The ‘green’ economy: a fantasy fuelled by financialization


Timorously, even by the standards of scholarly journals, three economists recently ventured, with some hedging, to make the obvious critical point about ‘green growth’:

‘Greening’ economic growth discourses are increasingly replacing the catchword of ‘sustainable development’ within national and international policy circles. The core of the argument is that the growth of modern economies may be sustained or even augmented, while policy intervention simultaneously ensures sustained environmental stewardship and improved social outcomes…

[Yet] when judged against the evidence, greening growth remains to some extent an oxymoron as to date there has been little evidence of substantial decoupling of GDP from carbon-intensive energy use on a wide scale.

‘Sustainable development’ had been the favoured watchword of both policy elites and eco-activists for well over twenty years – at least since the UN’s Bruntland Report (1987) and Rio Earth Summit (1992), which established a Commission on Sustainable Development.

The chief feature of this term, like the slogan ‘green growth’, was that the noun nullified the adjective rather than being modified by it.

Claims of sustainability  where they were not simply a decorative adornment fit for PR consumption  veiled attempts to seize rural land and other resources  for ‘green’ development, resource extraction, ecotourism, etc.

Entities formed in the name of sustainable development include the World Business Council for Sustainable Development. This was created by the Swiss billionaire Stephan Schmidheiny, and has corporate members including Royal Dutch Shell, BP, DuPont, General Motors and Lafarge. (One of its projects is the Cement Sustainability Initiative).

Yet, according to a recent World Bank report, the post-Rio mantra of ‘sustainable development’, while suitably vapid and obfuscatory, was inadequately attentive to economic growth.

‘Inclusion and the environment’ were laudable areas of concern. But they had to be ‘operationalized’ via the instrument of green growth if they were to feed the hungry, etc.

Convenient then that later, amid the market euphoria and asset-price inflation of the late 1990s, PR slogans of ‘sustainability’ became slightly less measured and sober, taking on a more obviously hucksterish tone.

Cornucopian eco-futurists like Jeremy Rifkin (author of The Hydrogen Economy) suggested that a New Economy had become ‘decarbonized’, ‘weightless’ or ‘dematerialized’.

The New Economy, its embellishers said, had been liberated from geophysical constraints. Through the technological miracle of an information-based service economy, it appeared, for the first time since the birth of industrial capitalism, that growing output and labour productivity had been ‘de-coupled’ from higher energy intensity, more material inputs and increased waste byproducts. (Evidence showed otherwise.)

Ben McNeil - Green growth

In his 2012 presidential address to the Eastern Economic Association, Duncan Foley speaks of the reality behind this ‘green growth’ ideology:

Rosy expectations that information technology can produce a “new“ economy not subject to the resource and social limitations of traditional capitalism confuse new methods of appropriation of surplus value as rent with new methods of producing value.

Thus, he notes, the appearance of ‘delinking’ between aggregate output and energy use (of fossil fuels) is an artefact of the growing incomes of individuals and entities (e.g. bankers, holders of patents or copyright, insurers, real-estate developers) whose ownership rights entitle them to a share of spoils generated elsewhere.

But, since these individuals never step anywhere near a factory, mine, recording studio or barber shop, their revenue streams or salaries seem not to derive from any material process of production in which employees transform non-labour inputs into outputs (and waste byproducts).

Due to changes in the type of income-yielding assets held by the wealthy, the ultimate source of such property income (in the transfer of a surplus product generated elsewhere) has become less transparent, more opaque.

The royalties, interest, dividends, fees or capital gains enjoyed by such people seem to arise from their own ‘weightless’ risk-bearing, creativity, inventiveness, knowledge or ingenuity – much as rental payments accrued by a resource owner appear to be a yield flowing from the ‘productive contribution’ of land.

Revenues extracted by holders of intellectual property and litigators of IP violations, by owners and trader of financial assets, etc. create niches in which many other people find their means of livelihood and social existence.

Income accruing to these agents involves the redistribution of wealth created elsewhere, in productive activity. The larger the proportion of social wealth absorbed by these unproductive layers, the more plausibly does GDP appear to have become ‘de-coupled’ from its material foundations.

These individuals are then flattered and enticed by visions describing them as the advance guard of a clean, green future.

Let me first describe these ‘new methods of appropriation of surplus value’ before I explain how they have generated the mirage of ‘sustainable growth’.

To a large degree, what is conventionally described as the ‘knowledge economy’ is better understood as the enlargement and strengthening of intellectual property rights (patents, copyright, trademarks, etc.).

Among other things, this has involved the outsourcing of corporate R&D to universities, and the consequent commercialization of the university’s research function.

This required extending the patent system to the campus, as occurred in the United States with the 1980 passage of the Bayh-Dole Act and the 1982 creation of the Court of Appeals for the Federal Circuit, which hears patent infringement cases.

Fortification of IP in the name of the ‘information economy’ did not bring about any great flowering of scientific research, nor give some new deeper purpose to invention or discoveries. Ideas did not thereby abruptly become ‘drivers of economic growth’, any more than they had been during the times of James Watt, Eli Whitney, Karl Benz or Fritz Haber.

It simply allowed the conferral of proprietary rights to the pecuniary fruits of those inventions (the royalties or licence payments), and the creation of a vast contractual and administrative apparatus for pursuing, assigning, exchanging, litigating and enforcing those ownership rights.

Thus sprang up technology transfer offices, patent lawyers, etc.

This broad patent system also governed rights of use, applying new legal restrictions and bureaucratic encumbrances to research tools and inputs used in collaborative research (bailments, material transfer agreements, software evaluation licences, tangible property licences, etc).

Baroque obstacles of this sort, allowing the IP possessor to threaten denial of access to the invention or discovery, provide the patent holder with the bargaining power needed to appropriate a share of income generated by productive use of the invention.

What has changed, therefore, with the birth of the ‘knowledge economy’ in recent decades, has been the range of things susceptible to patenting (thus becoming a revenue-yielding asset), and the types of entity qualified to hold proprietary rights.

The enforcement of intellectual property rights (in biotechnology and pharmaceuticals, entertainment products, software, agriculture, computer code, algorithms, databases, business practices and industrial design, etc.) was globalized via the WTO’s 1994 TRIPs agreement.

This created ‘winner-take-all’ dynamics of competition in several markets.

The winner of a ‘patent race‘ could subsequently protect its market share and its monopoly revenue without needing to innovate or cut costs, because IP rights deterred entry by competitors (if they did not completely exclude them). Through a licence agreement or, even better, an IP securitization deal, the holder of a patent or copyright (e.g. a university patent office) could sit back and idly watch the royalties roll in rather than bothering themselves with the messy, risky and illiquid business of production.

Yale royalty deal

Economists have played a privileged role in commercializing university research, and transforming ‘discoveries’ into claims on wealth that entitle their holder (the university technology transfer office) to a portion of the surplus generated elsewhere (as licence fees or patent royalties).

The economist Rick Levin has been a prominent contributor to mainstream economic theory on the patent system. He recently served as co-chair of the US National Research Council’s Committee on Intellectual Property Rights in the Knowledge-Based Economy. In this capacity he has helped prepare a series of reports on the patent system, as part of submissions made for recent amendments of US patent law.

Levin has been president of Yale for the past twenty years, and like Larry Summers at Harvard his job has been to restructure the university so that scholarly research becomes a revenue-generating asset.

Below he can be watched at the Davos World Economic Forum: touting, as if at a trade fair, the wares of Yale’s ‘curiosity-driven research’, including in quantum computing.

Strengthened IP has not been the only ‘new form of appropriation’ to license the popular idea of a ‘dematerialized’ knowledge economy.

The creation during the 1980s of funded pension schemes, the decline in the rate of return on non-financial corporate capital and the removal of cross-border capital controls had increased the liquidity and global integration of capital markets.

From the mid-1990s, increased inflow of funds into stocks and other variable-return securities led to an asset-price boom that (by raising the value of collateral) increased the creditworthiness of borrowers.

In such circumstances, corporate managers could most safely make profits (and earn bonuses) through balance-sheet operations (buying and selling assets and liabilities at favourable prices) rather than engaging in production or commercial activities.

This meant that large, formerly productive transnational enterprises like GE now behaved much like a holding company: issuing debt or equities to fund portfolio investment, cutting interest costs by repaying liabilities, acquiring new subsidiaries and divesting themselves of others, etc.

As ready profits could be made without production or sales, firms became disinclined to pursue revenue in the old-fashioned way: by undertaking expenditure in productive investment, with funds tied up in fixed capital or infrastructure.

With less demand for borrowing to finance expanded operations or new investment, savings flowing into the financial system were not met with a corresponding outflow of funds. This drainage failure increased the volume of funds churning around the financial system (‘savings glut’) in search of speculative returns.

Parallel bubbles thus sprung up without any corresponding increase in investment in tangible capital equipment, machinery, tools or materials.

During the late 1990s ‘New Economy’ boom, valuation of paper claims on wealth (such as the equity prices of dot-com firms listed on the NASDAQ index) reached for the stars, as to a lesser extent did US GDP.

As measured output and labour productivity rose, it was attributed to firms investing in ‘clean’ information-processing equipment, software, intangible IP assets and ‘human capital’, and to an epochal technological step change: the New Economy.

Such were the circumstances in which the inane idea of a weightless economy, free of all material constraints, acquired enough plausibility (it doesn’t take much) to be used as a journalistic, publishing and academic catchphrase.

These surface developments were based on deep underlying causes, so the trend to financialization has since continued despite periodic interruptions: Clinton-era exuberance was punctured by 2000 and its revival expired in 2007.

Rising inequality and a shift in relative returns has prompted a change in the composition of portfolios and distribution of assets held by the wealthy.

In many advanced economies, the social surplus product (the material embodiment of class power) is less and less manifested in a productive stock of capital goods (buildings, equipment, machinery, tools).

Rising net worth, as measured by holdings of paper assets and accounts in electronic databases, eventually yields dividends, interest or capital gains. These may be recycled by employing an unproductive retinue of lawyers, consultants, managers, advertisers, security guards, etc.

Increasingly the surplus product is absorbed in such a manner, or embodied in luxury consumption goods and other types of unproductive expenditure (e.g. armaments).

But, for the most part, the assets of the property-owning classes circulate as excess savings through the financial system, generating market liquidity and bidding up prices.

Thus, during the most recent decade (and especially following the outbreak of economic crisis in 2007), the price of financial assets and other private claims on wealth have again appreciated while growth in employment, fixed investment and real productive capacity has stagnated.

The proportion of economic activity generated (according to national accounts) by ‘financial and business services’ and related ‘clean’ industries has accordingly risen. The share of value-added produced by manufacturing and other ‘dirty’ sectors has fallen.

In Australia,  so-called financial and insurance services now account for the largest share of measured output (10%) of any industry. During the decade to 2011, financial services grew faster than any other industry (professional services also grew swiftly during this period).

All this has meant that the propertied classes could now receive several varieties of property income (interest, dividends, royalties, rent, salaries, etc.) at a distance safely remote from any production process in which employees turned non-labour inputs into outputs.

To some extent, of course, this had been true for a century, ever since the separation of ownership and control. The birth of the modern corporation had brought the retirement of the ‘entrepreneur’ to a quiet life of coupon clipping, with management and supervision left to a class of paid functionaries.

But with the late twentieth-century growth of funded pension schemes, institutional investors and internationalized capital markets, ownership was dispersed (and capital ‘depersonalized’) to a far greater extent than ever before. Foreign residents could now hold shares almost anywhere, and firms could list their stock on several major exchanges at once, thus raising capital abroad on the deepest markets.

Even a single asset, not to speak of an entire portfolio, now often bundled together several income-yielding sources, the final origin (and riskiness) of which remained opaque to its owner.

The ultimate source of profit (and rent, interest, royalties, capital gains, etc.) in material production became less transparent still.

As well as sowing the illusion of ‘de-coupled growth’, these structural changes have posed practical problems for statisticians and economists who compile the national accounts and estimate the size of aggregate output or value-added.

Foley has noted elsewhere how the ‘output’ of banking, management and administration, insurance, real estate, financial, business and professional services (law, advertising, consulting, etc.) can’t be measured independently.

Instead, in the national accounts, the ‘output’ of these industries is simply imputed from the income paid to its members (e.g. the value of ‘financial intermediation services’ is indirectly measured by the margin between interest charged on loans and interest paid on deposits).

Hence a salary bonus paid to a bank executive is included in the net output of that industry, whereas a similar payment to, say, a manufacturing executive does not increase the measured value-added of manufacturing.

This lack of an independent measure of output suggests that the contribution of these industries to aggregate output is illusory.

They should be understood as unproductive: employees do not produce any marketable good or service (adding value by transforming inputs) that is consumed by other producers or serves as an input to production.

Their wages and salaries, therefore, are a deduction from the social surplus product (value-added minus the earnings of productive employees).

During the past century, most advanced capitalist countries have exhibited a secular rise in the proportion of employees in such occupations, devoted to the protection or exchange of property rights and the enforcement of contracts (rather than the production of goods and services).

This trend has accelerated over the past forty years, as accumulation of fixed capital has slowed because productive investment has become unprofitable.

In such circumstances, the surplus product must be absorbed (and aggregate demand maintained) by employing large armies of lawyers, managers, consultants, advertisers, etc. (as described above, this is accompanied by a binge of elite consumption spending on luxury yachts, hotels and private planes, and by armament production).

As with the incomes of the propertied classes themselves, the larger the proportion of social wealth absorbed by these unproductive, upper-salaried layers, the more will aggregate output be overestimated, and the more plausibly will GDP appear to have become ‘de-linked’ from its material foundations.

Moreover, the collective identity of the new middle classes is based on a self-regarding view of their own ‘sophisticated’ consumption habits, compared to those of the bas fonds. And prevailing ideology explains an individual’s high earnings by his or her possession of ‘human capital.’

Members of this upper-salaried layer need little convincing, therefore, to see themselves as the personification of a clean green knowledge economy.

It is thanks to these circumstances, taken together, that we now hear clamant and fevered talk about a ‘green economy’ and ‘renewable’ capitalism with growth ‘decoupled from resource use and pollution’. Here is described a ‘win-win situation’: a confluence of all objectives in which ‘tackling climate change’ creates ‘prosperity’ and ‘the best economies’.

‘Green growth’ is thus a fantastic mirage generated by asset bubbles, social inequality, rent extraction, and the growing power of the financial oligarchy. An apparent cornucopia appears as a free gift of nature and human ingenuity.

Yet paper (or electronic) claims to wealth merely entitle their bearer to a portion of the social surplus.

The material existence of that surplus, as with any future stream of consumption goods or services, still depends on a resource-using process of production that employs physical inputs (and generates waste). Service workers must inescapably eat, clothe themselves and travel from residence to workplace.

Thus, in reality, capitalism does face geophysical limits to growth and is temporally bounded.

With its systematic demand for constantly growing net output, capital accumulation and rising labour productivity, it brings increasingly automated methods of production (i.e. labour-saving capital-using technical change). This implies ever-greater energy intensity (more energy per unit employment) or higher energy productivity (through better quality energy).

Energy intensity and labour productivity

australia - total primary energy supply

Industrial capitalism thus requires a ‘promethean’ energy technology (one that produces more usable fuel than it uses). It depends also on the inflow of low-entropy fuels and the dissipation of waste to the peripheral regions of the world economy.

No element of the existing social order escapes this dependence, no matter how ethereal. Even the liquidity of US Treasury securities, which underpins the liquidity of world capital markets, is sustained by Washington’s military dominance of the Persian Gulf, other oil-rich regions and commercial sealanes.

There is no prospect of energy-saving technical change on the horizon. I’ve discussed before how so-called renewable energy sources present no alternative. Renewables are parasitic on the ‘material scaffold’ of fossil fuel inputs, since they are (compared to oil and coal) poor quality fuels with relatively low net energy yields.

That is why Nicholas Georgescu-Roegen declared that faith in so-called renewables evinced a hope of ‘bootlegging entropy’, linked to the fantasy of endless growth. A renewable, he said, is ‘a parasite of the current technology. And, like any parasite of the current technology, it could not survive its host.’

For the past two hundred years, fossil fuels and other material inputs have allowed industrial capitalism to escape the Malthusian trap and experience (localized) exponential growth. This has come at the ecological price of disrupting the carbon cycle, which has inflicted immense damage and now threatens catastrophe.

In these terrifying circumstances, the successful packaging of ‘green growth’ for zesty ideological consumption reveals the existence of deep political despair, widespread confusion and reality avoidance.

Above all, Pollyanism is rooted in complacent assumptions about another kind of ‘sustainability’: the permanent survival of the fundamental institutions of capitalism  privately owned capital goods, wage labour and production for profit  or the absence of feasible alternatives.


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3 Responses to “The ‘green’ economy: a fantasy fuelled by financialization”

  1. jamesroom964x Says:

    Wow. Awesome, awesome post. I don’t think many people really understand just how commercialized scholarship, especially economic scholarship his become. Nice job sharing a ton of information.

  2. Nick Says:

    Thanks a lot!

  3. Doubt as a free good; or, ‘Product defence’ as an externality « Churls Gone Wild Says:

    […] ‘devkit’), then also pays a per-unit licensing royalty on sales. These IP royalties, a form of rent, are the principle source of profit for the console producers and […]

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