Future Vision of Economic Growth and Sustainable Society

JFS Newsletter No.162 (February 2016)

Copyright Daiwa Institute of Research All Rights Reserved.

Mariko Kawaguchi, chief researcher at Daiwa Institute of Research, Ltd., analyzes corporate social responsibility (CSR), environmental, social and governance (ESG) investment and ethical consumption. She is also a chief executive of the Japan Sustainable Investment Forum. When interviewed by the Institute for Studies in Happiness, Economy and Society (ISHES) in February 2015, she delivered an interesting talk on economic growth with society's consensus and the kinds of future enterprises that will be possible within the Earth's limited capacity. In this issue of the JFS Newsletter, we feature her interview, conducted by Junko Edahiro, president of the ISHES and chief executive of JFS, focusing on the question, "What is economic growth?"

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Edahiro: What is economic growth?

Kawaguchi: What ordinary people call economic growth generally means a rising GDP, which is thought to be a good thing. The word "growth" has a positive image: to grow up, get larger and improve. Because many people hold these values, they assume that all sorts of growth are good in all cases. Thus they believe that economic growth is good and then wonder how to measure it. Calculating the size of the GDP provides one means.

We can expect, however, complete disagreement from other people on whether economic growth is a good thing or not. We have to ask first how to define economic growth. Does it mean qualitative growth or an increase in GDP? The implications differ significantly depending on the answer.

In other words, I wouldn't state flatly that GDP growth is evil, as in a typical degrowth argument. It is not a simple issue of good versus evil. Even people who say it's evil surely benefit from today's strong economy. Some people are critical of those who work hard for major companies, They enjoy a relaxed life using the Internet in rural areas. This unilateral criticism, however, is useless, because it is people working hard for major companies that have built the Internet. We should treasure the basic attitude that "one good turn deserves another."

What should we aim for then? On what kind of economic growth can we form a social consensus? We should ask these questions first.

To begin with, I think it's wrong simply to regard a rising GDP as economic growth.

Because humans have ambition and seek advancement, growth should not be denied. Also, is it evil for us to become economically affluent? Not really. It would be misleading, though, to consider the GDP as a suitable index for calculating economic affluence, because quite a number of factors that have negative impacts on wealth and affluence inflate the GDP while causing harm. The GDP is used as the key performance index of economic growth, it would seem, as a result of a mistaken conclusion.

Originally, the GDP was said to be developed during World War II as a means of calculating the total sum of a nation's wealth to assess enemies' strength. It was useful then, so it came to be misused as a fundamental tool for economic policy. It was not developed as an index for promoting an affluent economy.

I read one of Adam Smith's books the other day. The truth is Smith never said that material growth led to spiritual satisfaction, but noted the difference between the two. His first edition of The Theory of Moral Sentiments was published in 1759, with six revised editions, some coming out after the publication of The Wealth of Nations in 1776. This suggests that he was more eager to write The Theory of Moral Sentiments than The Wealth of Nations. I think he, in essence, wanted to discuss spiritual wealth and morality.

Why did he write The Wealth of Nations? In the days before modernization and economic growth, there were many people who died of plague or famine, so the population stayed constant. I guess that Smith was acutely aware of the problem of how to stop poverty from taking lives.

He thought about how to promote industries and build a system that would help more people eat sufficiently. He observed the activities of farmers, merchants and craftsmen. I think he wrote The Wealth of Nations based on generalizations he derived from his observations and analyses.

I thus concluded that as a man in those days, he pursued material affluence, thinking that it would mean food for more people and thus human prosperity. He stressed again and again in The Theory of Moral Sentiments, however, that such things do not equate individual happiness.

It was not Smith but those who came after him who argued that material affluence should lead to people's happiness. They arbitrarily quoted Smith's words to their own liking, concluding that economic growth equaled material affluence which equaled human happiness.

If Smith were alive today, he would be amazed at the words attributed to him, saying, "I never said that." Economists after Smith argued that "economic growth is always good" based on their misinterpretation of The Wealth of Nations. Putting the market mechanism ahead of all else, they believed that the more goods people had, the richer and happier they would become.

I think people's efforts to achieve wealth are intrinsically good but we should discuss which indicators would be appropriate for representing wealth. In Japan's present situation, I think there should be indicators for wealth other than economic growth. Therefore our target lies in the direction Smith indicated.

At first we should clarify whether the advancement that people hope for is growth or development. Growth seems to mean increase in quantity or volume. Development signifies increased quality. I think we should shift from material-based economic growth to development that fundamentally includes spiritual development .

Especially important will be how to use Earth's resources effectively because there is only one Earth and its resources are finite. Companies' efforts to use resources effectively may improve their productivity and increase their profits. I think such efforts lead to more satisfaction using fewer resources and should be encouraged because they will benefit society at large.

While this is good at a corporate or micro level, such growth would be unreasonable from a macro perspective. The size of the entire pie cannot increase indefinitely because we only have one Earth. When we consider the balance between micro and macro perspectives, it is preferable to replace "material growth" with "development having qualitative significance." I fear we will reach a dead end in the future if we continue relying on our current approach, which regards the sum of micro-level growth as macro growth.

One clue to striking a balance between micro and macro perspectives can already be found in innovations among business entities. Corporations destined to seek ever-increasing profits always have to grow, just like tuna fish that must keep swimming forward all the time.

I think corporations will disappear or at least become a minor form of business entity in 100 years, because organizations required to continue growing cannot thrive on a small planet. A century and a half ago, few corporations existed among the business entities supporting Japan's economy. Thus, it wouldn't be surprising if corporations disappeared within a century.

I have heard that tuna fish were successfully cultivated. Since tuna can do nothing but proceed straight ahead, young ones often hit the walls of aquaculture pools and are killed. Why can't they avoid the walls? Because tuna spend their lives circulating in the vast expanse of the Pacific, there is no danger of them encountering walls. It is said that tuna have fins only for moving forward. Tuna are creatures with no conception of walls, but for cultivation, they must be kept in pools enclosed by walls. In an aquaculture pool, tuna need to be reborn as fish that can swim without hitting walls. In other words, the tuna are required to adjust themselves to their environment based on the survival of the fittest.

An economy driven by corporations or other organizations that seek profit growth as a supreme purpose, cannot remain viable under the restrictions of one Earth. Thus the organizational form itself must change. It seems to me that this change will not be made by large corporations as they exist. Instead, a different type of organization will take the place of corporations.

For example, an increasing number of talented young people are changing their careers to join NPOs or engage in social businesses. Young people may subconsciously relate to easy-going fish, such as flounder, that seem more sustainable than the tuna that will hit a dead end under current circumstances. This youthful perspective strikes me as more than temporary. I view them as a driving force for a shift toward sustainable business forms for the 21st century.

In the future, excellent human resources will make a career move from organizations seeking profits to those contributing socially. Until the 20th century, the walls confining economic growth were invisible, given the assumption of an infinite planet. It was good for all corporations to pursue the tuna-type business model in which they worked hard to manufacture more and more goods. Now, however, the walls are gradually emerging here and there. It has become apparent that corporations will crash into a wall and die if they maintain the status quo. Thus, the "tuna" are beginning to undergo a transformation to "flounder" that can stop or move backward. I expect the form of corporations and other organizations creating economic value to change by the year 2100.

What would these new organizations look like? One model that gives a clue is that of well-established Japanese restaurants, which provide excellent food and service to a limited number of customers on a scale that can be managed by skillful chefs. Even if there is no sales growth, the chefs are always working hard to attract customers, and people enjoy dining there. The cash flow is said to be sufficient for the people involved, despite no increase in scale. I think this type of business model will become a major economic player in the future. It has the disadvantage, though, that excessive expansion may cause trouble such as lower food quality, putting off regular customers, or scandals such as when leftover sweetfish from customers' plates was served to other customers.

Businesses fail without hard work, so there is competition. Even when sales are not increasing, it is necessary to strive for a certain level of cash flow. Furthermore, everlasting economic growth or development is possible when "growth" translates into "quality enhancement," namely increasing customer satisfaction. This is the kind of growth that is required in the 21st century.

We cannot expect stock price surges to be as prevalent as we have seen in the past over spans of 50 or 100 years, so means of financing will change instead, I think. It will be like, "This company has good cash flow, so we can receive dividends each year. The company is also said to contribute to society as well, so I think it's a good idea to invest in it," while it used to be like, "Let's invest in a growth corporation and make a profit."

Many businesses in the food, clothing and housing industries will become like first-class, traditional Japanese restaurants, which have few branches and provide quality food and services to limited customers. I think something like crowdfunding for social businesses could provide their main financing. In crowdfunding, many individuals invest small amounts of money in social businesses they would like to encourage. That kind of fundraising will become mainstream, I think.

In this context, I think the current trend of micro-investment, financing in citizens' power plants, and workers' collectives will become more popular. Future investment could be dichotomized into new areas on the one hand, such as high-tech industry and bio-industry, which are expected to see further growth, receiving investment funds that allow for risks, or into existing fields of food, clothing and housing, on the other hand, which don't change very much. In fields such as first-class, traditional Japanese restaurants, investors will provide funding directly and collect the cash flow. Moreover, the types of companies will vary; from major listed companies to corner diners and community businesses which local people support by investing through crowdfunding. Such types of social investment will spread. In fact, the Cabinet Office is promoting a system for investing in local projects, known as "Hometown Investment Funds."

Edahiro: How can we distinguish in reality between phases in which economic growth is needed, those in which economic growth is no longer needed, and those in which a shift from the former to the latter is required?

Kawaguchi: What I can say right off regarding shifting, is that any way you look at it, Japan is in the phase in which change is needed. One indication of this is the degree of affluence, in short, the amount of resources each person has. For example, how much clothing do we have per person? What level of education do we receive? Can we find safe water to drink, obtain electricity and maintain a cultured standard of living without difficulty? Other indicators to include are whether we can remain physically healthy, obtain education, network with other people and engage in cultural activities.

Even if we have enough basic food, clothing and shelter, though, there is still demand for further technological progress. Recently, for instance, iPads and other new gadgets have come out, stirring up our appetite for more and more and leading us to feel deprived without them.

Edahiro: Does continuous economic growth cost us anything? If so, what are the costs?

Kawaguchi: The cost of continuous economic growth is the loss of that which cannot be measured by the GDP, which is then added to the GDP.

For example, in Japan, over the last several decades, security services like SECOM (a major security company in Japan), have grown into an industry which is counted in the GDP, but 40 or 50 years ago, it was so safe in Japan that we didn't even need to lock our doors in most cases.

As for water, we can say the same thing. Now water is becoming less clean, leading to growth in water purification services. When I was a child, I heard that tap water was tasty everywhere in Japan, so I was astonished to hear I should buy water when I visited and lived in the US. Where all tap water is safe to drink the quality of life is high and we incur fewer expenses. However, this contributes nothing to the GDP.

Some businesses arise to meet everyday needs. The demand sometimes originates from a negative aspect of economic growth that we may have been better off without after all. Some businesses have improved our lives but we have lost many things along the way.

While our lives have become more convenient, we continue to lose many benefits we used to take for granted. We eliminate traditional values and incorporate new technologies in the GDP as value. In a stressful world, hospitals make more money if more people suffer from depression. Our society only focuses on superficial increased revenue. We don't take into account that society would be healthier if fewer people suffered from depression.

Edahiro: What specific things have been sacrificed in Japan?

Kawaguchi: A tremendous amount of natural scenery has been lost, including rural satochi and satoyama landscapes, rivers and coastal beaches. The water no longer tastes good. The sizes of sweetfish and Okhotsk atka mackerel, which people used to eat commonly, have gotten smaller. Wild native river eels are gone. How many people would consider these as lost benefits? Values change from time to time, so we need to be careful.

I often talk about Shirakawa-go, the village known for its historic "gassho zukuri" (houses built of wooden beams to form a steep thatched roof that resembles two hands in prayer).

When I traveled to Shirakawa-go by car with my family, we drove through deserted areas near Shirakawa-go. There were seedy looking villages of houses with corrugated iron roofs. Then, finally we arrived at Shirakawa-go.

The local people told me that all the run-down villages on the way used to have historic houses like Shirakawa-go. Those villages, however, were closer to the city and benefited economically, becoming richer and richer after World War II. They were influenced by western values. The people there decided to forego the out-of-date gassho zukuri. They built brand-new modern houses with corrugated iron roofs. After 30 years, the corrugated roofs became shabby, while the village with the old fashioned gassho zukuri became a World Heritage site.

People in Shirakawa-go back then were too embarrassed to say where they were from because of the outdated gassho zukuri. Some things retain their value even after many years of history. Cool, modern corrugated iron roofs became passe in a mere 30 years. Sometimes it takes many years for us to recognize real value. Have we learned that now?

Now across Japan, some people are trying to rediscover the value of old things that were left behind during modernization. They ask themselves, "What has true value?" Based on the values we once had, it was good to make new houses with corrugated iron roofs because they were more modern. Now, however, we are in a transitional time of repairing and maintaining the thatch roofing of Shirakawa-go, for example, that has a higher value.

Edahiro: How do you think the relationship between economic growth and a sustainable, happy society will change?

Economic growth and a sustainable society are essentially unrelated. The current economic system, though, such as tax and social security mechanisms, is built on the premise of economic growth. Even if we have enough material goods, we have to keep growing to ensure distribution of goods through the social system. We built this awkward system, and we must change it.

One common argument is, "If the population decreases, the social security system will collapse." The social security system was made to benefit people, but the argument implies that people should bear more children for the benefit of social security--a totally opposite way of thinking. When you consider the current situation, that argument becomes ludicrous.

We should consider separately that the economy will not grow and the population will not either. Based on this premise, we should say that we can create a mechanism anew. Within the existing framework, however, if we attempt that out of the blue, there will be much resistance and serious adverse effects.

Edahiro: How do we change the situation?

Kawaguchi: What we should not do is scrap the existing structure (system), build a new one and then move into it all together at one time. Rather, we should maintain the existing system and gradually move out of it when we are ready. I sense that some young people have already started to move away from the old system, going to a new one.

An overwhelming number of people, however, remain inside the existing one, so whether or not we can move these people away from it really matters. If we cannot show them the way to a soft-landing, it will make a hard-landing inevitable. Politicians as well as people who are in charge of economic policy fear this will happen.

If things go on this way, what will be even more dreadful is an environmental crash, not only the economic one. As I work on environmental issues, I get a guilty feeling that my efforts are just like what the Mensheviks tried to do. At the same time, I also fear what will happen if a Bolshevik-like great transformation occurs.

The Bolsheviks were a social revolutionary labor faction led by Lenin at the time of the Russian Revolution. In 1917, the absolute feudal system under the tsar was overthrown from below, in what is known as the Bolshevik Revolution.

In fact, more than 10 years before that, there had been a social revolution drive called the Mensheviks. In Russia, aristocratic young people tried to work for a gradual "Menshevik" revolution based on the idea that if the extremely unequal society--the gap between poor serfs and the tsar's absolute power--continued, the Russian Empire would collapse. While maintaining the systems of the empire and aristocracy, they tried to resolve the complaints by gradually reforming the aristocracy, recognizing the power of the serfs and enriching their lives.

It turned out to be too late, however, and a lenient reform was impossible, so the serfs and labor finally led the Bolshevik Revolution from below.

The environmental measures we are now taking are just like Mensheviks' way of thinking--while maintaining our current order and comfortable lifestyles, we can reduce CO2 a little, and not wreck our current lives. This is half-hearted in a sense.

I fear inside that the world will rebel if an 8 percent reduction of CO2 is implemented at the needed speed of change. Moreover, on the social security front, there is the risk that Japan will be destroyed financially while we grumble about decreased pensions and resist increased consumption taxes.

Over the past 40 years, it is said that human beings have wiped out 40 percent of the Earth's living land species. The global environment has little time to wait. The key to rescuing the Earth will be how many people share the sense of urgency.