The economics of enough

<p><strong>Viv Davies</strong>: Hello, and welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I'm Viv Davies from CEPR. It's the 20th of April, 2011 and I'm talking to Diane Coyle of Enlightenment Economics about a book she's recently written entitled <em>The Economics of Enough: How to Run the Economy as if the Future Matters</em>.</p>
<p>The book addresses the need to create a sustainable economy, how to consider tomorrow's needs as well as today's. It covers a broad range of issues and sets out some of the initial practical steps that will be needed to build a future economy that's based on a true sense of value.</p>
<p>I began the interview by asking Diane to outline what the book is about and to explain why it needed to be written.</p>
<p><strong>Diane Coyle</strong>: It's really about time horizons and economic policy, and in particular, how to develop policies and be able to implement policies that have a longer time horizon.<br />
And the trigger from writing it, there were several, but one in particular was the financial crisis. Lehman's Brothers collapsed, the overnight interest rate in the interbank market shot through the roof.</p>
<p>And I looked at that and I thought, &quot;Golly, the banks don't trust each other enough to lend each other money overnight. And in that case, why should I trust the banks either?&quot; And I spent the next week going to the cash machine taking out the maximum I was allowed every day.</p>
<p>And a year or so later, the Bank of England confirmed that actually the electronic clearing system and the payment system and the ATMs had almost stopped working. They'd come within a hair's breath. You don't get crises of capitalism any bigger than that.</p>
<p>And at the same time, there are obviously lots of other quite long term interactable problems facing the economies. One that we have thought about a lot is the environmental challenge. Climate change is a very long term collective problem and the mechanisms we have for responding to it in terms of policy don't seem to work at all.</p>
<p>Then on top of that, there are questions about the social sustainability, particularly in the Anglo Saxon economies of extreme income inequality people without any ladder of opportunity out of pretty awful lives trapped in welfare, obviously very complex reasons but again, one of those interactable long term challenges. All this, against a backdrop of deteriorating demography, aging populations, and all the issues around pensions and sustainability of health care systems that come with that.</p>
<p>And also the challenges of responding to quite profound technological changes, a general purpose technology that is upending institutional structures. Where there's already been quite a lot of response in the private sector in terms of how businesses organize themselves much less in terms of how the public sector organizes itself.</p>
<p>So across the whole waterfront of economic policies, it looked like public policy was finding it impossible to respond at all and certainly respond on a long term horizon to very long term problems. The timing issue, the question about time horizons seemed to me to be the common thread linking all of these things, and it was bringing all of those together that led me to write the book.</p>
<p><strong>Viv</strong>: The title reminds me a little of that maxim that inspired the sustainability movement or the sustainable development moment for Our Common Future from Gro Harlem Brundtland in I think the early 1980s.</p>
<p>I guess a lot of that motivation and basis for considering the future generations rather than utilizing resources now for your own needs. That's probably something that's informing this book as well.</p>
<p><strong>Diane</strong>: That's right. And that sustainability literature, although it's been maybe geared towards environmental questions, actually, I think is a really fruitful way of thinking about all of these types of problems. The basic question being are you leaving future generations at least as well off as you have been yourself or are you actually in some way consuming capital and making it impossible for them to have the same standard of living or welfare?</p>
<p><strong>Viv</strong>: So you suggest in the book that the building blocks for the Economy of Enough are measurement, values, and institutions. Perhaps you could elaborate a little on that for us.</p>
<p><strong>Diane</strong>: OK. Well, the measurement one I think is really interesting. And actually, I think economists in the past have been somewhat guilty of not paying enough attention to statistics, not only the quality statistics and how to treat them property econometrically, which has obviously improved massively, but also, what data should be collected, and this has always been seen as a little be anoraky I think. But you would never try to assess the health of a company or a household without thinking about the balance sheet as well as income flows.</p>
<p>And so in the same way, it's looking at national balance sheets in some sense that allow you to internalize the tradeoff between the present and future. You don't know whether or not you've got a sustainable economy if you don't know what&rsquo;s happening to all the different forms of capital.</p>
<p>So I talk in the book about this concept &ldquo;comprehensive wealth&rdquo; that Partha Dasgupta and others have worked on and start to try and calculate, which includes not only financial and physical infrastructure but natural capital, social capital, human capital.</p>
<p>Obviously, it is a very complex set of measurements to calculate, but I think it's really key, and much more important actually to put resources into that than in surveying people's happiness, which I think is a bit of a dead end in policy terms, although it's very fashionable at the moment.</p>
<p><strong>Viv</strong>: It's terribly fashionable here with the UK government and the &ldquo;big society&rdquo; and all that. So you believe in GDP as an indicator of growth for an economy, but it's not the only indicator.</p>
<p><strong>Diane</strong>: Well, actually, I think GDP is really important and it's been downplayed because the challenge has always been it doesn't include an environmental balance. It counts paid care, but it doesn't count care in the home that's unpaid. It's only market measure.</p>
<p>And all of those drawbacks to GDP are true and it therefore probably overstates welfare. But equally, it understates welfare in some really important ways because it never captures the welfare gains from innovation and the variety of goods, and that's massively understated by GDP.</p>
<p>But anyway, there&rsquo;s pretty clear evidence that GDP is linked to wellbeing or happiness. It's just not correct to say that they're not linked and it's a bit of a statistical blind alley to insist that GDP doesn't give you any information about peoples' welfare.</p>
<p><strong>Viv</strong>: And what about the values in institutions element of the analysis or your perspective?</p>
<p><strong>Diane</strong>: Institutions are the names we give to organizations that look beyond the individuals' profit maximization or utility maximization and whether it's social at any point in time or whether it's the transmission of wellbeing between generations. And &ldquo;institutions&rdquo; is sort of the collective name we give to that.</p>
<p>Institutions have been very profoundly challenged by new technologies. If you think about the climategate example, for instance. One of the problems that the scientists who were at the centre of that had failed to face up to was that the world is awash with information and they were not sufficiently transparent in the way to deal with the technological challenge, in that sense, is for the institution to become more transparent and they hadn&rsquo;t done that.</p>
<p>But again, across a whole array of economic problems, there seem to be governance issues and we now know how important governance is to good economic outcomes, so institution is another really important building block. It's very hard to generalize about them when you're going from global climate change responses to financial regulation It&rsquo;s a really broad front on which to try and make progress.</p>
<p>But I think institutions need great attention. And values is something that economists for, I don't know, a couple of generations have been rather embarrassed about talking about. Adam Smith certainly wasn't, and the point is really simple, that capitalism only really works well when it's got a set of ethical values at its heart.</p>
<p>I really do think that those values broke down. And there was an unacceptable level of greed and actually still is in the financial markets. We have to be not embarrassed about saying those sorts of values, particularly in public life but for anybody in a position of responsibility in the economy running a big business, running a bank, certainly running government policy morality is really important and that sense of a wider purpose than just money in your own pockets.</p>
<p><strong>Viv</strong>: Morality I guess begins at home, and a lot of people would say, how can you change institutions? The individual needs to change. A common sense of values or values to live by originate with the individual before the institution. So are you talking about a sort of renaissance or some kind of spiritual enlightenment for people generally, or it's something you think we can create from the society we have now?</p>
<p><strong>Diane</strong>: I think they interact. They obviously influence each other. There's a sort of two way causality there, that the individual sense of propriety affects the institution but equally institutions are very powerful ways of changing social norms and acceptable means of behavior.</p>
<p>Paul Krugman actually has a terrific article that I think was published around 2000 about executive boardroom greed and the way that reflected a change in social norms compared to the '50s and '60s, when he'd grown up. Corporate hierarchies then were very hierarchical, but the gap between top and bottom pay was not so large. The lifestyle of the top executives was not completely divorced from the lifestyle of the cleaning staff or the maintenance workers. So they influence each other I think.</p>
<p><strong>Viv</strong>: So this issue of equity you also address in the book where you discuss the trilemma in the management of the economy being a fundamental set of tradeoffs between using resources as efficiently as possible, sharing them fairly between people, and allowing people as much freedom and self determination as possible. Could you elaborate a little on that for us?</p>
<p><strong>Diane</strong>: These all sound like things that we want, don't they? We want the economy to be efficient. We welcome the freedom and variety that modern capitalism has brought us and, at the same time, we want a fair society.</p>
<p>Actually, there's a lot of evidence from the evolutionary biology and psychology literature that human beings care a lot about fairness. But if you push for two of these, you're going to lose sight of the other one. I think we had pushed on the first two and lost sight of the fairness, certainly in the US and probably in the UK in the 2000s, and lose one leg of the stool, the stool falls over.</p>
<p><strong>Viv</strong>: You end the book with what you call a manifesto, the manifesto of enough. Could you outline the kind of recommendations that you're making for governments going forward?</p>
<p><strong>Diane</strong>: There isn't a single big answer. And when you're trying to sell a book, that's actually a bit of a drawback, because there's a great appetite for what appear to be very simple answers that people can get their minds around easily. I don't think there is actually, so the manifesto is a lot of what might seem like quite small steps but all I think are necessary.</p>
<p>Some of them are about measurements, sticking with GDP but supplementing it with other indicators, quality of life indicators, health indicators. There's something called Measuring Australia's Progress, an annual exercise where the Australian Statistics Office asks every year in a consultation what people think is important and publishes it annually, and a lot of the indicators are the same kind that go into the human development index.</p>
<p>So it's really sensible to look at that broader array but also, as we discussed earlier, to add comprehensive wealth, which is an important political tool I think, policy tool, because there are hard choices. There are tradeoffs involved in not consuming today at the expense of tomorrow, and politicians actually need some help in getting to those hard choices.</p>
<p>And then there's another set of headings that are about institutional reform and experimentation with much more open governance and using the new technologies rather than just being threatened by them. And then on values, I think there&rsquo;s almost a national conversation or a global conversation about what ethical capitalism looks like. And what does that imply for the discussion we're having now about financial regulation or capital levels of banks and so on.</p>
<p>So no satisfying single answer but if had to sum it all up under one heading, it would be to regain the sense of the future matters is worth building towards. And so I end the book by referring back to the Victorians who had the same kinds of problems that we face. They had disruptive technologies. They had demographic challenges, globalization, great social tensions and social change, and they built the Manchester Town Hall. They built the sewage system in London. They built the railways. They created the joint stock company.</p>
<p>They introduced all these incredibly far sighted innovations, institutional innovations, bits of infrastructure with the expectation that this was going to matter in 100 years time. They cared about that, and that sense that we have a responsibility to what the world is going to be like in 50 or 100 years time is the single most important thing.</p>
<p><strong>Viv</strong>: So out of crisis comes opportunity.</p>
<p><strong>Diane</strong>: Yes, and obviously sometimes crisis is the only that you can get people to agree to make changes. We do have this problem of democracy.</p>
<p><strong>Viv</strong>: What do you think about the European government responses to the crises, the banking crisis and now the sovereign debt issues in Europe, et cetera? Do you think they've had a balanced response and a positive response to the crisis, or do you think it's all the same old story and we're repeating the same mistakes?</p>
<p><strong>Diane</strong>: I must say I think we're repeating the same mistakes. I'm not sure that it couldn't all happen again tomorrow. I think there has been&hellip;I don't know whether it's political failure of nerve or just a lack of clarity of vision about the sort of fundamental governance issues in the banking system.</p>
<p>Bonuses are not just a trivial matter. The size of the bonus pots in banking is a sign that bankers - people working in the industry - are profiting at the expense of their shareholders and their customers. The governance of banks is too weak, and they have too much market power. And unless those problems are addressed, there's nothing to stop them repeating the same kind of risk taking behavior that we've already seen.</p>
<p><strong>Viv</strong>: What would you recommend would be the way to address those problems?</p>
<p><strong>Diane</strong>: Review of governance, which was been so little talked about in the aftermath of crisis. It's really quite surprising. Many options there. Maybe unity boards are just not appropriate for banks, maybe it's the interplay between regulation and governance, but it's a thoroughly underexplored question.</p>
<p>And then I think the banks are too big. They are just too big. Particularly in the UK, there's great concentration in banking and they need breaking up. I don't myself have such strong views about whether it's a retail investment banking split. I just think they are too big and that &ldquo;too big&rdquo; part is the main part of too big to fail.</p>
<p><strong>Viv</strong>: Is the banking commission a good step forward do you think?</p>
<p><strong>Diane</strong>: It's a small step forward. My fear is that it is seen as something for the banks to take as an extreme position that they can lobby against and water down even more. If it were a first step, that would be fine, but I fear it's as it stands the best that we can hope for, and it's going to be even weaker when it's implemented.</p>
<p><strong>Viv</strong>: Diane Coyle, thanks very much for talking to us today.</p>
<p><strong>Diane</strong>: Thank you.</p>
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