Some time ago, the think-tank where I serve as Executive Director conceived the idea of a short video that could articulate the basic problem of global economics—the real problem—in a way that a thousand words never could. We called it The Impossible Hamster (

Why a hamster? Hamsters grow very fast. In fact, they double their birth weight every week from birth to puberty. Luckily, they stop growing at puberty. If they did not stop then, when they were one year old, they would weigh nine billion tons and, every day, each would consume the entire grain supply of the world.

That is just one small hamster. But what lies behind the story is a serious lesson in what infinite growth looks like and why it is impossible in a finite world. It is my contention that the hamster has lessons for all of us: it encourages us to take a second look at the assumptions that lie behind our economic objectives, in light of what we now know about the planet. Although human ingenuity and the human spirit have no limits, planetary resources certainly do. These assumptions have implications—not just for economics, but also for organizing business. I want to set out some of those implications here.

My own think-tank, the New Economics Foundation (NEF), has always been interested in the implications of its economic thinking for business. In the 1990s, we pioneered social auditing in the UK. We were one of the first to measure social responsibility and ethical reporting. At a very local level, and through our BizFizz work, we helped to create circa 800 micro-enterprises in deprived communities across the UK—with excellent four-year survival rates.

We founded and launched the Ethical Trade Initiative, an alliance of main street chain stores and, for a number of years, ran the high profile Inner City 100 Awards which celebrated the fastest growing businesses in some of the urban areas of Britain.

I explain this because I want to be clear about our attitude toward business. We believe in enterprise as a vibrant force in human development. We know that the predominant form of business organization, the public limited company (and its variations which focus on maximising returns to shareholders), has helped bring about a massive expansion of material wealth over the last 150 years. But we are also convinced that major change to the structure, incentives, measurement systems, and financing is needed if business is going to continue effectively driving human affairs.

These changes are urgently needed because not all business activity is positive, especially given our limited natural resources. We must move to a position where business is the primary force improving human well-being and enabling us to enhance rather than deplete the natural resources of our planet.

Why Change is Needed

The changes are urgent because humanity now faces four interlinked, systemic crises:

For the first time in human history, we are coming up against planetary environmental limits. Nicholas Stern, author of climate change report The Stern Review, estimates that we are on course for a minimum temperature rise of four degrees centigrade, compared to the pre-industrial limits, with dire consequences for humans and other species. We are also exceeding the safe boundaries in terms of biodiversity and the nitrogen cycle. The 2005 UN Ecosystems Assessment report showed that 15 out of 25 major ecosystem services were either in decline or in major decline, including pollination systems, fresh water, top soil and fish stocks.

Secondly, social inequality is rising rapidly within many countries, with devastating consequences for the cogency of the social fabric. The ratio of CEO pay of the 100 largest public companies in the UK to their average employee rose from 69 times in 1999, to 145 times in 2009. Increasing economic inequality has decreased demand for goods and services and increased personal debt levels.

The third crisis is all around us—major global financial instability and massive debt over-hang in many countries, including my own. A primary cause of this is the behaviour of our banking systems. For a time, money became our master rather than our servant. Good banking systems need to be stable, fair and socially useful. The incentive structure and banking regulation led to a situation where our banks were none of these. As IMF research has demonstrated, this situation was then further worsened by the inequality described above, leading to a huge rise in demand for credit by households. Banks and financial institutions met this demand, though much of this debt could never be paid back unless house prices continued to rise. The sub-prime mortgage crisis in the US then triggered a banking crisis which, in turn (due to the huge banking bailouts required), caused a sovereign debt crisis.

The fourth crisis is also a huge wasted opportunity. Human well-being in many “developed” countries is not increasing in line with increases in GDP. In the quarter century 1980 to 2005, the UK GDP doubled, while well-being levels remained static. In the same period, well-being levels declined in US. This leaves us with a very big question: if the current economic activity is putting humans at risk without actually contributing to increases in the quality of life, is there a better way of organising our economic system?

All of these crises are interlinked. Under current economic structures, much faster growth is needed in many countries to create enough good jobs. Yet, these levels of growth are incompatible with planetary environmental limits.

Five years ago, NEF calculated how much the global economy would need to grow if those who are now living on $1.00 a day were to have an extra dollar. The answer is that GDP per capita of the whole world would need to rise by $166 per day to get the extra dollar filtered down to those on $1.00 per day. Not only does the current system fail to trickle down wealth efficiently, this extra $166 rise in GDP per day is impractical - it is ecologically impossible to sustain.

For everyone on earth to live at the current European average level of consumption, more than double the planet’s available bio-capacity—the equivalent of 2.1 planet Earths—would be required to sustain us. If everyone consumed at the US rate, we would require nearly five. We do not have five planets, or even two—we only have one. If we want business to effectively continue its work this is the major problem we must confront.

Technological change will have a major part in addressing this issue, but there is growing evidence that, while necessary, it is unlikely to be sufficient. Humanity has only managed to reduce carbon dioxide emissions per unit of GDP by 0.7 percent per year in the last 10 years, when at least ten times this rate is needed. Furthermore, these gains have been overwhelmed by a combination of increasing world population and growing GDP per capita. Our economic system has failed to keep up with our present global circumstances. To solve these market failures, it is crucial that we address the nature of our economic system itself, by combatting certain myths of our economy .

The Economic Myths of the Previous Age

The idea that we can continue growing forever is, in all respects, the first of three pervasive myths that we urgently need to shed. As economist and systems theorist Kenneth Boulding once said: “Anybody who believes that we can have infinite growth in a finite world is either a madman or an economist.”

The second is that markets are always fair. Pioneer economist, Adam Smith, mentioned his “invisible hand” only once in The Wealth of Nations, when he was talking about a bakery. But the situation he imagined was where there were large numbers of buyers and sellers, none of whom could influence the price. He also assumed that those actors were behaving in a moral way.

Neither of these assumptions applies in the global market now, where there are huge concentrations of power in many markets and where people have no such thing as equal purchasing rights. The richest 1 percent of people in the world earn as much as the poorest 57 percent, which undermines anything approaching a level playing field. We also know that these power imbalances accelerate the imbalance. Markets do not self-balance. The energy efficiency pioneer Amory Lovins said: “Markets make a good servant, a poor master, and an even worse religion.” We should not be surprised if we suffer the consequences of creating a religion around the markets.

The third myth is that prices tell the whole truth. Øystein Dahle, Vice President of Exxon Mobil from 1985 to 1995, said that communism collapsed “because it didn’t allow prices to tell the economic truth. Capitalism will collapse because it doesn’t allow prices to tell the ecological truth.”

If we can rid ourselves of these pervasive mythologies, we could see our way more clearly to a business environment that addresses our current circumstances. For example, businesses of the future must maximize returns to scarce ecological resources. This means minimizing or eliminating waste and the use of non-renewable resources, shifting the focus from labour productivity to resource productivity. It implies a major change in the purpose of companies, away from maximizing shareholder financial value to creating value of an economic, environmental and social return for stakeholders as a whole and to maximizing the well-being of employees and customers. Most of all, and perhaps most challengingly, it implies that the value of a company needs to reflect the economic, social and environmental value which it is either creating or destroying.

Creating Solutions

The current focus in the business community is mainly on incremental changes. Some of these are helpful—living wage campaigns, well-being at work metrics, campaigns for reduced pay ratios between the top and the bottom, and new forms of accounting.

Vital work is being done by the Ellen MacArthur Foundation, which links businesses within a circular economy, where waste products can be used as raw materials. Marks & Spencer are leading the way on reducing waste and environmental harm in their supply chains. Nevertheless, work on corporate social responsibility, sustainability and even triple-bottom-line reporting, while often positive in themselves, will not lead to the necessary systemic change. What we now require is a shift in our fundamental thinking.

Unilever and Nestle? have taken a bold step in ceasing quarterly financial reporting and announced that their purpose is to maximize long-term stakeholder value. However, these companies are large enough to dictate to financial markets rather than the reverse. Smaller companies, such as Body Shop, Green & Blacks, and Ben & Jerry’s, which all held clear social purposes beyond maximizing shareholder value, had to sell to larger multinational organizations once they reached a certain size.

What such pioneers need, above all else, is for policymakers to meet them halfway—to re-imagine the administrative and legal environment in which companies exist and work, and to accelerate the new shape of the business world. I suggest the following resolutions to the most urgent policy issues:

1. Policy measures to counter short-termism

One of the biggest barriers to change is the short-termism of financial markets. They have become increasingly short-term over the last generation. The average turnover of stocks and shares every year was 25% in 1950 and is now nearer 300%. Amongst other changes needed are non-voting rights on shares held less than a certain period, much higher taxes on short-term stockholdings, and changes to investment behaviour of pension funds.

2. Change the corporate tax and incentive regime

Taxes need to be shifted from taxing employment and value added to taxing resource usage. High taxes are needed on pollution and use of non-renewable resources; much lower taxes on renewable resources.

3. Change the way we value companies

As mentioned earlier, we must ensure that a company’s market value accurately reflects the value it is creating or destroying. This is not triple-bottom-line reporting, which provides a multiple bottom line, when we need a combined single bottom line. The value of a company  should reflect whether or not it is creating or destroying social and environmental value as well as economic value. A transitional stage could include contingent liabilities and assets in a company balance sheet.

4. Change the structure of businesses

There need to be changes in company law and the incentives that govern success so that a variety of forms of organization designed to create jobs, improve well-being and maximize returns to ecological resources are encouraged and which recognize that their human resources are assets and joint equity holders.

5. Reform banking and financial markets

There is considerable evidence that businesses are best served in countries with a diversity of banks and financial institutions. Nations, regions and cities need dedicated institutions (and a variety of types) to support the kind of enterprising economy required. Mega-banks, specializing in the manipulation of money, are not enough. Separating investment banking from retail banking is a necessary start. Changing the incentive structure within retail banks is even more important. Retail banks create the majority of new money in our economies.

For instance, in the UK, they create 97 percent of all new money. However, the current incentive structure favors creating new money for property and speculative investments. This needs to be changed to favour business investment and investment in new, sustainable technologies. It requires supplementation by local public-interest banks that focus on lending to local organisations and people and whose fortunes rise and fall with that local economy.

These are the issues we need to wrestle with as a result of what we now know about planetary limits. They are the logical implications of our new understanding - that natural resources are scarce and human resources are infinite, rather than the other way around.

These shifts would also allow us to tell the difference between growth that is sustainable and that which is unsustainable. They allow us to see concepts like efficiency and productivity differently: if the key scarce resource is natural capital, and if what we are trying to maximize is well-being and jobs, then it has profound implications for the way we understand economics.

Here also is a potential escape from the so-called “over-consumption dilemma.” We are now running out of planet because we are over-consuming, and our foot is too heavy on the gas pedal. But as economics currently stand, if we try to relax the pressure on the gas, we simply put a lot of people out of work and the recession deepens. What we must do, instead, is change to a very different metric, so that we still have a market economy capable of meeting people’s needs.

That requires a Great Transition for the economy, which can only really be launched by governments. But business people need to be in the lead, because it is their imagination, and practical sense of how to shift humanity to where it needs to be, that is most urgently required.

Future Economics

The goal of our economy should be to maximize human well-being and social justice while simultaneously enhancing our stock of natural capital. Our modelling at NEF indicates that such a goal is perfectly realistic. We are under no illusions, however, that this does not require a fundamental shift in our economic thinking and practice.

First, it requires a shift in value systems. We must begin viewing ourselves as stewards of the planet’s resources rather than consumers.

Our measurement systems must radically change. GDP is only a speedometer (it indicates if our economies are going faster or slower). We also need to know if we are going to overheat or run out of fuel. Above all, we need to know if we are going in the right direction. This is why NEF has developed the Happy Planet Index: it determines which countries of the world are creating long and happy lives for their citizens, at the least cost to the planet. The current leader is Costa Rica, whose citizens have longer and happier lives than those in the USA, on one-quarter of the USA GDP and at one-quarter the cost to the planet. Countries worldwide need to follow Costa Rica’s example—or, in fact, improve in terms of ecological footprint. This is what going in the right direction should look like.

To arrive there will require lower inequality. This will not be achieved purely through taxation but by ensuring greater “pre-distribution” through investment in childcare and “good” jobs. We will require stronger local economies with a much higher percentage of food grown and energy produced locally.

Underpinning all of the above is the change in how we do business. We must retain the creativity and dynamism of the current market system yet harness it to the new challenges we face. The new economic question in the future is this: how much well-being can we achieve for each unit of natural resources?

In the past, the economy tried to maximize financial returns to financial capital. It will still remain necessary to provide sufficient returns to financial capital, but the new key goal will be to maximize well-being while preserving natural capital.

Unfortunately, changes in economic understanding tend to transform slower than they should. “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist,” said John Maynard Keynes. The sooner we free ourselves from the shackles of defunct economics, the better it will be for all of us.