A better way to gauge the economy

Going beyond our understanding of what motivates people and organisations within the market, there is growing attention to the metrics that guide the outcomes of that action. One of those metrics is the discount rate. Economist Nicholas Stein stirred a healthy controversy when he used an unusually low discount rate while calculating the future costs and benefits of climate change mitigation and adaptation; arguing that there is an ethical component to his use of the metric. For example, a common discount rate of 5 per cent leads to a conclusion that everything 20 years out and beyond is worthless. When gauging the response to climate change, is that an outcome that anyone – particularly anyone with children or grandchildren – would consider ethical?

Another metric is gross domestic product (GDP): the foremost economic indicator of national economic progress. It is a measure of all financial transactions for products and services. But one problem is that it does not acknowledge (nor value) a distinction between those transactions that add to the well-being of a country and those that diminish it. Any activity in which money changes hands will register as GDP growth. GDP treats the recovery from natural disasters as economic gain; GDP increases with polluting activities and, then again, with pollution cleanup; and it treats all depletion of natural capital as income, even when the depreciation of that capital asset can limit future growth.

A second problem with GDP is that it is not a metric dealing with true human well-being at all. Instead, it is based on the tacit assumption that the more money and wealth we have, the better off we are. But that’s been challenged by numerous studies.

As a result, former French president, Nicolas Sarkozy, created a commission, headed by Joseph Stieglitz and Amartya Sen (both Nobel laureates), to examine alternatives to GDP. Their report recommended a shift in economic emphasis: from simply the production of goods to a broader measure of overall well-being that would include measures for categories like health, education and security. It also called for greater focus on the societal effects of income inequality, new ways to measure the economic impact of sustainability and ways to include the value of wealth to be passed on to the next generation. Similarly, the king of Bhutan has developed a GDP alternative called gross national happiness, which is a composite of indicators that are much more directly related to human well-being than monetary measures.

The form of capitalism we have today has evolved over centuries to reflect growing needs, but also has been warped by private interests. Yuval Levin points out that some key moral features of Adam Smith’s political economy have been corrupted in more recent times, most notably by “a growing collusion between government and large corporations.” This issue has become most vivid after the financial crisis and the failed policies that both preceded and succeeded that watershed event. The answers, as Auden Schendler and Mark Trexier point out, are both “policy solutions” and “corporations to advocate for those solutions.”

We can never have a clean slate

How will we get to the solutions for climate change? Let’s face it. Installing efficient LED light bulbs, driving the latest Tesla electric car and recycling our waste are admirable and desirable activities. But they are not going to solve the climate problem, by reducing our collective emissions to a necessary level. To achieve that goal requires systemic change. To that end, some argue for creating a new system to replace capitalism. For example, Naomi Klein calls for “shredding the free-market ideology that has dominated the global economy for more than three decades.”

Klein is performing a valuable service with her call for extreme action. She, like Bill McKibben and his 350.org movement, is helping to make it possible for a conversation to take place over the magnitude of the challenge before us through what is called the “radical flank effect.”

All members and ideas of a social movement are viewed in contrast to others, and extreme positions can make other ideas and organisations seem more reasonable to movement opponents. For example, when Martin Luther King Jr first began his message, it was perceived as too radical for the majority of White America. But when Malcolm X entered the debate, he pulled the radical flank further out and made King’s message look more moderate by comparison. Capturing this sentiment, Russell Train, second administrator of the EPA, once quipped: “Thank God for (environmentalist) Dave Brower; he makes it so easy for the rest of us to be reasonable.”

But the nature of social change never allows us the clean slate that makes sweeping statements for radical change attractive. Every set of institutions by which society is structured evolved from some set of structures that preceded it. Stephen Jay Gould made this point quite powerfully in his essay – The creation of Myths of Cooperstown – where he pointed out that baseball was not invented by Abner Doubleday in Cooperstown, New York, in 1839. In fact, he pointed out: “No one invented baseball at any moment or in any spot.” It evolved from games that came before it. In a similar way, Adam Smith did not invent capitalism in 1776 with his book, The Wealth of Nations. He was writing about changes that he was observing and had been taking place for centuries in European economies; most notably the division of labour and the improvements in efficiency and quality of production that were the result.

In the same way, we cannot simply invent a new system to replace capitalism. Whatever form of commerce and interchange we adopt must evolve out of the form we have at the present. There is simply no other way.

But one particularly difficult challenge of climate change is that, unlike Adam Smith’s proverbial butcher, brewer or baker – who provide our dinner out of the clear alignment of their self-interest and our needs – climate change breaks the link between action and outcome in profound ways. A person or corporation cannot learn about climate change through direct experience. We cannot feel an increase in global mean temperature; we cannot see, smell or taste greenhouse gases; and we cannot link an individual weather anomaly with global climate shifts.

A real appreciation of the issue requires an understanding of large-scale systems through “big data” models. Moreover, both the knowledge of these models and an appreciation for how they work require deep scientific knowledge about complex dynamic systems and the ways in which feedback loops in the climate system, time delays, accumulations and nonlinearities operate within them. Therefore, the evolution of capitalism to address climate change must, in many ways, be based on trust, belief and faith in stakeholders outside the normal exchange of commerce. To get to the next iteration of this centuries-old institution, we must envision the market through all components that help to establish the rules, corporations, government, civil society, scientists, and others.

The evolving role of the corporation

At the end of the day, the solutions to climate change must come from the market and more specifically, from business. The market is the most powerful institution on earth, and business is the most powerful entity within it. Business makes the goods and services we rely upon: the clothes we wear, the food we eat, the forms of mobility we use, and the buildings we live and work in.

Businesses can transcend national boundaries and possess resources that exceed that of many countries. You can lament that fact, but it is a fact. If business does not lead the way towards solutions for a carbon-neutral world, there will be no solutions.

Capitalism can – indeed it must – evolve to address our current climate crisis. This cannot happen through either wiping clean the institutions that presently exist or relying on the benevolence of a laissez faire market. It will require thoughtful leaders creating a thoughtfully structured market.

For further details call on me for in-depth discussions, business advisory services and training.

•Lawrence Chukwuemeka Nwaodu is a small business expert and enterprise consultant, trained in the United Kingdom and the Netherlands, with an MBA in Entrepreneurship from The Management School, University of Liverpool, United Kingdom, and MSc in Finance and Financial Management Services from Rotterdam School of Management, Erasmus University Netherlands. Mr. Nwaodu is the Lead Consultant at IDEAS Exchange Consulting, Lagos. He can be reached via nwaodu.lawrence@hotmail.co.uk (07066375847).

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