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Some Basic Concepts of New Economics
09 / 2008
New Economics versus conventional economics
Conventional economics is held guilty of fostering many of humanity’s most pressing problems. Firstly, it defines economic progress in ways that are destroying the very ecosystem on which it subsists. Secondly, this model of progress while creating new material wealth also tends to transfer a great deal of wealth from the poor to the rich. Thirdly, it virtually excludes ethical and spiritual values from the center of economic life. Fourthly, it is rooted in the mechanistic and reductionist approach of the modern scientific paradigm.
Today the New Economics rubric refers to efforts which challenge these conventional axioms and attempt to reframe them. These efforts are founded on the recognition that economics is not value-free and thus can never be an objective science. It follows that economics must be a normative discipline based on a more realistic and wholesome view of human nature.
As a response to the planet’s severe ecological crisis, New Economics attempts to take the industrial economy back to the drawing board to rediscover and redefine notions of efficiency and optimum use of resource. Thus it is also sometimes known as Green Economics. It stresses the need for humanity to face up to the ecological limits of its activities by turning the consumer society into a conserver society.
This may seem absurd at a time when much of the global economy depends on endless multiplication of people’s wants and thus consumption. But as Ekins and others untiringly remind us, and which Adam Smith repeatedly affirmed, people are also powerfully moved by individual conscience and fellow-feeling. New economics makes room for the conscience and compassion of individuals and their links to the natural world – without unrealistically idolizing these traits. Instead, proponents of New Economics see these traits in more practical terms – as energizing and inspiring.
From this vantage point economic sphere of the 21st century is seen as a multi-level one-world system, with autonomous but inter-dependent component parts. Starting with individuals and households this system would simultaneously serve the needs of exchange at local, national and international levels. The point is to ensure that each larger unit is geared to enabling the smaller units within it to be more self-reliant and conserving. But this cannot be done without re-examining and re-defining basic economic concepts, such as – wealth creation and capital accumulation; efficiency and productivity; dependence, interdependence and self-reliance.
Wealth Beyond Measure, published by Ekins et al., was thus designed as an atlas of concepts. The title alludes both to wealth that is priceless and therefore cannot be measured, as well as to sustainable, universal abundance on a scale that challenges both our imagination and existing measurement skills! Though this basic text was published in 1992 and the ideas have undergone further refinement, it remains a good guide to the core ideas of New Economics and how it differs from conventional economics.
Wants and Needs
Green Economics makes a clear distinction between wants and needs and seeks to satisfy both. Its focus, however, is on welfare creation rather than satisfaction of endlessly expanding, insatiable wants.
Green Economics has two central objectives: the elimination of poverty and the maintenance of the economy at its optimal ecological size (i.e. what the biosphere can handle). The notion of optimum involves many aspects including number of people, the ecological footprint of their consumption patterns, the ethical basis for extracting and using natural resources and so on. This would mean addressing a question that currently does not feature in the mainstream discourse: do living things have a right to exist independently of their usefulness to human beings? Can our species claim the right to reorder the rest of nature purely for its own convenience? [Wealth Beyond Measure, p.33]
A Progressive Market and the State
The market and the State are seen in complementary roles. The market is valued as a marvellous and essential mechanism which gives expression to individual preferences. While conventional economics defines individual preference in terms of narrow self-interest, a green economics visualizes a progressive market in which consumers’ choices include ethical, social, and environmental considerations.
Many big brands have already seen sales decline following disclosures about their products being made by paying a pittance as wages or by causing environmental havoc. Consequently, the phenomenon of Socially Responsible Investing has moves out of the margins and closer into the mainstream. It is no longer rare for companies to commit themselves to social or economic objectives which are over and above what is mandatory by law.
The state is required not only to make and enforce the rules, but also to correct market failures. For example, the state has a key role in ensuring that polluters pay damages, monopolies do not form, companies divulge information required in the public realm, basic human rights are respected, high-quality education and heath care are available to all. The state is also required to support, encourage and recognize the importance of household and voluntary economies. [Wealth Beyond Measure, p.79]
Green Economics values the usefulness of money in its conventional functions but also sees the need for various kinds of monetary reform. Fundamentally, new economics is concerned with putting money back in its place as a convenience, a useful tool which must not be confused with wealth itself. There is also need to take stock of the ‘social economy’ sometimes also called the ‘core economy’ or ‘love economy’ which does not use money. According to one estimate, households and other forms of voluntary activity, self-help and barter produce equivalent of almost one third of the world’s gross annual product.
‘Green Money’ would aim to reflect wealth created by real goods and services rather than notional ‘value’ generated by speculative arbitrage or unproductive paper transactions. Such monetary reforms would also aim to ensure that the banking system favors those who can make productive use of money whether they are rich or poor. Green Money would impose strict financial discipline on government as well as controls on consumer credit in order to guard against inflation.
”Wealth creation and money creation are two entirely different things. Wealth is created by the application of human skills to natural resources in the myriad ways that produce useful goods and services. Money, on the other hand, is a human contrivance; it is a symbol created by a deliberate process involving entities called banks” (Thomas H. GRECO Jr., MONEY: Understanding and Creating Alternatives to Legal Tender).
The concept of Green Wealth rests on seeing the economy as just one of the four essential dimensions of the human condition. The other three are society, ecology, and ethics. In this context ‘development’ is defined as progress of the society towards goals it has set in all these spheres. Then wealth is what enables society to meet those multi-dimensional roles.
The basis of Green Wealth is a four capital model, including the ecological domain: the processes of the biosphere which sustain human life. Even human capital is defined not merely as ‘person hours’ of labor but in terms of actual health, knowledge, skill and motivation of workers. Thus it is important to distinguish between monetary and non-monetary wealth. The latter refers to structures like community, family, and other social formations that potentially engender well being. It follows that the market price of a commodity may not fully reflect its worth in ways that account for social, ethical and ecological values. This is why there are serious limitations to economists’ efforts to price non-monetary wealth by reference to conventional markets. It is only the most fanatical economist who would attempt to explain these values (like love, friendship, family) in terms of scarce resources and competing uses. [Wealth Beyond Measure, p.44]
New Economics also seeks to displace Gross National Product as the sole measure of prosperity. It aims to create more realistic and wholesome measures that reflect both human welfare and ecological sustainability. In the early 1990s, Ekins and others proposed that various elements be added to and subtracted from the GNP to produce a more realistic indictor of real income, which could be called the Adjusted National product (ANP). The basic objective of ecological accounting is to identify and monitor the crucial economic functions of environmental ‘services’. The New Economics thinking was supported by the Bruntland Report’s recommendation that there is need for an annual report, and audit, to track changes in environmental resources. Traditional annual fiscal reports have not done this. Over the last decade and a half, a whole range of environmental and social well-being indexes have come up. [Wealth Beyond Measure, p.62-64]
For example, the New Economics Foundation has designed an index called Measure of Domestic Progress (MDP). The MDP adjusts the conventional economic measure of GDP by subtracting the costs of crime, pollution and environmental degradation, since all of these have a negative impact on quality of life. The MDP calculations show that social progress has been decoupled from economic growth in Britain for about three decade.
The most daunting challenge for New Economics is to contend with and redefine the conventional concept of economic growth. Till the end of the 1990s, any criticism of the growth imperative was dismissed as a prescription for stagnation and decay. However, it has been clear for some time that true growth needs to be both sustainable and inclusive. The challenge is to evolve an industrial and commercial culture that would simultaneously meet the livelihood needs of all, but also restore and preserve the ecological balance [Wealth Beyond Measure, p.182]
This means diligently mapping the complicated interface between economic growth and environmental sustainability partly by integrating environmental and economic accounting (for example, by connecting the economics of climate change with environmental taxation).
Proper Valuing of the Household Sector
Even in industrial countries, the production by households has been valued at 25-40 percent of GNP. Yet conventional economic analysis ignores this wealth in national accounts, and the women who are the bulk of its producers are classified as ‘economically inactive’. Naturally, the percentage of household production is much higher in less industrialized countries.
As Ekins et al. state:
“If the household sector is important, no less so are the voluntary, community-based societies, organizations, and movements that also create non-monetary wealth. […] Human rights groups safeguard our basic freedom; peace groups confront the arms race; environmental groups work for a secure future; women’s groups give gender solidarity and provide the backbone of community life in many countries.” [Wealth Beyond Measure, p.68]
It is clear to most innovators of this sphere that a Green Economy cannot be legislated from above, any more than a New Economics can be crafted in academic cloisters. Government can, at best, remove obstacles and enable consolidation of good practice.
The key moving energy must come from all of us: “There is a huge amount everybody can do here and now in their own lives to become part of the Green economic solution, as producers, consumers, investors, parents, partners, friends and neighbors. In building a Green economy, motivation, information, and moral commitment are more important than money.” [Wealth Beyond Measure]
This sheet is also available in French: Vers une richesse « au-delà de toute mesure »
P. Ekins, M. Hillman, R. Hutchinson, Wealth Beyond Measure : An Atlas of New Economics, Gaia, London, 1992.
Thomas H. GRECO Jr., MONEY: Understanding and Creating Alternatives to Legal Tender, Chelsea Green, 2001
Rajni BAKSHI, An Economics for Well-Being, Centre for Education and Documentation, Mumbai & Bangalore, 2007
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