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Is the economic system incompatible with climate action?

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By Aznita Ahmad Pharmy

· 17 min read

It was a few afters after the Y2K hype had died down and my task was to convert hard copy manuals into electronic versions.

Naturally, this had to be done via software and on one particular day, it caused some delay. My colleagues and I planned to go to the movies after work. I had one task to finish right before clocking out but there was a glitch in the system, and my colleagues and I ended up leaving the office later than we had planned. Although we made it to the movies on time, my colleagues kept giving me heat and my quote of that day was, “It’s not my fault, it was the system’s!”

Fast forward almost two decades later, I am beginning to see why the climate movement has made very little traction since the day James Hansen addressed Congress in 1988, the day the 1992 Earth Summit was held in Rio de Janeiro, the day the late Wangari Maathai received the Nobel Peace Prize in 2004, the day governments and businesses promised to “build back better” after the onset of 2020 COVID-19 pandemic, or the many other chances the world has had to change the way we treat the Earth system.

I had not always been interested in economics, but I see now why it is so difficult to change the way we live. It is true that our individual habits and lifestyles, particularly those in developed countries, have contributed to the current climate crisis. However, unless you’re a decision-maker involved in the proliferation of industries and policies that transgress the Earth’s planetary boundaries, the climate crisis is not entirely your fault — but we all have a role to play in understanding and changing the economic system.

My Economics 101

After diving deeply into environmental issues and climate change since the 2010s, I began to wonder how never-ending economic growth could be compatible with nature and the Earth system. What good has increasing profits and the non-stop marketing of even higher consumption ever done to the environment? Deep down, we all know the answer.

The current understanding of the economy in a nutshell: extract as much as you want (without charge or recompense) from the natural world, repackage it and spend a ridiculously large amount of money to market it to consumers (whether they need it or not). The profit received will be unevenly distributed with most going to shareholders and upper management, while the people who did the actual work at the bottom of the “organisational chart” receive a pittance due to their “low-level skills”, which make them not deserving of a fairer share of the profits and by extension, not deserving of a decent living wage. Wage progression has moved at a snail’s pace while inflation and the cost of living keeps rising.

When listed out (or read aloud) in such a manner, I am sure there are those who would disagree with my description. Some would say developmental economics has improved the standard of living of millions of people and lifted many developing countries out of poverty. While this is somewhat true, there are still millions living well below the poverty line while the inequality gap within countries and between the North and South gets wider. The system may be working but not for everyone.

The thing is, we have been so used to this current situation that we have accepted it as an inevitable; as how things have always been. So much so that anyone who questions it is automatically dismissed as being naïve, idealistic, unrealistic or to borrow a social media term, a “hater”. Anyone who criticises the current economic system are labelled as being jealous of the success of those who thrived under this system. Those who do not participate in this system are seen as lazy due to their unwillingness to play by the rules set by others.

Rise of discontent

To be clear, criticism against the current economic system has been going on since at least the 1970s. In Kate Raworth’s 2017 book Doughnut Economics, she highlighted ecological economists, such as Herman Daly, whom introduced a conceptual shift in economics by redrawing the economy as an open subsystem of the closed Earth system. Around the late 20th century, mainstream economics solely focused on labour and capital, with land being included as part of capital (if it was mentioned at all). This is why the current economic system today barely pays any attention to the living planet. Raworth mentioned that far from being a closed, circular loop, the economy should be viewed as an open system with constant flows in matter and energy going inwards and outwards.

Ecological economics meanwhile more broadly defines economics as the relationship humans have with society and nature in order to provide for their material needs. The gist of of it is that the economy is embedded within society, which in turn is embedded within the biosphere of the Earth.

Daly said that humans have left the ‘empty world’, where a small human population comes with low levels of per capita consumption, to a ‘full world’ where a much larger human population consumes more than the planet’s regenerative and absorptive capacity allows via over-harvesting natural resources and filling the natural environment with excessive waste (pollution).

In mainstream economics, incidences such as toxic spills in rivers or air pollution in the city are termed externalities, which are framed as a peripheral concern. Daly put it bluntly when he said such negative externalities are those things that we “classify as ‘external’ costs for no better reason than because we have made no provision for them in our economic theories.”

The consequences of human activities going beyond Earth’s limit was brought to the fore in the 1972 report Limits to Growth. In the report, a team of authors conducted a computer simulation of the global economy (one of the first to do so), exploring different scenarios up to 2100 by taking into account five factors seen to affect economic growth: population, agricultural production, natural resources, industrial production, and pollution.

The result was as one would expect: in a business-as-usual scenario, non-renewable resources such as oils, metals and minerals would be depleted, leading to a drop in food production and industrial output, which would ultimately lead to famine, de-population and greatly reduced living standards for all.

The report outlined ways in which the world could change this bleak trajectory to one where it could achieve ecological and economic stability that could be sustained in the long-term. The objective of the state of equilibrium would be so that the basic material needs of each and every person can be met while ensuring everyone has equal opportunity to realise his or her individual human potential.

However, seeing how things have developed so far, we can see that most policymakers and businesses at the time until the present day have largely ignored the report and other criticisms against the current economic system.

Humans vs. humans

If the previous section casts a light on how mainstream economics have severely undermined the Earth’s limits, how has it affected us humans? Let’s start with wages.

Based on the Global Wage Report 2022–2023 by the International Labour Organization (ILO), global monthly wages decreased by -0.9% in the first half of 2022 and was the first negative growth recorded since the first global wage report was published in 2008. This was partly due to the lingering effects of the COVID-19 pandemic and the trend of rising inflation which began in 2021.

Figure 1 shows the rise in global annual average real monthly wage growth from 2006 to the first half of 2022. Real wage or real income refers to a wage that takes inflation into account as opposed to nominal wage, which doesn’t. The trend differs between regions, high-income and low-income countries, and so on.

Figure 1. Annual average global real monthly wage growth, 2006–22 (percentage)

Source: ILO estimates based on official national sources as recorded in ILOSTAT and the ILO Global Wage Database

The chart demonstrates a relatively recent trend but if we go further back, we see that wages have not kept up with productivity. We also see that income disparity in advanced economies like the US continues to grow with the bottom groups showing negative income growth in one out of three periods assessed while the top 5% recorded positive income growth in all three periods. This point is illustrated below using US data.

Figure 2. Productivity growth and hourly compensation growth in the US, 1948–2016

Figure 3. Average family income growth in the US, 1947–2013

The popular belief of current neoclassical economics is that it would eventually bring prosperity to everyone — but the data shows otherwise. There is a small group that is paid beyond their needs while many more receive a wage that is below a decent living wage.

Most are also not even fulfilled in the jobs that they do. In an HP survey involving 15,000 employees in 12 countries, results showed that only 27% have a healthy relationship with work, while more than half (55%) say they have difficulty with self-worth and struggle with mental health. Out of those that have an unhealthy relationship, around three-quarters of them (76%) are considering leaving their company.

That is just one survey involving a fraction of global employees but I have a feeling that if you were to just ask around your group of friends, you may find that it is not far off the mark.

On top of this, we are well aware of land grabbing done by governments and corporations in the name of development. The end result is the displacement of disenfranchised groups and the removal of Indigenous communities from their ancestral lands. Deforestation also increases wildlife-human interaction, which can lead to disease outbreaks.

The air pollution from vehicle and industrial emissions is also killing us. According to the World Health Organization (WHO), air pollution is one of the main causes of death among all risk factors, ranking just below hypertension, smoking, and high glucose. An estimated 7 million premature deaths per year from heart disease, stroke, lung cancer, and pneumonia (mostly affecting children in low- and middle-income countries) are attributed to air pollution.

The United Nations Environment Programme (UNEP) says that 99% of the world’s population is breathing unsafe air. To understand what the safe limit is for air quality, the WHO global air quality guidelines cover particulate matter (PM2.5 and PM10), ozone, nitrogen dioxide, sulfur dioxide and carbon monoxide — these limits are good to refer to if you want to raise the issue to policymakers.

So, it turns out that apart from the heat trapping effects of the greenhouse gases (GHGs) caused by growth in industry and consumerism, there is also an adverse physical and mental health impact on humans from those GHG emissions.

The Global North and Global South

The effect of the neoclassical economic system on a global scale further reveals a disturbing reality. A 2021 paper by Jason Hickel et al titled “Imperialist appropriation in the world economy: Drain from the global South through unequal exchange, 1990–2015” showed that the global North has been appropriating resources from the South and this drain of resources is worth over US$10.8 trillion per year, when calculated in Northern prices.

This amount far exceeds the amount global South countries receive in aid by a factor of 30. To put it in perspective, US$10.8 trillion could have been used to end extreme poverty 70 times over in 2015. Between 1990 and 2015, the drain from the South to the North totaled US$242 trillion (constant 2010 US$).

The Global South is a term used to refer to countries around the world that are sometimes described as “developing,” “less developed” or “underdeveloped.” While most of these countries are in the Southern Hemisphere, it doesn’t necessarily mean all of them are. Countries from the Global South are mostly in Africa, Asia and Latin America. The Global North are richer countries that are mostly located in Northern America and Europe with some in Oceania and elsewhere.

I may use Global South with emerging economies or developing economies interchangeably. Similarly, the Global North with advanced economies or developed economies.

Going back to the numbers demonstrating the North appropriating resources from the South, Hickel’s study examined direct and indirect trade flows in 2015 between the advanced economies and the rest of the world and found net appropriation in these four categories:

  1. Materials: 12 billion tonnes equivalents of embodied raw materials
  2. Land: 822 million hectares of embodied land
  3. Energy: 21 exajoules of embodied energy
  4. Labour: 188 million person-years of embodied labour (equivalent to 392 billion hours of work).

The table below provides a better visualisation of the drain from the North to the South.

Table 1. Resource drain of materials, land, energy and labour from the South

Source: Hickel et al (2022).

We now see that advanced economies have been appropriating resources from emerging countries under colonialism and continue to do so in the post-colonial era.

During the age of colonialism, major powers extracted resources through overtly coercive terms such as mass enslavement and indenture. The colonial system supposedly ended with the withdrawal of colonial troops, but according to economists and historians associated with dependency theory and world system theory, the general structure of the colonial economy remains in place to this day.

Advanced economies and megacorporations use their geopolitical and commercial clout in the world economy to depress or cheapen the prices of resources and labour in emerging economies, both at the level of whole national economies, as well as within global commodity chains. As a consequence, for every unit of embodied resources and labour that the South imports from the North, they have to export many more units to pay for it, thus enabling the North to achieve a net appropriation through trade. This dynamic is known as a process of “unequal exchange”, theorised by Arghiri Emmanuel and Samir Amin. Analysis from Hickel’s paper found that unequal exchange is a prominent driver of global inequality, uneven development, and ecological breakdown.

The gist of the paper is that the global North has been taking advantage of the global South via the global economy under the guise of ‘meritocracy’. If countries in the global South have not achieved the global North’s level of economic success, they say it is because countries in the South lack strong institutions, good markets, and a steadfast work ethic or are plagued by corruption and bad governance. Hickel’s study noted that while the paper looks at North to South net appropriation, it also happens between the global South countries and within countries.

What this means is that this global economic system with unequal exchange is also being practiced by those in the global South. And how can it not be, when lifestyles of the globally-rich are promoted as global aspirations for everyone, including those in the South. The capitalist model of hyperconsumption, extractivism, commodification and a discard culture of increasing waste production are packaged as symbols of progress, while their environmental consequences are ignored.

My thoughts as someone from the global South is — why should we continue to worship and replicate such a system?

If it’s the system’s fault, we need to change it

Transitioning to green growth, sustainable growth, and so on is just replacing energy derived from fossil fuels with renewable energy. But the underlying economic foundation will still remain the same. Corporations will still pursue higher growth; governments will continue to implement policies that drive higher GDP; all pathways will maintain hyperconsumption and discard culture.

The products we use will just be replaced with supposed environmentally friendly materials or materials that can be recycled or upcycled. The thing is, all these remain lip service. Bioplastics are not as biodegradable as they claim to be, and only a small percentage of collected plastics and clothing are actually recycled. In some cases, recycling factories cause pollution and emit GHG emissions as well.

Simply replacing an outdated system with different materials will not save the planet. A systems-wide change is needed. One that not only puts the planetary boundaries front and centre but also takes into account decolonisation, climate justice and ecological justice, particularly of the global South.

Policymakers need to start looking at other economic theories that challenge mainstream economics ranging from ecological economics, doughnut economics, post-growth, de-growth and agrowth (growth agnostic). But what is clear is that the world cannot continue with the current economic system. According to Farhana Sultana, this will require a critical examination of existing governance structures and processes, and a commitment to more inclusive, equitable and just forms of environmental governance.

This change will require demand from the public and social movements. Seeing that the global elites (and others who benefit from the status quo) would want things to remain the same, so regulatory shifts, cultural shifts, and policy changes must come from the bottom up.

All this may seem like an uphill task but it is not outside the realm of reality. It boils down to a question of intent, action and decision-making. I know most of us (including myself) find it hard to even imagine having an economic and political system other than the one we have now, but it may not be as impossible as we think.

In their book, The Dawn of Everything, archaeologist David Wengrow and the late anthropologist David Graeber discuss how recent archaeological findings hint that our distant ancestors may have regularly moved back and forth between different social orders (e.g., monarchy vs egalitarian communities), sometimes as frequently as the change in seasons. The real question is, according to them, how did we get stuck and end up in single mode? How did we lose the freedom to imagine alternative economic or social orders?

For starters, we need to learn more about the structures of the system we live in. Not just economics, but disciplines that consider how everything on this planet is interconnected. We need to understand more about decolonisation, education, climate justice, multi-species justice, gender equality, food security, anthropology, the way the Indigenous communities around the world manage natural resources and so on.

“Get educated. Don’t let people pull your strings,” The Adventures of Pinocchio by Carlo Collodi.

We all need to know about economic thought and theory, if we do not want to become the passive victim of someone else’s decision, as mentioned by Ha-Joon Chang in his book, Economics: The User’s Guide. He says that knowing the strengths and weaknesses of the different types of economics should not be reserved only for economists; it should be a collective effort by everyone to make the subject better serve humanity.

I started my learning journey relatively recently and encourage everyone to do so. All the books and papers mentioned in this article are highly recommended reading. Due to the rapidly closing window remaining to mitigate the effects of climate change, we need to learn and take action at the same time, whenever there is an opportunity.

This article was first published on The New Climate. Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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About the author

Aznita Pharmy is an independent climate change and science writer based in Kuala Lumpur, Malaysia. She has more than a decade of experience in the publishing field, having taken on roles including writer, copy editor, project editor, and policy researcher.

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