Download Decoupling

Modern mainstream economics:
science or ideology?
Hungarian Academy of Science
27. November 2006
Prof.Kasim Tatić, Ph.D.
Institute for Advanced Studies on Science, Technology and Society Graz
School of Economics and Business Sarajevo
[email protected]
• Ideology is a shared belief system that may
serve at once to motivate and to justify.
• It generally asserts normative values and
includes causative beliefs. How do things
happen? What does it all mean?
• An ideology may be utopian and progressive
or protective of the status quo.
• It offers a way in which to order the world,
defining enemies and allies, dangers and
opportunities, us and them.
• Ideologies are formal, structured, and involve
their own particular logic, often appearing
• in the guise of science or
objective knowledge.
• Ideology is implicated in collective action, as
criticism, explanation, or promise.
• It is represented in symbols and beliefs held
by a community and is publicly expressed.
• Science in the broadest sense refers to any
system of knowledge attained by verifiable
means.
• In a more restricted sense, science refers to a
system of acquiring knowledge based on
empiricism and experimentation, as well as
to the organized body of knowledge humans
have gained by such research.
• Fields of science are commonly
classified along two major lines:
• Natural sciences, the study of the
natural phenomena;
• Social sciences, the systematic
study of human behavior and
societies.
• Neoliberalism - A political movement
beginning in the 1960s that blends
traditional liberal concerns with an
emphasis on free market and
continuous economic growth.
• It is against government regulation,
environmentalism and fair trade.
• Neoclassical economics, as the
Chicago School of thought is now
called, has become an international elite
consensus, one that provides the
foundation for the entire global political
economy.
• In the United States, young members of
the middle and upper-middle class first
learn its precepts in the academy.
• Polls routinely show that economists
and the general public have widely
divergent views on the economy, but
among the well-educated that gap is far
narrower.
• A 2001 study ... showed that those with
college degrees are more likely to
subscribe to the views of neoclassical
economists than the general public...
• Because neoclassical economics always
presents itself as a
value-neutral description of the world,
its ideological commitments can be
adopted by those who learn it without any
recognition that they are ideological.
This is the source of some very spirited
debate within the field itself.
• A growing global movement of
“heterodox” economists has criticized the
ideological confines and blindspots of the
neoclassical approach.
• As Nobel Laureate Joseph Stiglitz put it,
the dominance of the neoclassical model
is a “triumph of ideology over science.”
• When equity and efficiency tradeoffs ... arise,
mainstream economists are systematically
biased in favor of efficiency because that’s
what they are experts on.
• Efficiency they can measure and analyze.
• Fairness? That’s the turf of philosophers and
politicians.
• According to mainstream economists it
is notoriously difficult to measure
fairness; it is notoriously inefficient to try
and that is why the mainstream
economists efficiently pass it along to
those to whom the opportunity cost of
arguing is zero: the philosophers.
• "Efficiency' can really only apply to machines or machine-like
actions. That is, one can tinker with a machine to make it go
faster, (car engines), or do more maneuvers etc; That can be
measured.
• But markets are not machines, they're fictional or abstract
creations, (in the same sense money is), that allow
transactions between humans. Because they're fictional or
abstract, they can be created any number of ways.
• There are no "markets-in-themselves" to use a Kantian terminology.
• Markets can be created to reflect certain social/
philosophical/ religious values that can be
"measured" in a sense.
The present-day market reflects the values that
society now holds. Those values are, (as far as I
see), the accumulation of material wealth and the
expansion of means to create more wealth.
• They are not values that hold the needs of future
generations in view, nor the environment, nor the
spread of economic and social equality to as many as
possible.
• This tendency is most pronounced in discussions of
economic growth, and how the benefits of that growth
should be distributed.
• Nobel Laureate Bob Lucas, said that
“once you start to think about the benefits of high
growth, it’s hard to think about anything else.”
In other words, first worry about how best to grow the
pie, then how to slice it up. Let efficiency trump
equity, create wealth, and then you can use the extra
wealth you’ve created to alleviate inequality.
• This makes a certain amount of sense.
But when this rhetoric comes to
dominate our politics, the problem of
inequality is never addressed.
• NOW is always the time for growing,
LATER is always the time to address
concerns about equity. ...
• In 2003 the top 1 percent of households
owned 57.5 percent of corporate wealth,
up from 53.4 percent the year before,
according to a Congressional Budget
Office analysis of the latest income tax
data.
• The top group's share of corporate wealth
has grown by half since 1991, when it was
38.7 percent.
• From 2003 to 2004, the average incomes
of the bottom 99 percent of households
grew by less than 3 percent, after
adjusting for inflation.
• In contrast, the average incomes of the
top one percent of households
experienced a jump of almost 17 percent,
after adjusting for inflation. (Census data
show that real median income fell between
2003 and 2004.
• The problem is that mainstream
economics cannot offer a coherent
development concept except "let's
just go on and see what happens".
• “The whole mainstream economics
focuses on economic growth,
how fast we can make economies grow.
Economic growth does tend to raise all
boats."
• In the literal sense of causing sea levels to
rise, they may have a point.
• Existing model of economic growth represent an
inefficient use of human resources.
• The hidden model that lies at the heart of neoclassical economics as it exists in practice is
Social Darwinism, the belief that biology and
science support the existence of a particular
social order, the social order which, by happy
circumstance and the virtue of our history,
happens to be the one in place at this time.
Globalization
What is sustainable
development
What is the link between
the Bible
Friedrich Nietzche,
and
sustainable development ?
Some key features of sustainable
development
Can we have growth and
environmental sustainability?
• Yes - but it needs to be:
– Smart
– Appropriate
– Low carbon
– Efficient in resource use
Can we have growth and
environmental sustainability?
• Developed countries have managed to
increase resource efficiencies as
technology has improved
• But…consumption growth has
swamped these gains in efficiency of
units
• We need innovation in consumption and
distribution as well as in production
• globalization represents the process of
increasing convergence and
interdependence of national economies
and of the international scope and
availability of markets, distribution
systems, capital, labor, and technology.
• Globalization on all levels leads toward
continuous requests for increased
competitiveness.
• Our goal is to highlight the role and
significance of the environment and
natural resources in the process of
creation of competitive advantages in
a globaly connected world.
Competitiveness
• Competitiveness can be thought of as
the ability of a company (or industry, or
country) to constantly increase its
productivity in creating differntiated
goods that respond to market demand,
and to bring those goods to markets
efficiently, while at the same time
fostering an increasingly discriminating
customer base. (Porter)
EU Thematic Strategy on the
Sustainable Use of Resources
• Objective:
• “ensuring that the consumption of resources
and their associated impacts do not exceed
the carrying capacity of the environment and
breaking the linkages between economic
growth and resource use”
• (common position adopted by the council
27/9/2001)
Concerns
• growth of economies outweighs
resource productivity improvements
• waste generation is 1:1 coupled to
economic growth
• emissions of selected pollutants is
decreasing but aggregated pressures
continue to increase: territorial
degradation, urban sprawl, etc.
Concerns
• green house gas emissions from
transport and tourism continues to
increase
• biodiversity, tropical forests, fish
stocks, groundwater quality, urban
air quality, ozone layer integrity, etc.
are endangered
Energy data OECD
1998
TPS (1)
213 400
TPS/GDP (2) 10.9
TPS/capita (3) 196
2020
275 622
8.0
221
change
+30%
-19%
+18%
(1) Total primary energy supply in PJ
(2) TPS divided by GDP in GJ/100 US dollars
(3) GJ/capita
Energy units are measured in petajoules (PJ). One PJ equals (approximately) 278
million kWh of electricity; 25 million cubic metres of natural gas; 24 thousand tonnes
of oil equivalent; and 34 thousand tonnes of coal equivalent.
Decoupling
• The term decoupling refers to breaking the
link between “environmental bads” and
“economic goods.”
• Absolute decoupling is said to occur when the
environmentally relevant variable is stable or
decreasing while the economic driving force
is growing.
• Decoupling is said to be relative when the
growth rate of the environmentally relevant
variable is positive, but less than the growth
rate of the economic variable.
Decoupling
• Decoupling can be measured by decoupling
indicators that have an environmental pressure
variable for numerator and an economic variable as
denominator. Sometimes, the denominator or driving
force may be population growth or some other
variable.
• The evidence presented in the OECD Report
“Indicators to Measure Decoupling of Environmental
Pressure from Economic Growth” shows that relative
decoupling is widespread in OECD Member
countries.
Decoupling
• The concept of decoupling is
attractive for its simplicity. Graphs
displaying a rising GDP juxtaposed with
diminishing pollutant emissions, or
pollutant emissions rising faster than
GDP, convey a very clear message.
Decoupling
• However, graphs of synthetic decoupling
indicators often convey mixed, or double,
messages. In a growing economy, relative
decoupling will imply that environmental
pressures are still rising.
• Equally, if economic activity is falling, relative
or even absolute decoupling may not imply a
positive development for society as a whole.
Decoupling
• Decoupling concept has no automatic link to
the environment’s capacity to sustain, absorb
or resist pressures of various kinds
(deposition, discharges). In the case of
renewable natural resources, a meaningful
interpretation of the relationship of
environmental pressure to economic driving
forces will require information about the
intensity of use of the resource in question,
i.e. of harvesting rate compared to renewal
rate.
Increase in energy
consumption
• According to Joke Waller-Hunter, former Director of
the Environment Directorate of OECD, despite ecoefficiency improvements, overall environmental
degradation has persisted in most cases. OECD
countries reduced the energy intensity of their
economies by 31% in the period 1973-1996, but they
increased total energy consumption by 23% over
the same period. Their total energy use is expected
to grow by a further 30-50% to 2020. (Waller-Hunter
2000).
GHG emission
• The similar situation is with greenhouse gas
emissions. While the output of GHG
emissions relative to GDP has fallen for
OECD countries in recent years, total
absolute emissions have risen. Under current
policies, OECD countries could increase
GHG emissions by a further 30% to 2010, far
from the overall Kyoto Protocol target of a 5%
reduction from 1990 levels to 2008-2012.
Transport increase
• In some cases, there are no signs of
any real improvement. This is true of
transportation, where motor vehicle
kilometers traveled in the OECD are
expected to increase by at least 65% in
the period 1990-2020 and passenger air
kilometers are expected almost to
quadruple.
Increse in energy
consumption
• “Energy is a key resource for our economy. Overall
demand is predicted to grow substantially over the
coming decades, by 30% for the OECD countries and
by 70% for the world as a whole in the next 30 years.
For the EU, these increases are smaller than the
targeted doubling of the economy over the same
period; if efforts are maintained, the decoupling of
energy use from economic growth will continue.
However, energy consumption will still increase in
absolute terms (European Commission 2003,).
EU Directorate forecast
• An annual economic growth of 3% leads
to a doubling of the economy in 25
years . (An annual growth of 3% leads
to a cumulated growth in 25 years with
a factor of (1.03)25 = 2. Hundred years
of growth gives rise to a cumulated
growth of (1.03)100 = 20).
EU Directorate forecast
• If this growth is realized within the
production and consumption patterns of
today, including the use of currently
available technologies, the resource use
will grow with a factor 2 as well. In this
case there is a 1:1 coupling of economic
growth and resource use.
EU Directorate forecast
Fortunately, this scenario will not happen.
The economic growth is not simply realized
by doing more of the same. In the coming
decades a considerable amount of value will
be created, which material and energy
intensity is less than today’s products and
services. Reasons: The growing contribution
of services to the economy and The ongoing
improvement of technologies is another one.
EU Directorate forecast
• Nevertheless, the increase of energy and material
use will be considerable, e.g. the energy use in
OECD countries is expected to grow in the next 20
years by 35% and by 51% worldwide (OECD 2001).
This means that economic growth and resource use
are decoupled to some extent.
Rresource use is growing, but less steep than the
growth of the economy. This phenomenon is called
relative decoupling. Absolute decoupling would take
place if the growth of the resource use would be
negative” (European Commission 2002,)
Decoupling resource use from
economic growtth
• If the resource use increases it may be
assumed that various environmental
pressures, associated with resource use, also
grow. Environmental statistics show that this
is indeed the case, although the growth of
various environmentally relevant variables is
considerable less than the economic growth
and less than the growth of the resource use
as well. Thus the phenomenon of decoupling
is also visible if environmental pressures are
related to economic growth.
• For example, the growth rate of
emissions of sulphur dioxide is less than
the growth rate of GDP. However, since
many environmental pressures are still
increasing decoupling is only relative
for these emissions.
Decoupling environmental
pressure from economic growth
Decoupling of resource use and
environmental pressure from
economic growth
• In drafting this figure it is assumed that the
growth of the environmental pressure is less
than the
• growth of resource use, both in case of
relative decoupling and absolute decoupling.
• The reason is obvious: if the input of
resources per unit of GDP can be reduced,
the environmental pressure per unit of GDP
will also decrease.
•
• It may even be expected that the latter
decreases steeper than the first, since
using new environmental technologies
the environmental pressure per unit
of resource use may be reduced
considerably.
• The environmental problems that
caused the greatest concern in the past
were related to point- source pollution,
which could be tackled by a "cherrypicking" method: the easiest issues
were largely dealt with, leaving
behind the more difficult questions to
be faced in the future.
• Moreover, most problems were tackled by
good house keeping attitudes and using end
of pipe
• technologies. In order to make a next step,
inherently benign technologies have to be
developed and applied, which will require
institutional changes on international level
(such as getting the prices right). The present
situation may be visualized as follows:
Relating economic growth, resource productivity
and eco-efficiency
• The dashed (blue) line represents the
increase of resource productivity between
1800 and 2000.
• For example, advances in steam engine
technology since 1750 have reduced coal
consumption per unit of power 25 fold. This
improvement is by far not a linear process:
• between 1800 and 1900 the improvement
was approximately a factor of 10, leaving a
factor of 2.5 for the period between 1900 and
today.
• Finally the dotted (green) line
represents the eco-efficiency
improvement which is needed to
compensate the economic growth and
to achieve decoupling of economic
growth and environmental pressure.
• Decoupling thus requires an eco-efficiency
revolution, similar to the resource productivity
revolution in the 19th and 20th century. Thus:
• - mining and agriculture should exploit
ecological resources environmentally benign
and
• - emissions from industry and households
should be reduced or should become nondestructive for eco-systems (e.g.
biodegradable).
Efficiency
• Bringezu and Schutz argue that in order
to reduce global resource extraction by
half, “industrial countries should
increase the efficiency of overall primary
resource requirements of energy and
materials in the next 30 to 50 years by 4
to 10 times”.
Environmental Sustainability
Index (ESI)
• ESI measures overall progess toward
environmental sustainability for 142
countries.
• Environmental sustainability is
measured through 76 variables grouped
into 21 indicators:
Air Quality
Water Quantity
Water Quality
ESI
Biodiversity
Land
Reducing Air Pollution
Reducing Water Sress
Natural Resources Management
Reducing Ecosystem Stresses
Reducing Waste and Consumption Pressures
Reducing Population Growth
Basic Human Sustenance
ESI
– Reducing Environment-Related Natural Disaster
Vulnerability
– Environmental Health
– Science and Technology
– Environmental Governance
– Private Sector Responsivess
– Eco-Efficiency
– Participation in Internatinal Colaborative Efforts
– Greenhouse Gas Emissions
– Reducing Transboundary Pressures
ESI
• ESI tracks relative success for each
contry in five core compnents:
– Environmental Systems
– Reducing Environmental Stresses
– Reducing Human Vulnerability
– Social and Institutional Capacity
– Global Stewardship
ESI
Finland case
Decoupling: Development of Finland’s real GDP,
emissions, and use of materials and energy
Global competitiveness report
2004-2005
• The Report on Global Competitiveness has
ranked 103 countries according to the value of
two indexes:
• Economic Growth Competitiveness Index,
and
• Business Sector Competitiveness Index.
Global competitiveness report
2004-2005
• Economic Growth Competitiveness Index is
composed of the three component indexes;
technological index, public institutions index
and macroeconomic environment index.
• Detailed analysis of the content and the
structure of these component indexes shows
that neither of them takes into account the
element of the environment.
Global competitiveness report
2004-2005
• In the process of calculation of the
Business Sector Competitiveness two
basic segments were taken into account:
functioning and the strategy of
companies, and
the business environment in the
country.
Global competitiveness report
2004-2005
• Certain mistakes and shortcomings in
the methodology have occurred,
primarily due to the wish of the authors
to apply the same common
methodological framework to very
different countries.
Global competitiveness report
2004-2005
• As of natural resources, the orthodox
economic thought has been used which
treats the natural resources simply as a
given, or as a supposition which will in
one way or the other, somewhere and in
some form would always be available to
entrepreneurs, and their technology
used in the production processes.
Global competitiveness report
2004-2005
• The Report completely ignores
principles of sustainable development
which is primarily based on the
recognition and acceptance of the
long run.
• Professor Michael Porter, as the main author
of the methodlogical framework and the
theoretical background of the Report, based
his approach to competitivenes on the
premises of the neoclasical economy
underestimating the role of natural resources
and neglecting practically the concept and
ideas of environmentaly sustainable
development.
• In the mentioned components the
environment found its modest place in
the segment of demand conditions,
although,it is not quite clear why, in the
form of the expression „stringency of
environmental regulation“, it is placed in
that particular segment.
• Natural resources are even in the worse
position. Among the factors having influence
on the business competitiveness natural
resources were not even mentioned.
Porter treats them simply as an assumption,
as something that is out of the question and
always readily available.
• In the Report (p. 21) Porter said: „Companies
in a nation must upgrade their ways of
competition if successful economic
development is to occur. Broadly, companies
must shift from competing on inherent
endowments (comparative advantages such
as low-cost labor or natural resources) to
competing on competitive advantages arising
form efficient and distinctive products and
process“.
• And further (p. 23): “National endowments
such as natural resources play a declining
role in competitiveness as the resource
intensity of the economy fails and as
technology substitutes for resources of opens
up new resource locations. ... It is the
productivity with which natural resources can
be utilized, not the resources themselves, that
normally have the strongest influence on
prosperity.
• Finally, Porter concludes (p. 44): „Countries with
lower levels of productivity are more dependent on
natural resources export“.
• This way, Porter, clearly recognizes and admits the
role that natural resources have as a mean of
competitive battle on the world market.
• It is entirely different matter how we see them in
that role – as more or less valuable, as efficient or
inefficient, as desirable or less desirable.
• It is more than obvious, that natural
resources have been and still are,
for the large number of countries,
predominant mean
in the competitive battle
on the world market,
• and
dominant mean by which they realize their
economic growth,
but probably not economic development,
and surely not sustainable development,
envisaged as a complex goal realized
through a balanced development
simultaneously on the four fields: economic,
environmental, social and cultural.
• Aaccording to the Report (WEF 2004, p.
44) the countries that lead in the export
(measured in the absolute physical
amount not as a size relative to their
overall export) of minimally processed
natural resources are the most
developed countries: United States,
Canada, Russia, Australia and Norway.
• Developed countries, like Japan, who
is one of the most important
producers of steel despite the fact
that it does not possess its own
metal ore at all, enormously use
natural resources of other countries
and to a significant extent base their
competitiveness on them.
• Exaggerated usage of the common
environmental goods – USA currently
use 36 % of the atmosphere as a place
for disposal of CO2 ,and CFC.
• USA has not signed Kyoto agreement.
Explanation ?
Transnational corporations from the
most developed countries, in spite of the
most advanced technology in their
possession, constantly search locations
worldwide characterized by comparative
advantages in the form of cheap natural
resources and labor force.
• It is another proof supporting the statement
that not only low developed countries used
natural resources as a basis of their
competitiveness but also the most developed
countries.
• They use their higher productivity simply to
achieve larger production and easier
distribution of their products all over the
world.
• Hence, not to include natural resources
in any way as a factor in the process of
calculation of competitiveness index
(justifying their exclusion by the
statement that natural resources
represent the gift of God and not the
result of the conscious efforts), simply
does not have real justification.
• We think, that globalization, which
supports previously mentioned patterns
of behavior represents the best way to
practically
keep
alive
otherwise
unsustainable competitive advantages.
• It is even worse, they are constantly
recommended as a desirable model of
behavior.
• But the Index known as the
Ecological Footprint clearly and
unambiguously point to that fact and
stress the unsustainability of such a
practice of economic growth of
developed countries and the world
as a whole.
• If we combine, with proper weights,
ESI and GCI into our proposed new
synthetic index designated as
Sustainable Development
Competitiveness Index (SDCI),
we would get completelly different and
more realistic picture and ranking of
particular countries.
• Competitivenss is not the goal for
itself. It is supposed to lead to
economic development, which is
supposed by itself to leave to better
life and increased overall welfare of
the citizens of particular countries,
and not to the increase of only one
component – material consumption.
• If the idea of the sustainable
development is really accepted, and not
only formally, we are convinced that
only one such synthetic indicator as
Sustainable
Development
Competitiveness Indexs would be a
much better indicator of the long–run
success of a national economy.
Porter again
• Stating that technology replace natural
resources Porter evidently declare
himself as a technological optimist who
believes that technology alone can
resolve all the problems and insure
desirable continuous economic growth
at the high rates.
Relative decoupling –
recomended sollution
• In the Report relative decoupling has
been presented as a universal and
sufficient sollution to numerous
problems relating to environment and
natural resources overexploitation.
Need fr absolute decoupling
• On the contrary, our opinion is that absolute
decoupling is what is realy needed if the
mentioned problems are to be resolved in the
long run. The emphasis is on the long run.
Since absolute decoupling has been very
rearly accomplished, emphasis of
achievement of only relative decoupling is
counterproductive and even dangerous.
•
WHY?
BECAUSE:
Saying that the relative decoupling is
the final solution to environmental and
natural resources problems leeds to the
situtation in which incentives for further
efforts aiming at absolute decrease of
quatity of limited resources used do not
exist or are discouraged.
• Achievement of reduction of
environmental impacts requires an
absolute decoupling of environmental
impacts from economic growth.
• Relative decoupling tends to mean just
resource efficiency, and resource
efficiency measures alone will not
deliver the objective of ensuring that
“the consumption of renewable and
non-renewable resources does not
exceed the carrying capacity of the
environment.”
• Relative decoupling would not lead to
reductions in environmental impacts,
merely a slowing down of the increase
in environmental impacts.
• To achieve absolute decoupling
between environmental impacts and
economic growth, an overall reduction
in resource use will be required, and ...
... significant changes are requested in
the field of consumption and
distribution of income, not only in the
field of extraction and manufacturing.
Action, action, action ....
Changes, changes, changes .....