Understanding Sustainability Economics

Towards Pluralism in Economics

Peter Soderbaum

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9781844076260
• eBook ISBN: 9781136549649
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This highly readable yet challenging book provides a critical examination of the failings of mainstream economics and the resultant environmental problems we are facing. Most importantly, it articulates what an alternative economics for sustainability would look like in both theory and practice.

The book provides a brief history of economics and looks at the intersection between politics and the often hidden values embedded in economics. Also covered are the roles of individuals and organizations, political structures and institutions, democracy, environmental decision-making, sustainability assessment and a vision of a future underpinned by sustainability economics. A main point raised is that, in any serious attempt to come to grips with unsustainable trends, fundamental issues such as the theory of science, the role of science in society, paradigms in economics, ideological orientations and institutional arrangements need to be critically examined. The theory is supported by case studies, explanatory figures, further reading sections and discussion questions to facilitate debate and learning.

1

Economics for Sustainability

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When looked upon in traditional terms of international competitiveness and growth in gross domestic product (GDP), our economies may be performing well. But it is increasingly understood that this is not enough. Sometimes GDP growth goes together with environmental degradation. We hear about China and India, for instance, with growth rates of 8–9 per cent per year that are accompanied by worrying trends in environmental degradation. The success of one country in export markets may furthermore cause unemployment in other countries and increased exports may not even improve employment in the exporting country (as a result of improved labour productivity). Whatever the truth in specific countries, it has become clear for many of us that the performance of an economy has to be measured in multidimensional terms. Monetary indicators, such as GDP, exports, investments at the level of the national economy and monetary profits at the level of the business corporation are still of interest and relevant, but never enough. Limiting attention to monetary indicators can even be considered a dangerous strategy. It is like cutting off the branch one is sitting on by undermining the functioning of life-supporting systems for society at large.

This is where ‘sustainability’ has entered the scene as a broader idea of performance for the economy as a whole and for individuals and organizations at the micro level. Rather than focusing exclusively on economic growth, development has to become ‘sustainable’ according to a broad spectrum of indicators.

Sustainability as a contested concept

One traditional idea in science is that all concepts should be clearly defined and indicators should be chosen so that they can be measured in an undisputable way. This is probably one reason among many behind the emphasis on monetary indicators in economics. While the ambition to define and measure in a clear way is reasonable, we should at the same time learn to deal with some concepts that are not so clear and not so easily measured. Relying exclusively on easily measurable indicators in relation to complex societal issues would be a mistake. As argued by William Connolly (1993) in his study of political discourse, we should live with some ‘contested concepts’ and – it can be added – this can be a way of opening the door for new thinking. While Connolly pointed to concepts such as ‘politics’, ‘democracy’, ‘participation’, ‘power’, ‘freedom‘, ‘legitimacy’ and ‘interest’, it is here argued that ‘sustainability’ can also belong to this category. Actually, sustainability is just one in a long list of ‘contested concepts’ that is discussed in the present book. I also speak about broader theoretical approaches, so-called ‘schools of thought’ or paradigms as being contested, arguing that there are more perspectives than one.

In public debate and even scientific discourse one can find competing interpretations of ‘sustainability’. As a scholar and citizen, I have preferences for specific ways of defining sustainability. Still, rather than excluding competing ideas from the beginning, I will deal with them and discuss more than one way of interpreting this term. Actually, an ideological power game is going on concerning the concept of sustainability and, as a social scientist, I find this power game interesting. Some politicians, established business actors and mainstream neoclassical economists may understand that apprehensions about climate change and other kinds of environmental degradation cannot easily be dismissed. However, there are those who vigorously defend a reliance on monetary indicators. In its simplest form this means that welfare in a society is connected with ‘sustained economic growth’ in GDP terms while success in business is a matter of ‘sustained monetary profits’. Such ‘monetary reductionism’ (in the sense of attempting to reduce everything to its monetary aspect), while being common, is not unchallenged. ‘Business as usual’ is only one possible interpretation and, as I see it, it departs from the intentions of the World Commission on Environment and Development (WCED, 1987), the commission that launched the vision of sustainable development.

The vision of sustainable development: A short history

In 1972, a UN conference on the Human Environment was arranged in Stockholm. At this time, the relationship between human beings and the environment was not a new concern. Still, the Stockholm conference can be seen as one of the first systematic attempts to deal with the international dimensions of environmental degradation. Pollution problems, such as ‘acid rain’ and mercury contamination were among the many issues raised. Rachel Carson (1962), Barry Commoner (1971) and other natural scientists identified what is now referred to as unsustainable trends and the international community succeeded through the conference and along other paths to mitigate parts of the problems. Not only natural scientists but also economists, such as Ezra Mishan and Herman Daly, participated in the dialogue. Mishan’s early book The Costs of Economic Growth (1967) suggests that ideas about progress emphasized in economics have to be reconsidered.

In everyday life and in science we too often simplify things. For instance, many actors argue and even believe that progress is equal to economic growth. Mishan’s arguments, and those of many others, suggest that progress cannot be measured in one-dimensional monetary terms. We have to accept a degree of complexity. A multidimensional idea of progress is preferable and the habit of reducing all kinds of impacts to one dimension, whether money or some other unit, is rather part of the problems faced. Environmental impacts should be described and considered in their own terms and the same is true of the social, health and cultural aspects now considered part of the sustainability concept.

Sustainable development became a catchphrase with the release of the Brundtland report (WCED, 1987). Before its release much of the discourse was about perceived threats to the environment and natural resources. It was argued that economists have to take ecosystems seriously. Some suggested a focus on ‘qualitative growth’ rather than exclusively pointing to the quantitative monetary aspect (Leipert, 1983). Ignacy Sachs coined the term ‘eco-development’ in the sense of ecological development (Sachs, 1976, 1984) and in Eastern Europe, Hristo Marinov (1984), among others, argued in favour of ‘ecologization of the economy’. Reference was made to ‘ecological imperatives for public policy’, i.e. principles for decision-making primarily formulated in negative terms (non-degradation of the natural resource base in your own region, non-degradation in other regions, observing a precautionary principle, etc.) (Söderbaum, 1980, 1982a).

In addition to multidimensional thinking as a way of broadening perspectives and interpretations, sustainable development involves a related effort to ‘extend horizons’ by bringing in ethics and ideology in a more explicit way. The idea here is that individuals should not limit their horizons to self-interest in a narrow sense and to immediate impacts. This political commitment means that the individual, in thinking and values, should step away from self-interest only, to include ‘otherness’ in the sense of internalizing the interest of others (Söderbaum, 2005). Such ‘otherness’ may refer to:

• the present generation of other individuals in the ‘home’ region;

• the present generation of individuals in other regions and ultimately in the global community;

• future generations of individuals in the home region;

• future generations of individuals in other regions and ultimately in the global community;

• present and future non-human forms of life.

The list can be extended. We can care about old landscapes, buildings and other cultural artefacts. Thinking in ethical terms is a way of bringing in the social aspects of sustainable development. Again, the important thing is to discuss social impacts in their own terms rather than in monetary terms. Welfare, poverty and human rights are multidimensional concepts and should not be reduced to some alleged monetary equivalent.

The above list may be perceived as overly idealistic – nobody can care about all other individuals in the home region and even less globally. Few of us would claim to consider all future generations in our decisions. The challenge is rather to get a feeling for the right direction and to get closer to sustainable development in a step-by-step fashion. We can ask ourselves, how can my lifestyle, in terms of market and non-market behaviour, be made more sustainable or less unsustainable? Similarly, actors in business corporations and other organizations, municipalities and national governments can broaden and extend their horizons in various ways. Policies and incentive systems formulated or designed by national governments can reflect visions of extended ethical horizons.

We all know that development patterns at the micro level – of individuals and organizations – or at the national and international levels are characterized by a lot of inertia and ‘path-dependence’. Changing one’s lifestyle with the purpose of reducing emissions of carbon dioxide (CO₂), for instance, is not easily done. The Rio de Janeiro conference in 1992, through its Agenda 21, pointed to a strengthening of democracy as the way ahead. Some changes in development patterns always occur in one direction or other and the challenge, from a sustainability point of view, is to add to positive changes and reduce the frequency of negative ones.

A short history of economic ideas

A critical question is whether we have an economic science that can constructively address sustainability problems of the kind indicated. Neoclassical economics (NE) is today the dominant paradigm in university departments of economics and in many other arenas where political dialogue takes place. What does ‘neoclassical’ stand for? Why this terminology? The prefix ‘neo-’ suggests that ‘neoclassical’ economists are the followers of ‘classical’ economists. The classical economists were active and dominant from the 18th century until about 1870, when the first generation of neoclassical economists entered the stage claiming some newness in their message.

Let us first broadly characterize the classical economists. Who were they? Textbooks in the history of economic ideas (for example Fusfeld, 1994) generally point to three people, Adam Smith, David Ricardo and Thomas Malthus. They were all broad-minded economists and philosophers who referred to their subject as ‘political economics’. Adam Smith, who previously had contributed to moral philosophy, wrote his book An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. Ricardo offered a theory about the claimed advantages of trade between nations and Malthus worried about the sufficiency of land (for food production) as a natural resource in relation to population growth.

Smith and Ricardo pointed to advantages of specialization or division of labour. These ideas even influenced the development pattern of science itself. Indeed, neoclassical economics from its very beginning, about 1870, is an example of this trend towards specialization. The idea was to get closer to a ‘pure’ science. Reference was made to ‘economics’ rather than ‘political economics’. Neoclassical economists emphasized objectivity and value neutrality and wanted their discipline to be as close to physics as possible. Much like physics, they hoped to formulate universal principles and laws. This ‘physics envy’ made neoclassical economists emphasize analysis in terms of ‘forces’ (of supply and demand) leading to an ‘equilibrium’ and more generally, the use of a mathematical language.

So far, our story appears straightforward. First came the classical economists. Then the neoclassical economists emerged with the kind of economics that is still dominant in the Western world. This sounds, however, as if one paradigm is replacing the other and as if only one paradigm is regarded as valid at a time. In reality, tensions between different schools of thought in economics have always existed. One paradigm may be dominant but there have normally been competing views. Not all economists became enthusiastic about the claimed advances of Karl Menger, William Stanley Jevons, Léon Walras and others in the first generation of neoclassical economists. The German Historical School around 1850 and later the American institutionalists, with Thorstein Veblen, John R. Commons and Weslie Mitchell, followed a different path and understood economics in evolutionary terms (Dorfman et al, 1964; Fusfeld, 1994, pp95–99).

Among more recent institutional economists who took an interest in environmental and development issues are K. William Kapp (1950), the first modern ecological economist (see also Martinez-Alier, 1999), and Gunnar Myrdal (1972, 1978), one of the pioneers of holistic and interdisciplinary development studies. In spite of systematic discrimination of non-neoclassical economists at the universities, a number of competing organizations have been strengthened and institutionalized. Among associations for institutionalists, the US-based Association for Evolutionary Economics (AFEE) with the Journal of Economic Issues, and the European Association for Evolutionary Political Economy (EAEPE), with the more recent Journal of Institutional Economics (JOIE), can be mentioned.

This story is admittedly short but I will come back to the meaning of neoclassical economics and comparisons with institutional economics repeatedly. One more point deserves attention at this stage: I believe it was a serious mistake by the neoclassical economists to abandon the label ‘political’. Neoclassical theory reflects a specific ideological and political orientation. Similarly, institutional economics and other competing schools of thought are specific in ideological terms. In fact, the reason why an economist prefers a specific paradigm or theoretical perspective is usually scientific and ideological.¹

Tenets of neoclassical economics

Since neoclassical economics will be scrutinized in the pages to follow, it is useful to first summarize several salient features of neoclassical economics. It is up to the reader to judge whether the neoclassical way of understanding the economy or economics is ideologically neutral or not.

NE is a relatively coherent theoretical perspective. Some of its fundamental assumptions can be described as follows:

• The actors considered in NE are ‘firms’ and ‘consumers’.

• Firms and consumers are related to each other through ‘markets’ for commodities (goods and services) and markets for ‘factors of production’ (labour, capital, natural resources).

• There is also a role for the ‘national government’ as a regulator of markets, to administer taxation and to make decisions about how tax income should be used.

• Markets (for commodities and factors of production) are understood mechanistically in terms of ‘supply’ and ‘demand’.

• The ‘economy’ consists of the mentioned actor categories and their market relationships.

• The interests of consumers (consumer preferences) and firms (monetary profit) are assumed to be given.

• Assumed self-interest is the starting point for the consumer’s and firm’s calculations of optimal behaviour.

• The consumer is assumed to be maximizing utility subject to a budget constraint and the firm is maximizing monetary profits (i.e. the difference between revenues and costs for each period).

• Decision-making is understood as systematic comparison of alternatives, observing the so-called ‘opportunity cost principle’. Reasoning in marginal terms is common: what will be the benefits and costs of producing (purchasing) one extra unit of a specific commodity?

• Efficiency at the national level is understood in terms of a monetary analysis of ‘costs’ and ‘benefits’, so-called cost–be...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of Figures and Tables
• Preface
• Acknowledgments
• Acronyms and Abbreviations
• 1. Economics for Sustainability
• 2. Unsustainable and Sustainable Trends
• 3. Sustainability Politics: Are there Protected Zones in the Development Dialogue?
• 4. From Economic Man to Political Economic Person
• 5. Interpretations of Non-Market and Market Relationships in Relation to Sustainability
• 6. Actors, Agendas and Arenas for Social and Institutional Change
• 7. Approaches to Decision-Making and Sustainability Assessment
• 8. Towards Sustainability Economics
• References
• Index