Free Trade And The World Trade Organization
by John B. Cobb, Jr.
John B. Cobb, Jr., Ph.D. is Professor of Theology Emeritus at the Claremont School of Theology, Claremont, California, and Co-Director of the Center for Process Studies there. His many books currently in print include: Reclaiming the Church (1997); with Herman Daly, For the Common Good; Becoming a Thinking Christian (1993); Sustainability (1992); Can Christ Become Good News Again? (1991); ed. with Christopher Ives, The Emptying God: a Buddhist-Jewish-Christian Conversation (1990); with Charles Birch, The Liberation of Life; and with David Griffin, Process Theology: An Introductory Exposition (1977). He is a retired minister in the United Methodist Church. His email address is firstname.lastname@example.org.. This lecture was delivered by Dr. Cobb in Shanghai, June 1, 2002 and Wuhan, June 4, 2002. Used by permission of the author. This material was prepared for Religion Online by Ted and Winnie Brock.
I. Basic Assumptions of Economic Theory
I am honored to have been asked to address you with regard to the World Trade Organization and China. I am also aware of my limited qualifications. Many of you have far more detailed information than I about the history and policies of the General Agreement on Tariffs and Trade and the WTO. You certainly know more than I about the negotiations that led to China’s inclusion in this organization. Accordingly, it would make no sense for me to lecture you directly on this subject.
If I have a contribution to make to your reflections about the role of China in the WTO, it is at a different level. I have come to my interest in economic institutions from the side of philosophy and theology rather than as an economist. It is my view that this kind of cross-disciplinary study is useful, since it tends to raise questions of a different sort. So I do not apologize for my acute limitations with regard to strictly economic analyses.
Around 1980, it finally became clear to me that economic thinking is the governing ideology of the world. The work of philosophers and theologians is now of little significance in comparison. In our age of academic specialization this realization of comparative importance does not influence most philosophers and theologians to broaden their study. But the type of philosophy and theology to which I am committed is of a different sort. My mind was captured in graduate school by the mathematician-philosopher, Alfred North Whitehead. Whitehead sought a comprehensive vision inclusive of the sciences and the humanities. He opposed the fragmentation of thought into airtight academic disciplines. This meant that, as a philosopher and theologian, I should study the system of thought that was most important and effective in shaping the policies that governed national and international affairs. I judged this to be neo-liberal economics.
I have made no effort to become an economist. Fortunately, I found an economist, Herman Daly, who shared my interests and point of view, so that I could work with him. My focus was on the most basic assumptions underlying neo-liberal economics. I found that these assumptions are little discussed by economists. Actually economists call discussion of such matters "theology", and they dismiss such discussion from their discipline. Nevertheless, these basic assumptions exercise a profound influence on their thought and, through that, on the policies that now shape the world. To me it seems to be a matter of great importance that these assumptions be examined.
In this effort, I believe, Chinese thinkers have an important contribution to make. They are familiar with Marxist thinking as are few Western economists. Marx shared some of the basic assumptions of neo-liberal thought, but he disagreed with others. Awareness of these different assumptions should stimulate analysis and criticism at this level. Some Chinese thinkers are also familiar with traditional Chinese thought. There are marked tensions between the basic ideas of this traditional thought and those that control modern economic thinking. This should also encourage critical reflection about the assumptions underlying neo-liberal economic thought.
I have emphasized "neo-liberal" economic thought. Actually, so far as basic assumptions are concerned, there is not much difference between neo-liberal and classical economic thought. Keynes came to economics as a philosopher and was much more aware of the assumptions economists made than were most economists. There is much of interest in his work. But in the economic school that calls itself Keynesian, most of the assumptions of which I speak were retained.
I will identify just three of the crucial assumptions. One is that human beings are oriented to their own good and that they judge this good in economic terms. That is, people seek to consume what they like and to amass possessions while engaging in as little work as possible. Their wants are insatiable.
A second assumption, closely related, is that human beings, or households, are atomistic. Their relations with other individuals or households are competitive or contractual. They relate to one another in the market through exchange in which all seek the best deals they can obtain.
A third assumption is that natural resources are essentially infinite. When one resource becomes scarce, its price rises. It is used more efficiently; resources of lesser quality are exploited; and substitutes are developed to replace it. Technological advances compensate for shortages, so that the economy as a whole can expand without limit.
Many economists acknowledge that the account I have given of human nature, while useful for economic theory, is not suitable for all other purposes. It is, therefore, the duty of the government to judge the relative importance of economics and other concerns. However, today, most governments have judged that economics is supremely important and have subordinated other concerns to this one. Accordingly, this caveat is not important in understanding the global economy. For practical purposes the policies adopted in most countries assume this view of human beings and of the natural world. Communitarian and ecological concerns play little role. The question of justice now has reduced weight. Fortunately, even if governments subordinate these other concerns to economic growth, they cannot ignore them altogether. On the other hand, the WTO is under no necessity to consider them at all.
I had the opportunity to talk with an Indian economist, Dr. Jagdish Bhagwati, who has played an important role in creating the WTO and in bringing India more fully into the globalized economy. He knew that I was troubled by the neglect of ecological issues by the WTO. He assured me that he was also concerned about the environment, but he strongly opposed confusing the mission of the WTO by introducing these concerns into its decisions. He urged the establishment of a separate international institution to deal with this. My own judgment is that this would do little to solve the problem unless this environmental organization had the power to overrule WTO decisions. It was quite clear that my conversation partner would not have favored such a solution. The goal of economic growth is, for him as for most of those who shape global policies, primary.
In the following three sections, I will discuss topics to which I believe the WTO gives too little attention: the historical change of the nature and role of trade; the excessive power and influence of corporations; and the costs of growth.
I. Free Trade
One of the beliefs that economists typically, indeed overwhelmingly, draw from their assumptions is the desirability of trade. This desirability is the reason for the existence of the WTO and for granting it so much power. It is worthwhile to reflect about the reasons for this desirability and to ask if there are limits.
Economists rightly point out that few people can produce all that they need. They also show that the effort to do this is very inefficient. Robinson Crusoe is the model of the wholly self-sufficient man. But there were many desirable goods that Crusoe lacked. Had he had a trading partner, he could easily have produced more than he needed of a few things and exchanged these both for goods he could not produce and also for goods that took him a lot of time and effort to produce. Trade would have reduced the time required to meet his needs and would have made his life more comfortable. For most people, who do not have the resources of a whole island to draw upon, trade is even more important.
What is true of individuals is true also of whole communities. No community has access to everything that it would enjoy possessing or consuming. Most communities can easily produce more of some things than they need. To exchange their surpluses for what they lack benefits them.
Noone disputes the benefits of trade. Nevertheless, some question whether all trade is beneficial. Indeed, through much of history, most cities and nations have restricted trade in some ways. Many economists believe that virtually all such restrictions are harmful, that trade should be completely free. This view dominates the policies of the WTO. But this view that all trade is beneficial is not as evident as the fact that much trade is beneficial.
One concern on the part of less developed countries has been that more developed countries would have a general advantage in trade. That is, it seems that the more developed country could sell the whole range of traded goods more cheaply and thus prevent the economic development of the less developed country. Ricardo is famous for his refutation of this expectation. He developed the doctrine of "comparative advantage" in which he showed that trade between such nations benefits both.
Since this is an important issue today, and quite relevant to WTO policies, let us look briefly at his argument. He took Portugal and England as his example of trading partners. He hypothesized that Portugal was able to produce both wine and textiles more cheaply than England. The English fear would then be that in trading with Portugal England would import both and have nothing to exchange. Ricardo showed that this would not be the case. Although Portugal had an absolute advantage in both, it had a greater advantage in wine than in textiles. In his terminology, England had a "comparative advantage" in textiles because its absolute disadvantage was less in that area. Accordingly it would be more profitable for Portuguese capitalists to invest in wine than in textiles. English capitalists could then invest in textiles. The total production of wine and textiles would be greater than if Portugal produced both. Hence, both countries would gain by trading Portuguese wine for English textiles.
Ricardo’s argument is sound, given his assumptions. In addition to the common assumptions of economists, Ricardo added another. He argued that capitalists prefer to invest their money in their own countries. In the eighteenth century this may have been largely true. He noted that the argument would not apply between different parts of England such as London and Manchester. If Manchester had the absolute advantage in a variety of goods, the fact that London had a comparative advantage in some would not help London. London capitalists would invest in Manchester, and all the goods would be produced there.
In today’s global economy, it is clear that comparative advantage as understood by Ricardo is irrelevant. Investments move from one part of the world to another at lightning speed. They seek absolute advantage. Unfortunately, economists still sometimes refer to comparative advantage in their arguments for the expansion of trade. When pressed, they acknowledge that what they mean by that is not what Ricardo meant. Sometimes they mean simply that each country should produce what it can produce best in comparison with other countries. However, they have not worked out a clear alternative meaning that supports the conclusions to which Ricardo came.
In fact, trade today must be supported with arguments based on absolute advantage. A less developed country must compete in the global market on the basis of that in which it has an absolute advantage. The advantage it may possess is one that did not occur to Ricardo -- low wages.
In Ricardo’s day it was assumed that labor worked for subsistence and that subsistence wages were much the same everywhere. He never suggested that the English would work for less and thus bring down the cost of their textiles and wine to compensate for less-efficient methods of production. But today wage differences among nations are enormous. One main reason for the push to extend the size of the market is so that corporations can take advantage of cheap labor in some countries as they produce for consumption in countries where wages are high. Low labor costs provide an absolute advantage to some countries.
The real situation is, of course, more complex. The quality of labor, the stability of the society, and the strength of the infrastructure in transportation and communications are also important factors in attracting capital. It is China’s strength in all of these categories that has made it so successful in this competition. Nevertheless, low wages are a very important factor.
There are problems associated with this basis for trade that did not apply in the case proposed by Ricardo. There are many nations that have low-cost labor. In a global economy they are competing for investment. Since their main advantage is low wages, and they lose this advantage if costs are still lower elsewhere, the economic incentive is to lower wages still further. This is usually accomplished by depreciating the currency. The result is to reduce the standard of living of already impoverished workers.
This possibility did not occur to Ricardo. He assumed that subsistence provided a floor for worker wages. This was often defined as sufficient pay to keep a worker and his wife alive and enable them to raise two children to replace them in the workforce. In today’s global economy, few workers receive subsistence pay as thus defined. Each family needs at least two wage earners to subsist. Many of the factory workers are young single women who, when worn out, will be sent home. Most countries would like to raise wages, but if they do so, capital will pursue the absolute advantage of low wages elsewhere. National policies are constrained by the mobility of capital, which Ricardo did not anticipate.
My point is that the shift from a theory of comparative advantage to a situation where absolute advantage is decisive, along with the shift from near identity of wages in all countries to very large differentials, is decisive for a realistic discussion of trade today. My complaint is that economists have done too little to help us rethink trade in light of this change.
Some economists, of course, have drawn optimistic conclusions from this changed situation. In their analysis, if low-wage countries attract the most investment, these countries will grow most rapidly. As they grow, their wages will rise. This will be possible because in the process of industrialization they will develop the advanced technology and specialized skills that free them from competition with low-wage labor elsewhere. They can command higher prices for their goods and, thus, provide higher wages for their workers. We can see how this process worked out in Japan and in some of the other Asian tigers. Meanwhile, according to this optimistic view, new transnational investments will flow to countries where wages are still very low.
According to this account, in contrast to Ricardo’s argument from comparative advantage, the more-developed and less-developed countries benefit from trade in quite different ways. The more-developed country benefits from the low prices of the goods it consumes. Its capitalists benefit from being able to take advantage of low wages in other countries to reduce their costs. In addition there are technologically advanced goods that the developed country can sell profitably in the larger market that is opened up by trade.
The less-developed country benefits by attracting investment capital. This produces industrial jobs and increases the total wealth and productive capacity of the nation. This, in turn, begins the process of economic expansion and technical development, which leads toward becoming one of the more-developed nations.
There is little doubt that this can happen and has happened. The hope for this form of development creates great support for the system. But there are questions that should be asked and are too rarely asked.
This way of development is typically based in large part on trade and investment. But it has, in fact, rarely been based on "free trade". Yet breaking down all barriers to trade is often presented as the path that leads to success. There are real questions about the wisdom of such an approach; yet this goal is being pursued quite single-mindedly by the Bretton Woods Institutions, including the WTO. It is important to consider the dangers of free trade and the advantages of controlled or managed trade.
First, I need to make clear that under "free trade" I am including the free flow of capital as well as that of goods. Ricardo envisioned only the latter. But as we have seen, economic globalization is based on the free flow of capital. This is an even more important part of the global economy today than is the free flow of goods. It is very closely connected with the privatization of formerly publicly-owned properties and the reduction or elimination of government regulation. One could argue for free trade in goods and oppose the free movement in capital and the privatization and liberalization of economies, but that would not be the kind of "free trade" supported by neo-liberal economics and to which the WTO is committed. If you want to see the direction in which the United States is pressing the WTO to go, you should study the proposed Free Trade Agreement for the Americas. Obviously, the WTO is far from able to enforce such a regime now, but if China wants WTO membership, but does not want other parts of what the United States hopes for in the globalization process, it needs to tread very carefully indeed.
Second, consider the historical facts. If we limit ourselves to the past half-century, we see that Japan and other East Asian countries that succeeded in economic development did so by tight control of their own economies. Japanese companies are owned and controlled by Japanese. The Japanese government worked with corporations in making basic economic decisions. Japan did not allow the free flow of foreign goods into the country. This does not mean that Japan did not trade. It exported extensively and imported more cautiously. It did not subscribe to the ideology of free trade. It is more open now, for with its economic success, the risk of losing control of its own economy is greatly reduced.
The first great success story that is truly based on the ideology of free trade is Thailand. Through most of the nineties it was touted as showing how well the system works. Few problems were discussed. Then at the end of the decade, Thailand suffered a major setback. Remember that this economy was built on the inflow of investment to take advantage of low wages in the approved manner. Much of the investment was in the stock market. When astute observers decided that the market was overpriced, they withdrew their funds. Loans were also called in rather than renewed when due. There were few new investments. The economy collapsed.
Much of Thai industry was owned by outside corporations, but Thais owned some of it. When the crash came, Thais were forced to sell their businesses at very low prices. Outside capital bought it up. No doubt Thailand will recover from this setback, but its dependence on foreign capital will be even greater than before. One might suppose that it would introduce controls over the flow of capital or restrictions on foreign ownership, but such steps will not be allowed by the institutions dedicated to free trade. Following the Japanese model is not permitted. Thailand in the future will be even more dependent on decisions made by leaders in international finance. One can expect cycles of boom and bust.
This means that in general the free-trade model of development works better for the developed countries than the developing ones. It allows capital to move freely from one country to another, benefiting from their economic growth, but also benefiting from their economic crises. International capitalists will come to own more and more of the productive capacity of the world.
Thus far China has exercised control over its own development. This has by no means excluded investments from abroad. In this way, its path of development has differed from that of Japan. But it has not flung open its doors as did Thailand. As China is more and more fully incorporated into the WTO, with its strong commitment to the liberalization of trade, it will be important for China to decide what it really wants. I doubt that it wants to become vulnerable to the speculative investments of global capitalism or develop an economy that is chiefly owned by outsiders. Perhaps it will be able to move the WTO away from its support of predatory capitalism.
I. Corporate Dominance
There has been another change of enormous importance since the days when the basic assumptions of economic theory were established. The early economists thought of the economic actors chiefly as individuals and small businesses. Today the major actors are corporations.
It can be argued that corporations are now replacing nations as the major organizing forces in society. Their power expresses itself in several ways.
First, in economic terms, many of them are larger than most nations. If one draws up a list of nations in terms of their Gross Domestic Product and a list of corporations in terms of their gross income and then mixes these two lists, it turns out that 51 of the largest 100 economies are now corporations. Corporations are more tightly and efficiently organized than nations; so their economic power throughout the world is enormous.
Second, they have great power within the political order. This is apparent in the United States. Candidates for elective office require substantial funding in order to advertise themselves. Some of this money comes from ordinary citizens who support them but expect nothing in return. More of it comes from wealthy individuals and corporations whose chief purpose is to have access to, and influence on, government officials. There is no question but that corporations exercise a great influence on how our legislatures, governors, and presidents make their decisions. For example, the influence of the oil companies on the decisions of the present administration is clearly excessive.
Third, the Bretton Woods Institutions have turned to corporations to take the lead in global development. This took place decisively around 1980 in what is called the Washington Consensus. Under the leadership of Ronald Reagan, it was decided that global development would no longer be primarily a matter of grants and loans from governments and international banks to developing countries. It would be primarily by the investments of corporations. By the nineties this shift had been fully realized. The structural adjustment programs imposed on scores of nations around the world were designed to make them attractive to corporate investment.
Fourth, the second and third of these points have come together in the role that governments, especially the United States, play in shaping the international order. When one examines the policies of the United States in the WTO, for example, one can see that they are largely dictated by the desire to support particular corporations or, sometimes, transnational corporations in general. Few of them are designed to help American workers or farmers, although the rhetoric about them is typically deceptive. As noted above, this is even more dramatically true of the now proposed FTAA.
The dominance of corporate interests in international affairs can be shown in many ways. I will select one. In the past, it has always been assumed that a corporation must obey the laws of a country and make adjustments as new laws are passed. This certainly binds those businesses that are owned by citizens of the country. But it turned out that corporations hesitate to invest too deeply in a country if they fear that laws may change in ways that are unfavorable to them. For example, if there is the danger that the corporation’s assets in that country may be confiscated after a change of regime, it is understandable that a corporation wants the assurance that it will be compensated for its loss. It does not want to have to pursue its case against the government in the courts of that country, because it does not trust those to be impartial between their government and an outside corporation. For this reason, in order to encourage investment, many urge that disagreements between foreign corporations and governments be settled in a neutral context.
The proposed Multilateral Agreement on Investments had, among other things, provisions for this. There was sufficient objection in the United States and other developed countries to having their laws challenged in a transnational court that this agreement never came into effect. But the North American Free Trade Agreement (NAFTA) had already instituted this kind of arrangement with little discussion or awareness of what is entailed. Under this agreement, a Canadian corporation is suing the United States because the state of California changed its laws about gasoline additives when it was found that its earlier laws had been environmentally harmful. U.S. corporations operating in the United States, of course, simply have to take the chance that their investments will prove unprofitable because of such changes in the law. But the Canadian corporation claims that its investment is protected from such losses by NAFTA.
I have chosen the case where it is the United States that is being sued. There are, as you might guess, more cases in which U.S. corporations are suing Canada and Mexico. The new FTAA, if adopted in its present form, will extend this protection of foreign corporations throughout the Western hemisphere.
Notice what is involved. First, transnational corporations are now claiming to be on an equal legal footing with governments. They do not come under the laws of the nations in which they operate. Those nations must submit themselves to adjudication with foreign corporations in a court of judgment in which the nation and the corporation are treated as equals.
Secondly, notice that foreign corporations now have an advantage over national ones. Instead of encouraging the development of a national economy, the new regime will favor Canadian corporations investing in the United States over their investing in Canada. U.S. corporations will have their investments in other countries better protected than those in the United States. It will be difficult for Canadian corporations operating in Canada to compete with U.S. corporations operating there.
At present the WTO adjudicates disputes among nations. In this way it has become the closest thing we have to world government. It alone is given the power to overrule the laws of nations, or at least to punish them for enforcing those laws. For the sake of trade, governments have been willing to give up an important part of their sovereignty. This is something new. There is little doubt that the WTO will in time be encouraged to give corporations analogous rights to punish nations for passing laws that are unfavorable to them. Perhaps China should resist!
The change in the historic situation due to the growing power of corporations has another effect. When the idea of "trade" was emphasized in the eighteenth and nineteenth centuries, the image was of many individuals and businesses located in each country buying from one another and selling to one another. Those who advocated "free" trade wanted this trading among individuals and businesses to be free of government intrusion. In particular, there should be no tariffs to inhibit the exchange of goods.
Still today, the "free" in "free trade" refers to freedom from governments. Now the agents who are free from governments are chiefly transnational corporations, many of them huge. Much of the exchange of goods and services that crosses national boundaries takes place today internal to corporations. More than a third of U.S. exports and imports take place between the divisions and subsidiaries of the same company. Such trade does not come under the disciplines of the market. It is closely managed and controlled for the sake of gaining maximum benefits for the corporation. International trade internal to corporations is not what the theory of "free trade" envisioned. That it is now promoted and protected indicates the extent to which we have moved into an era of corporate capitalism.
As China participates in the WTO, it is my hope that it will oppose the continuing extension of the power and special privileges of corporations. They already concentrate far too much power in too few hands. There is no justification for going farther down that path.
II. Limits to Growth
There is another consideration with respect to the overall situation that is highly relevant to the goals of the WTO. There is a serious question as to whether growth can continue indefinitely as current theory and practice assume. This question can be asked either quite abstractly or quite concretely.
Most people agree that growth cannot continue forever. They recognize that there are physical limits. For example, the sun will eventually burn itself out. But many judge that absolute limits are a question for the remote future, that they are not relevant to our present activities and plans. Others think that we need to pay attention to some of the absolute limits now.
This debate can be illustrated with reference to what is called the net primary production. At present human beings use 40% of the net primary production on land. This has to do with the photosynthesis on the basis of which our foods and fibers and forest products are produced. We use 40% of the product of that photosynthesis, that is, of plant growth. It is hard to say what the absolute limit may be, if we are willing that all those species of animals that are not used by us should become extinct and that all wilderness disappear. But clearly there is a limit. We cannot go beyond 100%!
Similar limits exist in the area of fresh water, fertile soil, and petroleum. But in each case, technological optimists may argue that none of these limits need stop economic growth. For example, they suggest that technology will find ways to produce food chemically from abundant substances such as coal. Ocean water can be desalinized and transported to the places where it is needed. Chemicals can continue to take the place of natural fertility, and plants can be genetically altered to adapt to quite different agricultural regimes. Atomic energy or hydrogen can replace petroleum. In other words, some believe that in principle, and in the long run, technology can transcend limits of this kind and postpone any ultimate limit into the very distant future.
The book with the title, "Limits to Growth", published around 1970, did not focus on absolute limits. It dealt more with the allocation of resources. If the problem on which we focus is food production, we will not have the resources to deal with crises in energy production. The cost of responding to the problems generated by global warming will reduce our ability to deal with other forms of pollution. The authors tried multiple scenarios of dealing with the multiple foreseeable problems caused by continuing growth. All of them led to patterns of overshoot and collapse. In the original publication, the date of collapse in various scenarios tended to be around 2020. This date was deleted from subsequent publications, because the authors wanted to point to the problem in a more general way, not to predict the exact time when crises would lead to collapse.
Of course, there was strong criticism of this idea that continuing economic growth will lead to catastrophe in the relatively imminent future. But the basic account of the danger was not refuted. And thus far the actual course of events gives no reason to think that the danger is not real.
My own contribution to the discussion of limits has been to put the question in terms of the economic costs of growth. I believe that, in fact, there are moral and social costs, but these cannot be quantified in economic terms. Accordingly, I have been interested in developing measures of economic progress and regress that subtract economic costs from benefits. My view is that, whatever the technological possibilities, we should not pursue economic growth when the cost of doing so exceeds the economic benefit gained from the growth. At that point, we have reached what I regard as the "limits of growth."
One clear example can be found in the area of energy production. Some have argued, correctly, that we will never exhaust the oil in the ground. It simply becomes more expensive to extract it as the more accessible sources are used up. They suppose that as the price of oil rises, it will become profitable to pump this oil. The problem is that no matter how high the price of oil becomes, there will still be limits set by the cost of pumping. When it takes as much energy to extract the oil as the energy provided by the extracted oil, then it can no longer make sense to extract it. Unless we subtract the cost of growth from the benefits of growth, we will be seriously misled.
Unfortunately, no such charge is made in those measures most commonly used to evaluate changes, such as Gross National Product and Gross Domestic Product. All the costs of extracting the oil are added to the GDP. This gives a false impression of how well the economy is doing.
I am not sure why economists have given so little attention to so important a question. Most continue to cite growth figures enthusiastically, even when they acknowledge that the figures do not indicate how much real improvement there has been. A few economists have done studies that show that the improvement is less than indicated, but they have not kept these up or urged their adoption by government officials charged with reporting economic statistics.
The best work was done around 1970 by William Nordhaus and James Tobin. They developed a Measure of Sustainable Economic Welfare for the United States for the period 1929 to 1965. Over this period they showed that sustainable economic welfare had improved by about two-thirds the amount indicated by GNP figures. They argued that since there was a fairly high positive correlation, it was acceptable to use GNP figures as a guide to policies designed to improve the economy.
Their interpretation of their own work was disappointing. Their actual figures showed that economic well being improved markedly with economic growth during the 30s and early 40s, but that in the postwar period, from 1947 to 1965 sustainable economic welfare grew at only one-sixth the rate of GNP. This indicated a marked decline in the usefulness of GNP figures, if the goal is improved economic welfare. The statistics left open the possibility that the cost of growth might soon exceed the benefits of growth. Even if that did not happen, it seemed to me that economic policies should be re-oriented to benefiting people economically rather than to increasing the GNP by any means at hand.
Because this question seemed important to me, I organized a group in the mid 80s, initially with the intention of bringing the MSEW up to date. Unfortunately, some of the sources were not available to us. More important, we judged that our index, which we called the Index of Sustainable Economic Welfare (ISEW) should be different from theirs in two ways.
First, we decided to omit calculations for leisure time. These were so large a contributor to the MSEW that they tended to overwhelm the other figures. Much of the overall result depended on which of several possible ways of calculating the value of leisure time was employed. For example, one calculation considered by Nordhaus and Tobin showed the MSEW actually declining in the years after 1947 instead of growing slowly, as their preferred figures indicated. We did not question that the inclusion of leisure time was valid, but we decided that our index would be more illuminating without it.
Second, Nordhaus and Tobin did their work while environmental consciousness was still in its infancy. They chose to neglect environmental costs. We thought that these should be an important part of the index.
Because of the omission of leisure from our index, between 1950 and 1965 the correlation between growth in GNP and growth in the ISEW was higher than between the GNP and the MSEW of Nordhaus and Tobin. During that period the ISEW grew almost half as fast as the GNP, instead of one-sixth for the MSEW. However, from 1966 to 1990, while the GNP increased by half, the ISEW declined slightly. An organization called Redefining Progress took over our project in the nineties and introduced a moderate treatment of the value of leisure time. With this addition, the decline in sustainable economic welfare turns out to be considerable. It is almost certain the MSEW, which also included consideration of leisure, would have shown a similar decline in this period had Nordhaus and Tobin continued their work.
I do not want to overstate the case. There are many questions to be asked about the statistics used and the inclusions and omissions in any index. There are always other ways of calculating that would have different results. Figures of this kind are far from exact. Nevertheless, I am confident that our figures are much more indicative of actual change in sustainable economic welfare than is GDP. I believe the calculations show, beyond reasonable doubt, that in recent years in the United States the costs of growth are at least equal to the benefits of growth. In other words, our continuing rapid growth is not making us economically better off.
Similar calculations have been made in a number of European countries with similar results. The strong indication is that, in highly developed economies, growth as measured by standard indices is of no real advantage to the people as a whole. This raises very fundamental questions as to the goals and policies of such organizations as the WTO.
Thus far these questions have been asked only by nongovernmental organizations. I believe it is time that they be taken seriously by governments. It is clear to me that the government of the United States is too controlled by corporations that profit from present growth policies to engage in this work. Perhaps the government of China can give leadership.
In all probability the sustainable economic welfare of the Chinese people is rising along with the truly extraordinary growth of GDP. But one can be certain that it is not rising as rapidly as the GDP. In China, too, growth has its costs. Indeed, these costs may be more apparent and immediate in China than in most other places.
For example, the building of the Three Gorges Dam is needed to supply electricity and water. But if one wishes to measure economic welfare, the cost of construction should be subtracted from the GDP, including the cost of building new housing and other facilities for resettlement purposes. The loss of the forests and fields that will be flooded should also be subtracted.
Similarly, as aquifers are exhausted, their value should be subtracted from sustainable economic welfare. As pollution grows worse, the resulting need for healthcare should be subtracted. As economic growth brings about more crime, the added costs for police and law courts and prisons should be subtracted. When all this is done, I expect you will find that, in the not too distant future, the costs of economic growth in China, as in the United States, will equal and then surpass benefits.
From all this I draw the conclusion that we should order our economic life to increase benefits with as little cost as possible. This would lead to slower growth as measured by GDP. But it would reduce costs even more. The growth would be channeled differently. This redirection would require more participation by civil society as well as by government than global corporate capitalism now allows. Perhaps China, which is still independent of corporate control, can help to reshape the WTO so that its effects will be truly beneficial.