Reinventing Prosperity. Graeme Maxton
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developed world while slowing the pace of climate change. It is about how to make sure that everyone has enough paid work, or enough income, to live comfortably. It is about how to make the transition to a cleaner, greener world without making people worse off in the process.
Many of our recommendations are unconventional, and some will certainly be controversial. Because they frequently run against the current political and economic tide, the knee-jerk reaction may be to reject them. They often require a little time for reflection before people can see that they really do describe a better path forward, a viable way to increase average living standards everywhere.
To help the reader understand the intellectual basis of our book, we have included a number of boxes in the text with extra information in the form of a short answer to a question that inquisitive readers are likely to be asking themselves.
We have sought to place the boxes on the page where you are likely to ask the question first. But you might also want to use the list of boxes on page vii to navigate as questions spring to mind.
We have already said that many of the ideas we present in this book would increase average well-being, or living standards, in the rich world. One of the main obstacles to this is what we call “extreme free-market thinking” (see Box: What is “extreme free-market thinking”?).
What is “extreme free-market thinking”?
Extreme free-market thinking is the sort of thinking that seeks individual consumption growth, promotes competition and free trade, views collective action as inefficient, and sees high taxes and strong government as dangerous. It promotes the idea that raising output (GDP) is more important than raising the output per person (GDP per inhabitant). It argues that the best way to increase well-being is through boosting GDP, downplaying the fact that this often serves the interests of the rich more than the poor. Finally, it enforces short-term thinking by using high interest rates to discount the future costs and benefits of human activities (for an explanation of this see Box: What is short-termism?).
We are painfully aware that extreme free-market thinking is fully, or at the very least partly, embraced by most of the rich world’s citizens, who are more interested in boosting short-term consumption than the well-being of current and future generations. We see this short-termism as another significant obstacle that needs to be overcome (see Box: What is short-termism?).
What is short-termism?
Short-termism is the tendency to place more emphasis on the short-term consequences of a decision—on what it might mean for people over the coming hours, weeks, or years—than on the long-term consequences—on what it might mean over the coming decades, possibly even beyond the lifetime of current generations.
In economic theory, and often in the practical world of business and government, people generally choose the outcome that offers the highest net present value (NPV). The NPV is the sum of all the future costs and benefits of a decision discounted to their value today. It recognizes that a benefit in the future is worth less than it is today. That is, $10,000 today is better than $10,000 in a year’s time. This is because you could invest the $10,000 you have today in a business or put it in the bank and earn interest. If you could earn 10% a year, then you would have $11,000 in a year. (To keep things simple, we are excluding the effect of inflation.)
Economists in both business and government calculate the NPV using something called the “discount rate.” When it comes to big decisions, such as building a new airport, this is usually set quite high—at around 10% a year—partly because there are many other competing uses for these funds.
To find the total NPV of a project, they add up the discounted net income (revenue minus the costs) from each year, and if the cost of building the airport today is less than the total discounted revenue made over the life of the project, it has a positive NPV and is deemed “profitable.” Conventional economics says it therefore makes sense to make the investment and build the airport.
This approach has several troubling consequences, however. It means that the benefits that accrue more than thirty years into the future have very little value at all, and the further ahead they lie, the lower they are valued today. This is because the further any benefit lies into the future, the more heavily it is discounted, so the less it appears to be worth.
This means that costs in the future have almost no value either. If people do something today that will damage the environment in fifty years, then that cost is valued at almost zero today. With a 10% discount rate, $1 million of damage in fifty years has a consequence that is valued at just $9,400 today, according to this sort of financial thinking.
The use of these high discount rates is one of the main reasons why most of the actions needed to stop climate change are so difficult to implement when the alternatives are to create more economic growth or do nothing.
If we had some magical power, we would end this short-termism in markets, politics, and the population at large. Sadly, we do not have magical powers. But we do have extensive knowledge of economics, climate science, and human development. So we have restricted ourselves to thirteen proposals that could not only create a better world but also offer immediate benefits to the majority of people. We have, in other words, only offered proposals that should be politically feasible in societies with a short-termist view of the world.
We wish you good reading, and hope that you might find something in what we write that will inspire you to help build a better world.
GPM AND JR
Europe, August 30, 2016
Please note: The views expressed in this book are those of the authors, and although they are shared by many of our colleagues in the Club of Rome, they do not represent the views of the club.
– CHAPTER 1 –
TWO URGENT PROBLEMS IN THE RICH WORLD
Two of the most urgent problems facing the modern rich world are persistent unemployment and rising inequality.
IN THE RICH world, the gap between rich and poor has been widening.1 As there has been strong economic growth for most of the last thirty years, this is something of a puzzle. Economic growth was meant to reduce inequality. The trickle-down effect, where the spending by the rich descends through some sort of economic filtration into the pockets of the poor, should have fortified the general population and raised living standards for everyone.
Yet millions of people in the rich world today live in conditions more like those of Victorian Britain. In the United States, 49 million people—out of a total population of 320 million—live in poverty.2 In Europe, it is one in every seven.3 In Eastern Europe, Spain, and Greece, poverty affects one in five, with women, single-parent families, and the young worst affected. Including those on very low incomes, a quarter of the population of the developed—rich—world is currently classified as being “at risk of poverty or exclusion.” That is almost 200 million people.
As the gap between rich and poor has widened, unemployment has also risen throughout the rich world, and it remains stubbornly high. Particularly badly afflicted are those under the age of twenty-five, though millions of baby-boomers in their fifties and sixties have found themselves without any income, pension, or work prospects too. And there has been a huge increase in the number of under-employed, those who want to work more but cannot find a paid full-time job.
At a time of record global wealth, and after so many decades of healthy economic growth, none of this should be. For decades, economists told people that economic growth would bring jobs, better incomes, and higher standards of living. But it has not.
What on earth is going on?
British