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31 December 2009

The constant economy

Filed under: books, Economics, green, leadership, market failure, vision — David Wood @ 2:54 pm

I’ve had mixed thoughts when reading Zac Goldsmith‘s “The constant economy: how to create a stable society” over the last few days.  It makes some useful contributions to an ultra-important debate.  However, the recommendations it makes frequently strike me as impractical.

Zac has been one of the advisors to the UK Conserative Party on environmental matters.  He is now the Conservative prospective parliamentary candidate for the Richmond Park constituency, which is adjacent to the one I live in.  It’s possible that his views on environmental matters will have a significant influence over the next UK government.

Some of the examples in the book made me think, “Gosh, I didn’t realise things were so bad; things can’t be left to go on like this“.  I had these thoughts when reading, for example, about the huge decline in fishing stocks worldwide, and about the enormous swathe of plastic waste in large parts of the Pacific Ocean.

Other parts, however, made me think, “Hang on, there’s another side to this story” – for example, for some of the incidents described in the chapter about the Precautionary Principle, and for the section about nuclear power.

This book is like a manifesto.  Mixed in with real-world anecdotes and analysis, each chapter contains a list of “Voter Demand Box” items.  For example, here’s the list from the chapter on “A zero waste economy”:

‘Take back’

People should have a legal ‘take back’ right enshrined in consumer law.  This would give everyone the right to take any packaging waste back to the shop it was bought from, and impose an obligation on retailers to recycle that waste once it was received.

Paying people to recycle

No more landfill

Using the right materials

Built to last

Government buying power

Incineration, a last resort

And from the chapter “An energy revolution”:

Find out the truth about oil

A cross-party taskforce should be established immediately to draw up a risk assessment.  It should not invite the traditional fuel industry to take part, as it would effectively be studying a risk scenario that says their maths is incorrect.  The taskforce should be required to publically report its findings within a year.

At the same time, we should also expect our government to put pressure on the UN or International Energy Authority to undertake a review of the world’s oil reserves.  If the economic models of every nation on earth are based on the assumption of everlasting oil supplies, it is reasonable that they should know how much oil actually exists.

Capture the heat

Reward the pioneers

Break the rules

Invest!

We urgently need a renewable energy fund to provide substantial grants for the research and development of radical new clean energy technologies.  From wave power to clean coal technology, potential solutions remain in the pipeline due to a lack of investment.  Government should provide that investment.  Diverting money that would otherwise be spent subsidizing fossil fuels or the nuclear energy could provide billions of pounds for research, support and, crucially, for upgrading the national grid.

Stop paying the polluters

Whilst there are elements of good sense to all (or nearly all) of these recommendations, this set of items needs a lot more work:

  • The items are uncosted, and generally open-ended;
  • It’s often unclear how the recommendations differ from policies and processes that are already in place;
  • There’s no prioritisation (everything is equally important);
  • There’s no roadmap (everything is equally urgent).

Despite this weakness, this book still has merit as a good conversation starter.

The book’s introduction provides a higher-level picture.  Here’s the opening paragraph:

The world is in trouble.  As human numbers expand and the resource-hungry economy grows, the natural environment is suffering an unprecedented assault.  Forests are shrinking, species are disappearing, oceans are emptying, land is turning to desert.  The climate itself is being thrown out of balance.  In just a few generations, we have created the biggest threat to the natural world since humanity evolved.  Unless something radical is done now, the world in which our children grow up will be less beautiful, less bountiful, more polluted and more uncertain than ever before.

The top-level recommendations in the book are, in effect:

1.) The need for first-class political leadership on environmental issues

We need political leaders who can free themselves from the constraints of pressure groups, whose vision extends far beyond the next election, and who can motivate strong constructive action (rather than just words):

Politicians in Britain, as elsewhere, can see the rising tide of concern over green issues, and in many cases know what solutions are required.  The environment has never been so high on the political agenda…

Yet few politicians are prepared to take the action needed.  Nothing happens.  Time ticks by, the situation becomes more urgent – and government does nothing.  Why?

Politicians are terrified of acting because they believe that tackling the looming crisis will involve restricting the electorates choices.  They believe that saving the planet means destroying the economy, and that neither business nor voters will stand for it.  They fear the headlines of a hostile media.  They fear, ultimately, for their jobs.  It always seems easier to do nothing – and to let the situation drift and hope that someone else takes the risk…

2.) The need to adapt market economics to properly respect environmental costs

Our defining challenge is to marry the environment with the market.  In other words, we need to reform those elements of our economy that encourage us to damage, rather than nurture, the natural environment.

The great strength of the market is its unique ability to meet the economic needs of citizens.  Its weakness is that it is blind to the value of the environment…

Other than nature itself, the market is also the most powerful force for change that we have.  The challenge we fact is to find ways to price the environment into our accounting system: to do business as if the earth mattered, and to make it matter not just as a moral choice but as a commercial imperative

Note: this is hardly a new message.  For one, Jonathon Porritt covered similar ground in his 2005 book (with a new edition in 2007), “Capitalism as if the world matters“.  However, Zac has a significantly simpler writing style, so his ideas may reach a wider audience – whereas I confess I twice got bogged down in the early stages of Jonathon’s book, and set it aside without reading further.

3.) The need for better use of market-based instruments such as taxation

We need to change the boundaries within which the market functions, by using well-targeted regulation.

Taxation is the best mechanism for pricing pollution and the use of scarce resources.  If tax shifts emphasis from good things like employment to bad things like pollution, companies will necessarily begin designing waste and pollution out of the way they operate…

The other major tool in the policymakers’ kit is trading.  Carbon emissions trading is a good example of a market-based approach which attaches a value to carbon emissions and ensures that buyers and sellers are exposed to this price.  As long as the price is high enough to influence decisions, it can work…

Note: it’s clear that the existing carbon trading scheme has lots of problems (as Zac describes, later in the book).  That’s a reason to push on quickly to a more effective replacement.

There’s also a latent worry over Zac’s confident recommendation:

It’s crucial that wherever money is raised on the back of taxing ‘bad’ activities is used to subsidise desirable activities.  For example, if a new tax is imposed on the dirtiest cars, it needs to be matched, pound for pound, on reductions in the price of the cleanest cars.

The complication is that once the higher taxation drives down usage of (in this example) the dirtiest cars, the amount of tax earned by the government will be reduced, and the “pound for pound” balance will break.  It’s another example of how the ideas in the book lack detailed financial planning.  Presumably Zac intends these details to be provided at a later stage.

4.) We need a fresh approach to regulation

Direct controls force polluting industries to improve their performance, and can eliminate products or practices that are particularly hazardous…  Markets without regulation would not have delivered unleaded petrol, for instance, or catalytic converters.  Without regulations requiring smokeless fuel, London’s smogs would still be with us.

This approach, however, needs to be effective.  With some products and processes, the regulatory bar needs to be raised internationally to avoid companies chasing the lowest standards globally.  We also need a change in our regulatory approach, away from an obsessive policing of processes towards a focus on outcomes.  If the regulatory system is too prescriptive, there is no room for innovation, and no real prospect of higher environmental standards…

5.) We need to measure what matters

Almost every nation on earth uses gross domestic product (GDP) to measure its economic growth.  The trouble is, expressed as a monetary value, GDP simply measures economic transactions, indiscrimately.  It cannot tell the difference between useful transactions and damaging ones…

Chopping down a rainforest and turning it into toilet paper increases GDP.  If crime escalates, the resulting investments in prisons and private security will add to GDP and be measured as ‘growth’.  When the Exxon Valdez oil tanker ran aground and spilt its vast load of oil on the pristine Alaskan shoreline, US GDP actually soared as legal work, media coverage and clean-up costs were all added to the national accounts…

US Senator Robert Kennedy said something similar:  “GDP does not allow for the health of our children, the quality of their education, or the joy of their play”, he said.  “It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.”

But the pursuit of economic growth, as measured by GDP, has been the overriding policy for decades, with the effect that the consequences have often been perverse…

A number of organisations have tried to assemble a new tool for measuring progress.  But the result is invariably a toolkit that is monstrous in its complexity and too impractical for any government to use.  A neater approach would be for the government to establish a wholly independent Progress Commission, staffed by experts from a wide variety of fields: economists, environmentalists, statisticians, academics, etc…

Whichever indicators are selected, the results would be handed each year to Parliament and the media.  The government would be required to respond…

Note: again, the suggested practical follow-up seems weaker than the analysis of the problem itself.  The economy has been ultra-optimised to pursue growth in GDP.  That’s how businesses are set up.  That’s going to prove very difficult to change.  Attention to non-financial matters is very likely to be squeezed.

However, it’s surely good to have the underlying problem highlighted once again.  Robert Kennedy’s stirring words ring as clearly today, as when they were first spoken: March 1968.

Let’s keep these words in mind, until we are confident that society is set up to pursue what matters, rather than simply to boost GDP.

Further reading: The book has its own website, with a blog attached.

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