In fact, such an event did occur in Sweden in 1992, when the OK Petroleum company successfully lobbied for an increase in the country’s tax on leaded gasoline. This surprising action stemmed from OK’s development of a high-octane (98) lead-free automobile fuel, which burned cleaner than other fuels while still maintaining high performance. The Swedish government agreed to the tax because it was in alignment with its own clean air policies and with international conventions that it supported. Since OK had the only lead-free product on the market, the gas tax gave the company a significant price advantage at the pumps. “The competition was forced to follow suit,” explained OK’s Per Wadstein, leading to cleaner air for all of Sweden.

Economy vs. Ecology

Economy and ecology arc often pitted against each other in the “profitability versus environment” debate. There is a perception that companies can either prosper financially or take care of the earth, but not both. However, as OK Petroleum showed, these pursuits do not have to be mutually exclusive. In fact, ecology and economy derive from the same Greek root, eco, meaning house. (Ecoloqy stands for “study of the house,” and economy means “management of the house.”) This etymology suggests that the two concepts are not contradictory, but actually part of the same larger idea. I low, then, can we study and manage our “house” (the earth) in ways that benefit both industry and society over the long term?

The “Systems ‘Thinking for a Sustainable Future” initiative, based at the MIT Center for Organizational Learning, provides a set of principles, practices, and processes that recognize and reinforce the synergistic link between long-term economic and ecological development. It seeks to provide industrial decision-makers with both a conceptual, framework stud practical tools for building financially healthy companies that arc also ecologically sustainable. In addition, the initiative attempts to foster learning environments in which various stakeholders can grapple with the larger issues of the day. The hope is that within these settings, the participants will create presently unimaginable solutions to some of the world’s most intractable problems.

Sustainabillty

What do we mean by “sustainable”? A sustainable society is one that is self-perpetuating over the long term—meaning that it uses resources at a rare that does not exceed the rare at which they can be replenished, and that it produces waste materials at a pace that does not exceed the rare at which they can be reabsorbed by the environment. Within this framework, a sustainable organization can be described as a company that provides customers with goods and services for living a satisfying life, while maintaining both a healthy balance sheet and a healthy balance with the natural world.

Creating environmentally sustain-able business practices used to be considered a choice for businesses—an optional activity for those companies that had the time, energy, and interest. But now it is becoming a more mainstream concern, due to several trends:

• The marketplace is demanding “greener” products that reflect environmentally responsible management. Supermarket aisles are filled with products that proclaim their eco-friendliness—from phosphate-free detergent and acid-free paper to recycled cardboard and “dolphin-safe” tuna.
• Material resources are becoming more scarce, resulting in a rise in production costs in many industries. For example, integrated steel producers virtually disappeared in the U.S. during the 1980s because the costs of mining iron ore grew financially prohibitive as the availability of that resource decreased.
• Regulatory compliance is becoming an increasingly costly concern. One petroleum company’s environmental compliance costs topped $1 billion in 1994—a figure that exceeded the company’s net profit for the year.

How can business managers think systemically about a sustainable future? How can they balance needs for economic prosperity and ecological survival? To address these challenges, companies need to expand their current strategic thinking to include economic and ecological concerns—creating what W. Edward Stead and Jean Garner Stead call “sustainability strategies.”

A Conceptual Framework

The Natural Step movement. which originated in Sweden, offers clear conceptual framework for creating such sustainability strategies. Lei Dr. Karl-Henrik Robert. The Natural Step has proven to be one the most effective sustainability movements in the world, aligning diverse social business and ecological interests around fundamental scientific principles of natural systems. The Natural step process has been studies: and practiced by corporate managers, urban community members, youth at risk, and schoolchildren; it has been shared via books, audiotape, board game, or CD-ROM with every household in Sweden. It is an approach that does not blame any one sector of society for our current problems, but rather encourages all of us to find ways to contribute CO effective solutions.

The guiding principles of The Natural Step, known as the “four systems conditions,” are derived from the basic hews of thermodynamics: matter cannot disappear, and matter tends to dispense (see “The Four Systems Conditions”). By using the four systems conditions to evaluate whether their products and services are economically and ecologically sustainable, some of Sweden’s largest corporations have produced significant changes in their business strategies.

For example, the ICA supermarket chain in Sweden was asked frequently by its customers whether its refrigerators and freezers emitted CFCs, which are linked to ozone layer damage. After familiarizing themselves with the four systems conditions, ICA’s leadership engaged in a conversation with Electrolux (Eureka in the U.S.), their primary vendor of refrigeration products. Aware that CFCs, a non-biodegradable, unnatural compound, violated systems condition 2, ICA’s leaders asked Electrolux what it would cost to eliminate this compound from their existing inventory. After some technical hedging, Electrolux designers answered that it would take 1 billion Swedish crowns (approximately $140 million) to convert to soft freons—another persistent and unnatural compound, but one that is thought to be less damaging than CFCs. The CEO’s response was, “You want me to invest 1 billion crowns in a product, of which the only thing I know for sure is that it is doomed to failure?! Please come up with a more suitable alternative.”

Electrolux, which had not previously encountered The Natural Step, subsequently phoned Dr. Robert and asked him to come “talk about your damned systems conditions.” A short time later, the Electrolux team announced the development of an interim compound that does not harm the ozone and that is now successfully being manufactured and marketed as a “green” refrigerant. The company is also well on its way to producing a refrigerant that is biologically harmless. As a result of its work with Dr. Robert and his colleagues, Electrolux has begun employing The Natural Step method throughout the company, and is now using the four systems conditions as a framework for its strategic planning process.

Integrating Sustainability Strategies and Organizational Learning

While the four systems conditions offer a basic conceptual framework for creating sustainable business strategies, they do not provide a specific process whereby those principles can be used to develop and implement such strategies. This is where the disciplines and tools of organizational learning can help. For example, the tools and methodology of systems thinking provide a means to test the long-term implications of policy decisions on the wider environmental system.

Systems thinking can also provide an overarching framework for understanding the industrial, governmental, and environmental interactions that play a role in sustainable development (see “The Sustainability Challenge”). An overall increase in industrial productivity (such as the U.S. has experienced for most of the 20th century) leads to a reinforcing cycle of economic growth and profitability (R1), but it can also lead to an accumulation of industrial wastes in the environment. In the U.S., this has led to heightened regulatory pressures designed to reduced waste.

At the same time, increased consumer awareness of the environmental impact of production is leading to emerging new market opportunities in terms of “clean” technologies (B3), which, for those companies that invest in them, can lead to profitable alternatives to unsustainable production techniques (R4). However, the subsequent increase in regulatory compliance costs can constrain profits (B2), which can potentially limit industry’s ability to invest in “clean” technologies (R4).

The disciplines of team learning and mental models also have much to offer in that they can help generate more informed, productive conversations. In the ecology/economy debate, dialogue skills of genuine inquiry, deep listening, displaying one’s own line of reasoning, and respect for other view-points are critical, as are the ability to surface our mental models and to inquire into those of other people (see “The Power of Mental Models”). Through the use of dialogue and role-playing, we can gain deeper understanding of diverse points of view and bring out new ideas and solutions that a single point of view might not have produced.

In a recent learning laboratory at a petroleum company, for example, role-reversal, dialogue, and consensus-building tools were used to develop a new framework for environmental leadership. As part of the workshop, employees from the environmental engineering division took turns role-playing the traditional contestants in the environmental debate: “Government Bureaucrats,” “Tree-Hugging Environmentalists,” and “Big Bad Business.” By humorously taking on their worst perceptions of each other, participants were able to see beyond the stereotypes that they had placed on their professional adversaries.

The Sustainability Challenge

Heightened consumer awareness of accumulated industrial wastes has led to heightened regulatory pressures designed to reduce waste. However, the subsequent increase In regulatory compliance costs can constrain profits (B2) which can potentially limit Industry’s Investment in “clean” technologies (R4).

In the dialogue that followed, the engineers gained insights into the motivation, logic, and humanity of the various stakeholders, and were better able to understand the validity and utility of each point of view, even if the perspective challenged their own position. The engineers found that their subsequent meetings with EPA representatives on a difficult Clean Air Act project were significantly enhanced in terms of quality of communications, creativity of thinking, and efficacy of solution generated—all as a result of their experience in the workshop.

Organizational Learning for a Sustainable Future Integrating sustainability strategies and organizational learning—one approach focused on content (where we need to. go) and the other focused on process (how we’ll get there)—may hold unprecedented potential for producing sustainable ecological and economic development. We have termed this synergy Sustainable Organizational Learning (SOL). Although the development of SOL is only in its initial stages, we can imagine a variety of learning practices through which SOL practitioners will work toward long-term economic and ecological sustainability:

• Aligning industrial cycles and natural systems. Conversations around strategy and future planning will include the question, “What business activities should we engage in that will be aligned with the systems conditions for sustainability?” The answers to this question will strongly influence investment decisions with respect to new products and services. In this way, SOL practitioners will begin to align their company’s industrial cycles with natural systems.
• Building cross-company consortiums. By building consortiums of companies engaged in a similar inquiry, sustainable learning organizations will participate in company-to-company conversations that will enable them to learn from each other’s challenges and successes in the pursuit of sustainability strategies.
• Engaging in ongoing practice. By studying and practicing the disciplines of SOL, practitioners will foster new learning in themselves, their compa

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Which view should we follow as we head into the uncertainties of the 1990s? Can companies learn from the lessons of past recessions and position themselves to make the most of the current downturn? Or have we entered new, uncharted territory where well beaten paths lead to financial ruin? To answer these questions we need to look beyond current headlines about hank failures and volatile oil prices to the underlying forces that are shaping this recession — and the economic recovery that will follow.

Recessions and the Long Wave

Recessions are part of the business cycle, and the business cycle, according to Professor John Sterman of the MIT Sloan School of Management, is one of several behavior patterns which produce the economy’s overall behavior (see “Economic Patterns” graph). Although the business cycle receives the most attention, it is in many ways the least important mode of behavior. It has a fairly small amplitude and averages four years in the United States, so its effects arc reversed quickly. The long wave, in contrast, has a much greater amplitude and a longer time-frame, making its effects more significant but less obvious. Both the business cycle and the long wave occur in the context of an even longer process, the life cycle of economic development — a high rate of average economic growth which began with the industrial revolution and has continued through the last 200 years.

The interaction of these forces produces the varied behavior of the economy: During an upswing of the long wave, a recession or downturn of the business cycle is generally short and mild, expansions are longer and more robust., and the rate of economic growth is well above average. During a peak or downturn of the long wave, recessions are more severe and the average rate of economic growth is greatly reduced.

How the Long Wave Works

The long wave was first proposed in the early 1900s by a Russian economist named Nikolai Kondratief (see Global Citizen for a more complete history and description of the long wave theory). Since the 1970s, researchers at MIT have been using system dynamics to understand the structural forces that give rise to the long wave. The resulting computer model of the U.S. economy has correctly anticipated nearly all of the significant economic “surprises” that have occurred in the past two decades: deeper and deeper recessions, speculative “bubbles” in assets, persistent unemployment, and growing political conservatism, among others.

The long wave expansion is powered by many reinforcing processes that lead to high capacity utilization, low unemployment, rising real wages, low real interest rates, rising debt, increased investment, and rising optimism. Due to this growth, the economy slowly becomes overbuilt and imbalances appear. Excess capacity develops. Speculation replaces investment. Unemployment rises and real wages stagnate. Margins fall and price wars develop as firms battle for share in shrinking markets. Real interest rates soar with the decline in prices and inflation, and so do defaults.

These imbalances must be corrected. During past long wave downturns, the correction process resulted in depression, financial panic, deflation and default. Excess capacity, untenable debt, and inflated asset values were eventually eliminated, setting the stage for the next upward cycle. Although the MIT research on the long wave has focused on the U.S. economy, Sterman notes that similar dynamics appear in most industrialized economies.

Past long wave downturns in the U.S. occurred in the 1830s and 1840s, the 1870s through the late 1890s, and in the 1920s and 1930s. The current long wave peaked around 1979, and will probably bottom out at the low point of the current recession, Sterman believes.

No “Great Depression”

This doesn’t mean we are heading into another Great Depression. “Many people believe that if there is a long wave, that means we will have a repeat of the Great Depression of the 1930s,” notes Sterman, “That’s not true. Each long wave downturn has been different, and the Great Depression represents one extreme.”

However, Sterman warns that the current recession “is going to be deeper and longer-lasting than most people think.” In the past, recessions have resulted from the temporary overbuilding of inventories, which can be worked off quickly. This time, it is not product inventories which are excessive, but the supply of condos and retail space, physical capacity, financial services and the government sector, and commercial debt. “These imbalances aren’t going to go away quickly,” says Sterman. “It takes years, for example, to work off excess real estate.”

Sterman also points out that the long wave does not happen in isolation, outside of our control. “It results from the everyday decision making process and actions throughout business and government.” Although the time is past to prevent the long wave downturn, he believes we still have the ability to choose between an uncontrolled “implosion” of the economy versus a more contained, controlled decline. What’s needed, says Sterman, are lower interest rates, early debt writeoffs, and solid leadership to maintain consumer confidence.

The Economic Circus

So how long will the recession last? No one knows for sure. One of the reasons this downturn is particularly difficult to calculate is the sheer magnitude of the government’s role in regulating the economy. In all previous long wave downturns the government was a much smaller actor — “a mouse among the animals in the economic circus,” as Sterman describes it. In the 1920s, the U.S. government controlled only one-tenth of the gross national product. It had little influence in the events leading up to the Depression and grew significantly in response to the crisis.

Now, with the government controlling one-third of the economy, it has become the elephant in the center ring. Government actions designed to prolong the current expansion have worsened many of the imbalances built up during the upswing of the long wave. The pressures continue to accumulate, not dissipate. In addition, the government — bloated with debt and burdened with enormous deficits — is now less able to respond to any new crisis.

The war in the Persian Gulf is another unknown factor. Although Sterman says its tough to say how it will affect the economy, he doubts that the war will bring the economy out of a recession the way World War II stimulated the post-Depression economy. The reason, he explains, is the timing of both wars in relation to the long wave. “World War II occurred just as the long wave had bottomed out, so that the excess capital and labor force were able to be used to meet the new military demand.” The Persian Gulf war, by contrast, is occurring in the downswing of the long wave, “when there are tremendous contractionary forces pushing down government spending.”

A Silver Lining

But Sterman notes there is a silver lining to the current economic outlook. “Keep in mind that the long wave is a cycle, and it will turn around. In the boom of the 1980s, a lot of people thought things would continue going up forever. If people now make the same mistake of thinking the economy will go down forever, they might miss some real opportunities.

“When the current imbalances are resolved, the stage will be set for the next long wave expansion, creating tremendous opportunity. Growth will resume at moderate rates. Real interest rates will decline. Unemployment will fall, though the new jobs will often be in new industries and require new skills. Debt will be rebuilt around a new set of financial institutions, a new set of managers, and newly-stiffened credit standards. A new ensemble of technologies will emerge, powering the growth of new firms.”

And the great pendulum of the U.S. economy will once again begin its upward march.

Portions of this article were adapted from “A Long Wave Perspective on the Economy in the 1990? by John D. Sterman which appeared in the July 1990 issue of The Bank Credit Analyst. For more information on the long wave and the National Economic Model, contact John D. Sterman, 552-562, MIT Sloan School of Management, 50 Memorial Drive, Cam-bridge, MA 02139, (617) 253-1559.

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Any informed student of systems thinking recognizes that such strategies eventually fail because they merely treat symptoms. They do not cure root causes. On the contrary, in time, these actions may actually worsen our underlying social and environmental problems. For instance, the availability of recycling may boost consumerism. Indeed, our problems will not go away until we discover that unlimited growth cannot be the primary goal of economic activity and act on this discovery. Society must learn to run an economy that enhances human well-being while ensuring that all life on Earth, both human and non-human, flourishes indefinitely.

Our problems will not go away until society discovers that unlimited growth cannot be the primary goal of economic activity.

To develop an economy that benefits Earth and its inhabitants, we need

• a good understanding of the state of our current economic system,
• a clear vision of the sustainability that must become the goal of our future economic system, and
• a willingness to take small steps to identify and remove the obstacles we encounter on the path to get us from our current economic system to the future system.

To achieve these goals presupposes that we identify the assumptions about reality that underlie our thinking. It also requires that we understand how we got to where we are today. Understanding how we arrived at this point allows us to make informed decisions about our economic activity and proceed wisely to develop a sustainable future.

Like performers in a jazz group, we have no full-blown score that shows us precisely what comes next. We do, however, have the ability to examine the past, consider the present, and create a viable path to a sustainable future.

The Origin of Belief in Economic Growth

How can we get to the core of the challenges that face us? How do we begin to make a significant difference? One place to start is by understanding and thinking carefully about the underlying assumptions that gave us economic growth as a viable business strategy in the first place. Adam Smith and the first generation of classical economists originally proposed the capitalist economic system as an answer to the question, “What is the best way to conduct economic activity so as to increase ‘the wealth of nations’?” Their concern was how to secure national wealth. Their focus was on providing an alternative to the 17th- and early 18th-century mercantilist nations’ efforts to amass precious metal reserves through conquest and one-sided trade surpluses. Early classical economists advocated gaining national wealth instead by encouraging industrial employment through the manufacture of and trade in products and commodities. In other words, they saw a nation’s economic strength in its productive employment and trade, not in vaults filled with dubiously acquired stores of gold and silver.

These economists put less emphasis on growth per se than on the social and legal conditions they saw as prerequisites to innovation, risk-taking, and investment. Thus, Smith and his peers argued that market exchange was superior to feudal custom as a basis for conducting economic activity. They also believed that manufacturers and traders should privately own the property and equipment they used in their enterprises. In this way, capital that had previously been locked up in the “commons” on the feudal manor would reach entrepreneurs eager to invest it in novel ways.

Only long after Adam Smith did economists shift their attention to, among other things, growth in the human economy. To some extent, this shift was a response to the unprecedented expansion of the human population that began after the onset of the fossil fuel–enabled industrial era in the early 18th century. Along with that growth came cycles of boom, depression, inflation, deflation, unemployment, and financial instability. These events prompted European and American economists by the first half of the 20th century to develop so called macroeconomic models to explain patterns of economic activity in the aggregate, as opposed to the microeconomic models of market and price behavior of individual consumers and firms that had been the chief concern of economists in the previous two centuries.

After the 1930s, government policy makers were using macroeconomic models and tools developed by John Maynard Keynes and other economists to deal with economic cycles, price-level fluctuations, and employment instability. Although the success of these models seemed to be confirmed by the long period of sustained economic growth in the Western democracies from the 1940s to the end of the 20th century — a welcome change after the long depression of the 1930s—it no doubt contributed to the environmental problems we now face, giving rise to the dilemma of today’s policy makers to come up with ways to achieve “prosperity without growth” (Tim Jackson, Prosperity Without Growth? Sustainable Development Commission, U. K., 2009).

By the late 20th century, then, the relatively small-scale and competitive industrial economy had been transformed into the vastly larger-scale, more centralized, and more monopolistic global economy. At the same time, the question of how to increase a nation’s wealth was replaced by an answer: transform resources into an ever-growing stream of goods and services for human consumption, without limit.

The Impact of Newtonian Thinking

The way modern humans have thought about the economy derived mainly from Western religious and scientific cosmology passed on through educational, religious, and social institutions from the 18th century to the present day. Particularly important in shaping economic thought has been the mechanistic view of reality articulated by that most admired of Western 18th-century intellectuals, Isaac Newton.

By the late 20th century, the relatively small-scale and competitive industrial economy had been transformed into the vastly larger-scale, more centralized, and more monopolistic global economy.

Central to Newton’s cosmology is the idea that reality in this universe is material “stuff” consisting of independent objects that connect only through external force. This force is of course known as “gravity.” Economists after Adam Smith’s time adopted the idea that the independent behavior ascribed by Newton to material non-human systems in the universe applied equally to all human, social, and living systems on Earth. Thus, homo economicus is an autonomous being motivated solely by his or her desire to maximize self-interest through winner-take-all competition and accumulation of material wealth. A social setting in which humans work, such as a business, achieves results that presumably can be measured as a linear sum of its parts. Holding the human economy together in a coherent way is an external force resembling gravity. Borrowing on Newton’s ideas, Adam Smith described that force as “an invisible hand” that produces the “greatest good for the greatest number” when all individuals independently pursue their self-interest through economic exchanges based entirely on prices set in free markets.

Growth was not a feature of Newton’s universe, but it became an inevitable part of modern economic thought as people increasingly viewed the goal of market exchange to be the accumulation of material “stuff” measured with abstract financial quantities. Having shifted the goal of economic activity from real, tangible things to abstract financial quantities, the race to grow without limit was on. After the early 19th century, more and more people began to take for granted what they presumed were limitless sources of power delivered by coal furnaces, internal combustion engines, and coal-generated electricity. They rushed to use such power to strip forests, mine minerals, produce steel rails and high-rise girders, travel great distances, and till millions of acres. They believed that inexhaustible resources would give them the necessary means to achieve unending growth. The adverse environmental impact of this growth was, for the most part, out of sight — either not yet readily visible or located far from major population centers.

Eco-philosopher Thomas Berry powerfully described this devastating transition in human history:

In our times . . . human cunning has mastered the deep mysteries of the earth at a level far beyond the capacities of earlier peoples. We can break the mountains apart; we can drain the rivers and flood the valleys. We can turn the most luxuriant forests into throwaway paper products. We can tear apart the great grass cover of the western plains and pour toxic chemicals into the soil and pesticides onto the fields until the soil is dead and blows away in the wind. We can pollute the air with acids, the rivers with sewage, the seas with oil — all this in a kind of intoxication with our power for devastation at an order of magnitude beyond all reckoning. We can invent computers capable of processing ten million calculations per second. And why? To increase the volume and the speed with which we move natural resources through the consumer economy to the junk pile or the waste heap. Our managerial skills are measured by the competence manifested in accelerating this process. If in these activities the topography of the planet is damaged, if the environment is made inhospitable for a multitude of living species, then so be it. We are, supposedly, creating a technological wonderworld (Thomas Berry, The Dream of the Earth, Sierra Club Books, 1988).

A New Cosmology

Ironically, the Newtonian cosmology that legitimated this “wonderworld” in modern economic thought underwent a radical transformation in the late 19th and early 20th centuries, just as the social and environmental costs of sustained economic growth were beginning to appear on the horizon. This new cosmology embodies a view of reality that itself has the potential to help answer the question of how to run a sustainable economy. According to this worldview, sometimes referred to as “the universe story,” our universe originated 13.75 billion years ago in an infinitely dense, small, and hot singularity — the “big bang” — containing the source of all the matter and energy that ever will exist. Since the “big bang,” the universe expanded continuously and thereby became host to an evolving array of increasingly complex forms such as sub-atomic particles, galactic clouds of hydrogen and helium atoms, stars, elements of the periodic table, molecules of water and amino acids, planets circling stars, Earth, and Earth’s life forms — ranging from prokaryotic microbes to human beings.

Consider the view of reality inherent in this cosmology. First, reality is not “stuff” put here all at one time in its present form. Instead, it is a continuously evolving process, or system, that itself produces all the forms we perceive around us. Moreover, that process embodies a small number of patterns that connect all matter and energy in relationships from which everything emerges.

Three features seem to permeate the universe:

1. Everything is connected to everything else. Nothing is independent. “The universe,” Thomas Berry remarked, “is a communion of interconnected subjects, not a collection of independent objects.”
2. Every form that has ever emerged from the evolutionary process is imbued with a unique self-identity, or “inwardness,” that embodies the form and enables it to multiply and expand its influence.
3. The universal system of interconnected, self-defining forms sustains itself and flourishes indefinitely by continuously generating increasing diversity, or differentiation, and thereby preventing any one form’s growth from extinguishing other forms (see Brian Swimme and Thomas Berry, The Universe Story, Harper Collins Publishers, 1992; Joel Primack and Nancy Abrams, The Journey to the Center of the Universe, Riverhead Books, 2006).

For nearly 14 billion years, relying on these three features, the universe has evolved, using an unchanging budget of matter and energy. All the increased complexity and differentiation intrinsic to the evolution of the universe has been accomplished with the same quantity of stuff — or, as an economist might say, “at zero marginal cost.” The universe is sustained by the continuous generation of newness, using a fixed amount of matter and energy to do so.

We humans have posed the first threat to this sustainability by using our unique powers of technology to consume from Earth’s fixed supply of resources and create waste faster than Earth can regenerate the waste, thus depriving resources to other life forms. This consequence of modern economic growth would not occur, however, were the human economy able to achieve prosperity and sustainability simultaneously, by consuming Earth’s resources at a steady rate that does not threaten the ability of other life forms to thrive. How to achieve that goal is the most important question of our time, perhaps the most important question humans have ever faced.

As revealed by modern science, the behavior of the universe suggests the best way to run an economy intended to support human well-being while ensuring that all life on Earth, both human and nonhuman, flourishes. When we acknowledge the interconnectedness of all life on Earth and when we grasp the current state of our life-denying global economic system, we are poised to identify constructive actions that will lead to a viable future state.

Economic Growth and Nature’s Systems

Anthropologist and systems thinker Gregory Bateson once commented, “The major problems in the world are the result of the difference between the way nature works and the way man thinks” (as quoted by Bill Devall and George Sessions in Deep Ecology: Living as if Nature Mattered, Peregrine Smith Books, 1985). A viable future state requires that we see that nature works through a series of interconnected feedback loops that prevent any species from growing without limit, ensuring that life can flourish indefinitely, despite Earth’s fixed supply of resources. Were it not for such checks on growth, population booms would lead to crowding and mass extinctions, thus reducing the number, diversity, and resilience of the planet’s flora and fauna.

By contrast, “the way man thinks” is to assume that Earth can supply all the resources to sustain endless expansion of the human economy. In past centuries, when humans grew steadily in number, we did not seriously threaten the health of the planet. Since the Industrial Revolution, however, and especially today, the human economy has consumed Earth’s resources at a pace that is causing environmental distress and the extinction of other species to a degree unprecedented since the extinction of the dinosaurs some 65 million years ago. When humans use our unique powers of language and technology to circumvent nature’s ways of constraining growth, and when we engage in unlimited consumption of Earth’s fixed, finite resources, our behavior compromises Earth’s capacity to sustain life. If this unchecked growth continues, we may be jeopardizing the sustainability of our own species.

Conditions for Growth

The dedication to growth is rooted in two conditions that profoundly shaped the course of the industrial economy for the past two centuries. One condition is the discovery and ever-increasing use of fossil fuels — coal since the late-eighteenth century; oil since the mid-nineteenth century; and natural gas since the late-nineteenth century. Without these fuels, the massive extraction and transformation of Earth’s resources into products for human consumption that has characterized the modern industrial economy would have been inconceivable. But helping drive that enormous consumption of resources was a second condition: the development and nearly universal use in the past century of abstract financial concepts to describe, explain, and direct economic activity.

When we view economic activity through the lens of financial numbers such as profit, cost, income, and GDP, it becomes a quantitative abstraction, completely separated from the concrete activities that produce such numbers. Indeed, corporations are seldom held accountable for the true social and environmental costs of their actions, including polluted air and rivers, toxic food, scarred landscapes, scarce or tainted water, discarded human lives and communities. Seen in this light, it is hardly an exaggeration to say that the modern industrial economy has been growing itself to death.

The rate of economic growth, especially in Western capitalist economies after the late 19th century, was also greatly accelerated by the use in limited-liability corporations of long-term debt and equity instruments. With access to large amounts of financial capital, companies produced — and consumers consumed — at higher rates than would otherwise have been possible. Since the early 20th century, financial capital has grown faster than physical capital (John B. Cobb, Jr., “Landing the Plane in the World of Finance,” Process Studies, Vol. 38.1, Spring-Summer 2009). This discrepancy gave global financial corporations the monetary wealth with which to acquire and control large industrial corporations.

As a result, a small number of individuals in the financial sector came to own and control an increasingly large share of the economy’s monetary wealth. To a much greater degree than ever before, inequality in the distribution of wealth increased rapidly. The predictable rise of political influence exercised by those at the upper end of the wealth distribution is now enabling political power in Western society to shift from popular democratic majorities to plutocratic minorities.

A Piecemeal Approach

Reinforcing this shift in power is our tendency to accept the growth of enormous corporations and to delegate virtually all of our economic decisions and fulfillment of our physical needs to them. As the writer, agrarian, and land steward Wendell Berry has said, “Most people in the ‘developed’ world have given proxies to the corporations to produce and provide all of their food, clothing, and shelter [and] . . . to corporations or governments to provide entertainment, education, child care, care of the sick and the elderly, and many other kinds of ‘service’ that once were carried on informally and inexpensively by individuals or households or communities” (Wendell Berry, “The Total Economy,” in What Matters?: Economics for a Renewed Commonwealth, Counterpoint, 2010). Large corporations and governments thus capture vast financial wealth and political power while providing, on their terms, almost all the goods, services, and jobs that shape our lives.

Given the hardships and inequities that this growth has created, it is surprising that popular public opinion about national and global economic policies supports the relentless economic growth that financially benefits a select few. Presumably, this paradox derives in part from the influence that large business and government institutions wield over education and the public media. Also, the public’s dependence on products, services and jobs created by those institutions—and our seemingly unending appetite for consumer items — helps make us complicit in the global growth strategy.

Thus, in response to our deepening environmental crisis, rather than reining in large growth-oriented institutions, most of our strategies have focused on piecemeal approaches such as recycling waste, buying plug-in electric and hybrid automobiles, installing solar panels on rooftops, creating vegetable gardens in abandoned urban spaces, and grinding worn-out running shoes into material for making playgrounds. While environmentally friendly practices are commendable in their own right, they address symptoms, not the fundamental problem of inexorable economic growth.

If we should continue to pursue unlimited economic growth, the unanticipated consequences may exceed our most fearful imaginings.

A Positive Future Economy

The following steps suggest ways we might solve our economic problems and repair the current destructive global economy that is based on “the way man thinks.” These steps propose a positive future economy based on “the way nature works.”

1. Take back what Wendell Berry calls the “proxies” we have given over the years to corporations and governments to fulfill all our physical and economic needs. This implies consuming less of everything and having each community become more self-sufficient and less dependent on outside institutions for necessities such as food, clothing, shelter, recreation, education, and healthcare. In short, take back global by going local.
2. Produce and trade more of what we consume locally and import less from the outside world by carefully planned programs to promote import substitution. This creates more local jobs and more local opportunities to invest local savings.
3. Delegate to outside corporations and to regional and national governments only those economic activities that cannot be provided effectively in the local community. Then initiate programs to steadily improve the local community’s ability to provide those activities.
4. Markets do well at defining prices for reproducible, homogeneous, fungible commodities but not for defining values of heterogeneous, nonrenewable, unique species. Most economists after Adam Smith and David Ricardo ignored this fact. Thus, modern economists take for granted that markets will set prices for land and labor as though they were fungible commodities. They increasingly regard Earth’s natural resources, human labor, and life itself as commodities to trade. This idea must end.
5. Modern science tells us that reality is relationships and process, not “stuff” to mechanically collect, assemble, and accumulate. But humans have yet to learn that their well-being requires them to emulate in their social, business, and economic organizations the patterns of relationships found in nature, not the mechanistic patterns so pervasive in present-day financial management. To that end, people managing economic processes in the workplace must recognize that “cost” is a function of how they design human relationships in those processes, not a financial quantity that they control by changing the scale of those processes and the speed at which the processes transform inputs into output.
6. Endless growth in the human economy makes it impossible for Earth’s remarkable life system to flourish over the long run. However, almost all present-day programs to promote “sustainability” or “sustainable development” fail to question the assumption that growth is a necessary condition of human economic activity. Thus, they do no more than treat symptoms of the underlying disease; they do nothing to prevent the disease itself. And by simply alleviating, temporarily, some of the adverse consequences of growth, they avoid tackling the fundamental problem, which is to produce a condition of long-term sustainability in a context of no growth.
7. Do not look to universities or academic researchers for answers to the social and environmental problems that we now face. Academic institutions are firmly entrenched in the status quo.

Undoubtedly no one seriously believes that the defining feature of the human economy should be the destruction of life. And yet today our economic activity is destroying Earth’s capacity to support life. To alter this condition, we must thoughtfully scrutinize our reasons for advocating continuous growth in production and consumption. If we should continue to pursue unlimited economic growth, the unanticipated consequences may exceed our most fearful imaginings.

H. Thomas Johnson is professor of business at Portland State University and Distinguished Consulting Professor of Sustainable Business at Bainbridge Graduate Institute. In 1997, Harvard Business Review named his book Relevance Lost one of the most influential management books of the 20th century, and in 2003, Harvard Business School Press listed Tom among today’s 200 leading management thinkers. In 2001, Tom’s book Profit Beyond Measure received the Shingo Prize for Excellence in Manufacturing Research, and in 2007, the American Society for Quality awarded him its prestigious Deming Award. You can contact him at johnsoht@pdx.edu.

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We can learn how to recognize and work more effectively with these dynamics by applying systems thinking to:

1. Illuminate the often non-obvious interdependencies among multiple elements that create such problems,
2. Increase awareness of how people unwittingly undermine their own efforts to achieve their stated aims, and
3. Point to high-leverage solutions that benefit the system as a whole.

This article briefly introduces several principles for analyzing the root causes of complex problems; applies them to gain a deeper understanding of the current financial crisis; and recommends high-leverage actions that political and business leaders can take to improve economic performance in sustainable ways.

The Instability of Reinforcing Feedback

The performance of a complex system is largely determined by interdependencies among its elements, many of which are indirect, circular, and non-obvious. Perhaps the most salient of these relationships is reinforcing feedback, which explains the dynamics of both exponential growth and spiraling decline. Such phenomena as compound interest that dramatically increases savings over time and engines of business success that fuel expansion are familiar illustrations of positive exponential processes. On the other hand, vicious cycles such as epidemics and economic collapse are indicative of negative reinforcing feedback.

In order to understand the current financial crisis, we first need to recognize that the same engines that stimulate exponential growth can also lead to sudden collapse. Economic bubbles tend to burst, and bull markets can suddenly turn into bear markets. In the case of the recent housing bubble, low interest rates generated easy credit, which was amplified by new financial instruments such as credit default swaps that spread and leveraged investor risk. Easy access to mortgage money increased housing prices — until higher adjustable mortgage rates kicked in and led to mortgage defaults and foreclosures, steep declines in housing prices, the collapse of key financial companies, and the tightening of credit.

In the case of the stock market, rising credit led to increased consumer confidence and increasing stock values, which in turn created greater purchasing power and fueled more purchases and higher market values. However, the sudden loss of confidence spurred by the financial crisis and declining stock prices has now led to reduced purchasing power, belt tightening, and a widespread recession. The bear market is intensified by (1) the long-term accumulation of debt resulting from credit-driven growth, and (2) the dependence of the previous bull market on purchases of largely non-renewable consumer and military products that have undermined investments in more sustainable innovations and growth. The dynamics of reinforcing growth and collapse are summarized in “The Instability of Reinforcing Feedback.”

Two high-leverage strategies for avoiding the dependence on reinforcing feedback as an unending source of growth are:

• Anticipate and prepare to address natural limits to any growth process. This means remembering that there are no free lunches and that promises of infinite growth inevitably prove false.
• Evaluate and manage growth in relation to independently meaningful goals rather than as an end in itself. We need to understand that money can enhance the quality of our lives by making it easier to realize our aspirations and express our values, but that the single-minded pursuit of money is ultimately deadening.

Managing Unintended Consequences

Another systems principle is that most quick fixes have unintended and delayed consequences that usually neutralize or reverse immediate gains over time. In the case of the current financial crisis, the bailout not only risks significant complications in years to come, but has also led to negative unintended consequences in the short term. First, the bailout has not achieved its immediate aims of opening credit markets or increasing consumer confidence, because banks have largely held onto the money to ensure their own solvency. Second, the resulting increase in the federal deficit, which will be compounded down the line by looming increases in Social Security and Medicare payments, will likely create significant tax increases that reduce purchasing power even further. A higher federal deficit will also generate inflation that reduces purchasing power and increases interest rates, thereby further limiting people’s ability to borrow as a way to stimulate growth.

One higher-leverage way to shift these dynamics is to address the root causes of the financial industry collapse instead of just its symptoms, i.e., prevent foreclosures by restructuring the mortgages of people at risk, and change the financial rules of the game (including incentives and instruments) that led to the collapse in the first place.

The performance of human systems is significantly affected by people’s deeply held beliefs and intentions. With regard to our economic system, many political and business leaders believe that growth measured primarily in financial terms is inherently good and that the ultimate goal of the system is to increase it. This belief results in high pressure for growth, which our country has tended to achieve by stimulating borrowing instead of savings (at the individual, corporate, and national levels) as the basis for investment, and encouraging spending, especially on consumer products and a strong military. For example, consumer spending has been spurred by low interest rates, and military spending has been increased to combat terrorism. The consequences of these strategies include increased deficits (again at all levels) and relatively low investment in renewable resources such as education, research and development, preventive healthcare, and alternative energy.

In order to reduce the high costs of an economic paradigm based primarily on financial growth, we need to shift to a new paradigm designed to achieve sustainable development. This entails:

• Reallocating federal spending and redesigning tax incentives to develop renewable resources such as people and alternative energy.
• Stimulating consumer and business spending based more on interest earned from savings than on interest paid for loans. One way to encourage savings is to gradually shift the tax structure toward reducing income taxes — because earned income tends to generate economic value — while increasing sales taxes (with credits for low-income families) — because consumption often destroys value.

This kind of economic stimulus package can reduce the federal deficit in the short term by decreasing mortgage defaults and thereby strengthening the financial industry. The deficit would decline in the long term due to changing policies that reduce lending risk and increase savings, and by the higher tax revenues generated from a more sustainable economy. These strategies for meeting the financial crisis and redesigning how we approach our economy are shown in “Framework for a New Economy.”

Facilitating Continuous Learning

s In addition, there are several other applications of systems principles that can help political and business leaders make wiser decisions about how to respond to the current economic crisis:

• Because most actions have both unintended and intended consequences, decision makers should always ask themselves what might be the accidental impacts of the solutions they propose before acting. Congress attempted to do so in challenging the bailout, but the fear of further immediate financial collapse resulted in Congressional approval without adequate oversight of how the money would actually be spent.
• Since unexpected outcomes are so common, processes for learning and correction should be built into all decisions. For example, since the bailout has done little to restore the economy so far and many people question its underlying rationale, policy makers and analysts should deeply question the reasons for the shortcomings and make adjustments as needed.
• Most actors in a human system unwittingly create or contribute to the very problems they are trying to solve. This means that as part of the learning about the bailout, decision makers must question their own responsibility for the problem rather than blame other stakeholders for what happened.
• Changes in complex systems often require significant time and patience to take hold. Therefore, any short-term learning and correction needs to be carefully judged against a theory of change that explicitly takes time delays into account.

In summary, systems thinking can support decision makers to increase both the short- and long-term effectiveness of their decisions. The current financial crisis offers an opportunity to alter previous policies and transform the way we develop our economy.

David Peter Stroh is a principal with Bridgeway Partners (www.bridgewaypartners.com) and a founding director of Applied Systems Thinking (www.appliedsystemsthinking.com). His areas of expertise—developed over a 30-year career consulting with private, public, and non-profit organizations around the world—include applying systems thinking to facilitate organizational and societal change, visionary planning, and leadership development.

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For three decades, Lester Brown has been dedicated to researching and communicating the major trends in the world’s use of resources, the health of our ecosystems, and the state of our society. His hope has been that by understanding the patterns of behavior of our economic system and its impact on the environment, all of us—individuals, businesses, nations would commit ourselves to halting destructive activities. But despite the many efforts that Brown’s work has inspired, he says they’re not enough.

Linking Economics with Environment

In the long run, if we do not create an economy aligned with the Earth, then we will erode the natural systems on which life depends.

In his latest book, Eco-Economy: Building an Economy for the Earth (Earth Policy Institute, 2001), Brown urges us to recognize that our economy does not function separately from the natural world. While we may be able to ignore the effects of our economic activity on the environment in the short run, in the long run, if we do not create an economy aligned with the Earth, then we will erode the natural systems on which life depends. Brown argues that “the economic policies that have yielded the extraordinary growth in the world economy are the same ones that are destroying its support systems.” He cites statistics that show how worldwide mismanagement has been eroding forests, range lands, fisheries, and croplands ecosystems that provide both raw materials and food.

Brown offers us three challenges: We need to understand how our current economic system and population growth are incompatible with the way that natural systems function; we need to create a positive, hopeful vision of an economy that works in harmony with ecology; and we need to change the structure of our current economic system to fulfill that vision. This last challenge in particular caught our interest as systems thinkers. The central premise of systems thinking is that a system’s underlying structure drives its behavior. As such, before we make changes, we should first understand that structure—that is, look at things such as information flows, rewards, and incentives to understand why people and physical systems act the way they do. Then we need to change the structure in ways that harness the energy of the system to push itself in a needed direction and don’t require constant effort and energy to sustain progress (see “Non-Structural vs. Structural Interventions”).

For our economy to support the natural systems on which all life depends, Brown says we need to create incentives that guide behavior naturally in positive directions. In the first section of Eco-Economy, he concisely summarizes the ecological trends that are motivating the need for change, from global climate instability to regional water-supply issues to species loss. In the next section, he moves quickly from the bad news into an ambitious, inspiring vision for a more sustainable economy. This vision includes a hydrogen-based energy system, a closed material product economy, and a redesign of cities. In the final section, Brown explores ways in which we could rewrite some of the rules of our economy to support the necessary changes.

Harnessing the Power of the Market

Brown’s approach in these last chapters feels refreshingly practical; he describes how various existing public policy tools could harness the power of the market to improve our economy by including both better information and truer costs. The theory is that the market provides a powerful system of product self-selection through supply and demand—in other words, how people spend money is what determines whether products and services are successful or not. So if ecological goals were better incorporated into the market signals (through costs and information), then the market could help nudge the world into alignment with natural systems. Some of his ideas include:

Eco-labeling. Consumers ultimately drive the success of products and businesses. Currently, many commodity products compete primarily on cost, and companies are forced to continually reduce their costs. This emphasis generally takes away from efforts to reduce the impact of products on the environment. Brown believes that when product labels provide information about superior environmental practices, such as farming organically, recycling fibers in paper, and designing for energy efficiency, consumers will reward the companies that are committed to developing more sustainable solutions.

NON-STRUCTURAL VS. STRUCTURALINTERVENTIONS

One of the most interesting contributions of Brown’s book is his focus on changing the structure of the market economy to make it more consistent with the ecological world. As shown in these examples, well-designed structural changes are changes in physical structure, information flows, or rewards and incentives that align the implicit goals of local decision-makers (such as individual consumers or investors) with the desired change in the overall system’s behavior.

Tax shifting. What we tax sends a powerful signal throughout the economy. For example, high taxes on wages limit the number of people we hire and the pay increases we offer. Conversely, low taxes on pollution and resource usage encourage us, as Brown writes, “to exploit our natural resources as rapidly and competitively as possible.” To align taxation with a more robust environment, Brown proposes “tax shifting”—changing not the level but the composition of taxes. To do so, we could decrease taxes on salaries and raise taxes on undesirable things, such as toxic waste and emission. He outlines actions that people in the U. S. can take similar to what many European countries have already done.

Subsidy shifting. Government subsidies also produce economic incentives that damage our ecosystems. Brown quotes a recent report that identified over $700 billion of environmentally destructive subsidies that encourage the overuse of water, fossil fuels, pesticides, and fishery resources. Many of these subsidies initially helped sectors such as farmers and fishing companies that were struggling with high costs, but, eventually, the subsidies led those same sectors to ignore signals of resource scarcity. Brown asks us to see this problem in the positive: What if we subsidized environmentally constructive activities? What would the impact of $700 billion be?

Eco-Economy’s focus on moving from understanding the trends to integrating our economic systems with the ecological world is appealing to systems thinkers—it helps us understand both the physical system at work and the rewards and incentives that encourage our decision making. While no single book can answer the question of what the sustainable economy is, Eco-Economy reminds us that we have practical policy tools that can guide the economy in a better direction and inspires us to try again to do so.

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This whirlwind journey through almost every aspect of existence might seem daunting at first, but Capra’s readable style links complex revelations from the leading edge of science in a clear and comprehensive framework. Capra begins at the beginning, with an examination of the simplest living system—a bacterial cell. Based on new findings, he defines a cell as “a membrane-bounded, self-generating, organizationally closed metabolic network; . . . it is materially and energetically open, using a constant flow of matter and energy to produce, repair and perpetuate itself; . . . it operates far from equilibrium, where new structures and new forms of order may spontaneously emerge, thus leading to development and evolution.”

His underlying premise is that these traits occur in all living systems: “there is a fundamental unity to life . . . different living systems exhibit similar patterns of organization.” For example, the network is one theme that characterizes all life forms. From this perspective, the author surmises, “a human organization will be a living system only if it is organized as a network or contains smaller networks within its boundaries.” These networks, in turn, must be self-generating: “Each communication creates thoughts and meaning, which give rise to further communications. In this way, the entire network generates itself, producing a common context of meaning, shared knowledge, rules of conduct, a boundary, and a collective identity for its members.” Such “communities of practice,” as organizational theorist Etienne Wenger calls such webs, develop within the formal structure. Yet these informal structures are the ones that support learning, creativity, and change.

“Disturbing” Systems

Ensuring an organization’s “aliveness” has profound implications for how managers behave. As Capra puts it, “A machine can be controlled; a living system, according to the systemic understanding of life, can only be disturbed. In other words, organizations cannot be controlled through direct interventions, but they can be influenced by giving impulses rather than instructions.” For people to respond constructively, the “disturbances” must be meaningful to them; that is, employees need to participate in the planning process rather than be put in the role of passive recipients.

Leadership involves finding the right balance between designed structures—which give the organization stability and emergent ones—which represent the organization’s vitality.

Capra also focuses much attention on another characteristic of living systems— “emergence,” that is, novelty that results from periods of instability. He explains how this principle works in an organization: “The event triggering the process of emergence may be an offhand comment, which may not seem important to the person who made it but is meaningful to some people in a community of practice. Because it is meaningful to them, they choose to be disturbed and disseminate the information rapidly through the organization’s networks.” As the information circulates, people build on it, until the organization can no longer integrate the concept into its existing structure. “At this stage, the system may either break down, or it may break through to a new state of order . . .” The resulting leap forward springs from the collective creativity of those in the organization. Capra concludes that “since the process of emergence is thoroughly nonlinear . . . it cannot be fully analyzed with our conventional, linear ways of reasoning, and hence we tend to experience it with a sense of mystery.”

Leadership, then, involves finding the right balance between designed structures—which give the organization stability—and emergent ones which represent the organization’s vitality. By understanding the different stages of emergence, a leader can actively support the process; for instance, by nurturing communication networks, creating a learning culture, being open and honest, and valuing experimentation. At the same time, “leaders who facilitate emergence use their own power to empower others. The result may be an organization in which both power and the potential for leadership are widely distributed.”

Reshaping the Global Economy

The idea of organizations as living systems is far from new. But Capra’s mission in this book extends well beyond simply applying the latest scientific discoveries to the organizational world—he builds a case for reshaping the global economy to better mirror and sustain natural processes. He cites the dire consequences of the current economic system, which he calls “life-destroying” rather than “life-enhancing”: “social disintegration, a breakdown of democracy, more rapid and extensive deterioration of the environment, the spread of new diseases, and increasing poverty.” The author places much of the blame for this state of affairs on “unfettered capitalism” and the principle that “money-making should always be valued higher than democracy, human rights, environmental protection, or any other value.”

But Capra sees signs that grassroots organizations ranging from feminist groups to the ecology movement are beginning to sway our culture in positive directions. In different ways, these forces for change are making our value system more compatible with the demands of human dignity, ecological sustainability, and life itself than it currently it. Capra might argue that this quest is his—and our—biggest challenge of all.

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