Economics – Dec 18

December 18, 2012

NOTE: Images in this archived article have been removed.

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Against growth

Joshua Farley, Eurozine
Given the relation between economic production and ecological degradation, Joshua Farley is convinced that economic growth must stop. It is just a question of when. And whether cooperation will displace competition as the dominant concept in the economic paradigm.

Almantas Samalavicius: The concept of ecological economics differs fundamentally from that one of neoclassical economics. However, it is the latter that seems to dominate globally, despite its obvious failings in dealing with present crises, and construct a longitudinal perspective of sustainable economy. All of which inevitably effects economic activities worldwide, and contributes to what sometimes strikes me as being somewhat akin to colonization – the colonization of economic thought. So why are the concepts and suppositions of neoclassical economics still so powerful, despite their obvious drawbacks and limitations? What is being done and what can be done to shake off the false theoretical premises on which the thinking of the majority of professional economists rests? Are there groups of economists (other than ecological economists) who dissent from this stale approach to understanding economy and its functions?

Joshua Farley: This question is one that has baffled me and other ecological economists for some time. I knew very little about neoclassical economics before I started my economics PhD, not even realizing that it relied so heavily on mathematics. My undergraduate degree was in biology, which gave me an appreciation of the scientific method, and I like math, so I was initially enthusiastic about this seemingly scientific approach. During my first semester however I realized that seriously flawed assumptions invalidated all the sophisticated math. Neither people, society, nor nature behave as the economic models require. The scientific method demands that we empirically test both our assumptions and our models, and reject them if they do not conform to reality. I found that economists either failed to test their models, or else when reality contradicted them, argued that we should reshape the world to conform to their assumptions. Economic textbooks even try to teach students to "think like an economist", which means they seek to change human behaviour to match their models! In retrospect, I realize that my scientific background inoculated me against belief in neoclassical economics. However, I also rejected economics on moral grounds, first because I did not believe that people were perfectly selfish, second because I did not believe that the goal of ever greater consumption was appropriate, and third because I believed that the physiological needs of the poor should take precedence over the luxury consumption of the rich. Talking with my peers in the program, it was evident that many of them shared my views. However, the sceptics either dropped out or changed their views over time. I only finished the programme because I won a fellowship to spend 15 months in Brazil explicitly to cultivate an interdisciplinary approach to economics, and while there discovered ecological economics.

I have several different theories concerning why economists stick so vehemently to their views. First, I was told that my criticisms reflected my lack of understanding, and that I would only be qualified to criticize the discipline after I had mastered it. However, it takes years of study to master the discipline, at which point if you criticize it, you are basically admitting that you wasted years of your life studying something that is simply not true. It’s actually even worse than this. Many people earning PhDs in economics, including myself, do so in order to become professors. An economics PhD primarily qualifies you for a job in an economics department, and in order to get tenure, you must publish in mainstream economics journals. You won’t get published if you criticize the discipline, so you have to muffle yourself for seven more years. By the time you are a tenured professor free to openly discuss what you believe, you have spent at least 11 years following the party line. This is a problem inherent to modern academics, not just economics. I knew I could never work in a mainstream economics department, but was fortunate to find one job opening specifically in ecological economics, in Far North Queensland, Australia.

Second, neoclassical economic theory is very appealing to people who are uncomfortable with uncertainty. Because it is based on mathematical models, there is a right or wrong answer to most questions – no shades of grey or value judgments. The model is based on negative feedback loops (i.e. an increase in price leads to a decrease in demand and an increase in supply – The Law of Demand) that lead inexorably to market equilibrium. All resources are substitutable, and the price mechanism will always provide incentives to create substitutes, so resources are in effect infinite. The single goal is to maximize economic surplus subject to the constraint that no one is made worse off, and the free market utilizes the decentralized knowledge and personal preferences of individuals to achieve that goal. Economic growth always increases economic surplus. The discipline bears the trappings of science, and is often held in higher esteem than other social sciences. In science however, we carefully observe a system, form a hypothesis about how it works, then try to find evidence that proves the hypothesis wrong. If we fail to do so repeatedly, the hypothesis becomes a theory. After decades or centuries of continual failure to falsify a theory, it becomes a law. Economists however tend to leap from observation directly to law!

Ecological economists in contrast believe that humans are complex creatures with a variety of needs and wants. Society has multiple economic goals about which reasonable people can disagree. All economic production requires energy and raw materials, and generates waste. The raw materials we use also serve as the structural building blocks of ecosystems, and their conversion to economic production and hence waste inevitably degrades the life-sustaining services provided by healthy ecosystems. These services are largely non-substitutable. The ecological economic system is highly complex, characterized by both positive and negative feedback loops, emergent phenomena and surprises. For example, under some conditions, an increase in prices will lead to a decrease in demand, but under other conditions, such as we recently witnessed with speculative investments in land, food, and oil, rising prices increase speculative demand, leading to further price increases. Positive feedback loops in a finite system are self-limiting, and must ultimately collapse in another positive feedback loop where falling prices reduce demand. Facts are scarce and uncertain, and both the economic system and the global ecosystem that sustains and contains it are rapidly evolving. As one example, 40 years ago stocks were held on average for seven years and the vast majority of foreign currency purchases were used to buy real goods and services. Thanks to high speed trading, stocks are now held on average for less than 30 seconds, and there is an estimated $5 trillion per day in currency purchases, almost entirely for speculative purposes. Speculation feeds positive feedback loops, creating a disequilibrium economy. This is a fundamental change in the global economic system, and we cannot apply the same models we used 40 years ago. The result is a much messier system in which policy prescriptions are not always clear. We lose the comfort of certainty.

Third, economics has always appeared to me to be more of a religion than a science, and religious convictions are not easily shaken. In spite of frequent speculation bubbles that completely disrupt the economy, market equilibrium remains at the heart of neoclassical economic theory. Much of market economic theory is by its very nature faith based. Neoclassical economists recognize that the real world does not conform to their theories. Government regulations inhibit free entry and exit of firms in the market, we lack perfect information about the products we buy and sell, producers and consumers are able to "externalize" many of the costs of their activities, and so on. What economic theory says is that if we eliminated these and other problems, then the invisible hand of the market would maximize economic surplus. We cannot even test the theory until we eliminate all the obstacle to perfect competition. The discipline is therefore more prescriptive than descriptive. This religion is taken to an extreme in the United States, where it is sacrilegious to even question the superiority of market allocation.

A number of schools of economic thought, often lumped together under the heading heterodox economics, also challenge neoclassical theory. Few of these fields however challenge the goal of economic growth.

There is nonetheless hope that we can change the economic paradigm as more and more evidence piles up that the core assumptions are flawed. The financial crisis of 2008 did lead many economists to change their views on the fundamental efficiency of unregulated markets. Judge Richard Posner, a public intellectual and formerly dedicated adherent of neoclassical economics, recognized that the market crash was the result of systemic failures inherent to capitalism. Behavioural economists are empirically testing many neoclassical assumptions about human behaviour and proving them wrong. Rapidly rising food and energy prices coupled with worsening environmental crises may soon be shaking neoclassical economists’ faith in perfect substitutability of resources. There are even a growing number of economists questioning both the desirability and possibility for continued growth. Perhaps the process of change will be similar to the recognition of anthropogenic climate change, where recent heat waves and storms seem to be shaking the faith of climate change sceptics. However, it will be extremely difficult for many neoclassical economists to abandon their life’s work, and there has been little change in how neoclassical economic theory is taught in universities. To paraphrase Max Planck, advances in economics may come one funeral at a time…
(30 November 2012)

How do you disruptively innovate a whole economy?

Paul Gilding, 3 Pillars Network
In his book The Great Disruption, Paul Gilding asserts that we are now in a global ecological and economic crisis that will lead to a period of major global economic transformation. This crisis driven change is a great opportunity to build a new approach to economic and social development. Hear about how shared value can create the new markets, opportunities for growth and ways to improve productivity that will increase opportunities to disruptively innovate our entire economy.

Image Removed

Recorded at the Creation of Shared Value Forum, Melbourne, Australia, November 14 2012.
(17 December 2012)

Where next for the circular economy?

Wayne Visser, The Guardian
It is not hard to make the case for a circular economy, ie one where closed-loop production brings us closer to the goal of zero waste; according to Hunter Lovins, author and founder of Natural Capitalism Solutions, our global economy is so inefficient that less than 1% of all the resources we extract are actually used in products and are still there six months after sale.

Not only is this unbelievably inefficient, it is also profoundly unsustainable. As Richard Heinberg says in his book, Peak Everything, "The 21st century ushered in an era of declines", from global oil, natural gas, and coal extraction to yearly grain harvests, climate stability, population, fresh water and minerals like copper and platinum.

The idea of a circular economy is not new. In the 1960s, US economist Kenneth Boulding called for a shift away from "the cowboy economy", where endless frontiers imply no limits on resource consumption or waste disposal, to "a spaceship economy", where everything is engineered to be constantly recycled. Mariska van Dalen, a circular economy expert at the consultancy and engineering firm Tebodin, captures the essence of the concept as: "Waste is food, use solar income and celebrate diversity."…
(10 December 2012)

Economists and the One-Percent

Michael Hudson, Information Clearinghouse
“Whom the gods would destroy, they first make mad.” And if they would destroy economies, they first create a wealthy class on top, and let human nature do the rest. The acquisition of power soon leads to its abuse, to economic and social hubris. By seeking to protect its gains, perpetuate itself and make its wealth hereditary, the emergence of a power elite locks in its position in ways that exclude and injure those below. The wealthy indebt them, shift the tax burden onto the less powerful, and turn government into an oligarchy.

It is an ancient tale. The Greeks got matters right in seeing how power leads to hubris, bringing about its own downfall. Hubris is the addiction to wealth and power, an arrogant over-reaching that involves injury to others. By impoverishing economies it destroys the source of profits, interest, capital gains, and even recovery of the original savings and debt principal.

This abusive character of wealth and power is not what mainstream economic models describe. That is why economic theory is broken. The concept of diminishing marginal utility implies that the rich will become more satiated as they become wealthier, and hence less addicted to power. This idea of progressive satiation returns gets the direction of change wrong, denying the basic thrust of the past ten thousand years of human technology and civilization.

Today’s supply and demand approach treats the economy as a “market” in a crudely abstract way, as quantities of goods (already produced), labor (with a given productivity) and capital (already accumulated, no questions asked) are swapped and bartered with each other. This approach does not inquire deeply into how some people get the capital to “swap” for “labor.” To top matters, this approach gets the direction of technological growth and basic business experience wrong, by assuming conditions of diminishing returns and diminishing marginal utility. The intellectual result is a parallel universe, whose criterion for economic excellence is merely the internal constituency of its abstract assumptions, not their realism…
(12 December 2012)

Michael Hudson’s book summarizing his economic theories, “The Bubble and Beyond,” is available on Amazon. His latest book is Finance Capitalism and Its Discontents. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. He can be reached via his website,

Tags: circular economy, ecological economics