“The global economy looks and acts more and more like a global casino.”
- Hazel Henderson, 1998
“In far too many countries, the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability.”
- Christine Lagarde, Managing Director, International Monetary Fund, 2014
“An economic crisis is a period when you should step back and think: is this a moment to make some fundamental changes?”
- Gerard Kleisterlee, Philips CEO, 2009
- There is evidence to suggest that the Great Recession may be the start of an historic tipping point that enables humans to achieve a more secure, inclusive and green economy.
- The global public saw the global economic crisis of 2008 as a systemic problem needing fundamental changes rather than simply a cyclical downturn needing only stimulus.
- Over the past 7 years, some key elements of the Social Contract have eroded. The most important underpinning of social cement, especially in hard times, is the extent to which people believe there is a fair sharing of economic benefits and burdens. Majorities in countries around the world see unfairness.
- A second fundamental element of a social contract relates to whether people see the rich in their country as deserving of their wealth. Fully one in two citizens do not believe that wealth is necessarily associated with hard work or cleverness.
- Strong majorities even disagree with the way in which we measure progress, with almost 7 in ten across 10 key countries saying we should go beyond GDP to include social and environmental indicators of progress.
- A final piece of evidence relates to the perceived economic impact of action on climate change. Majorities across OECD countries see climate action as not only necessary but also not a drag on the economy.
- Given this evidence, it is clear that policy makers need to better address the loss of public trust in economic fairness and economic oversight, and implement substantive measures to reduce the rich/poor gap, move beyond GDP to measure true progress, and ensure climate stability.
- In a way, the worst thing that could happen is for the Great Recession to be over before we make the systemic changes required to secure the stability and moderation most people seek and the planet needs.
- Without real economic reform, it is hard to imagine reaching the year 2020 without another serious economic downturn.
- Only a New Economy with fundamental improvements in oversight, fairness, and sustainability will gain the public trust and confidence needed to truly emerge from the Great Recession into a sustained period of economic health.
I considered calling this chapter “The Great Recession” but I thought that would be overly simplistic given the times we are in. I think Australian Paul Guilding has said it best by calling it “The Great Disruption”— when Mother Nature teams up with Father Greed to give us kids some tough love. It’s what happens when so few of us humans have been acting like adults lately. Too much “gimme, gimme”; not enough focusing on the real needs of everyone.
As economist Raj Patel states after writing of the unsustainability of our present consumer economy, “But the reverse of consumerism isn’t thrift, its generosity.”7
Could the global financial crisis of 2008 and the ensuing long recession turn out to be the start of an historic tipping point that enables humans to achieve a more secure and human economy? The jury is still out, but some believe the transition may have begun from an unsustainable economic model based on never-ending growth, to a dynamic equilibrium economy that respects the limits of both human nature and Mother Nature.
In September 2013, I had the pleasure of speaking at the annual Stern Stewart Institute at Schloss Elmau in the German Alps. This Davos-like retreat for mainly German and other European industrialists was pre-occupied with the bleak economic prospects, especially for Europe.
One of the other speakers was the brilliant Czech economist Tomas Sedlacek who shocked the business leaders present by likening the current global economy to a manic-depressive patient – teetering between highs of growth and lows of debt. He stated that an economic policy or system that only pursues growth will always lead to debt. In his view, the current unbridled free enterprise system is geared totally to growth, not stability. And he argued we need stability first and growth perhaps fourth.
After Tomas’ talk a group of us were standing outside on the Schloss’ elegant terrace in the pristine mountain air, having a glass of wine. A German CEO was vigorously challenging him on his assertion that growth wasn’t the primary goal we should be pursuing, using the argument that his shareholders insisted on getting a good return on their investment in the company he led. Tomas just waved his hands at the gorgeous mountain setting and suggested that the CEO and his shareholders were not having it too rough. Later, in a Der Spiegel interview, he said, “Greed is an engine of progress, but it's also the cause of our collapse. Enough is always just beyond the horizon.”
When GlobeScan asked people across G20 countries in 2009 who or what caused the global financial crisis, they mainly pointed to governments, presumably for not protecting the public interest; but 8 percent spontaneously named greed or corruption (see chart on page 48). For an unprompted question this is a significant result.
Even more interesting, the research suggests that people around the world viewed the global economic crisis of 2008 as a systemic problem needing fundamental changes rather than simply a cyclical downturn needing only stimulus.
A January 2009 24-nation poll for the BBC World Service showed that fully 7 in ten citizens around the world believed major changes were needed in the global economic system, and indeed their own country’s economy, in order to achieve a durable economic recovery. Only 4 percent thought no significant changes were needed to the global economic system—yet, that is pretty much all we’ve gotten so far.
The same survey showed that 7 in ten held the view that the free enterprise system works best when accompanied by strong government regulations—its highest level in our eight years of tracking across these countries. Clearly, the pressure on governments to strengthen oversight of the free market is enormous.
In this context it is unfortunate that G20 leaders at their summits throughout the recession, including the key 2009 London and Pittsburgh Summits, made relatively few systemic changes in the global economic architecture. The bulk of most countries’ economic stimulus packages were also aimed mainly at bolstering the existing system and institutions that got us into the mess in the first place.
No wonder the current recession is the longest lasting of any in modern times, approaching near-Biblical proportions of “seven bad years.” As Einstein famously remarked, “We cannot solve our problems with the same thinking we used when we created them.”
If greedy bankers, declining support for economic globalization, and a collapsing belief in the unfettered free market system were all we were dealing with, the current crisis would be daunting enough to fix. But we are in much more challenging times than this.
US President Barack Obama put it this way in his January 2009 Inaugural Address, “Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some but also our collective failure to make hard choices and prepare the nation for a new age.”
Many argue that we have so neglected some of the fundamental underpinnings of continued prosperity, and so externalized some of the real costs to people and the planet, that we are faced with solving many problems at the same time. For example, we have been pricing one of Earth’s most precious of resources, a benign climate, at zero8. But it goes far deeper than simply adding the climate challenge to the mix of problems to solve.
One of the deeper economic problems we have is distrust, not just in economic actors like banks and their regulators, but in the economic system itself. The popular support for Occupy Wall Street, Spain’s Indignados and other demonstrators calling for more fairness for “the 99 percent” suggests that regaining trust will be one of the principal challenges that will need to be met in order to restore economic confidence and emerge from what at best will be the “Great Recession.” Trust is also a key underpinning of a healthy social contract between economic actors.
It’s interesting how little we talk about the Social Contract today, given it has been one of the most influential moral and political theories in all of human history, since Jean-Jacques Rousseau’s 1762 book on the subject9. A tangible sense of social contract, or social cohesion, was a key element in the building of the economic miracle that led us out of the Second World War and created much of the wealth that exists today. There was a shared belief that there was something in it for everyone.
Some of the elements of a Social Contract—the perceived bond between rich and poor; between the powerful and the governed; indeed, our trust in the very economic system under which we labour—have eroded quite badly over the past decade, according to public opinion research.
However, the major element of the social contract that has more than compensated for the decline in other elements has been the continuing ability of the free market economy to deliver benefits that people value—principally more “stuff.”
One doesn’t need public opinion research to accept that many people in industrialized countries haven’t seen more stuff for an unprecedented period of time. With this fundamental pillar of our Social Contract weakened for the foreseeable future, and the need for social cohesion in this time of challenge, it stands to reason that we will have to focus on rebuilding other underpinnings. Hence, I predict that the social contract, or social cohesion, or simply trust, will be a continuing theme of debate and reconciliation.
A key economic underpinning of trust or social cement, especially in hard times, is the extent to which people believe there is a level playing field in the current economic system; that there is a fair sharing of economic benefits and burdens.
The BBC World Service Poll explored the economic views of people across 34 countries in December 2007, a year before the global financial crisis. In the BBC’s media release10 I was quoted as saying: “There is real public unease about the direction of the economy, but it’s not only about a downturn. It also has to do with how fairly benefits and burdens are shared, and the pace of globalisation.”
Majorities in 27 out of the 34 countries in the BBC Poll held the view that the benefits and burdens of “the economic developments of the last few years” have not been shared fairly in their country. On average 60 percent felt this way.
As the following chart shows, across 16 tracking countries, this average percentage has remained at this level; far from where it needs to be in order to help build the social contract.
A second fundamental element of a social contract relates to whether people see the rich in their country as deserving of their wealth.
In a Spring 2008 poll in collaboration with the New Economics Foundation in London, majorities in 11 out of 21 countries disagreed that “most rich people in our country deserve their wealth.” This was particularly the case in Europe and Latin America, where 56 percent disagreed. When GlobeScan asked the same question again in 2012, the results did not change significantly.
In other words, fully one in two citizens do not believe that wealth is necessarily associated with hard work or cleverness—surely one of the beliefs needed to underpin the current economic system. This suggests that views on inherited wealth, including the taxation of same, will be an interesting area to explore further in coming years.
True to the American dream, US citizens remain among the most convinced that the wealthy do in fact deserve their wealth (57% in 2008). Canada was the only country surveyed where an even bigger proportion of the population believe this element of the social contract.
Other research underscores how fragile the conventional economic paradigm has become. Citizens do not believe that the way we measure our economic progress, namely the Gross Domestic Product or GDP, adequately reflects the underpinnings of true progress.
In a 2007 10-nation poll GlobeScan conducted for presentation at a European Union-hosted economic conference, fully three-quarters supported going beyond GDP to include environmental and social indicators along with economic ones. To ensure we were asking a balanced and accurate question, the wording was approved by the chief economist at the OECD (Organization for Economic Cooperation and Development) at the time.11
As the following tracking chart reveals, the economic recession reduced the percentage of citizens wanting to go beyond GDP, but it has since rebounded in most countries. And the 10-country average has always represented a majority rejection of the adequacy of GDP in measuring true progress. It also suggests that the three pillars of sustainable development – economic, social and environmental – are all seen as important by most citizens across these countries.
A final piece of evidence related to achieving a sustainable economy concerns the perceived economic impact of action on climate change. For 15 years GlobeScan has tracked whether respondents agree or disagree with the statement “Our national economy will be significantly damaged if we try to cut our emissions of climate changing gases.” Over this time, majorities of citizens across wealthier (OECD) countries have consistently disagreed, suggesting citizens of OECD countries see climate action as not only necessary but also not a drag on their economy. It is only citizens of emerging economies (non-OECD) that are increasingly worried about this possible impact.
Given all the above evidence, it is clear that policy makers need to better address the loss of trust in the economy. Trust can only be rebuilt by responding directly and substantively to the perceptions that have worked to undermine it.
Regaining Trust in the Economy
Economic perceptions needing to be addressed in order to get people believing in the economy again:
Even before the current economic crisis and controversy over excessive executive compensation, majorities in most G20 countries held the view that economic risks and rewards were not being shared fairly in their country. History tells us that perceived injustice is one of the most powerful drivers of social unrest.
2. Rich/Poor Gap
The growing gap between rich and poor both within countries and across the world has been widely reported for years. With this gap widening even more through the recession12, this trend is not taking us anywhere we want to go.
People want more regulation of their national economy and of the global economy. While valuing the benefits of companies and the free market, citizens are clearer than ever before that strong oversight is needed. With the “invisible hand” of the market showing itself to be a flawed concept, citizens want Government’s hand back on the steering wheel.
Strong majorities of citizens think that Gross Domestic Product (GDP) is an inadequate measure of progress and that it should be expanded to also include measures of environmental and social progress.
5. Climate Stability
Majorities or pluralities of citizens in most countries across the world see action on climate change as urgent, and citizens of OECD countries believe investments in climate protection will be good for the economy.
Leaders of the G20 (the 20 largest economies) certainly have had the world-wide constituency necessary to support bold actions to strengthen global financial governance. Unfortunately, they have not acted with nearly-enough boldness. And if they haven’t done so seven years into the longest recession in modern history, they are unlikely to without another economic shock to spur them on.
Widespread perceptions of inequality will need to be addressed more fundamentally than a few isolated and superficial limits on bankers’ bonuses and executive compensation. As the Executive Director of Oxfam International, Winnie Byanyima, said in early 2014, “It is staggering that in the 21st Century, half the world’s population – that’s three and a half Billion people – own no more than a tiny elite whose numbers could all fit comfortably on a double-decker bus (i.e., the 85 richest individuals on the planet).”
And last but not least, the so-called externalities of climate protection and social cohesion will need to start to be valued in the economic and business equations.
In a way, the worst thing that could happen is for the Great Recession to be over before we make the systemic changes required to secure the stability and moderation most people seek and the planet needs.
Unfortunately, this is indeed the most likely scenario – that the Biblical ‘seven bad years’ will end not by chance or good government, but because wealthy people got tired of low returns on their investments and collectively decided to throw a vast stream of money at the New York Stock Exchange, taking the Dow Jones Index to historically high levels. While this has already happened to some extent, without enough benefit trickling down to average people the economy will continue to be a political problem in many industrialized countries.
Even with some success, a re-floated status quo economy will not be able to defy gravity for long. The elements of public trust outlined in this chapter will need to be re-built, especially the tattered social contract between rich and poor. At best, it will be a tenuous, short-lived recovery.
Without real economic reform, it is hard to imagine reaching the year 2020 without another serious economic downturn. The key question is, will the basis be laid by then for real reforms to be made to an economic system that will have failed us again?
Certainly, opinion research trends suggests that by the next crisis public opinion will have solidified further to create a real opportunity for reform-minded politicians to build the basis for a New Economy (rather than a re-float of the old economy) — a New Economy with fundamental improvements in oversight, fairness, and sustainability.
Only this will gain the public trust and confidence needed to truly emerge from the Great Recession into a sustained period of economic stability.
7 "The Value of Nothing” Raj Patel (HarperCollins)
8 A point made far more eloquently in a 2 March 2009 Financial Times commentary by economists Joseph Stiglitz and Sir Nick Stern.
9 Of The Social Contract, Or Principles of Political Right (Du contrat social ou Principes du droit politique; 1762) by Jean-Jacques Rousseau
10 “Widespread Unease about Economy and Globalization” dated February 7, 2008.
11 All three waves of this 11-country research was funded by Hazel Henderson and Alan Kay of Ethical Markets Media LLC. See http://www.ethicalmarkets.com/
12 According to the Capgemini/Merrill Lynch World Wealth Report 2011