Economic Myths

Why do we need a new type of economic development?

Welcome to LifeCity’s New Economy Blog Series! Each month, we will explore an issue or idea related to impact development. This month, we ask why a new form of economic development is necessary and explore some of the economic myths that help prevent change. You can find more information about the New Economy Blog Series here.

At LifeCity, we are focused on building an economy that works for good. We believe that impact development — a new paradigm for economic development that prioritizes equity and sustainability — is the key to a new economy that effectively distributes access and opportunity to everyone in our society while also supporting thriving ecosystems and business goals. Pursuing impact development forces us to think critically and ask hard questions about the structure of our development mechanisms, who benefits from those structures, and what outcomes those structures were designed to create. 

If we think about what outcomes our ideal economy would deliver and work backward to envisage a system that would produce those outcomes, we might find that our ideal economy looks different than the system we currently have. But the idea that our economy is inequitable and unsustainable is not new — inequality and environmental degradation have been growing crises for nearly half a century.

Despite growing awareness of inequality and environmental degradation and their association with contemporary economic structures, there appears to be a lack of political will for major economic change in many parts of society. We believe one reason for this may be the myriad economic myths that exist — closely-held social narratives about our economy that make it seem either more efficient than it actually is or impossible to change. 

In this installment, we will highlight some of these myths and their flaws. Future posts will explore each myth in greater detail, while painting a picture of the type of economy we want to create. This post will provide an overview of what we view as a few of the major obstacles to building an impact development framework. 

Myth #1: Growth is Always Good

Perhaps the most closely-held economic narrative in the United States is the idea that all social policy should be aimed toward economic growth. Every election cycle, we are bombarded with campaign rhetoric from both major parties about their plans to generate 5% or greater economic growth during their term in office. 

When we return to our thought experiment and consider the outcomes we want our economy to deliver, our responses probably include things like living wages, job opportunities, access to healthcare, clean air and water, and a variety of other items that allow us to live good lives. Growth may play a role in delivering these outcomes, but growth should be viewed as a means to these ends rather than an end in itself. If economic growth is only delivering increased opportunity or quality of life to 10% of the population, is growth helping us meet our desired outcomes? 

This is the problem with relying on GDP as an economic metric; it has no ability to detect the distribution of newly generated economic activity. Oxford University economist Kate Raworth suggests we become “agnostic” about growth — an approach in which we are selective, pursuing growth when it helps us meet a social need, and not when it’s purpose is simply to maximize accumulation. According to Raworth, this paradigm is key to building an economy that is equitable and sustainable, or in her words, “distributive and regenerative.”

Myth #2: Infinite Growth is Possible

The economic narrative around economic growth implies that it is even possible to accomplish this goal year over year in perpetuity. In reality, economic activity is coupled with material consumption; therefore, there is a biophysical limit to which the economy can grow without significantly harming the earth’s natural life support systems.

Johan Rockström and colleagues illustrate this idea with their work identifying nine planetary boundaries that represent a “safe operating space for humanity.” The boundaries (biodiversity loss, ozone depletion, etc.) are tied to resource consumption, and the authors argue that crossing them could lead to irreversible shifts in the environment. This work supports Raworth’s economic model (which she calls “The Doughnut”), which argues the economy should grow into a state of maturity in which it is developed enough to provide basic and social needs to the population without exceeding planetary boundaries. When we consider again our ideal economic outcomes, real questions arise not only about whether infinite growth is possible, but whether it is even desirable.

Myth #3: The Free Market is the Most Effective Way to Deliver Resources

A common refrain in the US is that economic activity should be dictated by the free market because it is the most efficient distributor of goods and services. Of course, the idea that we have (or have ever had) a truly free market is itself a myth; the US economy is subject to numerous regulations and a variety of industries benefit from federal subsidies. 

In reality, markets have two significant weaknesses. One weakness, according to former World Bank Senior Economist Herman Daly, is that they do not recognize sustainable scale. Markets are internally sensitive but cannot detect when they are growing beyond the point of ecological sustainability. 

Another weakness is ethical and gets back to our thought experiment about ideal outcomes. What happens when food, water, housing, or medicine become subject to market forces? While the cost of living in the US has risen in recent decades, real wages have remained stagnant for the majority of US workers. This becomes highly problematic as it becomes more difficult for people to meet their basic needs. This is not to say markets should have no role in our economy; it is just to say that we should be intentional about which goods and services should be subject to market forces, and which should be viewed as basic human rights. 

Myth 4: Focus on Impact Necessarily Undermines Economic Outcomes

Given what we know about the first three myths we discussed, it is clear that pursuing impact goals can not only produce positive results; it can actually help reverse some of the negative outcomes associated with traditional forms of development, including inequality and environmental degradation. 

The idea that impact goals inherently reduce return on investment reveals a narrow conception of value that focuses entirely on economic outcomes at the expense of human needs. Living wages, healthcare, and a clean environment add value to society and should be considered an important part of ROI in an impact-focused economy. If our goal is to provide opportunity and access to basic needs to everyone, then those components should be incorporated into our understanding of value.

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Building an impact development paradigm requires us all to think critically about our understanding of value and to recognize the ways in which we all benefit from an economy that is more sustainable and equitable. Alternative development models that provide space for individuals and businesses to thrive side-by-side are viable and could restore balance to the economy and the biosphere. In our next installment, we will explore what exactly we mean when we talk about impact development.