Replacing the Concept of Externalities to Analyze Constraints on Global Economic Growth and Move Toward a New Economic Paradigm

The prevailing economic paradigm has fallen short as a guide to policy making in this era of global economic crises. Numerous efforts are underway to revise it or replace it with a science of society that integrates intellectual disciplines. This paper makes a contribution to those efforts by arguing that the economic concept of externalities is no longer viable and that replacing it with the concept of an inclusive world economy provides new explanatory potential. The concept of externalities divides the world hierarchically, with the internal dominant and the external subordinate. In this way it gives any group of people the scientific legitimacy to conquer, manage and use other peoples and the natural world (the external) instrumentally; by extension, it drives the creation of ever newer technologies to do so. The concept fit the economic growth experiences of the emerging capitalist nations in the centuries prior to the 20th fairly well. Now that we live in a world in which all peoples, all economic activities, and all of the earth are tied together into a global economy that is no longer the case. The concept of an inclusive world economy fits our contemporary experiences better, aligns well with an integrated science approach, and provides new insights into prospects for economic growth.

“At the dawn of a new year, the world is in the midst of several epic transitions. Economic growth patterns, the geopolitical landscape, the social contract that binds people together, and our planet’s ecosystem are all undergoing radical, simultaneous transformations, generating anxiety and, in many places, turmoil.”1

Efforts to construct a new paradigm of understanding and action that makes sense of our world and empowers us to create a better one are being pursued in many quarters. This quest is widely seen as necessary because so much that has happened over the last quarter century has undone our sense of knowing what is going on. And having lost our sense of what is going on, we have lost our ability to effectively solve problems, especially those for which a collective will is required.

“Human activities, institutional processes, climate dynamics, & ecosystem dynamics are all deeply connected.”

The financial crisis of 2008, the Great Recession, and the slow and fitful recovery have shattered our certainty about economic matters. Concerns about rising levels of economic inequality, the emerging resource limits, and record numbers of extreme weather events are undermining our faith in a future that is more equitable and prosperous than the present. Globalized trade and financial relationships have increased exposure for everyone to many more sources of economic and political shocks.

The responsibility for our troubling circumstances falls heavily on the field of economics. Economists did not predict the financial crisis of 2008, did not warn that the recovery from the Great Recession would proceed very slowly and be incomplete, have largely dismissed concerns about climate change and resources limits, and almost universally hail globalization as an unmitigated advancement for the world’s people.

The need for rethinking economics is clear. Some of the world’s leading economists have affirmed this:

“As a world economic crisis developed in 2008 and lasted longer than most economists predicted, it became increasingly clear that beliefs about macroeconomics and macroeconomic policy needed to be thoroughly examined … we knew that we had entered a brave new world …”2

The challenge for people working to construct a new paradigm is well defined. The failures of the prevailing economic paradigm mentioned above, and others, tell us what a replacement paradigm must do well. How to go about the work of constructing that new paradigm is less well defined. But, we do have some ideas with which we can begin.

The scope of the work cannot be limited to the field of economics. The effort must draw from many intellectual disciplines and the resulting paradigm must transcend disciplines because the challenges the world is facing transcend disciplines. We now know that human activities, institutional processes, climate dynamics, and ecosystem dynamics are all deeply connected. We also know that ideas about challenges and opportunities, and decisions about which public policies to develop and implement, are deeply connected to our value systems.

The need for this kind of approach was captured with a rhetorical question in the preface to the World Social Science Report 2010: “Does a more integrated world require a more integrated social science?” The report went on to examine institutional issues related to taking a more integrated approach in the social sciences.3 In an article devoted to explicating the effort to construct a new paradigm Garry Jacobs surveys the forces behind the need for a new paradigm and calls for “an integrated science of society based on common principles to replace the fragmented disciplines that prevail today.” Those common principles broaden the call for an integrated effort to make it a values driven effort. In particular, Jacobs calls for an effort in which the foremost guiding star is “the right of every human being to peace, security, welfare and well-being.”4

The Club of Rome has defined the interdisciplinary scope of the work in programmatic terms. Its description for the program, A New Path for World Development, lists five areas of work (environment and resources, globalization, world development, social transformation, and peace and security). These areas of inquiry bring together multiple disciplines. The program description adds thata systems integration effort is part of the program: “As work proceeds on the five clusters, a parallel effort will focus on developing a better conceptual and practical understanding of the world systems within which they are linked and embedded. This helps to understand the linkages between trends, issues and actions and to identify the drivers of global change.”*

Two suggestions for particular steps to take are offered in the June 2014 Newsletter of the World Academy of Art and Science. Alexander Likhotal defined the work ahead in this way: “We need to develop a new content-based vocabulary for the changing social context, for the new model of social life.” While not directly responding to this idea, Ivo Šlaus suggested a way to begin this work: “A new paradigm maintains and preserves all the valid aspects of the existing paradigm…” These statements suggest that we can begin with a critical examination of the premises, concepts, and causal statements that make up the prevailing economic paradigm, tossing out some, modifying others, and creating new concepts as appropriate.

This article takes the lead from these suggestions and examines a concept that is part of the foundation of the economics of capitalism. That concept is externalities. Economists use the concept of externalities at every level of economic organization, from the firm to an industry to national and regional economies. Here, our focus is on the use of the concept in relation to an economy.

The concept is worth examining because it can be linked to a prediction that is widely embraced in the field of economics: the prediction that the world economy, or at least the majority of nations, can be restored to a high rate of economic growth. Most of the world’s economists insist that for any nation, a high rate of growth is only a few sound policy decisions and a little time away. For the world economy it is only a matter of time until nations that adopt the right policies lead the world into an era of increasing prosperity.

We have to question this prediction for three reasons. First, it is one of the most important predictions that economists derive from their economic paradigm. It fuels a widely shared expectation that the world’s middle class people will become more prosperous and middle class material prosperity will spread to more of the world’s people. It also drives the policy discussions among the world’s leaders that give us the policies that will or will not solve the world’s vexing problems.

Second, a growing number of economists, environmentalists, physicists, and other experts argue that the potential for economic growth is becoming increasingly limited, perhaps impossible.5,6,7 Third, the slow and erratic recovery from the Great Recession to date is at least as consistent with a model of the world economy in which economic growth has become permanently constrained as it is with one in which a resurgence of economic growth is assured.

Jim Lunday: Independent Workforce Trends Analyst
* A New Path for World Development, Program of the Club of Rome.
1. Klaus Schwab, “The Global Economy in 2014,” Project Syndicate
2. Olivier J. Blanchard and David Romer, “Preface,” in A. Michael Spence and Joseph E. Stiglitz, In the Wake of the Crisis: Leading Economists Reassess Economic Policy (Cambridge: MIT Press, 2012).
3. “Preface,” in World Social Science Report 2010: Knowledge Divides (Paris: UNESCO, 2010)
4. Garry Jacobs, “New Paradigm: The Necessity and the Opportunity,” Cadmus 2, no. 2(2014): 9-23.
5. Dennis Meadows et al., Limits to Growth (New York: Universe Books, 1972)
6. Jin Xue, “Arguments For and Against Economic Growth,” Conference Proceedings, 2nd Conference on Economic DeGrowth Barcelona, 2010
7. Ademar R. Romeiro and Henrique N. S ́Earp, “The Entropy Law and the impossibility of perpetual economic growth,”

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