Sustainable Growth: What Is Right? Who Decides?

MARCH 2006

Sustainable Growth: What is Right? Who Decides? Daniel J. O'Connor

Sustainable economic growth requires the simultaneous achievement of right allocation, right distribution, right scale, and right depth.

Sustainable Growth: What is Right? Who Decides? Daniel J. O'Connor

One of the important contributions of the ecological economists to the overall economic dialogue has been their emphasis on the notion of economic scale, which they generally define as a measure of the physical volume of matter-energy throughput, or the efficiency with which the economy is using the sources and sinks of the ecosystem. When they introduce the idea of scale, they typically do so in contrast to the more widely accepted ideas of economic allocation and distribution. As they see it, economics must address the perennial questions of allocation, distribution, and scale, seeking the appropriate means via market, state, and society to the desired ends of efficient allocation, fair distribution, and sustainable scale.1 Clearly, there are some value judgements being expressed in the crisp adjectives they choose to define their desired ends, so I will often adopt a more transparently normative, but deliberately ambiguous term like right allocation, right distribution, and right scale.

apparently irreconcilable visions of those who (accurately) recognize the ecological limits to economic scale and those who (accurately) recognize the potential for economic growth beyond these ecological limits. Thus, we have to consider right depth in relation to right scale, right distribution, and right allocation. Assuming for the sake of discussion that we can adequately define and measure degrees of economic allocation, distribution, scale, and depth, what can we say about right allocation, right distribution, right scale, and right depth? Given the positive economic truths, what are these normative economic rights? Who decides? Right Allocation

According to ecological and non-ecological economists, right allocation is efficient allocation. Efficiency in this context means the extent to which we all produced a mix of products consistent with what we all wanted to consume. The closer the match, the more efficient the allocation. A perfectly efficient allocation via the market is another way of describing a market system in equilibrium, free of any surplus or shortage. While they probably don't believe in perfectly efficient markets, many ecological economists apparently do believe that markets are the best means to the desired end of relatively efficient allocation. "The policy instrument that brings about an efficient allocation is relative prices determined by supply and demand in competitive markets."3 I find it interesting that with regard to this critical preference for allocation via exchange ecological economists are aligned with even the most orthodox neoclassical economists.

Assuming for the sake of discussion that we can adequately define and measure degrees of economic allocation, distribution, scale, and depth, what can we say about right allocation, right distribution, right scale, and right depth? As I presented in the article Sustainable Growth: Irreconcilable Visions?, I think we can benefit from the recognition of a fourth facet to economic development: that of economic depth.2 The easiest way to grasp economic depth is to imagine growth in economic output independent of any growth in money supply (i.e., inflation-adjusted growth) and any growth in economic scale (i.e., steady-state scale). What's left is growth in economic depth, or the depth dimension of the growth in economic output. We talk around the concept all the time without really defining it, using terms like knowledge economy, intellectual capital, experience goods, organizational learning, trust, and innovation, which are all just different components of this economic depth. As I have tried to demonstrate, the recognition of economic depth can reconcile the

O’Connor: Sustainable Growth

Right Distribution

When we shift to the question of right distribution across people, things get a bit more contentious. The ecological economists I've read propose that right distribution should be described as fair or just distribution, which they contend can only be determined through the non-market, political process of the state. "The policy instrument for bringing about a more just distribution is transfers, such as taxes and welfare payments."4

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The neoclassical economists will at least imply that the constrained optimization associated with an efficient allocation, or the strong tendency toward such an equilibrium exhibited by real markets, results in a reasonably fair distribution of income or products among market participants, wherein nobody can make oneself better off without simultaneously and unfairly making someone else worse off. They consider this to be a welfare optimum—not necessarily a welfare maximum, but at least an optimum given initial conditions.

and just about the state taking from one who has in fact earned a portion of the economic distribution and giving it to another who has not earned it? Worse yet, what is fair and just about the state taking from one who has earned it under the guise of giving it to one who needs it more, while secretly re-distributing it to households and firms that neither earned it nor really need it for basic needs? The moral seems to be that if the process of re-distribution is inherently unfair, then it may not be the resolution to past injustice that many people imagine it to be. Right Scale

The moral seems to be that if the process of re-distribution is inherently unfair, then it may not be the resolution to past injustice that many people imagine it to be.

Moving on to right scale, the ecological economists offer the ideal of sustainable scale. With economic scale being generally defined as a measure of the physical volume of matter-energy throughput, or the efficiency with which the economy is using the sources and sinks of the ecosystem, sustainable scale would then be that level of throughput or eco-efficiency that does not erode the capacity of the ecosystem to support such activity in the future. In other words, a sustainable economy would consume natural system services rather than natural capital, because the consumption of natural capital will reduce the ecosystem capacity to deliver services in the future.

Critics of this view would then point out that these initial conditions are all-too-important, as they include initial distributions of wealth and resources that are inherently unfair, perhaps due to inefficient allocations or unfair distributions that date back many years. They've got a good point. Unfair distributions going in will tend to yield unfair distributions coming out, despite a relatively efficient allocation of resources between input and output. I suspect that many neoclassical economists who appreciate the analytical power of their exemplar of constrained optimization might nevertheless acknowledge that many real-world markets do little more than efficiently re-allocate relatively unfair pre-existing distributions. However, one might argue with some justification that, over time, people who have not fairly earned their initial distributions will tend to lose them in a competitive market that, through every cycle of relatively efficient allocation, is also systematically redistributing income and products to people who continue to really earn it through smart work rather than lazy privilege. But then again, this is little comfort to those who believe that initial distributions are so unfair as to require decades if not generations to redistribute via the market's evolutionary process. Granted, but does this mean that economists must concede to the state the privilege of engineering the fair distribution that continues to elude the market? Not necessarily. Other schools of thought, Austrians for example, might argue that state-governed re-distribution of what the market already distributed is, by definition, unfair. They have a good point. What is fair

O’Connor: Sustainable Growth

One of the reasons why many economists question the capacity of the market to set a sustainable economic scale is because the market does not price every aspect of the ecosystem on which the economy depends. According to some ecological economists, "it is clear that scale should not be determined by prices, but by a social decision reflecting ecological limits." They continue by re-iterating that "distribution should not be determined by prices, but by a social decision reflecting a just distribution of assets." And finally, "subject to these social decisions, individualistic trading in the market is then able to allocate the scarce rights efficiently."5 They do offer guidance in this same source for how these social decisions are to be made, first, within the context of social dialogue about preferred futures and, second, within the context of the state's normal political and bureaucratic processes, with the hope that the latter is influenced by the former.

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One of the reasons why many economists question the capacity of the market to set a sustainable economic scale is because the market does not price every aspect of the ecosystem on which the economy depends. Having not established property rights in everything ecological, how can we expect market participants to respond adequately to such ecological phenomena as the future-robbing consumption of natural capital? Advocates of free-market environmentalism argue that we should work to expand ecological property rights in order to facilitate the market process whereby allocation, distribution, and now scale, at least for some key resources, can be determined simultaneously at the margin. Some ecological economists do appear to come rather close to this as a partial solution, advocating for an ecologically-informed state policy to establish selected ecological property rights (e.g., carbon emission credits) consistent with sustainable scale and then distribute these rights to firms and households consistent with fairness and justice considerations. Then the market process would be used to relatively efficiently allocate these rights as needed to support the ongoing processes of production and consumption. Of course, public choice economists might counter that such a political process would be susceptible to all manner of self-interested behavior and morallyquestionable dysfunction, with the likely outcome that the sustainability considerations would be trumped by politics (e.g., political censorship and distortion of scientific reports on climate change) and the fairness considerations would be warped by special interests (e.g., lobbyists for large polluters securing for their corporate clients an unfair share of carbon emission credits). As likely as this outcome seems, it is a critique that leaves us searching for a better solution.

in a rigorous fashion the economic value of specific ecosystems. As I recall from a conference presentation, one major analysis estimated the total value of the natural capital in the Puget Sound watershed as being roughly equivalent to the total value of the technological capital in this same region—i.e., buildings, roads, water mains, sewer systems, power plants, telecommunications, etc. As more people become aware of the value of what we may lose in the long-term if we do not achieve a sustainable economic scale, perhaps we will all become just a little more mindful of our contributions to the larger pattern of economic scale.

The magnitude of the shift required is truly unprecedented, in terms of the technological and psychological development that must emerge in a critical mass of people, as well as the changes we will see unfolding in markets, states, and societies worldwide. Furthermore, apart from the already difficult challenge of developing a strategy for sustainable scale, we would do well to remember that the ecosystem has in the past and will continue in the future to surprise us by both its resiliency and its fragility, on a case-bycase basis. We would be fools to mistake a human consensus on the best strategy for sustainable scale, no matter how well informed by ecologists and economists, for an actual solution that the ecosystem will predictably reward with good behavior. Right Depth

If we define economic depth as growth in economic output independent of any growth in economic scale (i.e., steady-state scale) and any growth in money supply (so real, non-monetary output), then what can we say about right depth? This depends on what we come to define as right growth in general and of course right scale in particular. If we begin with a particular rate of overall economic growth intended to satisfy the growing debt-service obligations of our monetary system, the growing population, and the growing per capita demand for output, and then deduct a declining rate of growth in economic scale consistent with the goal of sustainable scale, then right depth will be that amount of non-scale growth in output that fills the growing gap between the previous two diverging trends.

We would be fools to mistake a human consensus on the best strategy for sustainable scale, no matter how well informed by ecologists and economists, for an actual solution that the ecosystem will predictably reward with good behavior. Some environmental economists have responded to this need by doing pioneering work in the valuation of ecosystem services and capital, actually estimating

O’Connor: Sustainable Growth

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In other words, within the foreseeable future, we will have to produce ever more economic output to satisfy the ever growing demands of humanity and humanity’s monetary system, while systematically replacing the physical scale components of this growth with mental depth components—replacing matterenergy throughput with socio-technical innovation that allows us to shift to a pattern of truly sustainable economic growth before we reach the limits of the ecosystem. The magnitude of the shift required is truly unprecedented, in terms of the technological and psychological development that must emerge in a critical mass of people, as well as the changes we will see unfolding in markets, states, and societies worldwide. While very few economists address right depth, either directly or in relation to right scale, the general questions of innovation are of interest to many, often in connection with how we should combine market, state, and increasingly society (e.g., the p2p commons) to yield the right pace and the right mix of innovations. It is certainly true that many of the seminal innovations of the last century, those that have been disseminated and consolidated throughout the economy, have the finger-prints of politicians, scientists, engineers, entrepreneurs, corporate executives, journalists, and social activists all over them. Every sector seems to have played a role in the evolutionary development. What isn't nearly as clear is the question of what would have happened if the mix among the sectors had been very different. How much of what we take for granted as the socio-technical design of industrial and post-industrial civilization is a product of the peculiar interactions among specific actors in the market, state, and social sectors? Who should have what role in the future development of a widely sustainable, deeply innovative economy?

As if ignoring these larger policy questions, an increasing number of business leaders and householders are warming up to the idea of ecologically sustainable, technologically innovative, and psychologically rewarding economic growth. As if ignoring these larger policy questions, an increasing number of business leaders and householders are warming up to the idea of ecologically sustainable, technologically innovative, and psychologically rewarding economic growth. Relatively unburdened by the need to win debates with economists, ecologists, and politicians, but heavily burdened by the need to create value for all their stakeholders, many business leaders are discovering that there is a genuine win-win-win strategy that can create value for themselves, their stakeholders, and the larger social and ecological contexts in which they do business. Granted, it remains to be seen just how far and how fast the sustainable business movement can proceed, but it would not surprise me if these firms and the households that reward them demonstrate the validity of this economic model decades before mainstream economists grudgingly acknowledge it and claim to have always known it. Conclusions First, if allocation, distribution, scale, and depth coarise simultaneously from every act of market exchange, then it seems to follow logically that normative decisions regarding right allocation, right distribution, right scale, and right depth also co-arise simultaneously from every act of market exchange. Just as individual market participants are not generally aware of the larger patterns of allocation, distribution, scale, and depth to which they are in truth contributing, so too are they generally unaware of the normative implications for right allocation, right distribution, right scale, and right depth of their exchange decisions. Nevertheless, every market exchange involves two direct and countless indirect decisions about what is true and what is right in all four economic domains. Second, when a market observer renders some sort of normative judgment about one indicator— allocation, distribution, scale, or depth—it implies a set of corresponding normative judgments about the

Given the interdependence of allocation, distribution, scale, and depth, we have to be careful about assuming that particular institutions, whether they be labeled market, state, or society, are inherently deficient or proficient guarantors of right allocation, right distribution, right scale, or right depth.

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others. Moreover, taking an action to deliberately close the gap between what is true and what is right for one of these indicators, regardless of whether it is done from within the market (e.g., social entrepreneurship, sustainable business) or from outside the market (e.g., state tariffs and subsidies), will inevitably alter the other indicators, whether or not that is one's intent. For example, there is no way to intentionally redistribute in the interest of right distribution without altering the associated allocation, scale, and depth. The question then arises: will the re-distribution move us closer to right allocation, right scale, and right depth? If not, then what are the trade-offs that the parties to the decision and those impacted by the decision can accept? Such questions arise because of the complexity of the phenomena we are presuming to measure and manage.

policies that ignore specific exceptions to these generalizations. Such assumptions, rooted as they often are in deeply held but poorly examined political philosophies, tend to be conversation stoppers and learning impediments. Finally, the debate over who should decide such matters obscures what I consider to be a rather important detail: the fact that in every determination of allocation, distribution, scale, and depth, in both its positive and normative aspects, we find a decision being made according to a particular process that can be critiqued independent of who is making the decision. The question of who decides what is true and right, though important, is more controversial and less significant than the question of how they are deciding what is true and right. My focus is therefore to examine the ways in which people make these economic decisions—exchanges and transfers, to be sure, but also gifts and thefts—in light of an exemplar of integral decision making: the mutual pursuit of transparency, choice, and accountability. This empirically grounded, ethically compelling, and personally liberating Integral Value Proposition is entirely consistent with the ideals of market economics, democratic governance, and open society.6

The question of who decides what is true and right, though important, is more controversial and less significant than the question of how they are deciding what is true and right. Third, it is very difficult to discuss what is true and right in these matters without addressing the question of who decides? We all know the big question: To what extent should we rely on the centralized intelligence of state-employed policy makers, economists, and ecologists versus the distributed intelligence of entrepreneurs and other market participants? In my opinion, given the interdependence of allocation, distribution, scale, and depth, we have to be careful about assuming that particular institutions, whether they be labeled market, state, or society, are inherently deficient or proficient guarantors of right allocation, right distribution, right scale, or right depth. For example, assuming that the market is always the best path to right allocation but that we must rely on the state to provide for right distribution and right scale, will, at a bare minimum, lead to some dysfunctional

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Herman Daly. (1996). Beyond Growth: The Economics of Sustainable Development. Boston: Beacon Press, 45-60. Robert Costanza, et.al. An Introduction to Ecological Economics. Boca Raton: CRC Press, 80-83. 2 Daniel O'Connor. (2006). “Sustainable Growth: Irreconcilable Visions?” Catallaxis. http://www.catallaxis.com/2006/02/ sustainable_gro.html. Retrieved March 27, 2006. 3 Costanza, 80. 4 Costanza, 80. 5 Costanza, 81. 6 Daniel O'Connor. (2003). “A Crisis of Vision: Toward a More Integral Economics.” Catallaxis. http://www.catallaxis.com/ 2005/02/a_crisis_of_vis_1.html. Retrieved March 27, 2006. 1

Daniel O'Connor, MBA, MA, CFA, is a management consultant who helps entrepreneurs and executives envision alternative futures, articulate clear strategy, and measure strategic performance.

Catallaxis explores the potential for a more integral approach to the business and economic challenges of our time. It features original articles and essays, thoughtful reviews and commentary, and referrals to other work in the field.

email: [email protected] website: www.integralventures.com

O’Connor: Sustainable Growth

website: www.catallaxis.com

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