Capitalism and the Planet

Can Growth and Innovation Lead to a Lighter Environmental Footprint?


July 27, 2016 | Ted Nordhaus

The notion that high living standards and environmental protection represent a zero-sum game finds expression on both the left and right. On the right, the charge that environmentalists prefer trees and endangered species to people is a long-standing trope. On the left, the idea that humans must dramatically downscale consumption, lest the earth that sustains us collapse, has animated modern environmental thought since the early 1970’s.

So-called “bright greens” have challenged this dichotomy, suggesting that with the right technologies and social arrangements, the future might be different than the past. But the basic idea, that economic growth and rising living standards have been made possible by ever greater exploitation of the environment and natural resources, underlies virtually all contemporary environmental debates.

And while it is true that rising population and consumption over the last three centuries has resulted in higher environmental impacts in the aggregate, it is also true that resource use in relation to economic output has been falling. Farmers produce more food on less land, and with less water, fertilizer and pesticides. Manufacturers produce more widgets with less energy and material inputs. Indeed, virtually every sector of the global economy has reliably and dramatically improved the efficiency with which it uses materials and energy over the last century.

These trends have been not much considered in debates about the environment and the economy. But they hold considerable promise for both because it turns out that the mechanism that accounts for falling material demands upon the environment per unit of economic output is the same mechanism that most economists agree accounts for long-term economic growth: total factor productivity.

Economists once thought that economic growth was largely accounted for by growth in available land, materials, and labor, and this intuition largely underlays the notion that economic growth must, inevitably, come at the expense of the environment. But in modern economies, those factors can account for little of the long-term growth that has been observed. The rest of it is accounted for by productivity improvements: the efficiency with which inputs, land, labor, materials, and energy, are used in production processes.

This fact undermines claims made about the environment and economic growth. Modern societies have become wealthy by becoming less dependent upon nature and the material bounty it provides, not more. So an end to global economic growth is not a necessary precondition for sustainability. What determines human impacts upon the environment are the resource demands of economic production and the pollutants associated with the transformation of those resources into consumer goods. The size and value of the human economy is not intrinsically associated with either, as long term improvements in resource productivity demonstrate.

Of course, material consumption and environmental impacts are still rising, as population continues to grow and as billions of people make the leap from deep agrarian poverty to modern social and economic arrangements. But both population growth rates and economic growth rates are slowing in many parts of the world, as fertility rates crash after the demographic transition and economic growth rates reliably slow after the early stages of industrialization and urbanization.

In a new Breakthrough Journal article, "Does Capitalism Require Endless Economic Growth?" economist Harry Saunders pulls together these threads to demonstrate that long-standing claims that capitalist societies will inevitably exhaust the natural capital upon which they depend are not supported by either standard economic theory or observed trends. As societies become wealthier, people work less and have more time for leisure. Material consumption saturates. Even in junk food-addled America, there is only so much food most of us can eat in a day. Outside of "Lifestyles of the Rich and Famous," most of us only have so many cars and homes we wish to maintain.

Saunders goes further, arguing not only that material consumption is already beginning to saturate in wealthy economies but that capitalist economies do not require growth at all. Once a certain level of material prosperity is achieved, capitalist economies, all else equal, will evolve to a steady state -- at least that is what neo-classical theory suggests.

But from the perspective of environmental protection, all that matters is that global calls upon natural resources and pollution must peak and then decline. With stabilizing population, slowing overall economic growth, and continuing improvement in resource productivity, there is every reason to think that such a future might be possible.

Of course, capitalism does not actually work the way that neoclassical economists draw it up in their theoretical models. In the real world, all capitalist economies are, to varying degrees, mixed economies. Modern market economies are creations of modern states. Most of the technologies that have driven rising total factor productivity -- modern agricultural techniques and inputs, energy efficient turbines and machinery, microchips and satellites -- have been jointly developed by public and private actors. And the trends that Saunders observes are robust across economies as heterogeneous as Japan, the United States, and Scandinavia, suggesting that the particular mode of mixed capitalist economy is less important than having functioning, innovative markets and public institutions in concert. 

Ultimately, human prosperity and ecological sustainability depend on the choices we make today and the way that market economies, public institutions, social values, and consumer preferences continue to coevolve. It is possible that capitalist economies will fall apart either as shifting social values and political fault lines undermine the institutions upon which capitalism depends or because ecological pressures, most plausibly those associated with climate change, overwhelm the ability of human societies to adapt to them. But what Saunders demonstrates is that neither scenario is an inherent outcome of capitalist economic arrangements, as critics of capitalism from Marx onwards have in one form or another suggested.



Harry Saunders is a Senior Fellow at Breakthrough Institute and the managing director of Decision Processes Incorporated.




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