course only theory, and the failings and costs of pseudo prices will be a real limitation, alongside the political mandate that will be needed to facilitate the extensive externality pricing/ taxation required. We must recognise that in a free market the state has a significant role to play in pricing externalities, we have failed to maintain this in the definition of a state. I strongly believe we should increasingly look to revenue raise via taxing externalities, this will allow us to lower GST and income tax.
These two critiques of capitalism are not actually critiques of economic theory. Indeed they are both integral parts of the basic definition of a perfect economy that we are forgetting. Addressing both these failings in our economic rhetoric will be integral to healing our planet profitably. Here I will introduce a new definition - Economic environmentalism - a. A combination of replacing economic growth with economic efficiency measures and including intergenerational externalities in present day transactions. b. While including all current and intergenerational externalities from today's actions in transactions, we need to strive for an increase in economic efficiency. A last thought, if a market can’t succeed once the true cost of a production externality is included, it must fail to optimise total welfare.
2 https://www.overshootday.org/newsroom/country-overshoot-days /
3 https://advisory.kpmg.us/content/dam/advisory/en/pdfs/2021/yale-publication.pdf