Response to Martin Wolf by Jeffrey Sachs

Martin Wolf is right, in his generous review of my book (“Sustaining Growth is the Century’s Big Challenge,” June 11), that the biggest question in economics is whether there is room enough on the planet for 7 – 10 billion human beings, the tens of millions of other species, and economic convergence, that is the continued, reliable, and fairly rapid narrowing of income gaps between rich and poor due to technological catching up by the poor. The tendencies for convergence are powerful. Rapid economic growth in China and India reflect the powerful capacity of today’s poorer countries to close technology gaps. The results are impressive: income doubling periods of 7 to 10 years. The results are also harrowing: profound threats to the Earth itself, and therefore to continued economic development and even survival of vast numbers of people and vast parts of the biosphere.
Martin calls me both optimistic and pessimistic at the same time. My point is that either the positive trajectory or negative trajectory is possible, indeed both are plausible. I believe that physical resource limits alone will not do us in, or end economic convergence. On the other hand, the market economy by itself will not solve a now world-threatening crisis of sustainable development. The market system fails to solve four fundamental classes of problems: ecosystem functions (the bio-geophysical commons); population; extreme poverty (because of the very real dynamics of poverty traps); and technological pathways needed for sustainability. These are solvable problems. They require collective action, as they are fundamentally in the character of public goods. Yet for the same reason they are not solved. Part of the barrier is the ideology of market economics itself, which often denies these problems and therefore is short on producing practical tools and solutions.
The biosphere does not come packaged according to the assumptions of neoclassical economics. What we call externalities are the norms, not the exception. In ecosystems, the nutrients, carbon, water, nitrogen, energy, and species (including ours) are in flux. There are spatial migrations and temporal flows and interactions which make a lie of the underlying assumptions of “private” property. A farmer that encloses his farm, or drains groundwater, or introduces an invasive species, or puts on chemical pesticides, or replaces high biodiversity with a commercial monoculture, has pervasive effects on a whole ecosystem. These are, by nature, not fenced in his enclosure. None of this mattered in the extreme perhaps when the Earth was still populated by 1 billion of us, or perhaps even 2 or 3 billion. When local systems failed, there were new ecological niches to conquer. Yet in the past 250 years, the population has risen nearly tenfold. There are no more places to flee. And ecosystems everywhere are under profound threat.
It is often said that we have beaten Malthus, but that is also not quite right. We have had two main solutions to Malthus. The first is voluntary fertility reduction, especially in the past half century. Malthus really couldn’t imagine this. But the global demographic transition is still incomplete, and the human population is still rising by around 75 million per year. The second is massive mining of resources. We haven’t simply figured out how to get more for less, as we usually assume; we have just as often figured out how to get more for more . . . more groundwater depletion, more habitat destruction, more fossil fuel use, more use of chemical pollutants, etc. Our “solutions” have been really only half solutions. We are clever indeed, but less clever than we pretend, by counting as income what is in fact pervasive depletion of natural capital.
The answer then to the question of whether we’ve beaten Malthus, is “Yes, no, maybe.” Yes, we have enjoyed a pervasive rise in living standards ahead of the population curve, and have set in motion the powerful global dynamics for more. No, we have not done this yet in a sustainable manner. Populations are growing too fast, we are running out of some resources, such as conventional oil and fossil groundwater, and we will lose others, such as glacier melt. And maybe we can overcome these constraints as well, but with technologies which do not (quite) yet exist, or which exist but are still very costly, or which exist but for various reasons are not deployed (e.g. because the poorest of the poor can not afford them or because of market neglect of the commons).
Standard neoclassical economics makes four kinds of mistakes regarding sustainable development. First, it literally writes natural resources out of the baseline growth analysis. This is how we are taught on the first day, with the Solow and Ramsey growth models. This assumption is correct only if the neglected natural inputs are indeed available at constant cost relative to the outputs, in which case we can assume their effects away through aggregation. This is not the case. The recent rises of oil and food prices are real signals to the contrary. And there is even more output-threatening depletion and environmental destruction not yet registered in market prices. By the way, our international agencies until very recently operated with the same blithe assumptions. The energy sector forecasts of the International Energy Agency, for example, have been “demand-side” forecasts only, as they have implicitly assumed that the supply would be forthcoming, on the margin, at constant relative costs. In the same vein, mainstream economics vastly downplays the ecological costs of human activity, by treating the massive anthropogenic pressures as mere exceptional “externalities,” rather than the pervasive rule. Again, this did not matter as much on a global scale until recently.
Second, market economics neglects the importance of population policy, especially to help promote a demographic transition in the poorest countries through a rapid, voluntary reduction of fertility rates. The rapid population growth in the poorest countries is to nobody’s benefit: the poor themselves (especially the children’s generation), the world, and the environment. It results from a combination of factors, including the pervasive lack of access of the poorest of the poor to family planning services and contraception, high child mortality rates (which discourage voluntary fertility reduction), and lack of public financing of education of girls through at least secondary level. The demographic trap, in short, is part of the poverty trap, and it is threatening to the poor, global stability, and long-term environmental sustainability.
Third, and closely related, mainstream economics assumes that production functions and financial markets are such as to ensure market-based economic growth even in conditions of extreme deprivation and lack of infrastructure. Technically, the baseline growth theory blithely assumes away poverty traps (for example, in the famous Inada condition of the first day of growth theory, which posits nearly infinite returns to incremental private-sector investments in capital-scarce economies such as Mali, Niger, Chad, and Somalia!).
Fourth, the implicit assumption of market economics is that if a technology is vitally needed, it will be found by market forces, perhaps augmented by (non-market) patent rights. Necessity will be the mother of invention, rather automatically. Yet economics teaches that knowledge -- both science and the technology embodying scientific and practical know how -- is not just another commodity, but a public good par excellence. It will be produced and diffused in insufficient amounts by market forces alone. Market-based technological pathways may sidestep entirely the technological needs of the poorest of the poor, and of the global commons, unless guided by public policies and action. The massive technological change, of the kind needed urgently in this century, requires a mobilization of public and private institutions and actions, new public-private partnerships (PPP), and a rich institutional environment for technological change. Massive technological innovations will require public financing at least an order of magnitude greater than today directed at technological innovations in sustainable energy, food production, water use, biodiversity conservation, and more.
My optimism is indeed that our technological prowess can be good enough to address the harrowing challenges, and that physical resource availability (energy, land, water, biodiversity) can suffice with the invention and diffusion of resource-saving technologies. I put great stock in renewable energies (especially solar power, which I believe will likely be the most important of all energy technologies by the end of this century, perhaps together with safe nuclear power), high-mileage automobiles, drought-resistant crop varieties, carbon capture and sequestration, anti-malaria bed nets and medicines, and much more.
My pessimism is that there is nothing automatic (in market terms) about the development and application of such solutions. They require a new kind of economic analysis; vastly greater public awareness and consensus; and global cooperation on a scale not yet achieved. We can end poverty with existing technologies for less than 1 percent of rich-world income, yet we think it’s much more important to argue about that proposition than to try it (despite our endless promises at the highest political levels to try it), while in the meantime around 10 million children die each year of their poverty, and vast regions of the world are inflame in their hunger, disease, and desperation.
Are the vitally needed sustainable technologies within reach? Probably at modest cost. Many are already on the horizon, a “future that is already present.” Are we making such investments? Plainly no. We have yet to master the full “value chain” of research, development, demonstration, and diffusion (RDD&D) to mobilize sustainable technologies at anything close to the necessary global scale and speed. Incidentally, a recent study by the International Energy Agency, Energy Technology Perspectives 2008, takes a similar technological perspective, and finds that around 1 percent of GNP invested per year in sustainable energy systems (mainly in close-to-market technologies) would be sufficient to cut global emissions by half by 2050 consistent with resource availabilities and continued rapid global economic growth. It’s almost exactly the same conclusion and point estimate that I give, and is consistent with similar conclusions of Sir Nicholas Stern and others as well. It just won’t happen by itself. Indeed, small tweaks to the market, such as carbon trading, are also insufficient, because those tweaks only modestly change the game along the entire RDD&D trajectory.
My point, in the end, is that our traditional debate – Should we be optimistic or pessimistic? – is not really the right framing of the question. The right issue is how to achieve the achievable sustainable development trajectory through an appropriate mix of public-sector and private-sector investment, backed up by a mix of public and private institutions at all scales. Good answers, I believe, will require a far more serious approach than our profession currently gives to these problems. We need to take very seriously indeed the role of natural resources and ecosystems in economic production (e.g. in food and energy); the pervasive and unprecedented anthropogenic forcings on natural systems; the multiple and deep failures of “private” property in crowded, stressed, and non-linear ecosystems; the existence of demographic and poverty traps which kill millions each year and which hold entire regions (e.g. the Horn of Africa and much of Central Asia) in a trap of political and social crisis; and the complexity of the processes of innovation and diffusion, which require a subtle and changing mix of public and private institutions operating locally, regionally, and globally.Source: Financial Times Comment & Analysis