Green economics: Do we have to choose between growth and sustainability?

For a long time, sustainable growth for economists simply meant that the growth rate of a company was as high as possible without running into liquidity problems. Thus, sustainable growth was the growth rate a company could sustain without the need for financing with additional equity or debt.

This view has changed significantly in recent years. With the social and environmental challenges that people around the world are becoming increasingly aware of, what a company’s growth rate is built upon gains in importance. Green economic theories are based on the idea that all economic decisions should take environmental factors into account and that sustainable development should be achieved without environmentally harmful side effects. That’s why companies should no longer be committed to their success alone but to the overall health and wellness of nature, society and future generations.

“The public’s preferences and concerns about the environment are really rising fast,” explains Bengt Holmström. “Those who ignore it and just say, ‘We do business the way we used to’ are going to do financially worse. And so that’s one channel in which I think the environmental issues are going to intrude into business life.” Holmström, a contract theorist, has often commented on people’s growing awareness of environmental problems, and he himself is very concerned about the consequences of unethical business and consumption such as marine and air pollution.

Michael Spence, who formerly chaired the Commission on Growth and Development, a global policy group on strategies for producing sustainable economic growth, says that private sector engagement will be essential to address society’s important challenges. It’s a development pushed forward by customers, employees and investors alike.

“In the 1980s era, in the boards were lapdogs and the management ran the company in whatever fashion,” explains Michael Spence. “What’s happening now is people have come to realize that leads to a kind of non-engagement with the most challenging problems that societies have on the part of the business community, and that non-engagement makes it very difficult to solve these problems.”

“I think we’re in a transition to something different,” Spence continues. “An attempt by businesses to align their business model with the creation of social value. If you go around the rest of the world, you find businesses – even very profitable, meeting high return businesses – that were created with a primary mission that wasn’t high rates of return on investment. I think that’s the direction we’re going.”

Promoting inclusive and sustainable economic growth is one of the 17 Sustainable Development Goals the United Nations put out in 2015 as part of their 2030 Agenda. One way to achieve this, according to the UN, is to promote policies that support entrepreneurship, creativity and innovation. 

In 2019, Paul Romer and William Nordhaus were awarded the Nobel Prize in Economic Sciences. Both macroeconomists have studied economic growth, and while Nordhaus integrated climate change in the models he established, Romer found that growth really depended on the development of new ideas.

“When I got the call from Sweden, the good news was that I was paired with Bill Nordhaus,” says Romer. “There’s a message in that pairing. Global warming is a very serious problem and the potential for discovering new ideas is how we’re going to solve it.”

Romer sees no need to choose between sustainability and economic growth, not only because of people’s ability to develop new and better ideas but also because of rapid technological progress.

“The reason for optimism is what’s possible. The technological opportunities are just enormous. If we solve the problem of making hard decisions, making the right decisions, progress will continue. Standards of living will improve.”

Fellow laureate Michael Kremer agrees. “There’s a misperception that we can’t have economic growth and address climate change,” explains the development economist. “From an economic standpoint, there are things we can do that won’t stop economic growth. Part of what we need is new technologies.”

“If we put in appropriate incentives, we can develop new technologies that can help improve our climate at lower economic costs in the future. And so I think technological change will be very important going forward.”

The way to a green economy, an economy the UN defines as low carbon, resource efficient and socially inclusive, will be impossible without companies implementing a more balanced focus. In a sustainable company, return on investment and a good environmental performance go hand in hand.

While change is happening in the right direction, a new economic growth model is still needed. “We have to build sustainability in various dimensions into growth models or they are not going to be worth very much,” says Spence. “At no point in time could you say that the economic profession has got all the right models and the right solutions, but it evolves, and it will make a contribution.”