Contributor: Chris Milton
“It’s the economy, stupid!” Words which reverberate through modern society, like a long-hidden truth suddenly revealed. But what exactly is the economy… and more importantly, how can we create a resilient economy?
The problem with GDP
The first thing to get clear is that an economy has nothing to do with money.
Adam Smith, upon whose work nearly all modern economics is based, is credited with the 18th-century definition of “the art of managing the resources of a people and of its government”, with specific commercial emphasis on manufacturing, trade and consumption.
Fast forward to the 1930s, and Russian economist Simon Kuznets comes up with a measure of productivity to help the US recover from the Great Depression: Gross Domestic Product (GDP), which is adopted as an international tool by the Bretton Woods Conference in 1944.
GDP contains three huge flaws which, with the benefit of hindsight, can be said to have helped to lead the world to its current financial crisis:
- firstly, it measures only financial activity, encouraging the view that only consumption of new goods and services are good for the economy;
- secondly, it doesn’t measure why financial activity has taken place, leading to a reluctance to tackle root causes of social ills such as crime and cancer because spending money on the ongoing symptoms is “good” for the economy;
- thirdly, GDP is only about money and doesn’t take into account “free” natural resources or voluntary time given to support society, from prison visitors to school governors.
Because of these factors our economy has become wholly monetised, where people know the cost of everything, the value of nothing, and believe progress is rising prices.
This, in turn, means that when something goes wrong financially, as happened in 2008, there is no resilience in the system and everything falls apart.
So, what’s the solution?
Green and ecological economics
The green economy has been built up by many businessmen and politicians in recent years as an apolitical solution to these ills. It focuses primarily on reducing the environmental impact of people’s everyday lives in areas such as energy, transportation and food.
Much of the green economy’s current focus is upon decarbonising the economy and replacing fossil fuels with viable alternatives. This is because it would provide a much-needed boost to industry and help to tackle climate change. However green economics does have a wider agenda, including cradle-to-cradle manufacture and eco-mimicry in science and technology.
A lot of green economics is founded upon ecological economics, the view that man’s economy is embedded within a larger economy of natural processes. However, there are marked differences between the two.
For example, while green economics tries to take natural capital into account through GDP+ (GDP, but with a monetary value placed upon natural resources previously regarded as “free”), ecological economists seek to understand the wider environmental economy and place man’s activities in the proper place within it.
The Steady State and Gift Economy
One of ecological economics’ leading proponents is the former World Bank chief economist Herman Daly. In the 1970s he put together the Steady State Economy which advocated moving from a system of wealth creation to one of resource sustainability and improvements in personal wellbeing.
These are admirable goals but as time has progressed the Steady State Economy has drawn justified criticism from both mainstream economists and Daly’s own peers. Nevertheless, several principles of the Steady State Economy continue to be pertinent when creating a resilient economy, in particular, that income and wealth should be regulated by both minimum and maximum levels.
The idea of a minimum level is now under partial discussion under the auspices of the living wage but the idea of a maximum level is still politically taboo. However, it is just as necessary in order to build a resilient economy because it stops too much economic power being concentrated into a small number of institutions.
Whilst the Steady State Economy and green economics are genuinely progressive they still contain that fundamental flaw of measuring the economy solely in terms of financial activity.
To try and escape this and encourage an economy focussed on more than just monetary value, Charles Eisenstein has developed his own framework based on the traditional gift economy.
In his book, Sacred Economics Eisenstein proposes than money should, by and large, be removed from the economic system and replaced instead by a network of personal engagements and agreements. This, he explains, is because monetisation has broken down our personal relationship with the environment and each other, whilst “a gift transaction is open-ended, creating an ongoing tie between the participants.”
What’s more, he points out, the need to make money has led to the price inflation of necessities and products; these products are not becoming more scarce, it’s just that the people supplying believe they need to make more money. This could never happen in a culture based on gift transactions.
It is these two concepts, the floor and ceiling to income and wealth and the removal of the money as the sole pillar of the economy, which hold the key to establishing a resilient economy.
How to build a resilient economy
When building the resilient economy it’s worth remembering that an economy is all about the transactional relationship between the people for the resources of a particular locality, not the money spent or the wealth created.
Therefore the question becomes about how the transaction is conducted and the wellbeing and resilience that process brings to the community, not the nominal price attached to the transaction.
For example, at present, a national business could have outlets in all major towns or its goods used by a large number of households. However, the economic value generated by the acquisition of these goods and services leaves these communities almost immediately and is sucked into the company’s bank account.
However, if this business relied not only on local labour but also local services to support their operations in each community this would keep the value of the transaction within the community, lead to greater resilience within the economy and could stimulate innovation as well.
Similarly, that same business needs to consider the effect of the process it uses to fulfil the economic transaction: the short term dehumanisation of cash, or the long-term warmth of mutually beneficial exchange.
There are already a number of schemes used at the grassroots level which keep the economy going without the need for a financial transaction. These include:
- sharing circles, where goods are donated to common ownership and their use shared among the circle’s members;
- gift circles, where members give their time freely to one another without the expectation of financial or other remuneration;
- time banking, where members agree an exchange of time and expertise on specific projects.
There are no reason businesses cannot create their own versions of these, removing monetary exchange from the equation and building their own (and the economy’s) resilience. All it takes is a little bravery.
If businesses were to follow these examples a resilient economy would start to evolve naturally. The boost a cap on wealth and income gives small and local businesses would encourage a modular market resilient to the distortions of big players pursuing their own self-interest, and the adoption of gift economy principles would enable people and institutions to build collaborative relationships which are much more flexible than fiscal dependence alone demands.
It cannot happen overnight, but as degrowth starts to be forced upon the world through austerity and climate change these are the building blocks which will help create a new, resilient economy.
Chris Milton is a seasoned sustainability journalist focussing on business, finance and clean technology. His writing’s been carried by a number of highly respected publishers, including The Guardian, The Washington Post and Scientific American. You can follow him on twitter as @britesprite, where he’s one of Mashable’s top green tweeters and Fast Company’s CSR thought leaders.