Rethinking Capitalism, the Economy & Sustainability

Source: veeterzy on unspalsh

The Marriam Webster dictionary defines capitalism as an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market Note the highlighted portions.

The Oxford English dictionary defined Economic Growth as an increase in the amount of goods and services produced per head of the population over a period of time.

These two definitions are the crux of our progress and our problems. Globally all governments have been focused primarily on economic growth that is making sure the amount of goods and services produced and thereby consumed rises.  As a single point critical metric of performance, all governments are focused on incentivizing this growth. In capitalism, the decision, to invest, is a private decision, and investment decisions with some notable exceptions are designed to maximize sales and profits. This model of economic growth through a trickle-down effect is supposed to and has brought large parts of the global population out of poverty. However one must note 3 critical statistics

1. As of 2015, Based on a $1.9 dollar per day 2011 PPP based poverty line, 729 mm were below this line. However, if the metric is increased to $5.5 dollars per day, ~3386 mm were below the line, compared to the world population of ~7,300 mm in 2015 (Source: World Bank). The comparable figure for 1981 was 2991.17, compared to the world population of ~4512 mm.                                                                                                                                        
2. In 2016, the share of total national income accounted for by just that nation’s top 10% earners (top 10% income share) was 37% in Europe, 41% in China, 46% in Russia, 47% in US-Canada, around 55% in Sub-Saharan Africa, Brazil, and India and 61% in the Middle East. In all these countries/ regions the inequality has increased substantially since 1980 with the least in Europe to the highest in India, Russia, China, USA & Canada. (Source: World Inequality Report 2018)


3. The global top 1 % of the population has captured twice as much income growth as the poorest 50% of the world For e.g. In the USA the income share of the top 1% has grown from ~10.5% in 1980 to ~20% in 2015, while the income share of the bottom 50% has declined from ~20.5% in 1980 to ~13% in 2015. (Source: World Inequality Report 2018)

This data tells us of a few glaring things about the global economy

1. As the global economic system is geared towards maximizing consumption and given that the income and wealth are increasingly concentrated in the hands of the few, the ability to consume for the bulk of humanity has effectively declined, making growth without rising leverage of the impoverished next to impossible. This is presuming spending is always lower for the rich vis a vis those at the margins. Possibly the flight to "quality" in the stock markets has more to it than we have thought of
2. While poverty has declined in % terms to the population, the number of poor or low-income people in absolute terms has actually increased in the world. This is a side effect of the advances in science resulting is significantly higher life expectancy. If the government's performance metric was to actually reduce the absolute number of poor, the governments have failed miserably

Now if we are to again pay attention to the definition of economic growth - it was an "increase in the amount of goods and services produced per head of the population".  What governments have actually managed to do is create an environment to significantly increase the number of "heads" of the population from where a significant proportion of economic growth has come.

This has combined with the capitalistic's systems efforts to push sales (foremost) & then profits. This essentially means investments would flow into areas that would push consumption and create habit loops for the products. E.g. Fast Food, the fat/ salt/ sugar craving e,g, caffeine, cola, Starbucks) and the social media never-ending scroll  (e.g. Facebook/ Instagram/ Twitter). The profits derived from such sales would in turn be rolled into newer areas to spur consumption or if dividend out most likely ends up with the top 10% of the population & their discretionary consumption/wealth. To be clear- there are companies which are exceptions to this broad trend - but those remain exceptions.

The resultant impact of this population growth X increase consumption spree is

1. The world has lost~80% of its forests, with continued depletion of 375 sq km per day. At least 10,000 species go extinct every year
2. Every year we extract about 55 billion tons of fossil energy, minerals, metals, and biomass from the Earth. We are using up 50% more natural resources than the Earth can provide.
3. ~75% of earth land areas are degraded, the number is likely to go beyond 85% soon
4. Global temperatures have risen by ~0.85 degrees Celsius from 1880 to 2012 and sea levels have risen by 19 cms from 1901 to 2010

While these statistics are not new to any one of us, it is clear that if both these trends continue i.e. rising income inequality combined with massive ecological degradation, the majority of humanity is in for a hard landing.  The only way to soften this is:

1. Control population growth (P.s. not advocating an invitation to Thanos)
2. Consume efficiently i.e. those on the margins earning less than $5.5 per day should be consuming more and the rest need to significantly reduce consumption and this consumption should be sustainable without depleting environment further
3. The sustainability goals – need to go beyond reducing plastic usage, marginal reductions in carbon emissions. We need to set the bar higher factoring in % of recycling in items consumed, zero emissions, green cover restoration to replace those depleted every year,  etc. 

These three most logical things go significantly against some of our deeply held beliefs

1. GDP growth is the performance metric for government performance & not reduction in the absolute number of poor or low-income people
2. Investments are determined by private decisions - meant to maximize sales & profits & not to make consumption sustainable or ensure employment of those on the margins
3. Corporations and HNIs pay taxes to the government for this very reason to address inequalities & ensure sustainability

The counter-arguments:

1. If consumption reduction were to happen suddenly (as it has happened during the Corona crises), the resultant deflation would actually throw people on the margins into greater poverty 
2. Global wealth measured in financial market valuations would deplete significantly as there would be questions on future earnings & the time value of money we all presume implicitly would come into question. (negative interest rates - do tell their own story in these times). 
3. In a globalized world, unless all countries have the same goal, competitive dynamics & integrated financial markets would defeat any such focus on lofty ideals of sustainability, population & consumption
4. It is intrinsic human nature as a species to multiply & grow, to be unequal, etc. 
5. Other models such as communism, etc. have also failed and hence capitalism is the only solution that works
6. Universal Basic Income - UBI - to ensure those on the margins can continue consumption

Many of these arguments are valid and if we wish to avoid mass misery as a species and a reversal of hard-won progress in life expectancy and other social indicators, as individuals, corporations and governments we need a rethink on the underlying definitions of capitalism, economic growth & sustainability. We need to figure out a way beyond debt to get to this equilibrium. In subsequent parts of these articles, I will attempt to delve deeper into this issue

Reference links

http://iresearch.worldbank.org/PovcalNet/povDuplicateWB.aspx

https://wir2018.wid.world/files/download/wir2018-full-report-english.pdf
https://www.nationalgeographic.com/news/2018/03/ipbes-land-degradation-environmental-damage-report-spd/
https://www.theworldcounts.com/challenges/planet-earth/state-of-the-planet/resources-extracted-from-earth