#9 Dr Philip Lawn and the growth problem: part 1

Philip Lawn is an ecological economist who specializes in the Genuine Progress Indicator (GPI). The GPI is a better way to measure human welfare compared to GDP because it subtracts the bad from the good. Ecological economics focuses on limiting the scale of the economy to avoid overshoot. Lawn believes that understanding the economy is crucial to solving the world's problems, as many issues stem from economic activities. He became an ecological economist after studying environmental economics and being influenced by Kenneth Boulding and Herman Daly. Lawn believes that a scientific revolution in economics is necessary to solve global problems. Ecological economics emphasizes the economy's dependence on the finite and non-growing ecosphere, and the need for sustainable resource use, efficient resource allocation, and equitable distribution of goods and services. Welcome to the Voices of Franklin podcast. I'm your host, Steve Williams. Today I'm talking to heterodox economist Philip Lawn, who's based in Adelaide. Now Lawn is best known as an ecological economist who follows in the footsteps of the late US economist Herman Daly. Lawn's an expert in the Genuine Progress Indicator, which is a superior metric of measuring human welfare compared with GDP. GDP, as you may know, simply adds together all of a nation's production, whether it's good or bad. The GPI subtracts the bad from the good, giving us a much better indication of how we're traveling as a nation. Ecological economics is first and foremost about limiting or measuring and then limiting the scale of an economy to avoid overshoot. As Lawn says, we only have one Earth, not 1.8. Today we're talking to economist Philip Lawn from Adelaide. Philip Lawn, welcome to the podcast. Thank you very much, Steve. Thanks for having me. Phil, could you begin by telling the listener a bit about yourself and how you came to study economics? Okay. I find it always difficult to talk about myself, but I guess when I was fairly young, when I say young, maybe around early 20s, I had a concern about various issues and I felt as though I wanted to do something to improve the world I lived in. I felt that if that was going to happen, we needed to – well, I needed to have a better understanding of how an economy operated and worked. I felt that most of the problems of the world were caused by what was going on within the economy. We often hear people talk about the fact that we need to manage the natural environment better and so forth. Well, natural environment can look after itself. It always has. It's not a matter of better environmental management. It's, in fact, if you want to solve not just our environmental problems but other social problems, it's about human management. I think that to some extent doesn't necessarily start with the economy, but since a lot of the problems arise because of what's going on within the economy, I felt that I needed to know more about the economy and economics. So I did it back to university. I had been to university and dropped out. I was starting accountancy. I didn't particularly like that. I did various things before I went back to university. But as I was studying economics, I just questioned a lot of things. I didn't think that a lot of things made sense. Some things seemed, yes, naturally quite abstract but didn't seem to have any relationship to the real world. I think in my third year of my undergraduate degree, I did a subject called Environmental Economics. The textbook that we used was an interesting textbook. It was a fairly mainstream sort of environmental economics subject or textbook. But the first chapter was a bit like ecological economics as I found out later on. At the end of the book, it talked about various things, areas where you could read if you want to know a bit more about something. So that led me to Kenneth Boulding's famous article in 1966, The Economics of the Coming Spaceship Earth, and then on to Herman Daly and so forth. I became, I guess, an ecological economist. I did my PhD in ecological economics, but I found that of all the heterodox schools, even though I think ecological economics offers more than any of them, ecological economics is not enough because there are other areas of mainstream economics that are incorrect and that you need an understanding of the best aspects of all the various heterodox schools of economics, which I've tried to learn and I've tried to bring together to come up with a better economics which I think can help solve our problems. I think that we will not be able to solve the world's problems until there is a so-called Kuhnian scientific revolution in economics. That by itself won't solve the problems, but that is a necessary, even if it's an insufficient condition to solve our world's problems. Yeah, I completely agree with you on that. Economists run the world. Not enough people realise that economists run the world and that's at the heart of all our problems. Now, I'm glad you... Thanks for covering that introduction. Most people who know your name know you as an ecological economist. They will know that you're a champion of Herman Daly's work, I mean, in general terms. I class myself as a Herman Daly disciple. Yeah, that's fine. I find him hard to beat. We should just tell people, in case they don't know, that word heterodox economist, that basically means that group of economists who don't like the mainstream or disagree with the mainstream. There are lots of different heterodox economists. So we can classify you, Phil, to some extent as, I think, definitely one of Australia's leading or well-known ecological economists. Not that that means so much, because you're a big fish in a small pond, as they say. I mean, there aren't exactly thousands and thousands of ecological economists in Australia. But leaving that aside, because I've corresponded with you for a few years, I also know you're unusual in your adoption, to some extent, of modern monetary theory. So let's go back. We're getting a bit ahead of ourselves here. Can you encapsulate the kind of essential principles of ecological economics? I know that's a big ask in just a few minutes, but people who really know next to nothing about ecological economics, there are a few principles that distinguish it from the mainstream. Yeah. I think if you want to think like an ecological economist, you've got to start by recognising that the economy is a subsystem of society, which is a subsystem of the larger ecosphere. Meaning, of course, that the economy is entirely dependent upon the ecosphere. The ecosphere is finite, it's non-growing. As you could imagine, if something sits with inside something that's finite and non-growing, it can grow for a period of time, but it can't keep growing. The so-called parasite cannot outgrow its host. So once you start with that image of the economy and you recognise that the economy is entirely dependent upon the ecosphere, so we extract resources from the ecosphere, they enter the economy and they're allocated to produce various goods and services. Those goods and services, if they're non-durable goods and services, they're immediately consumed and they become waste. That waste exits the economy and returns to the natural environment, hopefully in quantities that the natural environment can assimilate and turn back into resources. Some of the goods and services, well the goods, physical goods, are durable goods. So we sort of, in inverted commas, consume them over time as we use them, they depreciate, so they eventually become waste. So it's important to ensure that the rate at which we use resources, extract resources from the ecosphere to maintain the economy or even to grow it for a period of time, and the rate at which we generate waste doesn't exceed the capacity of the ecosphere to regenerate, that is generate new resources and assimilate the waste that we generate. So that brings to bear the first important issue and that's the issue of scale, the scale of the economy. How big can the economy get before it reaches the point where the throughput, that's the input of resources and output of waste to maintain it, becomes ecologically unsustainable? And there are, well there's an indicator called ecological footprint and another called biocapacity and at the global level that indicator suggests that the rate at which we're using resources and generating waste is already ecologically unsustainable and it's been ecologically unsustainable for about 50 years. So the ecological footprint is about 1.7, 1.8 times global biocapacity, which essentially means that if we were to maintain the rate of resource use and waste generation at the current rate, at the global level, for it to be sustained, we would need 1.8 Earths and of course we've only got one Earth. So since the economy is dependent upon the ecosphere for its existence and maintenance, we have to ensure that rate of throughput is ecologically sustainable. So we need to ensure the economy, the scale, the physical scale of the economy is sustainable. Once those resources enter the economy, then they're allocated to produce various goods and services. We need to make sure that the allocation of those resources, since they're scarce, there's only a certain amount entering the economy at any point in time, go to their best possible use. When that happens, we can say that the allocation of resources is efficient. We're getting the best use of those resources. And of course, so that's the allocation problems. We've got the scale, the allocation issue and then we've got the distribution issue. So once the goods and services are produced, who gets to consume those goods and services? And of course, they don't necessarily have to be distributed equally or evenly, but they should be distributed equitably, meaning that the poorest person should at least get enough of the goods and services to live a decent existence and that the difference between the poorest and the richest person is fair, is just and is deemed acceptable by society as a whole. So there's three main areas. There's scale, how big the economy is relative to the ecosphere, which dictates how much or many resources we should be extracting from the ecosphere over any particular period of time and the quantity of waste that we generate. There's what we do with those resources once they're extracted and they enter the economy. That's the allocation issue. And once the resource has been transformed into goods and services, who gets to consume the goods and services? That's the distribution issue. So there are the three main principles of ecological economics, which starts from this view of the economy as a subsystem of society, which is a subsystem of a finite and non-growing ecosphere. And probably the main issue in all this field is the question of scale. The mainstream economist, and this includes all our politicians, they want the economy to grow forever exponentially at about two or three percent. That gives us a doubling time of what 30 to 40 years. The economy is going to double in size every 30 or 40 years forever. Now, you really got to wonder what's going on inside these people's heads. Now, they come out with things like, oh, we're going to have a circular economy. Don't worry. We're going to have green growth and we're going to have a circular economy. Now, what do you say to that, Phil? Yeah, well, that's frustrating when people talk in those terms. And I know there's even a lot of so-called progressives that talk in terms of a circular economy. It's become a very popular term. I think that if you're a believer in perpetual growth, that is music to their ears. I would love to hear nothing more than all these progressive people who are interested in and stress the importance of sustainability to be now talking in terms of a circular economy. Of course, this throughput of matter and energy from the ecosphere to the economy back to the ecosphere in the form of waste is a linear movement of matter and energy. Yes, we may have little whirlpools and eddies within the economy, only in terms of materials, by the way, not in terms of energy. You can't recycle energy. You can recycle waste matter and materials to some extent, never to 100%. But of course, to recycle waste materials does require the use of additional energy. So it's important to understand that this movement of matter and energy is linear. If you fall into the trap of believing it's circular, then it's possible to believe in perpetual growth. It's just a case of circulating this matter and energy at a faster rate if you want to grow the economy. That goes against the laws of thermodynamics, this notion of a circular economy. It's not possible. People who believe that it's important for the economy to be sustainable need to understand that this movement of matter and energy cannot be circular. There needs to be a recognition that the movement is linear. Then the focus goes back to what I mentioned before, and that is making sure that the rate at which we extract resources doesn't exceed the natural regeneration rate of the ecosphere and the rate at which we generate waste doesn't exceed the capacity of the ecosphere to safely absorb and assimilate those wastes and turn them back into natural resources for future use. One way to resolve that debate or partly to resolve that debate, Phil, would be to cap resource use and pollution at, let's say, a safe level, whatever that was determined. In fact, it's the only way. Exactly. It's the only way you can do it. Cap resource use and pollution at a safe level, and then if this magical thing could happen, which is sometimes called decoupling, or you can call it green growth if you want, call it the circular economy if you want, that magic or that phenomenal outcome can then either happen or not happen. But because you've capped throughput at a safe level, we can then run the experiment and see if you can increase GDP, which is what they mean when they say increase, have growth, increase the size of the economy. We could then all happily sit back and watch technology work its magic or not. Yeah, true. Yes, so if these people have such great faith in technology, that's fine. But they should be, therefore, the people least concerned about resource and waste caps, which suggests, in my opinion, they don't have the great faith in technology that they profess to have. In fact, I distinguish two types of technology. I believe that technology can be classed as either efficiency increasing technology, that is technology or technological progress that reduces the quantity of resources and the waste generated to produce a dollar's worth of GDP, and that can happen. But there's a limit, thermodynamic limit, to how much you can reduce the throughput required to produce a dollar's worth of GDP. And then there's what I call throughput increasing technology or technological progress. That's technological progress, which allows us to extract more resources and therefore generate more waste. And only the efficiency increasing form of technological progress is beneficial once you cap the rate of resource use and waste generation. The throughput increasing technological progress no longer can help in that regard. And even today, I think the majority of the technological progress tends to be of the throughput increasing kind, that is finding new ways to dig deeper, drill deeper, go further to extract resources of a poorer grade that we could never use in the past, simply to bump up the rate of throughput to grow the economy. But as much as that bumps up the rate of throughput, it still results in that rate of throughput exceeding the regenerative and waste-assimilative capacities of the ecosphere. So that is one of the reasons why the global ecological footprint is now exceeding and increasingly exceeding global biocapacity. And we've now got to 1.8 Earths and it's growing. Now, you're also well known for your work on the Genuine Progress Indicator. Can you quickly tell the listener what the Genuine Progress Indicator is? Okay. Well, before I do, let me just say something about GDP. Some people say we just shouldn't use GDP at all. I disagree with that, believe it or not. GDP, Gross Domestic Product, was originally designed in about 1940 as a means of measuring, even though it was in monetary terms, the physical volume of output being generated by an economic system and, of course, the different types of things that were being produced, largely to assist in the war effort during World War II. You wanted to know how much was being produced. You wanted to know what was being produced. That was very important at the time. Well, GDP has since been used as a measure of economic welfare. And national income as well. National income. No, it's just a monetary measure of the physical volume of goods and services produced by domestically located factors of production. So, in other words, what a country is producing. Well, if that's what you want to know, go no further than GDP. That is the ideal indicator if you want to know how much and what a nation is producing. And that can be very useful and important information. But if you want to know what's happening to the economic welfare of a country, the physical volume of economic activity doesn't tell you much because economic welfare is essentially the difference between the benefits of economic activity less the costs. That's what the Genuine Progress Indicator does. It measures all the major benefits of economic activity at the macroeconomic level and it measures all the costs. And by costs I mean not just economic costs but also social costs like unemployment, overwork, the cost of crime, and environmental costs such as the cost of resource depletion and excessive waste generation and subtracts the costs from the benefits. So, the GDI is a measure of net benefit. So, it's telling us what is happening to net benefits as GDP rises. And if net benefits, so if the GDI is rising, it means that the benefits of growing the GDP are rising at a faster rate than the costs are rising, which is a good thing. But what we're finding with a lot of wealthy countries is that now that GDP seems to have gone past, it appears as though there's some threshold level of per capita GDP where if it continues to rise, the costs go up at a faster rate than the benefits go up. And so, the net benefits or the GDI declines. When that happens, growth effectively becomes uneconomic. It's automatically assumed that when GDP rises, that that's economic growth. It's certainly growth of economic output, but it's not necessarily economic in the true sense of the word. Something is economic when if you do more of it, it increases benefits more than it increases costs. If doing more of something increases costs more than increases benefits, then it becomes uneconomic. So, growth in a lot of countries has become uneconomic. It's no longer economic. And the GDI can be a means of determining when growth becomes uneconomic. And another important thing is it's pretty clear that growth is almost certainly going to become, or growth in GDP, uneconomic before it becomes ecologically unsustainable. So, since the ecological footprint of most countries in the world has gone beyond the biocapacity of those countries, that is, it's become ecologically unsustainable. Even without calculating the GDI, we can be pretty certain that if we did go ahead and calculate the GDI, that it would indicate that GDP growth within that country has already gone beyond the point where it becomes uneconomic. So, the economic limit to growth is reached before the ecological limit to growth. And for most countries, it is... Yeah. Somebody's got to do those calculations. Well, I'm trying to do it, but it's... And others as well. But no... When I taught the Genuine Progress Indicator to my students over the years, they almost all say, why aren't we using the GDI? Well, no national statistical agency is using the GDI. There's at least one state in the US. Is it Vermont? Well, okay. A group of people campaigned and a piece of legislation was passed in the state of Vermont in the USA requiring the GPI to be calculated for the state of Vermont every five years. But that doesn't necessarily mean it's being used. And it's not being calculated by a public or civil servant department within the state of Vermont. Someone was being commissioned to do it, and I think it was being conducted, the study, but largely being ignored and not really having much effect on public policy within the state of Vermont. Yeah. Should we quickly move on to... Okay. Now, go ahead, Phil. No, it's just... So the GPI has been around for a long time. One of the problems with it, it needs to be standardised. In the past, there's been an ad hoc GPI study here and there, often using inconsistent data, that is data inconsistent in one study compared to another, and which sometimes dictates the use of different methods. So there needs to be some effort to standardise the GPI in the same way that the calculation of GDP for every country is standardised in order for the GPI to gain traction and to perhaps be used as a public policy guiding indicator, which isn't at present. Yeah. The problem with your politician is either GDP is growing or you're in a recession, and they're the two choices they see. And if you're in a recession, then they're going to lose the next election. So you can see the dilemma even for a politician who is kind of open-minded and is open to some of these ideas. They think, well, what am I supposed to do? Yeah. Well, if you put up a chart of GDP over time, per capita GDP over time, apart from the odd year here and there, it goes up. And if you're a politician and you're campaigning and you're in government rather than in opposition, you want to point to a chart where the line is going up, not where it's starting to level off or decline, which is what the GPI indicates. So the GPI appears to be a bad news indicator, and that's the last thing that a politician wants to point to when they're campaigning. They want to point to a line that's going up. Whether or not that line going up indicates that people are getting better off. Let's move on to monetary theory because this is a way whereby you could have a steady state economy or even a degrowth economy, and yet you could have full employment, and you could control interest rates and inflation and a bunch of other things that they worry about simply by understanding how the monetary system works. Now, we only got a few minutes left, but is it possible for you to say a few things about MMT in that short period of time, or should we leave it for another time? We could have another session on MMT, but I can just say a couple of little things. I'm not a big fan of the term modern monetary theory because I don't really believe it's a theory as much as some of the proponents of MMT do believe it's a theory. I've never heard a convincing argument to suggest or indicate that it is a theory. It's a description of our monetary system. I think it's important to understand how modern money came into existence. Most people think the take-home message of MMT is that a central government that is the monopoly owner and issuer of the nation's currency has no fiscal constraint. That's true, but I don't believe that's the real take-home message of modern money. If you understand the story of modern money and how it came into existence, what modern money is and the reason why it came into being, firstly, you need to know that taxation emerged along with modern money. They came into existence together. At some point, an emperor—some central authority of an empire or what have you—decided it would be a good idea if they created a currency, issued it by spending it into existence, and imposed a tax liability that was only extinguishable in the currency that they issued, which meant that the masses needed to obtain the currency to pay their taxes. Otherwise, they lost their head. To obtain the currency, they needed to offer their labour or offer to sell to the government or the central authority some of the things that they could produce. They were good at producing. So modern money became a very effective and efficient means of transferring real resources from what we would today call the private sector to the public sector, and it hasn't changed. The reason why taxation was needed, as well as issuing the currency, was to create a demand for the currency. It's not to raise money for the central authority to spend back into existence. Things haven't changed. The only thing that's changed is that when modern money first came into existence, the emperor would use those real resources to build monuments or riches for that emperor. Now, the central authority uses those resources to build schools and hospitals and roads and so forth. So once you understand that story, know the story and the reason why modern money came into existence and understand that it emerged along with taxation, then you realise, well, yes, the government doesn't raise taxes or impose a tax liability to raise money in order to spend. Which sounds ridiculous when you think that the central authority is the owner and issuer of the currency. Why would the owner and issuer of the currency need to obtain the currency from people? It's the other way around. The people need to obtain the currency. Of course, because there would have been a point in time where the central authority spent into existence more of the currency than it destroyed through taxation, people had some of this modern money. It was later on that that modern money became a medium of exchange. In fact, you didn't have to offer your labour to the central authority. If someone had some of the money, you could offer your labour to that person and work for the person who had some of the currency that hadn't been taxed away by the central authority. That's when modern money became a medium of exchange. The mainstream story is that money emerged firstly as a medium of exchange to overcome the inconvenience of barter. As societies became more sophisticated and the number of goods and services being produced increased and so forth, people used to exchange through barter. That requires the so-called coincidence of wants. I've got to have too much of something, not enough of something else. I've got to find someone who's in the opposite situation. Because of that inconvenience, money then emerged as a medium of exchange. There is no archaeological or anthropological evidence to indicate that money ever emerged that way. We're going to have to leave it there, Phil. We'll come back for part two, maybe next week. Okay, no problem. But thanks so much for that introduction and we'll see you next time. All right. Thanks for having me, Steve. Thanks, Phil. Bye.