In the last few decades, making sense of social and economic forces that touch and shape our lives has become much more difficult. We have access to enormous streams of information made available to us by a globally integrated information system that is linked to a 24/7 news and commentary industry. Sorting through so much information from so many sources and making sense of it is enormously time consuming. It really can’t be done without the aid of an observational perspective that helps us discard observations and commentaries that do not go to the heart of the issues that matter to us and then to organize the relevant observations and commentaries into a coherent story about the opportunities and challenges facing us.
Obviously, as basic features of the world around us change, observational perspectives must change. Unless they do, the story lines those perspectives generate will degrade into myths and falsehoods that lead us astray individually and collectively.
This is the situation our policy experts and policy makers are now in. Basic features of the world around us have changed. As our exposure to tidal waves of news and information from and about all parts of the world and our own experiences as workers, consumers, and investors so clearly tell us, we are now part of an integrated world much larger that the nations in which we live. National boundaries no longer define the boundaries of our economic lives.
Although integration of the world’s peoples and territories into a single world economy has proceeded unevenly, and although the process is not complete, there are, nonetheless, no longer any notable territorial populations that are financially, commercially and socially isolated from all other populations. Concepts like “China’s economy” , “the emerging economies”, and “Michigan Economy” are now little more than convenient fictions. They lubricate conversation, but they badly misrepresent the realities of our economic world. We now work and live in a world of global economic relationships, global economic processes, global economic transactions, and global economic trends.
Those same tidal waves of global news and information also remind us quite often and in powerful ways that human activities are not separate from the rest of nature. We humans have always known that we depend on the flows of resources produced in nature, but we have only recently understood that our own activities can damage nature’s ability to produce the resources and environmental conditions that are essential to our well-being. We don’t just live in and by means of a single human world economy, we live in and by means of a single world economy that includes all the activities of nature as well as human activities.
The Inclusive World Economy Concept
“In macroeconomics, the subject is typically a nation—how all markets interact to generate big phenomena that economists call aggregate variables. In the realm of microeconomics, the object of analysis is a single market—for example, whether price rises in the automobile or oil industries are driven by supply or demand changes.”
Chris Rodrigo, Micro and Macro: The Economic Divide, Finance & Development website, International Monetary Fund. Accessed July 26, 2015.
Macroeconomics is the study of economies. An economy is generally defined as a system of people, institutions, and activities that produce and distribute wealth. In practice, economists almost always study national economies, urban economies, state economies, etc. Such economies are defined in terms of jurisdictional boundaries. We can refer to these as jurisdictional economies.
The apparent rationale behind this practice is the premise that a jurisdictional boundary nicely coincides with the boundary of a distinct system of economic actors and relationships that produce and distribute the wealth consumed by the people in that jurisdiction. This notion goes back at least to Adam Smith’s treatise on the causes of the wealth of nations. Now, as then, a national boundary is the most strongly defended type of jurisdictional boundary, so the national economy is the primary form in which an economy exists and, thus, is the primary object of study.
The problem with the concept of a jurisdictional economy is that it does not align well with the concept of a system. A system consists of a population of components functioning in relationships with each other in such a way as to produce a particular outcome or set of outcomes. An economic system consists of a population of people and institutions that produce and distribute items of wealth. But, as noted above, the people and institutions that produce the items of wealth used and consumed by any jurisdictionally defined population of people (Americans, Peruvians, Parisians) are spread across the world and routinely interact across national boundaries. Defined in terms of system components, relationships, and purposes, the only economy in existence is the capitalist world economy.[i]
The concept of the world economy solves some analytic problems, but it is still not adequate for explaining the production and distribution of the items of wealth that any of us depend on. The concept of the world economy carries forward the practice of excluding nature from economics. Nature must be brought into the concept of an economy because it is a powerful domain of activities that produce and distribute items of wealth that are essential not only to human wealth production but also for the qualities of life we desire. This is done with the concept of the Inclusive World Economy.[ii]
We typically use the word ‘wealth” to refer to human made goods and services, yet we know, at least intuitively, that such things as the oxygen rich air we breath and zones of moderate temperature that support agriculture are forms of wealth that nature produces. What we have yet to fully acknowledge is that these two worlds of wealth creation are inextricably interconnected.
The problem with defining human wealth production separately from nature’s productive processes is that the scale of human production activities has become so large and the scope of those activities so far-reaching that the consequences of those activities for natural systems can no longer be pushed away and ignored. The vast flows of goods, services, monies, ownership titles, forms of energy, and people provide pathways for the global distribution of the products of human activities and the products of nature; the vast flows of water and air that make up the rivers, ocean currents, and weather systems of the world distribute enormous amounts of materials and energy that originate in human activities as well in nature’s activities. These interdependent production and distribution systems constitute a single system of wealth production.
The world economy is the human part of an Inclusive World Economy that includes nature’s wealth production processes. The human world economy is a massive economic machine that takes forms of wealth produced by nature and converts them into different forms of wealth – the goods and services that define affluent society. In so doing, the human world economy extracts and uses flows of energy and stocks of living and non-living resources that nature would otherwise use in its own production processes.
As a totality, this Inclusive World Economy of humans and nature is a single global economic system. The only real input is the energy from the sun (discounting the miniscule meteorite contributions to the mass of the earth). We can process one form of wealth (say soil and water) into another form of wealth (crops), but we cannot make net additions to the earth’s total store of wealth.
The point here is that the human part of the Inclusive World Economy grows at the expense of the natural part. Conversely, the natural part expands at the expense of the human part (in the forms of rust, rot, and natural disasters). Human economies have always used nature, just as all living things do, but the capitalist world economy is the first human economy to press against the fixed stock and regenerative limits of the entire earth. This is a crucial and overlooked reason the human world economy is trapped in dysfunction.
Power of this Perspective
By diminishing the significance of geopolitical boundaries and the human society-nature boundary in studying the production and distribution of wealth, the Inclusive World Economy perspective brings transnational relationships and our interdependencies with nature to the fore in analytic work. This shift in perception calls forth new hypotheses, new lines of inquiry, new explanations, and new insights into what national policy makers can and cannot do to increase wellbeing. The theoretical and analytic challenges become much more daunting, but this only seems appropriate given the enormity of the instabilities, disturbances and threats that now confront the world.
As an example of how this perspective can raise new questions and suggest new insights, consider the uneven and still inadequate job growth record in the U.S. since 2009. Using the nation-state unit of analysis, economists and other policy experts generally attempt to explain and predict national, state, and local employment trends using national, state, and local institutional development and policy factors. Using the Inclusive World Economy as the unit of analysis, economists and policy experts would examine global institutional developments, global patterns of policy making, and changes in earth systems dynamics in search of trends and developing institutional and environmental pressures that are altering probabilities for job and wage growth in the U.S. and its states and localities.
Economists are beginning to reference global events and trends when discussing business prospects and the employment outlook in the U.S. and elsewhere, but the approach is little more than shifting the weight of “external” factors relative to domestic factors in their narrative models. They are still very far from adopting the inclusive perspective and analytic methods advocated here.
Notes
[i] The one area of general agreement about economic matters is that the world economy is capitalist, even though many variations on the theme can be observed.
[ii] I introduced the concept of the Inclusive World Economy in a paper critiquing the economics concept of externalities — Replacing the Concept of Externalities to Analyze Constraints on Global Economic Growth and Move Toward a New Economic Paradigm, Cadmus, October 19, 2014 but others are pursuing a similar line of conceptual development. Jason W. Moore and his colleagues have proposed the concept World-Ecology to unite human economic activity and nature (see their website World-Ecology Network).
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