Closing the circle

Sergio Focardi, PhD

The main theme of this site is that macroeconomics needs to understand complexity and qualitative changes. The main reason is that modern advanced economies are truly complex systems subject to rapid evolution. In modern advanced economies , under a combination of technology push and market pull, products and services as well as the web of their symbolic values are subject to rapid changes. Complexity and qualitative changes are an empirical fact.

But, in addition to technology and marketing factors there is a new important consideration: the cogent need to make industrialized economies ecologically sustainable by mitigating their impact on climate and by slowing down the depletion of natural resources. This need will make economies more qualitative than quantitative.

Climate change has come to the fore in the media and increasingly in political decision making. It is by now widely believed that an increase of the average temperature of the earth above 2 degrees Celsius will have irreversible effects on climate and on organized society. It has been recognized that carbon emission is one of the major causes of climate change. Hence, there are by now some efforts to reduce carbon emissions. The 2015 Paris agreement signed by most countries effectively tries to curb carbon emissions. Depletion of natural resources and chemical pollution of the environment are factors affecting sustainability of modern economies. These factors are very important for the sustainability of life but command less attention.

What are the economic effects of mitigating climate changes and reducing depletion of natural resources? A first comment is in order: most discussions on how to mitigate climate change ignore or underplay two critical factors: population growth and wars.

Limitation in carbon emissions or any other pollutant are strictly related to the level of population. Today the major polluters are advanced economies while population growth is localized in poor pre-industrial societies. Therefore, population growth and pollution are not proportional. However, if inequalities are reduced and all populations reach a similar level of consumption, the relationship between population and pollution becomes will become tighter.

Discussions on limiting population growth have a strong moral and political connotation. Many religions and many ethical systems consider procreation an inalienable human right. Limiting population growth is perceived as a sinful limitation on a fundamental human right. In addition, today population growth is concentrated in poor countries while rich countries have reached a kind of equilibrium. Limiting population growth is perceived as a violence perpetrated by rich countries against poor countries.

It is often believed that when poor countries will develop and will reach a level of wealth and income on a par with all other countries they will self-limit their population leading to sustainable economies. This argument might be flawed. First one should understand if the equilibrium point, given that it exists, is sufficiently low to be sustainable. Second it might not be true that wealth alone will curb rates of population growth. Currently in rich countries the limitations of population growth are due to choices that favor career, work, money making, leisure over parenthood. But ultimately this might not be true for all cultures.

The second important points are wars. While it is generally believed that a nuclear war will put an end to life on earth, the effects of multiple local conflicts are not sufficiently considered. A fair share of pollution is due to local wars. After WWII we have witnessed many local wars with devastating ecological effects. We assume that population growth can be controlled and that wars will not make efforts to mitigate climate change useless. But we should understand that thos assumption is far from being obvious. Any effort to mitigate climate change and resource depletion ultimately depends on population growth and wars.

With the above assumption, what can reasonably be done to mitigate climate changes? And more in general, what can be done to limit the usage of resources and make economies sustainable?

A line of ecological thought claims that de-growth is the only solution. De-growth means drastically reducing consumption and embracing much simpler life-styles so that industrial impact on climate is reduced and resource depletion is stopped. This line of thought started perhaps with the reports The limits of development commissioned to MIT by the Club of Rome which made it clear that a finite world cannot sustain an exponentially growing consumption. Nicholas Georgescu-Roegen in his book The Entropy law and the economic process claimed that the laws of thermodynamics place fundamental limits to the possibility of growth. As a consequence, many researchers and activists thought that climate changes can be mitigated only by dramatically reducing consumption. This movement is particularly active in France under the lead of Serge Latouche.

De-growth is politically very difficult to implement. If implemented in full earnest, de-growth implies an unprecedented level of cooperation and drastic reduction of inequalities. It would be impossible to persuade people, on a large scale, to accept a drastic reduction of consumption still keeping inequalities at the present level.

Is there a way out? Is it possible to implement a sustainable economy without de-growth? Current regulations to curb carbon emission do not go in the direction of de-growth. Current regulation set limits to the amount of carbon emission and let economies to adjust and to find alternative sources of energy. It is expected that the share of production of energy from renewable sources will increase in the next two-three decades. Currently renewable sources satisfy some 18-20% of the global energy needs. Nuclear energy is responsible for another 20% of global energy needs. As carbon emissions are reduced these percentages will grow to guarantee the supply of energy.

Of course, sustainable growth has been the subject of research, debates, reports. Without discussing the details of a sustainability program, it seems clear that any sustainable growth should be qualitative and not purely quantitative. In order to be less polluting we have to become a world of higher quality. Higher quality means higher complexity. As forcefully stated by Cesar Hidalgo in his book Why information grows future economic growth will be driven by increasing complexity. In a nutshell, consumption will not be reduced but will become more complex, more qualitative.

This change will appear in many forms. First, reducing carbon emission will create the need for more sophisticated products and infrastructures. Think, for example of electric cars, more efficient manufacturing processes, new sources of lights which are products and processes characterized by a higher level of complexity with respect to the previous generation of similar products. Reduction of wasteful disposable (throwaway) products will also result in more complex, higher quality products.

But sustainable economies need a change of consumption habits. To become sustainable consumption habits of people must become oriented towards consumption of quality and complexity. A sustainable economy needs demand for sustainable products, services and processes. For example, a sustainable economy requires that esthetical values be appreciated.

Most likely, a sustainable economy needs a significant reduction of inequalities and competition. Why? Simply put, competition leads to quantity. Wealthy successful people want the biggest house, the most powerful car, the biggest boat. And values based on quantity trickle down and permeate society. Social symbols linked to power and money are inimical to a sustainable society. There must be demand for intelligent, high quality consumption. For example there must be demand for high quality food, for cultural products and so on. Growth and cultural motivations go together.

To manage an economy of this type we need tools capable of representing and understanding quality and complexity. However, mainstream economic theory is currently ill conceived to model qualitative changes. A first major problems is aggregation and the quantitative measurement of economic output. The notion that modern economies produce an output that can be measured quantitatively is nonsensical. It is also nonsensical the idea that we can define an inflation index that is valid for an entire economy. Modern economies are complex systems that evolve too rapidly to allow to define a meaningful notion of economy-wide inflation.

In order to compute the inflation rate, a panel of goods is chosen. Inflation rates are computed by computing the percentage change of the price of the chosen panel. Goods and services which are not included in the basket do not contribute to the computation of inflation. Changes of quality and complexity of products and services does not affect the computation of inflation.

Regulations to curb carbon emissions and the practical need to avoid depletion of resources will force economies to increase complexity and qualities. Macroeconomics needs a major overhaul to cope with these issues.