Economic Growth: a paradigm, an ideology, a system

Submitted in Partial Fulllment of the Requirements for PACS 301-01: Promoting Peace in Perilous Times Course Instructor: Lowell Ewert and Mary Lou Klassen

Caleb Gingrich Faculty of Engineering Department of Systems Design Engineering

January 3, 2012

Contents
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 3 Paradigm of Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Growth as Saviour: A False Ideology . . . . . . . . . . . . . . . . . . . . . . Understanding Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A modied system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3 5 7 14 16 27

Acknowledgements
I am familiar with uWaterloo Academic Policy on academic ethics and arm that this paper does not violate any of its provisions.

I would like to thank the following people for their assistance in writing this paper. They all provided useful resources and directed me in helpful directions. Luann Good Gingrich Lowell Ewert Paul Fieguth Mark Vander Vennen Judy Paul Ernie Lightman Rebecca Bartel

Executive Summary
In the modern world, economic practises impact every aspect of life. It is crucial to understand these practises, and the paradigms and ideologies that drive the economic system. When facing issues of international peace, it is impossible to create eective change without understanding the economics driving behaviour of individuals, companies and countries. The reigning economic paradigm is that of continuous, innite growth. However, this is doomed to fail, as the planet sustaining this economy is nite - the physical space, the resources available, and the energy ows are all nite. There are several indications that human civilization is reaching the limits of the planet: peak oil and peak phosphorus, resources that power our economy and our food production, are at the highest possible level of production, as will soon begin to decrease. Economic growth as an ideology is trumpeted as a the solution to most socio-economic and environmental problems. It is important to realize that the positive correlation of happiness and economic income only holds up to US$10,000 per capita income. Technological advancements driven by economic growth decouple economic growth from negative environmental impacts, but while environmental impacts per dollar are decreasing (relative decoupling), the total environmental impact is not (absolute decoupling). The limits of GDP as an economic measure are also embedded in this ideology. When increasing the GDP is the goal, any expenditure is a positive action, and issues of equality are not considered. Human understanding of the economic system is founded on several key assumptions: rationality of actors, perfect information, and perfect mobility. The assumptions are clearly false, and there impacts are not understood. To create an economic system that truly

respects the planet and its people, a new paradigm and measurement system is needed. The Genuine Wealth Assessment model presented in The Economics of Happiness by Mark Anielski provides a model based on more holistic denitions of wealth and capital. The GWA method allows the values of the community to be embedded in the economic analysis of the community. Anielskis work is expanded by suggesting the creation of a Centre for Genuine Wealth Assessment in a community. This Centre would work with the citizens of the community to conduction the background work necessary to complete a GWA, dene the indicators and benchmarks to be used by economic actors in the community (government and companies), and collect the data necessary to complete GWA as well as other holistic Return on Investment analyses quickly. The Centre would expedite the shift of the economy to a fruit-bearing economy, allowing companies to easily adopt a holistic accounting system.

The current economic paradigm relies on three key concepts: debt, eciency, and growth. Debt is the fuel that makes the current economy turn. Ninety percent of the worlds money is created as debt given by large banks.1 Increased consumption in the West has been fuelled by debt, not increases in income. The UK has experienced huge economic growth in the last decade, but personal debt has more than doubled, now exceeding the countys GPD.2 Eciency has been raised up as the ultimate goal of our economy. The prime consideration of any purchase, any policy, any activity is the return on investment. Ultimately, this is an eciency consideration: how eciently does this activity turn invested money into prot. The growth concept says that as long as there is economic growth, the participants of the economy will experience an increase in their income, and therefore their well-being. Consider the growth paradigm in more detail.

Paradigm of Growth

Welcome to planet Earth. Standing on the surface, it captures the senses. The scales are staggering. With a mass of 5.97 1024 kg2 , a surface area of 5.10 1012 km2 , and a volume of 1.08 1012 km3 , it is incomprehensibly huge.3 Of this volume, only 2% supports life: this 44 km thick, 22.2 109 km3 layer is known as the biosphere.4 This thin layer supports a
Mark Anielski. The Economics of Happiness: Building Genuine Wealth. New Society Publishers, 2007. Tim Jackson. Prosperity Withouth Growth? The transition to a sustainable economy. Tech. rep. Sustainable Development Commission, 2009. url: http://www.sd-commission.org.uk/publications.php?id=9 14, p. 24. 3 Wikipedia. Earth. url: http://en.wikipedia.org/wiki/Earth#Chemical_composition. 4 These numbers were calculated assuming both the Earth and the biosphere are perfect spheres, which they are not exactly. The boundaries of the biosphere were taken to be 3 km into the crust, and 41 km above the surface. These represent the extremes of where microorganisms have been found. (Ecology: a Canadian context. Toronto: Nelson Education, 2011. isbn: 9780176501143)
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huge amount of life: 7 billion humans,5 and over 1.4 million animal species.6 The engines of life operate on a similar scale. In one year, planetary systems move 1.07 1015 kg of water7 , 458 103 kg of carbon, and 605 103 kg of nitrogen.8 The sun delivers energy to the earth and its atmosphere at a rate of 1.7 1017 W, while a world population of 10 billion would require around 1 1011 W of energy.9 While these numbers are staggering, they are not important in and of themselves. They are important because they exist, and they are nite. They impose a hard upper limit on the space (volume), the land, the water, the materials (carbon), the nutrients and the energy available to support life on this earth. The limitations are actually much lower, the resources are not all available, and are not uniformly distributed. These limits are dicult to overcome on a local scale, and nearly impossible to circumvent globally.10 Human civilization is quickly reaching the limits of its nite planet. The increasing scarcity of food and water, as well as the competition for land between the agriculture and energy sectors, is possibly the rst sign. Another is the impending Peak Oil crisis.
Oct 31, 2011 was declared as the Day of 7 Billion by the United Nations Population Division of the Department of Economic and Social Aairs of the United Nations Secretariat. World Population Prospects, the 2008 Revision Frequently Asked Questions. url: http://esa.un.org/unp d/wpp/Other-Information/faq.htm. 6 Ecology: a Canadian context, op. cit. 7 Summed water budgets shown on pg 92, Figure 5.1 (Fred T Mackenzie. Our changing planet. Vol. 4. Prentice Hall, 2011). Converted to kilogram using the density of water at 20 C, given as 998.2 kg m3 (Roger Walker. Table of Density of Pure & Tap Water and Specic Gravity. url: http://www.simetric.co.uk/s i_water.htm). 8 Ecology: a Canadian context, op. cit. 9 The technical problems and economic limitations of solar energy are hidden in these numbers. While solar energy is a potent source of energy, it will never completely power our civilization, as it is only suitable for certain applications. Frank Kreith and Jan F. Kreider. Principles of Solar Engineering. Hemishpere Publishing Corporation, 1978, p. 14. 10 Nuclear power allows humans to circumvent the energy limit. However, current technologies are bound by their dependance on plutonium and uranium as a fuel, again presenting a hard limit to available energy. Fusion presents the possibility of overcoming this limit and would make the available energy virtually limitless relative to current usage, but is not technologically possible at this time.
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Humanity has consumed around half of the oil reserves available to us. However, the rate of production will begin to decrease - a reality incompatible with the current paradigm of growth. It has been predicated that with careful planning, the economy could withstand a decrease in oil production of 2-5% per year, but a rate of 10% would be catastrophic. Materials are experiencing a similar trend. Phosphorus is a key ingredient in fertilizer, and is obtained by mining phosphate rock. Studies indicate that peak phosphorus was reached worldwide in 1989 - bad news for a population continuing to grow.11 While the current information and communication technologies are generally viewed as innite, the hardware they rely on is not. It is dependant on rare elements such as antimony, chromium, gold, tantalum, tin, and copper. Production for all of these resources has peaked in the last 50 years.12 It is clear that the economy will be forced to stop growing imminently13 .

Growth as Saviour: A False Ideology

Even if continued economic growth was possible, it is not necessarily desirable. A strong, growing economy is generally viewed as the answer to almost all socio-economic and environmental problems. How else can humanity aord to address environmental damage, poverty, debt, unemployment. However, investigation into the economic reality of this ideology demonstrates this premise to be false. The most fundamental idea to challenge is that increasing monetary income is the same as
Richard Heinberg. The End of Growth: Adapting to our new economic reality. New Society Publishers, 2011, Chapter 3. 12 Ibid., Chapter 3. 13 The peak in material production is not as concerning as the peak in oil, because it is possible to recycle and reuse all of these materials. However, current recycling practices are small, as many devices do not allow for easy recycling. Even with perfect recoiling, innite grow is still impossible, because the supply is nite.
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increasing well-being. It has been demonstrated that monetary income and happiness have a strong positive correlation up to a point. It is astonishing to realize that this threshold occurs, across nations, at US$10,000 per capita income; pushing a countrys income above this level has almost no impact on well-being.14 This gure has important implications for the lifestyles of the worlds wealthiest countries. According to the economist Andrew Oswald, the more money a person has, the more it takes to increase their happiness the same amount.15 Increases of income may even reduce happiness: between 1957 and 2002, average incomes in the US have more than doubled, while 5% fewer citizens rate their lives very happy, divorce rates have doubled, teen suicide has tripled, violent crime has quadrupled, and depression has become pandemic.16 Secondly, proponents of economic growth claim that with a strong economy, technology will improve eciencies to such an extent that the environmental concerns are removed. At most, small tweaks are suggested, often new government spending programs. Consider two illustrative examples: the Green Energy Act in Ontario, and the spending policy of the United States. The Ontario Green Energy Act, introduced in 2009, encourages the installation of renewable electricity generation through taris paid to the producer for all electricity fed to the grid.17 This bill has met opposition due to the cost of the feed in tari program, and some poor execution.18 Yet even this controversial move has not had a signicant impact. Ontario
Ed Diener and Martin E.P. Seligman. Beyond Money: Towards an Economy of Well-Being. In: Psycological Science in the Public Interest 5.1 (2004), p. 31. url: http://www.brookings.edu/Comm/events/ 20040603b.pdf. 15 Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit., p. 223. 16 David Myers. The Secret of Happiness. In: YES! Magazine (2004). url: yesmagazine.org/article. asp?id=866. 17 Wikipedia. Green Energy Act 2009. url: http://en.wikipedia.org/wiki/Green_Energy_Act_2009. 18 John Laforet. Ontarios Ballot Box Question: Future of the Green Energy Act. In: The Hungton
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Power Generation is capable of generating 22 790 MW.19 While total capacity of the 10 000 proposed projects totals 20 913 MW, only 30 MW of contracts are actually in commercial operation20 . The program has been moving fairly slowly. However, projects totalling 4390 MW of capacity have been approved by the OPG.21 Transportation is the largest single energy use in the US, consuming 28% of all energy used, exceeding industrial, commercial and residential uses.22 The federal cost of maintaining the American highway system is $50 1010 a year.23 The American bailout of the US nancial system was original priced at $7 1011 ,24 but it has since exceeded this amount. The combined total cost of the wars in Afghanistan, Iraq and Pakistan will likely total $4 1012 .25 With these gures in mind, consider the fact that it would cost $6 1011 to connect every US city with an electried rail system.26 This system would be able to replace 85% of the current intercity transportation while using only 5% of the energy currently used
Post (2011). url: http://www.huffingtonpost.ca/john-laforet/ontario-election-green-energy_b_ 973630.html. 19 Ontario Power Generation. Counting the Megawatts. url: http://www.opg.com/education/whatwedo/. 20 This only includes proposals to the FIT program. The numbers for the microFIT program are signicantly smaller, and less clear 21 November 25, 2011 Bi-weekly FIT and microFIT Report. Tech. rep. Ontario Power Authority, 2011. url: http://microfit.powerauthority.on.ca/sites/default/files/Bi- Weekly%20FIT%20and%2 0microFIT%20Report%20November%2025%2C%202011_1.pdf. 22 A.J. Simon and R.D. Belles. Estimated State-Level Energy Flows in 2008. Tech. rep. Lawrence Livermore National Lab, 2011. url: https://flowcharts.llnl.gov/. 23 Alan S Drake. A Citizens Guide to an Oil Free Economy. Association for the Study of Peak Oil & Gas, 2010. Chap. Electried and Improved Railroads. url: http://www.aspousa.org/index.php/2010/1 0/a-citizens-guide-to-an-oil-free-economy-chapt-1/. 24 Wikipedia. Emergency Economic Stabilization Act of 2008. url: http://en.wikipedia.org/wiki/ Emergency_Economic_Stabilization_Act_of_2008. 25 This number is signicantly larger than the Department of Defences direct spending on Iraq ($757.8 billion), as it includes the interest costs of nancing the war and the cost of paying for veterans care into the future. L. J. Bilmes et al. Cost of War. Watson Institute for Internation Studties, 2011. url: http://costsofwar. org/article/economic-cost-summary Wikipedia. Financial cost of the Iraq War. url: http://en.wikipedia.org/wiki/Financial_cost_of_t he_Iraq_War#cite_note-0. 26 Heinberg, The End of Growth: Adapting to our new economic reality, op. cit., Chapter 4, Wont Innovation, Substitution, and Eciency Keep Us Growing?

for that transportation, and would only require 6 years to implement.27 The impact this sort of project would have is huge, considering both the environmental benets, and the value of domestic investment. Neither of these proposals address the core need for economic growth. They simply encourage decoupling economic production from resource inputs and environmental damage. By increasing the eciency of transportation, the proposed American electried rail system reduces the energy input required to generate economic output. The Ontario Green Energy Act works to replace fossil fuel based energy with renewable energy, reducing the environmental damage of economic activity. These eorts are the conventional response to the increasing threats of unlimited growth, and even they can be seen as radical and fatal to the economy. But they dont address the core issues. It is crucial to dierentiate between relative and absolute decoupling.28 Relative decoupling is a decrease in the ecological intensity per unit economic output. The examples given above all promote relative decoupling. Net impacts can still increase, however, even as relative decoupling occurs. Absolute decoupling occurs when the resource or ecological intensity declines in absolute terms. Relative decoupling is fairly easy to achieve under the current paradigm, because it is protable to seek eciency increases: indeed, the modern economy excels at nding eciencies.29 Since 1970, the global energy intensity decreased 33%, and resource and carbon
The energy savings here seem to be optimistic, but I did not read the analysis. The increased eciency is due to the lower friction of steel on steel than rubber on concrete, the eciencies of electric motors compared to diesel engines, and the possibilities for regenerative braking. Drake, A Citizens Guide to an Oil Free Economy, op. cit. 28 Jackson, Prosperity Withouth Growth? The transition to a sustainable economy, op. cit. 29 B. McKibben. Deep Economy: The Wealth of Communities and the Durable Future. In: Henry Holt & Company, 2008. Chap. 1. isbn: 9780805087222. url: http://books.google.ca/books?id=Y6PDf8w2A\_0C.
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intensity show similar trends.30 In the Middle East, energy intensity has doubled between 1980 and 2006, but in India it has been decreasing slowly. China experienced a 70% drop in CO2 intensity between 1980 and 2000, but it has begun to increase again in the last decade. Both India and China currently have CO2 intensities more than twice the world average.31 The statistics above demonstrate relative decoupling for some resources. Absolute decoupling, on the other hand, is clearly not occurring. Even with the declining energy and carbon intensities, CO2 emissions have been increasing by more than 3% per year.32 Worldwide trends in primary metal extracting show not only a sharp and accelerating increase, but also show an increase in relative intensity.33 Clearly absolute decoupling is not occurring. Roughly, absolute decoupling occurs when the sum of the population growth rate and the per capita auence growth rate is less than the rate of relative decoupling.34 To ensure absolute decoupling, the population and auence growth rates must be controlled, as the rate of relative decoupling is hard to predict. Past eorts to control population growth and auence growth have not been well received. A key barrier to achieving absolute decoupling is that natural resources and services are considered external to the economic system. An externality occurs when the economics activities of one party causes a change in welfare for another party, but no compensation occurs.35 It is now understood that the externalities of nature, calledecosystem services, have
Jackson, Prosperity Withouth Growth? The transition to a sustainable economy, op. cit. Ibid. 32 Ibid. 33 See Figure 16, page 54 ibid. 34 This grows out of the Ehrlich equation, explained in Box 3 ibid., p. 54. 35 Herman E. Daly and Joshua C. Farley. Ecological Economics : Principles and Applications. Island Press, 2004. isbn: 9781559633123. url: http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&A N=118237&site=ehost-live&scope=site.
31 30

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huge economic value.36 These services include pollination, decomposition of waste, regulation of our atmosphere composition (production of oxygen, ozone layer, removal of sulphur oxides), water supply and regulation, recreation and cultural aspects.37 Astonishingly, the value of these services has been found to be US$33 trillion per year. This is far larger than all human economic activities combined.38 No truly accurate economic system could ignore these services. The most common criticism of the current economic paradigm is the use of Gross Domestic Product (GDP) to measure economic health. It is well known that a massive oil spill is good for the economy because of the signicant costs of cleaning it up. The GDP simply reports the monetary value of all goods and services both bought and sold in a given economy.39 When the GDP is used to report growth, and any economic growth is viewed as an increase in well-being, the underlying assumption is that all expenditures, regardless of their impacts, is an increase in well-being. Anielski presents a thorough discussion of the problems with GDP.40 In summary, the GDP includes all expediters as a positive contribution, minimizes the benets of other expenditures like education, ignores crucial activities that do not generate wealth such as parenting, volunteering and all ecological services, considers depleting natural resources as a current income rather than asset liquidation, and does not consider the distribution of growth or the social costs of inequality and poverty. Perhaps the largest issue with the GDP, at least from a human rights standpoint, is that is does not capture the wealth or income distributions in a country. Reganomics says that
McKibben, Deep Economy: The Wealth of Communities and the Durable Future, op. cit. Robert Costanza et al. The value of the worlds ecosystem services and natural capital. In: Nature 387.6630 (May 1997), pp. 253260. url: http://dx.doi.org/10.1038/387253a0. 38 McKibben, Deep Economy: The Wealth of Communities and the Durable Future, op. cit. 39 Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit. 40 Ibid., Chapter 3: Whats wrong with the picture of progress.
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growth of an economy will benet all members of the economy - by trickling down from the rich to the poor. There are many issues with this theory, both ethical and systematic. For instance, how does one control the huge multinational corporations that result from encouraging massive growth of the people with the greatest resources to achieve this. But most importantly, the trick down theory has been proven to be false. The wealth does not trickle down. Even as Indias GDP grew signicantly in the last decade, the incomes of the poorest 50% of the country have stagnated or declined ! There is huge irony in the fact economic models predict the best way to create growth quickly is to redistribute wealth evenly. The main solution put forward in the literature is replacing the GDP as the measure of economic activity. Many have tried: the British have been working on developing an index of well-being; Statistics Canada is trying to measure education, environmental quality and community vitality; and the Australians have developed an inclusive wealth framework.41 Cli Cobb developed the Genuine Progress Indicator, a measure that begins with the GDP, and adjusts for several shortcomings Cobb identied.42 Other indicators abound: Ecological Footprint, Full Cost Accounting, Global Peace Index, Green Gross Domestic Product, Happy Planet Index, Human Development Index, Index of Sustainable Economic Welfare, Living Planet Index, Quality-of-life Index,43 Index for Social Health, and World Wildlife Funds Living Planet Index.44 Note that some of these indicators are intended to provide a single measure to evaluate the state of all economic activities, while others simply seek to measure
McKibben, Deep Economy: The Wealth of Communities and the Durable Future, op. cit. Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit., p. 30. 43 Absolute Astronomy. Genuine Progress Indicator. url: http://www.absoluteastronomy.com/topics/ Genuine_Progress_Indicator. 44 Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit., p. 40.
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other factors not included in the GDP in order allow their use in decision making.

Understanding Systems

The GDP constitutes a crude mathematical model of the economic system, for the purposes of measuring economic health. When modelling a system mathematically, simplications are always made. Mathematics provide a formal way of abstracting the real world into a form that is convenient. These simplications are called assumptions, and are made because they signicantly reduce the complexity of the model. For example, when modelling the movement of a simple box sliding down a ramp in physics, several assumptions are made. The body is assumed to be rigid (does not change shape or deform) with all of its mass at one point. The forces involved are assumed to be point forces all acting on the boxs centre of gravity (forces at only at a point, instead of being distributed over a surface). Finally, a frictionless environment is assumed. All of these assumptions make the system much easier to model - a high school student can model this system, where if these assumptions are removed, a mechanical engineering graduate would be required to handle the math and complex physics. Similar simplications or assumptions are made when modelling the current economic system. The current understanding of the economic system relies completely on these assumptions. They are rationality, perfect information, and perfect mobility.45 Rationality is the assumption that all economic decision makers act rationally in all decisions. This behaviour is called utility maximization, and is the process of determining the action that
45

Ernie Lightman. Social Policy in Canada. Toronto: Oxford University Press, 2003.

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will provide the decision maker with the greatest happiness, or security, or self-satisfaction, depending on the goal of the decision maker.46 Perfect information is the assumption that the decision maker has all the information they need to determine what actions will maximize their utility: they know all alternatives, the true cost of each alternative, and the true outcome of each alternative, without any uncertainty. Perfect mobility is the assumption that the decision maker can access all options on the market. Together, these assumptions ensure that a market-economy will provide everyone with exactly what they need, at the lowest possible cost.47 Consider an illustrative example. When Margaret Thatcher was Prime Minister of Britain, she would read all the newspapers looking for the best sale on toilet paper, drive to the store with the best price, purchase several hundred rolls and store them in her basement.48 While this seems logical, not everyone could behave that way. This behaviour is enabled by Thatchers ability to purchase all the newspapers (perfect information), the time to analyze the information and make a decision (rationality), and the ability to drive anywhere in the city and store huge volumes of toilet paper (perfect mobility). The problem with the assumptions of the economic system is that their eects on the system are not known. In the physics example, it is well understood that ignoring friction will mean the model predicts a higher speed than will be achieved in actuality. It is much easier to use experiential judgement to adjust for this eect than to model friction, which is extremely dicult to describe mathematically. Through experimentation, it is known that the other assumptions have little eect in the situation of a box sliding down a ramp, and it is known when these assumptions cannot be safely made (modelling a building or
46 47

McKibben, Deep Economy: The Wealth of Communities and the Durable Future, op. cit., p. 30. Lightman, Social Policy in Canada, op. cit. 48 Ibid.

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a bridge). The impacts of assuming rationality, perfect information, and perfect mobility are not understood completely. More concerning, it appears that these assumptions are so engrained in economic practise, that they are not even accounted for or discussed.49

A modied system
In The Economics of Happiness, Mark Anielski presents a new economic paradigm.50 The paradigm begins by examining our denition of wealth. The word wealth has roots in the Old English words weal (well-being) and th (condition).51 In Greek, euporeo is the word for wealth, and comes from the roots eu (well) and poros (a passage).52 So wealth is the means to achieving, or the state of well-being. By redening wealth, denition of capital is also radically changed. Capital is the wealth available for the production of more wealth that is owned or used by an economic individual.53 Anielski, in the tradition of ecological economics, denes ve kinds of capital, which better capture all aspects of an economy: 1. Human capital 2. Natural capital 3. Social capital 4. Built capital 5. Financial capital
49 50

Ibid. Anielski, The Economics of Happiness: Building Genuine Wealth, op. cit. 51 Ibid., p. 16. 52 Ibid., p. 16. 53 Ibid., p. 26.

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Human capital is the dened by considering all that is of value in a human: minds, bodies, spirits, souls, dreams, visions, knowledge, skills, competencies, capabilities.54 Any loss in health, be it mental, physical, emotional or spiritual, is a loss in human capital. Social capital captures the value of relationships. It is trust, collaboration, shared responsibility, reciprocity and belonging.55 Natural capital is all of the natural world. It can be considered the ecosystem services discussed earlier. Some natural capital can be regenerated, like forests and air quality, while others, like oil and mineral resources, are nite. Manufacturing and industry converts natural and human capital into built capital. This consists of equipment, buildings, tools, factories and all physical infrastructure, be it private or public.56 Intellectual property is also considered built capital. Finally, nancial capital is anything captured by monetary terms, such as cash, savings, and investments. Financial capital also includes debt and other nancial liabilities.57 These dierent forms of capital come from a deep understanding of the human and natural world in which all economies operate. They can be viewed as dierent levels of a process, all working towards well-being, when a distinction is made between means and ends.58 Means are the inputs to the system, the foundations that make everything possible. Ends are the outputs of the system, the goals to be achieved through use of the ends. Economists Herman Daly and Josh Farley proposed the continuum shown in Figure 3 after building on the work of Max-Neef and Maslow who identied dierent categories of human needs and wants59 .60
Ibid., p. 74. Ibid., p. 74. 56 Ibid., p. 76. 57 Ibid., p. 76. 58 Ibid., p. 69. 59 Ibid., p. 69. 60 Figure 5.3 ibid., p. 73.
55 54

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Figure 1: The Capital Continuum, working from Means to Ends

Using these ve capitals, a holistic accounting system, called Genuine Wealth Accounting, can be envisioned. From a personal perspective, education is no longer simply a huge expense necessary to acquire a career. Instead, it is an expenditure of nancial capital that increases personal human capital in the form of knowledge, skills and competencies. Moreover, it allows a fuller understanding of the university experience, because the values of lifelong friendships and professional networks can be captured in social capital. This system of accounting then provides a much more accurate picture of economic activities, and the impact they have on what is valued at a personal, household, community, workplace, municipal, national or international level.61 A key consideration of this process is the values, principles and virtues of the individual the accounting process is serving. Values are the components that make life worthwhile, dene happiness, and meet the desires of the individual.62 Principles are the guidelines, assumptions, laws and beliefs that guide the actions of the individual.63 Virtues are the qualities that are viewed as morally good and admirable.64 The process of completing a Genuine Wealth Accounting is much dierent than a normal accounting process. It requires processes
61 62

Ibid., Ibid., 63 Ibid., 64 Ibid.,

p. p. p. p.

77. 67. 67. 67.

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Figure 2: The Genuine Wealth Accounting Process

of holistic stock taking and introspection, identifying appropriate statistical measures, and visioning and implementation.65 Consider the complete cycle shown in Figure 366 . When applied to a business, the GWA model is very similar to concepts of balanced scorecard, triple-bottom-line, and Global Reporting Initiatives.67 However, there are signicant and important dierences. Firstly, the GWA process has broken free of the scientic ideology than only objective measures matter. When measuring the well-being of a community, for instance, both the true crime rate and the citizens perception of safety in the community matter.68 Secondly, currency units are not used to quantify all forms of capital. Rather, after taking stock and identifying values (A and B in Figure 3), appropriate indicators are
Ibid., pp. 79-88. Figure 5.5 ibid., p. 79 This gure was constructed specically for communities. However, if the word community is replaced by the appropriate economic individual, it applies equally as well. 67 Ibid., p. 147. 68 Ibid., p. 77.
66 65

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selected. A benchmark is then selected for each indicator, identifying the worst recorded or conceivable value, and a target. The indicators are then indexed between 0 and 100 using the benchmark.69 The indicators and benchmarks are selected using the value identied. Anielski has conducted a GWA assessment for Leduc, Alberta.70 To capture the Genuine wealth of the community, he divided the ve capitals into 22 Well-Being Themes (Figure 371 ), and used 117 statistical indicators to measure the contributions of each of these themes. The indicators included crime rates, tax rates, ecological footprint, self-rated happiness, sense of belonging and trust of neighbours, GPD per capita, and GDP growth rate.72 The benchmarks were selected from the Alberta provincial average, the Canadian Average, City of Edmonton or the City of Calgary. The indices where then given grades: excellent if 10% better than benchmark, good if within 10% of benchmark, or poo if 10% below benchmark. The analysis revealed powerful results.73 Leduc has a very competitive economy supported by a diverse business community. The people are happy, and satised with life. However, shortages of aordable housing and the persistent demand for food bank donations indicate some inequality. Rising property and drug crime rates raise further issues. The extreme challenges in achieving a clean and sustainable environment were also abundantly clear. It is clear that Anielskis GWA presents a powerful tool for building a better economy. He presents ways in which this accounting system can be applied to the individual, the
Ibid., p. 84. Mark Anielski and Je Wilson. City of Leduc 2005 Genuine Well-being Report. Tech. rep. Anielski Management, Inc, 2006. url: http://www.anielski.com/wp- content/uploads/2011/11/Leduc- GWReport.pdf. 71 Table 1 ibid., p. 12. 72 The complete table of indicators is included in Appendix A ibid. 73 Ibid., p. 10.
70 69

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Figure 3: Well-being Themes and Scores for Leduc 2005

community, the nation, and even to a business. However, implementing it presents several challenges. The process of identifying the values, principles and virtues of the economic individual, especially when this individual is a community or a business, is complex and time consuming. Turing these values, principles and virtues into indicators that use accessible information in a statistically valid manner that actually reect the true state of the ve capitals requires signicant thought and expertise. Selecting baselines for the indicators to index them that gives a meaningful and accurate representation of reality, instead of simply a comparative analysis, again complex. Both choosing the indicators and choosing the baselines requires intimate knowledge of statistics, as well as intimate knowledge of disciplines as diverse as physiology, sociology, ecology, economics, engineering and anthropology. After this is done, the process for completing the analysis has been dened, but the data still

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needs to be collected, inputed into the system, and analyzed. Anielski has presented a useful framework and overall model for a truer economic measure, but has not clearly dened the indicators, baselines and data collection best practices for most potential users of this framework. The strength of this model is how exible and uniformly applicable it is, but this also makes it time consuming to implement. In my view, helping businesses to change their practises is one of the most eective and ecient ways of changing the economy. While consumers collectively hold a lot of power, it is nearly impossible to get them to act in a unied manner towards a goal as quickly as is required. Governments have huge power to force businesses to change, but the correct government must be in place. The process of writing good policy that is equally eective for all industries of a diverse economy is nearly impossible. However, working with business individually, especially large businesses, can have a huge impact while requiring convincing and educating relatively few individuals, and adapting the process to only one specic context. Businesses and industry, rather than individual citizens or governments, have the most direct impact on a communitys capitals. I do not see business widely adapting a Genuine Wealth Accounting process quickly without signicant external help. I also believe that businesses should serve the communities in which they operate. It is the communitys responsibility, not the businesss, to identify the values, principles and virtues that the business should use when accounting for a businesss impacts on the communitys human, social, natural, built, and nancial capital. However, it is the private sector that has the largest impact on the ve types of capital in a community. It is crucial then to empower the private sector to track their impacts on the ve capitals of the communities they impact in a way that is consistent with the communitys values. 22

To this end, I propose the establishment of a Centre for Genuine Wealth Assessment in each community. This Centre would be responsible for working with the citizens of the community to dene the values, principles and virtues that form the basis for the GWA. The Centre would then work with specialists in the required elds to identify the appropriate indicators and benchmarks for the GWA. The Centre would also serve as a storehouse of statistical data, collected from dierent institutions in the city, and stored to expedite GWA processes. Industry and businesses would then work with the Centre to complete their GWA, using well dened processes that reduce the work load of the accountants in the businesses. The Centre provides a huge eciency in this work, only requiring the process and data collection to be completed once, instead of individually for each business. This Centre would be an intersection of many worlds. It would partner with academics of all stripes to help them produce more accurate and helpful indicators and statistical measures. It would work with the community members to identify values, track happiness and other subjective measures of wealth, and almost serve as a ombudsman. But most importantly, it would connect the communitys needs with businesss actions. The Centre would help business identify the projects and investments that need to be made in the community to increase or maintain current levels of well-being. In Beyond Poverty and Auence, the concept of a fruit-bearing economy is presented.74 The image used is of a fruit tree. As a seed, a fruit tree grows rapidly, putting all of its energy into reaching the sun and reaching deeper into the earth. This is necessary in order for tree to survive. As the tree matures, slowly more and more energy and resources are
Bob Goudzwaard and Harry de Lange. Beyond Poverty and Auence: Towards a Canadian Economy of Care. Ed. by Mark R Vander Vennen. University of Toronto Press, 1994, p. 128.
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allocated to the process of maintaining the height of the tree. Eventually, the tree stops growing, and begins to bear fruit. The tree recognizes that both growth, and bearing fruit, require huge amounts of energy. In a fruit-bearing economy, once the economy as a whole, and an economic individual as well, has gone through the crucial growth phase and has achieved suciency, the economy can begin bearing fruit. This fruit would be investments in well-being in general, enriching forms of capital that are weak, but do not necessarily limit the growth of the company directly. The key is that the community, not the corporations, must choose what fruit is created.75 Cradle to Cradle uses the same fruit tree image as the authors imagine a new economy.76 However, Cradle to Cradle focuses on how the fruit tree responds to the changes of the seasons, feeds and shelters the ecosystem around it, and reuses its own waste. Combining these two images of fruit-trees is immensely powerful. The Centre also enables ecient Return On Investment (ROI) analysis for many programs in a community. Consider The Circle of Friends program in Kitchener, which supports women and children as they transition from an emergency shelter to long-term housing.77 They recently had an ROI analysis conducted, and found that each dollar invested in the program either saves the city or generates $3.14 dollars of value.78 This is primarily through reduced ambulance usage and the value of the training volunteers receive. Notice that this SROI has captured increased human capital by placing a dollar value on it. Collecting the data for this analysis was extremely dicult and time consuming. With the proposed Centre, the process
Ibid., p. 104. William McDonough and Michael Braungart. Cradle to cradle: Remaking the Way We Make Things. New York: North Point Press, 2002. 77 MCC Ontario. Circle of Friends. url: http://ontario.mcc.org/poverty/circlefriends. 78 Kaylie Tiessen. Circle of Friends Social Return on Investment Analysis. In: MCC Ontario (2011). url: http : / / ontario . mcc . org / system / files / Poverty / SROI % 20CoF % 20 - %20final % 20copy % 20 %20publish%20to%20PDF%20edition.pdf.
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could be quickly completed, and high impact opportunities can be quickly identied. The Centre discussed above would help businesses identify the places where investments are needed. In this way, the community would dene how economic growth is valued, and also what fruit the economy bears when it is ready. This presents a challenge, however, when a business is a transnational corporation impacting many individual communities at a time. It is infeasible for a businesss accounting practises to meet as many dierent requirements as communities it impacts. The requirement for a business to embed itself deeply in the community it operates in limits the size and reach of a single organization, encouraging local economies and removing many of the problems of globalization. In some ways, the government and taxation already serve the role of the Centre. However, the Centre imagined above would involve a much higher degree of community engagement than simply a single vote on a candidate campaigning on many issues. For this Centre to work, a business participation in it may need to be mandatory, but the transition period would likely require voluntary participation, ideally motivated by tax breaks. Further reading into existing corporate tax law is required to dierentiate the Centre from the role of taxation, and dene how it interacts. Another area for further research is the possibility of incorporating these multi-capital considerations directly into the tools used for evaluating economic opportunities such as Internal Rate of Return. This requires replacing the compound interest equation, and one possible candidate is the Logistics equation, borrowed from modelling population dynamics. In the logistics equation, growth is exponential at rst, until an upper limit, called the carry capacity, is reached. The challenge is identifying the carrying capacity. Some research has

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been conducted that connects economics and carrying capacity.79 In conclusion, it is clear that the paradigm of continuous economic growth cannot continue. It is rapidly headed for collapse as the limits of the nite planet Earth begin to enforce themselves. Technology will not solve this issue alone. Nor is it desirable for the economic growth paradigm to continue. The correlation between happiness only holds up to a point, economic growth does not address issues of inequality nationally or globally, and is rapidly devastating the planet. All of these issues can be addressed by implementing a fruit bearing economy the captures the value of all ve types of capital, and is supported through community-based Centres for Genuine Wealth Assessment. In this way, the incredible success of modern economics and capitalism can be built on, while addressing the sever issues that they create.

Kenneth Arrow et al. Economic growth, carrying capacity, and the environment. In: Ecological Economics 15.2 (1995), pp. 91 95. issn: 0921-8009. doi: 10 . 1016 / 0921 - 8009(95 ) 00059 - 3. url: http : //www.sciencedirect.com/science/article/pii/0921800995000593.

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Daly, Herman E. and Joshua C. Farley. Ecological Economics : Principles and Applications. Island Press, 2004. isbn: 9781559633123. url: http://search.ebscohost.com/login. aspx?direct=true&db=nlebk&AN=118237&site=ehost-live&scope=site. Diener, Ed and Martin E.P. Seligman. Beyond Money: Towards an Economy of Well-Being. In: Psycological Science in the Public Interest 5.1 (2004), p. 31. url: http://www.broo kings.edu/Comm/events/20040603b.pdf. Drake, Alan S. A Citizens Guide to an Oil Free Economy. Association for the Study of Peak Oil & Gas, 2010. Chap. Electried and Improved Railroads. url: http://www.aspousa. org/index.php/2010/10/a-citizens-guide-to-an-oil-free-economy-chapt-1/. Ecology: a Canadian context. Toronto: Nelson Education, 2011. isbn: 9780176501143. Generation, Ontario Power. Counting the Megawatts. url: http://www.opg.com/educatio n/whatwedo/. Goudzwaard, Bob and Harry de Lange. Beyond Poverty and Auence: Towards a Canadian Economy of Care. Ed. by Mark R Vander Vennen. University of Toronto Press, 1994. Heinberg, Richard. The End of Growth: Adapting to our new economic reality. New Society Publishers, 2011. Jackson, Tim. Prosperity Withouth Growth? The transition to a sustainable economy. Tech. rep. Sustainable Development Commission, 2009. url: http://www.sd-commission.or g.uk/publications.php?id=914. Kreith, Frank and Jan F. Kreider. Principles of Solar Engineering. Hemishpere Publishing Corporation, 1978. L. J. Bilmes et al. Cost of War. Watson Institute for Internation Studties, 2011. url: http: //costsofwar.org/article/economic-cost-summary. 28

Laforet, John. Ontarios Ballot Box Question: Future of the Green Energy Act. In: The Hungton Post (2011). url: http://www.huffingtonpost.ca/john-laforet/ontari o-election-green-energy_b_973630.html. Lightman, Ernie. Social Policy in Canada. Toronto: Oxford University Press, 2003. Mackenzie, Fred T. Our changing planet. Vol. 4. Prentice Hall, 2011. McDonough, William and Michael Braungart. Cradle to cradle: Remaking the Way We Make Things. New York: North Point Press, 2002. McKibben, B. Deep Economy: The Wealth of Communities and the Durable Future. In: Henry Holt & Company, 2008. Chap. 1. isbn: 9780805087222. url: http://books.goo gle.ca/books?id=Y6PDf8w2A\_0C. Myers, David. The Secret of Happiness. In: YES! Magazine (2004). url: yesmagazine.o rg/article.asp?id=866. November 25, 2011 Bi-weekly FIT and microFIT Report. Tech. rep. Ontario Power Authority, 2011. url: http://microfit.powerauthority.on.ca/sites/default/files/BiWeekly%20FIT%20and%20microFIT%20Report%20November%2025%2C%202011_1.pdf. Ontario, MCC. Circle of Friends. url: http://ontario.mcc.org/poverty/circlefriend s. Population Division of the Department of Economic and Social Aairs of the United Nations Secretariat. World Population Prospects, the 2008 Revision Frequently Asked Questions. url: http://esa.un.org/unpd/wpp/Other-Information/faq.htm. Simon, A.J. and R.D. Belles. Estimated State-Level Energy Flows in 2008. Tech. rep. Lawrence Livermore National Lab, 2011. url: https://flowcharts.llnl.gov/.

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