by Marion Dumas
The growth story of the 21st century must be of green and inclusive growth. When promoting this vision, many economists, as well as consultants and policy strategists, point to the fact that businesses that "go green" generally don't lose competitiveness. We observe that businesses that innovate to produce more ecological products generally see an increase in their revenue.
Why is that so? The reason is that they are differentiating their products from their competitors. They can then charge more to consumers who value the environment and any related benefits of green products (such as health for example) and can afford higher prices.
But if the story stopped here, we would merely have a niche market of green products bought by a handful of higher-income consumers. So much for green growth! Think of architect and construction companies hailing their latest cutting-edge zero-energy building made of recyclable materials only to produce thousands of standard energy-hungry concrete structures. This would be the equilibrium: green for the flagship and high-cost expenditures of a few motivated purchasers, and dirty for the rest, for years.
But the story does not stop here of course. In ‘Capitalism, Socialism, and Democracy’ Schumpeter wrote
"The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort... The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses."
He was talking about a virtuous cycle by which businesses innovate by producing higher quality products. Initially, only the rich can buy then. But, betting on the growing popularity of such products amongst consumers, businesses compete with each other and innovate to make these products cheaper such that eventually they become widely available.
Does this virtuous cycle always spontaneously make product innovations available to all? Does it work for green goods? In truth, we do not yet know the answer to this question. My project for Rebuilding Macroeconomics asks how can we harness innovation and competition to create the green mass consumer market.
The answer is not obvious because if businesses do not expect enough growth in demand, they will not innovate to bring down the price and improve the attractiveness of these goods. Innovation could instead be targeted at a specific part of the market. Recent research by Xavier Jaravel at LSE shows that product innovation in the US in the last 15-20 years has mostly benefited the rich: the price of products consumed by the top quintile decreased more than for other quintiles and the variety of products available to the top quintile increased more than for other quintiles.
At a larger scale, theoretical work in macroeconomics and economic history suggests that inequality may be an important driver of innovation. Too little inequality, and there is simply not enough fuel for businesses to innovate and charge wealthy consumers for these innovations. Too much inequality and businesses do not see a mass consumer market within their reach; they do not attempt to innovate to bring down the price of their goods within reach of the average person.
We know very little about how this innovation and competition process is unfolding for green products. We therefore know little about how product differentiation and competition contributes to green growth. How different does this process look across types of products, from electric vehicles, to organic food, to LED lights? How different does it look across countries? Are there systematic differences that can be explained by macroeconomic factors such as inequality and institutions? Do the differences stem more from microeconomic factors, such as differences in consumers preferences and specific policies such as product standards?
These questions have policy urgency. They also ask a deep economic question: can the dynamics of creative destruction that Schumpeter saw as central to capitalism stir us towards a more sustainable economy? This project will provide some theory and evidence beyond the Green Growth Hype.