Choosing your own capitalism in a globalised world?

Daron Acemoğlu, James Robinson, Thierry Verdier 21 November 2012

Amid the current economic slowdown there is renewed interest in what type of capitalism fosters growth
and best improves welfare. This column argues Nordic-style capitalism may provide higher welfare but in
an interconnected world, it may be the cut-throat US capitalism, with its extant inequalities, that makes
possible the existence of more cuddly Nordic societies.
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Against the background of the global financial crisis and the current economic slowdown, there is
renewed interest in what type of capitalism is ‘best’ – which fosters growth and/or best improves average
welfare in a society.

The debate between Mitt Romney and Barack Obama in the US presidential elections highlighted these
choices, in essence pitting them against one another. On the one hand was the stereotypical image of US
society based on unfettered competition and risk taking. On the other was an alternative conception in

which the US should take steps towards a Nordic-style social democracy with greater emphasis on

redistribution and social protection.

Both the US and the Nordic systems have produced prosperous countries and similar growth rates over
the past 60 years1. Significant differences, though, exist between these societies.

 The US is richer than Denmark, Finland and Sweden2.

 The US is also widely viewed as a more innovative economy.

It has played a leading role in many of the transformative technologies of the last several decades, partly
because it provides more high-powered incentives to its entrepreneurs and workers who work longer
hours, take fewer and shorter vacations, and take more risks.

 Nordic societies have much stronger safety nets, more elaborate welfare states, and more
egalitarian income distributions than the US (Smeeding, 2002, Atkinson et al. 2011).

The economic success and social performance of Nordic countries raises two interrelated issues.
 First, the US path to economic growth is not the only one.

Nations appear capable of achieving prosperity without sacrificing their social welfare programs and a
relatively egalitarian structure.
 Second, to the extent that more limited inequality is valued for social cohesion reasons or due to

risk sharing, average welfare could easily be higher in Nordic nations despite their lower income
per capita.
But if so, why don’t we all try to adopt Nordic-style institutions? More generally, in an interdependent
world, can we all choose the same type of capitalism and, in particular, combine dynamic capitalism with
a heavy emphasis on egalitarianism and social protection?
Varieties of capitalism

One answer to this question comes from the literature on the 'varieties of capitalism' in comparative

political economy (Hall and Soskice 2001). This literature draws a distinction between a coordinated

market economy capturing salient features of Nordic countries, and a liberal market economy proxying for
a US style economy.
This literature suggests that both types of economies can achieve high incomes and similar growth rates,
but coordinated market economies typically have more social insurance and less inequality. A successful

capitalist economy need not give up on social insurance to achieve rapid growth. Moreover, this literature

also suggests that different societies have developed these arrangements for historical reasons and once

established, they tend to persist (perhaps because of institutional complementarities or because of the

usual difficulties of changing institutions).

Behind this analysis is an implicit view. Because economic outcomes are similar but coordinated market
economies provides better social insurance to their citizens, the citizens of liberal market economies that
became coordinated market economies would gain in social welfare terms. Moreover, such a switch is

feasible even if the weight of history makes it non-trivial.

Asymmetric institutional choices in an interdependent world

In recent research (Acemoglu et al. 2012), we suggest that in an interconnected world, the answer may
be quite different. With international economic linkages, institutional choices of different societies are also
entangled. For one, countries trade and this induces specialisation. If there are some complementarities

between specialisation decisions and certain institutional arrangements, the world equilibrium might be

asymmetric. Some countries would choose the ‘liberal’ route and specialise in sectors in which this
creates a comparative advantage, while others choose the coordinated route and specialise in other

sectors.

Another international linkage is technological, and this is the one our research formally develops. We
consider a canonical dynamic model of endogenous technological change at the world level with three

basic features. First, there is technological interdependence across countries, with technological
innovations by the most technologically advanced countries contributing to the world technology frontier,

on which in turn other countries can build on to innovate and grow. Second, we consider that effort in
innovative activities requires incentives which come as a result of differential rewards to this effort. As a
consequence, a greater gap in income between successful and unsuccessful entrepreneurs increases
entrepreneurial effort and thus a country’s contribution to the world technology frontier. Finally, we
assume that in each country the reward structure and the extent of social protection shaping work and
innovation incentives is determined by (forward-looking) national social planners.
The fact that technological progress requires incentives for workers and entrepreneurs results in greater
inequality and greater poverty (and a weaker safety net) for a society encouraging more intense

innovation. Crucially, however in a world with technological interdependence, when one (or a small
subset) of societies is at the technological frontier and contributing disproportionately to its advancement,
the incentives for others to do so will be weaker. In particular, innovation incentives by economies at the

world technology frontier will create higher growth by advancing the frontier, while strong innovation
incentives by followers will only increase their incomes today since the world technology frontier is already

being advanced by the economies at the frontier.

This logic implies that the world equilibrium with endogenous technology transfer is typically asymmetric
with some countries having greater incentives to innovate than others. In such equilibrium, the

technologically leading countries opt for liberal-style institutions (what we call 'cut-throat' capitalism) with
high-powered incentives, little social insurance and income inequality, while other following countries
adopt coordinated-style institutions (what we call 'cuddly' capitalism) as a best response to the technology

leader’s advancement of the world technology frontier, ensuring therefore better insurance to their

population and greater equality.

We can’t all be like the Nordics, can we?

The main result of this theoretical investigation is that, in the long run, all countries tend to grow at the
same rate, but those with cuddly reward structures are strictly poorer. Notably, however, these countries
may have higher welfare than the cut-throat leader; in fact if the initial gap between the frontier economy

and the followers is small enough, the cuddly followers will necessarily have higher welfare because of
the greater social insurance that their institutions provide. Thus, our analysis confirms the intuition that all
countries may want to be like the Nordics with a more extensive safety net and a more egalitarian

structure.

Yet the main implication of our theoretical framework is that we cannot all be like the Nordics! Indeed it is
not an equilibrium choice for the cut-throat leader, the US, to become cuddly. As a matter of fact, given

the institutional choices of other countries, if the cut-throat leader were to switch to such cuddly
capitalism, this would reduce the growth rate of the entire world economy, discouraging the adoption of

the more egalitarian reward structure. In contrast, followers are still happy to choose an institutional
system associated to a more egalitarian reward structure. Indeed, this choice, though making them
poorer, does not permanently reduce their growth rates, thanks to the positive technological externalities
created by the cut-throat technology leader. This line of reasoning suggests therefore that in an
interconnected world, it may be precisely the more cut-throat American society, with its extant
inequalities, that makes possible the existence of more cuddly Nordic societies.
Conclusions

Our research has taken a first step towards a systematic investigation of institutional choices in an

interdependent world where countries trade or create knowledge spillovers. This perspective suggests
that the diversity of institutions we observe among nations may be explained not just as an outcome of
policy mistakes or historical legacies, but also as the result of mutually self-reinforcing asymmetric
equilibria. To make this point in the most forceful way, our analysis naturally abstracted from differences

in fundamentals between nations, such as cultural differences in terms of taste for redistribution or

concern for fairness. We further focused on one specific institutional dimension, i.e. the structure of

rewards associated with innovation and entrepreneurship, leaving aside all the richness and complexity of

clustering, path dependency and interactions of multidimensional institutional systems (including labour,
product and financial market regulations, or educational and training systems). Investigating how these
various facets interact with the logic of our framework is certainly worthwhile doing in future research. At
the end of the day, however, whether these ideas contribute to the actual divergent institutional choices

among relatively advanced nations remains largely an empirical question. We hope that this research will

be an impetus for a detailed empirical study of these issues.

References

Acemoglu, Daron, James A Robinson and Thierry Verdier, (2012) “Can’t We All Be More Like Nordics?
Asymmetric Growth and Institutions in an Interdependent World”, NBER Working Paper 18441, National

Bureau of Economic Research.

Atkinson, Anthony B, Thomas Piketty and Emmanuel Saez (2007) “Top Incomes in the Long Run of
History,” Journal of Economic Literature, 49:1, 3-71.
Hall, Peter and David Soskice (2001) Varieties of Capitalism: The Institutional Foundations of

Comparative Advantage, Oxford University Press, USA.

OECD (2011) OECD Statistics.

Smeeding, Timothy (2002) “Globalization, Inequality, and the Rich Countries of the G20: Evidence from
the Luxembourg Income Study (LIS),” Center for Policy Research Working Papers 48, Maxwell School,

Syracuse University.
1 The average growth rates of income per capita in the US, Denmark, Finland, Norway and Sweden
between 1980 and 2009 are 1.59%, 1.50%, 1.94%, 2.33% and 1.56%.
2 The US had an income per capita (in purchasing power parity, 2005 dollars) of about $43,000 in 2008.
Denmark’s is about $35,870, Finland’s about $33,700 and Sweden stands at $34,300 (OECD 2011).
Norway, on the other hand, has higher income per capita ($48,600) than the US, but this comparison

would be somewhat misleading since the higher Norwegian incomes are in large part due to oil revenues.
Are the Nordic countries really less innovative than the US?
Mika Maliranta, Niku Määttänen, Vesa Vihriälä 19 December 2012

Do the ‘cuddly’ Nordic countries free ride on the ‘cut-throat’ incentives for innovation in US-style
economies? Don’t PCs, the internet, Google, Windows, iPhones and the Big Mac speak for themselves?
This column argues that, despite a higher overall tax burden and more generous safety nets, the Nordics
have generated at least as much – if not more – innovation than the US. So far, ‘cut-throat’ capitalism has
not been the only road to an innovative economy.
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Related
 The next productivity revolution: the ‘Industrial internet’
Marco Annunziata
 Cuddly or cut-throat capitalism: Choosing models in a globalised world
Daron Acemoğlu, James Robinson, Thierry Verdier
The cut-throat versus cuddly capitalism distinction (Acemoglu et al. 2012) resonates with widely-held
stereotypes. The US is a ‘mean streets’ sort of place to live but the law of the jungle approach to
capitalism produces breakthrough innovations. European nations – especially Nordic nations – are just,
social democratic societies, but comfort saps the life out of invention. Acemoglu et al. (2012) argue that
advancing the technology frontier fast requires US style cut-throat capitalism and that cuddly Nordic
economies are free-riding on US innovation.
Stereotypes
Do the facts resonate as well as the stereotype? One cannot deny the importance of high-powered
pecuniary incentives in advancing innovation and economic activity. We, however, argue, that – as a
simple empirical matter – the claim that the Nordic countries are less innovative than the US is, to put it
kindly, not unequivocally supported by data. Several measures of innovation activity and success suggest
that the Nordic countries are doing equally well as, or even better than the US. There are also plausible
explanations for these outcomes.
Nordics are dynamic
In their related working paper, Acemoglu et al. (2012a) use two measures to argue that the US is more
innovative than the Nordic countries: the number of US patents and GDP per capita. Neither of these is a
very good comparative measure of innovation.
It is quite understandable that US companies dominate patent filings in the US. For an international
comparison, the so-called triadic patents – i.e. patents filed for the same invention in the US, EU and
Japan – are a more suitable measure. By this indicator, US innovation activity lags behind that of
Sweden, Denmark and Finland. The same result obtains when comparing some of the most frequently
used indicators of innovation inputs, such as business expenditure on research and development, the
share of researchers in total employment, and even the stock of venture capital as a share of GDP (Table
1). In Table 1, we don’t present statistics for Norway and Iceland because, arguably, they are special
cases due to their large natural resources.
Table 1 Indicators of innovation activity, 2008
USA SWE DEN FIN
Triadic patents per million of population 48.7 88.3 60.5 63.9
Business expenditure on R&D, % of GDP 2.01 2.78 1.91 2.77
Researchers per 1000 of employed 9.5 10.6 10.5 16.2
Venture Capital, % of GDP 0.12 0.21 0.16 0.24
Worker reallocation, 2000–2007, % 43.3 32.0 45.5 39.8
Sources: Worker reallocation from Bassanini and Garnero (2012), other statistics from OECD (2010).
As Acemoglu et al. (2012a, 2012b) stress, innovation requires risk-taking. In a very innovative economy,
one would therefore expect to find intensive job creation and job destruction, as firms that are successful
in innovative activities expand rapidly while others are forced to exit the market.
The available data do not suggest that the US economy is unambiguously more dynamic than the Nordic
economies (Bassanini and Marianna 2009, OECD 2004). In Denmark, worker reallocation is more
intensive, and in Finland almost as intensive as in the US (Table 1). Moreover, time series from the US
indicate a marked decline in job and worker flows since the late 1990s (Davis et al. 2012), whereas – at
least in Finland – both flows have stayed intensive (Ilmakunnas and Maliranta 2011).
Nordics pushing productivity frontiers
Of course, innovation inputs, patents, or reallocation of labour are not ideal measures of a society’s
success in pushing the technological frontier forward. They do not measure the outcome in terms of
output or value-added.
But neither is GDP per capita a good measure. First, GDP per capita is affected by the degree to which
labour resources are utilised, which does not add to innovation. Secondly, GDP includes the value-added
by the public sector, which is hard to measure adequately. In an international comparison, a particular
problem is that the size of the public sector varies a great deal across countries and even the data
compilation practices differ.
These problems can be sidestepped by using productivity in the market sector as an outcome measure. It
is also useful to look at productivity in different sub-sectors. Table 2 presents some labour productivity
comparisons based on Inklaar and Timmer (2008).
Table 2 Labour productivity in 2007, % of the US figure
SWE DEN FIN
Total economy 83 76 80
Market sector 89 75 86
Manufacturing excl. ICT industries 93 62 113

ICT 235 35 102

Trade 100 129 135
Transport and storage 50 73 82
Finance and business 74 70 38
Personnel services 48 92 58
Non-market services 67 79 63
Sources: Authors’ calculations based on Inklaar and Timmer (2008) and EU KLEMS database.
Note: ICT refers to electrical and optical equipment, and post and telecommunications.
The US advantage in labour productivity (value-added/hours) is somewhat reduced if we consider the
market economy rather than the total economy (rows 1 and 2). Interestingly, relative productivity levels
vary a great deal between sectors. The US seems to have a comparative advantage, especially in finance
and business services.
In our view, there are good reasons to focus on the manufacturing sector. For one thing, measurement of
productivity is the most reliable in manufacturing industries. Manufacturing also features important
international technology spillovers.
Since the study by Inklaar and Timmer (2008) does not include productivity comparisons for the entire
manufacturing sector, we need to exclude ICT when considering manufacturing. As Table 2 shows, in
manufacturing that excludes ICT, US labour productivity is lower than in Finland and only marginally
higher than in Sweden.
Figure 1 provides a comparison of productivity performance that is broader (with more countries), longer
(with time-series), and more comprehensive (also including total factor productivity). This comparison of
productivity performance takes into account the use of capital input as well as the quality of labour input.
The figures give further evidence that the Finnish advantage in manufacturing productivity is long-
standing, and not related to high capital input.
Figure 1 Relative productivity levels in manufacturing excluding ICT industries
Sources: Inklaar and Timmer (2008) and computations with EU KLEMS database.
Taken together, these observations are rather strong evidence against the claim that an American
incentive system is necessary for being at the technology frontier.
The Nordics promote equal opportunity education and innovation
One explanation for Nordic good performance might be that they are better in mobilising human
resources. While hours per capita are higher in the US, a larger share of the working age population is
employed in the Nordics owing to more inclusive educational, social and employment policies.
This may imply that talents are harvested better for gainful economic activity. A second explanation could
be the rather determined public policies to promote innovation.
Incentives are perhaps not miserable after all
A third explanation might be that the economic incentives for innovation in the Nordics, while weaker than
in the US, are not miserable after all, at least not across the board. For instance, all Nordic countries have
introduced dual income taxation, according to which capital incomes are taxed at a flat rate. This helps in
motivating entrepreneurs, despite quite progressive taxes on earned income. Sweden has recently
encouraged wealth accumulation by abolishing wealth and inheritance taxes altogether.
A well-designed safety net may also work to promote risk-taking. In particular, unemployment insurance
may help risk-taking entrepreneurs by making it is easier for them to hire workers (see Acemoglu and
Shimer 2000).
The Nordic model needs to be adjusted
The Nordic model has its problems. High labour and consumption taxes, together with social security
benefits, reduce the labour supply. The increasing mobility of a well-educated new generation may lead to
cherry-picking in different phases of life. Population ageing raises concerns about the sustainability of the
generous public pension and health insurance systems.
Keeping the cuddly Nordic capitalism competitive under these pressures requires adjustments in policy.
The generous ‘welfare promise’ requires an efficient public sector and high employment to be financially
sustainable.
Conclusions
The US economy is undoubtedly very creative, flexible and at the productivity frontier in many fields. After
all, PCs, the internet, Google, Windows, Apple Mac’s iPhone and iPad, and the Big Mac are all American
innovations. Financial incentives do play an important role in this. Nevertheless, despite a higher overall
tax burden and more generous safety nets, the Nordics have generated at least as much innovation
activities as the US, and reached matching levels of productivity in important parts of the economy. So
far, ‘cut-throat’ capitalism has not been the only road to an innovative economy.
References
Acemoglu, D, Robinson, C, and Verdier, T (2012a), “Can't we all be more like scandinavians?
Asymmetric growth and institutions in an interdependent world”. NBER, working paper, 18441.
Acemoglu, D, Robinson, J, and verdier, T (2012b), “Choosing your own capitalism in a globalised world?”,
VoxEU.org, 21 November.
Acemoglu, D, and Shimer, R (2000), “Productivity gains from unemployment insurance”, European
Economic Review, 44, 1195-1224.
Bassanini, A, and Garnero, A (2012), “Dismissal protection and worker flows in oecd countries: evidence
from cross-country/cross-industry data”, IZA/ DP, 6535.
Bassanini, A, and P Marianna (2009), “Looking inside the perpetual-motion machine: job and worker
flows in oecd countries”. IZA/ DP,4452.
Davis, S J, R J Faberman and J Haltiwanger (2012), “Labor market flows in the cross section and over
time”, Journal of Monetary Economics, 59, 1-18.
Ilmakunnas, P, and M. Maliranta (2011), ”Suomen työpaikka- ja työntekijävirtojen käänteitä: toimialojen
elinkaaret ja finanssikriisi”, Työpoliittinen Aikakauskirja, 54, 6-23.
Inklaar, R, and Timmer, M (2008), “GGDC productivity level database: international comparison of output,
inputs and productivity at the industry level”, EU KLEMS, working paper, 40.
OECD (2004), Understanding Economic Growth, Paris.
OECD (2010), OECD Science, Technology and Industry Outlook, Paris.
Why Scandinavia is not the model for global prosperity we should
all pursue
With high levels of equality, low unemployment and sophisticated social services, Norway, Denmark and
Sweden represent models many strive to emulate, but they are not the northern utopias they seem
Henrietta Moore
Mon 1 Dec 2014 17.33 GMT Last modified on Thu 4 Dec 2014 16.18 GMT
Scandanavian countries might look like league champions. But they don’t necessarily provide a desirable
model for future prosperity in the rest of the world. Photograph: Stefano Amantini/ Atlantide
Phototravel/Corbis
And so another league table has confirmed what has become a truism: that when it comes to prosperity,
Scandinavia rules the roost.
This year’s edition of the annual Legatum Prosperity Index (LDI) places Norway, Denmark and Sweden in
first, fourth and sixth places respectively, with Finland trailing at a still-enviable eighth. The UK was 13th,
narrowly beaten by Ireland but ahead of Germany.
The Nordic nations frequently feature at the top of such lists, giving the aura of a shimmering northern
utopia. On almost every indicator worth measuring – from public health to educational attainment and
social wellbeing – the Scandinavians seem to have got things sorted.
But should we all be aiming to be Norway? Indeed, is that goal even desirable?
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Scandinavian societies are certainly admirable in many respects. Their high scores for human
development are built around principles of individual autonomy and self-determination.
Their commitment to gender equality saw Norway introduce a much-publicised law in 2003 requiring 40%
of board members at large firms to be female, in an attempt to forcibly shatter the glass ceiling. Female
political representation is also high, and both Norway and Denmark currently have female prime
ministers.
These countries also fare well on measures of inequality – with Gini indices consistently ranking them
among the most income-equal societies in the world.
Low levels of unemployment are supported by high levels of engagement between trade unions (in
Sweden around 71% of workers are members of unions), the government and employers. Arguably, this
results in a more engaged and democratic workforce.
But not everything is as rosy as it might first seem.
If we look at carbon emissions per capita, some Scandinavian countries are ranked quite high - Norway is
in 24th place and Finland in 26th compared to the UK’s 47th, according to the US Department of Energy’s
Carbon Dioxide Information Analysis Center (CDIAC).
And on the WWF’s scale of ecological impact across carbon, grazing land, cropland, fishing ground,
forests and built-up land, Denmark, Finland, Norway and Sweden are all near the top of the chart,
consuming considerably more than the world average of 2.7 gha per capita (one gha represents a
biologically productive hectare with world average productivity).
In other words, citizens of these countries – just like all nations in the global north - are consuming
resources at a rate that would require several Earths to sustain.
Part of the problem is that the Scandinavian nations (with the possible exception of Denmark) have based
their economic success on extractive industries – whether it’s Norway’s oil, Sweden’s iron ore or Finland’s
forests, creating huge carbon footprints. Being geographically remote and subject to extreme cold for
parts of the year also means that their food production capacities are small, with the consequence that a
high proportion of food and other goods have to be imported, creating road, air and shipping miles.
In prosperity terms, they also enjoy the luxury of having relatively small, homogenous populations across
which to spread their wealth. In this, the Scandinavian nations are again unusual.
So, the Scandanavian countries might look like league champions. But they don’t necessarily provide a
desirable model for future prosperity in the rest of the world.
High levels of autonomy and self determination are important for everybody, but these may not be a clear
indicator of prosperity or wellbeing in countries where community resilience is of paramount importance,
because of the need to collectively manage environmental resources like oceans, forests and agricultural
land.
And while the conditions of salaried work are very important for people’s life satisfaction in Europe,
unionisation won’t do much for people in countries where most people work in smallholder agriculture and
the informal economy – and are often at the sharp end of managing environmental resources and the
effects of climate change brought about by consumption in rich countries.
The LDI is interesting and informative and it’s pleasing to see that sub-Saharan Africa’s prosperity levels
have gone up 0.58 points between 2013 and 2014.
But I would argue that the ‘prosperity’ depicted in the index is based on social and economic models that
are essentially outdated because they’re not sustainable in the long term. We are already feeling the
effects of manmade climate change and the pressure on resources is becoming ever more acute as the
world’s population heads towards an estimated 10 billion by 2050.
The truth is that there is no one model of prosperity. In the future, there will have to be multiple models of
prosperity based on individual circumstances, and the specifics of culture, history, economics and politics;
not everybody following one model - but everybody flourishing within their own context.
Discovering what these models may look like has prompted UCL to establish the Institute for Global
Prosperity, the first centre of its kind in the world bringing together academics, business and policymakers
to examine the challenges and propose solutions.
This provides a challenge for all of us, but particularly for global businesses who operate in diverse
contexts around the globe. In the case of the Scandinavian countries, it’s the way in which the
redistribution of tax and wealth from business works that makes a lot of their success possible.
Their free market system underpinned by high levels of state welfare is one model of government-
business cooperation.
However, across the globe we need new and diverse models if we are to secure multiple forms of
prosperity for diverse citizens and regions. Global businesses have a unique role to play in devising these
new models of collaboration precisely because they are engaged in diverse contexts.
Coming top of the league is all very well, but we need some new ideas about what it means to be a team
player in an interdependent world.
Professor Henrietta Moore is director of UCL Institute for Global Prosperity
Challenging the old narrative that possessions equal
prosperity
A shift to the sharing economy, millennials shunning private car and home ownership, a saturation of
consumerism - is a new economic narrative emerging?
L Hunter Lovins
Fri 10 Oct 2014 15.25 BST Last modified on Thu 25 May 2017 11.12 BST
The changing face of prosperity - what do possessions really do for us? Photograph: Radius
Images/Alamy
Prosperity. Every segment of society seeks it, but ask what it means or how to get it and the answers are
not always clear.
Do possessions equal prosperity? The mavens of Madison Avenue tell us: “He who dies with the most
toys wins.” So we measure self-worth by what we buy, going deeper in debt to project the perception of
plenitude.
A New Yorker cartoon portrays a woman in an elegant boutique asking whether they have something to,
“Fill that dark empty space in my soul.” As Dana Meadows observed, we seek to meet non-material
needs with things. It’ll never work. Worse, we’ve allowed the ad industry to induce the impression that in
the absence of whatever they’re selling, we’re inadequate.
To play this game, you need money. The siren song is work harder, and you too, can join the moneyed
class. It’s seductive: we all know someone who did win: the entrepreneur who struck it rich, hard-working
immigrants who scrimped to put the kids through college, clawing their way to the middle class.
But Thomas Piketty’s book Capital in the 21st Century shows the system is rigged. Working harder won’t
ensure prosperity. Without transformation of the financial system, the neoliberal ideology that has
imposed austerity around the planet is punishing everyone who is not an owner of capital.
GDP and prosperity
Such a situation is fragile. After 9/11, George W Bush famously implored a panicked public to go
shopping. Not for therapy, but because his advisers rightly reckoned that an economy built on
consumption acting as if no shock has happened will achieve precisely that economic impact – no
contraction.
At all costs, keep Wall Street prosperous. So governments bailed out the banks, the 10 biggest of which
are bigger now than they were before 2008, as most of the world’s people live on the edge, further from
prosperity.
Despite its creator, Simon Kuznets, warning that it could never measure anything beyond the velocity of
the economy, gross domestic product (GDP), the international metric for wellbeing, counts increased flow
through the economy of money and stuff as better. But that’s clearly wrong.
Spending money may increase GDP, but not necessarily wellbeing. Robert F Kennedy observed in 1965:
“Gross National Product counts air pollution and cigarette advertising ... ambulances to clear our
highways of carnage ... locks for our doors and the jails for the people who break them ... destruction of
the Redwood and the loss of our natural wonder in chaotic sprawl.
“It counts napalm, nuclear warheads and armoured cars for the police to fight the riots in our cities. Yet
the gross national product does not allow for the health of our children, the quality of their education or
the joy of their play ... beauty of our poetry or the strength of our marriages ... It measures neither our wit
nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our
country, it measures everything in short, except that which makes life worthwhile”.
Employment and prosperity
Politicians cling to growth because historically it tracked to job creation and prosperity depends on having
a job.
The new political currency, job creation, justifies any expenditure. But can enough jobs deliver shared
prosperity? Automation, structural changes in the economy and the jobless recovery suggest not.
Can new jobs even pay enough? Wal-Mart got a black eye for putting boxes in stores for its own
underpaid associates to donate food so the least-well off of its employees might have a Thanksgiving
supper. Slammed in the media for tone-deafness, Wal-Mart’s same store sales have been dropping,
despite its prior success with green initiatives. In contrast, Costco takes care of its employees, paying a
living wage so that they are able to buy their own supper, and has rising same-store sales year on year.
What we really need is not a job but an assured livelihood. Some European countries discuss whether a
minimum living should be considered a basic human right. Opponents ask how to pay for it – by which
they really mean how do we keep people from becoming lazy slackers? A financial transaction tax or
Peter Barnes’ tax and dividend approach to limit carbon emissions could generate the funds.
How might people create meaning in their lives if they do not have to define themselves by the job that
they do? Interesting trends, such as a rejection of home and car ownership, suggest there’s greater
hunger for meaning and relationships in life than for accumulation of stuff.
Millennials’s preference for their mobile phone over the keys to a car reflects a bundle of choices that are
both encouraging and scary: a shift in consumer preferences to the sharing economy is key to buying
time to deal with looming resource shortages, but could spell disaster for many industries: the rise of Uber
and Lift have taxi companies mounting campaigns to get them banned as they offer their customers a
viable alternative.
But customers love such services, and are using them to transform their lives. Airbnb founder Joe Gebbia
proudly describes how his “hosts’” choice to share unused space with strangers can allow them to quit
hated jobs, celebrating a trust economy that underpins his entrepreneurial success.
The changing face of prosperity
This is not only a western phenomenon. Dr Hiroshi Komiyama, chair of Mitsubishi research, has shown
that demand for consumer goods is saturating in Japan. People have what they want, so buy less.
Japan’s no-growth society, far from stagnation has delivered rising happiness, at least until Fukushima.
The current, neoliberal government, however, is trying to reverse the clock, grow the economy and
reopen nuclear power plants, but it remains to be seen if that’s what the people want.
Dr Nan Zhou of Lawrence Berkeley National Laboratory described a similar phenomenon in China, as
well as how energy efficiency and increasing use of renewable energy can not only deal with looming
energy shortages but clean up China’s deadly air and combat climate change.
These are but a few examples of a new narrative of what it means to be prosperous – what
Scandinavians call “lagom” - having enough. A new narrative is emerging from New Economics
Foundation, Capital Institute, New Economy Coalition, the Club of Rome and the Alliance for
Sustainability and Prosperity of an economy that will deliver prosperity for 100% of humanity – an
economy in service to life.
But we can’t do it alone.
L Hunter Lovins has been a promoter of sustainable development for over 30 years. She is president of
Natural Capitalism Solutions