Towards a new sustainable economy

31 03 2009

Robert Costanza comments on the failure of capitalism to provide for human well-being and protect the environment in the Real-World Economics Review.

The current financial meltdown is the result of under-regulated markets built on an ideology of free market capitalism and unlimited economic growth. The fundamental problem is that the underlying assumptions of this ideology are not consistent with what we now know about the real state of the world. The financial world is, in essence, a set of markers for goods, services, and risks in the real world and when those markers are allowed to deviate too far from reality, “adjustments” must ultimately follow and crisis and panic can ensue.

To solve this and future financial crisis requires that we reconnect the markers with reality. What are our real assets and how valuable are they? To do this requires both a new vision of what the economy is and what it is for, proper and comprehensive accounting of real assets, and new institutions that use the market in its proper role of servant rather than master.

The mainstream vision of the economy is based on a number of assumptions that were created during a period when the world was still relatively empty of humans and their built infrastructure. In this “empty world” context, built capital was the limiting factor, while natural capital and social capital were abundant. It made sense, in that context, not to worry too much about environmental and social “externalities” since they could be assumed to be relatively small and ultimately solvable.

It made sense to focus on the growth of the market economy, as measured by GDP, as a primary means to improve human welfare. It made sense, in that context, to think of the economy as only marketed goods and services and to think of the goal as increasing the amount of these goods and services produced and consumed.

But the world has changed dramatically. We now live in a world relatively full of humans and their built capital infrastructure. In this new context, we have to first remember that the goal of the economy is to sustainably improve human well-being and quality of life.

We have to remember that material consumption and GDP are merely means to that end, not ends in themselves. We have to recognize, as both ancient wisdom and new psychological research tell us, that material consumption beyond real need can actually reduce well-being. We have to better understand what really does contribute to sustainable human well-being, and recognize the substantial contributions of natural and social capital, which are now the limiting factors in many countries. We have to be able to distinguish between real poverty in terms of low quality of life, and merely low monetary income.

Ultimately we have to create a new model of the economy and development that acknowledges this new full world context and vision.

This new model of development would be based clearly on the goal of sustainable human well-being. It would use measures of progress that clearly acknowledge this goal. It would acknowledge the importance of ecological sustainability, social fairness, and real economic efficiency. Ecological sustainability implies recognizing that natural and social capital are not infinitely substitutable for built and human capital, and that real biophysical limits exist to the expansion of the market economy.

Social fairness implies recognizing that the distribution of wealth is an important determinant of social capital and quality of life. The conventional model has bought into the assumption that the best way to improve welfare is through growth in marketed consumption as measured by GDP. This focus on growth has not improved overall societal welfare and explicit attention to distribution issues is sorely needed.

As Robert Frank has argued in his latest book: Falling Behind: How Rising Inequality Harms the Middle Class, economic growth beyond a certain point sets up a “positional arms race” that changes the consumption context and forces everyone to consume too much of positional goods (like houses and cars) at the expense of non-marketed, non-positional goods and services from natural and social capital.

For example, this drive to consume more positional goods leads people to reach beyond their means to purchase ever larger and more expensive houses, fueling the housing bubble. It also fuels increasing inequality of income which actually reduces overall societal well-being, not just for the poor, but across the income spectrum.

Real economic efficiency implies including all resources that affect sustainable human well-being in the allocation system, not just marketed goods and services. Our current market allocation system excludes most non-marketed natural and social capital assets and services that are critical contributors to human well-being. The current economic model ignores this and therefore does not achieve real economic efficiency. A new, sustainable ecological economic model would measure and include the contributions of natural and social capital and could better approximate real economic efficiency.

The new model would also acknowledge that a complex range of property rights regimes are necessary to adequately manage the full range of resources that contribute to human well-being. For example, most natural and social capital assets are public goods. Making them private property does not work well. On the other hand, leaving them as open access resources (with no property rights) does not work well either. What is needed is a third way to propertize these resources without privatizing them. Several new (and old) common property rights systems have been proposed to achieve this goal, including various forms of common property trusts.

The role of government also needs to be reinvented. In addition to government’s role in regulating and policing the private market economy, it has a significant role to play in expanding the “commons sector”, that can propertize and manage non-marketed natural and social capital assets. It also has a major role as facilitator of societal development of a shared vision of what a sustainable and desirable future would look like. As Tom Prugh, myself, and Herman Daly have argued in our book “The Local Politics of Global Sustainability,” strong democracy based on developing a shared vision is an essential prerequisite to building a sustainable and desirable future.

The long term solution to the financial crisis is therefore to move beyond the “growth at all costs” economic model to a model that recognizes the real costs and benefits of growth. We can break our addiction to fossil fuels, over-consumption, and the current economic model and create a more sustainable and desirable future that focuses on quality of life rather than merely quantity of consumption.

It will not be easy; it will require a new vision, new measures, and new institutions. It will require a redesign of our entire society. But it is not a sacrifice of quality of life to break this addiction. Quite the contrary, it is a sacrifice not to.

Also see my previous post on Herman Daily’s “Steady-State Economics”.




2 responses

31 03 2009
T. Caine

I think that there is certainly a need for change in perspective, but I am not convinced that the final goal is to be anti-capitalistic. I agree that the real goal is to reassess our valuation system including natural and social capital.

Capitalism did not exclusively get us where we are- it is a system with as many accolades and flaws as any other but it’s misuse can result in calamity, which is where we find ourselves. The continuous growth model is a cultural idea of excess that America has subscribed to and, unfortunately, believes it is entitled to. There is no prerequisite for a free market economy that makes it so it needs to continuously expand in order for it to function. Capitalism can achieve a sustainable cycle.

There is nothing that “forces everyone to consume too much of positional goods.” The decision to needlessly purchase excess is a societal flaw that exists in relation to, but not exclusively tied to, our free market structure–which could still function well even without people bleeding their money away on nonsensical items.

I do think that the problem is how natural and social capital are measured, but I do not think it is that they are “substituted.” I think it is that they are currently valueless. Long term environmental health has no value in corporate finances. Clean water, clean air, old growths forests have zero value in how we make our decisions. I see trading carbon credits as a free-market way of trying to ascribe value to the environment that, if done properly, can rebalance value inequalities involving natural capital.

So if we agree that our drive towards needless excess and out disregard of social and natural capital has to change, we arrive at the question of whether or not regulation can actually do that. I think it’s ability to is limited. This mindset has to be fundamentally changed on a cultural level. You cannot regulate gluttony. I think the strongest forces against it are education, supporting positive, efficient products and processes to market and helping to prove the existence of progressive solutions.

Nice post. Good to see the issues brought up.

1 04 2009

For me sustainable capitalism is an oxymoron. The world economy is a complex beast that eats up healthy ecosystems and spits waste back into them. It’s quickly becoming too big for our finite world. We would probably agree here. Though, at the same time global capitalism allocates 80% of the world’s production to 20% of its population, creating massive inequality. Over the last thirty years or so, globalisation has channeled natural resources out of underdeveloped countries, undermining their capacities for development and leaving people starving and destitute. There is no way that our current model of western capitalism could equitably serve 6.5 billion people, let alone 9 billion.

On your points:

Continuous growth model.

Growth is an inherent component of capitalism, it can’t survive without it. Currently the world economy is experiencing minus growth and capitalism is suffering as a result. Multi-national corporations hold huge amounts of power and are thus able to influence government decision-making into creating legislation and policy that suits them. Ultimately excluding most stakeholders and their interests. In the US, the most obvious example would be inaction on climate change. Capitalism has created these psychopathic monsters with no moral compasses, which willingly turn any forest or watershed into dust to satisfy stockholders.


I am very wary of solutions that seek privatisation as a means to eliminate negative externalities. Look at what privatisation did to England after the enclosures, aside from excluding people from the land on which they had been born and lived, it created agricultural monoscapes. Private ownership of rainforests could do just the same to indigenous peoples, placing profit and environment over people. Recent carbon trading schemes have been an utter disaster. In the EU pollution permits have been over-allocated: “93%, or about 9,000 of the 10,000 heavy industrial plants covered by the EU’s trading scheme, emitted less carbon than their quota of free permits”. It is such a shame that so much of the proposed climate solutions depend on them. Mechanisms such as REDD could face considerable economic competition from other forms of land-use such as oil palm when carbon credits are not achieving high prices (see: “REDD in the red: palm oil could undermine carbon payment schemes” in Conservation Letters). I see a scheme that involves indigenous communities as owners of forests as a more sustainable solution.

Personally, I am still uncertain as to what type of economy will adequately function within ecological limits and for human requirements. Traditional socialism, like capitalism is industrial and can still destroy the environment. It can also be resentful towards individual liberty. Equally, common and public ownership of ecosystems can degrade ecosystems.
Common ownership strategies can protect the environment from private owners who are more inclined to exploit them for profit if they are cognizant of local conditions. The problem is global commons management.

Taxes on fossil fuels could be a potential option to influence behaviour, but only if they are combined with tax reductions elsewhere, such as on low incomes. Revenues from this could be invested in sustainable infrastructure.

I would agree with you on the need for a cultural shift. People need to be aware about the consequences of their actions, for instance when buying a product that is driving the destruction of an ecosystem the other side of the earth. But I feel that there is a general apathy towards the environment and also a great level of cynicism about the serious of the climate and ecological crisis. When we as individuals are positioned in a capitalist society that rewards selfish and overly competitive actions, it’s hard to imagine a future in which people are empathetic to a wider ecological and social good. Here I think a more participatory democratic system could play a role in engaging more people in the political process, educating and create an awareness of community and environmental issues. Inevitably, with less consumption there would be fewer jobs, but this could free up time for community, political, artistic and ecologically related activities (eg. permaculture).

It’s such as massive problem and I believe that solutions will no doubt have to take on board a range of perspectives and be tested through adaptive co-governance (see:

Thanks for the comment.

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