Alternative Vision for the Economy _ Aug 2010_Sinead Pentony

The Role of the Economy in a Flourishing Society – Sinéad Pentony

The Role of the Economy | Sinéad Pentony | August 2010

The Role of the Economy in a Flourishing Society

This paper aims to stimulate debate on the society we would like to live in ‘after the crisis’, and on how the economy needs to be transformed to service a flourishing society. There are realistic, progressive alternatives to a return to neo-liberal ‘business as usual’, and that involves a new and different growth model: one that is economically, socially and environmentally sustainable, is possible.

The predominantly neo-liberal, infinite growth model of the recent past has let us down. The financial crisis has exposed deep flaws in the approach to economics that has dominated policymaking for a generation. Economic liberalisation has not delivered on its promise of rapid growth on a consistent basis, but has been characterised by booms and crashes. Fewer and fewer have benefited from the booms, as wealth and incomes have become increasingly concentrated, while those who experience the most negative effects of crashes have seen few if any benefits in the good times. Inequality has risen to record levels, and has contributed to and exacerbated many of the social ills in society.

Essentially, orthodox economic theory assumes the infinite consumption of finite resources.

Growth, in the sense of using more and more resources, is impossible when there is a limit to resources. The assumption that economic growth is a good in itself, and that the benefits of economic growth automatically trickle down to all, has proven to flawed.

The world is warming and we are running out of non-renewable sources of energy. The atmosphere cannot absorb the levels of CO₂ being pumped into it for much longer without triggering irreversible climate change. We can use what we have more efficiently, but this too has limits. Our ‘footprint’ in the developed world has grown too heavy, and we are showing no signs of our being able to tread more lightly. Therefore, the time is ripe to develop a new vision for the economy that does not rely for its stability on relentless growth and expanding material throughput. Such an economy must be informed by a different set of values, creating the conditions for a flourishing society – within limits.

Changing the way we think about the economy and measuring progress The challenge of ecological sustainability is now widely recognised, but what instruments are needed to achieve it and, importantly, how can we avoid unduly sacrificing other valid social goals (equality, good jobs, quality public services and rising living standards)? There is no clear model for achieving economic stability without consumption growth. Nor do any of the existing models take full account of the dependency of the macro-economy on ecological variables such as the opportunity cost of depleting finite resources.

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The Role of the Economy | Sinéad Pentony | August 2010 We need to rethink what we value, and how we quantify these values. The progress of countries has traditionally been measured using GDP, which measures the value of goods and services produced by a country. However, GDP critically ignores the value of services not supplied by the market, such as state healthcare and education or unpaid childcare provided by parents. An obsessive focus on GDP and economic growth has fuelled dangerous risk-taking, chronic overconsumption and unsustainable resource depletion.

There needs to be a shift in emphasis from a ‘production-oriented’ measurement system to one focused on the well-being of current and future generations, i.e. towards broader measures of social progress. Building social and environmental values into the measurement of progress should be the central goal of policy-makers. Market prices also need to reflect real social and environmental costs and benefits. We need to make ‘good’ things cheap and ‘bad’ things very expensive. Markets should continue to have a role in a transformed economy, but they must be set up in such a way that prices reflect true social and environmental costs and benefits.

The neo-liberal model of economic development has given rise to the situation where society is serving the economy, rather than the economy being designed to serve society for the benefit of all citizens. Consequently, an over- emphasis on growth has superseded societal and human wellbeing, demonstrating a profoundly distorted sense of values in which quality of life, human life and dignity are subordinated to material achievement.

Material achievements are important – we want a future where people can work, where basic needs are satisfied, where human dignity is respected. But can we perhaps achieve those goals within a society defined by a new vision – a vision premised on the idea of flourishing within limits. In the context of this vision, we need to create a culture which values society as well as the individual, a culture of common good that has equality at its core and which commits itself to responsibility for inter-generational care of the planet.

Transforming the Economy Growth is unsustainable, and the implications of this for the Irish economy are immense. The Irish model, with its market-friendly state, low tax base and its inability to plan for a more successful society, is ill-prepared to deal with the challenges associated with transforming the economy. However, policy responses to the crises can put the Irish economy on a more sustainable footing. In order to achieve a job-rich post-growth economy, we need to consider how our economy can simultaneously address ecological sustainability issues while maintaining high levels of employment.

If we valued jobs as much as economic growth, we would measure the success of our economic policy by the number of jobs created (and, of course, the quality of those jobs), rather than crudely measuring national success as a function of increasing ‘economic growth’. Full employment should be a central goal of economic policy – not a side-effect.

The weaknesses of the Irish economic model need to be addressed as part of this process of change – weaknesses that are essentially features of a model based on ‘growth’, which (i) is 2 The Flourishing Society

The Role of the Economy | Sinéad Pentony | August 2010 highly dependent on foreign direct investment, (ii) pursues a low-tax strategy, and (iii) is weak in terms of redistribution of income and wealth. The engine of growth in the Irish economy did not come from the capabilities developed within the economy, but was essentially an extension of growth and innovation generated by the US economy.

In the short to medium term, a radical shift in economic structures is required together with structural reforms of supply-side policies in order to move to a smart, green and inclusive growth. This should include a focus on building a more diverse economy, where we produce a wider variety of goods and services, and add value to products in new and different ways. The more diverse our economy, the more we protect ourselves against future economic shocks. We also need to build a stronger domestic economy by providing support to small and medium-sized firms, as well as providing support to encourage (productive) foreign direct investment. Finally, for the medium to long term we must support innovation and develop industries that build on Ireland’s natural advantages, e.g. wind and wave energy.

Such an approach must go hand in hand with measures to reduce inequality, and with changes to our concepts of growth in favour of a more qualitative approach. Our immediate economic priority should be to favour labour rather than capital, to focus on work and jobs as our primary prime target, and to consider salary caps or more progressive redistributive tax policies in order to bring about greater equality.

The Role of the State, Taxation and Expenditure The state has a key role to play in terms of creating the conditions for a transformation of the economy. In the absence of explicit interventions by the state, market economies produce undesirable outcomes: booms and busts, rising inequalities, economic imbalances. This was a characteristic feature of the post-1980 period dominated by neo-liberalism: by the idea that the ‘market knew best’ and it was not appropriate for states to ‘interfere’ in the efficient functioning of the markets. State intervention, far from being inherently inefficient, turned out to be essential to prevent system-wide collapse. As a society, we cannot return to having blind faith in markets to deliver a future of endless, rapid growth.

In Ireland, the role of the state has been to give priority to the maximisation of competiveness and profitability over investment in social and economic infrastructure and the welfare of society. The role played by the state has configured both the regime of capital accumulation (facilitating FDI) and the regime of distribution in such ways that they respond much more to the needs of corporate capital rather than the needs of citizens. Therefore, the role of the state must also be transformed if it is going to facilitate the shift towards a different type of economy.

The experience of the Nordic countries provides ample evidence of how strong social democracies can create regulated social market economies – economies that afford their citizens a high quality of life and which place equality at the core of public-policy making.

The current economic crisis has highlighted the need for debate regarding the appropriate level of public spending in Ireland. The benefits of public spending, as evidenced in the Nordic 3 The Flourishing Society

The Role of the Economy | Sinéad Pentony | August 2010 countries, are numerous and include the provision of public services such as education and health; reducing inequality through redistribution measures; and providing a social safety net and a minimum standard of income. It is clear that public policy in a range of areas can exacerbate or ameliorate inequalities in society. Two of the areas which have the greatest impact on the levels of inequality are taxation and public services. While public policy during the boom failed to use the taxation system to redistribute resources (whether directly, or through improved funding of public services), the austerity policies pursued over the last three Budgets have resulted in reduced incomes for many low income families and social welfare recipients, while also depleting public services through spending cuts. These reduced incomes impact on the economy as a whole through reduced aggregate demand, as well as on individuals and households.

Ireland maintained the third lowest average level of public spending in the OECD as a proportion of GDP over the period from 1995-2008. In 2007, Ireland’s pre-crisis level of taxation was 31.2 per cent of GDP, compared to an EU-25 average of 39.9 per cent. To provide Western European standards of public services the tax take would have to increase significantly to a European average of 45 per cent, in the medium term. Our system of taxation also needs to be more stable and progressive and this can be achieved by including taxes on wealth, as well as income and by ensuring consumption taxes do not impact disproportionately on low earners and social welfare recipients. Contributions to taxation from the corporate sector also needs to increase to ensure that all sectors are contributing on a progressive basis – those who benefit the most from the economy pay the most in taxation. All of these taxes need to be part of the mix in providing stable and sustainable revenue for the State.

The Role of Banking and Finance The current series of crises have their origins in the financial and banking sectors. The finger has been pointed at the failings of regulatory systems to regulate these sectors adequately in terms of managing risk, corporate governance and transparency. However, there are more fundamental questions to be asked of these sectors and their role in the economy - the answers to which should inform any process of reform. The financial and banking sectors are a vital part of any modern economy but they have become detached from the ‘real economy’, and over the last two decades they have evolved and been built on trading and speculation for the sole purpose of generating profit and wealth for investors.

Finance and banking should exist to serve society. The fundamental roles of the financial and banking systems are to act as a repository and provide access to liquid assets; provide financial services and to extend credit to households and the business sector; allocate and transfer capital investment for productive use by connecting investors to entrepreneurs.

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The Role of the Economy | Sinéad Pentony | August 2010 Pure trading and speculating is not connected to productive activity, and should be discouraged to the maximum degree possible. Reform of the financial and banking sectors needs to be informed by a different vision of their role in the economy.

The provision of finance constitutes a public good; therefore, the future of banking and financial systems should be built on a core of public-service, mutual and/or cooperative banking. Banks need to recognise that they have obligations to all stakeholders, not just to shareholders, and that they have a social function in serving the ‘real economy’. We already have a strong tradition of banking serving communities through the credit union movement, which provides a firm basis on which to build a new financial and banking system.

Equality outcomes During the boom, the increased living standards and improved employment opportunities generated by the Irish model improved the lives of many. However, during this time little attention was focused on the increases in relative poverty and or on the growing inequality that characterised the boom years. Nor was sufficient attention paid to the failure to invest adequately in quality public services, especially for the most marginalised.

A transformation of the economy will require a gradual redistribution of a variety of resources.

Firstly, income and wealth resources will have to be transferred from those who do not need them to those who do. There also needs to be a redistribution of ownership, to create a form of ‘economic democracy’, where company shares are progressively transferred to employees in a resurgence of mutual and co-operative ownership. The redistribution of other less quantifiable resources will also have to be considered – such as ‘time’, in an effort to create a better balance between paid work and the vital ‘core economy’ of family, friends and community life.

Redistribution must form a central tenet of the transformation of the economy if we are to achieve the goal of creating a more equal and flourishing society – within limits.

More equal societies are happier societies. By focusing on equality, we reap both social and economic benefits, as we no longer have to pay such a high price for the social ‘ills’ associated with high levels of inequality. A more equal society will lower the importance of status goods. A less growth-driven economy will improve people’s work-life balance. Enhanced investment in public goods will provide lasting returns in terms of national prosperity.

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