New Economic Theory
Project leaders: Orio Giarini, Ivo Šlaus, & Garry Jacobs
|Paradox of Value & Uncertainty||Need for a New Paradigm in Economics||NET Update Aug 2012|
1. In December 2009 Ivo Šlaus convened a small group of Fellows consisting of Orio Giarini, Garry Jacobs and later Bernard Lietaer to discuss the need for new economic theory and feasibility of formulating a broad approach outlining the issues and perspectives that it should include.
2. Over the following three months there was an intensive exchange of questions and ideas, which gradually evolved into the outlines of an article. The group drew extensively on original theoretical work done by Orio Giarini and published in two reports to the Club of Rome, Dialogue on Wealth and Welfare (1980) and Limits to Rationality (1991), which at the time had not received the full attention they merited.
3. In May 2010 the group met in Trieste to sketch the outlines of a project on new economic theory and also agreed to establish Cadmus journal as an organ to project new thought related to the fields of economics and governance.
4. The group agreed that new economic theory requires the parallel development of new economic measures. Therefore, side by side with the theoretical discussions, Garry Jacobs and Ivo Šlaus evolved the framework for a new measure of economic progress, the Human Economic Welfare Index, incorporating measures for real household consumption and savings, inequality, unemployment, health, education and energy sustainability.
5. The first issue of Cadmus which came out in October 2010 carried an article entitled “Introductory Paper for a Programme on The Wealth of Nations Revisited” and a companion article “Indicators of Economic Progress: The Power of Measurement and Human Welfare” by Garry Jacobs and Ivo Šlaus.
6. A special SEED-WAAS website for New Economic Theory was created to become a focal point for this project.
7. Meanwhile, Ian Johnson, the recently appointed new Secretary General of Club of Rome, wrote expressing appreciation for the article and requesting the authors to present a summary of their findings at the Club’s annual conference in Winterthur in October 2010.
8. Numerous meetings between Ivo Šlaus, Ian Johnson, Orio Giarini and Garry Jacobs took place in January, February and September 2011.
9. An article by Orio Giarini “Science and Economics: The Case of Uncertainty and Disequilibrium” appeared in Cadmus issue 2 in April 2011 together with an article by Winston Nagan on “Human Rights, Liberty and Socio-Economic Justice”, an article by Hazel Henderson “Grossly Distorted Picture: GDP Still Misleading” and an editorial on “The Great Divorce: Economics & Philosophy”.
10. Cadmus Issue 3 (October 2011) includes articles by Roberto Peccei on “Rethinking Growth: The Need for New Economics”, by Hazel Henderson on “Real Economics and the Illusions of Abstraction” and an extensive study by Orio Giarini and Garry Jacobs on the significance of the evolution of agrarian and industrial economy to the modern service economy and the implications for measurement of economic value, “The Evolution of Wealth & Human Security: The Paradox of Value and Uncertainty”.
11. Roberto Peccei, Orio Giarini, Ivo Šlaus and Garry Jacobs participated in presentations and discussions on new economic theory as part of the Club of Rome-WAAS conference in Delhi in November 2011.
B. Next Steps
While the group is pleased by the attention and interest the initiative has generated within and outside the Academy, it is now time to develop a plan for systematic development of the project. The addition of Robert Peccei and Ian Johnson, who has just been recommended by the Board for election, will considerable strengthen the project team. In addition a means should be found to involve a number of other Club of Rome members, such as Hazel Henderson and David Korten, who are working on parallel lines. Thus, development of a project plan is the next essential step.
Presentations at Delhi GA on November 2011
Paradox of Value & Uncertainty
The question of value is central to the formulation of new economic theory. In his presentation at the GA, Orio Giarini called for a radical reassessment of economic value based on the real purpose of economy, which is maximizing human welfare, not maximizing economic growth or monetary wealth.
These apparently synonymous terms are often in direct conflict for a number of reasons:
1. The confusion between flow and stock blinds us to the fact that increasing economic activity can be and often is achieved by consuming non-renewable resources that reduce real wealth even as they increase economic activity.
2. Measures of economic growth neglect the concept of negative value. Growth may result in greater destruction of real wealth than it creates. Are higher levels of military spending and environmental remediation really indications of rising human welfare?
3. Real economic value has to take into account the utilization value of goods and services over time. In a modern service economy, true cost and value can no longer be fully defined at the point of sale. R&D expenditure, warranty and liability costs may occur years before or after the sale transaction. Many services such as health care are delivery systems that we invest in to provide for on-going service and security over time, and cannot be properly valued at the time of sale.
4. Important aspects of human welfare do not fall within the monetarized economy, such as home care for children and the elderly. We now spend $60 billion a year on bottled water which formerly was a virtually free commodity. The monetarization of drinking water is at least partially a result of declining quality of life, not progress.
More profoundly, the evolution from the industrial to the modern service economy has led to a paradox of uncertainty. Uncertainty is the source of doubt and insecurity which human activity strives to minimize. At the same time it is a rich creative cauldron of untapped potentials from which new wealth is constantly emerging in the form of new aspirations, products, services, technologies, organizations, etc. The key to future prosperity is to learn how to tap the creative value of uncertainty.
For a detailed discussion of these issues, see “The Evolution of Wealth & Human Security” in Cadmus Issue 3.
The world needs a paradigm shift in economics similar to the one physics experienced a century ago, when quantum mechanics and relativity theory were formulated to address phenomena not explainable by Newtonian mechanics. This was the central thesis of Roberto Peccei in his presentation on November 11.
The emergence of a paradigm change in Physics came from understanding the limitations of the existing theories, and then inventing new concepts appropriate for these new regimes. A similar reassessment is needed in economics today.
The central issue facing the world today is that unbridled population and economic growth are untenable in a finite world. This calls for development of legal and social instruments which will provide solutions to our present predicament outside of present economic theory. New economic theory is needed based on sustainability rather than growth.
Economics is still based on many of the concepts formulated in the time of Adam Smith which were applicable to the transition from an agrarian to an industrial economy. We need new theory that incorporates concepts of biocapacity and sustainability. Okun’s law describing the relationship between growth and employment is really a tautology, rather than a valid theory.
New theory must also address the true role and purpose of financial markets to support human well-being, rather than speculative activities driven by greed, and promote investment in the real economy, creation of new jobs and equitable distribution of wealth.
To see Roberto Peccei’s Delhi presentation click here.
See his article on “Rethinking Growth: The Need for a New Economics” in Cadmus Issue 3.
The European financial crisis has reached critical intensity in Greece and has now spread to Spain. With persistently high levels of unemployment in the industrialized nations, the slowing of world trade and exposure of malpractices within the international financial community, it reinforces the importance of the Academy’s efforts to evolve the foundations for new economic theory and practice.
During the first half of 2012, WAAS has continued to develop its collaboration with the Club of Rome on New Economic Theory. A joint CoR-WAAS paper entitled by Ian Johnson and Garry Jacobs was presented and discussed during a one day CoR-organized seminar in Rotterdam on May 9, and will appear in the next issue of Cadmus. The document stresses that the economic, ecological, social, political and security crises that humanity confronts today can be traced back to common factors and root causes and can only be successfully addressed by instituting fundamental changes in the values, policies and institutions that underpin the global economic system.
Following the conference, Maria da Graca Carvalho, WAAS Trustee and member of the European Parliament, organized two meetings with a representative of the European Commission’s Bureau of Economic Policy, who expressed serious interest in our perspective and proposed to organize further discussions with the EC. An article tracing the development of Orio Giarini’s economic thought, appeared in Cadmus Issue 4.
Values are not merely utopian ideals – they have the power to change the world. Values define us and the institutions we create. They contain the quintessence of wisdom acquired by successive generations regarding the essential requirements for higher levels of human accomplishment. On June 18-20, WAAS participated in a CoR workshop in Bristol which launched a new initiative to explore the values underpinning the last two centuries of global achievements and crises in search of a new and better narrative to guide humanity’s progress in the 21st century.
Research continues on the essential parameters of a Global Employment Model. In April, project leaders from WAAS and CoR met with a senior official of the ILO in Geneva and agreed to jointly organize a seminar on the global employment challenge with ILO in the fall.
The continuing financial crisis dramatically highlights the need for greater understanding of monetary and financial systems. Cadmus Issue 4 also includes an article proposing an alternative In May, WAAS Fellow Bernard Lietaer co-authored a major report on published by the EU Chapter of Club of Rome. WAAS co-sponsored the First International Social Transformation Conference in Split, Croatia on July 10-12 in the City of Split (Croatia) focusing on alternative monetary models. Plans are now underway to launch an inquiry into the fundamental role of money in social development in collaboration with CoR member David Korten, commencing with a web-seminar and e-conference in the fall and a conference in 2013.
Discussions are also underway with several collaborating organizations in Trieste for a major conference in 2013 addressing economic and employment issues.
Garry Jacobs, Ivo Šlaus and Orio Giarini
Project Coordinators, New Economic Theory