How Do We Achieve a Sustainable Economy?
“Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist” – Kenneth Boulding
Economic policy is aimed at socially sustainable growth, yet scientific evidence suggests our economy has physical limits. Our atmosphere and energy supplies are almost certain constraints on future output. The limits on physical resources might need to be taken into account by macroeconomics to create a more accurate understanding of sustainability. What is the importance of energy availability for growth, and do planetary boundaries need to be taken more seriously?
Views vary on the outlook for energy availability. But if we do enter a world where the supply of energy decreases, as many predict, how would this affect us? The conventional economic view is that energy prices would spike in the short-term as it would be difficult to substitute to alternative means of energy production. In the long-term, these higher prices would encourage alternative methods of energy production.
Although, one argument is that the reduction in energy in the short-term might make it impossible to substitute to alternative forms of energy, as the discovery process itself requires energy. We might get to a point where we do not have enough energy from the currently used methods to switch to an alternative. This is because if energy is a critical enabler of key technologies then technology is only possible because of energy. This also questions the rate of technological progress: falling energy availability could reduce technological progress and damage long-term growth.
There is evidence that the mainstream “growth” model may be environmentally unsustainable as we approach biological boundaries that scientists warn us from crossing. Climate change is one such boundary. Rising sea levels, air and water pollutants, biodiversity loss, rates of extinction are all examples of how economic activity is infringing on the environment. These consequences could be wipe-out economic activity in certain areas, such as in flooded cities. Macroeconomic models do not take into account the possibility of irreversible catastrophes like this.
How can we sufficiently factor in planetary boundaries into macroeconomic models and methodologies? To what extent do economic models – with or without explicit roles for environmental factors – need to take account of feedback loops, thresholds/tipping points, fat-tailed distributions and non-equilibrium system dynamics? Do we need new models beyond DSGE such as agent based modelling? And do we think it will be these planetary boundaries, rather than material or energy constraints, that will limit economic growth? How quickly and effectively do we think we might transform current consumption and production trends, substitute for natural resource use and protect ecosystem functions? Ultimately, will we need to stop growing altogether, or is “green growth” possible in the long-term?
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