Either or?
Many wonder how to navigate a polarized debate between those who believe that:
Without persistent economic growth (as measured by GDP) the economy would become unstable because of asset value decay, unemployment, and financial instability. The likely result would be collapse, while others believe that…
With persistent economic growth (as measured by GDP) the economy would become unstable because of ecological depletion and decline undermining reliable resource input and destroying fundamental ecological services economies depend on. The likely result would be collapse.
What’s the way out?
Rather Focus on Wealth
Many societies, particularly those in which growth versus degrowth is debated, share an overarching goal: to secure prosperity for all, across time and space. While the strategies to achieve this goal may vary, the pursuit of prosperity is a prevalent objective, whether explicitly stated or implicitly understood.
Starting with this shared goal offers guidance for transcending the fundamental clash of perspectives between growth and degrowth. It prompts us to recognize that the crucial issue is how to produce and sustain society's ability to prosper, i.e., how to secure its wealth. In this context, income is seen as a possible strategy, a means to an end rather than the end itself.
Unfortunately, the prevalence of GDP has led to a bias, if not an obsession, with income in current policy development. This focus often results in overlooking the more fundamental goal of serving society's prosperity. Therefore, rather than being preoccupied with the dichotomy of growth versus degrowth, it is more beneficial to redirect investors' and society's attention toward determining what contributes to, rather than diminishes, true wealth. This should guide decision-making regarding activities or investments, with the focus shifting from its impact on GDP to its impact on genuine wealth.
Defining Wealth
While income represents a flow, indicating an amount per year, wealth is characterized as a stock, signifying a cumulative amount. It encompasses all assets and liabilities combined and can be viewed as the total of elements that enable a society to generate income or services over time. [1]
Current economic policy thinking predominantly centers on income, often neglecting the depletion of assets in the process. However, these depleted assets play a crucial role in society’s ability to generate income. Additionally, the focus on income overlooks whether investments are contributing to building assets with a future value or ones that might turn into liabilities.
Wealth extends beyond being simply “money in a bank account.” A more comprehensive interpretation acknowledges the physical nature of wealth or capital. Essentially it is capacity. This capacity encompasses the ability to feed, transport, house people, produce goods and services, and involves organizational structures and relationships that facilitate effective collaboration. It also includes tested knowledge[2] that enhances our ability to achieve predictable outcomes. [3] Increasing wealth, therefore, involves building capacity to meet future wants and needs. In a future marked by climate change and resource constraints, capacity that can function effectively in that environment will be highly valuable.
The practical question for every public investment is whether it enhances society's capacity to provide critical goods and services for a thriving population. The same question is relevant for private investments because assets that enhance society's ability to thrive in the foreseeable future stand a better chance of increasing in market value.
Consequently, it is beneficial for both investors and society at large to focus on assets, including companies and urban projects, that boost society's capacity to operate effectively in the predictable future.
Wealth versus GDP thinking
The emphasis on wealth rather than income in this approach deviates significantly from current practices. Most policy debates remain fixated on GDP.
GDP primarily tracks key income streams, representing a flow or an annual amount. However, GDP falls short by excluding other relevant flow aspects, such as in-kind contributions and stock depletion. Consequently, GDP considerations fail to capture the true change in asset values. Building wealth is, therefore, distinctly different from both GDP and annual GDP growth.
Furthermore, GDP growth on its own often results in increased demands on nature, leading to higher 'Ecological Footprints.' In contrast, a wealth-focused approach pays attention to the assets being constructed and evaluates whether they facilitate the generation of income or useful services over time. If assets are encouraged that may eventually become stranded, this effort is detrimental to wealth, ultimately impoverishing society.
Therefore, look for value
To transcend the paralyzing debate between growth and degrowth, shift the focus towards cultivating genuine wealth. Genuine wealth is defined by the capacity to operate effectively in the predictable future. The specific strategy, whether it involves economic growth or degrowth, becomes secondary in achieving this desired outcome.
Narrow down your inquiry and ask: Are your decisions contributing to enhancing the value of your business, city, country, or assets in the predictable future?
[1] Wealth is made up of several types, some of which are critical. Critical means that less of that component cannot be compensated by more in another wealth type. For individuals, for example health may not be compensated with more real estate wealth. For society, insufficient ecological wealth means other wealth types are also becoming compromised and cannot be expanded without more ecological wealth. Social trust is another critical component of societal wealth, as lack of social trust cannot be easily compensated with more of other kinds of wealth.
[2] Such knowledge also requires physical activities to produce it, store it, distribute it. Not even knowledge is fully dematerialized.
[2] Wealth, or rather capacity, comes therefore in various shapes and forms. Some aspects are less physical, such as trust or knowledge, other one is very physical, such as nature or urban infrastructure. Money gives the illusion of infinite substitutability, which obviously is not the case across all wealth dimensions (timber production without forests cannot be compensated with more sawmills; lacking fish resources cannot be compensated with more fishing boats, as Herman Daly pointed out). To build wealth, the question becomes what kind of assets is most limiting for enabling a thriving situation. Wealth is therefore not just one number. Still numbers matter. It is helpful to quantify various wealth aspects. For traded human-made assets, such as enterprises, a market value can be established. For those assets, it is likely that their market value is gaining if they strengthen society’s capacity to operate. As we enter a predictable future of climate change and resource constraints, the capacity to be able to operate means that the ability to operate in that very future. In contrast, assets that are less able to operate in such a future are more likely to lose in market value as they are less able to provide needed services.