Coming Soon — Anthropocene Economics

UNTIL RECENTLY, economists were perceived as reliable sources of political and policy wisdom. From the 1960s on, they managed our inflations and disinflations, great and small recessions, housing and stock market booms and busts, trade deals, deficits, and financial crises. No longer. Beset by a still uncontrolled pandemic overlain with financial crisis, political polarization, crumbling infrastructure, burgeoning inequality, raging forest fires, heat waves, and floods, the authority economists once commanded has cratered. The unforeseen consequences of their pronouncements are coming home to roost.

When Larry Summers, senior advisor to Clinton and Obama, pronounced Biden’s aid package the “least responsible” macroeconomic policy in four decades, his sour tone was that of the sidelined outsider. Summers’s old command post as director of the National Economic Council is now held by a climate change lawyer. The economists within the Biden administration have a humbler tone as the profession struggles to regain its footing, rummaging through the old saws of free trade, intellectual property, inflation management, and deregulation, with the consolation that at least they’re not getting the ridicule currently being piled on the foreign policy establishment after the Afghanistan debacle.

Despite this soul-searching, there still remains a fundamental error in the metrics of current economic thinking: economists still call for more growth, even as we live through phenomenal technological change and profit-bloated corporations spend trillions on innovation. There is a profound disconnect here: in the age of the Anthropocene, there are impacts that Adam Smith never dreamt of to take into account. To quote Adam Tooze, “[T]he novel challenge we face is how to disarm economic growth as a planetary threat.”

Even in this pandemic, when everything seemed to slow down, vaccine design that required years sped up to a few days. And the lockdown further accelerated our reliance on Amazon, Netflix, Google, and Zoom, feeding a high-tech stock market frenzy. We thus ratcheted up already high use-rates achieved by ecommerce, smartphones, search, and social media in the years since the iPhone’s debut in 2007. Amazon Prime now has more subscribers than there are US households. Facebook has roughly two billion users worldwide while over three billion people have smartphones powered by Apple and Google. Google completes almost all search requests outside of China. Artificial intelligence, having achieved literally superhuman performances in Go, chess, and Texas hold ’em poker, is transforming every corner of the economy.

Yet economists’ data say US growth is too low. Successive US administrations of both parties have deregulated, strengthened intellectual property, and lowered taxes and trade barriers, all to drive innovation because economists kept saying we had insufficient growth. Corporate innovators are given license and rewarded but, looking at how much new stuff we produce, that’s like turning on the garden sprinklers in the middle of a flood — and it’s the middle classes that are being drowned as the wealthy flourish in their walled gardens.

How did this happen? Because innovation is missed in our statistics. Economists measure growth by asking if our total incomes grow faster than the prices we pay, the rate of inflation. If you buy 500 gallons of gas a year, and the price of gas goes down a dollar, then your income will go $500 further. To that extent, your income grew. To calculate inflation, economists take a sample of goods that are precisely the same this year as last year, and measure their price changes overall. Such calculations say that today’s average household is no better off than a generation ago.

But new goods that weren’t there last year are left out of the calculation, leaving the gains from new products uncounted. And this is no small problem: every month, one in 20 goods disappears permanently and is replaced by something new. We usually don’t count innovative products as part of growth.

Consider the COVID-19 vaccine. The Pfizer-BioNTech and Moderna vaccines cost about $40 for two jabs; the J&J vaccine is $10 per jab. In all, these vaccines will cost the government about $8 billion. We are using only a tiny bit of our incomes on the vaccines — but we can’t include it in measures of inflation, because last year had no price for comparison. The vaccine makes us safer. We’re way better off having it. How much would you have paid for a vaccine a year ago? Would the vaccine have improved your life $1,000 worth or more? The price to the individual is way lower (in fact, free) than its inherent value. So our incomes went much further this past year; at least $200 billion worth for two hundred million vaccinated Americans. One could argue that the value is much greater than $200 billion: another year without the vaccine might mean 500 thousand more deaths, two million more suffering from long COVID-19, and a crippled economy, a counterfactual in which we are more than a trillion dollars worse off. But US GDP will only record $8 billion in its measure of real growth from this source.

This blind spot extends to all innovative products. In 2007, the new iPhones had no impact on measures of inflation, however valuable they instantly became. Neither did Tesla’s Model 3, which — with the opening created by climate imperatives and policy — blew up the gasoline-based auto industry. Worse yet, lots of the most important innovative products — search, email, social media, photos, and egames — are free. Economic statisticians have no method to include zero-priced goods in price indices, so they have no impact on inflation rates. In fact, with these free products, output shrinks because the paper, film, and encyclopedias we used to buy no longer have to be produced, saving our wallets that much more. And there’s the shift from purchase to subscription. Like streaming. In the old days, you spent maybe $200 to $300 a year on, say, 300 songs to play whenever you wanted. Now you can subscribe to Spotify and have access to millions of songs, for $120 a year. This hurt the high end of the music business, but, at least prior to COVID-19, gave mid-level musicians (whose earnings have always been from live performances) even greater exposure. The total amount we pay for telecom has shrunk as we abandon our landlines while the number of megabytes that flow through our smartphones rises 40 percent a year. The mobility revolution has basically been free for end users. Apple, Google, Amazon, Microsoft, and Tesla are now worth over $8 trillion! Did they do nothing for us? That’s what our data suggest.

Alas, the faster and more profound the innovation in our economy, the worse we are at measuring it. Our statistics say that our purchasing power hasn’t risen in 30 years. But look at how much we have that our parents or grandparents never had: instant access to friends, information, and entertainment, nearly self-driving cars, cheap travel, an extraordinary variety of foods at grocery stores and restaurants. America’s cars are bigger, our closets and bellies more obese. Hundreds of economists over the last 30 years have worked to improve our statistics and statisticians have worked hard alongside them, but the economy’s breathless pace exceeds our grasp. [1]

To make matters worse we are experiencing a data flood that feeds supercomputers primed to manipulate us into “likes,” social choices, purchases, voting preferences, and, above all, overdosing on screen time. The numbers that once allowed economists to lord it over the other social sciences have become privatized, monopolized by the few. What was once public and intended to serve our understanding has become the implement of control and disinformation, filling the vacuum left by dysfunctional statistics. Thankfully, some economists are stepping up to recast our perceptions and statistics.

Partha Dasgupta has looked at how our economic lenses blind us to the environment, encouraging our economies to further harm Nature. Mariana Mazzucato has examined the many myths and misconceptions surrounding innovation. Anne Case and Angus Deaton have taken a hard look at the damage wrought on once stable middle- and working-class communities in our growth-obsessed economy.

In The Economics of Biodiversity, Partha Dasgupta argues that looking at human activity solely through the lens of cash transactions has been disastrous. Although humans now command all of Nature, we have no cash transactions with Nature. Nature doesn’t buy and sell. When we add up all our transaction to create GDP, Nature has disappeared entirely. Yet Nature is still there transacting with us, absorbing our waste, providing ores, crops, weather, and the very air we breathe.

Dasgupta’s central point is ridiculously obvious: the biosphere is being depleted as our demands on it exceed its capacity to regenerate, resulting in climate change, mass extinction, eutrophy. His great achievement is to cut through the statistical babble in an attempt to remodel our economic understanding. He breaks down our economic demand on Nature into world GDP per person times the size of the global population times the resource demand on Nature per dollar. When demand exceeds supply, Nature’s capital is depleted and its future supply becomes more limited. Once we include Nature in economic metrics, subtractions from world GDP growth are introduced, measuring quantitatively our shortfall from a sustainable path.

Economists make two opposite mistakes with their numbers — they understate the growth impact of our corporations and overstate growth by failing to account for our depredation of Nature. So, with correct metrics, we should turn away from corporations — reduce profit incentives and increase regulation — in favor of sustaining biodiversity.

Dasgupta’s revision of GDP reveals three clear policy targets. One, let’s slow private GDP per person growth; it needn’t stop, but slower growth is better. Two, encourage slower population growth, by giving women who wish to limit their fertility access to family planning goods and services, access which has had low priority in development aid. Three, reduce the demand on Nature per dollar of GDP through innovations targeted at social benefit, not profits. But how does a program for prosocial innovation get traction?

Mariana Mazzucato illuminates this in Mission Economy by careful dissection of the sources, processes, networks, and institutions that make up our innovation economy. Silicon Valley, biotech, and pharma companies propagate myths of self-sufficient entrepreneurship by hiding their dependence on government research and support. Moderna partnered with the US National Institutes of Health to develop their vaccine, but Moderna alone owns the vaccine. And of course, innovator profit depends on a system of intellectual property rights enforced by governments through worldwide trade treaties.

Mazzucato shows that the US government, in targeting and achieving the Apollo moon landing, gave crucial support for much of the technology that led to the internet, software, cell phones, and medical engineering. And if we turn toward prosocial innovation to reduce our demands on Nature, the existing ecosystem of research and development could be repurposed to accelerate innovation in renewables and recyclables; foster new industries, such as electric cars, batteries, heat pumps, solar cells, and wind turbines; improve forestation and reduce carbon use throughout industry. And there are few technological obstacles to this pivot: on the contrary, economists like Nobelist Michael Kremer argue the lowest hanging fruit in innovation is in prosocial innovation. Big Pharma’s tragic lack of interest in producing antivirals needed against the pandemic is due to the lower profit margins of these products. The resistance to Dasgupta’s insights is ideological and institutional. How do we deal with that? First, as Mazzucato has outlined, the government sector can bump up research for societal benefit, a step the Biden administration is pushing and that Europe’s Horizon 2020 began implementing four years ago.

More recently Mazzucato proposed that governments receive more resources to direct us toward prosocial innovation: the government — the taxpayer — should take an equity interest in the results of research it has funded. In this way, she argues, taxpayers can get their fair returns on the research they support. This would also make visible the value of the overall portfolio of projects supported by the government and put an end to hypercritical standards of success never applied to the private sector. Politicians attacked government support of the Solyndra bankruptcy, yet that same government program also supported Tesla. Just consider Steve Jobs’s many failures — Apple III, the Lisa, the first Macintosh, NeXT, and the Mac Cube all lost money. But his successes were worth a trillion dollars. Mazzucato shows that the government’s track record is terrific relative to the private sector (think penicillin, the internet, and the human genome) and that it can leverage policy to address the staggering problems in our economy.

Do we need wealth and power increasingly concentrated among a tiny number of individuals and institutions? The disproportionate rewards to innovation gave Jeff Bezos and Elon Musk each over $60 billion in 2020. And after Bezos’s ex, MacKenzie Scott, gave away $6 billion she was still wealthier by the end of the year than when it began. Know how much wealth a billion dollars is? If you have a mere million dollars and spend $10,000 a day, you would run out of money in less than four months. With a billion dollars, you wouldn’t run out of money in 250 years. Put another way, a billion dollars could have paid the year’s full tuition for every Ivy League student who matriculated in 2020. Yet hundreds of startups are valued at a billion dollars or more.

Anne Case and Nobel Laureate Angus Deaton’s Deaths of Despair puts the costs of this massively unequal innovation economy front and center. The white middle class that once epitomized the success of the American economy has been ravaged by suicide and addiction. These people have less hope than their forebears. How the innovation economy ruined their lives is vividly illustrated by the US health-care system’s role in this betrayal.

The rapid advance of medical science has steadily raised the cost of health care per person; the full cost of a good health insurance program for a family of four is some $20,000. The average household with no college degree holder earned $47,000 after taxes in 2018 — and 55 percent of Americans live in these households. For the many, full health-care insurance is unaffordable, and with standard insurance, Americans face high copays when they get sick or injured. Even before the pandemic, one in four Americans postponed a serious medical treatment every year, putting their health further at risk. And at the same pace, one in five American households couldn’t pay at least one medical bill.

The unaffordability of health care, Case and Deaton argue, has led corporations to outsource low-pay workers so medical insurance doesn’t even modestly depress the profits and pay of the innovators and their managers who are now at the corporate core. And the inability to pay for necessities like medical care robs workers of family stability, self-respect, and, indeed, life itself. Fast growth is killing us.

The power of economics is built on intellectual and socioeconomic foundations that reach back to the Scottish Enlightenment. Adam Smith and David Hume fostered the idea that the fairly priced exchange of goods could limit the power of religious and military authorities and usher in a more rational and democratic world by creating a new disinterested authority: the market. [2] Ever since, economists have revered marketplace power as the key element in the evolution of industrial prosperity and liberal democracy. Transaction prices gave them hard numbers with which to build an elegant intellectual edifice where price signals — what sellers decide to charge and what the buyers are willing to pay — call forth production or demand, furthering the reach and the collective will of the economic community and capital. Those numbers, with which the profession lorded it over “softer” social sciences, are now failing them and us.

These failing metrics are wrecking the future, depriving many of dignity and enabling the wealthy to have sole dominion. It’s hard to find a more vivid illustration of Keynes’s observation that “practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

If there is any optimism for the creation of an economics for the Anthropocene, we have it in the work of Dasgupta, Mazzucato, Case and Deaton, and others like them. It will entail the daunting task of recalibrating our measures for a better science in guiding our decisions. But for the time being, we need to be aware of the limitations of economic advice, and that any progress — indeed our very survival — depends on the recognition that the current idolization of the transaction and the growth it supposedly measures is not only irrational but also inhuman and destructive.

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Leonard Nakamura and Michael Mackenzie are working on a book on how rapid innovation befuddles economists and all of us. These are our opinions and not those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

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[1] See the working paper by Leonard Nakamura, “Accelerating Mismeasurement of Economic Growth and Inflation in the 21st Century,” https://www.philadelphiafed.org/the-economy/macroeconomics/evidence-of-accelerating-mismeasurement-of-growth-and-inflation-in-the-us-21st-century.

[2] David Rasmussen, The Infidel and The Professor: David Hume, Adam Smith and the Friendship that Shaped Modern Thought. Albert O. Hirschman’s The Passions and the Interests provides a far richer and more nuanced view of the intellectual heritage of arguments for capitalism before its triumph, but the joint biography of Hume and Smith is the summary version of what economists and neoliberals rejoice in.