Decoupling Growth or System Change?

It is becoming ever more clear that something has to change in the way human economic activity takes place and impacts the world around us. The ecological footprint of the world economy is ever increasing – it is by now believed to have reached unsustainable levels. Few people are questioning this. However, so far the (re-)actions to this new challenge have not been adequate – the 17th Conference of Parties of the UNFCCC in Durban last month, where the world leaders failed to agree on a binding framework aiming at tackling anthropogenic climate change, is a prime recent example. Alas, it is not the only one – rather it is the tip of the iceberg. There are many proposals what to do. And it is clear that human economic activity (including consumption) is the main problem. One popular idea is to “decouple” growth from resource use (in a wide sense of the latter).

Why should we want to decouple growth from resource use? Well, as pointed out above, the current global resource use is far from being sustainable. It has to be lowered if we want our descendants to enjoy a standard of living comparable to ours. Resource use increases with growth in the volume of human economic activity. As I pointed out elsewhere, what is commonly called “economic growth” (i.e., growth in GDP) is actually a composite measure with two components. One is called by ecological economists “growth” – this is the quantitative component: more production (or output) with more input. This is, so to speak, the “bad” component. The other is called “development” – it is a qualitative measure, i.e. more output given constant inputs or constant output with less input. The idea of decoupling growth from resource use is mainly the idea to constrain quantitative expansion of production.

However, the main presumption of decoupling growth from resource use is the belief that we are able to maintain growth under these new circumstances. This is understandable to some extent, since our current economic system, prevailing all over the world, is highly dependent on growth. Under this system, slower or (God forbid!) no growth means unemployment, deflation, soaring debt (both private and – especially – public) and, as a result of these, social and political unrest. This is what can currently be observed in Greece and earlier in Russia, Argentina and other countries.

A particularly problematic aspect of the growth dependence is public debt. No country really repays its debt under the current system. Instead, governments borrow money to pay interest on money borrowed earlier to pay interest on money they borrowed earlier to pay interest… This “strategy” is common all over the world, it is known under the name debt rollover. It is only possible as long as the economy in question is growing (and with it the State’s tax revenue). When growth ceases, for whatever reason, problems arise (look at Greece). Problems can arise due to factors other than (actual) growth as well (e.g., the so-called investor confidence), but they all can be reduced to growth (or growth expectations – often a self-fulfilling prophecy, when investors believe that growth in a country will slow down, pull back their money, and therefore cause a recession).

Thus the dilemma, as it is seen by the proponents of the idea of decoupling growth from resource use, is the following: either we do nothing, and the ecosystems that sustain our livelihoods break down. Or we stop growing, and our economic system collapses (and with is probably the political systems as well). But there is (?) a solution to this dilemma – we decouple growth from resource use and kill the two birds with one stone.

Alas, there is one problem: we don’t know whether it is actually possible to decouple. I personally (and many others) doubt it. It may be that, while trying, we will recognize that the dilemma described above cannot be solved. And then, it may well be too late to avert both negative outcomes (the environmental and the economic catastrophe). There is much uncertainty and doubt about our ability to decouple growth from resource use. Furthermore, in this way we wouldn’t cure other ills of the current economic system.

The alternative is not easy as well. System change never is. But it is much more probable that we can change the system than that we will be able to stabilize the current one, especially in the long run. Instead of decoupling growth from resource use, maybe it would be more reasonable to “decouple” the economic system from its growth dependence?

An important part of such a system change would be a fundamental reform (or, more poignantly, an overthrow) of the financial system. It seems to be the largest ill today, causing or influencing many other ills – including debt problems or unemployment (no credit → no investment → market share loss → lay-offs). As was argued elsewhere, the current financial system is incompatible with ecological sustainability. One reason for this is that financial markets, which originally were thought as intermediaries between those who save money and those who would like to productively invest it, have become an entity existing and functioning for its own sake. There is, for instance, a huge discrepancy between the virtual wealth “produced” by the financial system and the real wealth produced in the real economy – in 2010, the volume of stock market exchanges globally was 417 bn €, while world GDP was only 44 bn. One may ask: what is the purpose of having more money that can possibly be spent on tangible goods and services? Much of this virtual wealth is created through speculation of all kinds, financial market bubbles and fiduciary credit. While the former two can be straightened out within the current system (at least in theory), the latter is an integral part of that system. However, many argue that it is a highly destabilizing part. The abolition of it would, of course, constrain the ease to get credit – but this may indeed be a good thing, since the scarcity of credit may force investors to care more about the quality of their projects. There are many possible ways how to change the financial system – some time ago I discussed a proposal based on the tradition of Islamic banking. A concrete proposal made by researchers from the New Economics Foundation can be found here.

A change toward an economic system independent of growth would be dramatic and fundamental. However, the current system appears to be highly unsustainable. Moreover, it is historically not very old, so it is possible to imagine that its time has just gone past – it should not be impossible to imagine another economic system. Of course, to change such a complex, encompassing system one needs a lot of time. There are concepts there how to do it. They are not comprehensive, but were the concepts of modern capitalism comprehensive in, say, the beginning of the 19th century? Sometimes humanity has to take risks and go on without being fully certain about where it will arrive. Today is such a time – if we want to avert a catastrophe, be it ecological, be it economic (or, most probably, both), we have to change a lot. Better we start now.



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