Old Economic Paradigms

Old Economic Paradigms

In the Wealth of Nations, Adam Smith proposed that competition be used to channel energy from rational and self-interested individuals toward consumer goods which would serve others. Assuming an insatiable nature, the market was designed to grow infinitely. We measure our market by the Gross National Product, the amount which we produce.

Of course, in reality humans have been proven not to be rational, purely self-interested or insatiable. The TEEB reports, “The independence assumption has been falsified by thousands of empirical tests. It does not make good predictions of real economic behavior and offers a poor guide for economic policy,” suggesting replacing the “rational economic man” for markets to achieve pareto efficiency.

Rory Sutherland, President of the Institute of Practitioners in Advertising, suggests that economics be a subset of psychology, due to the ‘PART’ that rational and self-interested thought, plays in our greater decision making processes.

Another criticism of classical economics comes from the perspective of context for the economy.  Joshua Farley, co-author of the textbook ‘Ecological Economics’ suggests that economics become a subset of the greater eco-system, as the eco-system can exist without the market, but the market cannot exist, without the eco-system.  Our notion that the ‘environment’ is a subset of the economy is leading toward dangerous effects of the inevitable extraction and waste processes damaging our ecological infrastructure which is costly not only to our health, but to our economy itself.  In fact, in 2008 it was measured that due to our inability to value nature, we lost between 2-4 trillion dollars in natural capital.

What we are seeing as efficiency, is in fact extremely inefficient, due to our inability to truly measure.  Nik Marcs a statistician and founder of The New Economics Foundation is showing that the well-being and health of a society (even the society’s elite) is no longer connected with economic growth once a nation is developed and that in fact health and well being are only correlated with social status after basic needs are met.

Others suggest GNP should be considered a cost, while it is our current aim!

OECD in Agreeance:

The Organization for Economic Co-operation and Development has typically been driven by GDP and trust in old paradigms, but with looming social and environment disaster, they are coming to rethink their models. The 40 Developed countries of the world recently signed onto an agreement to seek ‘Green Growth’, which moves toward alternative measurements, and protection of capitals.

“Without taking care of the environment we are shaving digits off GDP and, therefore, limiting our very potential for the future.” Now even the OECD, conventionally the ‘high church’ of GDP, is beginning to understand the inadequacies of our market forces.  Secretary General, Angel Gurria says, “If we want to make sure that the progress in living standards we have seen these past fifty years does not grind to a halt, we have to find new ways of producing and consuming things, and even redefine what we mean by progress and how we measure it.”

“A return to “business as usual” would indeed be unwise and ultimately unsustainable, involving risks that could impose human costs and constraints on economic growth and development. It could result in increased water scarcity, resource bottlenecks, air and water pollution, climate change and biodiversity loss which would be irreversible.”
“In June 2009, Ministers from 34 countries signed a Green Growth Declaration, declaring that they will: “Strengthen their efforts to pursue green growth strategies as part of their responses to the crisis and beyond, acknowledging that green and growth can go hand-in-hand.” They endorsed a mandate for the OECD to develop a Green Growth Strategy, bringing together economic, environmental, social, technological, and development aspects into a comprehensive framework.”

 

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