Winning essay for our essay contest

As part of the Future Markets Consultation, students and young scholars were invited to participate in an essay contest. This essay was the winner the category of master students. It was written by Camila Posada, a Colombian student at Wageningen University.

It appears that humanity’s industrial period, with all the benefits it has brought, is tilting out of stability (if there ever was one), and that a new transition, a new order, must take its place. We must, then, wonder: what will this new rule book entail? If all economics are economics of transition, then what does this transition need? What can it keep from its predecessors and what must it shed? This essay will analyze these questions as relating to three different components of the economy: the existence of a common goal, the role of labor, and the value of freedom.

The economists Gustav Ranis and John Fei divide the history of the last 500 years between epochal and transition growth (Fei & Ranis, 1997). Epochal growth, or what others call a socio-metabolic regime (Haberl et al., 2011), is characterized by a certain unity in the factors that create growth and by generally stable ‘rules of the game’. Transition growth, or that of socio-technical transitions (Jurgilevich et al., 2016), occurs when such a system shifts (Fei & Ranis, 1997). These periods not only bring with them a change in human life and in the biosphere that they inhabit (Haberl et al., 2011) but usually result in some sort of rule book, in the compilation of ideas that guide the transition (Fei & Ranis, 1997). The latest of such periods took (or has been taking) place since the dawn of the industrial revolution in Britain in the late 1700s. The accompanying rule book was first filled by classical economists such as Adam Smith and David Ricardo, then amended or complemented by new theories, equations, or ideas like those of Alfred Marhsall, Leon Walras, John Maynard Keynes, or Milton Friedman. It appears, though, that humanity’s industrial period, with all the benefits it has brought, is tilting out of stability (if there ever was one), and that a new transition, a new order, must take its place (Haberl et al., 2011). We must, then, wonder: what will this new rule book entail? If all economics are economics of transition, then what does this transition need? What can it keep from its predecessors and what must it shed?

This essay will analyze these questions as relating to three different components of the economy: the existence of a common goal, the role of labor, and the value of freedom. Although the reasons to suggest the need for a new rule book are varied and contested, this essay will be limited to two fundamental ones: the ecological crisis (specifically climate change and ecosystem destruction) and the persistence of socioeconomic inequality. By focusing on the historical role of economic thought, it proposes the critical (re)evaluation of the fundamental aspects that make up our current society, how they have been reimagined in the past, and whether or not they can or should be reimagined for the future.

1. The Goal

If economics “has set out as a goal to guide societies” (Collste, 2020), it must have a specific direction in mind to do so. For the classical economists, whose mind had been recently open to the possibilities of the industrial world, the goal appeared to be the production of goods for consumption. It was no longer gold, as the mercantilists thought, or strictly what grew on the ground, as the physiocrats did—but useful things, things that would increase people’s quality of life (Kishtainy, 2017). Measuring this production of useful things (which would much later go by the name of the somewhat infamous GDP, and that will be referred to as national income or domestic product throughout this essay) was key for guiding society towards this goal (Kishtainy, 2017).

Yet the starkest criticism of this measure is that it fails to include the two aforementioned fundamental problems. It doesn’t only lack any clear connection to greenhouse gas emissions or resource conservation, but rather encourages high levels of production and consumption, both of which, under current circumstances, mostly contribute to ecological destruction. It also involves no measure of how this domestic product is distributed within the population, thus making it blind to unequal allocation. Of course, a bigger pie means the potential for a bigger slice for everybody. But it is only this potential, as opposed to the mechanism or the acknowledgement of its importance, that is embedded within the current paradigm of income per capita. Alternatives that include broader measures of quality of life, as well as the preservation of our natural surroundings, have proved a prevalent source of discussion in past years.

Within these alternatives, there are those who believe that the system can be re-thought without changing the goal. This would be the case for ‘decoupling’, or allowing the economy to grow independently of natural resource consumption (Collste, 2020). Arguments for this follow the logic of the classical economists—that increased production of goods will increase well-being for everyone, but that added value is not necessarily in something physical, but on the labor or technology that goes into it (Fei & Ranis, 1997; Kishtainy, 2017). A feasible way of achieving this would be through increased resource efficiency (Haberl et al., 2011) or through the introduction of a circular economy (Korhonen et al., 2018). The former, however, has often been criticized by economists who believe in Jevon’s paradox, or the idea that increased efficiency will result in lower prices and, therefore, in increased resource consumption (Haberl et al., 2011). The latter has been the center of much research and enthusiasm and, although promising, its link with the current growth paradigm—or how this paradigm can direct towards circularity—has often been limited or unclear (Calisto Friant et al., 2020).

Others are adamant that the system should be completely re-oriented. These include those that advocate for de-growth (Collste, 2020), as well as those that have attempted to come up with new measures or metrics, that could direct the system in new directions. The economist Amartya Sen, who believed that society could only develop if people’s ‘capabilities’ were also developed (Sen, 2005) came up with the Human Development Index (HDI), which the United Nations has used to evaluate countries’ progress more holistically. Nobel laureate Joseph Stiglitz suggests indicators that measure material well-being, quality of life, and preservation of natural resources (Schoenmaker, 2020), an interdisciplinary community has gathered to replace GDP by 2030 (Schoenmaker, 2020), and talk of a ‘broad GDP’, or an ‘SDG index’, has become more common in academic and political discussions (Schoenmaker, 2020). Despite this, countries are still publishing GDP data as a hard-working student shows off their grade-point average at the end of the year.

How feasible is it, then, for this measure to be re-imagined? History is often a good place to start. Mercantilism, which straddled in between a medieval and an industrial society, has been considered daft for its over-valuing of bullion, and the naivety of those who thought that trade balances were the only important measure (Kishtainy, 2017; Williams, 2020). Francois Quesnay and the physiocrats suffered the same fate, realizing a complex and highly rational way of looking at economic value shortly before the world drastically changed direction (Kishtainy, 2017; Quesnay, 2012; Williams, 2020). But governments during mercantilism needed the gold, the physical metal, to pay their armies and their workers, and, yes, there were limited amounts of it which could be taken away by splurging on foreign goods. Quesnay emphasized agriculture as the backbone of the economy and thus, as the source of any form of wealth. To a large extent, these measures have been apt for the needs of their times. The same can be said of GDP, which has created the material conditions to house, feed, and clothe a growing industrial population. But, as before, a change in times calls for a re-evaluation of goals and, with it, of its measuring sticks. It is possible to re-imagine both of these, and for future economists to think of GDP as anachronistic as a coffer full of gold.

While it is time for a new measure to take into account economic equality and ecological stability, it will have big shoes to fill. Measures of economic growth are quite beautiful in the way that they are value-laden (they value consumption, material necessities, and, to a large extent, freedom) but they do not require every actor contributing to be morally equipped to consciously contribute to such goal. Perhaps this specific fact was what was so revealing, so attainable, within Adam Smith’s description of the invisible hand and why the same is far from being the case when you find yourself buying fair-trade coffee at the supermarket. Measures of economic growth are blindingly objective, straightforward, complex, and pervasive. Any new measure in a new rule-book will likely need to learn this from its predecessors to be as powerful as national income has been.

2. Labor

It is not surprising that labor is at the core of current macroeconomic theory. After all, it is the basis of how the individual interacts with the economy and how he or she justifies or earns their place in it. It is also not surprising that labor is seen as a tool towards economic growth within the current paradigm. But in a world where basic goods are made by so few (as so starkly revealed by the coronavirus pandemic) and where technological change (Solow, 1956) and capital (Piketty, 2014) are much more important for economic growth, it is surprising that the issue of (full) employment still harnesses so much attention.

By striving for full employment, the current paradigm permits the low wages given to those in the lower ranks of the economic system and creates rather rigid labor structures that keep some working (and earning) too much, where others spend their days filling out unemployment forms and relying on a welfare system (Bregman, 2017), which proves that the basic goods do exist and that there is no need for every single person to work for them for forty hours of their week. Arguably, it also perpetuates the creation of more goods for consumption above basic needs which contribute to ecological destruction. In many ways, it adds to the system’s problems of inequality and ecological destruction.

What is most striking about it, however, is how limiting this aspect of the current paradigm is in the search to re-imagine the current economic system. After the ‘labor theory of value’, where thinkers like Adam Smith, David Ricardo, and even Karl Marx thought that the added value of a product was specifically in the labor that was embedded in it, was discarded (Kishtainy, 2017) employment took on a new form in the economy. It was no longer essential to economic growth in order to create the necessary production force but to create the necessary consumption force. It is the lost consumption from the wage-earners, as opposed to the lost production of essential goods from the laborers, that often worries economists the most when thinking about a recession. It makes mathematical sense, but it often appears self-defeating.

The search for alternatives has sprung from the aforementioned reasons as well as from the growth of artificial intelligence, which threatens the survival of many professions. They include the call for a universal basic income (Bregman, 2017), more flexible labor laws, or—the opposite—more stringent job protection. But, most importantly, our failure to re-imagine the labor market, may prove exceedingly limiting when attempting to re-draw the boundaries of the new rule-book.

3. Freedom

Difficult enough as the search for a new system is, deciding how and by whom it should be implemented may prove even more difficult. The previous handbook (that of (neo)classical economics) did not even agree on this—some favored the market above all else, some thought the government had a big role to play, especially in the myriad of cases where the market would fail. The ideological battle between the free market and government still wages, but it does no longer seem to cover the whole of the ideological spectrum. Above all, market decisions appear to benefit those with the economic resources to have an (often disproportionally large) say, whereas governments may in some cases be bureaucratic and unrepresentative of the people. The question often boils down to the value of freedom, what it means, and how it can be the least compromised. It is a question that will need to be addressed by a new rule-book—in fact, it may become more relevant as the issues that it intends to solve are more specific.

The economist Friederich A. Hayek believed that markets created freedom (Caldwell, 1997). By creating the space for individual preferences to direct the economy, they do to a large extent. But this may not be the case when these markets, even with as much government intervention as necessary, direct towards inequality or perpetuate biases towards specific groups of people. Women have often been left out of much of the narrative (Strassman & Polanyi, 1995), so have various minority groups or specific races. When thinking about ecological destruction, whichever freedoms are enabled by the market might be rendered useless if there is no space, no structure, within which to fulfill them. The issue of freedom is not one to be taken lightly and one that will need to be incorporated into a new rule-book.

However, as a growing majority of the world becomes aware of and preoccupied with the looming failures of our current system, it would be easy for a new rule-book to come filled with highly normative and very specific alternatives directed towards solving them. The alternatives are needed—but who the decisions come from and the way that they are implemented remains paramount to maintaining the value, and the objective, of freedom.

Take two current propositions to decision-making in the current economy. One, which lies on the market side of the spectrum, is the idea of switching the priority from shareholders to stakeholders (Schoenmaker, 2020; Zingales & Felber, 2020). Whereas decisions in companies currently involve those with financial power over them, switching to a type of decision-making involving all those that hold stakes (employees, inhabitants of the place of production, nearby companies, etc.) would make for more equilibrated power (Zingales & Felber, 2020). Another idea, centered more around the role of governments and institutions, is to include more legal requirements. (Zingales & Felber, 2020). The stakeholder approach would not harm individual freedom, as the power to make decisions would still be within free-thinking individuals and the market would act accordingly. However, this may be too subjective and scattered to summon the necessary changes in the system. Legal requirements, on the other hand, may be more powerful and precise. They are also, by default, value-laden, thus new ones would not drastically interfere with the balance of freedom. But if such legal requirements were to be incorporated undemocratically, or would be exploited for a particular ideology or objective, then they would become far from ideal, not only compromising the value of individual freedom but coming close to a feared fascism (Zingales & Felber, 2020).

A new rule-book must, therefore, engage in a similar debate as the market versus government one. For the sake of re-imagination, this may take the form of individual versus collective freedoms; of human versus ecological; of basic versus luxurious. Whichever form it takes, it must not forget the value of freedom, nor understand that this freedom should be for all. As the economist Niall Kishtainy wrote when referring to the work of Amartya Sen, “real human development is about the growth of freedom itself” (Kishtainy, 2017, p. 193).

Conclusion

This essay has examined three of the building blocks of our current socio-metabolic regime. Even with a clear and measurable goal in mind, the previous socio-technical transition still struggled to settle the issues of employment and freedom (among many others). A new socio-ecological transition needs a goal to work with, but it also needs to re-think employment and to enable freedom for individuals across space and time. It also needs to address a myriad more issues, not covered within the scope of this essay. This may not be easy, but it has also not been so in the past—by looking at the history of economic thought, it is easy to realize that whatever we may perceive as written in stone has been gradually built over centuries of complex ideas that have been praised and tossed, tragically or successfully implemented, ignored and criticized. We must not be scared, then, to allow ourselves to re-imagine every aspect of our system. We must do it carefully and thoughtfully, this essay hopes to have highlighted, and to not toss aside all that has been achieved over the centuries. But we must also be radical, daring, and creative, so that our new rule-book is well-stocked and convincing enough to guide a powerful, and necessary, transition.

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