by Kate Raworth
The US economist Richard Easterlin found that between 1946 and 1974, GDP per capita grew significantly in the US but the population’s self-reported levels of happiness – on a scale of 0 to 10 – remained flat, and even fell in the 1960s.43 Those findings have since been called into question by studies that find self-reported happiness continuing to rise as income rises, albeit ever more slowly the richer a country becomes.44 But even if we were to accept Easterlin’s data at face value, the fact that people’s self-assessed happiness stayed flat while their income rose is no proof that happiness would still stay level if incomes flatlined. What’s more, when wages for the worse-off stagnate, immigrants are all too quickly blamed, as has happened in many high-income countries in recent years, fuelling xenophobia and social strife. Our societies, like our economies, have evolved to expect growth and have come to depend upon it: it seems we do not yet know how to live without it.
No wonder Martin Wolf, one of the UK’s most respected financial journalists, wrote with palpable unease in 2007 when he took the rare step of leaning across the debating aisle to agree with the prepare-for-landing crowd about the economic implications of cutting global carbon emissions. ‘If there are limits to emissions, there may also be limits to growth,’ he acknowledged in his Financial Times column. ‘But if there are indeed limits to growth, the political underpinnings of our world fall apart. Intense distributional conflicts must then re-emerge – indeed, they are already emerging – within and among countries.’45 Such a view of GDP growth – that it is still necessary but no longer possible – is clearly a deeply uncomfortable one to hold. These are the words of a man daring to face the Medusa.
Are we there yet?
Whether our economic airplane can keep on cruising, or is about to stall mid-air, one thing is evident: it is currently heading for a destination that we do not want to reach, one that is degenerative and deeply divisive. If we reorient ourselves to the economic destination that we do want – an economy that is regenerative and distributive by design – then new questions about growth come to the fore. What might happen to GDP as we transition towards that destination? And what is GDP likely to do once we get there? It is not possible to predict definitively one way or the other whether GDP will go up or down in high-income countries as they create regenerative and distributive economies that engage the household, market, commons and state alike.
Getting there calls for many sectoral transformations, including a strong contraction of industries such as mining, oil and gas, industrial livestock production, demolition and landfill, and speculative finance, offset by a rapid and lasting expansion of long-term investment in renewable energy, public transport, commons-based circular manufacturing, and retrofit buildings. It calls for investing in the sources of wealth – natural, human, social, cultural and physical – from which all value flows, whether it is monetised or not. And it opens up opportunities for rebalancing the roles of the market, the state and the commons as means of provisioning for our needs.
Combine these uncertain shifts and it is by no means clear what will happen to the total value of products and services that are bought and sold in the economy. It might go up and then down. It might go down and then up. Or it might come to oscillate around a steady size. We simply cannot be certain of how GDP will respond and evolve as we make this unprecedented transition into the Doughnut’s safe and just space, or how it will behave once we are thriving there. And that is precisely why we have a problem. Because over the past couple of centuries, just as Rostow spelled out, capitalist economies have restructured their laws, institutions, policies and values so that they are geared to expect, demand and depend upon continual GDP growth. Let’s revisit that conundrum we find ourselves facing:
We have an economy that needs to grow, whether or not it makes us thrive. We need an economy that makes us thrive, whether or not it grows.
What does this mean for the economic airplane ride? If Rostow were still alive, and no longer an aspiring presidential adviser but a concerned fellow citizen on this flight, perhaps he’d offer to update his theory, realising that the story cannot end with the plane cruising for ever into the sunset of growth. As much as having the ability to fly, this plane must have the ability to land: the capacity to thrive when growth comes to an end. So he might just agree to amend his book like this:
W.W. Rostow’s six stages of growth
(the twenty-first-century update)
1. The traditional society
2. The preconditions for take-off
3. The take-off
4. The drive to maturity
5. The age of high mass-consumption
5. Preparation for landing
6. Arrival
Of course it would be a revolution in mainstream economics simply for Rostow to propose these new chapter headings. It would be another revolution altogether for him – and us – to know what to write in those two missing chapters of the flight manual, because such a controlled descent has never been attempted. Every real passenger jet comes equipped to make a safe landing: wing flaps to create drag and slowdown without stalling; landing gear with sturdy wheels and shock absorbers for that moment of touchdown; and brakes and reverse thrust for bringing the plane to a smooth standstill. But the economic airplanes that Rostow so admired in the 1960s were not built to land: in fact their institutions were locked on autopilot, expecting to cruise at around 3% growth for ever, and have been attempting to do so ever since.
Attempting to sustain GDP growth in an economy that may actually be close to maturing can drive governments to take desperate and destructive measures. They deregulate – or rather reregulate – finance in the hope of unleashing new productive investment, but end up unleashing speculative bubbles, house price hikes, and debt crises instead. They promise business that they will ‘cut red tape’, but end up dismantling legislation that was put in place to protect workers’ rights, community resources and the living world. They privatise public services – from hospitals to railways – turning public wealth into private revenue streams. They add the living world into the national accounts as ‘ecosystem services’ and ‘natural capital’, assigning it a value that looks dangerously like a price. And, despite committing to keep global warming ‘well below 2°C’, many such governments chase after the ‘cheap’ energy of tar sands and shale gas, while neglecting the transformational public investments needed for a clean-energy revolution. These policy choices are akin to throwing precious cargo off a plane that is running out of fuel, rather than admitting that it may soon be time to touch down.
Learning how to land
What would it mean to prepare high-income economies for landing so that they could touch down safely and become thriving, growth-agnostic economies when the time was right? The clue lies in Rostow’s preconditions for take-off, the key stage during which, he wrote, ‘each of the major characteristics of the traditional society was altered in such ways as to permit regular growth: its politics, social structure, and (to a degree) its values, as well as its economy’.46 Preparing for landing, then, calls for taking the economy out of that growth autopilot and redesigning the financial, political and social structures that have turned growth into what Rostow called ‘the normal condition’. It will be tricky, of course, because economists have not had the training, let alone the experience, to land this plane and create economies that thrive whether or not they grow. But some innovative economic thinkers have started to put their minds to the task by asking, in the words of the ecological economist Peter Victor, can we ‘go slower by design, not disaster’? Or even – in the name of agnosticism – what would it take to design an economy that can handle GDP growth without hankering after it, deal with it without depending upon it, embrace it without exacting it?
It has been a long flight: is it time to land?
As ever, the core ideas of systems thinking set out in Chapter 4 will be a useful tool. GDP growth, like all growth, arises out of a reinforcing feedback loop, and it will eventua
lly come up against a limit – a balancing feedback – that will most probably emerge from the larger system in which the economy is embedded. Based on the evidence available to date, it looks as if that limit lies in the carrying capacity of the living world. Must this encounter lead to collapse, or could we pre-empt that future by transforming the economy from ever-growing on an unstable trajectory to ever-oscillating within a stable range? What advice would a systems thinker offer?
We have already followed Donella Meadows’s wise advice to go for high leverage points like changing the goal, by booting out the cuckoo of GDP growth and aiming for the Doughnut instead. Other powerful leverage points include finding ways to weaken growth’s reinforcing feedback loops while strengthening balancing ones instead. Looked at through this lens, it becomes clear that many innovations in economic thinking are aiming to do just this, as we will see below. Most striking is that many of the policies proposed for enabling an economy to be growth-agnostic are also ones that could help drive it towards being distributive and regenerative by design.
How, then, are today’s high-income economies locked into dependency on GDP growth, and how could they learn to thrive with or without it? Few economists have bothered – or dared – to ask these questions in public until now. Herman Daly was an early pioneer in the 1970s but his prescient call for creating ‘steady state’ economies fell on reluctant political ears. Today, an increasing number of governments in high-income countries face very real prospects of low or no GDP growth over the coming decades and, for the first time, some are quietly asking if economists have ideas about how to embrace that reality. Support for such thinking is emerging from the most unexpected of places, such as the influential mainstream US economist Kenneth Rogoff, whose career has spanned the IMF, the US Federal Reserve and Harvard University. ‘In a period of great economic uncertainty,’ he wrote in 2012, ‘it may seem inappropriate to question the growth imperative. But then again, perhaps a crisis is exactly the occasion to rethink the longer-term goals of global economic policy.’47
Let’s take up the opportunity of this prolonged crisis and start identifying the various ways – financial, political and social – in which today’s high-income economies, and others following their path, are locked into and addicted to pursuing GDP growth. From there we can start to ask what it would take to cut loose, and whether there are innovations under way that illustrate some possible options. There are, of course, no easy answers. It will take some decades of experiments and experience to come up with smart solutions given that this problem has been brewing for so long – which is precisely why it deserves far more attention and analysis now. Consider what follows, then, as an initial attempt to sketch the ‘Preparation for Landing’ pages that have long been missing from the economist’s flight manual.
Financially addicted: what’s to gain?
Let’s start at the heart of the matter: with the financial addiction to growth. Because every decision in the world of finance revolves around one underlying question: what’s the rate of return? That question is prompted by the search for ‘gain’, the driving motive of the capitalist economy since it took off in Britain in the nineteenth century. ‘The mechanism which the motive gain set in motion,’ wrote Karl Polanyi in the 1940s, ‘was comparable in effectiveness only to the most violent outburst of religious fervor in history. Within a generation the whole human world was subjected to its undiluted influence.’48 Polanyi was far from the first to realise that the pursuit of gain opened the door to endless accumulation: he got the idea from Marx, who described capital as ‘money which begets money’ and ‘has therefore no limits’.49 Marx in turn got the idea from Aristotle who, recall from Chapter 1, distinguished economics, which he saw as the noble art of managing the household, from chrematistics, the pernicious art of accumulating wealth. ‘Money was intended to be used in exchange, but not to increase at interest,’ he wrote in 350 BCE; ‘…of all modes of getting wealth this is the most unnatural.’50
The search for gain – which drives shareholder returns, speculative trading, and interest-bearing loans – lodges dependency upon continual GDP growth deep within the financial system. For John Fullerton, the banker who walked away from Wall Street, here lies the source of the problem. ‘We’ve reached the logical conclusion of this expansionist economic paradigm,’ he says. ‘Unless we can achieve magical decoupling we have an exponential function on a closed system planet … yet the finance system has no in-built plateau, it can’t “mature” – and none of the experts in finance are even thinking about this.’51
That is why Fullerton and his colleague Tim MacDonald started thinking about ways for regenerative enterprises to escape the constant pressure to grow from shareholders. They came up with the concept of Evergreen Direct Investing (EDI), which delivers acceptable and resilient financial returns from mature low- or no-growth enterprises. Instead of paying profit-based dividends to shareholders, the enterprise pays out a share of its income stream to investors in perpetuity. This set-up enables a profitable but non-growing business to attract stable investment from wealth stewards with a long-term view, such as pension funds.52 ‘EDI allows an enterprise to behave like a tree,’ Fullerton explained to me. ‘Once it is mature, it stops growing and bears fruit – and the fruit are just as valuable as the growth was.’53
The pressure for shareholder returns is, however, just one manifestation of how financial gain drives growth. Indeed this expectation of gain is so ingrained that we hardly notice its most unusual feature: it runs counter to the fundamental dynamic of our world. Given time, tractors rust, crops rot, smartphones break, and buildings crumble. But money? Money accumulates for ever, thanks to interest. No wonder it has become a commodity itself, and hence is so underinvested in creating the productive assets – from renewable energy systems to circular manufacturing processes – that are needed to underpin a regenerative economy.
What kind of currency, then, could be aligned with the living world so that it promoted regenerative investments rather than pursuing endless accumulation? One possibility is a currency bearing demurrage, a small fee incurred for holding money, so that it tends to lose rather than gain in value the longer it is held. The fact that demurrage is an unfamiliar term shows how accustomed we are to the ever-rising financial escalator that we ride – like knowing the idea of ‘up’ but not ‘down’, ‘more’ but not ‘less’. But demurrage is a word worth knowing because it could just feature in the financial future.
The concept was first proposed by Silvio Gessel, a German-Argentinian businessman whose 1906 book The Natural Economic Order advocated introducing a paper currency accompanied by stamps that must be bought and periodically affixed to it to ensure its continued validity. Today the same effect could be achieved far more simply with electronic currency that incurred a charge for being held over time, so curtailing the use of money as a store of ever-accumulating value. Only money that ‘goes out of date like a newspaper, rots like potatoes, rusts like iron’ would be willingly handed over for objects that similarly decay, argued Gessel: ‘… we must make money worse as a commodity if we wish to make it better as a medium of exchange’.54
These ideas sound outlandish and impracticable on first hearing but they have proven very practical in the past. Paper-based demurrage was successfully used in city-scale complementary currencies in 1930s Germany and Austria to reinvigorate the local economy, and it was almost introduced across the US in 1933. But in each case, the national government shut the initiative down, evidently threatened by its bottom-up success and the loss of state control over the power to create money. Keynes, however, was impressed by Gessel – who he called ‘an unduly neglected prophet’ – and was drawn to his proposal because of its proven ability to reboot spending in the economy, the priority of the Depression era.55
Imagine, then, if a demurrage-bearing currency could be designed so that, instead of boosting consumption today, it boosted regenerative investments in tomorrow. It would transform the landscape
of financial expectations: in essence, the search for gain would be replaced by the search to maintain value. And one of the best ways to preserve the long-term value of stored wealth would be to invest it in long-term regenerative activity such as a reforestation scheme.56 Banks would consider lending to enterprises promising a near-zero return on investment if it were preferable to the cost of holding money: that would bode well for regenerative and distributive enterprises delivering social and natural wealth along with a modest financial return. And it would, crucially, help to release the economy from the expectation of endless accumulation, and hence the financial addiction to growth.
Demurrage may seem quite alien to modern financial markets, but it is not so far removed from negative interest rates, which effectively charge those who are holding money in savings. These negative rates have become part of the contemporary financial landscape, being used for emergency measure by Japan, Sweden, Denmark, Switzerland, and the European Central Bank since 2014. These countries’ aims have been diverse – to resurrect GDP growth, to manage exchange rates, and to raise inflation – but between them they have bust the myth that interest rates cannot fall below zero.
Of course the idea of designing demurrage into currency raises many challenging questions for a financial system, such as its implications for inflation and exchange rates, for capital flows and pension funds, and its balance between stimulating consumption and boosting investment. But these are just the kinds of question that are now well worth exploring in the process of reinventing finance so that it is in service to thriving – rather than ever-growing – economies. And, as the use of negative interest rates has shown in recent years, it is striking just how quickly the unfeasibly radical can become the feasibly practical.
