STWR - Share The World's Resources

For the most part, the wake-up call in 2008 to rethink our economic model went unheeded. Governments must address financial and ecological sustainability together in order to allow humans to flourish within the limits of a finite planet, argues Tim Jackson.

12th January 2010 - Published by the RSA Journal

Where on earth is the next economy? What is the basis of tomorrow’s enterprise? How do we set about building a shared and lasting prosperity? These questions haunt the fragile truce of a still-faltering economy. It’s time we came up with some answers. It’s time we demanded them from our politicians.

The banking crisis of 2008 led the world to the brink of financial disaster and shook the dominant economic model to its foundations. It redefined the boundaries between market and state. It forced us to confront our inability to manage the financial – let alone the social or environmental – sustainability of the global economy. Consumer confidence was shattered. Investment stalled. Unemployment may still be rising. Trust in financial markets is likely to suffer for a long time to come. Public sector finances will be stretched for a decade or more. Not to stand back now and question what happened is to compound failure with failure: failure of vision with failure of responsibility. If nothing else, the economic crisis has presented a unique opportunity to address financial and ecological sustainability together.

For the most part, that opportunity has gone unheeded. For a while, politicians paid lip service to the interesting idea of a ‘green stimulus’ – government spending to address simultaneously the demands of economic recovery and the investment needs of a sustainable, low-carbon society. “The contours of a resilient, low-carbon recovery are becoming clear,” claimed Gordon Brown at the World Economic Forum in Davos, barely a year ago. “Underlying all these measures is a common principle: the need to lay down now the infrastructure and the hardware to support a low-carbon recovery and the green economy of the future.”

But like so much of the economic rhetoric of the past decade, it turned out to mean very little. The UK government, along with many others, found hundreds of billions of pounds to shore up the collapsing financial sector, but little or no additional cash to invest in a truly sustainable economy. It reduced itself instead to shameful appeals (and empty fiscal gestures) aimed at persuading people to go out shopping again – as if, by foregoing the high street, we were recalcitrant school kids skipping class. A rapid return to rampant consumerism seemed the only vision left to despairing politicians. It would be comical were it not so damaging.

Perhaps most worrying of all, there doesn’t seem to be a single politician prepared to address the critical question: where on earth is the next economy? The collapse of the financial sector should have been more of a wake-up call to Britain than to almost any other nation in the world. For more than a decade, we’d based our productivity growth on a model of monetary expansion – supercharged by the financial sector. London built its hopes on becoming the financial capital of the world. We’d ramped up consumer debts higher than GDP for three years in a row, and an external debt second only to the US in absolute terms. With manufacturing capabilities long since eroded, the ‘sunset industries’ in near-terminal decline and the financial sector in crisis, this should have been a moment to rethink our virtually non-existent policies on enterprise. Business secretary Lord Mandelson came close at one point, announcing something called industrial activism, but it turned out to mean little more than propping up the ailing car industry with nonsensical scrappage schemes.

A Flawed Growth Model

As economics commissioner for the Sustainable Development Commission, the government’s independent watchdog on sustainable development, I visited numerous government departments in the wake of the economic crisis and asked the same questions time and again. Where is economic recovery going to come from? Where do our economic strengths lie? Which sectors will support our future economy? I was repeatedly told that it wasn’t the government’s job to pick winners and that the priority was to restore consumer confidence. Yet the second bit of this answer does nothing for sustainability and I know for a fact that the first part isn’t true. For six years, I’ve been visiting different parts of the UK, talking with regional and devolved governments about economic development. And for six years, I’ve heard the same story. ‘High-end jobs’ are the preferred route to regional prosperity. High-end jobs are the de facto ‘winners’.

What are these high-end jobs? Basically, they’re jobs in high value-added sectors that we hope will deliver high labour productivity growth year on year: high-tech industries, biotech, ICT and the service sector. And why do they matter so much? Because that’s what will raise the Gross Value Added (GVA) from production – the most critical regional performance indicator.

The trouble is, it’s patently flawed as a model of growth, let alone a model of prosperity. Chasing high productivity growth may raise wages in the lucky sectors but it puts a downward pressure on regional employment that can only be alleviated by further growth. This relies in turn on a continual stream of inward investment to realise yet more productivity gains. But inward investment is fickle at the best of times. With everyone chasing the same goal and investment faltering, this strategy becomes a recipe for disaster. The holy grail of high-end jobs leaves no resilience in the local economy and a legacy of stranded assets and systemic joblessness.

Neither is this strategy any more effective at delivering a low-carbon economy. At face value, some of these high-end sectors have a lower-than-average carbon intensity. The shift away from manufacturing is one reason for the apparently declining carbon emissions in the UK over the past two decades. But once you take account of the carbon in supply chains, including the carbon embodied in imported goods and services, you find that the strategy just isn’t working. Far from falling, carbon emissions attributed to UK consumption patterns have risen by more than 10 per cent since 1990, as three independent studies have shown. We don’t have a low-carbon economy. We don’t have a secure economy. And we don’t have a workable strategy to reach either of these goals.

One of the aims of my report for the Sustainable Development Commission was to explore the potential for such a strategy. And despite the numerous ‘impossibility theorems’ with which one is confronted when daring to question the conventional growth model, I was continually surprised by how much we already know about what is involved.

We know, for example, that resilience matters. Economies that collapse under perturbation directly threaten human wellbeing. We know that equality matters. Unequal societies drive unproductive status competition and undermine wellbeing, not only directly but also by eroding our sense of shared citizenship. Work – and not just paid employment – still matters in this new economy. Apart from the obvious contribution of paid employment to people’s livelihoods, work facilitates our participation in the life of society. Through work we create and recreate the social world and find a credible place in it.

We know, too, that the next economy must remain ecologically bounded. The limits of a finite planet need to be coded directly into its organisation and its working principles. The economic valuation of ecosystem services, the greening of the national accounts, the identification of an ecologically bounded production function: all of these are likely to be essential to the development of a sustainable economic framework. We even know quite a lot about the specific nature of economic activities in such a society. In the first place, they have to satisfy three clear operational principles:

• Positive contribution to wellbeing

• Provision of decent livelihoods

• Low material and energy throughput.

And it isn’t just the outputs from these activities that will count; it’s the form and organisation of our systems of provision as well. Economic organisation needs to work with the grain of community and the long-term social good, rather than against it.

It’s even possible to identify a primitive blueprint for this kind of activity. Community-based enterprises engaged in delivering local services – food, health, public transport, community education, maintenance and repair, recreation – contribute to flourishing, are embedded in community, have the potential for low-carbon footprints and provide people with meaningful work. Let’s call these ‘ecological enterprises’. At the moment they constitute a kind of ‘Cinderella economy’, operating at best at the margins of the formal economy.

This Cinderella economy is problematic in conventional terms, however, because its potential for productivity growth is almost negligible. There are very good reasons for this. Human interaction lies at the heart of the value proposition. Reducing the labour content makes no sense at all here. In a conventional growth-based economy, this is potentially disastrous. In an economy geared towards providing capabilities for flourishing (including decent work) within ecological limits, it is a considerable bonus.

Supporting and expanding this kind of activity doesn’t, of course, mean that this is all the economy is doing. There will still be a role for many traditional economic sectors. The resource extraction sectors will diminish in importance, with fewer materials used and more recycled. But manufacturing, construction, agriculture and more conventional service-based activities, such as retail, communication and financial intermediation, will remain important.

Crucially, though, these sectors will need to adapt. Manufacturing will need to pay more attention to durability and reparability. Construction must prioritise the refurbishment of existing buildings and the design of new sustainable and reparable infrastructures. Agriculture will have to pay more attention to the integrity of land, soils and livestock. Financial intermediation will depend less on monetary expansion and more on prudent, long-term, stable investment.

Ecological Investments

In fact, investment is vital to the new economy – but its nature and scope will change. From its traditional role as a stimulus to productivity growth, investment will be geared much more towards ecological transformation: increased energy and resource efficiency; renewable and low-carbon technologies and infrastructures; public assets; climate adaptation; and ecological enhancement.

The question of how these ‘ecological investments’ behave in conventional macroeconomic terms is key. Some will turn out to increase total factor productivity and may even compete with conventional investment on its own terms. But there will certainly be others that are less ‘productive’ in conventional terms, with lower rates of return and longer periods of return. Some of these may not show conventional economic returns at all, unless environmental and social benefits are explicitly included in the equation.

This new investment portfolio offers a rather different ‘investment ecology’, so the idea that it can be delivered through conventional capital markets is problematic. But the one thing we already know from the financial crisis is the extent to which capital markets need reform. And since the crisis, even the terms of the debate have changed. In particular, there is a renewed willingness to consider the role of the public sector in the ownership of revenue-generating assets. Though ideologically unthinkable over the course of the past couple of decades, this possibility returned to the political table during the recession, when governments took equity stakes in financial sector institutions.   

What does the next economy look like? It’s built on a concept of ecological enterprise that aims to enable humans to flourish within the ecological limits of a finite planet. It recognises the role of ecosystem services in providing these capabilities and the importance of investing in ecological assets to maintain this capacity. It may very well not return the same expectations of conventional material growth. But that need not matter. In fact, it’s entirely the point.

For at the end of the day, prosperity goes beyond material pleasures. It transcends material concerns. It resides in the health and happiness of our families. It is present in the strength of our relationships and our trust in the community. It is evidenced by our satisfaction at work and our sense of shared meaning and purpose. It hangs on our potential to participate fully in the life of society. The challenge for our society is to create the conditions under which this is possible. It is the most urgent task of our times.

Tim Jackson's book Prosperity Without Growth: Economics for a Finite Planet is published by Earthscan.

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