economic growth: a paradigm, an ideology, a system
TRANSCRIPT
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Economic Growth: a paradigm, an ideology, a
system
Submitted in Partial Fulfillment of the Requirements for
PACS 301-01: Promoting Peace in Perilous Times
Course Instructor: Lowell Ewert and Mary Lou Klassen
Caleb Gingrich
Faculty of Engineering
Department of Systems Design Engineering
January 3, 2012
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Contents
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1 Paradigm of Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 Growth as Saviour: A False Ideology . . . . . . . . . . . . . . . . . . . . . . 7
3 Understanding Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A modified system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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Acknowledgements
I am familiar with uWaterloo Academic Policy on academic ethics and affirm that this paper
does not violate any of its provisions.
I would like to thank the following people for their assistance in writing this paper. They
all provided useful resources and directed me in helpful directions.
Luann Good Gingrich
Lowell Ewert
Paul Fieguth
Mark Vander Vennen
Judy Paul
Ernie Lightman
Rebecca Bartel
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Executive Summary
In the modern world, economic practises impact every aspect of life. It is crucial to un-
derstand these practises, and the paradigms and ideologies that drive the economic system.
When facing issues of international peace, it is impossible to create effective change without
understanding the economics driving behaviour of individuals, companies and countries.
The reigning economic paradigm is that of continuous, infinite growth. However, this
is doomed to fail, as the planet sustaining this economy is finite - the physical space, the
resources available, and the energy flows are all finite. There are several indications that
human civilization is reaching the limits of the planet: peak oil and peak phosphorus, re-
sources that power our economy and our food production, are at the highest possible level
of production, as will soon begin to decrease.
Economic growth as an ideology is trumpeted as a the solution to most socio-economic
and environmental problems. It is important to realize that the positive correlation of
happiness and economic income only holds up to US$10,000 per capita income. Techno-
logical advancements driven by economic growth decouple economic growth from negative
environmental impacts, but while environmental impacts per dollar are decreasing (relative
decoupling), the total environmental impact is not (absolute decoupling). The limits of GDP
as an economic measure are also embedded in this ideology. When increasing the GDP is
the goal, any expenditure is a positive action, and issues of equality are not considered.
Human understanding of the economic system is founded on several key assumptions:
rationality of actors, perfect information, and perfect mobility. The assumptions are clearly
false, and there impacts are not understood. To create an economic system that truly
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respects the planet and its people, a new paradigm and measurement system is needed.
The Genuine Wealth Assessment model presented in The Economics of Happiness by Mark
Anielski provides a model based on more holistic definitions of wealth and capital. The
GWA method allows the values of the community to be embedded in the economic analysis
of the community. Anielskis work is expanded by suggesting the creation of a Centre for
Genuine Wealth Assessment in a community. This Centre would work with the citizens of
the community to conduction the background work necessary to complete a GWA, define the
indicators and benchmarks to be used by economic actors in the community (government
and companies), and collect the data necessary to complete GWA as well as other holistic
Return on Investment analyses quickly. The Centre would expedite the shift of the economy
to a fruit-bearing economy, allowing companies to easily adopt a holistic accounting system.
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The current economic paradigm relies on three key concepts: debt, efficiency, and growth.
Debt is the fuel that makes the current economy turn. Ninety percent of the worlds money
is created as debt given by large banks.1 Increased consumption in the West has been fuelled
by debt, not increases in income. The UK has experienced huge economic growth in the
last decade, but personal debt has more than doubled, now exceeding the countys GPD. 2
Efficiency has been raised up as the ultimate goal of our economy. The prime consideration
of any purchase, any policy, any activity is the return on investment. Ultimately, this is an
efficiency consideration: how efficiently does this activity turn invested money into profit.
The growth concept says that as long as there is economic growth, the participants of the
economy will experience an increase in their income, and therefore their well-being. Consider
the growth paradigm in more detail.
1 Paradigm of Growth
Welcome to planet Earth. Standing on the surface, it captures the senses. The scales are
staggering. With a mass of 5.97 1024 kg2, a surface area of 5.10 1012 km2, and a volume
of 1.08 1012 km3, it is incomprehensibly huge.3 Of this volume, only 2% supports life: this
44 km thick, 22.2 109 km3 layer is known as the biosphere.4 This thin layer supports a
1Mark Anielski. The Economics of Happiness: Building Genuine Wealth. New Society Publishers, 2007.2Tim Jackson. Prosperity Withouth Growth? The transition to a sustainable economy. Tech. rep. Sustain-
able Development Commission, 2009. url: http://www.sd-commission.org.uk/publications.php?id=914, p. 24.
3Wikipedia. Earth. url: http://en.wikipedia.org/wiki/Earth#Chemical_composition.4These numbers were calculated assuming both the Earth and the biosphere are perfect spheres, which
they are not exactly. The boundaries of the biosphere were taken to be 3 km into the crust, and 41 km abovethe surface. These represent the extremes of where microorganisms have been found.(Ecology: a Canadian context. Toronto: Nelson Education, 2011. isbn: 9780176501143)
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http://www.sd-commission.org.uk/publications.php?id=914http://www.sd-commission.org.uk/publications.php?id=914http://www.sd-commission.org.uk/publications.php?id=914http://en.wikipedia.org/wiki/Earth#Chemical_compositionhttp://en.wikipedia.org/wiki/Earth#Chemical_compositionhttp://en.wikipedia.org/wiki/Earth#Chemical_compositionhttp://www.sd-commission.org.uk/publications.php?id=914http://www.sd-commission.org.uk/publications.php?id=914 -
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huge amount of life: 7 billion humans,5 and over 1.4 million animal species.6 The engines of
life operate on a similar scale. In one year, planetary systems move 1.07 1015 kg of water7,
458 103 kg of carbon, and 605 103 kg of nitrogen.8 The sun delivers energy to the earth
and its atmosphere at a rate of 1.7 1017 W, while a world population of 10 billion would
require around 1 1011 W of energy.9
While these numbers are staggering, they are not important in and of themselves. They
are important because they exist, and they are finite. They impose a hard upper limit on
the space (volume), the land, the water, the materials (carbon), the nutrients and the energy
available to support life on this earth. The limitations are actually much lower, the resources
are not all available, and are not uniformly distributed. These limits are difficult to overcome
on a local scale, and nearly impossible to circumvent globally.10
Human civilization is quickly reaching the limits of its finite planet. The increasing
scarcity of food and water, as well as the competition for land between the agriculture
and energy sectors, is possibly the first sign. Another is the impending Peak Oil crisis.5Oct 31, 2011 was declared as the Day of 7 Billion by the United Nations
Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat.World Population Prospects, the 2008 Revision Frequently Asked Questions. url: http://esa.un.org/unpd/wpp/Other-Information/faq.htm.
6Ecology: a Canadian context, op. cit.7Summed water budgets shown on pg 92, Figure 5.1 (Fred T Mackenzie. Our changing planet. Vol. 4.
Prentice Hall, 2011). Converted to kilogram using the density of water at 20C, given as 998.2 kgm3 (RogerWalker. Table of Density of Pure & Tap Water and Specific Gravity. url: http://www.simetric.co.uk/si_water.htm).
8Ecology: a Canadian context, op. cit.9The technical problems and economic limitations of solar energy are hidden in these numbers. While
solar energy is a potent source of energy, it will never completely power our civilization, as it is only suitablefor certain applications.Frank Kreith and Jan F. Kreider. Principles of Solar Engineering. Hemishpere Publishing Corporation, 1978,p. 14.
10Nuclear power allows humans to circumvent the energy limit. However, current technologies are boundby their dependance on plutonium and uranium as a fuel, again presenting a hard limit to available energy.Fusion presents the possibility of overcoming this limit and would make the available energy virtually limitlessrelative to current usage, but is not technologically possible at this time.
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Humanity has consumed around half of the oil reserves available to us. However, the rate
of production will begin to decrease - a reality incompatible with the current paradigm of
growth. It has been predicated that with careful planning, the economy could withstand
a decrease in oil production of 2-5% per year, but a rate of 10% would be catastrophic.
Materials are experiencing a similar trend. Phosphorus is a key ingredient in fertilizer, and
is obtained by mining phosphate rock. Studies indicate that peak phosphorus was reached
worldwide in 1989 - bad news for a population continuing to grow.11 While the current
information and communication technologies are generally viewed as infinite, the hardware
they rely on is not. It is dependant on rare elements such as antimony, chromium, gold,
tantalum, tin, and copper. Production for all of these resources has peaked in the last 50
years.12 It is clear that the economy will be forced to stop growing imminently13.
2 Growth as Saviour: A False Ideology
Even if continued economic growth was possible, it is not necessarily desirable. A strong,
growing economy is generally viewed as the answer to almost all socio-economic and en-
vironmental problems. How else can humanity afford to address environmental damage,
poverty, debt, unemployment. However, investigation into the economic reality of this ide-
ology demonstrates this premise to be false.
The most fundamental idea to challenge is that increasing monetary income is the same as
11Richard Heinberg. The End of Growth: Adapting to our new economic reality. New Society Publishers,2011, Chapter 3.
12Ibid., Chapter 3.13The peak in material production is not as concerning as the peak in oil, because it is possible to recycle
and reuse all of these materials. However, current recycling practices are small, as many devices do not allowfor easy recycling. Even with perfect recoiling, infinite grow is still impossible, because the supply is finite.
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increasing well-being. It has been demonstrated that monetary income and happiness have
a strong positive correlation up to a point. It is astonishing to realize that this threshold
occurs, across nations, at US$10,000 per capita income; pushing a countrys income above
this level has almost no impact on well-being.14 This figure has important implications for the
lifestyles of the worlds wealthiest countries. According to the economist Andrew Oswald, the
more money a person has, the more it takes to increase their happiness the same amount.15
Increases of income may even reduce happiness: between 1957 and 2002, average incomes in
the US have more than doubled, while 5% fewer citizens rate their lives very happy, divorce
rates have doubled, teen suicide has tripled, violent crime has quadrupled, and depression
has become pandemic.16
Secondly, proponents of economic growth claim that with a strong economy, technology
will improve efficiencies to such an extent that the environmental concerns are removed.
At most, small tweaks are suggested, often new government spending programs. Consider
two illustrative examples: the Green Energy Act in Ontario, and the spending policy of the
United States.
The Ontario Green Energy Act, introduced in 2009, encourages the installation of renew-
able electricity generation through tariffs paid to the producer for all electricity fed to the
grid.17 This bill has met opposition due to the cost of the feed in tariff program, and some
poor execution.18 Yet even this controversial move has not had a significant impact. Ontario
14Ed Diener and Martin E.P. Seligman. Beyond Money: Towards an Economy of Well-Being. In: Psy-cological Science in the Public Interest 5.1 (2004), p. 31. url: http://www.brookings.edu/Comm/events/20040603b.pdf.
15Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit., p. 223.16David Myers. The Secret of Happiness. In: YES! Magazine (2004). url: yesmagazine.org/article.
asp?id=866.17Wikipedia. Green Energy Act 2009. url: http://en.wikipedia.org/wiki/Green_Energy_Act_2009.18John Laforet. Ontarios Ballot Box Question: Future of the Green Energy Act. In: The Huffington
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http://www.brookings.edu/Comm/events/20040603b.pdfhttp://www.brookings.edu/Comm/events/20040603b.pdfhttp://yesmagazine.org/article.asp?id=866http://yesmagazine.org/article.asp?id=866http://yesmagazine.org/article.asp?id=866http://en.wikipedia.org/wiki/Green_Energy_Act_2009http://en.wikipedia.org/wiki/Green_Energy_Act_2009http://en.wikipedia.org/wiki/Green_Energy_Act_2009http://yesmagazine.org/article.asp?id=866http://yesmagazine.org/article.asp?id=866http://www.brookings.edu/Comm/events/20040603b.pdfhttp://www.brookings.edu/Comm/events/20040603b.pdf -
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Power Generation is capable of generating 22 790 MW.19 While total capacity of the 10 000
proposed projects totals 20 913 MW, only 30 MW of contracts are actually in commercial op-
eration20. The program has been moving fairly slowly. However, projects totalling 4390 MW
of capacity have been approved by the OPG.21
Transportation is the largest single energy use in the US, consuming 28% of all energy
used, exceeding industrial, commercial and residential uses.22 The federal cost of maintain-
ing the American highway system is $50 1010 a year.23 The American bailout of the US
financial system was original priced at $7 1011,24 but it has since exceeded this amount.
The combined total cost of the wars in Afghanistan, Iraq and Pakistan will likely total
$4 1012.25 With these figures in mind, consider the fact that it would cost $6 1011 to
connect every US city with an electrified rail system.26 This system would be able to replace
85% of the current intercity transportation while using only 5% of the energy currently used
Post (2011). url: http://www.huffingtonpost.ca/john-laforet/ontario-election-green-energy_b_973630.html.
19Ontario Power Generation. Counting the Megawatts. url: http://www.opg.com/education/whatwedo/.20
This only includes proposals to the FIT program. The numbers for the microFIT program are signifi-cantly smaller, and less clear
21November 25, 2011 Bi-weekly FIT and microFIT Report. Tech. rep. Ontario Power Authority, 2011.url: http://microfit.powerauthority.on.ca/sites/default/files/Bi-Weekly%20FIT%20and%20microFIT%20Report%20November%2025%2C%202011_1.pdf.
22A.J. Simon and R.D. Belles. Estimated State-Level Energy Flows in 2008. Tech. rep. Lawrence LivermoreNational Lab, 2011. url: https://flowcharts.llnl.gov/.
23Alan S Drake. A Citizens Guide to an Oil Free Economy. Association for the Study of Peak Oil &Gas, 2010. Chap. Electrified and Improved Railroads. url: http://www.aspousa.org/index.php/2010/10/a-citizens-guide-to-an-oil-free-economy-chapt-1/ .
24Wikipedia. Emergency Economic Stabilization Act of 2008. url: http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008.
25This number is significantly larger than the Department of Defences direct spending on Iraq ($757.8
billion), as it includes the interest costs of financing the war and the cost of paying for veterans care intothe future.L. J. Bilmes et al. Cost of War. Watson Institute for Internation Studties, 2011. url: http://costsofwar.org/article/economic-cost-summary
Wikipedia. Financial cost of the Iraq War. url: http://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War#cite_note-0.
26Heinberg, The End of Growth: Adapting to our new economic reality, op. cit., Chapter 4, Wont Innova-tion, Substitution, and Efficiency Keep Us Growing?
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http://www.huffingtonpost.ca/john-laforet/ontario-election-green-energy_b_973630.htmlhttp://www.huffingtonpost.ca/john-laforet/ontario-election-green-energy_b_973630.htmlhttp://www.huffingtonpost.ca/john-laforet/ontario-election-green-energy_b_973630.htmlhttp://www.opg.com/education/whatwedo/http://www.opg.com/education/whatwedo/http://microfit.powerauthority.on.ca/sites/default/files/Bi-Weekly%20FIT%20and%20microFIT%20Report%20November%2025%2C%202011_1.pdfhttp://microfit.powerauthority.on.ca/sites/default/files/Bi-Weekly%20FIT%20and%20microFIT%20Report%20November%2025%2C%202011_1.pdfhttp://microfit.powerauthority.on.ca/sites/default/files/Bi-Weekly%20FIT%20and%20microFIT%20Report%20November%2025%2C%202011_1.pdfhttps://flowcharts.llnl.gov/https://flowcharts.llnl.gov/http://www.aspousa.org/index.php/2010/10/a-citizens-guide-to-an-oil-free-economy-chapt-1/http://www.aspousa.org/index.php/2010/10/a-citizens-guide-to-an-oil-free-economy-chapt-1/http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008http://costsofwar.org/article/economic-cost-summaryhttp://costsofwar.org/article/economic-cost-summaryhttp://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War#cite_note-0http://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War#cite_note-0http://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War#cite_note-0http://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War#cite_note-0http://costsofwar.org/article/economic-cost-summaryhttp://costsofwar.org/article/economic-cost-summaryhttp://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008http://www.aspousa.org/index.php/2010/10/a-citizens-guide-to-an-oil-free-economy-chapt-1/http://www.aspousa.org/index.php/2010/10/a-citizens-guide-to-an-oil-free-economy-chapt-1/https://flowcharts.llnl.gov/http://microfit.powerauthority.on.ca/sites/default/files/Bi-Weekly%20FIT%20and%20microFIT%20Report%20November%2025%2C%202011_1.pdfhttp://microfit.powerauthority.on.ca/sites/default/files/Bi-Weekly%20FIT%20and%20microFIT%20Report%20November%2025%2C%202011_1.pdfhttp://www.opg.com/education/whatwedo/http://www.huffingtonpost.ca/john-laforet/ontario-election-green-energy_b_973630.htmlhttp://www.huffingtonpost.ca/john-laforet/ontario-election-green-energy_b_973630.html -
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for that transportation, and would only require 6 years to implement.27 The impact this sort
of project would have is huge, considering both the environmental benefits, and the value of
domestic investment.
Neither of these proposals address the core need for economic growth. They simply en-
courage decoupling economic production from resource inputs and environmental damage.
By increasing the efficiency of transportation, the proposed American electrified rail sys-
tem reduces the energy input required to generate economic output. The Ontario Green
Energy Act works to replace fossil fuel based energy with renewable energy, reducing the
environmental damage of economic activity. These efforts are the conventional response to
the increasing threats of unlimited growth, and even they can be seen as radical and fatal
to the economy. But they dont address the core issues.
It is crucial to differentiate between relative and absolute decoupling.28 Relative decou-
pling is a decrease in the ecological intensity per unit economic output. The examples given
above all promote relative decoupling. Net impacts can still increase, however, even as rela-
tive decoupling occurs. Absolute decoupling occurs when the resource or ecological intensity
declines in absolute terms.
Relative decoupling is fairly easy to achieve under the current paradigm, because it is
profitable to seek efficiency increases: indeed, the modern economy excels at finding effi-
ciencies.29 Since 1970, the global energy intensity decreased 33%, and resource and carbon
27The energy savings here seem to be optimistic, but I did not read the analysis. The increased efficiency isdue to the lower friction of steel on steel than rubber on concrete, the efficiencies of electric motors comparedto diesel engines, and the possibilities for regenerative braking.Drake, A Citizens Guide to an Oil Free Economy, op. cit.
28Jackson, Prosperity Withouth Growth? The transition to a sustainable economy, op. cit.29B. McKibben. Deep Economy: The Wealth of Communities and the Durable Future. In: Henry Holt &
Company, 2008. Chap. 1. isbn: 9780805087222. url: http://books.google.ca/books?id=Y6PDf8w2A\_0C.
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intensity show similar trends.30 In the Middle East, energy intensity has doubled between
1980 and 2006, but in India it has been decreasing slowly. China experienced a 70% drop in
CO2 intensity between 1980 and 2000, but it has begun to increase again in the last decade.
Both India and China currently have CO2 intensities more than twice the world average.31
The statistics above demonstrate relative decoupling for some resources. Absolute de-
coupling, on the other hand, is clearly not occurring. Even with the declining energy and
carbon intensities, CO2 emissions have been increasing by more than 3% per year.32 World-
wide trends in primary metal extracting show not only a sharp and accelerating increase, but
also show an increase in relative intensity.33 Clearly absolute decoupling is not occurring.
Roughly, absolute decoupling occurs when the sum of the population growth rate and
the per capita affluence growth rate is less than the rate of relative decoupling.34 To ensure
absolute decoupling, the population and affluence growth rates must be controlled, as the
rate of relative decoupling is hard to predict. Past efforts to control population growth and
affluence growth have not been well received.
A key barrier to achieving absolute decoupling is that natural resources and services
are considered external to the economic system. An externality occurs when the economics
activities of one party causes a change in welfare for another party, but no compensation oc-
curs.35 It is now understood that the externalities of nature, calledecosystem services, have
30Jackson, Prosperity Withouth Growth? The transition to a sustainable economy, op. cit.31Ibid.32Ibid.33See Figure 16, page 54
ibid.34This grows out of the Ehrlich equation, explained in Box 3
ibid., p. 54.35Herman E. Daly and Joshua C. Farley. Ecological Economics : Principles and Applications. Island Press,
2004. isbn: 9781559633123. url: http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=118237&site=ehost-live&scope=site.
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huge economic value.36 These services include pollination, decomposition of waste, regula-
tion of our atmosphere composition (production of oxygen, ozone layer, removal of sulphur
oxides), water supply and regulation, recreation and cultural aspects.37 Astonishingly, the
value of these services has been found to be US$33 trillion per year. This is far larger than
all human economic activities combined.38 No truly accurate economic system could ignore
these services.
The most common criticism of the current economic paradigm is the use of Gross Do-
mestic Product (GDP) to measure economic health. It is well known that a massive oil spill
is good for the economy because of the significant costs of cleaning it up. The GDP simply
reports the monetary value of all goods and services both bought and sold in a given econ-
omy.39 When the GDP is used to report growth, and any economic growth is viewed as an
increase in well-being, the underlying assumption is that all expenditures, regardless of their
impacts, is an increase in well-being. Anielski presents a thorough discussion of the prob-
lems with GDP.40
In summary, the GDP includes all expediters as a positive contribution,
minimizes the benefits of other expenditures like education, ignores crucial activities that
do not generate wealth such as parenting, volunteering and all ecological services, considers
depleting natural resources as a current income rather than asset liquidation, and does not
consider the distribution of growth or the social costs of inequality and poverty.
Perhaps the largest issue with the GDP, at least from a human rights standpoint, is that
is does not capture the wealth or income distributions in a country. Reganomics says that
36McKibben, Deep Economy: The Wealth of Communities and the Durable Future, op. cit.37Robert Costanza et al. The value of the worlds ecosystem services and natural capital. In: Nature
387.6630 (May 1997), pp. 253260. url: http://dx.doi.org/10.1038/387253a0.38McKibben, Deep Economy: The Wealth of Communities and the Durable Future, op. cit.39Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit.40Ibid., Chapter 3: Whats wrong with the picture of progress.
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growth of an economy will benefit all members of the economy - by trickling down from
the rich to the poor. There are many issues with this theory, both ethical and systematic.
For instance, how does one control the huge multinational corporations that result from
encouraging massive growth of the people with the greatest resources to achieve this. But
most importantly, the trick down theory has been proven to be false. The wealth does not
trickle down. Even as Indias GDP grew significantly in the last decade, the incomes of
the poorest 50% of the country have stagnated or declined! There is huge irony in the fact
economic models predict the best way to create growth quickly is to redistribute wealth
evenly.
The main solution put forward in the literature is replacing the GDP as the measure of
economic activity. Many have tried: the British have been working on developing an index
of well-being; Statistics Canada is trying to measure education, environmental quality and
community vitality; and the Australians have developed an inclusive wealth framework.41
Cliff Cobb developed the Genuine Progress Indicator, a measure that begins with the GDP,
and adjusts for several shortcomings Cobb identified.42 Other indicators abound: Ecological
Footprint, Full Cost Accounting, Global Peace Index, Green Gross Domestic Product, Happy
Planet Index, Human Development Index, Index of Sustainable Economic Welfare, Living
Planet Index, Quality-of-life Index,43 Index for Social Health, and World Wildlife Funds
Living Planet Index.44 Note that some of these indicators are intended to provide a single
measure to evaluate the state of all economic activities, while others simply seek to measure
41McKibben, Deep Economy: The Wealth of Communities and the Durable Future, op. cit.42Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit., p. 30.43Absolute Astronomy. Genuine Progress Indicator. url: http://www.absoluteastronomy.com/topics/
Genuine_Progress_Indicator.44Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit., p. 40.
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other factors not included in the GDP in order allow their use in decision making.
3 Understanding Systems
The GDP constitutes a crude mathematical model of the economic system, for the purposes
of measuring economic health. When modelling a system mathematically, simplifications
are always made. Mathematics provide a formal way of abstracting the real world into a
form that is convenient. These simplifications are called assumptions, and are made because
they significantly reduce the complexity of the model. For example, when modelling the
movement of a simple box sliding down a ramp in physics, several assumptions are made.
The body is assumed to be rigid (does not change shape or deform) with all of its mass at
one point. The forces involved are assumed to be point forces all acting on the boxs centre
of gravity (forces at only at a point, instead of being distributed over a surface). Finally,
a frictionless environment is assumed. All of these assumptions make the system much
easier to model - a high school student can model this system, where if these assumptions
are removed, a mechanical engineering graduate would be required to handle the math and
complex physics.
Similar simplifications or assumptions are made when modelling the current economic
system. The current understanding of the economic system relies completely on these as-
sumptions. They are rationality, perfect information, and perfect mobility.45 Rationality is
the assumption that all economic decision makers act rationally in all decisions. This be-
haviour is called utility maximization, and is the process of determining the action that
45Ernie Lightman. Social Policy in Canada. Toronto: Oxford University Press, 2003.
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will provide the decision maker with the greatest happiness, or security, or self-satisfaction,
depending on the goal of the decision maker.46 Perfect information is the assumption that the
decision maker has all the information they need to determine what actions will maximize
their utility: they know all alternatives, the true cost of each alternative, and the true out-
come of each alternative, without any uncertainty. Perfect mobility is the assumption that
the decision maker can access all options on the market. Together, these assumptions ensure
that a market-economy will provide everyone with exactly what they need, at the lowest
possible cost.47 Consider an illustrative example. When Margaret Thatcher was Prime Min-
ister of Britain, she would read all the newspapers looking for the best sale on toilet paper,
drive to the store with the best price, purchase several hundred rolls and store them in her
basement.48 While this seems logical, not everyone could behave that way. This behaviour
is enabled by Thatchers ability to purchase all the newspapers (perfect information), the
time to analyze the information and make a decision (rationality), and the ability to drive
anywhere in the city and store huge volumes of toilet paper (perfect mobility).
The problem with the assumptions of the economic system is that their effects on the
system are not known. In the physics example, it is well understood that ignoring friction
will mean the model predicts a higher speed than will be achieved in actuality. It is much
easier to use experiential judgement to adjust for this effect than to model friction, which
is extremely difficult to describe mathematically. Through experimentation, it is known
that the other assumptions have little effect in the situation of a box sliding down a ramp,
and it is known when these assumptions cannot be safely made (modelling a building or
46McKibben, Deep Economy: The Wealth of Communities and the Durable Future, op. cit. , p. 30.47Lightman, Social Policy in Canada, op. cit.48Ibid.
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a bridge). The impacts of assuming rationality, perfect information, and perfect mobility
are not understood completely. More concerning, it appears that these assumptions are so
engrained in economic practise, that they are not even accounted for or discussed.49
A modified system
In The Economics of Happiness, Mark Anielski presents a new economic paradigm.50 The
paradigm begins by examining our definition of wealth. The word wealth has roots in the
Old English words weal (well-being) and th (condition).51 In Greek, euporeo is the word for
wealth, and comes from the roots eu (well) and poros (a passage).52 So wealth is the means
to achieving, or the state of well-being.
By redefining wealth, definition of capital is also radically changed. Capital is the wealth
available for the production of more wealth that is owned or used by an economic individual.53
Anielski, in the tradition of ecological economics, defines five kinds of capital, which better
capture all aspects of an economy:
1. Human capital
2. Natural capital
3. Social capital
4. Built capital
5. Financial capital
49Ibid.50Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit.51Ibid., p. 16.52Ibid., p. 16.53Ibid., p. 26.
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Human capital is the defined by considering all that is of value in a human: minds, bodies,
spirits, souls, dreams, visions, knowledge, skills, competencies, capabilities.54 Any loss in
health, be it mental, physical, emotional or spiritual, is a loss in human capital. Social
capital captures the value of relationships. It is trust, collaboration, shared responsibility,
reciprocity and belonging.55 Natural capital is all of the natural world. It can be considered
the ecosystem services discussed earlier. Some natural capital can be regenerated, like forests
and air quality, while others, like oil and mineral resources, are finite. Manufacturing and
industry converts natural and human capital into built capital. This consists of equipment,
buildings, tools, factories and all physical infrastructure, be it private or public.56 Intellectual
property is also considered built capital. Finally, financial capital is anything captured by
monetary terms, such as cash, savings, and investments. Financial capital also includes debt
and other financial liabilities.57
These different forms of capital come from a deep understanding of the human and natural
world in which all economies operate. They can be viewed as different levels of a process, all
working towards well-being, when a distinction is made between means and ends.58 Means
are the inputs to the system, the foundations that make everything possible. Ends are the
outputs of the system, the goals to be achieved through use of the ends. Economists Herman
Daly and Josh Farley proposed the continuum shown in Figure 3 after building on the work
of Max-Neef and Maslow who identified different categories of human needs and wants59.60
54Ibid., p. 74.55Ibid., p. 74.56Ibid., p. 76.57Ibid., p. 76.58Ibid., p. 69.59Ibid., p. 69.60Figure 5.3
ibid., p. 73.
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Figure 1: The Capital Continuum, working from Means to Ends
Using these five capitals, a holistic accounting system, called Genuine Wealth Accounting,
can be envisioned. From a personal perspective, education is no longer simply a huge expense
necessary to acquire a career. Instead, it is an expenditure of financial capital that increases
personal human capital in the form of knowledge, skills and competencies. Moreover, it allows
a fuller understanding of the university experience, because the values of lifelong friendships
and professional networks can be captured in social capital. This system of accounting then
provides a much more accurate picture of economic activities, and the impact they have
on what is valued at a personal, household, community, workplace, municipal, national or
international level.61
A key consideration of this process is the values, principles and virtues of the individual
the accounting process is serving. Values are the components that make life worthwhile,
define happiness, and meet the desires of the individual.62 Principles are the guidelines, as-
sumptions, laws and beliefs that guide the actions of the individual.63 Virtues are the quali-
ties that are viewed as morally good and admirable.64 The process of completing a Genuine
Wealth Accounting is much different than a normal accounting process. It requires processes
61Ibid., p. 77.62Ibid., p. 67.63Ibid., p. 67.64Ibid., p. 67.
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Figure 2: The Genuine Wealth Accounting Process
of holistic stock taking and introspection, identifying appropriate statistical measures, and
visioning and implementation.65 Consider the complete cycle shown in Figure 366.
When applied to a business, the GWA model is very similar to concepts of balanced score-
card, triple-bottom-line, and Global Reporting Initiatives.67
However, there are significant
and important differences. Firstly, the GWA process has broken free of the scientific ideology
than only objective measures matter. When measuring the well-being of a community, for
instance, both the true crime rate and the citizens perception of safety in the community
matter.68 Secondly, currency units are not used to quantify all forms of capital. Rather,
after taking stock and identifying values (A and B in Figure 3), appropriate indicators are
65Ibid., pp. 79-88.66Figure 5.5
ibid., p. 79This figure was constructed specifically for communities. However, if the word community is replaced by theappropriate economic individual, it applies equally as well.
67Ibid., p. 147.68Ibid., p. 77.
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selected. A benchmark is then selected for each indicator, identifying the worst recorded or
conceivable value, and a target. The indicators are then indexed between 0 and 100 using
the benchmark.69 The indicators and benchmarks are selected using the value identified.
Anielski has conducted a GWA assessment for Leduc, Alberta.70 To capture the Genuine
wealth of the community, he divided the five capitals into 22 Well-Being Themes (Figure 371),
and used 117 statistical indicators to measure the contributions of each of these themes. The
indicators included crime rates, tax rates, ecological footprint, self-rated happiness, sense of
belonging and trust of neighbours, GPD per capita, and GDP growth rate. 72 The benchmarks
were selected from the Alberta provincial average, the Canadian Average, City of Edmonton
or the City of Calgary. The indices where then given grades: excellent if 10% better than
benchmark, good if within 10% of benchmark, or poo if 10% below benchmark.
The analysis revealed powerful results.73 Leduc has a very competitive economy supported
by a diverse business community. The people are happy, and satisfied with life. However,
shortages of affordable housing and the persistent demand for food bank donations indicate
some inequality. Rising property and drug crime rates raise further issues. The extreme
challenges in achieving a clean and sustainable environment were also abundantly clear.
It is clear that Anielskis GWA presents a powerful tool for building a better economy.
He presents ways in which this accounting system can be applied to the individual, the
69Ibid., p. 84.70Mark Anielski and Jeff Wilson. City of Leduc 2005 Genuine Well-being Report. Tech. rep. Anielski
Management, Inc, 2006. url: http://www.anielski.com/wp-content/uploads/2011/11/Leduc-GW-Report.pdf.
71Table 1ibid., p. 12.
72The complete table of indicators is included in Appendix Aibid.
73Ibid., p. 10.
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Figure 3: Well-being Themes and Scores for Leduc 2005
community, the nation, and even to a business. However, implementing it presents several
challenges. The process of identifying the values, principles and virtues of the economic
individual, especially when this individual is a community or a business, is complex and time
consuming. Turing these values, principles and virtues into indicators that use accessible
information in a statistically valid manner that actually reflect the true state of the five
capitals requires significant thought and expertise. Selecting baselines for the indicators
to index them that gives a meaningful and accurate representation of reality, instead of
simply a comparative analysis, again complex. Both choosing the indicators and choosing the
baselines requires intimate knowledge of statistics, as well as intimate knowledge of disciplines
as diverse as physiology, sociology, ecology, economics, engineering and anthropology. After
this is done, the process for completing the analysis has been defined, but the data still
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needs to be collected, inputed into the system, and analyzed. Anielski has presented a useful
framework and overall model for a truer economic measure, but has not clearly defined
the indicators, baselines and data collection best practices for most potential users of this
framework. The strength of this model is how flexible and uniformly applicable it is, but
this also makes it time consuming to implement.
In my view, helping businesses to change their practises is one of the most effective
and efficient ways of changing the economy. While consumers collectively hold a lot of
power, it is nearly impossible to get them to act in a unified manner towards a goal as
quickly as is required. Governments have huge power to force businesses to change, but the
correct government must be in place. The process of writing good policy that is equally
effective for all industries of a diverse economy is nearly impossible. However, working with
business individually, especially large businesses, can have a huge impact while requiring
convincing and educating relatively few individuals, and adapting the process to only one
specific context. Businesses and industry, rather than individual citizens or governments,
have the most direct impact on a communitys capitals.
I do not see business widely adapting a Genuine Wealth Accounting process quickly
without significant external help. I also believe that businesses should serve the communities
in which they operate. It is the communitys responsibility, not the businesss, to identify the
values, principles and virtues that the business should use when accounting for a businesss
impacts on the communitys human, social, natural, built, and financial capital. However, it
is the private sector that has the largest impact on the five types of capital in a community.
It is crucial then to empower the private sector to track their impacts on the five capitals of
the communities they impact in a way that is consistent with the communitys values.
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To this end, I propose the establishment of a Centre for Genuine Wealth Assessment
in each community. This Centre would be responsible for working with the citizens of the
community to define the values, principles and virtues that form the basis for the GWA. The
Centre would then work with specialists in the required fields to identify the appropriate
indicators and benchmarks for the GWA. The Centre would also serve as a storehouse of
statistical data, collected from different institutions in the city, and stored to expedite GWA
processes. Industry and businesses would then work with the Centre to complete their GWA,
using well defined processes that reduce the work load of the accountants in the businesses.
The Centre provides a huge efficiency in this work, only requiring the process and data
collection to be completed once, instead of individually for each business.
This Centre would be an intersection of many worlds. It would partner with academics
of all stripes to help them produce more accurate and helpful indicators and statistical
measures. It would work with the community members to identify values, track happiness
and other subjective measures of wealth, and almost serve as a ombudsman. But most
importantly, it would connect the communitys needs with businesss actions. The Centre
would help business identify the projects and investments that need to be made in the
community to increase or maintain current levels of well-being.
In Beyond Poverty and Affluence, the concept of a fruit-bearing economy is presented.74
The image used is of a fruit tree. As a seed, a fruit tree grows rapidly, putting all of its
energy into reaching the sun and reaching deeper into the earth. This is necessary in order
for tree to survive. As the tree matures, slowly more and more energy and resources are
74Bob Goudzwaard and Harry de Lange. Beyond Poverty and Affluence: Towards a Canadian Economyof Care. Ed. by Mark R Vander Vennen. University of Toronto Press, 1994, p. 128.
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allocated to the process of maintaining the height of the tree. Eventually, the tree stops
growing, and begins to bear fruit. The tree recognizes that both growth, and bearing fruit,
require huge amounts of energy. In a fruit-bearing economy, once the economy as a whole,
and an economic individual as well, has gone through the crucial growth phase and has
achieved sufficiency, the economy can begin bearing fruit. This fruit would be investments
in well-being in general, enriching forms of capital that are weak, but do not necessarily limit
the growth of the company directly. The key is that the community, not the corporations,
must choose what fruit is created.75 Cradle to Cradle uses the same fruit tree image as the
authors imagine a new economy.76 However, Cradle to Cradle focuses on how the fruit tree
responds to the changes of the seasons, feeds and shelters the ecosystem around it, and reuses
its own waste. Combining these two images of fruit-trees is immensely powerful.
The Centre also enables efficient Return On Investment (ROI) analysis for many programs
in a community. Consider The Circle of Friends program in Kitchener, which supports women
and children as they transition from an emergency shelter to long-term housing.77
They
recently had an ROI analysis conducted, and found that each dollar invested in the program
either saves the city or generates $3.14 dollars of value.78 This is primarily through reduced
ambulance usage and the value of the training volunteers receive. Notice that this SROI has
captured increased human capital by placing a dollar value on it. Collecting the data for this
analysis was extremely difficult and time consuming. With the proposed Centre, the process
75Ibid., p. 104.76William McDonough and Michael Braungart. Cradle to cradle: Remaking the Way We Make Things.
New York: North Point Press, 2002.77MCC Ontario. Circle of Friends. url: http://ontario.mcc.org/poverty/circlefriends.78Kaylie Tiessen. Circle of Friends Social Return on Investment Analysis. In: MCC Ontario (2011).
url: http: //ontario.mcc.org/system/ files/Poverty/SROI% 20CoF%20- %20final% 20copy% 20-%20publish%20to%20PDF%20edition.pdf.
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could be quickly completed, and high impact opportunities can be quickly identified.
The Centre discussed above would help businesses identify the places where investments
are needed. In this way, the community would define how economic growth is valued, and
also what fruit the economy bears when it is ready. This presents a challenge, however, when
a business is a transnational corporation impacting many individual communities at a time.
It is infeasible for a businesss accounting practises to meet as many different requirements
as communities it impacts. The requirement for a business to embed itself deeply in the
community it operates in limits the size and reach of a single organization, encouraging local
economies and removing many of the problems of globalization.
In some ways, the government and taxation already serve the role of the Centre. However,
the Centre imagined above would involve a much higher degree of community engagement
than simply a single vote on a candidate campaigning on many issues. For this Centre to
work, a business participation in it may need to be mandatory, but the transition period
would likely require voluntary participation, ideally motivated by tax breaks. Further reading
into existing corporate tax law is required to differentiate the Centre from the role of taxation,
and define how it interacts.
Another area for further research is the possibility of incorporating these multi-capital
considerations directly into the tools used for evaluating economic opportunities such as
Internal Rate of Return. This requires replacing the compound interest equation, and one
possible candidate is the Logistics equation, borrowed from modelling population dynamics.
In the logistics equation, growth is exponential at first, until an upper limit, called the carry
capacity, is reached. The challenge is identifying the carrying capacity. Some research has
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been conducted that connects economics and carrying capacity.79
In conclusion, it is clear that the paradigm of continuous economic growth cannot con-
tinue. It is rapidly headed for collapse as the limits of the finite planet Earth begin to
enforce themselves. Technology will not solve this issue alone. Nor is it desirable for the
economic growth paradigm to continue. The correlation between happiness only holds up to
a point, economic growth does not address issues of inequality nationally or globally, and is
rapidly devastating the planet. All of these issues can be addressed by implementing a fruit
bearing economy the captures the value of all five types of capital, and is supported through
community-based Centres for Genuine Wealth Assessment. In this way, the incredible suc-
cess of modern economics and capitalism can be built on, while addressing the sever issues
that they create.
79Kenneth Arrow et al. Economic growth, carrying capacity, and the environment. In: Ecological Eco-nomics 15.2 (1995), pp. 91 95. issn: 0921-8009. doi: 10. 1016/ 0921- 8009(95)00059- 3. url: http://www.sciencedirect.com/science/article/pii/0921800995000593.
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