The SAGE Handbook of Globalization
Sustainable Economic Systems
Contributors: Póciennik Sebastian
Edited by: Manfred B. Steger, Paul Battersby & Joseph M. Siracusa
Book Title: The SAGE Handbook of Globalization
Chapter Title: "Sustainable Economic Systems"
Pub. Date: 2014
Access Date: September 30, 2016
Publishing Company: SAGE Publications Ltd
City: London
Print ISBN: 9781446256220
Online ISBN: 9781473906020
DOI: http://dx.doi.org/10.4135/9781473906020.n48
Print pages: 853-868
©2014 SAGE Publications Ltd. All Rights Reserved.
This PDF has been generated from SAGE Knowledge. Please note that the pagination of
the online version will vary from the pagination of the print book.
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Sustainable Economic Systems
PóciennikSebastian
Introduction
The first decade of the twenty-first century witnessed the strong impression that the global
economy had become a sphere of extreme uncertainty and risk. Considering the dimension of
the crisis, which started in 2007, this was not very surprising. The crisis didn't look like another
business cycle setback, a temporary overheating or a sectoral bubble such as the previous
‘dot-coms crash’ of 2000. This was a profound breakdown, strong enough to question the
foundations of modern approaches to the creation of welfare.
Symptoms were numerous. Apart from collapsing financial markets there were rising
unemployment, deeper inequalities, a shrinking middle class, extreme indebtedness, and
inability of governments to force through reforms. In addition, there were the increasing
challenges of climate change and availability of resources, which are necessary to develop
new technologies and keep economies growing. This was exactly what many years ago was
predicted by the German sociologist Ulrich Beck, who coined the term ‘risk society’ (Beck,
1986).
This essay asserts that the main reason for the current problems has been the inability of
modern societies to produce enough stability and sustainability. These two elements have
been produced so far in a rather fragmented way and not always efficiently. In fact, we can
now observe a fascinating and globally conducted discussion on how to make the future
economic system free from previous deficiencies. The first part of the chapter is devoted to
previous developments and approaches to stability and sustainability until the last crisis
started. The second part focuses on analysis of areas, which are crucial for reforms and the
emergence of a new, less risky and more responsible art of capitalism.
Stability
Firmness in position, permanence and resistance to change, especially in a disruptive way –
these are general associations connected with the term ‘stability’. In an economic sense this
association was more specific. The International Monetary Fund (IMF) describes it as ‘avoiding
large swings in economic activity, high inflation, and excessive volatility in exchange rates and
financial markets’ (International Monetary Fund, 2012).
This definition refers to indexes, which describe the economy in short-term categories.
Headline news saying that the ‘economy is stable’ means actually that the system is in one of
the calm phases of the business cycle, neither heading towards boom nor towards
depression. The overall pattern has been known at least since the analysis of the French
economist Jean Charles Leonard de Sismondi in 1819 and also the works of Joseph
Schumpeter. It says that within a few years every economy moves through periods of rapid
growth with rising demand, higher inflation and dropping unemployment, followed by
depression with reversal phenomena (Knoop, 2009).
The challenge is that excessive highs and lows should be avoided. In other words, extreme
bubbles of economic activity must be calmed down before they burst. The fluctuations
themselves are unavoidable – like the business cycle – but a clever stabilization policy could
flatten and shorten them without changing significantly long-term trends of growth. The idea
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of an anti-cyclical policy sounds very modern, but is in fact very old. Tomas Sedlacek, the
Czech author of an influential book on the history of economics, reminds us in this context of
the bible parable about pharaoh's bad dream, in which seven plump and healthy cows get
devoured by seven lean cows. Joseph said to the pharaoh that this dream was a prophecy
showing seven affluent years and seven bad years. The only way to react, then, is to save
and store food in the time of plenty in order to react when people will be in need during the
dreary years (Sedlacek, 2011: 63).
This point of view has become clear since the Great Depression of 1929, when the economy
collapsed in a dramatic way after long years of post-war prosperity and overproduction. In fact
during this disaster governments did not feel that it was their place to intervene. Classical
economists of this epoch believed in the self-regulation ability of economic systems and, in
their view, an unrestricted price mechanism should be enough to restore stability – at least in
the long term. John Maynard Keynes commented on this approach in 1923 with his famous,
sardonic sentence, that ‘in a long term we all will be dead’ (Ball and Bellamy, 2003: 63). A
decade later Keynes published his seminal work The General Theory of Employment, Interest
and Money, reviewed after 75 years in Cate, 2012, in which he designed a theoretical
framework proving why it makes sense to raise government spending in harsh times in order
to prevent long-lasting depressions. In the next half-century, the capitalist world followed
Keynes' hints, and economists refined them by developing sophisticated models of fiscal and
monetary policy.
The global crisis in the 1970s, the time of surprising stagflation (rise in inflation and
unemployment), opened the gates for new economic ideas. One of them was monetarism and
its premise that stabilization could be produced control of amount of money in circulation. This
approach, whose prominent face was Milton Friedman, started to dominate global capitalism.
It fitted well with neo-liberalism, which expanded with the free market reforms of Ronald
Reagan in the USA and Margaret Thatcher in the United Kingdom. After two decades of quite
successful application of this policy, the self-confidence of economists and politicians became
resolute. Ben Bernanke, a member of the Board of Governors of the Federal Reserve (USA),
spoke about the time of ‘Great Moderation’ in which sophisticated stabilization policy
measures could guarantee high growth without upsetting volatilities known from the past
(Bernanke, 2004). Business cycles and crises appeared to many to belong to the past.
From a wider, global perspective this optimism was exaggerated. The 1990s still saw many
collapses in the world economy, among them the Asian financial crisis in 1997, the Russian
crisis, followed by the disaster in Argentina, which began in 1999. They were caused mainly
by major political mistakes, but particularly alarming were their contagion effects. Many
countries got dragged into the turmoil. The global interconnectedness, which was very
advantageous to the world economy because of exchange, showed its other, less appealing
face. Another problem was that new technologies made economic process faster and less
predictable. This argument concerned in particular the financial markets, which got boosted
by the speed and complexity of internet backed transactions. Many dangers of this process
for stability could have been identified first by the so-called internet bubble with its climax in
2000. The reaction based on belief in the Great Moderation led governments to adopt a lax
stabilization policy driven by an overly optimistic trust in rationale of markets. After a couple of
years of bubbling, markets crashed and then the crisis came. Since 2007 many countries had
been trying to restore stabilization with expensive spending programmes and generous
monetary policy. Effects were ambiguous. Imbalances in the world economy and complex
interdependencies made it difficult to target precisely. The try-and-try-again desperate
attempts to revive economic growth contributed to the persistence of extreme public debt in
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many countries and the zero-bound trap by the monetary policy. Production of stability is now
jammed and this, together with grim prospects for the world economy in the coming decade,
is perhaps the most severe symptom of the crisis.
Sustainability
Sustainability should be seen as different from stability, although at the first sight the overlap
seems obvious. It considers the longterm capacities of a system to exist, not its short-term
resistance to change. A well known definition of sustainability, which emphasizes its economic
notion, comes from the Bruntland Report (World Commission on Environment and
Development, 1987) prepared for the United Nations in 1987. It says that ‘development that
meets the needs of the present without compromising the ability of future generations to meet
their own needs’ deserves the label of sustainability. In other words, it is about responsible
use of resources.
Economics had had a certain problem with sustainability, analyzing mainly the questions of
long-term growth. It was hard to discern the issue of possible depletion of resources in
economic theories, because price mechanisms in market economies would translate scarcity
into higher costs and reduced consumption of the good. This is why the branch devoted more
attention to the problem of what combination of resources could induce growth.
At a certain stage of development of economic theories technology became a fantastic escape
from the sustainability dilemma. The message was both simple and convincing: new
techniques of production help to expand size of output without raising necessary input. One
of the most popular longterm growth concepts, the Solow-Swan model from the 1950s, saw
the only chance for it in innovations. A sheer increase of the amount of resources added to
input could lead to diminishing marginal returns only. New ideas in technology and
organization made it possible to overtake the steady state of zero growth and induce
development without increasing resources. In the 1980s another powerful theory of Paul
Romer and Robert Lucas strengthened this way of thinking (called the new growth theory).
The endogenous factors, like human capital and education, were recognized as crucial for
growth and their application was free from the steady state problem of classical resources.
From this perspective sustainability played a marginal role, because it was better to think
primarily about new technologies making a better use of resources instead of literally saving
resources.
There was also another factor that contributed to the easy approach to sustainability in the
past. At its very beginning, the capitalist system faced open/waste spaces of the globe, and
was free to expand and exploit resources. The only problem was to reach them before other
competitors did. This environment created the imperialism of the eighteenth and nineteenth
centuries and an even more vital culture of externalization of negative side effects of growth.
For a long time the earth seemed to be a space able to deliver an unlimited number of
chances and goods, and simultaneously adopt unlimited pollution, slavery, and violence. This
illusion is over, but the externalization bias is still strong. Even today if a society wants a
cleaner environment, it can always shift its ‘dirty’ production abroad to other, usually poorer
countries, and enjoy unchanged patterns of consumption.
It would be, however, too much to say that the issue of sustainability was none-xistent. The
pioneer was the British scholar Thomas Malthus, who published in 1798 a book on the grim
consequences of a rising population, which consumes all surplus food production and thus
prevents a rise in living standards. The solution was found in increased productivity of
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agriculture, which culminated more than two centuries later in the Green Revolution in places
such as India and Bangladesh. In the nineteenth century the issue of sustainability
considered mainly social conditions in early industrial capitalism. The German social state,
and also the Victorian welfare state, Marxist movements, brought their own interpretations of,
and solutions to, the question. For example, Bismarck forced his social insurance reforms not
because he liked the idea very much, but because the German army was horrified with the
quality of recruits who spent their childhood as workers in factories and also because of
industry moguls who realized that more sophisticated production and political peace require a
more affluent society. This has created the fundamentals for social sustainability of the postwar welfare states in Europe.
Modern debate on sustainability, focused mainly on environmental questions, came later. In
1968 Garret Hardin wrote his famous work ‘Tragedy of the commons’, in which he analyzed
how public goods got exhausted by actors in a free market economy (Hardin, 1968). His
arguments helped to explain why, for example, non-regulated access to fishery can quickly
lead to empty seas and collapse of the fishery industry in many countries. A few years later, in
1972, the Club of Rome published ‘The limits to growth’, a groundbreaking study which dealt
precisely with the connection between economic growth and scarcity of resources. Its
conclusions, based on a computer simulation, were very pessimistic and echoed strongly in
the public debate around the world. For an update of this study, see Meadows et al. (2006).
The book launched an extensive area of research and political activity around environmental
questions, food production and energy policy. In many countries green parties established
themselves as powerful factors in domestic policy. Rising awareness of the sustainability
problem in environmental issues and resources translated also into international cooperation.
So far there have been many conferences on climate change and framework agreements
(e.g. the Kyoto Protocol on reduction of greenhouse gases), but their effectiveness is not very
high. Many countries see such global actions against climate change as endangering their
vital economic interests, among them particularly developing economies. According to the
study published by the Netherlands Environmental Assessment Agency, since 1990 to 2011
the most populous countries in the world and rising industrial powers, China and India,
increased their emission of CO2 at 227% and 100% respectively. China's emission was in
2011 with 9700 million tonnes of CO2 almost three times higher than in the EU27 (3790
tonnes) (Olivier, et al., 2012, p. 29). This is why it is hard to say much about success in the
area and why the risks have not yet been reduced.
Figure 48.1 Top 20 of the highest public debt ratio (% to GDP)
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Sustainability perspective started to be visible not only in the environmental area. For many
years the theme of overpopulation occupied an important place in the debate. However, the
process of ageing of societies in Europe, Japan and China brought slightly different
arguments, seeing dangers for the sustainability of pension and health-care systems. It is
argued that the current structure incurs huge public debt in favour of current consumption of
the older generation and at the expense of the shrinking, youngersector of society. A similar
way of thinking can be seen in the discussion of the global financial system and level of
indebtedness or food production and consumption. Even if in all these areas progress is
unquestionable, there is still no consequent governance on both national and global level. In
fact, the expansion of sustainability culture in the current economic system is based on
bench-marking of good practices. It is not enough to stop rising imbalances.
Towards a Sustainable (and More Stable) Economic Model
It is time to elaborate on what kind of economic governance can deal efficiently with problems
of stability and sustainability. Where are new approaches necessary? In my opinion, there are
three areas of economic models that should be re-thought and redesigned. Firstly, the issue
of what is an ‘efficient market’ needs some new clarification. Secondly, we must accept the
fact that there might be many different institutional ways to efficient economic systems, but it
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does not necessarily mean that some of them are a priori more efficient, stable and better for
sustainability, then the others. Thirdly, a redesign needs a wider look at what is economic
growth and what kind of growth is compatible with the idea of sustainability.
Table 48.1 CO2 emissions in 2011 (million tonnes CO2) and CO2 emissions change in %,
1990–2011
Emissions 2011
Change 1990–2011 in %
United States
5420
-12
EU
273790
-18
Germany
810
-23
United Kingdom
470
-27
Italy
410
-11
France
360
-17
Poland
350
11
Spain
300
29
Netherlands
160
2
Russian Federation
1830
-25
Japan
1240
7
Canada
560
24
Australia
430
57
Ukraine
320
-58
China
9700
227
India
1970
100
South Korea
610
110
Indonesia
490
122
Saudi Arabia
460
62
Brazil
450
53
Mexico
450
5
Iran
410
49
South Africa
360
-1
Taiwan
270
90
Thailand
230
Source: (Olivier et al., 2012: 29)
106
Complexity Approach to Markets
Markets are the most substantial, constructional element of economies. However, nowadays
we are dealing with biases which make understanding their functioning puzzling. As a
consequence there are difficulties with efficient economic policy and, obviously with providing
stability and sustainability.
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One of them is surely the formal concept of markets which dominates modern economics. It is
based on strong assumptions which make building theoretical models easier, but, like many
authors have concluded even before the crisis stated, only partly coincide with reality
(Fulbrook, 2004; Keen, 2011). Individual actors in such models are generally driven by a onedimensional motivation of profit, are able to calculate precisely costs and gains, take
advantage of access to all necessary information and are actually not disturbed by other
actors who have more power over the market. Another strong assumption is that markets tend
always to a state of equilibrium set out by forces of demand and supply. If there is a situation
of imbalance caused by external shocks, these forces push markets ‘automatically’ towards
an efficient equilibrium level of price, no matter what kind of shock caused them. There is a
famous ‘rocking-horse’ metaphor of the Swedish economist Knut Wicksell referring to this
feature of markets (Louçã, 2001: 29): no matter the reason, a horse with blinkers will move in
an expected way.
This mechanistic paradigm has dominated economics since the nineteenth century, both in
academia and economic policy. It created a strong body of many valuable and sophisticated
theories. However, if we consider the fact the it failed with providing enough insights into the
grounds and mechanism of the last economic crisis, the overall assessment of the state of
economics must be cautious. The crisis wasn't after all an effect of a ‘black swan’ in the sense
expressed by of Nassim Nicolas Taleb: an unexpected event with dramatic consequences
(Taleb, 2007). It was a classical bubble which had not been perceived because the formal
concept of markets has had problems with explaining e.g. how irrational behaviour impacts
economic processes, how imbalances can become persistent and why economies can stuck
by a suboptimal equilibrium for a long time. Thus they had not been able to explain why
stability and sustainability were not provided in the system.
If one looks for a central term embracing all the problems mentioned above, it is complexity,
or, to be more precise, quickly rising levels of complexity in modern economies. More
commodities, more diversified preferences and needs of actors, more suppliers and more
buyers, faster communication between them, more sophisticated, global relations between
markets, etc.: all these did not fit into relatively simple models anymore and also challenged
traditional, sectoral and nationally oriented regulation. For example, financial markets behave
to a certain level as a kind of shock buffer fulfilling an extremely important role in the
economy. If shocks get bigger, however, they quickly switch to a shock booster and find a new
equilibrium at a very inefficient level. When, how, over which mechanisms – this is still a
vague supposition. The Wicksell metaphor of “rocking horses” may sound well, but a a picture
of a herd of wild horses, from which everyone reacts differently on incoming impulses and
often runs into a different direction can be more convincing nowadays.
What should be done? There is a huge need for a more holistic and organic approach to
economies. This social system should be considered as a dynamic, non-linear, self-organizing
one with intelligent, flexible actors, rather than a set of structurally similar markets, which all
tend towards equilibrium (Beinhocker, 2007). For economics, which so far enjoyed selfisolationism (or methodological imperialism) (Milonakis and Fine, 2009: 149–71) it can mean
integration of interdisciplinary approaches into the mainstream, including psychology, political
science (crucial actors and interest), sociology, but also biology with its evolutionary elements
and neuro-economics, as well as physics to explain problems of imbalances and bubbles in
complex systems. More attention must be paid to empirical studies, even in a manner of
‘Freakonomics’ (Levitt and Dubner, 2011), and economic history. Economic historians were
after all among few researchers, who signalled the approaching crisis and belong today, like
Nigel Roubini (Roubini and Mihm, 2010), to luminaries of the branch. This interdisciplinary
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approach should lead to the collection of knowledge, which helps to create a digital surrogate
of reality. These ‘would-be-worlds’ (Beinhocker, 2007) could emulate economic systems and
say much more about conditions for stability and sustainability.
Economic policy and regulation must also draw consequences from the newest developments
– and this is actually happening. Public agencies try to collect more specific data about
markets in order to deal with complexity challenge. This includes for example identification of
crucial actors in the financial system with the ‘too-big-to-fall’ potential and of criteria for their
‘stress-tests’ or redundancies stopping domino effects. It resembles, in part, an approach
towards super-spreaders in epidemic prevention. Some governments consider also reduction
of speed of computer systems connecting international financial markets (so called HFT, high
frequency trading) in order to diminish the number of transactions and risk of bubbles (Arnuk
and Saluzzi, 2012). The next years will be surely devoted to application of stabilization criteria
in many areas of economic systems.
There is a very serious problem with imposing such new rules on more and more globally
oriented markets. Fragmented regulation of national markets is insufficient since externalities
have global dimension and produce unequal distribution of costs among countries. If only
some of them will be covered with it, actors will try to avoid costs of rules and search for exit
options. This is why any supranational solutions must be connected with universal
acceptance and credible sanction. How difficult is it can be seen in the example of global
climate change regulation (Dessler and Parson, 2010) There have been so far experiments
with market solutions (emission rights), benchmarking and elements of regulation. None of
these has been efficient enough so far. This is why it is more sensible to prepare for a less
romantic, but relatively effective option known from studies on complex systems. Not a
covering agreement, but decisions and actions of crucial and powerful actors in the system
are decisive. In the global reality this principle translates into regional agreements where it is
easier to deal with distribution of costs (like e.g. in the European Union which has been trying
to achieve its local climate change agreement between ‘old’ members pushing towards
restrictions and new members who try to protect their industries). At a further stage this
approach will enable a global regulation. This process is happening not only in the climate
change area. A good example is also in the policy against tax evasion. Since it is extremely
difficult to set a common denominator, Germany decided to acquire data with tax evaders in
Switzerland or Liechtenstein and started to sustain pressure on them in order to block this exit
option. In addition to that Berlin pushes countries to change their financial regulation. It is a
highly controversial, unilateral method of action, but probably the only efficient one so far.
Pluralism of Development Models
How Convergence Failed
The years after 1980 put into the economic debate the issue of convergence of national
economic models. The source of this consideration was the rapid expansion of neoliberal
ideology, which saw markets as the most efficient way of social coordination and true growthcreating machines. Spectacular expansion of the globalization process, economic reforms in
the USA, United Kingdom and Latin America, the collapse of communism combined with
shock therapies of previously state-led economies – all these created an ‘end of history’
atmosphere. It seemed that the only way to grow and develop was a liberal agenda
formulated in the most lucid way in the Washington Consensus. Economic policies of national
states started to be evaluated under the criterion, how small are governments and how much
freedom is granted to market actors (e.g. the Economic Index of Freedom by the Heritage
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Foundation). It wasn't a big challenge to find arguments for the hypothesis that all economic
models would drift gradually to the Anglo-Saxon solutions (Gilpin, 2001). Crisis in Japan, the
weakness of Germany and to some extent also the Scandinavian economies in the 1990s
seemed to confirm this supposition.
The neo-liberal agenda brought, however, some problems. Firstly, it increased exposition of
the world economic systems on crisis and contagion effects since most reforms were aiming
at national deregulation which was not àreplaced' by efficient global regulation. This issue
became quite clear when local collapses in the 1990s, like the Asian crisis or the Russian
crisis, turned to be global events with extremely dangerous potential. International economic
organizations created to help countries in trouble, like the International Monetary Fund and
the World Bank, were conditioning their aid measures with even deeper deregulation of crisisridden economies. This strategy provoked many controversies (Serra and Stiglitz, 2008) since
it sharpened some stability problems instead of solving them and was actually finally
abandoned. Also development policy of these institutions based on the market priority has
been harshly criticized (Head, 2008).
The second problem concerned efficiency. The tacit and wide-spread assumption on
superiority of free market solutions has some flaws. There are issues with shorttermism, high
volatility and inability to deal with externalities (costs and benefits affecting third persons),
which are directly connected with the challenge of sustainability. The efficiency assumption is
also criticized in the context of social inequalities. They are produced by the free market
game, but in neoliberal approaches, the less affluent “losers” have incentives to become more
efficient and should catch up winning the next round of the game. This is exactly the content
of the founding myths of the American capitalism: ‘from a shoe cleaner to a millionaire’.
However, inequalities can become lasting producing “constant losers’ and in this case, as
newer publications show, economic efficiency suffers a lot. Poverty trap destroys capacities of
human capital and make domestic demand unstable. (Banerjee and Duflo, 2011; Stiglitz,
2012; Wilkinson and Pickett, 2009). And last but not least: the success of economies like
Japan, South Korea and China is proof that not only market strategies can work well but also
highly interventionists ones.
The third problem is legitimacy of market based solutions. The market itself is not able to
produce legitimacy, but it needs acceptance of all actors (Rodrik, 2007: 237–42). However,
while starting with distribution of welfare and power over the competition mechanisms, the
neo-liberal agenda has to have not only a good idea of what to do with the winners (it
certainly does), but also what to do with the losers. If there is no feasible solution of this
challenge – a clear and accepted definition of social justice – a market economy endangers
its political sustainability by making alternatives more attractive. This is why markets need to
be propped up by other means of coordination: state, family, associations, which are able to
formulate such justifications.
During the last crisis it has been easy to find examples of this clash. Greek people put under
the pressure of very neo-liberal market reforms after 2009 tend to vote more for extremist
parties because they do not accept distribution of social burdens and its official grounds. On
the other hand, equally harsh market reforms in Poland or the Baltic states after the
communist era, enjoyed acceptance due to widespread hopes in their societies that in a long
term they will be beneficiaries of changes.
The above arguments can be summed up with a metaphor of the American economist Dani
Rodrik: ‘Markets are the essence of a market economy in the same sense that lemons are the
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essence of lemonade. Pure lemon juice is barely drinkable. To make good lemonade, you
need to mix it with water and sugar’ (Rodrik, 2011). This means that the market must be
‘mixed’ with other mechanisms of social coordination. The open question is – what should be
the proportion of this mix? The answer can be delivered by the varieties of capitalism
approach (VoC), which has produced for a decade many interesting publications in political
economy, explaining why diversity is possible and is better than homogeneity. It will be
elaborated in the next paragraphs.
Varieties of Capitalism
This VoC is posited on a couple of basic assumptions. Firstly, it considers firms as the most
important actors for welfare creation in national economies, since they provide innovations and
new products. To achieve their goals they need access to resources, to mention the most
fundamental ones – capital, labour and skills. This access is not always easy due to risk and
uncertainty which concern almost every transaction in an economy. Very helpful in this context
can be institutions defined as rules of the game, which structure social interactions. They
create a minimum of certainty and enable transactions. It is easy to imagine that in different
countries across the world institutions have very diversified characters. Some of them are
more market oriented, others put into transactions more hierarchy, rules of associations,
networks, government regulation or even religious norms. These institutional arrangements
can be decisive for competitive profiles of national economies, since they decide how dynamic
or stable access to resources will be. VoC authors use in this context the term ‘institutional
comparative advantage’, clearly referring to the traditional Ricardo's theory (Hall and Soskice,
2001: 1–71). They might have been right: institutions are among the few things in
globalization that cannot be bought and transplanted.
From the variety of systems we can distinguish two outermost, theoretical models: liberal
market economy (LME) and coordinated market economy (CME). The first type, LME, can be
characterized by dynamic access to resources, which means, that it is relatively inexpensive to
change conditions of transactions or resign from it. We can see this feature in design of
markets for capital, labour and skills. Capital in LMEs is derived often from stock markets,
where assets can quickly change owners and their value is estimated by price mechanisms.
The labour market is also shaped by dynamic relations, where hire and fire is relatively easy
thanks to limited regulation. If firms perceive the market situation bad they simply lay off
workers, but if prospects are promising they quickly employ. In the third area – skills –
individuals and potential workers – invest in their knowledge and then sell it to firms. However,
due to flexibility of the labour market they tend to choose transferable skill profiles, since they
must consider their chances and balance the promise of getting a high salary for unique skills
with the risk of remaining unemployed. This kind of system, if well designed and transmitting
right incentives, produces radical innovations, since it is very open to new ideas and new
products. It creates a good environment for new branches, like telecommunication
technologies, biotechnology, and media. A classic example is the USA.
The second outermost model is coordinated market economy (CME). Transactions are more
stable and long term oriented. Capital is provided by banks which create loyalty based
relations with firms, thus the access is ‘patient’. The labour market is characterized by long
term contracts and relatively low differences in wage levels. Skills are produced rather in
companies, which invest their own capital in order to create a set of specific, rare qualifications
fitting ideally into their product profile. Since workers get employed for a longer time this kind
of an investment makes sense. Japan and Germany have been considered as typical
examples of CME. Their institutional comparative advantage is found in branches, which
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demand very specialized skills and are based on incremental innovations. They do not
compete with low costs, but rather high quality. This is something that we can easily observe
in German and Japanese factories for cars or sophisticated machines.
These two systems are of course extreme examples, and between them there are many
possible combinations. Scandinavian models mix free market with a generous social
insurance that encourages people to invest in rare, specific skills. Other models apply strong
coordination of the state, other religion or families. What is important, however, is that neither
of them is per se more efficient than the other. Local institutions can create very unique
institutional comparative advantage and provide by the way more legitimacy. What is
important is rather the quality of institutions: if they communicate enough with each other, if
they do not contribute to power asymmetries, and if they have a credible sanction. It sounds
like an idea for a more stable and sustainable solution.
There is also another argument for more diversity, important from the global perspective.
Some authors argue that LMEs and CMEs are in the world economy like pedals in vehicles
(Acemoglu et al., 2012). In fact, they are rarely in the same state. At beginning of innovation
cycles, LMEs drive the global system with their new technologies and rising productivity and
CMEs lag behind. It is a time of immigration to LMEs, which offer higher salaries. Later on,
when the wave of innovations calms, CMEs make their own job by integrating the latest
technologies into sophisticated production regimes and providing the global market with
mature, high quality products and also well-educated workers. This enables LMEs to shift
resources to new experiments and prepare a new wave of innovations. It looks a bit like the
case of USA and Europe and their coexistence in the global economy. This coexistence is
definitely not disadvantageous for stability of development: a bicycle with only one pedal is
not a safe machine.
Approaches to Growth
The Roll-Over Effect
Modern capitalism developed in the last 200 years based itself on the assumption of growth
and expansion. The more products we are able to deliver, the better for everybody. Expression
of this attitude is the domination of the GDP index in measurements of performance of
national economies. It shows the output in a given year and expresses it in monetary value
(national currency). It has many advantages. First of all the GDP offers statistical precision
and comparative perspective, since it is relatively easy to apply similar techniques of collecting
and converting data in countries across the world. In this way GDP creates also a kind of
competitive environment for nations: it is evident who has the highest GDP growth or the
highest GDP per capita. However, the GDP is not flawless. Its beguilingly clear numbers can
show only one dimension of growth, hiding others. In all we can get a distorted picture of
economic development. Just to quote some examples: A dinner prepared at home by family
members and friends is worse for the economy than a dinner ordered in a restaurant. If there
is no transaction, there is simply no growth measured. On the other hand, a heavy smoker of
cigarettes is a true GDP driver. Not only can the single transaction of buying cigarettes be
supportive, but also later visits to physicians and purchase of medicaments. In a similar way
one can look at divorces, which can make real estate markets grow, give a boost to furniture
factories, not to mention the demand for lawyers.
On a more general level doubts about quality of growth versus sheer size of GDP can be
analyzed in the context of stability and sustainability of economic systems. A high number of
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goods delivered in a national economy translates to short term growth, which combined with
other short term indicators like inflation or unemployment rates can say a lot about stability.
However, it essentially overlooks many long term indica tors of development, for example
accessibility resources and their ability to regenerate, and also social issues like health,
education and security. To put it simply: costs of current growth considered as a GDP rising
can be rolled-over to a less ‘visible’ long term or, as it happened in the past, to other coun
tries and regions of the world.
There are many examples of the roll-over problem. Longer working time can quickly boost the
supply of labour, but in the longer term it can cause lower birth rates, a higher propensity of
diseases, in particular, burnout syndrome, depression and cardiovascular diseases – all in all,
challenges for the labour market. An even more outspoken example concerns the debt issue.
Easy and inexpensive access to loans can make selling numbers explode and so, too, the
GDP rates. Perhaps, then, this is one of the reasons why modern capitalism has such a loud
culture of overconsumption and capacities to make it popular. The effect might be, however, a
rising level of debt, which must be ‘solved’ later, by subsequent generations. The same
scheme is about resources. Today's growth and consumption are ‘innocent’ in terms of GDP,
but they flourish due to ignoring the future; and this future can bring not only scarce, more
expensive resources, but a catastrophe of the entire system. This is not an abstract scenario:
it happened many times in the past as was shown very pointedly in the book of Jarred
Diamond titled ‘The Collapse’ (Diamond, 2005). Awareness about this problem has
dramatically risen in the last 20 years. This is attributed to the fact that the roll-over has gotten
much more difficult in the first decade of the twenty-first century. The world has now more
visible ‘limits’ and exporting consequences of exponential growth and deficiencies in
sustainability cannot be made so easily. However, there is no clear, common view, on how to
meet this challenge.
More Growth
There is a strong voice in favor of continuation of the existing, dominating path. Economies
should still take care about their output level, so the GDP remains the most important point of
reference. How should sustainability be achieved then? Well, by adjustment of economies to
market forces, which make some scarce resources simply more expensive and thus enforce a
more sustainable, responsible exploitation. This principle refers not only to natural resources.
If for example capital is more expensive, a more responsible approach to debt would be an
expected reaction leading to financial sustainability.
Another assumption is a strong belief in technological progress. It will increase productivity
and, in particular, save resources. Hybrid or electric cars, bio-agriculture, recycling
techniques, communication that reduces travelling, etc. – all should contribute to faster, and
simultaneously, better quality of growth. There are no illusions, however, that this will happen
immediately. This will be a gradual way, with temporary use, for example, of alternative gas
resources from controversial fracking methods. Such a way is considered as safe for
economies, since it does not exert a push to reduce energy consumption too quickly.
This idea deserves, if necessary, some interventionism. Nicolas Stern, a British economist and
former chief economist of the World Bank, who prepared in 2006 a report on climate change
prospects, treated the ecological challenges for sustainability as classical economic
externalities, which must be regulated, taxed and if necessary also balanced by direct
spending of 1–2 per cent of GDP annually in order to prop up the non-carbon technologies
(Stern, 2007). In this sense, there is much more acceptance for regulation and the
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government intervening, but the logic of growth remains the same: the more goods, the
better.
Amended Growth
The second approach to growth is a more sceptical one. It sees the GDP index as an
important measure of human achievements, but it has to be combined with additional indexes
which refer to several aspects of quality of life and sustainability. The only problem is that it is
still not very clear what aspects are important. This is why there are many more or less
complicated indexes in the market, which compete against each other.
The only globally accepted measure of ‘amended’ growth and its quality is the Human
Development Index (HDI). It was created in 1990 by Mahbub ul Haq, the Pakistani economist,
and then developed by the Indian Nobel Prize Laureate Amartya Sen and used by the United
Nations Developing Programme for comparative studies. Its idea is to combine income, life
expectancy and education (see: http://hdr.undp.org/en/humandev/) It is of course not an ideal
measurement It is criticized particularly for lack of ecological perspective and focusing on
formal aspects of education (school attendance), not really a level of acquired knowledge.
Another interesting group comprises indexes developed and applied at country level.
Sometimes they build up reputation and become popular at the global level. A good example
is the Gross National Happiness, coined by the king of Bhutan Jigme Singye Wangchuck in
1972. In the last decade it has been supplemented by a new generation of happiness
measurements (‘well being’), but their problem is very similar to those of HDI. Interest in the
issue of happiness has been rising; however, so we can expect further amendments and
profound studies (Frey, 2010). Possibily they can count on political support. For instance, the
president of France Nicolas Sarkozy announced in early 2008 that we need to measure also
happiness instead of GDP only. A similar idea was supported by the British prime minister
David Cameron. What is interesting is that neither of these politicians is a socialist who have
usually been promoters of alternatives to GDP.
Some countries are pretty much advanced in application of their own indexes. One of the best
known examples is the Canadian Index of Wellbeing, which includes arts, culture and
recreation, community vitality, democratic engagement, education, environment, healthy
populations, living standards and time use (see: https://uwaterloo.ca/canadian-indexwellbeing/). Also Germany is a provider of similar experiments with measuring qualitative
development. Stefan Bergheim, an economist and founder o f t h e Z e n t r u m f u e r
Gesellsschaftlichen Fortschritt, developed the Progress Index. It analyzes income, health,
education and environment, a so called ecologic footprint. It provides also a promising
statistical approach (Bergheim and Barth, 2012). These and many other initiatives cannot
drown out the fact that a universal, globally used and renowned index connecting level
production with quality of life is still not available.
End of Growth
The search can be speeded up by the economic crisis and cassandric voices that our global
economic system is now at the end of its known shape. Many of its current axioms, among
them steady and fast growth of production and ‘obvious’ rise of welfare, will be some of the
first victims of the process. Tyler Cowen, professor at George Mason University in Virginia,
prophesies that the world economy is moving towards a time of a ‘great stagnation’. The
close-to-recession statistical footprint of Japan in the 1990s, called the lost decade, should be
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perceived as ‘a new normality’ (Cowen, 2011).
What are the arguments for this scenario? Cowen says that there are no ‘low hanging fruits’
anymore. He means by this that the day of inexpensive access to resources is over. One can
also say that extreme increase of productivity following from migration of the labour force and
global competition is also close to exhaustion. The most important argument is, however, a
slower pace of innovation – a crucial point for explaining lower rates of productivity rise. It is
worth stressing that until the eighteenth century the average growth of the world economy
was very low (1–1.5 per cent annually), because real innovations were simply lacking. The
last 200 years of growth followed from an extreme, unprecedented wave of new techniques of
production: from steam engine and mass manufacturing to the internet. However, maybe
there are no new sources of revolutionary innovations and the old ones have reached their
limits. In this context, the scathing statement of the Nobel Prize winner in economics, Robert
Solow (known as the Solow's computer paradox) that ‘you can see the computer age
everywhere but in the productivity statistics’ (Gordon, 2004: 11), sounds like a warning.
The above arguments are of course speculations, and it is not difficult to find opposite,
optimistic views (see e.g. Brynjolfsson and McAfee, 2014). However, dreary visions contain
enough credibility to encourage ideas about a new concept of growth and development, and
thus new concepts of sustainability and stability. Dennis Meadows seems to be on their side
while saying that ‘sustainable development is a pointless word, like peaceful war’ (in an
interview for the German magazine Zeit, in 2012). Innovations and production growth should
be entirely subordinated to the balance account of the system, including resources, energy,
consumption biases, and debt. Such opinion is expressed also by Tim Jackson, British
economist, who criticized a ‘soft’ conciliation approach to growth represented by current green
parties. From his point of view switching to electric cars is just another bypass to save the old
habits. He thinks that the world must leave the traditional growth logic and search for
progress in quality of life, development of services, provision of local goods, shortened
working time, end of consumerism and higher public investment (Jackson, 2009).
Such a scenario sounds tempting, but is politically not possible. It could work in developed
economies, but would be fiercely rejected in developing, currently booming economies, whose
citizens dream about a similar level of material GDP measured affluence. This urge is difficult
to reconcile with radical development ideas. Proponents of the new approach mean, however,
that it is not a matter of ‘if’, but rather ‘when and how’ the human civilization moves to a new
concept of growth. It can move actively via reasonable consideration of facts and new policies
(maybe through amended growth), or reactively, adjusting to crisis and disasters caused by
despairing attempts to save the old, good world of exponential growth and quick advance of
material status.
Conclusion
It is not an exaggeration to say that the first part of the twenty-first century will be devoted to a
search for a new balance between old ambitions to grow quickly now and new fears of losing
chances for growth in the future. This is a revolutionary time for the human civilization,
comparable with the industrial revolution of the nineteenth century. We still do not have a
proper name for the process, and we aren't perhaps able to specify all features of the change.
But villagers who moved 200 years ago to emerging cities must have had a similar perception
process.
What can we assume now? Firstly, the issue of sustainability will expand to all fields of
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economic life and merge with stability. Short term policies will be evaluated under their long
term impact. Secondly, we are moving towards a new economic model. It will still be market
economy; there are few symptoms suggesting that totally new alternatives have any chances
to become viable. It will be based on the efficient markets approach, which means no
tolerance for asymmetries of information and power, and much better knowledge about their
behaviour in complex environments. The third element will be the pluralism of institutional
arrangements which can create unique competitive profiles of national economies and a more
stable global system. The fourth and the last element, is a corrected goal and measure of
development. The very focus on growth of production is not sustainable, although still
informing well about a state of economy. However, it will be supplemented with long term
development factors, like social coherence, energy coherence and environmental coherence.
It is a matter of time, then, when this integrated approach to growth and development
becomes reality.
Discussion Questions
1 Since we all agree that sustainability will be a major challenge in the future, it is still
unclear how to deal with it. Is the free market approach a better way to sustainability or
do we need more regulation and government interference in this area?
2 How is it possible to design global governance on access to recourses in order to avoid
a roll-over of negative externalities to poorer countries? Is it better to transfer power over
the issue to some exclusive groups like G20 or to invest in democratic approaches via
e.g. UN?
3 How to convince developing countries that it is a good idea to invest in ecological and
financial sustainability, even if it means a temporary slowdown in current GDP growth
rates?
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