Two major threats face the world: environmental degradation and the growing gap between rich and poor. Historical and contemporary evidence indicates that they are symptomatic of a growing structural imbalance in all economies – how nature is exploited to create wealth and how it is shared among the population. The root of this imbalance is that natural capital is under-priced, and hence overly exploited, whereas human capital is insufficient to meet demand, thus encouraging relatively higher wages for skilled labour and wealth inequality.
This, in turn, has three important economic consequences. First, because natural capital is relatively cheap compared to human capital, producing goods and services uses too much natural resources relative to skilled labour. Second, as the relatively scarce factor of production, skilled workers receive increased real wages and incomes. Third, as the income gap between skilled and unskilled workers widens, wealth inequality worsens.
The result is a profound structural imbalance in the modern world economy; global production now uses natural capital excessively, while skilled workers are made much better off, and inequality is increasing.
In recent decades, the processes reinforcing this global structural imbalance have accelerated. Financial capital has become the dominant form of wealth in modern economies, and more of the income and wealth of the rich comes from the financial sector. Moreover, its unchecked expansion has led to greater financial risk and instability, increasing concentration of wealth and global imbalances.
Reproducible capital – our conventional “fixed capital” assets comprising factories, machinery, equipment, dwellings, etc. – continues to be overly resource and energy-intensive, and is the main conduit for skill-biased technological change.
As a result, accumulating reproducible capital encourages both more use of natural capital and rising demand for relatively skilled labour. However, human capital accumulation in modern economies – that is, the development of a skilled labour force – is failing to keep pace with this demand, which has caused the wage gap between highly skilled and less-skilled workers to grow.
The global outcome is increasing wealth inequality, pockets of poverty, structural unemployment, and increased social polarization. Finally, the under-pricing of natural capital has led to increasing over-use and severe environmental degradation. The result is greater pressure on ecological and natural resources, signaling the emergence of such global environmental problems such as climate change and declining freshwater availability.
One reason for this imbalance is that the current structure of production in the world economy has been mainly determined by the second phase of innovations of the Industrial Revolution. These occurred from 1870 to 1900 and were based largely on electricity and the internal combustion engine, which were in turn made possible by the new hydrocarbons oil and gas, along with coal.
Harnessing these technological and economic changes eventually led to the rise of the United States as the leader in 20th century industrialization, which other countries began emulating. As industrialization spread worldwide, fostered by trade in energy and resources, there was a large boost to global productivity, which lasted until the1970s.
This second phase of the Industrial Revolution was an outcome of the fossil fuel era. Since the 1890s, coal, oil and gas have accounted for at least half of global energy consumption. And, despite the rise in renewable energy and nuclear power, they still encompass 80% of energy use worldwide. In addition, as economies became more energy-intensive during the second phase, they also increased their use of non-renewable materials, such as minerals and ores, construction materials and nonrenewable organics, which currently comprise 95 per cent of material consumption.
The increased resource and energy use since the early 20th century has also been accompanied by skill-biased technological change, continuously raising the demand for more skilled labour in economic production.
Today’s economies are exacerbating this imbalance. We hide the rising costs of increasing environmental scarcity by continuing to under-price natural and ecological capital. And, rather than investing in sufficient human capital to keep pace with skill-biased technological change, we allow skilled labour to become scarce and thus attract excessive wages. It seems that we are prepared to accept the economic and social consequences of excessive environmental degradation and rising wealth inequality.
If we are to address the current structural imbalance, we must tackle these twin problems of excessive environmental degradation and insufficient human capital. This requires transitioning to a more inclusive green economy through a Balanced Wealth Strategy. Such a strategy needs to include policies directly aimed at benefiting the large number of resource-dependent economies and ending the significant pockets of poverty found worldwide. Global market failures – climate change, loss of ecosystems and declining availability of water – need to be addressed as well.
Consequently, the Balanced Wealth Strategy has four key elements:
The Balanced Wealth Strategy is clearly not without cost, and will require substantial commitments by all economies. But unless such a strategy is pursued – offering the opportunity to transition to a more inclusive economy through green innovation and growth – the current global threats of environmental scarcity and inequality will continue to worsen.
In sum, we face two possible visions of the future. We can persist with the current path of an exclusive but brown economy inherited from the second phase of the Industrial Revolution and the fossil fuel era. Or, the world economy can embark on a third phase of innovation, sustainable growth and economic prosperity.
Making the transition to an inclusive green economy will not be easy, but the consequences for the majority of the world’s population of the current pattern of depleting nature to accumulate wealth could be bleak, if not catastrophic.