5-1 Towards an Ecological Macroeconomics

• Identifying author's purpose
• Discovering the meaning of new vocabulary from context
• Objective three

Towards an Ecological Macroeconomics

Tim Jackson, Ben Drake, Peter Victor, Kurt Kratena and Mark Commer

A recent surge of interest in the development of an 'ecological macroeconomics' (Jackson 2009, Jackson and Victor 2010, Rezai et al 2012) speaks to several shortcomings of conventional economics. One of these shortcomings is the inability of conventional economics to integrate a coherent description of the financial economy into its models and policy prescriptions for the so-called 'real economy' (Keen 2011)¹.

The failure of almost all mainstream economists to foresee the global financial crisis of 2008/9 provides abundant evidence for this shortcoming (Bezemer 2010). Just a year before the onset of the great recession the then chairman of the U.S. Federal Reserve Ben Bernanke failed to foresee the financial crisis in a report presented to the U.S. House of Representatives (Bernanke 2007). In his report he states that “the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend.”

The IMF was similarly blindsided when in August 2007 it stated that “notwithstanding recent financial market nervousness, the global economy remains on track for continued robust growth in 2007 and 2008, although at a somewhat more moderate pace than 2006. Moreover, downside risks to the economic outlook seem less threatening than at the time of the September 2006 World Economic Outlook.” (IMF, 2007). The crisis revealed painfully that the apparent economic success of the ‘great moderation’² was largely built on a growing fragility in the balance sheets of firms, households and nation states (Barwell and Burrows 2011, Koo 2011). But these risks remained invisible to most economists and unpredicted by the majority of economic models.

In the wake of the crisis, economists have therefore placed a renewed importance on the task of understanding the behaviour (and in particular the stability or instability) of the financial economy and integrating this understanding into the workings of the real economy. A host of new research initiatives and the re-emergence of some earlier schools of thought bears witness to this new turn in economics (Keen 2011, Minsky 1994, Turner 2013, Wray 2012). These new insights provide important foundations for prospective models of the transition to sustainability.

Paradoxically, the expansion in economic activity across most regions of the world over the last three to four decades has been at best ambivalent in terms of human wellbeing outcomes. Increases in economic output are highly correlated with increases in wellbeing in the poorest countries; but the impacts were less pronounced in more developed countries (Kubiszewski et al 2013, Victor 2008). Cross-sectional patterns in life expectancy, infant mortality, maternal morbidity, participation in education and even life-satisfaction all show diminishing returns as incomes rise (Jackson 2009, Layard 2005, Steinberger et al 2013) and there is evidence to suggest that the increased materialism which has accompanied economic growth also undermines wellbeing (Dittmar et al 2014, Pieters 2013).

One important culprit for the diminishing returns to income in terms of wellbeing is a deepening of inequalities both within and between nations (Stiglitz 2013). In some of the richest countries across the world, overall increases in average per capita income have masked falling real wage levels and declining social investment, with both income and wealth increasingly concentrated in the top decile (OECD 2008).

At the same time there has been an improved understanding both of the mechanisms through which this inequality is created (Piketty 2014) and of the impacts it has on human wellbeing (Wilkinson and Pickett 2009). Ultimately, it is clear, prosperity for the few, achieved only at the expense of the many, cannot be regarded as sustainable. Modelling the transition to a sustainable economy must certainly make some attempt to account not just for total output but also for the distribution of incomes, wealth and wellbeing.

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1. We use the term real economy here to describe the set of relationships that describe the production,
   and consumption of goods.
2. The ‘great moderation’ refers to a period of economic history in which the volatility of business cycles
   decreased, recessionary pressures were largely averted and inflation was deemed to be tamed.

Foundations for an Ecological Macroeconomics: literature review and model development