Rethinking Finance: The Need for a New Economic Model to Protect Our Future

Anastasia Linn, Matt Orsagh and Steve Rocco, Arketa Institute for Post-Growth Finance

To protect our future, we need to rethink finance.

Our work is only as good as the tools we use. If we use flawed tools, our work is compromised. This principle is true in finance and economics as well. If we use the wrong models, we can reach the wrong conclusions.

Our current understanding of economics is one such flawed tool.

Neoclassical Economics

Neoclassical economics is a broad set of theories that focuses on the allocation of resources through markets where the forces of supply and demand drive production, pricing, and consumption decisions for goods and services. It has been the default economic model for decades, first emerging at the turn of the 20th century and becoming the dominant economic paradigm following World War II. It has its flaws though, and we are increasingly feeling the consequences of those flaws today.

The fundamental flaw of neoclassical economics is that it does not adequately account for the energy and materials we use to drive our global economy.

It takes note of certain parts of the production and consumption processes but overlooks the physics of the material moving through the process or the energy (human or electric) needed at every stage. It also ignores the larger system in which all this activity takes place—the environment—which is the life support system upon which our lives and economies depend. Neoclassical economics suggests that an economy can grow more and more profitable and prosperous forever.

Neoclassical economics is what most of us learned in school and serves as the basis of most financial practice today. But it is not the only game in town. We already have an alternative that properly values our dependence on natural systems in our economics: ecological economics

Ecological Economics

Ecological economics reminds us that “the economy” lies within society, and that both the economy and society sit within and depend upon our environment. Ecological economics emphasizes the dependency of our economy on the natural world, making clear the damage we do to ourselves by damaging our environment.

Ecological economics recognizes that an economy that grows forever simply is not possible on a finite planet, and it shifts the focus instead to ask what the optimal scale of the economy might be.

If we accept the premise that the economy is a subsystem of the biosphere, then we need to assess whether the resources needed by the economy can adequately be provided by the biosphere, and whether the waste produced by the economy can adequately be handled by the biosphere. This is the basic idea of sustainability and can be visualized as how much water you can carry in a bucket without spilling it.

When an economy is very small relative to the biosphere, the biosphere can easily provide all the resources for the economy and easily deal with the waste produced by the economy. Such a state in which the economy is very small in relation to the biosphere is an “empty world” in the language of ecological economics. This was arguably the case in centuries or maybe even decades past when neoclassical economics was established. But we don’t live in an empty world anymore.

Empty World – Graphic adapted from Herman Daly and Joshua Farley's Ecological Economics: Principles and Applications (2004)

We live in a “full world”, where the economy is bumping up against, and even surpassing the limits of what the biosphere can sufficiently handle. But how do we know this?

Planetary Boundaries

In 2009, the Stockholm Resilience Centre published its first Planetary Boundaries Framework. Their goal is to more clearly communicate the amount of degradation different natural processes can endure before they break down. While the model has become widespread in the intervening years, unfortunately we have seen the planetary boundaries themselves push farther and farther into the danger zone. The farther these systems move into the red, and the longer they stay there, the more difficult it becomes for human civilization to survive, let alone thrive.

Graphic adapted from Planetary boundaries www.stockholmresilience.org/research/planetary-boundaries.html

We have pushed past six of nine planetary boundaries, meaning we live outside of a safe space for humanity in these areas. This is our collective “bucket” that is spilling over the edges due to our living beyond our ecological means. We need to move back into a safe zone in each to give ourselves the best chance of surviving, let alone thriving.

For those not familiar with the planetary boundaries1, here is a quick introduction:

Climate change – Greenhouse gases in the atmosphere trap heat.
Novel entities – Things introduced into the environment that are disruptive to Earth’s systems, mostly plastics.
Stratospheric Ozone Depletion – The ozone absorbs dangerous ultraviolet radiation from the sun.
Atmospheric Aerosol Loading – Atmospheric aerosols are particulate matter or pollution in the atmosphere.
Ocean acidification – If a solution becomes too acidic, it can support less life.
Biochemical flows – Chemical elements (mostly phosphorus and nitrogen) infringing on living systems (water, soil).
Freshwater use – The flow of the hydrological cycle that refreshes the water resources of the world.
Land system change – Changes in the landscape, such as deforestation.
Biosphere integrity – Diversity and health of life on Earth.

The longer we stay outside of these planetary boundaries, the harder it will get for people to provide the essentials of life to themselves and their families.

It is clear that things must change, and that includes our conceptions of the economy and of our industry—finance—as well.

1. https://www.stockholmresilience.org/research/planetary-boundaries.html

Finance Needs to Evolve

Our current financial and economic systems are built on the expectation of perpetual growth. Even a modest expectation of two percent growth globally means that the global economy would double in thirty-five years. That mandate for growth is incompatible with a “full world” in which we must move back to the safe side of our planetary boundaries.

Sustainable investing as we know it only incrementally addresses these problems.

Currently, sustainable investment means choosing from a menu of investments, some of which are already not compatible with staying within planetary boundaries. Such action will not result in sustainable outcomes.

The menu of investments to choose from must be compatible with planetary boundaries from the start. This would push some current business models off the menu in order to stay within planetary boundaries.

The logical conclusion is to put the integrity of our planetary boundaries first and foremost in our economic, political and cultural decision making, as these planetary systems are our life support system. If we can do this, we can design an economy that operates within planetary boundaries. If we choose not to do so, disaster will eventually force us back within them, as Earth’s systems break down.

Finding a New Path

Because our current economics does not adequately consider the damage to our environment from energy use and material waste, our global society has focused on economic growth as the measure of our success as a civilization. But this focus on growth for the sake of growth puts our own life support system at risk. After a certain point, pursuing growth for the sake of growth becomes self-defeating, as it compromises our life support system, and therefore inhibits our ability to live well – or possibly live at all.

That is where we are now as a global civilization.

By recognizing the limits of our planet and accepting the reality of this “full world”, we can better prepare for a post-growth economy. We can lay the foundations for a society that can thrive within our planetary budget and move towards an economy where growth will happen but is no longer a measure of economic success.

Some of our peers are already adopting this mindset. Examples of institutions adopting this post-growth model include Triodos Bank, based in the Netherlands, or Alternative Bank Schweiz, based in Switzerland. Each bank looks to serve local community needs while operating within ecological limits. Other financial firms can develop their own models that prioritize serving client needs within planetary boundaries, above growth that weakens our life support system. Finance can follow this new path, and indeed, we believe, it must.