Creating an Economy That Won’t Cheat the Future


In The Economics of Enough: How to Run the Economy as If the Future Matters (Princeton University Press, 2011), economist Diane Coyle gives us a thoughtful, thorough, and somber account of the West’s, and the world’s, ecological and economic problems. Coyle correctly observes that these cannot be divorced from political and social problems; it is not enough to diagnose difficulties and then offer remedies that are politically unachievable. Instead, Coyle offers useful suggestions that might be implemented—if not by current governments then at least by imaginable governments. In doing all this, Coyle has done us a real service. And yet there is an important piece missing from Coyle’s analysis, without which it is hard to envision a way out of our current predicaments.

The Problems That Must Be Solved

The constellation of problems that makes current economic activity unsustainable can be traced to shortsightedness. The world’s citizens are using up the resources of their descendants. This is true both of natural and financial resources. Coyle devotes a chapter to each. She is clearly not a radical environmentalist and goes to considerable lengths to acknowledge the scientific controversies surrounding estimates of the pace of global warming, and the costs that correcting it would entail; nonetheless, Coyle has no doubt that, viewed over generations, our current use of nature is unsustainable. She also thinks that the cost, in standard of living, of mending our ways in the present would be substantial in terms of lost growth. Moreover, the worst environmental offenders, going forward, are likely to be developing countries, and these countries will understandably resent being told to tighten their environmental belts just when they are able to afford belts. If developed countries had to bear the brunt of changes in the way they live and consume resources, while simultaneously allowing developing countries to grow, saving the planet would entail sacrifices that no politician who aspires to win elections could ask citizens to make. Much of this ground has been covered by others, but I admire Coyle’s detailed and even-handed presentation of the arguments and evidence. She is interested in analysis, not headlines or sound bites.

However, Coyle is more sanguine than she should be in her belief that environmental problems may be financially easier to solve in the future: quoting economist William Nordhaus, she suggests that future generations will be much richer than we are and better able to make the needed sacrifices. This suggestion is based on the contentious, if not dubious, assumption that the world economy will grow by 1.3 percent a year—indefinitely. We, and our descendants, should all be so lucky! Even if this rosy outlook turns out to be true, decades of research in behavioral economics has shown how painful it is for people to experience financial loss—no matter what their starting point. So sacrifice may not hurt any less in the future than it would now.

Just as we are using up our children’s air and water, we are living on our children’s money. This is true at the level of individuals and at the level of states. Individual savings rates are, in most societies, not adequate to meet the needs of retirement. Instead, individual citizens count on pensions and health care provided by the state. But states will not be able to afford to deliver what they have promised. As the proportion of the population engaged in productive, tax-generating work continues to decline, the financial burden on the state will continue to grow. And China will not be willing to bail out Western countries indefinitely.

Most economists who warn of burgeoning government debt as a consequence of entitlements propose that people prepare to support themselves by making investments in the stock market, with its historically higher returns. Coyle acknowledges this idea but says, pointedly, that it is insufficient. “Financial assets held in a pension fund are claims on returns to economic activity in the future, and these returns will not be high enough unless there are enough people engaged in sufficiently productive economic activity at that time” (p. 97). Though we might imagine that the financial sector can operate independently of the “real” economy, and continue to show gains whether or not the real economy grows in productivity, anyone who holds this view has a very short memory.

How do we get people to think responsibly about the future? To do this, Coyle says, we need to embrace a new set of values—one that cares as much about our children and their children as it does about ourselves. And just as environmental and financial prospects are not good, prospects are not good with respect to values either. In chapters on “fairness” and “trust,” Coyle observes that the developed world seems to be using these resources up as well. Citizens of the developed world seem willing to tolerate increasing inequalities of income and wealth, despite possessing what Coyle mistakenly calls a fairness “instinct” (research in psychology shows concern for fairness to be far more malleable than the word “instinct” implies). And trust? Nobody trusts politicians, and the litany of free-market abuses—from Enron through the collapse of the financial sector, all of them accompanied by obscenely high compensation of the perpetrators—has eroded whatever trust we had in business. Coyle correctly points out that trust, and other indices of “social capital,” are not merely nice things to have; they are, as Adam Smith pointed out in The Theory of Moral Sentiments 250 years ago, and as Robert Putnam documented more recently, essential to the smooth and efficient operation of free markets.1 So just as we need to appeal to people to think beyond themselves, about the welfare of other people, and to think about the future of their families, their societies, and the earth, the values with which such appeals might resonate are in increasingly short supply. As I said, this is a somber story indeed.

What We Can Do

The problems we face are large, and if we focus on the goal line, we’ll give up in discouragement. Coyle realizes this and offers several feasible steps that can be taken in the short run that will move us in the right direction and that might even generate a groundswell of support, making it easier to take bigger steps down the road. Among her ideas are the following:

  1. Change what we measure. Though this may seem prosaic, it is actually of crucial importance. Gross domestic product was never a very good measure, and it has only gotten worse as economies and societies have changed. It misses “goods” that are not monetized and, worse, it largely misses social costs—externalities—that accompany the way we live now. Coyle doesn’t want to abandon GDP, but she wants to supplement it with other measures of well-being. In this regard, I find her dismissive attitude toward modern psychological research on the determinants of well-being both puzzling and unjustified.2–4
  2. Pay attention to intergenerational accounts. That is, consider not only “flows” (which GDP measures) but also “stocks.” Measure—and monitor—wealth (including natural wealth) and not just income.
  3. Encourage people to save more (something that we know how to do, thanks to research in behavioral economics).5
  4. Encourage investment with long time horizons, using the tax system to incentivize a future orientation.
  5. Rekindle enthusiasm for the old-fashioned virtue of public service, in part by ridding government of its most egregiously wasteful and corrupt practices.
  6. Use moral exhortation and the tax system to reduce growing income inequality. This is, for Coyle, both good in itself and good because it can create more social solidarity (“we’re all in this together”).
  7. Institutionalize the state’s responsibility to have the long-term health of the society and the economy always in mind.

I find all these suggestions reasonable and congenial. If we could get citizens and their leaders to follow them, the world would be a better place. And yet, Coyle’s prescriptions also reveal what is missing from her analysis. Notice that all the items on the list, save the first two, appeal to the values of states, leadership, and the citizenry. Do we have the needed values in sufficient strength? If not (and Coyle thinks not), then why not? What eroded the needed values and what can be done to reclaim them?

What Is Missing

Coyle is sensitive to the importance of values (misplaced ones got us into our current mess, and different ones will be needed to get us out of it). She argues that her home discipline, economics, has always been sensitive to the need for values—for trust and other forms of social capital—if the machinery of capitalism is to purr. She defends economics against the cartoonish portrayal of the discipline as knowing the price of everything and the value of nothing. And she points out in detail how the values we need are in increasingly short supply. But why? What dynamic is producing this change? Here, Coyle is silent. It is as if some deus ex machina has been corrupting us.

I think there is a “machina” and that it is the very engine of capitalism that she embraces so enthusiastically for the growth in material prosperity and individual freedom it enables. Many have made this argument, and Coyle acknowledges some of them.6–12 But she doesn’t take their arguments seriously enough. If she did, her list of recommendations would look rather different, and her guarded optimism about the steps she proposes to start reversing the crises we face would be covered over with storm clouds.

Coyle points out several times in the book that we face a “trilemma.” We aspire to economic efficiency, economic fairness, and economic freedom. But though we might be able to manage two of them, we can’t have all three. Because of her enthusiasm for growth, Coyle will not give up on efficiency. And she is a big fan of freedom. Indeed, Coyle almost mocks my own modest efforts to suggest that too much freedom of choice actually impairs well-being.13 I think Coyle is mistaken to embrace efficiency and growth so uncritically. My view is that unless we take on “efficiency” and “freedom,” and ask what they really mean and whether more of them is always beneficial, we will get precisely nowhere in instilling the values that Coyle thinks are essential. To me, the surest sign that “efficiency” had become untethered from reality was when people started talking—seriously, not metaphorically—about the difference between the “real” economy and the “financial” economy. The pursuit of efficiency—of frictionless transactions in financial markets and of attractive quarterly statements that boost share prices—has a great deal to do with the near collapse of the world economy. It wasn’t that CEOs suddenly got “greedy.” Would anything have been different if they were satisfied with $3 million a year instead of $30 million? As long as we continue to celebrate enhanced “liquidity” as the justification for financial markets with as little friction as possible, and as long as we retain the model of the publicly held corporation, answerable to shareholders on a quarterly basis, all exhortations to “think long term” or be “stewards of the earth” will fall on deaf ears. As long as that’s true, Coyle’s sensible recommendations will get nowhere.

At the beginning of her book, Coyle admiringly quotes Amartya Sen: “profit-oriented capitalism has always drawn on support from other institutional values.”14 She goes on to say that the “policies of the past thirty years have lost their anchor in values outside the market” (p. 18). She is exactly right, and unless we point our causal finger where it largely belongs—at the market itself—we will just be spinning our wheels.

And here is where, in being so dismissive of the work on the determinants of well-being, Coyle misses a terrific opportunity to contribute to the rekindling of the values she says we need. What research on well-being strongly suggests is that the two key ingredients of well-being are engaging, meaningful work and close social relationships. If people knew this, and embraced the values it implies, they would care more about their descendants and less about the objects of material consumption that threaten our natural and financial future. They would also ask themselves about the meaning of the work they did—the effects of that work on others. Profitable quarters, rising share prices, annual bonuses, and increases in efficiency might take a back seat to efforts to make the world better.

People who underwent this shift in values wouldn’t be giving much up. A large part of Coyle’s defense of efficiency and growth is that they enhance freedom of choice. My own work has shown that, when it comes to choice, there can be too much of a good thing.11,13 With too little choice, life is barely worth living. But too much choice brings paralysis and dissatisfaction, not liberation. We need to find the right amount of choice—the “sweet spot”—and in the developed world we long ago passed the sweet spot by.

For some reason, Coyle missed the opportunity to take the well-being research seriously. But the rest of us don’t have to. We can combine her cogent analysis of the world’s problems with insights from the study of well-being to nurture the values we need if we are to usher the world onto a more sustainable path.