December 11, 2017

The need for a New Economics

Economists can no longer predict the course of our economy. The limits of their discipline are now apparent. A broader economic theory is required to deal with the post-industrial age.

Published in The Ecologist Vol. 9 No. 6, September 1979.

“The economist’s desk may be covered with references containing the latest indicators of the health of the economy but rare indeed is the economist concerned with the health of the earth’s principal biological systems.”

—Lester Brown

A year ago the major industrial countries met in Bonn to discuss their economic problems. From this meeting there emerged a whole set of targets and solemn promises, but as Ivan Fallon of The Times points out these ”have been forgotten or swept aside”.

None of the countries (with the surprising exception of Italy) have been able to maintain the growth targets fixed at that meeting. Undertakings to reduce unemployment have on the whole failed, in particular in Germany, France and Japan. Firm commitments to resist all trends towards protectionism have not been kept, for protectionist pressures have proved irresistible. The US oil deficit which President Carter undertook to reduce has instead continued to grow, helping to increase still further the imbalance between the US deficit of $22 billion and the huge Japanese trading surplus which has nearly doubled this year to $19 billion.

This is not an isolated incident. If our politicians and their economic advisers are proving less and less capable of controlling our economy, they have also shown themselves to be singularly incompetent at predicting economic changes. The British Treasury’s forecasts for economic growth rates, for instance, have proved consistently wrong. The closest they were to the mark was in 1969-70, and again in 1971-72 when their predictions were only out by 15 percent; their most spectacular error was in 1973-74 when they were wrong by 90 percent.

Their ability to predict major economic discontinuities has been even more lacking. Thus, in September 1973, Mr Heath told the British Nation:

“We have made good progress towards achieving a prosperous, fair and strong society. Already as a result of our policies the standard of living of people in this country has gone up half as much again in three years of Conservative rule as in the whole of the six years of Labour government.”

In less than a year, the country had been plunged into the worst economic depression since 1929, and today’s economic future looks grimmer than ever before. To quote Business Week,

“Economists no longer know what to make of figures that they once thought they could interpret with confidence. The prime statistical series that every forecaster reviews for clues to evolving trends has begun to give bewildering signals.” [1]

Changes in the value of the ‘leading indicators’ (which include such things as hours worked; unemployment claims; orders for capital goods; stock market prices; and company profits) no longer seem to provide an accurate guide to changes in the economy. Something has gone radically wrong and, as Alan Codrington points out,

“[it is not just] an occasional breakdown or shortcoming in analytical capacity but an overall loss of confidence. It is not just that the least able are stumbling but that the finest minds are missing the mark so widely.”

Economic theory: a toppling edifice

This can only mean that it is not our individual economists who are to blame but economic theory itself. This is also Business Week’s conclusion:

“When all forecasts miss the mark, it suggests that the entire body of economic thinking – accumulated in the 200 years since Adam Smith laid the basis for modern theory with his inquiry into The Wealth of Nations – is inadequate to describe and analyse the problems of our times.”

What has happened? As Business Week points out, “a number of economists fear that they may have defined their science too narrowly”. One such economist is Robert J. Heilbroner, who sums up this viewpoint:

“Economists are beginning to realise that they have built a rather elaborate edifice on rather insubstantial narrow foundations.”

In his opinion, economics must resume its original name, ‘political economy’ and draw on political science sociology and psychology as well as on its own traditions. The result would be

“an eclectic theory that asks the questions economics doesn’t ask, and answers some questions that conventional economics does ask in a rather unconventional way.”

Heilbroner is obviously quite right. Modern economics like most of the disciplines into which knowledge is at present divided is studied in almost complete isolation from everything else. [2] As Georgescu-Roegen points out, the economic process, is depicted in the standard text-books, as

“a circular diagram, a pendulum movement between production and consumption within a completely closed system.”

This means that it is seen as governed exclusively by its own laws rather than by those that govern all the other processes occurring within the natural world. The fact that there is a continuous mutual influence between the economic process and our physical environment carries no weight with the standard economists. The same is true of Marxist economists who swear by the Marxist dogma that everything nature supplies man is a spontaneous gift. In Marx’s famous diagram of production, too, the economic process is represented as a completely circular and self-sustaining affair.

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Nature discounted

Nature, in the modern economist’s model of the economic process is thereby treated as a constant rather than as a variable. It does not take into account that our modern economy is, among other things, parasitical to (and hence totally dependent on) the biosphere from which it derives its resources and to which it consigns the waste products it must inevitably generate. As Lester Brown writes,

“Economists are unaccustomed to thinking about the role of biological systems in the economy, much less the condition of these systems. The economist’s desk may be covered with references containing the latest indicators of the health of the economy but rare indeed is the economist concerned with the health of the earth’s principal biological systems. This lack of ecological awareness has contributed to some of the shortcomings in economic analysis and policy formulation during the seventies.

“Four biological systems – fisheries, forests, grasslands, and crop-lands – form the foundation of the global economic system. In addition to supplying all our food, these four systems provide virtually all the raw materials for industry except minerals and petroleum-derived synthetics. The condition of the economy and of these biological systems cannot be separated.” [3]

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Nature can no longer meet needs

But why, we might ask, has this insight suddenly become so important? The answer is obvious: a man with a hatchet in the middle of Amazonia can, for a very long time, cherish with impunity the illusion that the forest goes on forever, that it is infinite. If he is joined, however, by hordes of people, all of whom are equipped with the latest and most sophisticated bull-dozers, it will not be long before his notion of the forest will be found wanting and its fundamental flaw exposed.

This is precisely what is happening today. Our fisheries, our forests, our grasslands and our croplands are all under such incredible pressure as a result of the unprecedented increase in our numbers and in our per capita production and consumption, that they are deteriorating fast and are ever less capable of satisfying our growing requirements for their produce.

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The scientific community is partly to blame

There is no point in simply blaming our economists for this obvious deficiency in the theory that they have developed. It is our natural scientists rather than our economists who should have realised long ago that the Earth was finite, and that an economy that could only survive by systematically pillaging it, must of necessity be short-lived. That the scientific community has, on the whole, been as blind to this obvious fact as have the economists, was shown by the way it responded to our Blueprint for Survival, Limits to Growth and other such studies.

In general, the attitude of the scientific community and of the economists – in spite of their claim to objectivity – simply reflects that of the public at large, for whom the world remains as bountiful as ever. Even today a Gallup poll taken a few months ago, showed that 68 percent of Americans still refused to believe that there was a real world oil shortage. The present crisis, they insisted, was but the result of some sort of conspiracy on the part of the oil companies.

People may pay lip service to Kenneth Boulding’s concept of “space-ship earth” but it has not yet permeated into their consciousness and the mental climate that still prevails, continues to favour the ‘cowboy’ rather than the ‘spaceman’ economy.

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Economics: A means of Reorganising Nature

The inter-relationship between the economy and the biosphere is much more subtle than this discussion so far reveals, however. Our modern economy, besides extracting resources from the biosphere and polluting it with its waste products, actually sets out to reorganise it in that way which best satisfies economic requirements.

Thus to satisfy economic exigencies, our forests must be transformed into plantations or into fields having the shape and size that are most favourable to whatever agricultural techniques are economic at the time. The shape of our cities must also be modified, as must the very fabric of our society, which much now be that which most favours the performance of what, within a market economy, become the principal functions of man; to produce and to consume.

This rearrangement of the biosphere to satisfy economic exigencies can only be achieved with impunity if its viability, and hence its ability to provide us with the innumerable non-economic benefits on which we depend for our biological survival, is not itself dependent on the maintenance of its original structure – if, in other words, its original organisation was a purely random one.

Surprising as it may seem, the scientific world as a whole, until a century ago, seemed to assume that this was so, even though it is difficult to see how such an assumption could be reconciled with such things as the theory of evolution, to which most scientists were already at least paying lip service.

It was only in the latter part of the last century that it was shown that discrete parts of our natural environment such as a forest, a marsh, a river or a sea were self-regulating units of behaviour – “ecosystems” as they were first termed by Haeckel in 1875. It has since been shown that ecosystems have much in common with other units of behaviour, or ‘natural systems’, such as molecules, cells, biological organisms, populations, etc.

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How natural systems are organised

Now the main feature of a natural system, as we learn from General Systems Theory is that “its parts are in dynamic interrelationship with each other” [4] and hence that it displays organisation. This means that it is more than the sum of its component parts.

In fact, if a system is capable of self-regulating adaptive behaviour, this is not solely by virtue of that particular set of constituents into which it can be broken down, but by virtue too of the way these are organised. What is more, this organisation is critical. It cannot be modified without reducing its viability.

Surprising as it may seem to those brought up in a disintegrated modern mass society, a normal human society, i.e. one that is organised on a tribal basis of a type in which at least 95 percent of all men have lived, can also be shown to be but a specialised instance of a natural system and the generalities of its behaviour, subject to the same set of laws that govern those of other natural systems.

This, our sociologists are still loath to accept. Imbued with the empiricist philosophy that still underlies both the natural and the social sciences, their reaction to General Systems Theory is that it does no more than draw a vague analogy between the behaviour of things that are, in reality, very different from each other. To Oppose General System’s Theory on this score, however, is, as Von Bertalanffy [5] points out

“tantamount to criticising Newton’s Law because it draws a loose analogy between apples, planets, ebb and tide and many other entities or if one would declare the theory of probability meaningless because it is concerned with the ‘analogy’ of games of dice, mortality statistics, molecules’ in gas, the distribution of hereditary characteristics, and a host of other phenomena”.

If they were identical then there would be no need to compare them. Systems are basically comparable, however different they may seem, if the generalities of their behaviour, at least, can be represented by a model that makes use of the same set of variables, and this can be shown to be the case for all natural systems [6].

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Society cannot be reorganised to economic ends

Not surprisingly, sociologists who, almost all, in effect, reject the systems approach, though they may pay lip service to it, still tend to regard society, as it is fashionable to do today, as a random assortment of unrelated people who happen to inhabit the same area and are thereby governed by the same administration. This, it is important to realise, is the only view of society that justifies the notion that it can be reorganised with impunity to satisfy economic ends.

What is true of individual ecosystems and the human societies that inhabit them, must also be true of the biosphere itself, the ultimate ecosystem that englobes all others on this planet, and whose basic structure is also essential to the maintenance of its overall viability.

If the main feature of the biosphere and of its component sub-systems is that their parts are interrelated in that way that assures their viability, then they must be affected by and, in turn, themselves affect the behaviour (including the economic behaviour) of specific sub-systems (including human populations). If this is so, then we must go further than Heilbroner suggests and examine the economic process in the light of a general model of the biosphere seen as a single system.

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Internalising externalities

If economic behaviour must be examined within its total spatial context so must it be regarded too within its total temporal context, i.e. in the light of the total experience of man which is largely that of pre-market and pre-industrial societies and indeed of the other natural systems whose general behaviour we have seen to be governed by the same basic laws.

Of course this would involve, among other things, depriving economics of what Business Week refers to as “one of its most useful devices – the ceteris paribus clause, the stipulation that other things must remain unchanged for the theory to work”. On the contrary, we must assume today that things must change. Such changes, rather than being regarded, however, as ‘external’ to our theory must now be taken as ‘internal’ to it, as part of the legitimate subject matter of economic theory.

Of course, if this were done, then very little would be left of the discipline of economics as we know it today. What would emerge would be a very different discipline, perhaps more closely akin to the original economics of the 18th century, that of de Quesnay and the physiocrats who actually coined the term, and who saw it as a branch of Natural Science rather than as a form of mechanics – “the mechanics of self-interest” as Jevens referred to it, which is what it essentially remains today.

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1. Business Week, 29 June 1974.
2. Roegen N. Georgescu, “Economics and Entropy”, The Ecologist, July 1972.
3. Lester Brown, The Global Economic Prospects, New Source of Economic Stress. Worldwatch Paper No. 20, May 1978.
4. Hall & Fagen, Definition of System, General Systems Year Book Vol. 1, 1956.
5. Ludvig von Bertalanffy, General Systems Theory, General Systems Year Book Vol. 1, 1956.
6. Edward Goldsmith, The Stable Society, Wadebridge 1978.
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