Building a sustainable economy

‘Sustainability’ was defined according to the UK government’s definition in my previous entry. It is certainly a vague term. What is it that we want to be sustained and probably improved? Our standard of living is one vital measure of success. This must mean our material wealth and the not unrelated category of ‘well-being’, though the latter is far more than is allowed for by material progress. And if our standard of living is to be improved without limit, the means by which we develop socially, economically and politically has to by definition be sustainable. It may be unpalatable to some, but wonderful to others, this prospect of unlimited progress. But it seems to me to be necessary for human survival.

Here I want to explore different notions of sustainability, at the level of the individual, firm, industry, and national and global economies.

As has been explored at length by the economist Paul Ormerod in his book ‘Why Most Things Fail’, the behaviour of these categories, while is may or may not succeed for a time, is often doomed to failure. An individual dies, a firm goes bust, an industry technology is gradually superseded and finally replaced by superior forms. Sometimes, but less frequently, whole economies go bankrupt, and in a period of crisis, the behaviour of the global economy can seem to fail. During the Great Depression of the 1930s, the capitalist system was seen to be failing drastically to grow and to employ the great majority of its workforce, throwing millions into poverty all around the world. Partly as a result of this, it was replaced in some countries by Fascism and Communism, which seemed to offer a more rational approach to organising society and the economy. They promised full employment and centrally planned economic growth; a means to prosperity. Ultimately, these systems failed to provide sustainable peace-time development and were replaced by new forms of capitalism with varying degrees of political freedom. For the moment, capitalism has triumphed as form of economic and social organisation, and the question during the current financial and economic crisis is not what it can be replaced with, but how it can be better organised to continue to grow and deliver further prosperity. With the twin threats of global warming and environmental degradation, part of the answer to this must involve ‘greener’ and more sustainable growth, notwithstanding further crises, which seem to be somewhat intrinsic to the system, although I would argue that they can be substantially mitigated.

An individual can spend on credit in what proves to be an unsustainable way. When he or she is borrowing against the value of property whose value is rising, all seems to be well. When the property market turns and the value of this collateral falls, he or she may eventually be unable to borrow further to service debts. This behaviour can create booms and busts in private consumption across an economy and can be seen as part of the current credit crisis. Are these swings in consumption sustainable? They have happened in decades past, and the economy continues to grow on average from year to year; the answer would appear to be yes. Would it be desirable to have smoother consumption patterns? One can look at the misery of mass personal bankruptcy and unemployment caused in part by a severe downturn and argue yes also. But individuals would need to forgo some freedoms they have hitherto enjoyed, if credit regulations were tightened to prevent such consumption booms in the future. Even in the absence of this, the scale of personal indebtedness, in the UK and the US for example, seems likely to produce a typically more cautious consumer for a number of years.

Green behaviour by individuals, such as using recyclable or reusable carrier bags for shopping, buying from sustainable sources and so on, seems likely to incrementally create some sort of revolution in consumption. The interaction between firms, individual consumers and governments will stimulate such changes. Consumers can become more aware of the consequences of their habits for the environment and change their behaviour accordingly. As discussed in my previous entry, firms and governments can both lead and follow consumers in this way encouraging the other actors in this process to behave more sustainably.
Firms ‘failing’ and going bust is an inevitable feature of capitalism. Woolworths in the UK is a useful recent and well-known example. The economic downturn did not help, but much of Woolworths business had been undercut by competitors, and its share price had fallen precipitously during 2008. Such failure is part of the process of ‘creative destruction’ described by the economist Joseph Schumpeter. Competition and creative destruction help to drive economic growth and transform society. One could describe the recent behaviour of Woolworths as unsustainable because it led ultimately to failure. It is not clear that the company’s bosses could have done a great deal about its demise. On the other hand, its behaviour for many years was sustainable and economically successful. It is necessary for some companies to go bust to create sustainable economic growth and allow new forms of business organisation to prevale. So what is sustainable for one firm in the medium run may not be sustainable in the long run; and the unsustainable behaviour of one firm allows the economy as a whole to be sustained for longer. What is objectionable is the unemployment caused by failure, especially if jobs for the newly unemployed are not readily available. A modern welfare state can help insure individuals against problems which are more the result of systemic than individual behaviour, such as mass unemployment, and to some degree protects them financially from this endemic feature of capitalism; that is, creative destruction and recession.

Occasionally, whole economies can ‘fail’, and in today’s world, they may receive a loan from the International Monetary Fund (IMF). Iceland is a good modern example, though no-one would really claim that the Icelandic society had ‘failed’, more that its economy had run into some very serious financial problems. Semantics aside, a rich country such as this may be more likely to be able to reorganise itself to recover after a number of years. Argentina since the 1989 financial crisis is another example with to date worse consequences in terms of the loss of economic output since then, and especially relative to its economic ‘competitors’ (those countries at a similar level of development, with competing industries). Whole national economies can be too big to fail, such that they do require assistance from international institutions and by implication, the pooled financial contributions of other countries. Adjustment can be painful for the mass of the population, and crises too common for comfort, but it is more a failure of organisation and also a failure of ideas, rather than the failure of a whole nation. That would be too hard to bear.

Sustainability, in its new form as a buzzword of green economics, is perhaps mostly about the long term future of the global economy. Beyond the serious economic crises that preoccupy policymakers from time to time all over the world, there is perhaps a potentially more serious crisis that threatens the future of the planet. The concept of the global economy is only one way of examining this potential threat. We need to develop in a way that conserves (certain) natural resources and does not irreperably damage the ecosystem. The current financial crisis pales into insignificance next to the destruction of the ecosystem and the damage to human life which could result. Human beings also benefit from living in a pleasant environment and may wish to prevent other species from becoming extinct as a result of their activities. Losing such species may prevent some material progress from being satisfied: increased human life expectancy from the development of drugs from rare plants for example. It is difficult to predict the consequences for human beings of a dramatic loss of species from the earth. This is not really for an (amateur) economist to discuss however.

Much sustainability concerns the use of resources and the desire to either conserve energy or, more usefully, to use it more efficiently and produce it with far less damage to the ecosystem. Here economics has more to say. I will write more on this in future entries.

In sum, sustainability is about the survival of mankind. On a more detailed level, it is also about more than ‘green’ issues, and concerns the success and failure of different kinds of organisation, as well as individual behaviour. Companies can suceed for a while and then ultimately fail. Economies, local as well as national and global, can prosper and then decline, both relatively and absolutely, in the short, medium and longer term. It is up to us to ensure we experiment with new ideas and apply the best we can find to organise human activity for the long term. That is a difficult task.

Promoting sustainability: better left to government?

The UK government definition of sustainability runs as follows: “Sustainable Development is a very simple idea. It is about ensuring a better quality of life for everyone, now and for generations to come.” It may be a simple idea, but how can it be put into practice? Does a ‘better quality of life’ mean more than material gains, valuable though these are. It could mean better health, more ‘freedom’ to pursue one’s aspirations and to ‘self-actualize’, in the words of Abraham Maslow, and to become all that one is capable of becoming. The ‘generations to come’ that also define sustainability are key. All the philosophical ‘good’ that is achieved must be able to be sustained into the future. Certain natural resources must not be depleted in a way that damages the ecosystem and puts at risk further development. The consumption of other resources that it may be less costly to use up should not do similarly. And whose job is it to promote such a course? Should governments lead the way, or is it down to the firm or the individual? I will argue below that the actions of all three can drive the changes needed. Moreover they interact holistically in doing so.

It is the job of a government to govern its people. Whether it takes place democratically or not, government performs a mixture of leading and following, with leaders becoming popular and/or successful when they manage to judge a public mood and then act to implement policy which reflects or anticipates it. Sometimes this might mean public opposition for a while, followed eventually by acceptance that the politician did the ‘right’ thing for the prosperity of some majority. For promoting ‘sustainable’ prosperity, reform to the economy and society should be ‘win-win’ in the long-run, but may involve unpopularity for politicians and pain for citizens in the shorter term.

As mentioned in an earlier entry, in economic terms, unsustainable activity involves market failure due to externalities. These can be ‘internalised’ through taxes or regulation so that individuals, businesses and other organisations pay the ‘correct’ price. The latter should promote greater sustainability. It is the proper job of governments to enforce taxes and regulations. Unfortunately these can slow economic growth if they are set at too high or too stringent a level. Businesses can potentially relocate production abroad to avoid these new costs. This can lead to calls for international taxes and regulation to ‘level the competitive playing field’. On the other hand, a growing awareness of and demand for sustainability among consumers can see them switch to buying from ‘well-behaved’ companies, no matter where they locate, negating the effects of businesses avoiding new costs. Increasingly, it may offer a competitive advantage to be ‘good’ and to be seen to be so. Enter Corporate Social Responsibility (CSR).

CSR, as businesses seen to be going ‘good’, shows that governments can be behind the curve in promoting sustainability. Sometimes it seems to be little more than simply a public relations exercise in which firms dress up what they are already doing as sustainable and ethical. In other cases, it leads to real changes in business practice and in the best of all possible worlds, greater economic efficiency and higher profits go hand in hand with the changes. A firm may cut costs by shrinking its carbon footprint and economising on energy use. I mentioned a theoretical example in which CSR creates competitive advantage in my October entry. So individual firms and industries can potentially lead the way.

Individual consumers can also ‘lead’, or more accurately, stimulate, the promotion of a sustainable society and economy. Quite simply they can buy the products and services they perceive to be sustainable. As citizens, individuals can support political parties and policies that promise to create a more sustainable economy. This then requires a new awareness to be effective. Companies may lie in promoting their products as being green. Politicians can fail to implement promises. So it can sometimes be difficult for individuals to contribute to sustainability. But in demanding socially responsible business practice and government policies, they can certainly help.

I would also argue that the behaviour of the three actors considered above interacts in a holistic fashion. Individuals, as both citizens and consumers, can demand new policies and practices from government and business, and vote and consume accordingly. Businesses can act more sustainably and thereby give governments some idea of what policies may promote both efficiency and the social good for the long term. They can also set new benchmarks for business practices, such that individuals demand such practices in the future. Finally, governments can lead the way and implement new policies which guide the overlapping categories of business, industries, citizens and consumers in new directions of behaviour. A combination of these directions of causality is likely to operate in reality. Clearly everyone can make a difference.