Liberal Economics’ Track Record on Inclusion, Sustainability and Resilience

Abstract

This chapter summarizes the important historical contribution of liberal economics in accelerating economic growth and reducing poverty, while examining its profound and persistent difficulty in responding effectively to societal demands for greater social inclusion, environmental sustainability and resilience to major shifts and shocks. It traces a growing body of evidence and criticism that modern economics may be constitutionally incapable of addressing these considerations adequately, particularly since its theoretical models generally treat them as afterthoughts, matters assumed to resolve naturally over time on the strength of a rising tide of national income generated by economic growth. It then assesses the state of reform in each of these three respects, concluding that efforts to date have been essentially aspirational, procedural or incremental and thus are destined to fall well short of what would be required to fulfil the corresponding goals humanity's political leaders have set in multilateral agreements, such as the Sustainable Development Goals, Paris climate and Kunming-Montreal biodiversity agreement targets, and objectives of the ILO Centenary Declaration for the Future of Work. Despite the widespread call for replacement of “neoliberalism” and the Washington Consensus, a viable theory of more fundamental and sufficient change has yet to emerge from within the economics community. This will require a deeper critique and reformulation of liberal economic doctrine, starting with a re-examination of its first principles.

Economics—that is, the nearly 250-year tradition of liberal political economy originating with Adam Smith and fellow eighteenth- and nineteenth-century pioneers—has been in something of an existential crisis for more than a decade. Despite its remarkable accomplishments over the years and outsized influence in the halls of government and academia, it is facing a chorus of fundamental criticism, including in its own professional ranks.

Difficult questions and unresolved tensions exposed by the Great Financial Crisis have combined with the extraordinary circumstances of the past few years—the COVID-19 pandemic, US–China trade rift, Russian invasion of Ukraine and accelerating algorithmic automation and climate change regulation—to trigger a period of searching reflection the likes of which have not been seen since economists and policymakers struggled to find solutions to the multiple crises they faced in the 1930s.

To be certain, modern economics, including its neoliberal variant of the past few decades, has made an enormous contribution to human progress by increasing economic growth. With the exception of a handful of countries bordering the North Sea, growth was nearly non-existent in all regions of the world until the nineteenth century,¹ when the market-oriented principles developed by Smith, David Ricardo, John Stuart Mill, W.S. Jevons, Leon Walras, Alfred Marshall and their twentieth-century successors began to be applied. While the technological advances of the First and Second Industrial Revolutions played a major role in this economic breakthrough—as, it must be said, did colonial and other forms of human and environmental exploitation—growth has often been strongest in countries that applied these market-oriented principles earliest and most consistently. Indeed, at different times over the past several decades, the growth rates of China, India and several Southeast Asian and Latin American countries shifted markedly upwards after their governments instituted policy changes that strengthened market signals, whether through domestic reforms or international trade and investment liberalization, or both.

The expansion of economic output that these principles helped to produce has improved the human condition unmistakably in at least one very important sense: poverty reduction. Roughly 90% of humanity lived on less than US$2 per day (in 2011 dollars) until about 1860.² Such absolute poverty declined fairly steadily to about two-thirds of the global population by 1950, mainly on the strength of progress in the West, where these principles were born and first consciously applied. Again, other factors such as technological advances, favourable geography and colonization figured prominently in the economic progress made by these countries; however, their liberal economic reforms contributed importantly, too.

This conclusion is corroborated by the more recent experience of many developing countries.³ World Bank household survey consumption data show that the pace of extreme poverty reduction in the world increased after 1980. By then, absolute poverty had been virtually eradicated in Western Europe, North America, Japan, Australia and New Zealand. But the share of the global population living on less than US$1.90 per day in 2011 dollars declined dramatically from 44% in 1980 to less than 10% in 2015. Hundreds of millions of mainly Chinese, South and Southeast Asian, Latin American and other citizens were lifted beyond a subsistence level of existence or worse in little more than a generation. The timing of this remarkable—indeed, historically unprecedented—transformation coincided with the implementation of market-oriented reforms, which began in earnest in China in 1979, in India in 1991,⁴ in Brazil in the mid-1990s⁵ and in Indonesia⁶ and Vietnam⁷ in 1985 and 1986, respectively. Before these dates, the pace of economic growth and poverty reduction in these large developing countries had been modest by comparison.

China’s progress has been nothing short of spectacular in this respect; extreme poverty has fallen from about 88% of its population of one billion in 1981 to below 1% today. Many other countries have also made strong progress. Nearly a third (29%) of the non-Chinese world population was living in extreme poverty in 1981, most of them in South Asia and sub-Saharan Africa. By 2013 this figure had fallen to 12%. From 1990 to 2013 alone, the number of people worldwide living on less than US$1.90 a day more than halved, from 1.8 billion to 766 million.⁸

Thus, the contribution of market-oriented economics to socioeconomic progress over the past 200 years is clear and impressive. It has a proud legacy of helping to raise economic output and incomes from the very low levels experienced by humanity for millennia. But modern liberal economics is manifestly struggling to respond effectively to three contemporary challenges on which societies everywhere are demanding much faster action: social inclusion; environmental sustainability; and resilience to major shifts and shocks. There is a growing body of evidence and criticism that it may be constitutionally incapable of responding effectively to these problems. Indeed, its theoretical models generally treat them as afterthoughts—as matters assumed to resolve naturally over time on the strength of a rising tide of national income generated by economic growth.

Incremental and halting progress on these three important questions is contributing to an erosion of popular confidence in the political dimension of the liberal tradition: the principles of democratic governance and the rule of law underpinning free, open and tolerant societies. Disillusionment with the track record of economies on inclusion, sustainability and resilience is playing into a growing cynicism and even nihilism in the political culture of many countries—a dangerous and potentially volatile belief that elites are either out for themselves or hopelessly out of their depth, or both, in the face of the disruptive changes sweeping our economies in the twenty-first century.

This dim view of the so-called dismal science’s chances of effectively confronting these challenges is grounded in a considerable body of evidence.

Inclusion

When viewed from a global historical perspective, much progress has been made on income inequality, particularly in the last half-century. As the people at Our World in Data have observed (see Fig. 2.1):

Fig. 2.1

Global income distribution in 1800, 1975 and 2015

In 1975, the world’s income distribution was “bimodal”, with the two-humped shape of a camel: one hump below the international poverty line and a second hump at considerably higher incomes. During the preceding century, the world had divided into a poor, developing world and a developed world that was more than 10-times richer. But over the following 4 decades, there has been a convergence in incomes: in many poorer countries, especially in South-East Asia, incomes have grown faster than they have in rich countries. Whilst enormous income differences remain, the world no longer neatly divides into the two groups of “developed” and “developing” countries. We have moved from a two-hump to a one-hump world. And at the same time, the distribution has also shifted to the right—the incomes of many of the world’s poorest citizens have increased and extreme poverty has fallen faster than ever before in human history.⁹

Upon closer inspection, however, the record on inequality is less positive. There has been considerable variation in the pace of progress, and some large groups have barely progressed at all. This is the story told by the so-called “elephant curve” (Fig. 2.2),¹⁰ which was widely interpreted to show that the poorest of the world and the middle and working classes in advanced economies were stagnating, while those of the emerging-market middle class and the richest 1% were enjoying disproportionate income gains. Subsequent refinements in both data and interpretation have qualified key parts of this story (in particular that post-Soviet countries and Japan account for most of the dip in the trunk and China accounts for most of the hump),¹¹ but much of it has been corroborated by other evidence and analysis showing a pronounced rise in within-country inequality across all levels of economic development.¹²

Fig. 2.2

Global change in real income by income percentile, 1988–2008

In fact, a more disaggregated look at the record of and prospects for social inclusion in the world reveals three serious and enduring problems.

First, in advanced economies, there has indeed been long-running stagnation in the income and living standards of the middle and working classes, especially relative to higher earners. The Organisation for Economic Co-operation and Development (OECD), an organization whose members are mainly advanced industrialized countries, reports that median household income in these countries has been stagnant since 2017, after growing 1% between the mid-1980s and mid-1990s and a more respectable 1.6% between the mid-1990s and mid-2000s. As the OECD’s researchers observe, this tepid performance with respect to the middle and working classes contrasts with the fortunes of higher earners:

Overall, over the past 30 years, median incomes increased a third less than the average income of the richest 10%. Moreover, in some countries the share of incomes at the very top has surged; in the United States, for example, the share of top 1% on total income has almost doubled from about 11% to 20% over the past three decades and almost half of all income growth over this period accrued to this group … Therefore, the economic influence of the middle class and its role as “centre of economic gravity” has weakened. Three decades ago, the aggregate income of all middle-income households was four times the aggregate income of upper income households, i.e. those with incomes above two times the national median; today, this ratio is less than three.¹³

At the same time …

the prices of core consumption goods and services such as health, education and housing have risen well above inflation … while middle incomes have been lagging behind. In particular, ageing and new medical technologies have driven up the cost of health services; the race for diplomas is pressing parents to invest more and more in education while, at the same time, education services became more costly in a number of countries; the geographical polarisation of jobs is pushing up housing prices in large urban areas, precisely where most rewarding jobs are available … Housing, in particular, is key: at around one-third of disposable income, it constitutes the largest expenditure item for middle-income households—up from around a quarter in the 1990s. Despite large within-country variations, house prices have been growing three times faster than household median income over the last two decades. Housing is more than just a standard consumption good: in many countries, being middle class is traditionally associated with owning a home, so soaring house prices have touched on the very meaning of being part of the middle class.¹⁴

This statistical analysis of widening inequality in advanced economies during the past generation—commonly referred to as the “hollowing out” of their middle classes—is based on a definition of the middle class as households earning between 75% and 200% of the national median. This group averaged 61% of the population across the OECD’s member countries, ranging from roughly 50% in the United States to around 70% in a number of Nordic countries (with Czechia, France, Canada and Sweden not far behind).

The particular way these income thresholds are calculated makes them somewhat difficult to translate into terms with which people can readily identify, but the Pew Research Group runs its own more accessible calculation of the middle-class income thresholds of countries, and arrives at a similar definitional conclusion as the OECD (specifically, between 67% and 200% of current dollar median household income versus the OECD’s range of between 75% and 200% of median household disposable income on a 2010 purchasing power parity [PPP] adjusted basis). On this very similar basis, Pew defines the US middle class as having household income for a family of three of between US$48,500 and US$145,500 in 2018, with those above this threshold regarded as higher-income households.¹⁵ Other sources helpfully segment this higher income group further,¹⁶ placing the line between upper-middle-income and wealthy households at around US$350,000 to US$400,000, near the point at which the next-to-highest US individual income tax bracket (35% rate) begins for married couples filing jointly.

In sum, these data paint a picture of middle and working classes in advanced economies being squeezed by a combination of stagnant real incomes, the rising cost of key necessities, and a job market undergoing polarization in skills and compensation. The OECD reports that

one out of two middle-income households now report difficulties to make ends meet, though this ranges from one out of five or less in the Nordic countries and the Netherlands to two out of three or more in some Southern and Eastern European countries. Furthermore, almost 40% of middle-income households are financially vulnerable: i.e. they are [i]n arrears or would not be able to absorb unexpected expenses or a sudden income fall.¹⁷

These trends have been building for over a generation and have become embedded in family perceptions of their intergenerational economic prospects. Fully “60% of parents list the risk that their children will not achieve the level of status and comfort that they have as one of the top-three greatest social and economic long-term risks”.

Precarity and downward mobility is thus the current lived experience of much of the middle and working classes of these, the richest countries on the planet. The fear of downward intergenerational mobility is not an irrational one; in fact, this trend is increasingly evident in the data (see Fig. 2.3).

Fig. 2.3

Since the Baby Boomer generation, each new generation has seen its chances of belonging to the middle-income class fall

In sum, despite the significant increase in GDP, asset prices and affordable consumer conveniences in these countries during the past generation, a troubling expansion of inequality and insecurity has occurred within the largest segments of their populations. There is thus serious trouble in the supposed socioeconomic paradise of advanced economies, a status to which all developing countries aspire. Moreover, the problem appears to be getting worse, not better, and standard economic doctrine is seemingly impotent in the face of this.

Second, in many middle-income countries, progress in both economic growth and poverty reduction has been remarkable over the past few decades, thanks in large part to the waves of pro-growth reforms described above. However, it is not at all clear that their rapid convergence with the level of economic development of advanced industrialized economies—which has driven the two-humps-into-one-hump reduction in global inequality illustrated previously—can be sustained. Evidence of the existence of a so-called “middle-income trap”, a seemingly systemic failure of even the most successful middle-income developing countries to join the ranks of wealthy advanced economies, is as compelling as it is vexing. South Korea is the only non-European-Union member of the United Nations with a population greater than 10 million to have unambiguously crossed this threshold over the past half-century.¹⁸ This phenomenon, thus, increasingly appears to be structural, perhaps bred in the bone of the prevailing growth and development model.

Until now, progress in living standards and particularly poverty reduction in middle-income countries has been driven mainly by economic growth.¹⁹ But, after more than forty years, it has become clear that the traditional growth-oriented prescription of reforms emphasizing improved economic efficiency and physical capital accumulation does not by itself provide a solution to the conundrum of the middle-income trap. Clues as to what might constitute a more effective strategy can be found in the experience of South Korea and its “Four Tigers” counterparts in East Asia.

The World Bank released the definitive analysis of this topic, The East Asian Miracle,²⁰ in 1993 under the leadership of Chief Economist Joseph Stiglitz. Colleagues and I have previously summarized this report and its policy implications for developing countries aspiring to high-income status as follows²¹:

The World Bank’s landmark 1993 study, The East Asian Miracle, examined how eight economies in the region succeeded in achieving a remarkable record of “high growth with equity” from 1960 to 1990. In a chapter entitled “An Institutional Basis for Shared Growth,” its distinguished research team concluded: “Of course, few political leaders anywhere would reject, on principle, either the desirability of growth or that the benefits of growth should be shared. What distinguished the High-Performing Asian Economies’ leadership was the extent to which they adopted specific institutional mechanisms tailored to these goals, and that worked.” The team then documented the institutional approaches that contributed importantly to this positive outcome in such areas as education, land reform, small- and medium-sized business support, housing, labor–management relations, insulation of policymaking from rent-seeking behavior, integrity in public administration, and business–government relations.

The blue-ribbon Commission on Growth and Development chaired by Nobel laureate Michael Spence drew a similar conclusion in its 2008 report, The Growth Report: Strategies for Sustained Growth and Inclusive Development:

In recent decades governments were advised to “stabilize, privatize and liberalize.” There is merit in what lies behind this injunction—governments should not try to do too much, replacing markets or closing the economy off from the rest of the world. But we believe this prescription defines the role of government too narrowly … On the contrary, as the economy grows and develops, active, pragmatic governments have crucial roles to play … [M]ature markets rely on deep institutional underpinnings, institutions that define property rights, enforce contracts, convey prices, and bridge informational gaps between buyers and sellers. Developing countries often lack these market and regulatory institutions. Indeed, an important part of development is precisely the creation of these institutionalized capabilities.²²

My colleagues and I went on to conclude from these two studies that,

In fact, economic institution-building has been a crucial part of the development path of essentially every country that has industrialized and achieved high living standards. Because development is a complex and multidisciplinary process—many conditions need to be fulfilled in order for widespread poverty to be replaced by ever-rising middle-class prosperity—this process of institutional deepening occurs across a wide spectrum of domains. But the process is not automatic. Although rising national income generates additional resources and policy space to establish and effectively implement such institutional mechanisms as public education systems, independent judiciaries, labor protections, social insurance systems, competition, investment climate, anti-corruption rules and enforcement agencies, and basic and digital infrastructure, they do not guarantee it. The pace and pattern of economic institution-building is a choice, a function of policy decisions and public–private cooperation. Like other aspects of a country’s growth model, it is shaped by the prevailing political economy and is largely endogenous to the development process. Because it is a policy choice, the size of the payoff from economic growth to broad socioeconomic progress is as well, to a considerable extent.

Indeed, the importance of economic institution-building for balanced and inclusive growth was a central lesson of the economic and financial crises of the early twentieth century. Beginning at the turn of the century and gathering force in the decades following the Great Depression, most of today’s advanced industrialized countries underwent a sustained process of institutional deepening to broaden the base and strengthen the resilience of their economies. Labor, financial, social insurance, competition, and other reforms were deliberately aimed at engineering a more inclusive and sustainable growth model. They played a critical role in supporting the dramatic expansion of the middle class, eliminating poverty, and reducing economic insecurity in these societies during the latter half of the century.

If an economy can be thought of as a garden or arboretum, its macroeconomic and competitive environment sets the climate (basic conditions of moisture, sunlight, and temperature), while its institutions represent nutrients in the soil. Improvements in soil fertility can have a pronounced effect on the pace and consistency of plant growth, a process that takes years to get right and requires regular monitoring and modulation. Similarly, the essential fecundity of an economy—its yield of broad-based advancement of living standards—is shaped by the health of its macro-competitive environment as well as the strength of its institutions and policy-based incentives in areas particularly important for social inclusion. Like both weather conditions and soil quality, these factors require equal and ongoing attention. This fundamental lesson—and the rebalancing of emphasis in national policy that it implies—is where the journey toward a more socially-inclusive growth paradigm begins.²³

Unfortunately, the lessons of these two landmark reports about the importance of institutions to achieving broad-based prosperity have never taken hold in the wider academic and policy communities. For all the hopeful talk after the 2008–09 financial crisis about the death of the Washington Consensus—the policy paradigm aptly described in the Commission on Growth and Development quote above—it continues to serve as the frame of reference for great majority of national policymakers as well as their international organization policy advisers and lenders. Such path dependency (i.e., it is hard to change old habits) perpetuates the middle-income trap, putting into question the durability of the impressive convergence of middle- and high-income countries and corresponding reduction in global cross-country inequality of recent decades.

Third, in low-income countries inequality and socioeconomic exclusion pose a particularly difficult challenge. These countries have been falling farther behind their middle-income counterparts in recent years while registering a very slow overall rate of convergence with advanced economies. Their performance has improved relative to before the mid-1990s,²⁴ but they continue to experience high levels of extreme poverty and deprivation of basic human needs. In richer economies, such material necessities are considered public goods and supported or provided by the state. But this tends not to be the case in the dire circumstances of the world’s 28 low-income countries. As a result, traditional income-based measures of income poverty (e.g., the standard measure of extreme poverty of US1.90 per capita per day in 2011 prices or US$2.15 per day in 2017 prices) give an incomplete picture of the extent of material deprivation. Thus, the remarkable story of global poverty reduction of the past generation described earlier in this chapter, which is based on per capita GDP or income-based measures of poverty and disproportionately influenced by the progress of large middle-income countries like China and India, partially obscures the considerably less encouraging experience and lived reality of people in the world’s poorest countries.

For this reason, new measures of poverty, so-called “multidimensional poverty indexes”, have gained currency. By examining not only income but also key facets of people’s lived experience with respect to the basic enabling necessities of life (e.g., access to health, education, employment, safe drinking water and sanitation, etc.), they track socioeconomic progress and poverty reduction more accurately. Studies comparing trends in income poverty and multidimensional poverty in low-income countries, as measured by the two leading such indexes—the Multidimensional Poverty Index (MPI) and Global Correlation Sensitive Poverty Index (G-CSPI)—have found a significant discrepancy, with the former providing a considerably rosier picture of progress in recent decades than the latter. One study concluded,

A comparison between the trends in (extreme) income poverty and multidimensional poverty—based on a sample of 42 countries for which information was available for both indicators—reveals the former has declined significantly more than the latter (32% vs. 15%). Moreover, the prevalence of multidimensional poverty (as measured by the headcount ratio of the G-CSPI) is substantially higher than the prevalence of extreme income poverty (as measured by the headcount ratio for USD 1.90 a day). These findings highlight that—once we take other, non-monetary dimensions into account—the progress in poverty eradication has not been as remarkable as believed and calls for stronger efforts in tackling the different forms of poverty.

Some additional analyses reveal further important policy information. While deprivations in all three dimensions of poverty have declined [the team of researchers focused on education; decent work; and access to potable water and adequate sanitation, which is a proxy for and strongly correlated with health status], the employment dimension has registered the smallest improvements. Moreover, [this] is the dimension that contributes the most to overall poverty; therefore, major attention should be given by policy makers to the functioning of labour markets. A preliminary analysis indicates that economic growth correlates with poverty reduction, but this elasticity is much lower for our G-CSPI than for income poverty. This finding is in line with that of Santos et al. who used the MPI as a measure of multidimensional poverty … The direct policy implication is that, to address pockets of multidimensional poverty, a focus on the quantity aspect of growth is not enough. More attention must be given to the quality of the growth process and to the potential of social protection schemes and, more broadly, social policies to alleviate the multiple deprivations suffered by the poor.²⁵

Thus, the crucial role of economic institutions in enabling social inclusion applies to low-income countries, too, albeit with a particular focus on the provision of basic needs. But such institutional deepening presents a particularly big challenge for these countries because of their more limited fiscal capacity and greater reliance on the often path-dependent policy advice and lending programmes of international organizations. This influential community, like the economics profession more broadly, continues to have as its primary frame of reference for economic development the traditional growth prescription of fiscal discipline, market competition and trade liberalization. It has traditionally placed much less emphasis on social protection, labour markets and public support of basic necessities.

In recent years and particularly since the onset of the pandemic, the leader-level messaging of these institutions has been changing in this regard; however, programmatic practice and resource allocation have yet to fully reflect this shift in narrative. For example, the United Nations Children’s Fund (UNICEF) reports that, before the COVID-19 crisis struck, 25 countries were already spending more on debt service than on social spending for education, health and social protection combined. By early 2021, the World Bank and the International Monetary Fund (IMF) were warning that 28 countries were at high risk of debt distress and 23 countries were at moderate risk. A quarter of all lower-middle-income countries were at high risk of debt distress. As of June 2021, the G20’s Debt Service Suspension Initiative (DSSI) had offered an estimated US$13 billion in debt service relief to at least 43 participating countries, but just US$6 billion had been implemented. The programme was extended a final six months to December 2021, but it had become clear by then that permanent debt restructuring rather than the temporary deferrals of scheduled repayments was required. The G20 then launched a replacement programme, the Common Framework for Debt Treatment. However, it has been slow to take off despite a significant further deterioration of the finances of developing countries owing to rising fuel and food costs, increased US interest rates, a strengthened US dollar (in which many debts and imports are denominated) and the ongoing pandemic.

In fact, a formal consensus exists within the international community on the universal human right of social protection and its progressive realization through national social protection floors.²⁶ Social protection floors are nationally defined sets of four categories of basic social security guarantees that secure protection intended to prevent or alleviate poverty, vulnerability and social exclusion.²⁷ Despite this multilateral consensus, which should have a strong influence on the resource allocation decisions of bilateral and multilateral development finance institutions, less than half of humanity is covered by a single such category of basic social protection notwithstanding evidence that countries at all levels of development have the capacity to institute basic social protections, particularly if complemented with initial international support.²⁸ But while development donors in their own countries spend the same on social protection as they do on education and health combined, social protection receives one-seventh of the resources allocated to education and health in their foreign assistance budgets.²⁹

In sum, there are serious and growing deficits in social inclusion within high-, middle- and low-income countries alike. According to the evidence of the past several decades, the stubborn persistence of these dimensions of inequality and insecurity appears to be a hallmark, not an aberration, of the prevailing liberal economic growth and development model, notwithstanding the dramatic reduction in income poverty and expansion of the global middle class, both driven in large part by the rapid, sustained economic growth of China, India and a number of other large middle-income countries.

Sustainability

The problematic track record of liberal economic governance regarding environmental sustainability is less nuanced than its performance on social inclusion. There has been a systematic failure over the years and across all levels of development to internalize the adverse environmental impacts of economic growth in prices and policies. The evidence is unmistakable. Yes, environmental performance tends to improve with economic development, particularly once countries reach high-income status. But the overall environmental legacy of industrial development is abysmal verging on catastrophic, despite round after round of intergovernmental reform commitments beginning with the 1972 United Nations Conference on the Human Environment in Stockholm and the 1992 Earth Summit and Rio Declaration, which were inspired by the concept of sustainable development articulated by the landmark Brundtland Report, Our Common Future, published five years earlier.³⁰

Prominent examples include:

• Biodiversity: According to the United Nations Environment Programme (UNEP), populations of species are declining and species extinction rates are increasing steadily. At present, 42% of terrestrial invertebrates, 34% of freshwater invertebrates and 25% of marine invertebrates are considered at risk of extinction. Between 1970 and 2014, global vertebrate species population abundances declined by on average 60%. Steep declines in pollinator abundance have also been documented. Ecosystem integrity and functions are declining. Ten out of every 14 terrestrial habitats have seen a decrease in vegetation productivity and just under half of all terrestrial ecoregions are classified as having an unfavourable status.³¹

  Moreover, loss of tropical forest is projected to increase from around 0.8% per year between 1981 and 1990¹⁴ to an estimated 2% per year in the years ahead.¹⁵ Projections show that a large fraction of species will be “committed to extinction” in the twenty-first century because of conflicting land use and climate change. The International Union for Conservation of Nature (IUCN) Red List contains (as of September 2018) 26,000 threatened species or 27% of all assessed species, including: 41% of amphibians, 33% of reef-building corals, 25% of mammals, 13% of birds and 34% of conifers.¹⁶ The average rate of vertebrate species loss over the last century is up to 100 times higher than the background rate.¹⁷ Invasive species have contributed to more than half of the animal extinctions for which the cause is known.¹⁸

• Climate change: Global temperatures have risen by 1.2 °C so far, and already we are seeing an increase in natural disasters such as flooding and hurricanes. The UN Intergovernmental Panel on Climate Change (IPCC) 2022 report warned that the world is set to reach the 1.5 °C level within the next two decades and that only drastic cuts in carbon emissions from now would help prevent an environmental disaster. The report warned that the world is approaching certain tipping points, meaning that we will have gone beyond the point where the damage can be repaired. It highlighted, in particular, widespread forest die-off and global sea level rise from polar ice cap melting, the latter being likely to result in a one-metre rise, other things being equal.³²

  As important as comprehensive action is on all of the major drivers of greenhouse gas emissions,³³ nothing is more vital in the race to stabilize atmospheric concentrations of these gases by the mid-twenty-first century than rapidly reducing the burning of coal and preventing the installation of new coal-burning capacity.³⁴ Even if no new coal plants were built, the existing global fleet would consume most of world’s remaining carbon budget of roughly 440 gigatons of carbon dioxide under a moderate-probability scenario of 1.5 °C in global warming, including a third of the budget in just the next 10 years.³⁵ For this reason, unabated coal-fired power generation must decline quickly—much faster than use of oil and natural gas³⁶—if the world is to have a realistic chance of achieving either of the Paris climate agreement’s 1.5 °C or “well-below-2 °C” goals: an 80% reduction by 2030 to achieve the 1.5 °C goal or the same reduction by 2038 to remain under the 2 °C limit, as well as virtual elimination (a 97% decline) within the following 10 years in both cases.³⁷ Although plans for many new plants have been cancelled in recent years, some 1000 coal boilers are still under construction or are being planned and permitted around the world, equivalent to around a quarter of existing capacity.³⁸ Coal is thus a central factor driving the current trajectory of 2.5% to 3 °C in global warming above pre-industrial levels,³⁹ which the bottom-up nationally determined contribution (NDC) process of the Paris climate agreement has yet to substantially alter on the ground. Some sort of extra-market intervention is clearly going to be required to achieve such a dramatic transition.

• Oceans: The United Nations Food and Agricultural Office (FAO) reports that nearly 85% of global fish stocks are currently overexploited, depleted or in recovery from exploitation.⁴⁰ According to Oceanos,⁴¹ approximately 70% of world fish populations are now unsustainably exploited; the biomass of 25% of them has collapsed to less than 10% of historic levels; and 90% of worldwide stocks of large predatory fish are already gone. Species such as Orange Roughy, Chilean Sea Bass and Bluefin Tuna have collapsed. We are losing species as well as entire ecosystems. As a result, the overall ecology of our oceans is at risk of collapse and we, as a species, are at risk of losing a valuable food source that many depend on for social, economic or dietary reasons. Scientists now believe that, on current trends, nearly 90% of the world’s fisheries will be overfished by 2050, meaning that they will be substantially depleted and on a path to collapse absent remedial action.⁴² Moreover, they estimate that global coverage of living coral has declined by half since the 1950s⁴³ and many regions are expected to see their coral collapse entirely by late this century, according to current trends in global warming, ocean acidification and other pollution.

• Freshwater and sanitation: The World Meteorological Organization (WMO) concluded in a 2021 report that 3.6 billion people had inadequate access to water for at least one month per year in 2018, and that by 2050 this figure is expected to rise to more than five billion.⁴⁴ Water-related hazards have increased in frequency over the past 20 years; since 2000, flood-related disasters have risen by 134% compared with the two previous decades. The number and duration of droughts have also increased by 29% over this same period. In 2020, 3.6 billion people lacked safely managed sanitation services, 2.3 billion lacked basic hygiene services and more than two billion lived in water-stressed countries with a lack of access to safe drinking water. Seventy-five countries reported water efficiency levels below average, including 10 with extremely low levels. Current rates of progress need to quadruple in order to reach the global Sustainable Development Goal (SDG) targets by 2030.

  A group of scientists published a study in 2016 tracing the rise of water scarcity over the past century. Noting that the maximum global potential—the so-called “planetary boundary”⁴⁵—for consumptive freshwater use is approaching rapidly,⁴⁶ they concluded from the data that, whereas water consumption increased fourfold, the population under water scarcity increased from 0.24 billion (14% of global population) in the 1900s to 3.8 billion (58%) in the 2000s. In other words, water scarcity has increased 16-fold since the 1900s despite the total population having roughly quadrupled.⁴⁷

In sum, it should be abundantly clear from this partial summary⁴⁸ of global environmental degradation that a new and decidedly un-neoliberal approach is going to be required to stabilize let alone reverse this situation, notwithstanding all of the good intentions, initiatives and multilateral agreements of recent years. Any reasonable interpretation of the evidence leads to the conclusion that a revolution in economic policy—a fundamental reformulation of growth and development—is going to be required. The standard liberal economic model appears to be constitutionally incapable of internalizing negative environmental externalities in economic decision-making, both public and private, at the pace necessary to prevent catastrophic damage to the biosphere this century, despite growing recognition of the destabilizing effect this would have (and is already having) on economic and political stability.

Resilience

Liberal economic governance has also shown itself to be remarkably prone to major shocks having profound human consequences. It has a track record of systematically failing to learn from such difficulties in order to construct sufficient guard rails or buffers against the threat of future financial, food, energy, health and supply chain crises. It also has a chronic tendency to underinvest in a minimum level of human resilience and dignity through the construction of social security systems.

• Finance: The evidence with respect to financial crises is particularly damning. One comprehensive historical database covering the experience of 206 countries since the Second World War identified 151 systemic banking crises (1970–2019), 414 currency crises (1950–2019), 200 sovereign debt crises (1960–2019), 75 twin such crises (1970–2019) and 21 triple such crises (1970–2019).⁴⁹ If anything, the problem is getting worse and even more engrained despite growing evidence that financial crises are susceptible to prediction, since they are in large part an artifact of excess credit creation and therefore substantially preventable through anticipatory policy measures.⁵⁰

  The end of US dollar convertibility into gold in the early 1970s and the deregulation of financial services since have provided greater national policy autonomy. However,

  a combination of fiat currencies (those not linked to the price of gold or other physical commodity) and ever weakening financial market regulation has enabled exponential growth in credit and debt creation. This change has made boom and bust cycles more prevalent at a global level and ushered in an era of regular crises, but ones that have so far been tamed by even looser policy and debt/credit growth.⁵¹

  There is every reason to believe that the papering over of vulnerabilities in the financial system and real economy over the past 15 years through the provision of extraordinary central bank liquidity and fiscal stimulus is likely to end in tears. Yes, there has been major progress in strengthening key aspects of bank regulation since the 2009 London G20 Summit and creation of the Financial Stability Board (FSB); however, major gaps in prudential regulation remain, notably with respect to shadow banking and fintech, including but not limited to crypto-assets. Moreover, banking interests have succeeded in rolling back some of the hard-fought safety measures agreed following the Great Financial Crisis. As former US Federal Reserve chairman Paul Volcker is reported to have quipped, “about every 10 years we have the greatest crisis in 50 years”.

• Food and energy: The food and energy crisis of 2021–23 is also hardly unprecedented. As for food, history is replete with examples in which the international commodification and commercialization of agricultural production has degraded local food security, including the level of buffer stocks and cultivation of indigenous crops, to the social breaking point.⁵² High food prices, often related to dependence on food imports, increase the “risk of conflict and political unrest in countries with weak social safety nets. Roughly four dozen countries experienced domestic political unrest or civil war during the 2008–12 global food price crisis. Governments in Haiti, Libya, Madagascar, and Tunisia fell, sometimes violently, and protracted civil wars erupted in Syria and Yemen.”⁵³

  The world has experienced three major food crises in the past 50 years. Each time, it struggled to cobble together a tactical response to the immediate situation rather than channel the political urgency of the moment into a set of structural improvements in global food security institutions and frameworks. These need to include safety nets and buffer stocks, trade arrangements, international support for domestic productive capacity, and expanded public investment in areas with particular potential to strengthen the resilience of the system.

  Global energy crises have typically originated in geopolitical tensions rather than structural weaknesses in global markets. Nevertheless, fuel-importing developing countries routinely pay a heavy price for related increases in oil and gas prices. They are usually not a party to the political tensions giving rise to these price spikes, but they bear the principal collateral damage in large part because the international community has never been able to agree on an effective mechanism to manage the resulting impact on their public finances and sovereign debt sustainability. The lack of such a systematic mechanism for external debt restructuring in such cases is a structural weakness in the resilience of the world economy from a human and social perspective. The consequence of this gap in the international financial architecture is austerity and increased poverty and deprivation that complicate an already difficult, and often dire, social situation. The world appears to be on the verge of repeating this vicious cycle—so evident in the Latin American debt crisis of the 1980s and heavily indebted poor country (HIPC) debt sustainability crisis of the 1990s and 2000s—albeit with different characteristics. In particular, a far larger proportion of the debt is privately held this time around, which is likely to complicate and delay the inevitable restructuring.⁵⁴

• Health: The World Health Organization (WHO) and other bodies have warned of the threat of a disruptive pandemic for years. This risk has been rising along with the increased travel and migration that has accompanied the world economy’s rapid integration over the past two generations. But the political will to strengthen the surveillance and early-warning and response capabilities of international health authorities has been lacking despite repeated appeals. This persistent lack of investment in a key aspect of the world economy’s resilience was a contributing factor in WHO’s uneven early response to the COVID-19 pandemic.⁵⁵ There are signs that this lesson is being learned. Governments agreed in May 2022 on a plan to strengthen the organization’s finances⁵⁶ as well as create a new Pandemic Preparedness, Prevention and Response Fund.⁵⁷ Nevertheless, its ACT-A programme to support developing country COVID-19 vaccine access and related health system capacities was severely underfunded (to the tune of nearly two-thirds of its estimated needs for 2021–22 alone),⁵⁸ leaving the world that much more exposed to the potential further mutation and spread of the virus and ensuing economic dislocation.

• Supply chains: The global supply chain crisis of 2021–22 was produced by a “perfect storm” combination of US–China trade tensions, the snap-back in demand for goods during the pandemic and associated challenges in maintaining seafarer workforces during the lockdowns, and Russia’s invasion of Ukraine. However unique, these circumstances exposed a systemic vulnerability in the prevailing model of industrial organization, with its heavy reliance on remote and highly distributed sourcing relationships and just-in-time delivery practices.

  These severe supply chain disruptions have led to much reflection and debate about the resilience of supply chains across a range of risks—environmental, geopolitical, economic and technological.⁵⁹ Whether this rethink leads to companies assigning a higher priority to supply chain resilience in their strategic resource allocation and operational planning going forwards,⁶⁰ or they revert to least-cost but less secure and redundant options, remains an open question. This is ultimately a matter of corporate governance, i.e., whether boards and management teams see it as their duty to optimize near-term financial performance or the medium- to long-term value of the enterprise by also properly weighing material but often more intangible considerations, such as resilience to potential shocks. As such, structural weaknesses in the resilience of liberal economic governance are not just an issue for public policymakers; they also raise important questions for business leaders.

• Social protection: Arguably the biggest structural weakness in the resilience of the prevailing growth and development model is its pattern of underinvesting in human resilience and dignity. As noted earlier, half of humanity lacks access to even a single social security protection from among the five elements of a social protection floor: health; children; maternity; disability; and old age.

  The vast majority of the world’s poor, including those without any social protection coverage, live in middle-income countries, which by definition should have the means to institute a social protection floor over time. The ILO reports that:

  Today, many developing countries have levels of GDP per capita similar to those of high-income countries when the latter started to develop their social protection provision. For instance, Botswana and Indonesia today have a similar GDP per capita to that of the United Kingdom in 1911, when the Government enacted laws and established the first social insurance and social assistance programmes.⁶¹

  In fact, it has been estimated that all but six of the 51 countries classified by the World Bank as lower middle-income could afford to implement a social protection floor across the four areas of children, maternity, disability and old age, based on the updated extreme poverty threshold of US$2.15 per day, by raising over several years their tax revenues as a share of GDP to an average of 26% from the current level of 21% (which ranges from 15% to 42% depending on country circumstances) and allocating a “fair share” of 14% of such revenues to social protection (as compared with the OECD average of 33%).⁶² Moreover, multilateral and bilateral donors clearly have the wherewithal to facilitate progress in this direction by increasing their funding for initial design and set-up costs; they currently allocate only 2.5% of their aid funds to social protection.⁶³ This is curiously at odds with their commitment to eradicate extreme poverty by 2030 as enshrined in SDG 1, since the people most susceptible to extreme poverty are precisely those who would benefit from the establishment of a social protection floor across these four domains.

A Self-Reinforcing Dynamic

In sum, notwithstanding its considerable success in helping to increase the rate of economic growth and poverty reduction over the years, liberal economic governance is demonstrably failing in its efforts to address the twenty-first-century imperatives of inclusion, sustainability and resilience. Its inadequacies in these respects appear to be deep-seated and structural. They have been largely impervious to the many expressions of commitment to fundamental reform by leaders dating back to the Rio Summit and Kyoto Protocol in the 1990s, the G20’s pronouncements during the 2008–09 financial crisis,⁶⁴ the Paris climate agreement and SDGs agreed in 2015⁶⁵ and the ILO Centenary Declaration for the Future of Work⁶⁶ and Global call to action for a human-centred recovery from the COVID-19 crisis that is inclusive, sustainable and resilient⁶⁷ in 2019 and 2021, respectively.

This economic, social and environmental reform agenda has been memorialized in the 17 SDGs and their 169 corresponding policy targets.⁶⁸ Progress towards these 2030 targets is lagging badly, including with respect to such topics as inequality, universal social protection, climate change, poverty and hunger eradication. It was falling short even before the pandemic struck. Moreover, some aspects of the adverse trends summarized above are self-reinforcing. In a major study on the implications of inequality for macroeconomic policy, the Bank for International Settlements (BIS), the international organization of the world’s central banks, recently concluded,

We discover a two-way interaction between inequality and recessions. Higher levels of income inequality imply deeper recessions. And recessions tend to have a very persistent effect on income inequality. The income share of the wealthiest 10% of the population generally increases after recessions, usually remaining higher for years afterwards. In addition, we show that greater inequality makes monetary policy less effective when used either to stimulate or slacken aggregate demand. Finally, fiscal policy has tended to become less redistributive and less countercyclical, putting more onus on monetary policy as a tool for macroeconomic stabilisation. Taken together, these results suggest the importance of taking income inequality into account when designing and implementing both fiscal and monetary policy. First, both types of policy should seek to reduce the frequency and depth of recessions. Second, fiscal policy should seek to further limit the effects of recessions on the rise and persistence of income inequality. Third, policymakers should keep in mind how income inequality can erode the effectiveness of monetary policy.⁶⁹

On the ground, governments are struggling to narrow the gap between social expectations and policy delivery on inclusion, sustainability and resilience. Civil impatience and frustration are on the rise and increasingly taking the form of street protests and social unrest affecting countries at all levels of development in all regions. In its 2021 report, the Global Peace Index found that anti-government demonstrations, general strikes and riots increased by 244% over the preceding decade, with an increase in the proportion relating to economic issues. More than 5000 pandemic-related violent events occurred between January 2020 and April 2021.

Recent examples of major social unrest (involving more than 10,000 people) triggered by socioeconomic conditions include: Chile (October 2019); Kazakhstan (January 2022); Tunisia (January 2021); France (November/December 2018); Iran (November 2019); Algeria (February 2019); Brazil (May 2019); Lebanon (October 2019); India (September 2020); Cameroon (October 2018); Ecuador (October 2019); Sri Lanka (March 2022); Greece (April 2022); Mauritius (August 2020); Mongolia (December 2018); the Netherlands (June 2022); Nicaragua (April 2018); Spain (March 2022); etc.⁷⁰

Major social unrest is a threat to economies as well as governments. In 2018, the Gilets Jaunes (Yellow Vest) movement in France protesting fuel prices and economic inequality cost French retailers US$1.1 billion in revenue in just a few weeks.⁷¹ A year later in Chile, large-scale demonstrations sparked by an increase in subway fares led to insured losses of US$3 billion. The 2020 protests in the United States over the death of George Floyd in police custody were estimated to have resulted in over US$2 billion insured losses.⁷² And the South African riots of July 2021, which followed the arrest of former president Jacob Zuma and were fuelled by job lay-offs and economic inequality, caused damage worth US$1.7 billion.⁷³

An IMF team examining this issue more comprehensively observed “a tight link between unrest and subsequent economic performance”. It found that, on average, major unrest events are followed by a one percentage point reduction in GDP six quarters after the event (see Fig. 2.4). Unrest motivated by socioeconomic factors is associated with sharper GDP contractions than is unrest associated with political motives. Yet events triggered by a combination of both factors correspond to the sharpest GDP contractions.⁷⁴

Fig. 2.4

GDP relative to baseline in percentage points

An Apparent Feature, Not a Bug

Thus, despite repeated appeals from both political leaders and people on the street for fundamental improvement in the performance of their economies with regard to social inclusion, environmental sustainability and resilience, standard liberal economic governance appears to be stuck, capable of mustering only incremental progress at best. Key institutions and the supporting policy and political establishment are blocked, unable to depart much from the path they have been on for decades.

This extended record of policy immobility relative to the scale of the challenge suggests a deeper problem than a lack of political will or the capture of policymaking by vested interests, as important as these problems are. It suggests a lack of imagination—a blind spot in the very model of economic progress framed by standard liberal economics, or at the very least a fundamental misunderstanding about how the principles of liberal political economy should be adapted to contemporary circumstances.

These shortcomings of a discipline that takes pride in its intellectual rigour and central relevance to real-world decision-making are clearly exacerbating the broader political travails of the liberal tradition in the twenty-first century.⁷⁵ Within the course of one generation, perspectives about democratic capitalism have shifted from “end of history” triumphalism to “the jungle grows back”⁷⁶ trepidation and even resignation. There is growing speculation that liberal democracy may be in irreversible decline⁷⁷ and eclipsed by illiberal forms of governance in the decades to come.

Indeed, the increasingly unabashed case against liberalism rests in no small part on claims of its ineffectiveness and fecklessness. The ongoing failure of democratic leaders to deliver the big improvements in social inclusion, environmental sustainability and human resilience and dignity demanded by their citizens strengthens this case. It certainly feeds the political cynicism and disaffection on which illiberal movements thrive.

Despite the high political stakes, the response by the economics community (both academic and policymaking) to these challenges has taken four indirect and mainly aspirational or incremental forms:

• Description and analysis: An avalanche of analysis has been produced in the past ten to twenty years, both descriptive and empirical, framing the shape and size of the problem economies face in strengthening their inclusion, sustainability and resilience.

• Empathy, exhortation and goal-setting: There have been repeated political efforts to give voice to these societal concerns and build an intergovernmental consensus on the broad changes in policy direction required to address them, including through the setting of long-term goals and targets for governments in UN agreements and companies in environmental, social and governance (ESG) and other sustainability initiatives and frameworks.

• Measurement, advocacy and education: Important work has been done to improve the measurement of these challenges (i.e., beyond-GDP indexes, SDG indicators; multidimensional poverty indexes; science-based targets, etc.) and apply these frameworks to raise public consciousness, enhance institutional accountability and expand frameworks of analysis, including in economics textbooks (e.g., the Curriculum Open-Access Resources in Economics, or “CORE Econ”, curriculum⁷⁸).

• Individual initiative: Countries and companies have not stood still; many have initiated actions—some significant, others less so—to address one or another of these challenges within the reach of their jurisdictions and operations.

In short, there has been a flurry of constructive movement in these four areas, particularly in the last five to ten years. Goal-setting, individual action and better measurement and analysis are all useful, but with few exceptions they do not rise to the scale of change required to reverse the serious adverse trends detailed earlier in this chapter. They are not producing the systemic shift in the performance of economies demanded by people and planet at the speed required by politics and physics, respectively.

One is left to conclude that such a shift will require an intervention at a deeper level—a change in the prevailing growth and development model itself. Inclusion, sustainability and resilience will need to be “designed into” market behaviour and economic policy and institutions more directly and systematically. Their positive and negative externalities will need to be routinely internalized in economic activity through corresponding incentives and disincentives in the policies, institutions and broader norms that make up the enabling environment within which market and policy decisions are made.

None of the four current modes of response operates at this level. Together, they may be helping to lay the groundwork for such a frontal response, but they are essentially working around the edges of the problem rather than confronting it directly in the form of a new theoretical construct and accompanying policy framework to guide the practical work of rebalancing priority-setting and resource allocation within governments and firms.

After 15-plus years of diagnosis, goal-setting and incremental action regarding globalization, neoliberalism and their discontents, where does this most fundamental dimension of the economic reform debate stand? What would be the nature of a more systemic fix?

A theory of the case is required to answer this question. A thesis regarding the nature and source of the essential disequilibrating factor or factors driving liberal political economy’s chronic underperformance in these respects is needed in order to formulate a more sufficient response.

In some sense, this is an age-old debate; Marxists, socialists and social democrats have been rehearsing versions of it for the better part of two centuries. However, there are two prominent theses gaining momentum today:

• Inherently unjust: The first is the view that markets inherently produce socially unjust outcomes, including inequity and insecurity for broad sections of the population. They may be efficient mechanisms for allocating resources from the standpoint of maximizing production and returns on capital for owners of productive assets, but that is a different thing entirely from maximizing the economy’s value for society. Advocates of this fundamental critique of liberal economics argue in particular that:

  • i. Markets tend to commodify labour and people, even more so with digitalization, and this is in fundamental tension with the economic and social rights enshrined in the Universal Declaration of Human Rights and the ILO’s corpus of multilaterally agreed labour and social security standards.

  • ii. Capitalism was built on social and environmental exploitation through colonialism and natural resource extraction, the legacy of which endures in the global distribution of wealth and aspects of the business culture, skewing markets and market-oriented economies away from just socioeconomic and environmental outcomes.

  • iii. There is an ongoing disconnect between the cross-border organization of economic activity and national organization of politics, leading the world economy’s integration to reinforce commodification and exploitation and create a race-to-the-bottom dynamic that is already outpacing governance and poised to accelerate further as automation spreads throughout economies.

  Many adherents of this critique take a rights-based approach to fundamental reform. They advocate an agenda that not only recognizes the rights of all people to a basic level of material well-being and capacity but also advocates full implementation of these rights through the necessary collective action and policy intervention. This can take the form of mechanisms that supplant the role of markets either in whole (central planning) or in part (a mixed economy with a major role for state- or other collectively owned entities). Or it can take the form of large public investments and fiscal transfers that sit alongside markets and compensate for their inequitable and unsustainable processes and outcomes. In other words, rights-based approaches incline towards a reform agenda that would either replace markets to one degree or another, or tax the owners of capital more heavily in order to generate sufficient public resources to ensure basic economic rights and capabilities, or both.

• Inherently unstable: The second ascendant school of fundamental criticism argues that markets and market economies (particularly highly financialized ones) are inherently unstable, and that this habitual instability imposes severe, unjustifiable costs on societies and particularly on the most vulnerable people within them. The tendency of market-oriented systems towards disequilibria, whether in financial, environmental or social terms, requires extra-market intervention. Absent this, liberal economies tend towards the dystopic in the form of volatility and instability that severely damage both the economy and social fabric.

  The financial system aspect of this critique is supported by a long history of compelling theoretical and empirical work, including that of Hyman Minsky,⁷⁹ Charles Kindleberger,⁸⁰ Irving Fischer,⁸¹ and Carmen Reinhardt and Kenneth Rogoff.⁸² More expansive critiques of the inherent economic instability of capitalism include the work of Karl Marx,⁸³ John Maynard Keynes,⁸⁴ Thomas Piketty⁸⁵ and David Harvey.⁸⁶ Still broader critiques of capitalism’s bias towards social and environmental disequilibria include the work of Karl Polanyi,⁸⁷ Pope Pius XI,⁸⁸ Herman Daly,⁸⁹ Robert Kuttner⁹⁰ and various proponents of zero growth or de-growth.⁹¹ There has been important related work in recent years to take better account of social and environmental factors, such as through the construction of social accounting matrices and the efforts of ecological economics to introduce the concept of stocks and flows of resources, particularly with respect to natural capital and resources.⁹² The Stiglitz–Sen–Fitoussi Commission⁹³ convened by the French government following the Great Financial Crisis served to galvanize additional thinking and initiatives in these respects; however, the practical manifestation of these innovations thus far has mainly been in the form of pilot projects.

There has been impressive growth in these two broad schools of thought in recent years, reflecting rising disillusionment with the failure of mainstream academic economists and policymakers to move beyond the four mainly aspirational and incremental modes of response described above. Citizen impatience with the slow pace of change is on the rise and may increase further as the combined after-shocks of the pandemic, war in Ukraine and monetary response to rising inflation are felt around the world, and as the disruptive effects of climate change become ever more visible and destabilizing in people’s daily lives.

That said, the broad solutions associated with these two fundamental critiques have gained little traction, and they appear unlikely to do so for rather fundamental reasons. The first set of solutions tends to take the form of grand proposals for fiscal transfers that are in the nature of a work-around for the weaknesses in liberal economic governance (i.e., measures to compensate ex post for the unequal, unsustainable or fragility-inducing outcomes of market activity) rather than a structural fix of them. These typically take the form of big macroeconomic stimulus and public borrowing initiatives that would generate large sums to be spent on social and environmental objectives. Sometimes these proposals are linked to and find their ultimate expression in Modern Monetary Theory (MMT), with its potential to create the public resources necessary to finance a universal job guarantee or basic income as well as massive industrial restructuring. MMT advocates rightly observe that many countries have far more fiscal space than traditionally has been recognized, particularly if it is used to invest in areas that enhance labour productivity and the growth potential of economies, such as human capability, labour force participation, sustainable infrastructure, and technical progress. But the sheer scale of the deficit financing this approach implies can create its own uncomfortable risk of instability, namely unsustainable debt overhangs, particularly in countries that do not have the luxury of borrowing in their own currency or are already facing large structural deficits owing to their ageing populations and recent, crisis-related extraordinary stimulus packages.

The second focuses on measures to limit economic growth. However, zero growth or de-growth is not a particularly viable social or political proposition in developing countries seeking to eradicate poverty and boost modest living standards, as some of the proponents of this school of thought have acknowledged. Poor countries encompass the overwhelming majority of the world’s population, and while they might be sanguine about a major reduction in consumption by their rich Northern counterparts, it is just as likely that they would regret the resulting drop in demand for their exports of goods, services and indeed people earning remittances to send to families back home. As long as there is significant poverty and inequality in the world, economic growth is going to continue to be a legitimate social priority. It is simply easier for everyone to obtain a larger piece of economic pie if the overall pie is growing. Thus, the critical challenge for policymakers is to improve the quality of growth, its sustainable contribution to broad-based progress in living standards. As Herman Daly argued, in environmental terms this means ensuring that renewable resources are exploited no faster than they can be regenerated, wastes are emitted no faster than they can be assimilated and non-renewable resources are depleted no faster than renewable substitutes can be developed to replace them.⁹⁴ In other words, the objective must be to sharply reduce the material and polluting content of growth rather than throttle its overall rate per se. Nevertheless, degrowth advocates do a service by challenging the wholly insufficient nature of progress in this respect and the underwhelming record of strategies that rely mainly on market mechanisms in particular.⁹⁵

In Search of a Viable Theory of Fundamental Change

Such is the disappointing state of the global economic reform agenda with respect to social inclusion, environmental sustainability and resilience to major shifts and shocks. Economies give every appearance that they will continue to operate for the foreseeable future on the basis of the standard liberal economic growth and development model, making piecemeal or incremental progress on these three bottom-line social priorities. A viable theory of change of a more fundamental nature has yet to emerge. Massive ongoing fiscal deficits to finance a universal basic income or publicly bankrolled climate transition are not a feasible financial proposition for most if not all countries; and zero growth is not a feasible socioeconomic or political proposition in any except perhaps a small group of rich countries with shrinking populations.

In other words, the liberal economic reform project remains becalmed 15 years after the Great Financial Crisis, when neoliberal hubris was supposed to have been shattered and world leaders committed their governments to deep reform. The Washington Consensus has been declared passé, but nothing coherent or commensurate has taken its place. As a result, those in the forefront of reform are increasingly exposed to the criticism that their work is essentially hot air: a combination of unfulfilled political promises; piecemeal, incremental and often largely procedural measures; and grand but infeasible concepts.

To be certain, an impressive international consensus has been built on the direction of necessary reform. This process began at the 1972 UN Conference in Stockholm and it continued through the 1992 Rio Conference on Sustainable Development, 1994 Kyoto Protocol, 1995 Copenhagen Social Summit, 2009 G20 London and Pittsburgh Declarations, 2015 SDGs and Paris climate agreement, 2019 Centenary Declaration and 2021 Global Call to Action for a Human-Centred Recovery of the ILO and, most recently, the 2022 Kunming-Montreal Global Biodiversity Framework.

This combined economic, social and environmental agenda is actually a very important political achievement—a credit to the multilateral system in a world characterized by so much division. But it is not self-executing. As the product of political processes, it is a shared vision rather than a practical blueprint for the different model of economic growth and development and corresponding policy framework required for the achievement of much more inclusive and resilient societies and the stabilization, let alone reversal, of the planet’s environmental degradation. That will require a deeper thought process—a more fundamental enquiry by scholars and practitioners in economics and adjacent social sciences.⁹⁶

Specifically:

• What is the source of the conceptual or systemic flaw in liberal economic doctrine, that is to say, its disequilibrating feature with respect to inclusion, sustainability and resilience?

• How can these three factors be intentionally and systematically designed into the process of economic growth and development rather than assumed to obtain as an inevitable by-product of it?

In short, building a more viable theory of change is going to require a structural critique and deeper reformulation of liberal economic doctrine—a more forthright attempt to locate and confront its possible constitutional flaw instead of continuing to talk past, paper over or otherwise work around it.

This suggests that a re-examination of first principles is in order. Are the shortcomings of modern economics with regard to inclusion, sustainability and resilience—its treatment of living standards as a residual consideration—a matter of original sin or wayward and mistaken practice? In other words, are they due to an initial conceptual flaw or omission or to a misapplication of the field’s foundational principles?

The next chapter undertakes this historical investigation; it traces the intellectual roots and evolution of liberal political economy with this question uppermost in mind.