Green Capital

A New Perspective on Growth

Christian de Perthuis, Pierre-André Jouvet, Michael Westlake

• Publisher: Columbia University Press
• Year: 2015
• eBook ISBN: 9780231540360
• Topic: Economics
• Subtopic: Sustainability in Business
• Index: Economics

Many believe economic growth is incompatible with ecological preservation. Green Capital challenges this argument by shifting our focus away from the scarcity of raw materials and toward the deterioration of the great natural regulatory functions (such as the climate system, the water cycle, and biodiversity).

Although we can find substitutes for scarce natural resources, we cannot replace a natural regulatory system, which is incredibly complex. It is therefore critical that we introduce a new price into the economy that measures the costs of damage to these regulatory functions. This change in perspective justifies such innovations as the carbon tax, which addresses not the scarcity of carbon but the inability of the atmosphere to absorb large amounts of carbon without upsetting the climate system. Brokering a sustainable peace between ecology and the economy, Green Capital describes a range of valuation schemes and their contribution to the goals of green capitalism, proposing a new approach to natural resources that benefits both businesses and the environment.

1

Growth

A Historical Accident?

IN 1972, THE PUBLICATION of The Limits to Growth had a major impact. Commissioned by the Club of Rome, the book emerged from the work of a multidisciplinary modeling team from MIT directed by Dennis Meadows.¹ It showed that a number of exponential curves reflecting population growth, industrial production, the extraction of natural resources, etc. could not be extrapolated in a finite world. The growth process was therefore nothing more than a historical parenthesis and would come up against insurmountable limits. Its authors recommended anticipating the shock rather than running headlong into the wall of physical scarcity.

A year after the publication of the Meadows report, commodity prices were all soaring. The OPEC oil embargo led to fears of an overall shortage. The system of currency stability inherited from the Bretton Woods agreements,² signed after World War II, exploded, and the industrialized world experienced its first major recession since the war. Some people viewed this situation as evidence of the accuracy of Meadows’s theses and as heralding the end of growth. They failed to foresee the new wave of expansion that would give rise to globalization, digital technologies, and the growing power of emerging countries. This expansionary wave lasted three decades before breaking with the recession of 2009.

Like that of 1973, the 2009 recession was the result of a twofold shock that wrecked the economic machine: commodity prices and financial deregulation.³ Symbolically, the price of oil peaked in July 2008, two months before the bankruptcy of Lehman Brothers investment bank, an event that revealed to the world the extent of contamination of the financial system by excessive debt. Unlike with the Mexican and Asian crises in the preceding decades, it was no longer the periphery that was affected but the very heart of the system: Wall Street, with its mountain of subprime mortgages,⁴ debt collateralized on an indefinite increase in price of property. Would this crisis come to mark, forty years after the publication of the Meadows report, the end of the period of rapid growth that began at the end of World War II? Would that “golden age,” as it had been termed by the economist Angus Maddison, turn out to have been a mere accident of history?

Economic Growth Since 1500: Gradual Then Faster Acceleration

Considered solely from the quantitative standpoint, growth can be represented as the increase in a global magnitude measuring wealth. Take gross domestic product (GDP) as an indicator of this wealth, and transpose it to a per capita basis. In the long run, this indicator is very much a matter of convention because it involves comparing today’s goods and services, many of which did not exist in the past, to yesterday’s, which in many cases no longer exist in the present. The very notion of wealth, and its relationship to welfare, has to be treated with caution (a topic discussed in more detail in chapter 4). The observations made by the economists Maddison and Bairoch⁵ from this type of indicator nevertheless provide valuable lessons.

According to Maddison and Bairoch, the world economy moved from a stationary regime to a growth regime in the fifteenth century, a time of major discoveries. Technological advances, mainly in agriculture and navigation, then led to a slow rise in productivity that in turn underpinned this first secular growth cycle.

Until around 1820, growth was barely detectable in the passage from one generation to the next: it took more than two hundred years for GDP per capita to double. The perception people would have had of their standard of living was that of a stationary regime: only the vagaries of climate, wars, and epidemics might make their lives end in better or worse conditions than at the time of their birth. The idea of progress was forged gradually with the thinkers of the Enlightenment, who began to foresee the potential impact of the application of technology on the organization of social life. But this idea remained visionary and uncertain and was held only by a minority. In the famed correspondence between Voltaire and Rousseau in the aftermath of the Lisbon earthquake of 1755, Rousseau expressed the prevailing view of the time that nature alone was responsible for such disasters, against which human ingenuity was powerless. It was not until the nineteenth century that the idea of progress became generally established with positivism and the birth of political economy.⁶

Another feature of this preindustrial period is that differences in living standards between countries and continents were nothing like what they became later. For example, it is difficult to assess whether the wealth per capita was higher in China or in Western Europe in the early nineteenth century.⁷ But international trade in goods and capital was still very limited in the preindustrial world. It was not able to provide the function of equalizing living standards that generations of liberal economists would later attribute to it.

The first acceleration of growth began around 1820 in England and was rapidly transmitted to Western Europe and the United States. With the taming and then the widespread use of new forms of energy—coal, then oil and electricity—the global economy moved up a gear. Product per capita grew by just under 1 percent per year, or a doubling every seventy years. This shift was reflected fairly quickly in living conditions and led to a decrease in mortality that in turn resulted in an increase in population growth. If we combine the wealth effect per capita with the increase in population, we obtain overall growth of around 1.75 percent per year: a doubling every forty years for a century and a half. Such a pace transforms living conditions, especially through urbanization. It was accompanied by a significant widening of the disparity between economic areas. Wealth became polarized as it never had been historically in Europe, North America, and Japan, which together represented about a fifth of the world population. At the same time, huge economic territories were destructured by European and American expansion. In particular, the magnitude of the Chinese and Indian economies was eroded during this period that coincided, moreover, with colonial exploitation.

The period following World War II saw a further—spectacular and unexpected—acceleration in growth. In the old industrialized countries (Europe, the United States, and Japan), the momentum was initiated by expenditure on making good the damage caused by the war. In addition, Western Europe and even more so Japan were among the economies benefiting most from this “golden age.” What was new was that economic and population growth were diffused much more widely throughout the world. Overall, GDP growth per capita approached 3 percent per year, or a doubling every quarter century: a rate unprecedented in human history. Many people thought that this historical anomaly would end in 1970 with the breakdown of the Bretton Woods monetary system and the subsequent sharp recession as a result of the oil shock. History, however, followed another scenario: not that of a slowdown in global growth but of its redistribution among geographical regions.

Since 1973: Geographical Redistribution of Global Growth

Forty years after the publication of The Limits to Growth, the weakening of growth in the old industrialized countries is not in doubt. Between 1973 and 2013, the slowdown in their trajectory was particularly marked in the case of Japan and more moderate in Europe and the United States. The decline reflects the difficulties of adjusting in a globalized world in which taking on debt is facilitated by deregulated capital markets and in which the sanctioning of their excesses may come out of the blue because it is no longer possible to eliminate debt mountains through the traditional means of inflation. Japan was the first to fall into this deflationary trap in the 1990s. It was followed by the English-speaking countries, where the great recession of 2008–2009 originated, with the latest episode being the euro sovereign debt crisis from 2011 onward.

The slowdown in these economies has not, however, resulted in weaker global growth because it has been offset by the economic dynamism of emerging countries. By accumulating capital at an unprecedented pace, China, India, Brazil, and some other countries have, since 1973, been gradually making up for their secular backwardness. New forces are in operation and account for the speed of such redistribution. The openness of trade has acquired a new dimension. In 1950, the proportionate volume of goods traded in the global economy was below its 1913 level; over the next fifty years it increased fourfold. Following the liberalization of markets, financial capital has become totally mobile. Information technologies facilitate the acquisition of new expertise, the spread of innovations, and the interconnectedness of markets. Beginning with the takeoff of small Asian countries, this epochal change extended to mainland China, which started to open up its markets in 1979 with the coming to power of Deng Xiaoping, followed by the other continent-sized country, India.

The propagation of this dynamic to other regions of the world did not take place without its ups and downs. It took Latin America a good decade to adjust to the two oil shocks, culminating in the Mexican debt crisis, which convulsed the continent during the 1980s. Africa was even worse affected, with a fall in GDP per capita between 1973 and 1998. The transition of the centralized economy of the USSR to a market economy took place under the worst of circumstances. The disintegration of the state and the application of free market recipes naively transposed from the University of Chicago caused an implosion of the Russian economy and those of its former satellites in the 1990s.

The first decade of the new millennium amplified the geographical spread of global growth, whose center of gravity shifted to China and emerging countries. Latin America emerged from its difficulties at the beginning of the 1990s. Russia and its former satellites managed to halt their downward spiral around 1997–1998. Since 2001, sub-Saharan Africa, the last major region to participate in the global dynamism, has seen its growth per capita rising strongly. One sign of the displacement of the center of gravity of the world economy is that when the great recession of 2008–2009 erupted, the financial fragility of the old industrialized nations was fully exposed, with their accumulated debt of hundreds of billions of dollars owed to emerging countries. Would this new recession, forty years after the Club of Rome report, mark the end of an exceptional period of rapid global growth?

The Limits to Growth: The Exhaustion of Resources or of the Capacity for Innovation?

The idea that the world’s economies are about to end a long period of growth because they are coming up against the wall of raw materials scarcity has regained ground. Yet historians of growth reveal how societies have managed to elude successive threats by means of technological advances leading to more efficient use of these scarce resources and by increasing their availability through investment in exploration or finding substitutes.

The last forty years do not seem to be an exception. Take the example of oil, without doubt the most iconic commodity. In 1973, an embargo lasting a few weeks gave rise to widespread fears of physical scarcity. But has there been any oil shortage over the last forty years? In 1973, the fledgling International Energy Agency (IEA) estimated that there remained forty years of oil reserves at the extraction rate then prevailing. In 2013, this estimated figure had not changed and, if shale gas and other now exploitable unconventional resources are taken into account, there remain considerably more years of hydrocarbon extraction ahead than there seemed to be in 1973. What is more, since 1973 global GDP has almost tripled, the share of fossil fuels in primary energy production has remained at 80 percent on average throughout the world, and the reserves are still not exhausted.

True enough, the proponents of the peak oil theory will reply, but we cannot extrapolate from the past.⁸ Since stocks are finite, there is a physical limit that will one day be reached. We must therefore prepare for this by committing without delay to an energy transition. Conventional economists of energy will add that the physical scarcity of a resource results in price increases that have the threefold effect of encouraging economy of use, facilitating substitutions, and boosting investment in research and exploration. Everyone can see, moreover, how the increase in oil prices has led to a fever of exploitation worldwide, spearheaded now not only by the traditional players of the oil world—multinational corporations and Middle Eastern states—but also by new entrants such as China and Brazil, among others. It is hard to believe that this unprecedented wave of investment will not again lead to further unexpected discoveries in the future.

Though the return to growth is elusive, it is altogether unwarranted to attribute the main cause of this stagnation to the scarcity of raw materials and, by extension, to their projected rise in price. Furthermore, everyone can see the dynamism of the emerging Asian economies—China, Korea, India—which obviously cannot be explained by their domestic availability of raw materials, because in recent decades they have become major importers. Might it not be more appropriate then to consider another resource in accounting for the continuing slowdown of growth in the old industrialized countries—namely the capacity for adaptation and innovation?

Such is the thesis of the economist Robert Gordon, whose analysis forecasts such a decline of growth in the United States.⁹ According to Gordon, the potential for U.S. expansion has steadily diminished in recent decades, and the economy will tend toward a near-stationary state with no more than 0.2 percent GDP growth per capita over the coming decades. More fundamentally, Gordon reminds us that “there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history.”¹⁰

Gordon links the closing of this historical parenthesis of the period of growth to the absence of new groundbreaking innovations. In his view, the “anomaly” of twentieth-century growth originated in the changes induced by three major innovations made between 1880 and 1900: the control of electricity (in its production, its distribution, and its uses), the development of the internal combustion engine, and the introduction of running water and sanitation. In other words, three innovation clusters directly related to the new use of existing natural resources.

Gordon argues that these engines derived from innovations made in the late nineteenth century drove the growth of the developed countries until about 1970. Since then, they have tended to lose momentum because the goods and services stemming from these innovations are widely distributed, without any further innovations taking their place. Gordon insightfully shows in his analysis of the digital revolution why the new information technologies do not produce breakthroughs comparable to those engendered by electricity, the internal combustion engine, and general access to drinking water in cities. He also sees the energy and climate constraint as one of the parameters that will permanently be a burden on the U.S. economy, in the same way as rising inequality and debt. Economic dynamism weighed down by climate policies? Bad news for advocates of green growth!

The main theme of the present book is instead based on the idea that the correct approach to natural capital can produce a lasting economic recovery. Where can the breakthrough innovations leading to reinvigorated growth come from? As Gordon shows, they will not emerge from constantly increasing the power of computers or expanding the functionality of smartphones, nor by inventing spacecraft or ultrafast futuristic transportation systems such as those dreamed up by Jules Verne. Taking the environment into account can, however, become the m...

Table of contents

• Cover 
• Title Page
• Copyright
• Contents 
• Introduction: The Color of Growth
• 1. Growth: A Historical Accident?
• 2. The Spaceship Problem: An Optimal Population Size?
• 3. Degrowth: Good Questions, Bad Answers
• 4. Introducing the Environment into the Calculation of Wealth
• 5. “Natural Capital” Revisited
• 6. Hotelling: Beyond the Wall of Scarcity
• 7. Nature Has No Price: How Then Is the Cost of Its Degradation to Be Measured?
• 8. Beyond Hotelling: Natural Capital as a Factor Required for Growth
• 9. Water, the Shepherd, and the Owner: A Choice of Green Growth Models
• 10. How Much Is Your Genome Worth?
• 11. The Enhancement of Biodiversity: Managing Access, Pricing Usage
• 12. Climate Change: The Challenges of Carbon Pricing
• 13. International Climate Negotiations
• 14. The “Energy Transition”: Not Enough or Too Much Oil and Gas?
• 15. The Inescapable Question of the Price of Energy
• 16. Nuclear Energy: A Rising-Cost Technology
• 17. Growth-Generating Innovations
• 18. Planning or the Market: What Are the Catalysts?
• 19. European Strategy: Jump Out of the Warm Water!
• Conclusion: Green Capital, Green Capitalism?
• Notes
• Index