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

6. Conceptualizing an Alternative View
Seeing the world through the economics concept of externalities is not the only way to see it. Taking guidance from those who advocate an integrated approach to developing a new paradigm suited to the challenges of our times, we can also see the world as an integrated whole that must be studied and understood as a system. We can discard concepts that fragment the world and disconnect the pieces and turn to concepts that include and reconnect the fragments the prevailing paradigm has handed down to us.

The concept employed here is the concept of an inclusive world economy. This is a concept intended to shift analytic practice away from defining all problems and solutions in terms of geopolitical, geophysical, and ecological entities toward defining some problems in terms of processes that transcend those boundaries.

By adopting an inclusive point of view, we weaken lines of reasoning that depend on the concept of externalities, but we also strengthen other lines of reasoning. In particular, we strengthen lines of reasoning that grow out of efforts to produce understandings of the world by integrating insights from multiple disciplines.

In the case at hand (examining prospects for continuing high rates of economic growth), adopting the concept of an inclusive world economy considerably undermines optimism about economic growth. Possibilities that are visible from the perspective of the limited world of the internal become less salient when they are considered alongside possibilities that become visible when the internal and external are united and system wide processes are given greater attention.

7. From a World Economy with Externalities to an Inclusive World Economy
The concept of externalities belongs to a bygone era. Without selecting a particular year or decade, we can say that the history of capitalism is divided into two periods. The first period (roughly the 16th through the 19th centuries) was a dynamic period in which capitalist nations and their emissaries and armies incorporated more and more of the world’s peoples and territories and resources into the expanding system of nation-states and capitalist markets. That period roughly coincided with the activities widely referred to using the terms colonialism and imperialism. For convenience we can call that period the expansion period in the development of the world economy.

The concept of externalities belongs to that expansion period because significant numbers of the world’s people and significant amounts of territory and resources had not been incorporated into nation-state jurisdictions; all aspects of life had not been organized around commodity markets, not even in the capitalist nations and not even by the dawn of the 20th century. Dividing the world into hierarchies of the internal and external was a strong fit with a world of capitalist and pre-capitalist societies, limited interactions across geopolitical and societal boundaries, political systems based on royal families and property rights, and limited understandings of the impact of human activities on the environment.

That world disappeared over the course of the 20th century. We are living in the second period of the history of capitalism and the concept of externalities does not fit the circumstances that now prevail. In this period there are no true externalities, no inputs from outside the system, and no outputs and outcomes that are transferred outside the system. There is a continuum from core to periphery in the system – core processes to peripheral processes, core nations to peripheral nations, core markets to peripheral markets, etc. In this world, the sources of inputs and the destinations of outputs and outcomes are politically defined as internal and external, but in reality they are only distributed unevenly among politically defined territories, populations, and ecosystems. No matter the distributional map for inputs, outputs and outcomes, they are internal to the world economy, not external to it. The earth and every­thing animate and inanimate that resides in, on, and above it constitutes the world economy. The current period can be called the inclusive world economy period.

Describing the contemporary world in this way is not new. In his book, Something New Under the Sun, J. R. McNeill writes an environmental history of the world economy that sets off the 20th century as a new phenomenon because of the unprecedented scale of human activities and the unprecedented impact of those activities on the environment: “…for the most part the ecological peculiarity of the twentieth century is a matter of scale and intensity.”9 In a similar vein, Herman Daly, an economist and advocate for a steady-state economy, notes that “The most important change in recent times has been the enormous growth of one subsystem of the Earth, namely the economy, relative to the total system, the ecosphere … The closer the economy approaches the scale of the whole Earth the more it will have to conform to the physical behavior mode of the Earth.”10

Describing the world in this way is also well aligned with calls for a new paradigm for understanding society that transcends disciplines. The concept of an inclusive world economy explicitly defines the world economy to consist not just of human activities and interactions among humans, but to also include non-human realms of activity and interactions between human institutions and those other realms of activity. Interactions among these various realms of activity and their consequences for human wellbeing cannot be fully understood without data and insights from the disciplines on all sides of those interactions.

8. Empirical and Interpretive Support for This View
Much can be said in favor of adopting the concept of an inclusive world economy. A growing body of empirical data shows that the peoples of the world are linked together in numerous ways. A popular expression of the “smallness” of the world is the idea of six degrees of separation between any one person and any other person on the planet.

9. Evidence of Global Integration
The high level of integration of the world’s economic and geopolitical activities is demonstrated by numerous statistics. For instance:

  • In 2010 the daily volume of currencies traded was 220 per cent higher than that in 2001, and 65 per cent of the transactions were cross-border ? up from 54 per cent in 1998. Between 1990 and 2011 foreign direct investment increased more than six fold.11
  • The ratio of world exports of merchandise and commercial services to world GDP in current dollar terms was around 32 per cent in 2012, up from 22 percent in 1990 and close to its peak value of 33 per cent in 2008.12
  • The movement of people across national boundaries is increasing. In 2013, 232 million people (3.2 per cent of the world’s population) were international migrants; in 2000 the number was 175 million and in 1990 it was 154 million.13
  • International travel is growing. From 2010 to 2013, outbound trips increased by 22 percent. In 2012 arrivals exceeded one billion.14
  • New technologies are spreading across the world at an accelerating rate.‡, 15
  • Since World War II the world has gained numerous international organizations – the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development, the Group of Eight, European Union, the World Trade Organization, and others.
  • The World Trade Organization reports that regional trade agreements (RTAs) have become increasingly prevalent since the early 1990s. As of June 2014, 379 RTAs were in force.§
  • Membership in the United Nations has grown from 51 in 1945 to 193 in 2011.
  • Centralized control of the world economy has been increasing, as shown by a study of the ties among owners of international corporations that found that “transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions.”16

The International Monetary Fund (IMF) has produced a number of studies of economic spillovers from one country to another. From one such study: “The size and composition of spillovers across countries is one of the many issues that have resurfaced in the wake of the Great Recession. It is now apparent that events in some countries can have profound spillovers elsewhere which are not limited to their immediate neighbors but can ricochet around the globe.”17

Other IMF studies report evidence of shortcomings in policy effectiveness when sufficient transnational coordination is missing. This quote from the summary of a study illustrates this point: “In cross-border cases, misaligned incentives and lack of robust mechanisms for resolution and cross-border cooperation left some country authorities with little choice but to take unilateral actions, which contributed to the high fiscal costs of the crisis and resulted in disorderly resolution in some cases.”18

Increasingly, nature is being pulled from the external world into the world economy through activities that effectively assign monetary value to various aspects of nature. Examples of this process include investments in wildlife preserves, wilderness areas, endangered species protection, wet lands protection and reclamation, and many other forms of nature protection and management. Assigning a price to carbon dioxide to discourage emissions is equivalent to assigning a monetary value to climate stability. Markets in which nature futures are bought and sold are now as much a reality as markets for corn and hog futures.

10. Interpretive Support
In addition to the empirical data, interpretive support for an inclusive world economy is increasingly coming from economists and other experts. Michael Spence, Professor of Economics at NYU’s Stern School of Business and Nobel laureate economist, observes that national “policies (or policy shifts) are increasingly affecting other economies and the global system, giving rise to what might be called “policy externalities” – that is, consequences that extend outside policymakers’ target environment.”19 Javier Solana, president of the ESADE Center for Global Economy and Geopolitics and Distinguished Fellow at the Brookings Institution, concludes that the nations of the world have become so interdependent that “one country’s policies, whether pertaining to work, the environment, public health, taxation, or myriad other issues, can have a direct impact on others.”20 Moisés Naím, senior associate in the International Economics Program at the Carnegie Endowment for International Peace, warns that “politicians should do a much better job of explaining to their constituents’ that what happens beyond the borders of their country or city has implications for what happens inside their homes.”21

“The concept of economic growth captures only one component of the development of the inclusive world economy; measuring economic growth has only limited use as an indicator of changes in human wellbeing.”

Stefano Bartolini, Associate Professor of Economics, University of Siena, inadvertently makes the case for adopting the concept of an inclusive world economy with an argument that the “growth process generates extensive negative externalities which reduce the capacity of the social and natural environment to furnish free goods.” Put another way, externally sourced goods (free goods) are disappearing. As they disappear they must be replaced with produced (not free) goods. Since produced goods have an assigned value, they are counted as wealth.22

‡ See Information Technology, Globalization 101, SUNY Levin Institute
§ See World Trade Organization
¶ See
9. J. R. McNeill, Something New Under the Sun: An Environmental History of the Twentieth-Century World (New York: W. W. Norton & Company, 2000).
10. Herman E. Daly, “A Steady-State Economy, Report to the Sustainable Development Commission” Sustainable Development Commission 2008
11. Moisés Naím, “The Dangerous Cocktail of Global Money and Local Politics,” Financial Times November 18, 2011.
12. Part I- Trade Developments in 2012 and Early 2013 World Trade Report 2013 (Geneva: World Trade Organization, 2013).
13. “232 million international migrants living abroad worldwide–new UN global migration statistics reveal,” Department of Economic and Social Affairs, United Nations October 2013
14. ITB World Travel Trends Report (Munich: Messe Berlin GmbH, 2013)
15. Rita McGrath, “The Pace of Technology Adoption is Speeding Up,” Harvard Business Review Blog November 25, 2013
16. Stefania Vitali, James B. Glattfelder, Stefano Battiston, “The network of global corporate control,” arXiv July 2011
17. Tamim Bayoumi and Francis Vitek, “Macroeconomic Model Spillovers and Their Discontents,” International Monetary Fund Working Paper January 2013.
18. “Cross-Border Bank Resolution – Recent Developments,” International Monetary Fund Policy Paper June 2, 2014
19. Michael Spence, “The Blurry Frontiers of Economic Policy,” Project Syndicate September 19, 2013.
20. Javier Solana, “Whose Sovereignty?,” Project Syndicate March 12, 2012.
21. Moisés Naím, “The Dangerous Cocktail of Global Money and Local Politics,” Financial Times November 18, 2011
22. Stephano Bartolini, “Beyond Accumulation and Technical Progress: Negative Externalities as an Engine of Economic Growth,” University of Siena Economics Working Paper No. 390, 2003

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