Wednesday, March 6, 2013

Earth economics. Because it’s the only one we’ve got

Take a look at the World Development Report or the World Economic Outlook.  It will be difficult to find anything on the Earth economy in these flagship publications: the World Bank and the IMF analyse world issues by aggregating nations into regions and regions into even larger entities. Starting at the nation state, they expect to arrive at the the world economy, but it is more probable that they actually lose sight of the whole. What can you tell about beehives if you study only the bees? That’s why there is an increasing demand for a new, truly global approach.

 Why on Earth?

The reason to study Earth on its own is because Earth is a closed economy. Earth cannot lend or borrow. Neither can Earth export or import. Earth will thus have to resort to its own natural resources, its own factors of production, its own saving and investment. Indeed, Earth cannot rely on others to provide raw materials, labour, knowledge or capital. The message is clear: if you want to understand Earth you have to study the planet as a stand-alone.

 Trade with Moon or Mars

It is not simply interesting to use this perspective. It is also the only logical approach and it is a challenging line to attack economic processes. Eartheconomists study short-term fluctuations and long-run growth in the Earth economy. They use this highly aggregated level of analysis because the world economy is the only economy where the concept of a closed economy – one that does not trade with other economies – makes perfect sense. After all Earth does not trade (yet) with Moon or Mars.

Of course this does not mean that there is no international trade on Earth. The countries of our globalized world trade with each other. The point is simply that our world does not trade with other worlds and in this sense it is and remains a closed economy.

 Nagging questions

The Earth perspective provides a different and stimulating viewpoint than the usual analyses based on the aggregate findings for the individual countries in the world economy. This is because the Earth perspective shows the big picture and asks nagging questions:

·         What would be the best course of action for a world government?

·         How can we increase Earth’s human, natural and physical capital?

·         How to distribute Earths proceeds? (and to whom?)

·         How could we improve the well-being of all earthlings?

·         How can we ensure that the earthling – now and in the future – develops, learns, gets work, produces…?

 These key questions for humanity emerge in the eartheconomic  framework as it critically challenges many of the mainstream policy analyses and recipes.


Many object to the analysis of Earth as a closed economic system. They say that the simplicity of the closed economy is unrealistic in view of the complexity of the real world. It is true that eartheconomics  ‘neglects’ that countries can learn from, cooperate with and help each other, but also that countries differ to a large extent, focus on national interests and may not agree on the appropriateness of some considered economic, monetary and/or financial policy. These costs should not be neglected, but they should also not be exaggerated and – importantly – be balanced against the benefits of a new manner of framing policy questions that are important for world development.

Down to Earth

Eartheconomics is no l’art pour l’art. The questions that eartheconomists study are relevant because economic policies influence large numbers of people around the globe in a very concrete way: unemployment, growth and inflation influence our daily lives. The important issues are to understand:

  •  the causes and consequences of short-run fluctuations (the business cycle),
  •  the determinants of long-run economic growth (increases in national income) and the long economic waves, and
  • what we can and, equally importantly, cannot do to stimulate development and prevent or remedy downturns of the economy.

Answering the last question (what we can and cannot do) always requires a close examination of actual economic variables, their development and relations with other economic variables. This is why Earth Economics is as much about theory and empirical research as it is about policy. This book respects the heritages of Keynes (short-term demand management: the ISLM model) and Solow (long-run neoclassical growth). I do so not out of economic respect, but because these tools are very useful to understand the Great Recession and also because they are in a down to earth manner elementary to analyse the policy responses to that crisis. 

Global public goods (and bads)

Earth’s economy cannot flourish without global public goods, such as human health care, the environment, universal education and peace. Likewise global public bads are a threat to Earth’s economy: pandemics, climate change, financial instability and widespread poverty are clear examples. Global public goods include global rules and regulations that are highly important for the proper functioning of the Earth economy. Examples are the rules against economic discrimination provided by the World Trade Organization, the labour standards provided by the International Labour Organization and the health and food safety requirements set by the World Health Organization and the Food and Agriculture Organization. The Security Council of the United Nations sets political norms and values backed up by economic sanctions and peace-keeping missions. These forms of governance are important facilitators if not drivers for global economic cooperation and the global division of labour. Eartheconomists therefore study the developments of the economic conditions for the provision of global public goods. This also provides the basis for understanding the prospects for policy coordination and multilateral rules and regulations.

 Let’s become earthlings!

Obviously, it is from an economic theoretic point of view important to realize that we can and actually should use the closed economy model to teach and understand eartheconomic developments: unlike many economists think, closed economy models do not only serve a didactic purpose, but actually make sense empirically. This is a nice point, but that is not the only reason to become an eartheconomist.  Eartheconomics frames the major issues in (economic) policy in a context that goes beyond nations, nationalities and nationalism.

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