#12 Growth Special: Adjusting our perspective on economic growth
Markus H.-P. Müller
Managing Director, Chief Investment Officer Sustainability & Global Head of Chief Investment Office Private Bank at Deutsche Bank l University Lecturer l TED Speaker
Increasing challenges from climate change are forcing us to adjust our perspective on the nature and desirability of economic growth. But how should we do this? In this issue I look at:
Thinking differently about economic growth
We have gotten used to growth. In many parts of the world, growth became the default economic state in the second half of the 20th century. [1] We even invented a metric solely for the purpose of measuring growth: Gross Domestic Product (GDP). The trouble with GDP is that it only measures flows and not stocks. And that shortcoming epitomises what makes our current economic model incomplete: it neglects the very foundation of economic activity – Nature as Capital. The impact of this definitional failure on populations and economies is well known and has recently been emphasised once again by the Potsdam Institute for Climate Impact Research and the U.S. National Bureau of Economic Research. [2],[3]
"De-growth” challenges
So, this may be a good time to think differently about growth. “De-growth” is a term that is often brought up in this context. It seems like a straightforward idea, but its political and societal implications are less clear. Even academics struggle with it[4]: While some definitions demand an actual shrinking of the economy, advocating taking us back for example to the output levels of the 1970s – others are somewhat more “liberal” and allow growth within limits.[5],[6]
This ambiguity in the definition of “de-growth” leads to a number of practical, philosophical, and political challenges. At a practical level, how do we de-grow without prejudicing some aspects of how we live (e.g., medical advances)? At a philosophical level, is it right to limit the future growth of developing and emerging economies, the likely source of most future emissions [7], and thus keep people in poverty? Politically, how can governments persuade electorates to accept economic contraction?
Overall, “de-growth” is likely to be much easier to talk about than to implement. So, I remain sceptical about it – while acknowledging the need to establish a nature-compliant economy. Instead, I advocate for taking a step back and starting to think differently about the nature of growth itself.
German physicist and climate scientist Anders Levermann argues that we should look at the mathematical principles of folding theory – which allows infinite expansion in a finite space through growth into diversity. [8] In my view, such growth into diversity can be achieved either through innovation, e.g., via new technologies and the improvement of existing ones (like electric vehicles), or through development, e.g., systemic changes such as switching from private to public transport. Of course, a mixture of both is likely to be necessary to a certain degree – but one major ingredient needs to be added to encourage innovation or development: scarcity.
Engineering scarcity
In theory, there is one clear way to do this: scarcity can be created by putting a price on negative externalities. Successful examples of policies to do this exist, such as the the sulphur dioxide (SO2) allowance-trading programme established in the U.S. in 1990, which lead to a 43% reduction in SO2 levels – without negatively impacting growth. [9]
Another reason I appreciate Levermann’s work is that recognising the limits of the planet also implies recognising the importance and distribution of natural capital – thus also recognising the fundamental interdependence between the Global North and the Global South. A frequently cited argument, for example, is that the prosperity of the Global North has come at the expense of the Global South. [10] The political dimension of this is often the focus for discussion, but our understanding of the complexity of these interdependencies is far too limited [11] – a problem that could start to be addressed with Levermann’s approach.
Building policy understanding
I firmly believe in humanity’s ability to innovate, as recently demonstrated by a study showing a possibly viable way to produce climate-neutral cement [12]. But we must acknowledge that economic markets (carbon or otherwise) or reporting systems can be distorted and “gamed” unless they are subjected to careful construction and management. The risk is that attempts to encourage sustainable growth could become an accounting exercise, not a route to real-world change.
A key prerequisite to avoiding this and making policy more effective is to design it in a supportive manner. In this context of how to govern our “commons” (shared natural resources), policy should be designed to incentivise change, not to add another “tick-the-box” exercise – which sometimes seems to be the case. One study found that companies’ spending on sustainability reporting exceeds spending on sustainability innovation by 43%. [13]
There is also a risk, perhaps still underappreciated, that technology can be a source of risk rather than a solution. Consider for example, the rapidly increasing carbon emissions of some major tech firms (in one case up 50% over five years) as they meet the rising energy needs of data centres and supply chains. The problem could get even worse as AI demands increase. [14]
So, what’s the bottom line?
“De-growth” may seem like a simple solution, but it is not a viable option. Accepting the limits of our planet must go hand-in-hand with accepting people’s desire for greater prosperity. Innovation and sophisticated regulatory policies will be a crucial in matching these two priorities.
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References for my commentary:
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Thanks for highlighting Oliver Meier , and nice to virtually chat Markus H.-P. Müller, long time not see!! As anticipated by Oliver, I would warmly suggest you to read “Growth”. Daniel Susskind first provides a good background on how we got to growth (and GDP) as the primary objective, and then - considering that what truly matters is the broader #welfare and #wellbeing of humanity, not just economic output - he suggests to look at negative trade offs more consciously (environmental degradation, widening equalities, erosion of local communities, rise of technology we struggle to control). His call to action is to continue fostering innovation, AND invest in mitigating those trade-offs (eg through incentives, taxes, subsidies, change of perspective/culture). When trade off can’t be weakened, he suggest conscious and collective decisions about what we truly value. An incredible valuable read!!!
Strategy, Change & Innovation | Sustainable Finance & Impact Investing (born at 340 ppm)
4moThanks, Markus H.-P. Müller, for this very interesting train of thought. So, using innovation and sophisticated regulatory policy instead of de-growth in order to deal with the limits of our planet. Arguably the realistic maximum of what can be achieved in the short to medium term. But will it be enough to save us in the long run? Rosa Sangiorgio maybe this is quite interesting in comparison to your book tip ‘Growth’ by Daniel Susskind (haven't read it yet but it's at the top of my list!).