Megatrends and How to Survive Them: #5 Economic Activity

Authors: Patricia Lustig, MD LASA Insight, and Gill Ringland, SAMI Emeritus Fellow and Director, Ethical Reading.

Megatrends and How to Survive Them is the title of our book published by Cambridge Scholars Publishing and available on Amazon.

This is one of a series of blogs based on the work we have done for the book. We chose Economic Activity as a topic for discussion because the structure of much economic thinking is being challenged by the megatrends.

The economic megatrends are that economic growth will continue and the average GDPs of countries and regions will tend to converge. Growing returns to capital at the expense of labour means that multi-nationals will increasingly impact local economies, and that there will be growing inequality within countries.

The impact on economic thinking comes from (at least) three directions.

First, economist and social scientist Kenneth Boulding made the point that “The classical economic taxonomy of the factors of production into land, labour and capital is too heterogeneous to be useful; know-how, energy and materials are a much more useful taxonomy in understanding productive processes.”

Over the past decades, each of these has seen a substitution: of non-human for human sources of energy, automated control systems for humans as a source of process control, and the embodiment of knowledge and know-how in process plant, and equipment for knowledge and know-how embodied in production labour.

There has been a persistent trend to use mechanical energy from non-human sources in place of mechanical energy from human and animal sources. This substitution is approaching completion.

Second, almost every production process requires process control. Increasingly automated control systems are displacing humans as a source of process control, for example driverless vehicles. This substitution will continue to play out over the next few decades.

Over the next decade, almost every production process is informed by knowledge and know-how. Originally, the humans who did the work and provided process control, also provided the knowledge and know-how needed for production. Increasingly, the knowledge and know-how are embodied in the plant and equipment. The generation of knowledge and know-how is highly specialised and is easily replicated. This is the domain of the Connected World megatrend.

Together these substitutions, as they work out, have profound implications for human societies. As humans play a smaller and smaller role in production, payments for labour will not be adequate to be the main means for accessing the goods and services that can be produced. And, most of the value created in production will accrue to the owners of the process. They are then able to buy more, that, in turn, generates even more income. The result is that we are witnessing increasing concentrations of wealth globally. While the expansion of the middle classes in Asia is a dominant force for change in our timescale, the underlying structural factors mean that inequality of wealth and the nature and role of work represents an ongoing challenge for society and economic policy.

Third, in Doughnut Economics, Kate Raworth reminds us that economic growth was not at first, intended to signify wellbeing. Simon Kuznets, who standardised the measurement of growth, warned: “The welfare of a nation can scarcely be inferred from a measure of national income.” While economics in the 20th century took as its dominant model “rational economic man”, she argues that the aim of economic activity should be economies that “make us thrive…”

The central image in mainstream economics is the circular flow diagram. It depicts a closed flow of income cycling between households, businesses, banks, government and trade, operating in a social and ecological vacuum. Energy, materials, the natural world, human society, power, and the wealth we hold in common … all are missing from the current economic model. Unpaid work is ignored, though no economy could function without it. Like “rational economic man”, this representation of economic activity bears little relationship to reality.

Raworth embeds the economy in the Earth’s systems and in society, including the flow of materials and energy. She also includes people as more than just workers, consumers and owners of capital. The resulting doughnut model consists of two rings. The inner ring of the doughnut represents a sufficiency of the resources we need to lead a good life: food, clean water, housing, sanitation, energy, education, healthcare, good government. Anyone living in the hole in the middle of the doughnut is in a state of deprivation. A billion people live in the hole in the middle (Level 1 on Hans Rosling’s categorisation in his book Factfulness).

The nature of the outer boundary is more fluid. We have breached the outer boundary in several places by using up resources faster than they can be replenished by the ecosystem. There is evidence to suggest that prosperous societies become more environmentally aware and better at protecting it, and that technology is finding ways to avoid the zero-sum game, e.g. renewable energy, biotech, and nanotech as an aid to recycling etc. As the population continues to increase and push up against resource limits, the world may need this type of integrative framework within which to set conventional growth measures and to add new economic measures.

For instance, some models start to build in the factor that many people now have choices and may not be driven by economic/financial factors in making decisions. This is a major challenge to many existing economic models. As people become wealthier, they may choose to spend their time in different ways, on no cost experiences, rather than driving for more wealth or accumulating more goods.

So, for leaders, the questions to ask themselves and their organisations could be:

• How does growing inequality of wealth affect your organisation, supply chain and customers?
• Do you assume that rational economic man is the dominant model? Have you tested this with people in your organisation and outside?

We are very grateful to Dr Robert Hoffman and Willem Londeman for their significant inputs to this blog.

We live in exciting times!