Can sustainable development provide the growth engine for capitalism’s next phase?

2017 is a landmark year for the sustainable development movement. It’s 30 years since the World Commission on Environment and Development — better known as the Brundtland Commission after its chair, the then Norwegian Prime Minister, Gro Harlem Brundtland — published its final report, Our Common Future.

‘Humanity,’ the report states, ‘has the ability to make development sustainable to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.’

Gro Harlem Brundtland at the World Economic Forum annual meeting in Davos, 1989 (Source: World Economic Forum)

2017 also marks a 30th anniversary of a rather different kind. In December 1987, two months after the publication of Our Common Future, Oliver Stone’s iconic film about the ruthless, unscrupulous and sometimes downright criminal world of high finance — Wall Street — hit cinemas across America. Played by Michael Douglas, the film’s anti-hero Gordon Gekko quickly became a cult figure on the real-life Wall Street.

Michael Douglas as Gordon Gekko (Source: Wikipedia)

Gekko’s famous dictum — ‘greed is good’ — seemed to capture the spirit of the times, alas, rather better than the nobler sentiments espoused in the Brundtland Report.

The sustainable development movement was born into a world in which financiers were ‘masters of the universe,’ as the writer Tom Wolfe put it (also in 1987) in his novel, The Bonfire of the Vanities.

30 years on, little of substance has changed. Across the world, the financial sector has undergone Alice-in-Wonderland-style growth in recent decades, playing an ever more dominant role within the global economy. Increasingly, this has been to the detriment of the so-called ‘real economy’ as more and more money circulates within what the journalist Rana Foroohar calls ‘the closed loop’ of the financial system. Corporate executives like Unilever’s Paul Polman complain that the excessive short-termism of financial markets undermines companies’ ability to focus on creating long-term value — a view that is borne out by declining rates of investment in things like R&D.

Economists refer to this trend as ‘financialisation’, or the ‘decoupling’ of finance from the real economy. It’s a trend that is, in the most basic sense of the word, unsustainable. And yet, for now, nine years after the collapse of Lehman Brothers, the Gordon Gekko paradigm of financial capitalism limps on, masking its fragility with the same bravado and swagger that made Gekko an icon in the first place.

But it won’t last forever. Zoom out and it becomes clear that the financialisation of the last 30 years is part of a cyclical pattern we’ve seen many times before.

The Russian economist Nikolai Kondratiev was the first to popularise the idea of long-wave economic cycles back in the 1920s. These cycles, he argued, are largely driven by technological innovation and its gradual diffusion through entire societies and economies.

In the intervening century, many others have built on Kondratiev’s work — notably, in recent times, Carlota Perez. Perez argues that since the Industrial Revolution began in the late 18th century, there have been five waves, or ‘great surges of development’. Each wave has an ‘installation period’, during which bubbles, manias and a decoupling of finance from the ‘production economy’ are a recurrent phenomenon. Then economies undergo an often-painful transition, before entering into a ‘deployment period’, characterised by more inclusive growth.

We are currently, according to Perez, at the mid-point of the fifth wave since the Industrial Revolution. Historically, at this point in the cycle, a ‘re-coupling’ of finance to the real economy takes place.

Image courtesy of Carlota Perez

This analysis raises an important question: to what exactly is finance meant to ‘re-couple’? After so many years of growing fat, it requires a mighty powerful locomotive to attach itself to, if we’re to continue chugging up the hill towards prosperity, rather than sliding back down into recession.

Last time we were at this point in the cycle — in the 1930s — it took a massive surge in both public and private sector demand to effect the transition from installation to deployment. The full mobilisation of national economies during World War Two, the building of a welfare state, mass suburbanisation and the growth of what Dwight Eisenhower called ‘the military-industrial complex’ during the early Cold War — without these massive pools of demand, the post-war boom wouldn’t have happened.

Where’s the equivalent impetus for economic transformation and shared growth going to come from today? A cursory glance across the economic landscape is enough to see that many of the industries that drove the last boom — oil, automotive, retail etc — are in no fit state to drive the next one. We’re fast approaching “peak oil”, “peak car” and even, potentially, “peak stuff” — and we’re only accelerating.

Consider the findings of a recent report on the future of transportation by a new US think-tank called RethinkX:

‘We are on the cusp of one of the fastest, deepest, most consequential disruptions of transportation in history. By 2030, within 10 years of regulatory approval of autonomous vehicles (AVs), 95% of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model we call “transport as-a-service” (TaaS).’

This disruption, the report states, ‘will have enormous implications across the transportation and oil industries, decimating entire portions of their value chains, causing oil demand and prices to plummet, and destroying trillions of dollars in investor value.’ It estimates that, by 2030, 70% fewer passenger cars and trucks will be manufactured each year. Oil demand, meanwhile, will peak at 100 million barrels per day as soon as 2020, dropping to 70 million barrels per day by 2030. That’s 40 million barrels per day below the Energy Information Administration’s current “business as usual” case.

Even if you take RethinkX’s projections with a pinch of salt — which is probably advisable — you’d have to be crazy to believe that the next boom is going to be powered by Ford, ExxonMobil and co.

So what is the alternative? Perez argues that innovation needs to be given a ‘direction’ if it is to produce strong, shared growth. Today, she writes, the most promising direction on offer is ‘green’ — shorthand for the twin challenge of reducing our negative impact on the planet whilst enabling billions more people to join the global middle-class. The essence of Perez’s argument is this: switching our economy onto a sustainable track isn’t a challenge to growth; it’s our opportunity to kick-start a new era of prosperity.

Others agree. In their 2016 book, The New Grand Strategy, retired Marine Colonel Mark Mykleby, economist Patrick Doherty and sustainability writer Joel Makower argue that America needs a new strategic direction and a new ‘investment hypothesis’ in order to unlock the next boom:

‘Our old growth scenario is exhausted. The post-World War II economy ran out of fuel back in the early 1970s… Ever since, we’ve been inflating one speculative bubble after the other, draining wealth from the middle class and reversing the hard-earned postwar gains.’

Theirs may be a US-centric perspective, but it has wider implications. Echoing Perez, they argue that sustainability is the solution, not the problem. They start with a very simple formula:

Demand + Capital — Stranded Assets = New Growth Scenario

Taking each element in turn, they show first that ‘thanks to large-scale demographic shifts over the past 20 years, the United States is sitting astride three vast pools of pent-up demand… for walkable communities, regenerative agriculture, and resource productivity.’ In particular, the first of these — driven by the changing preferences of millennials, who are less attracted to the suburban lifestyle than their parents were, and retiring baby boomers, who fear being stranded in suburbia in their old age — is foundational for a new growth model.

Capital certainly isn’t the issue. The vast amount of cash being held by US companies — estimated to be about $16 trillion if you include hedge funds, private-equity firms and institutional investors — is a symptom of the fact that investments offering a decent yield are in desperately short supply.

Stranded assets do present a very real challenge. To stay within 2°C of atmospheric warming, the International Energy Agency estimates that we will have to avoid emitting the carbon from roughly 80% of the world’s proven oil and gas reserves. The rest is what’s called “unburnable carbon”. Estimates of the value of this “unburnable carbon” are in the $20–25 trillion range — more than America’s entire annual GDP. Simply writing those assets off would crash the entire global economy.

Mykleby, Doherty and Makower propose an elegantly simple solution: ‘we believe it is time to solve the stranded hydrocarbon issue by executing a feedstock shift, moving oil and gas out of combustion and into materials.’ In other words, rather than burning all the oil and gas, we must build with it.

While clearly it would be preferable to have people in government thinking about these strategic challenges, Mykleby, Doherty and Makower are realistic about the fact that isn’t going to happen any time soon in the US. In any case, they argue that the private sector needn’t ‘wait on Washington’ to solve these problems. By their calculation, the pent-up demand for walkable communities, regenerative agriculture and resource productivity represents an economic opportunity worth $1.3 trillion a year. Globally, the Business and Sustainable Development Commission has identified market opportunities related to the UN Sustainable Development Goals worth $12 trillion a year by 2030.

The old engine of growth is failing. A new one is within reach — and this time sustainability won’t be an afterthought that we try to retrofit onto an existing model; it’s the very foundation of the new order.

Thirty years on from Our Common Future and Wall Street, we may at last be on the brink of a shift from the Gordon Gekko model of extractive, financial capitalism to the Gro Harlem Brundtland model of inclusive, sustainable capitalism. Not because greed has finally been tamed, but precisely because it hasn’t.