Both Brains Required

I’ve posted this image before but find myself repeatedly returning to the tension it expresses. It is sort of a Rorschach test for climate intuition.

It depicts a clash of mindsets about the relationship between economy and environment that I believe lies at the heart of the climate change debate, though is too often left implicit. 
 
The left chart is economics’ view that ‘growth is the solution’ for environmental problems. Yes, economists say, economic growth may initially cause environmental damage – the curve rises up to start – but more growth will bend the curve down again, creating a ‘win-win’ of growth and environmental protection.  
 
The intuition is ‘growth generates the wealth to pay for environmental protection’, or:
 
Growth → wealth → environmental protection
 
Technically, this is the ‘Environmental Kuznets Curve’, or EKC. It is a proposition about the ‘win-win’ potential not of an individual technology or investment but of a whole system defined by a certain type of damage, e.g. the planet for climate change.
 
Critically, the EKC is an *hypothesis*. Growing evidence finds it is only sometimes true, not a law of the universe.
 
Which is exactly what concerns ecologists, who see the world on the right. What they are most worried about is that climate and ecological problems are characterized by the prospect of irreversible tipping points that, if crossed, may trigger ongoing damage that no amount of growth could repair.
 
The contrasting intuition: the growth that generates the wealth to pay for environmental protection may cause irreversible damage before the solutions arrive, or: 
 
Growth → (damage > wealth) → environmental destruction
 
It all hangs on the red dashed line. Are there thresholds and tipping points in the biophysical world, or not?
 
Economics has repeatedly rejected ideas of limits – Malthus, Club of Rome, etc. – but critically today’s limits are a different type to those of past debate.
 
Instead of the age-old concern about running out of inputs – food, energy, etc. – the new concern is that our many outputs and impacts – emissions, waste streams, etc. – may exceed natural absorptive and regenerative capacities and destabilize the planetary systems upon which we depend.
 
Bluntly, the limits problem today is less about ‘running out’, and much more about ‘screwing it all up’. This is what ‘Anthropocene’ is trying to get at.
 
In other words, ecologists are increasingly troubled by possibilities that economics – and hence business and finance – rule out by assumption.
 
Why it matters is that the left chart fosters a view that system-wide sustainability is a grand ‘win-win’, while the right chart suggests sustainability is a ‘race against time’, whether it be profitable or costly.
 
People might reflect not just which chart feels more intuitive for them, but why? Based on what formal education, professional experience or cultural upbringing? And does the original learning context still apply?

Can economic growth really solve global ecological problems like climate change?

Economics’ case that growth can solve problems like climate change is based on the ‘Environmental Kuznets Curve’ (EKC) hypothesis (left-hand graph). The story the EKC tells is that economic growth first increases environmental damage, but then reliably reduces it.

Unfortunately, the EKC is just a hypothesis and is increasingly challenged both empirically and conceptually, raising difficult questions that cannot be ignored.

Empirically, the evidence from hundreds of studies into the EKC is very mixed. Sometimes the curve bends down, sometimes it doesn’t.

Conceptually, the EKC denies the irreversible thresholds and ‘tipping points’ that scientists increasingly point out are the key features of climate change and other global ecological challenges. If tipping points exist, the EKC may bend backwards – a thought that seems not to have occurred to economists, betraying the sort of thinking that economics has been.

For much more on this, see the presentation on economic growth and the EKC:

“Can Growth Really Solve Climate Change? Or What if the Environmental Kuznets Curve Can Bend Backwards?”

Can financial directors really feel comfortable signing off on today’s externality-denying financial statements?  

Central to the sustainability challenge is that the modern world increasingly directs matter, energy, and human effort in line with what financial statements deem ‘profitable’. Projects that pencil out to a profit get a green light, while businesses that make a loss eventually go bankrupt and stop influencing the world. Such is how we ‘make’ the world today. Yet, the all-important financial statements at the heart of the process exclude large and mounting social and ecological costs.  
 
Just to take carbon as one major external cost, the World Bank estimates less than 4 percent of global carbon emissions are priced at a level consistent with Paris Agreement temperature targets. If so, for this one metric alone, can any corporate financial statement be said to be ‘fully costed’? Including – sobering thought – the statements of solar, wind, battery companies etc, which may be ‘solutions’ and better than alternatives, but which themselves are not paying the full price for their material and energy inputs…?  
 
The de facto decision-making of modern society continues to deny external costs that have become glaringly apparent on this generation’s watch. This has overturned economists’ earlier belief that externalities were negligible residuals of market activity – too small to worry about, or possibly if large too soon remedied by growth to dwell on. Instead, stubborn externalities are becoming the main event of the economy; a growing share of the market’s value consequences are off-balance sheet, not on.   
 
One of the key moments when external costs are denied is when directors sign off on financial statements that represent the aggregation of myriad underlying transactions. Yes, those statements may be ‘generally accepted’, but are they meaningful statements of value? Indeed, what does net income or profit even mean if all costs are not reflected?
 
In being ‘generally accepted’, financial norms do a lot of difficult psychological work for us as the established shared conventions by which we collectively excuse ourselves from thinking about what the economy as a system is actually doing. Indeed, directors might claim they are just fulfilling a commendable fiduciary duty – yet this increasingly has the disturbing ring of ‘just following orders’ with its connotation of abnegating greater responsibility. Responsibility is just shunted back up the principal-agent chain to who…?
 
Signing off on financial statements may seem a routine confirmation of ‘the numbers’, but it is a political and cultural act of great significance in that the moment when directors lend their name to a statement is a micro-reinforcement of the legitimacy of what those numbers exclude – and all those micro-reinforcements accumulate up to perpetuate an unsustainable collective system.  
 
This should be a real dilemma for directors.  

I really wish the ubiquitous GHG ‘decoupling’ charts were better news than they are (as it would make things much easier) but unfortunately they fall foul of the ‘fallacy of composition’ and are fostering a dangerous complacency about climate change efforts.

(The following is a repost of a Twitter thread with clearer images.)

TL/DR: decoupling charts show some countries are now reducing emissions while still growing GDP, but the climate challenge is to reduce absolute global emissions to near zero before it is too late. The former does not at all guarantee the latter. 

While Adam Smith’s Invisible Hand has many beneficial attributes, somewhere along the way the Invisible Hand was recast as the Infallible Hand, seeding today’s widespread faith that markets can solve large-scale social and ecological problems they are ill matched for.

In the formidable shadow of the Infallible Hand, non-market solutions – policy, regulatory, cultural, behavioural – are often deemed ‘impractical’, so remain under-utilized. ‘Green growth’, ‘sustainable profit’ ‘shared value’ etc. are the solutions of the day.  

Yet, if a market system denies its external costs and consequences – as contemporary markets do in spades – then the Hand is not Infallible at all, but rather it is powerfully, ubiquitously, and possibly existentially very fallible indeed.

Excess faith in markets is starting to feel like a major wrong turn of human cognition – indeed, a trap that seems very difficult to reverse out of. The sustainability challenge increasingly has the character of whether we can collectively unlearn modern myths about the superiority of market outcomes before it is too late. For, if markets deny their external consequences and are not fully costed, they are not the most efficient and distributed means of allocating resources, as textbooks proclaim, so much as the most efficient and distributed method we have yet devised to extract and appropriate value.

Of course, governments and cultures are fallible too, so it is a question of matching problems to decision-making domains. Markets do valuable work in handling myriad diverse expressions of self-interest, but the inevitable social and ecological fallout of all that self-interested activity requires the constant re-directing and re-regulating of markets that only ‘meta-market’ (?) government and cultural influences can provide.

It’s a real pity that Smith offered the world a disembodied hand. Hands seem to work best when they are connected to arms and bodies. It may be more helpful to view the Fallible Hand as being dependent on the arm and body of government and culture, which, while they cannot rival the Hand’s dexterity, have the gross motor capabilities to direct and place the Hand where its dexterity can be most beneficial. It is almost as if gross motor and fine motor skills have evolved as useful complements that exemplify the layered, nested ‘wisdom of systems’.      

For private sector actors sincere about developing a sustainable human culture, rather than double down on the latest greatest firm- or portfolio-level sustainability strategy, it may be more effective – more ‘sustainable’, even – to concede the limitations of trying to solve global ecological problems as a profit-bound private entity, and instead help re-invigorate the public sector’s capacity to internalize the substantial externalities that have become irrefutably known on our generation’s watch.

I have finally organized some of Matt’s best illustrations on a new gallery page.

These and many more there. All free to use.

A major first response to our sustainability challenges has been to try and turn profit to more sustainable ends. Alas, even ‘purposeful profit’ seems unable to overcome the deeper momentum of what might be termed ‘externality-denying capitalism’ – ‘externality-denying’ in that billions of daily investment and consumption decisions ignore certain of their social and environmental consequences.

As just one example, the World Bank reports that less than 4 percent of global carbon emissions are currently priced at levels consistent with the Paris Agreement’s temperature goals, endorsed by 194 nations. Hence, hardly any of today’s market transactions are fully costed, in terms of reflecting their contribution to climate change. The same neglect repeats to varying degrees for certain other environmental and social problems.  

We don’t call our predominant socio-economic system ‘externality-denying capitalism’, but possibly we should, to constantly remind ourselves of what we are doing.

 Caught in this embracing dynamic, first-response market-led sustainability strategies – such as SRI, CSR, ESG, sustainable investing, etc. – are showing signs of exhaustion. While these strategies have helpfully accelerated awareness of sustainability challenges and have catalysed fresh innovation paths and business models, they are being overpowered by the externality-denying capitalism that remains the larger force shaping our social and natural worlds.

Hence, there is a pressing need to step out of the day-to-day frame to appraise this bigger system…

Download full PDF (22 pages including 18 illustrations): “The Towering Problem of Externality-Denying Capitalism“

…

Maybe the difficult truth is that sustainability just is not much of a market opportunity, but rather a profound moral challenge.

And perhaps the increasingly desperate insistence that sustainability be a market opportunity is merely the means to fend off acceptance of the moral obligation.

It is becoming too late in the day to maintain the pretence that a Voluntary Market-Led approach to sustainability can achieve enough change, fast enough – for multiple social and ecological issues. Persisting with Voluntary Market-Led tactics – seeking the perfect ESG rating, formulating the ideal corporate disclosure framework, announcing the most eye-catching pledge etc., – is simply doubling down on avoidance of policy, behavioural and cultural changes now urgently needed.

It is to keep believing that markets can solve problems markets are still organized not to recognize. Markets ‘see’ prices, but – just one example – the World Bank reports less than 4 percent of global carbon is yet priced sufficiently. So-called ‘Mr Market’ has no inkling there is a climate crisis because we haven’t yet told him in the language he understands!

Like many, I hoped our sustainability challenges might yield to enlightened, voluntary actions within unchanged markets, but it is clear (and has been clear to many others for much longer) that the very mindset that casts sustainability primarily as a new ‘market opportunity’ is central to our unsustainability.

We are effectively trapped in the ‘double bind of externality-denying capitalism’ (see image). In continuing to resist solutions that might be costly or growth-detracting, we pursue with increasing urgency ‘win-win’ solutions compromised by rebound and backfire effects. At best, these foster a dangerous complacency that sufficient progress is under way. At worst, they aggravate the situation by constituting brand new ways by which we accelerate transformation of the matter and energy of the world, which is the root cause of ecological crisis.

Markets can be enormously beneficial, but – remember the theory – *only* if all costs are recognized. If that is not true, as today, then however ‘generally accepted’ profit and growth figures might be, they are not ‘fully costed’. Indeed, the flaw in our socio-economic system in a nutshell: our ‘generally accepted’ profits are not fully costed. Is any company in the world yet reporting a fully costed profit? If reported profits are not fully costed, do we want more profit or less? Who knows?! Ditto for ‘economic growth’.  

In continuing not to properly internalize large and known externalities – ‘consequences’, in plain English – the capitalism we currently practice and so daily reinforce is externality-denying in character. It is innately extractive as a whole system. No ESG rating or data initiative or voluntary pledge can overcome that fundamental problem or is really trying to. Policy and moral leadership – both costly and effortful, unfortunately – just might.

Note:

Double binds were first formulated by Gregory Bateson and colleagues in the 1950s as part of the search for causes of schizophrenia. While they would not be considered a distinct cause of schizophrenia today, they are seen as a contributing dynamic in a wide range of mental health problems and dysfunctional relationship patterns.

Anthony Chaney, author of an excellent biography on Bateson, Runaway: Gregory Bateson, the Double Bind, and the Rise of Ecological Consciousness, defines double binds as follows:

“Double binds are impossible dilemmas that occur within complex systems when premises at different levels of generality contradict each other [hence the need to draw concentric or nested circles to convey different ‘levels’ of logic]. They persist because conditions prohibit communication about the contradiction. Life finds ways to live with them that are often increasingly destructive.”

While Bateson originally described double binds in relationship terms – e.g., a dysfunctional parent-child relationship (Steps to Ecology of Mind, page 206), the ‘double bind’ we have collectively fallen into with externality-denying capitalism is a system in which we are both perpetrator and victim. As Sally Weintrobe, psychologist, has expressed it:

“It is traumatising to see that you are caught up in a way of living, whether you like it or not, that makes you a victim and a perpetrator of damaging the Earth.”

Chaney’s point that ‘they persist because conditions prohibit communication about the contradiction’ rings true about the appetite mainstream business discourse has for candid discussion about concepts such as ‘degrowth’ or ‘post-growth’ etc. These would be distinctly uncomfortable topics to bring up in the corporate board room, for example. Different spaces permit different conversations.

Hence, part of the vexing character of the double bind is not that they can’t be recognized, but that they can’t – yet? – be acknowledged and discussed in the arenas where it might make a real difference.

How to escape from a double bind? Acknowledge that the logic of the outer loop is the locus of the problem and go single-mindedly after that. But, of course, easier said than done. It requires overcoming norms, incentives and even one’s sense of identity if that identity has been shaped by success within the externality-denying paradigm.

The Invisible Hand is proving no match for the Unmentionable Foot.

Externality-denying capitalism – or ‘consequence-denying capitalism’ – is what systems thinkers term a ‘fix that fails’. That is, it seems like a ‘fix’ at first, but ultimately proves to be a fail as the unaccounted consequences accumulate and become apparent.

Economic orthodoxy assumes that the Hand can continue to ‘fix’ faster than the failures of the Foot accumulate. Ecologically, the ‘wealth’ created by growing the economy will help us restore or remediate the environmental damage incurred along the way. Socially, wealth will ‘trickle down’ soon enough to make temporary inequality just a necessary phase of development. That’s the theory, anyway.

However, the continuing and persistent deterioration in many ecological and social justice metrics indicate that the Hand simply cannot ‘fix’ fast enough to keep up. The Foot is proving the more muscular force. The system overall is dysregulating and generating more net harm than good, now threatening to breach ecological thresholds and levels of social tolerance.

The basic shape of the remedy is extra-market fixes (regulations, laws, new cultural norms) that make visible the externalities or consequences that the market system we defer to simply cannot see. In other words, to cure our system of the market myopia to which we have succumbed.