When checking my bank account, I was surprised by the interest I had received over the year of 2017. It was not much – as the interest rate has been set close to zero by the ECB to stimulate the economy – but it was at least something. If I do not withdraw any money from my savings account, the amount will only grow over time. It is common sense that money grows. However, not everyone knows or understands how it happens, (does it have to do with interest, inflation, real income, risk, uncertainty?), but putting our money on a savings account yields us more than withdrawing money to treasure it under our mattresses.
We have become familiar with the concept of growth. Not only the growth of our money, but also the growth of our economies. Newspapers report the expansion or slowdowns of gross domestic product (GDP), and companies try to expand their reach and production across the globe. Lately, a lot has been said about the value and sufficiency of our current economic system. We believe in growth: economic growth, capital growth, and technological growth. We use models of growth in economics, and we compare the growth of countries with each other. Probably most importantly: we strive for it. Growth is an equivalent for success, whereas a decrease in production leads to recessions. These kind of crises withhold us from consuming, let us fear for our jobs and the security that our jobs provided us with before the crisis arrived. Economic growth has become the religion of the 21st century, but why do we believe so strongly in economic growth and why should we not?
The belief in capitalism and infinite growth
The belief in the current economic system dates from centuries ago, when the concept of ‘credit’ was first introduced. As Yuval Noah Harari describes in his book ‘Homo Deus’, credit enables humans to create an added value for everything that was traded or produced. Harari defines credit as the economic manifestation of trust. Thanks to trust, this capitalistic system in which investment is the central vehicle of growth, has led to the enormous growth of production and the development of new technologies. All this progress has led us to where we are today. There are a lot of wealthy states, and humanity as a whole has become able to overcome the three biggest problems of the past: hunger, disease and war. Of course, humanity has not solved these problems entirely, but compared to centuries ago, mankind is getting there. However, the system that brought us here has its drawbacks as well.
The first big drawback is of course the fact that these problems are only locally solved. The wealthy nations have proven to be able to solve the problems of hunger, disease, and war, but there is still a big part of the world suffering from all three causes. The three problems are solved in the places where the money is. For example, investors put their money in pharmaceutical companies not so much because of their intrinsic motivation to do so, but because of the lucrative rate of return once a product is sold on the market. Also, a lot of economic incentives withhold certain parties from starting a war (a physical one, different from a trade war), as almost all economies around the world are dependent on each other. Furthermore, hunger is solved in places where the money is, as wealthy states often overproduce or import a lot.
All these local solutions increase inequality. And although many economists argue that the invisible hand is there to eventually solve this problem of the gap between the poor and the rich, there might be other ways to tackle it.
But then, if all three problems are to be solved all around the world: How are we going to manage this? BBC News reported in 2015 that if everyone would live like the average U.S. citizen, we would need a planet 4.1 times as big as the one we have. This is due to the huge amount of resources needed for the consumption of an ordinary American citizen. If that is the standard we are looking for, then we would indeed have a problem if all countries are striving for that same infinite growth. There are not only enough resources, but also not enough places to dump the waste that huge amounts of consumptions lead to.
Kate Raworth, a British economist and professor at Oxford University, has developed an economic model that includes the social and planetary boundaries that we are facing called The Doughnut Model. The premise of the model is the balance between the social foundation and ecological ceiling. In order to find this balance, one needs to move towards a circular economy rather than a linear one. What Raworth also states, is that it is a misconception to strive for infinite growth, as nothing on our planet grows forever. On earth, everything grows until it flourishes, and that is exactly what economists and policy makers in her eyes should strive for. In our current economic system, we are overshooting and therefore damaging the environment. Climate change can be considered a good example of the damaging that our consumerism has caused. It is due to our own behaviour that it only takes time before climate change will lead to serious troubles, and it will mostly be the poor that suffer.
Why are we not acknowledging and solving the problems then?
A possible cause of the resistance as to why people and institutions are not changing their behaviour in order to create a more sustainable economy might be time-inconsistency. As people value the present higher than the future, it is important to realize that this leads to denial and a delay in actions. Just as is the case with climate change: a lot of people have known for quite a long time that emissions are boosting global warming, but it is only by now that solutions are provided by governmental institutions. Why? Probably because the consequences of global warming were not really noticeable before, and policies in which a lot of money has to be invested in something that people are not benefitting from immediately are not going to win the elections. As macro-economist Gregory Mankiw argues in Leonardo DiCaprio’s documentary ‘Before the flood’: people have so many things on their minds for the short term already that they simply cannot manage to worry about the longer term. It is thus easy to explain why people tend to behave time-inconsistently, and do not solve the problems caused by the deeply rooted economic system that is called capitalism.
Maybe here lies the job of any government: looking forward. If governments could be able to nudge people into the behaviour that is sustainable, then circular economies would become reality rather than ideology. As Raworth argues: it is time for a change. The economic system that focuses on infinite growth is not going to be sustainable in the long term, as we need more resources than the planet can provide us with. Maybe it is time to create an economy in which people should be aware and be concerned towards the betterment of others rather than only their self-satisfaction. Maybe it is time to be guided in the right direction, and admit that some problems are near. If not, the growth will come to an end for sure.