How does economics need to change to deliver a Green New Deal?
O n 9 August 2021 the Intergovernmental Panel on Climate Change (IPCC) published its Sixth Assessment Report. Its message was the starkest yet: extreme weather is taking hold in every part of the planet, the atmosphere and seas are warming at rates unprecedented in human history, and some of the consequences are irrevocable. According to the UN chief, the report represents a “code red for humanity”.
The Covid-19 pandemic represents a critical juncture in the fight against climate breakdown. As vaccines start to be rolled out across the world, attention is turning to how the global economy can be rebooted. But restoring the pre-pandemic status quo would not be a neutral act — it would be an active decision to deepen the climate crisis. So instead of spending billions to return national economies to their environmentally destructive path, it is clear that governments must instead forge a different path. But what does this mean for economic policy?
In the final webinar in IIPP’s ‘Who owns what and why’ event series, the Financial Times journalist Rana Foroohar was joined by IIPP director Professor Mariana Mazzucato and Mark Carney, UN Special Envoy for Climate Action and former governor of the Bank of England, to explore the question: ‘The Green New Deal: what’s the real deal?’
Foroohar kicked off the discussion with a question about value theory in economics and how this needs to change if we are deliver on the promise of a Green New Deal.
Different theories of how value is created will lend themselves to different policy prescriptions, and can also justify very different distributions of income and wealth. Throughout history, different theories of value have come and gone in economics as capitalism has evolved, new technologies have reshaped the way the economy works, and new schools of thought have emerged.
Professor Mazzucato highlighted how in recent decades it has been common for economists to hail businesses as the real ‘value creators’, and have designed policy accordingly. “We’ve gotten stuck thinking that value creation and wealth creation just happens inside businesses. And we forget that value is collectively created across different actors.”
At the same time, it has been assumed that value is a reflection of price — if something has a high price, then it must be valuable. In practice, this has meant that economists have either ignored the natural environment, or traded it off against other monetary goals.
If we are to have a chance of tackling the climate crisis, this needs to change. “Any green and inclusive agenda must start from the recognition that value is not the same as price, and value creation is a collective process that involves not only businesses, but also workers, public institutions and civil organisations”, Professor Mazzucato said.
Mark Carney added that economists also need to rethink how they appraise policy decisions to ensure that climate change does not get overlooked: “We need to build a consensus about where we want to get to, and that means putting sustainability at the top of the value hierarchy — not trading it off against other things. And then we need to organise markets in a way that supports this.”
According to conventional economic theory, the state should only intervene in markets to ‘level the playing field’ or to correct certain identifiable market failures. Because the state has neither the knowledge nor the expertise to allocate resources better than the market, it should avoid pursuing policies which try to ‘pick winners’ as this will only serve to distort market competition.
But at a time when governments around the world are facing major social and environmental challenges, simply trying to ‘level the playing field’ or ‘fix market failures’ will only lock us into our current trajectories. As Professor Mazzucato noted: “When policymakers simply try to fix market failures, by definition they will be too late. It means waiting for things to fail, and then just bandaging up the system.”
To deliver a Green New Deal, policymakers should therefore stop trying to ‘level the playing field’ and instead seek to ‘tilt’ the playing field in a green direction. Importantly, this means recognising that the state has a role in not only ‘fixing’ markets, but also in co-creating and shaping new markets, technologies, and industrial landscapes. This also means redesigning every tool available — procurement, regulation, grants, loans — to steer spending and investment in a green direction.
Importantly, a market shaping approach to policy also has major implications for how public institutions are designed and governed.
In order to decarbonise the economy on the timeframe that is required, public sector institutions must play a leading role. However, as Professor Mazzucato highlighted, in recent decades key public functions have been delegated to management consultants and outsourcing companies, meaning that the public sector’s capacity has been drastically hollowed out.
Tackling the climate crisis will therefore require investing in public sector institutions, and increasing their capacity to think and act big. It will also require breaking down the boundaries between existing government departments. Breaking out of these silos will need strong leadership from the very top of government — but it will also need an adaptive and agile culture in which civil servants can work across the public sector to harness the abilities of the state in a dynamic way.
In some areas new public institutions may also be needed to accelerate the green transition. Carney suggested establishing new central bank-like ‘carbon councils’ to determine climate policies without political interference, while Professor Mazzucato stressed the powerful role that mission-oriented state investment banks can play in catalysing green investment.
Importantly however, a successful Green New Deal will not be the product of any single body or agency, but rather of the interactions between different public agencies and their interactions with private actors. Crucially, it will also depend on getting buy-in from the general public — and ensuring that the cost of the transition is shared fairly.
As Professor Mazzucato said: “The ‘green’ bit of a Green New Deal is easy — we just need to the science. The ‘deal’ bit is much more challenging. It means redesigning the social contract; resigning public-private relationships; and redesigning the role of social movements. This is where we really need more thought leadership.”