DIETER HELM

LEGACY
HOW TO BUILD
THE SUSTAINABLE
ECONOMY

https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press

https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press
 Legacy
What would a sustainable economy look like? What would it take to live
within our environmental means? Legacy answers these questions, setting
out the key features of the sustainable economy. It explains what it would
take to properly maintain different types of capital, why polluters would
have to pay, why the current generation would have to fund the necessary
maintenance of our natural assets and why we would have to save to invest.
The message is a tough one: we are way off course in terms of meeting these
conditions and we cannot escape the consequences. This book explains
what we would have to do to mend our ways. In doing so, it highlights the
feebleness of current approaches to net zero and biodiversity loss as well as
our great neglect of the core infrastructures, and why we are not meeting
our duties to the next generation. This title is Open Access.

Sir Dieter Helm is Professor of Economic Policy at the University of

Oxford and Fellow in Economics at New College, Oxford. From 2012 to
2020, he was Independent Chair of the UK Natural Capital Committee,
providing advice to the government on the sustainable use of natural
capital. He provides extensive expert advice to governments, regulators
and companies across three key areas: Energy & Climate; Regulation,
Utilities & Infrastructure; and Natural Capital & the Environment. Dieter
is a Vice President of the Exmoor Society, a Vice President of Berkshire,
Buckinghamshire and Oxfordshire Wildlife Trust and an Honorary Fellow,
Brasenose College, Oxford.

https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press

https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press
 Legacy
How to Build the Sustainable Economy

Dieter Helm
University of Oxford

https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press

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Names: Helm, Dieter, author.
Title: Legacy : how to build the sustainable economy / Dieter Helm, University of Oxford.
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Identifiers: LCCN 2023028322 | ISBN 9781009449229 (hardback) |
ISBN 9781009449212 (ebook)
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 To Amelia, Jake and Ralph

https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press

 ‘Be realistic, demand the impossible.’

Student slogan in Paris 1968, quoted in Odd Arne Westad,

The Cold War: A World History, London: Allen Lane, p. 379.

‘Two roads diverged in a wood, and I—

I took the one less travelled by,
And that has made all the difference.’

‘The Road Not Taken’ by Robert Lee Frost, 1915

https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press

 CONTENTS

Preface page ix
Acknowledgements xii
List of Abbreviations xv

1 Introduction 1

2 The Next Generation 15

3 Taking Precautions, Building Resilience 34

4 The Capitals 55

5 Sustainable Accounting and the Balance Sheet 73

6 Polluter Pays 93

7 Public Goods and Zero Marginal Costs 114

8 Sustainable Consumption, Deficits and Debt 132

9 Social Justice 155

10 Delivering the System Plans 176

11 A New Constitution 197

12 Conclusions: It Could Go Either Way 218

Websites 228
Bibliography 229
Index 241

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https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press
 PREFACE

In my lifetime, the world’s population has more than doubled,

the climate has warmed and many of the species that were common
when I grew up are now scarce or gone. I have spent much of my career
watching these dark clouds gathering. My previous books – Natural
Capital, Green and Prosperous Land and Net Zero1 – have set out
how to think about these problems through the lens of natural capital.
The future is what we make it. It is open-ended and what I
have tried to do in this book is to set out what that future could look
like if it is to be sustainable, what it would be like if we actually lived
within our environmental means and hence if we chose an optimistic
path and faced up to climate change and biodiversity loss head on.
It would be a brave green world and radically different from the
way we live now. It requires the greatest economic transformation to
our overwhelmingly carbon-based economy in less than three decades,
to get away from the current 80 per cent global reliance on fossil fuels.
We would have to stop burning the rainforests and plundering the
oceans, while decarbonising agriculture, transport, heating and cooling,
and do all this as the population goes on upwards for several decades to
come and people in developing countries aspire to Western standards
of living. Otherwise, our legacy will condemn the next generation to a
poverty of nature, against which their lives will be constrained.

1
D. Helm (2015), Natural Capital: Valuing the Planet, New Haven: Yale University Press;
(2020), Green and Prosperous Land: A Blueprint for Rescuing the British Countryside,
revised edn, London: William Collins; and (2021), Net Zero: How We Stop Causing Cli-
mate Change, revised edn, London: William Collins.

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 x / Preface

The more I thought about the scale of the challenges and our
feeble responses, the more I became disillusioned with conventional
economic answers. The economics toolbox is still remarkably reliant
on the theories developed almost 100 years ago, in the years of high
theory of the 1920s and 1930s, an intellectual world view created by
names still familiar today and who continue to dominate our economic
debates, like John Maynard Keynes and Friedrich von Hayek and oth-
ers perhaps less familiar like John Hicks. Today’s economists and the
textbooks that set out their ideas are heirs to this older tradition. Their
great theories have dominated economic policy debates ever since: in
privatisation, liberalisation and competition; in the debate between
monetarists and Keynesians; and most recently in the responses to the
great financial crash and the shock of Covid.
It is the ghosts of Keynes, Hayek and Hicks that lurk behind
today’s economists’ prescriptions. None had a primary concern with
the environment. Many of their tools break in the hands of the sus-
tainable economy: it is not about marginal changes to discrete bits of
the economy and cost–benefit analysis; it is not primarily about util-
ity, utilitarianism and making people happy; and it is not about maxi-
mising aggregate demand and printing money and creating ever larger
piles of debt. To put my cards on the table, I am not a utilitarian and
I am not a Keynesian. I don’t think maximising utility is all there is
to life. The citizens of my sustainable economy have entitlements and
rights, as well as duties and obligations to others now and to the next
generation. The purely consumerist lens will not suffice, not as cur-
rently promoted by governments, companies and the media.
Whilst I have borrowed the bits that help, like the pricing of
pollution and the provision of public goods, my sustainable economy
is a long way away from the conventional economics, and further still
from the Keynesian macroeconomics which places short-term con-
sumption at the heart of economic policy. Its focus is on the longer
term, on assets, systems, balance sheets and capital maintenance, on
radical uncertainty and citizens and the obligations to the next gen-
eration. My academic colleagues may not like the result, but then the
conventional economic models are helping to send us towards the envi-
ronmental cliff edge. The way out is not to boost retail sales, borrow to
pay for what we cannot otherwise afford, and hope that the spending
will lead to lots of economic growth, just assuming the longer term will
take care of itself.

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 xi / Preface

I struggled with the temptation to make this a very academic

book, to lock horns directly with mainstream economics and its guid-
ing theories. You may feel I have given in too much to the temptation,
but throughout my aim is to take the general reader with me, and to
provide a comprehensive overview of the sustainable economy, rather
than give detailed supporting references for each and every component
part. I plan to turn to the more academic exposition later on.
In writing this, the thought often struck me that maybe I have
been just wasting my time describing what to many must seem a uto-
pian dream. But then the reality struck in a simple one-liner: what is
not sustainable will not be sustained. We are either going to have to
change the fundamentals of our economies and sort out the pollution
we cause and the erosion of the fundamental natural capital, or we will
face the disaster of much more warming and the consequences of los-
ing a lot more of earth’s rich biodiversity. There is simply no escape.
Utopia or dystopia: we can choose which path we want to be on.
It is a good idea to know where you want to get to before set-
ting off. This is my best shot at trying to define this end point, what
the sustainable economy would look like, one where we humans live in
greater harmony with nature, and the battle against nature has ended. I
don’t shy away from how radical this would be. I don’t assume we will
choose to do what is necessary, but if we don’t we should not delude
ourselves about how it will otherwise end.

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 ACKNOWLEDGEMENTS

All ideas are ultimately borrowed from someone else. I have

the great good fortune to spend my career amongst many people much
cleverer than me, and who have shaped and critiqued my arguments.
I started out under Amartya Sen’s supervision, and he got me
to help John Hicks compile his collected papers whilst I was simultane-
ously working on my thesis. For me, Sen’s deep pluralistic and tolerant
version of liberalism based upon justice, in turn grounded in capabilities,
is the best way to think about what we owe to other people, and I have
used some of his ideas to shape how I think about the legacy we should
pass on to the next generation and its citizens. Understandably, despite
lots of attempts to persuade him otherwise, he never really worked out
the implications for the design of welfare states and the broader econ-
omy, and although the environment was important to him, he never
wrote much directly on the issues, to the best of my knowledge.
John Hicks made the great years of high theory in the 1930s
come alive and he helped me to see through much of what became the
Keynesian enthusiasms. He once remarked to me that Keynes was so
busy doing so many things that he never really had time to work out
his ideas properly.
These are the two biggest influences on me from academic
economics and I have borrowed the capabilities approach for my sus-
tainable economy from Sen, and the Labour Standard to develop my
Consumption Standard from Hicks.
Amongst my contemporaries, the two biggest influences on me
have been Colin Mayer, who taught me to take accounts seriously,

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 xiii / Acknowledgements

and Cameron Hepburn, whose constant comments and criticisms have

been an inspiration to me.
During my time as chair of the Natural Capital Committee,
Georgina Mace and Kathy Willis helped me appreciate the science of
biodiversity. Ian Bateman is the stand-out environmental economist,
and discussions with him helped shape my views on cost–benefit analy-
sis. In rejecting much of the sort of economics Ian excels at, I learnt so
much from him.
I am grateful for comments on and conversations about ear-
lier drafts from Joe Grice, Tony Ballance, Chris Bolt, Stephen Glaister,
Edward Barbier, David Vines, Laurence Lustgarten, Iain Smedley, Alex
Teytelboym and Anthony O’Hear.
Academics shape debates, but our environmental problems
will not be solved uniquely in ivory towers like Oxford. I have spent
much time with civil servants across Whitehall and in Brussels, and
with politicians. The latter include outstanding MPs, and a string of
ministers and prime ministers. Though it is fashionable to criticise
them, and indeed criticism is essential to democracy, I have learnt from
them, not least because they have the art of appealing to voters – us.
They, too, are the ones who will need to step up to the plate to avoid
us going over the environmental cliff. Michael Gove was the reforming
Secretary of State for the Environment, Food and Rural Affairs, chal-
lenging vested interests, and the architect of both the UK’s Agriculture
and Environment Acts. Rory Stewart’s short time as Secretary of State
for International Development offered a glimpse of what could have
been done. I learnt a lot from both.
I am grateful to Chris Stark, the outstanding Chief Executive
of the Climate Change Committee for his patient responses to my com-
ments and challenges, Julia King, Mike Thompson, Glenys Stacey and
James Bevan. Thanks, too, to Nick Barter, Julian Harlow and Rebecca
McIlhiney.
Amongst the think-tanks and non-government organisations
(NGOs), I am grateful for continuous engagements with Shaun Spiers
and Richard Benwell.
None of course is responsible for any errors or omissions and
none can be assumed to agree with all or any of my arguments, espe-
cially as this book is so much against the conventional intellectual and
policy currents.

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 xiv / Acknowledgements

Cate Dominian has yet again beavered away at my scribbles

and copyedited it all. Without her skills, support and good humour the
book would never have seen the light of day. Jenny Vaughan has, as
ever, been wonderfully helpful on the administrative side.
Thanks to Philip Good and Chris Harrison at Cambridge Uni-
versity Press for their enthusiastic and professional support.
Thanks finally to New College. The Warden and Fellows of
New College, Oxford have continued to provide the best of all aca-
demic environments within which to write this book. It is the students
and their contemporaries who will determine whether we – and New
College – take the sustainable path.

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 ABBREVIATIONS

AGR advanced gas-cooled reactor

AI artificial intelligence
CCC Climate Change Committee
CCS carbon capture and storage
CEGB Central Electricity Generating Board
COP Conference of the Parties
Covid severe acute respiratory syndrome coronavirus 2
(SARS-CoV-2)
DDT Dichlorodiphenyltrichloroethane
Defra Department for Environment, Food and Rural Affairs
ECB European Central Bank
ESG environmental, social and governance
EU European Union
EU ETS European Union emissions trading scheme
GDP gross domestic product
GMO genetically modified organism
HS2 a planned high-speed rail project for England
IAM integrated assessment model
IEA International Energy Agency
MMT Modern Monetary Theory
mRNA messenger ribonucleic acid
NGO non-governmental organisation
NHS National Health Service (UK)
OPEC Organization of the Petroleum Exporting Countries
ppm parts per million

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 xvi / List of Abbreviations

QE quantitative easing
R&D research and development
RAB regulatory asset base
UN United Nations
UNFCC United Nations Framework Convention on Climate
Change
USO universal service obligation
VAT value-added tax

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 1 INTRODUCTION

It can’t go on like this. The concentration of carbon in the

atmosphere is marching on relentlessly, adding two parts per million
(ppm) every year since 1990, remarkably even during the lockdowns in
the pandemic years. Coal, oil and gas still make up 80 per cent of the
world’s energy, the same as they did back in 1970. Global temperatures
are already up over 1˚C; 1.5˚C will probably be crossed at some stage
in this decade, and the pathway points towards at least 3˚C. No serious
progress on climate change has been made despite thirty years of trying.
The story on biodiversity is more complex, but every bit as
bad. The rainforests are diminishing and, in some cases, burning. Parts
of the Amazon are now net emitters of carbon. The oceans are more
acidic, the great rivers polluted and there has already been an insect
Armageddon. On current trends, one of the great extinction events of
geological history is well under way.
These are the facts, neither optimistic nor pessimistic. They are
the result of the great economic expansion mainly since 1900. Fossil
fuels made it possible to feed a global population that increased from 2
billion to now 8 billion. This expansion made us all consumers, and we
all bought into and became dependent upon a continuous increase in
gross domestic product (GDP). The diesel and petrol engines replaced
horses, sail and even steam engines. Tractors, and fertilisers, produced
by the Haber Bosch process, transformed agriculture. Plastics have
become ubiquitous. Cars became a part of everyday life and flying

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 2 / Legacy: How to Build the Sustainable Economy

around the globe reached the masses in developed countries. Electric-

ity, generated mainly by coal, transformed both industry and domestic
life, and gas heated homes. At the end of the twentieth century, the
energy-intensive internet, smartphones and laptops began to usher in a
whole new way of working, aided by robots, and genetics have already
yielded the ability to manipulate the very stuff of life.
Most of human economic consumption (and most pollution)
has happened since 1900, and most people have lived since then too.
For thousands of years, the human population was small and vulner-
able to famines and plagues, and economic growth barely existed until
the eighteenth and nineteenth centuries. Life was short, nasty and brut-
ish for too many people who lived before 1900. Nature kept popula-
tions in check.
All of this great fossil-fuel-driven economic growth has yielded
great benefits: longer healthy lives, better food, better housing and, in
the developed countries, a standard of living unimaginable for all but
the very rich in previous centuries.
Not everyone of course has benefited: the two world wars left
millions dead, and murderous regimes like Mao’s China and Pol Pot’s
Cambodia killed lots of their own people. Poorer countries suffered
from the legacy of colonialism, and there were terrible famines, like
that in Darfur in the mid-1980s, yet by the end of the twentieth century
poverty was in general retreat. A global Malthusian nightmare of mass
starvation was avoided, as food production kept pace with population
growth. Eight billion are better fed in 2020 than the two billion were
in 1900.
This extraordinary transformation in both population and
economic prosperity is now largely taken for granted. There is a lot
to like about this. Extending further the great twentieth-century ben-
efits to the fast-rising populations in Africa, India and to those caught
in the middle incomes of China, the Middle East and much of Latin
America is an obvious and understandable aspiration. By 2050, Nige-
ria’s population alone will have doubled and probably be larger than
that of either Europe or the US. Why shouldn’t Nigeria’s prospective
half a billion people live like those in the developed countries do now?
The promise of the endless progress often seemed too good to
be true, and scratch below the surface of the consumer nirvana it has
created, and which we continue to vote for, and doubts emerge. Are
we all really so much better off? The inconvenient truth, the first of

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 3 / Introduction

many, is that all of this has come at a terrible price to the environment.
Those green facts will not go away. The twentieth century was one that
pushed nature back hard. Chemicals killed the pests and diseases, and
in the process destroyed much of the insect life. Rivers and lakes have
been grossly polluted. Rainforests retreated. Biodiversity declined.
Extinctions mounted. The twentieth century was a great boom for us
as consumers, but it also created the prospect of an unfolding envi-
ronmental disaster. It had costs, and we are now beginning to face its
environmental price.
It is now pretty clear to everyone that the current pathway
is not sustainable. What follows, if this is true, is that it will not be
sustained. It can’t go on and it won’t go on. There will be an environ-
mental reckoning, and it has already begun to materialise, whether or
not there are dramatic tipping points to come. The twenty-first cen-
tury might have inherited all the technology and wealth built in the
twentieth century, but it has also inherited all the environmental con-
sequences too, neatly summarised in the facts of climate change and
biodiversity loss.
We face a stark choice. We can either act now and head off
further damage, or we can live with the consequences as and when our
economic way of life is no longer sustained. The former opens up the
possibility of transforming our economy into the sustainable one now,
by tackling our problems head on. It is an exciting prospect for human-
ity. The latter takes us over the cliff like the lemmings, with all the suf-
fering and damage that might bring. Billionaires might fantasise about
moving to another planet, or at least retreating to a special bubble for
the very rich to enjoy whilst the rest of humanity struggles to cope. For
the rest of us (and for them too), there is no Planet B.
This book sets out the main building blocks of the sustainable
economy – what the economy would look like if we lived within our
environmental means. It answers the question: how could we get onto
the sustainable path when the general population is more concerned
with getting from today to tomorrow, affording what are now seen
as necessities and doing as much consuming as possible? Unwilling to
face up to the costs of Covid and its lockdowns and furlough schemes;
unwilling to pay the higher costs of energy? Most of the world aspires to
live like Americans and Europeans (or at least the better-off ones). Peo-
ple in developing countries want to eat more meat, drive their own cars
and have broadband, clean water and air ­conditioning. The ­Americans

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 4 / Legacy: How to Build the Sustainable Economy

and the Europeans do not want to sacrifice their consumption to help

the developing world. On the contrary, they want more. Transfers of
money are pathetically small, and even these are widely resented.
Turning around climate change, getting out of that 80 per
cent dependency on fossil fuels, is a very big ask. Doing it in just over
twenty-five years, by 2050, is a transformation without precedent in
economic history. Halting the destruction of biodiversity is, if any-
thing, an even bigger challenge, especially given where the biodiversity
that is left actually is – in Brazil, the Democratic Republic of Congo,
the countries along the Mekong and the great free-for-all vastness of
the oceans. It is not hard to look at the lives of ourselves and those
around us and realise that we can’t go on like this, even with lots of
new technologies, consuming ever more of the one planet we have.
Reorientating our economic approach to life does not mean
that consumption is unimportant, that it does not matter whether we
can meet our needs and that we cannot have more economic growth.
That is the mistake many environmentalists make. They say that eco-
nomic growth caused our problems, and we therefore should move to
a no-growth economy to make things better. It can easily lead to a kind
of arcadian nostalgia, a desire for the simpler life, forgetting many of
the hardships that went with it, and especially for the poor.
There is something to be said in favour of this kind of low-
impact, off-grid lifestyle, but what it neglects is the great human capac-
ity for ideas and the creation of new technologies. It is these that enable
each generation to build on the shoulders of the knowledge created
by the previous generations. It allows us to decode the genetics of the
coronavirus and develop a vaccine in a matter of days, and head off a
repeat of the tragedy that the Spanish Flu caused towards the end of
the First World War. It allows the internet to deliver to us huge access
to knowledge, information and social contacts that could feature only
in science fiction just a few decades ago. It gives us the science to be
able to understand the causes of climate change and how ecosystems
work. Human progress is not an evil to be stopped in its tracks. Sus-
tainable economic growth will enable future people to be better off, in
the sense of having better assets, more knowledge and in the process a
better understanding of how to manage and sustain our world. But it
must be sustainable, a genuine enlightenment.
To this must be added an element of humility. Instead of fore-
casting the future and tweaking the economic interventions to keep

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 5 / Introduction

the economy on its maximum growth pathway, it would be better to

admit, despite the great scientific advances, just how ignorant about
the future we (and especially economists) still are. Instead of trying to
make people, especially future people, happy, we should try to achieve
a humbler objective: to ensure that we pass on to them a set of assets at
least as good as we inherited, so they can choose how to live their lives
armed with the wherewithal to do so.
The fundamental building block of the sustainable economy is
us, as citizens, as members of a society with rights and obligations to
each other, and who must cooperate together for the economy to work
and for our lives to be fulfilled. We are entitled to inherit from the last
generation a habitable world, and we are obliged not to make it worse
for those who follow us. That is the overarching principle of the sus-
tainable economy, to which other secondary principles (the ‘polluter-
pays’ and the ‘precautionary’ principles) are added.
For us as citizens to participate in society and the economy,
we need a stable climate, a thriving biodiversity and infrastructure net-
works. We need the knowledge embedded in ideas, science and tech-
nologies. We need to have access to health services, education, and we
increasingly need a broadband connection, as well as affordable access
to clean water, sewerage and rubbish disposal, reliable electricity avail-
able on demand, and roads and railways and airports. Take away any
one of these and the citizens are vulnerable to being excluded from
society and the economy.
All of the above come in systems – the natural, physical, human
and social capitals. All comprise assets. They are the more important
primary assets. Of these, the natural assets, what nature gives us for
free and what makes life on this planet the wonderful cornucopia of
opportunities that these provide, are the most important. Without
natural capital, nothing else is possible. These natural assets come in
two sorts: non-renewable and renewable natural capital. Our modern
economy is based upon the non-renewables – things like oil, coal, gas
and iron ore – and increasingly on nickel, lithium, cobalt and cop-
per (used for wind and solar generators and in batteries for electric
vehicles). These are all extracted from the earth’s crust. Once burnt
or refined or purified, they provide energy and materials that literally
build our world. There is a good reason why the last 200 years have
seen the world population go from less than 2 billion to 8 billion. It is
called coal and oil and iron ore and the other core minerals.

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 6 / Legacy: How to Build the Sustainable Economy

We overwhelmingly depend on these non-renewable natural

capital assets. We always will. Our generation is extracting and, in the
case of fossil fuels, burning them without much regard to what will be
left for future generations, and without any serious regard for the pollu-
tion that is a by-product of their use. Few realise that the new low-carbon
technologies will take mining onto a whole new and vast industrial scale.
In the sustainable economy, we can go on using up these non-
renewable natural capitals, provided we compensate the next genera-
tion for the fact that we have had the benefits that they cannot have
(because these capitals have been used up) and we deal with the pollu-
tion their extraction, refining and use cause. The fact that we are a very
long way from meeting these conditions does not mean they cannot be
met. We could have national sovereign wealth funds to provide com-
pensation to the next generation, and we could deal with the pollution.
But mostly we do not, and that means that we need to change our
unsustainable ways quickly. Turning from oil, gas and coal to cobalt,
lithium, nickel and copper is not an escape from these responsibilities,
but so far there is no evidence that we are compensating future genera-
tions for their depletion or dealing with the major pollution caused by
mining for these ‘low-carbon’ minerals.
Renewable natural capital is even more important. It is alive,
the stuff that nature will keep on giving us for free as long as we do not
deplete it so that it can no longer reproduce itself. Think of the cod and
herring swimming around in the North Sea, the Atlantic and beyond.
We have been eating them for millennia. In the sustainable economy,
the catch is capped so that the fish stocks remain at a healthy margin
above the thresholds that would tip them over into the non-renewable
category, even to extinction.
Behave selfishly, campaign for bigger and bigger fish quotas,
and deplete the stocks too far, and then it is not just that there will
soon not be any fish and chips, and kippers, but all future people also
will not have these. The value of renewable natural capital is open-
ended. People in 100,000 years’ time could enjoy cod and herring, pro-
vided we treat these fish as assets-in-perpetuity and refrain from the
sorts of reckless and destructive practices that are prevalent in modern
fishing. Mega industrial trawlers now extend the destruction to deeper
waters, stripping out fish stock wherever they still remain.
This open-ended value adds one further dimension to the sus-
tainable economy. Nature does not come in discrete bits and discrete

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 7 / Introduction

species. Everything in nature depends upon everything else. Unlike the

claims of conventional economic theories, based upon discrete and
atomistic consumers (‘agents’ in the economic literature), and discrete
bits of capital which can be substituted at the margin for each other,
the great renewable natural capital systems of the rainforests, the soils
(with much more carbon than the atmosphere), the river catchments
and the oceans are integrated ecosystems. They cannot be substituted
for anything else.
The sustainable economy is starkly different from that of con-
ventional economics, whose views we are exposed to every day, from
the politicians and industrialists who are what Keynes called the ‘slaves
of defunct economists’. The primary assets, with the exception of the
non-renewable natural capital, are all assets-in-perpetuity. They need
to be maintained and, in many cases, not only be restored but also
enhanced for us and the next generation to thrive. They are the essen-
tial building blocks of the sustainable economy and the state they are
in is what politicians and the public should all be talking about, and
what we should be worrying about.
With these assets in good shape, citizens are able to choose
how to live their lives because the systems give them the capabilities
to do so. Future citizens are enabled to be free to choose. To make
these choices, citizens need these assets-in-perpetuity. They cannot do
without them.
Basing the sustainable economy on citizens opens up a very
different vista. Instead of GDP and the cash-based national accounts
which tell us very little about the underlying state of the primary assets,
the sustainable economy needs very different accounts. Accounts
should answer the question as to whether the economy is on a sustain-
able path, and whether current consumption is consistent with leaving
the next generation with a set of assets at least as good as those we
inherited. GDP won’t tell you this. Conventional economists look at
the flows of goods and services, the flows of expenditures and the flows
of incomes. The sustainable economy starts with the balance sheet of
the assets and asks how well the stocks of these assets are being stew-
arded. In the example above, it is about the stocks of fish, not just how
many we are catching. The former can be declining while the catches
are going up, increasing GDP.
These accounts are anything but boring. Accounts shine a
torch on what is going on. There should be a continuous updating on

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 8 / Legacy: How to Build the Sustainable Economy

the state of the primary building blocks of the economy, an exercise

that is more like William the Conqueror’s Domesday Book than esti-
mating GDP. Accounts should tell us every year how well we are doing
in sustaining the primary assets. The balance sheet should be net of
maintaining the assets, of any spending necessary to fix damage to the
climate, to biodiversity, to the energy systems and to other core utility
system networks in perpetuity. These costs of maintenance should be a
charge to the nation’s current account, analogous to a business’s profit
and loss account.
What might look like an arcane accounting detail has really
radical implications in the sustainable economy. What is left for us to
spend now is net of having first made good any damage we have done.
If you own a house and have neglected to fix a hole in the roof, you
will not pretend that you are better off and can spend more because
the money has not been spent on fixing the roof. On the contrary,
your house would be worth less; you would in effect be eating up your
capital, mortgaging the future for the benefit of your spending today.
Try constructing your own household balance sheet and see how few
assets you have to fall back on. That is what we have been doing at the
national and global scale in not paying for the capital maintenance. We
have not been maintaining our personal or our national capital.
Proper accounts for the sustainable economy result in a very
different set of national budgets. Imagine if finance ministers presented
sustainable accounts. These would show the state of the primary assets,
and would include an item on the current account subtracting the mon-
ies needed to properly maintain the value of the assets on the balance
sheet. The amount of capital maintenance required for the hospitals,
schools, railways, energy systems, water and broadband to prevent any
deterioration would be subtracted, as would the more general cost of
the environmental damage to natural capital. What is left would be a
lot less for governments and us to spend. It would be a sobering colli-
sion with reality.
The sustainable economy treats debt very differently. Across
most developed countries, finance ministers are borrowing to pay for
both current spending and for capital maintenance (where it is being
done at all). In the sustainable economy, the purpose of debt is to
finance new enhancements after the existing assets have been properly
maintained. The next generation gets the debts and the new additional
assets to match, so they are at least as well off. At present, they get

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 9 / Introduction

both debts and the degraded assets. All of the above is also true for
you and me. Borrowing to spend, armed with credit, is a dangerous
path to follow.
The next generation is properly respected in the sustainable
economy, and the accounts tell us whether we are making sure that
they will have the assets that provide the capabilities for them to choose
how to live their lives. They keep us honest. The enhancements they
get, which will include a significant amount of new knowledge, ideas
and technologies, increase their opportunities, and they incentivise us
to look to increase these because they pay for these if they are genuine
enhancements. We borrow from them, and they get to repay the debt.
This is why economic growth in the sustainable economy is possible.
The accounts tell us if we are over-consuming and messing up their
inheritance.
The investments in enhancements need savings to back the
debts. Savings must equal investment. Saving is forgone consump-
tion. The sustainable macroeconomic economy sets up the framework
within which this is facilitated. A glance at where we are now tells us
we are a very long way from this pathway. Interest rates have stayed
well below inflation for the last quarter of a century, incentivising
spending and borrowing and disincentivising savings and investment.
It is no accident that productivity growth rates are widely exception-
ally low and, in the absence of the incentives to save, the debt has had
to be partly monetarised through quantitative easing (QE). It is not
accidental that printing money has led to inflation and it is no accident
that it has resulted in greater inequality. None of this is consistent with
the sustainable economy.
It would be painful to get onto the sustainable macroeconomic
path. We would have to pay for the capital maintenance, and we would
have to save for the investment. Together, these are two big whammies
to our current consumption, and together illustrate how far we are liv-
ing beyond our sustainable means.
There is one more hit our consumption has to take to get onto
the sustainable path. An obvious requirement is that pollution is inter-
nalised in the economy by making polluters pay. Following the polluter-
pays principle would be another very radical departure from the status
quo. Today’s pollution is typically paid for by the polluted, who get
the costs in terms of dirty air, poor-quality rivers and pesticides in their
food. They are often the poor. In almost all major economies, farmers

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 10 / Legacy: How to Build the Sustainable Economy

are subsidised to pollute, and expect to get subsidised fuel, and even
subsidies to own land. The ‘ask’ of government by farming lobbyists is
that farmers should be paid to provide public goods, paid to husband
the carbon in the soil, paid to reduce nitrate run-offs and even paid to
store water for irrigation. In effect, farmers claim the right to pollute,
and if they are to take the environment into account, they want to be
paid to do so. The fishing industry looks to be compensated for any
loss of fishing grounds. At the global scale, Brazil expects to be paid
not to cut down more of the Amazon rainforest.
This is all the wrong way around. If polluters pay, the relative
prices of polluting goods and services go up, and those of the less-
polluting ones go down. The price of fossil fuels goes up, as does the
price of beef raised on cleared Amazonian forests and the price of palm
oil from the cleared South East Asian rainforests. The price of local
food becomes relatively cheaper than the price of food flown around
the world, as the transport costs to the environment are added in.
Why then don’t we make polluters pay and internalise these
costs, and thereby make the economy more efficient? The answer
reveals yet another inconvenient truth: the ultimate polluters are you
and me. Companies do not produce stuff for the fun of it: they do it
for profit, and profits come from selling stuff we demand. Whilst it is
convenient to pretend that it is all the fault of dirty businesses and for
activists to glue themselves to the doors of big (Western) companies
and the banks that finance them, it is best to bear in mind that these
businesses are selling petrol and diesel to us, and the petrochemicals
industry is making the plastics and synthetic materials for the clothes
and shoes we buy. The act of buying this stuff is the act of causing the
pollution that its production entails. All that 80 per cent fossil fuels is
for you and me.
With this further inconvenient truth in mind, it is hardly sur-
prising that voters resist carbon taxes and increases in fuel and avia-
tion taxes, wanting to have all this stuff but not wanting to pay its full
costs. Yet by sidestepping our responsibilities as citizens, the pollution
costs do not go away. Worse, whilst demanding that companies clean
up their acts, we do nothing much to curtail our own polluting habits.
This is where it gets personal. To see how this would work for
you, try drawing up a diary of your daily spending and divide it up
according to your best guess of its environmental impacts. To get to
the sustainable economy, now try rewriting it excluding the polluting

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 11 / Introduction

stuff: the petrol, diesel, heating gas and oil, the palm oil, the plastics
and the cardboard, and the non-renewable energy used for all the IT
gadgets. If you use cryptocurrencies, try to work out how incredibly
harmful they can be.
What the polluter-pays principle does is to go behind that
spending and helps to change it. It puts us as citizens at the heart of the
economy and at the heart of addressing climate change and biodiver-
sity loss. That beef from Brazil, that palm oil from Malaysia, all that
polluting stuff would now cost us more, and in some cases a lot more.
We might not completely stop buying the polluting stuff, but we would
use a lot less of it.
The inconvenience of us being the polluters goes deeper. It
means that, because we are not paying the full costs of the stuff we
consume, we are all living beyond our sustainable means. It means
sustainable consumption will have to be lower, even if it can rise over
time as sustainable economic growth builds on the basis of new ideas
and technologies. We can get better off, but only from a lower sus-
tainable level, one that internalises all those pollution costs in your
diary.
This gives us the three big adjustments to our consumption:
deducting the costs of capital maintenance so we are not consuming
our primary capital assets; setting aside savings to fund investment;
and paying for the pollution we cause.
Together, these require a very significant adjustment, and the
burden would be most acutely felt by the less well-off. That means that
social justice has to play a big part in the transition to the sustainable
economy. Making sure that future generations have general access to
the core systems, to health and education, to the body of knowledge
and ideas, and to the natural environmental systems will not be enough
to ensure that everyone has sufficient capability to choose how to live
their lives. They will need enough income to spend on private goods
and services, a problem that the switch from an unsustainable to a
sustainable consumption path will exacerbate, given the scale of the
claims already on current consumption, and the fact that pollution will
be priced into the shopping basket. The sustainable economy embeds
social justice within it, and social justice will be essential to the transi-
tion from here to there.
The way this is usually dealt with is through social security
systems, funded by taxation. There are means-tested benefits for the

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 12 / Legacy: How to Build the Sustainable Economy

poor and progressive taxes on the rich. But there are several obvi-
ous and well-known problems with these conventional approaches to
social justice. They can undermine the incentives to work, inhibit con-
tributions to the sustainable economy and lead to unemployment, and,
despite the costs, still leave a lot of people in poverty.
The alternative is to break the link between wages and benefits.
Flexible wages give people the incentive to work at whatever wage
rates clear the market. Universal basic income is an idea that seeks to
make this break. It does this by giving all citizens a sufficient income
and therefore eliminates poverty. In the sustainable economy, this
would be on top of the access to the core system assets, and together
these would deliver social justice, so that all citizens have the capabili-
ties to participate in society.
The obvious problem is that it would be (very) expensive.
Eliminating poverty is never going to be cheap. Yet this, too, can be
addressed pragmatically. It can have a high cut-off point, to exclude
the better-off to whom the basic income will not make any difference
to their choices. It becomes a universal safety net for the least well-off.
A second constraint can be created by tying the level of basic income to
the performance of the economy as a whole. The basic income could be
a dividend on the national balance sheet, and so add a second advan-
tage. Citizens would now have a direct stake in the economy, and the
basic income has to carry only the costs that the economy can bear as
a result of its productivity performance over time. A national fund,
backed by the national balance sheet, provides a means to the end of
the relief of poverty, and it does so in a way that leaves the economy
on a sustainable path. Most or all get a pay-out from the fund, and the
pay-out is only what can be afforded without jeopardising the pros-
pects of the next generation.
The sustainable economy now has its core assets and these are
properly maintained. It has enhancements that are paid for by borrow-
ing, and savings equal investment. Polluters pay, so that the economy is
efficient because all the costs are internalised. Social justice is achieved
by providing both the assets and a modified form of universal basic
income based on a national dividend.
That leaves regulatory structures and the constitution. The
institutions of the sustainable economy will need to be underpinned by
a systems regulatory framework and by a constitution that embeds the
principle to leave the assets in at least as good condition for the next

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 13 / Introduction

generation and embeds the rights and duties of current and future citi-
zens. The tyranny of the current majority needs to be limited by giving
the interests of the next generation constitutional protection.
You might by now be thinking that whilst it may be interesting
to know what the sustainable economy would look like, and how big
a departure from the status quo it might be, its uncomfortable impli-
cations are going to deter anyone from seriously following its design.
That may well be the sad fact about our politics and our generational
selfishness. It might even be a true representation of human nature.
But, in thinking this, the conclusion that follows cannot be escaped,
and cannot be repeated too often. If you recognise that the current
way of doing things is unsustainable, then you also have to accept the
conclusion that follows: it will not be sustained.
The consequences of global warming do not go away because
we refuse to address its fundamental causes. Our current path leads to
nasty carbon and biodiversity crunches. The difference between now
and earlier generations is that these crunches are getting closer, and we
know it. It is within this century that quite a lot of the consequences will
be felt, within the lives of our children and grandchildren. It is getting
ominously close. This might not be ‘our last century’ as some alarm-
ists have predicted, but there is nothing inevitable about the human
species escaping the extinction that has already hit 98 per cent of the
species that have ever lived. The rules of the sustainable economy tell
us what we need to do. We can do it now and head off the worst of
what is coming because of the actions of our selfish generation; or we
can be forced onto the sustainable economy path later. A key differ-
ence is that the latter is almost certainly going to be a lot more painful
than the former. Nature, of course, doesn’t care one way or the other.
Unsustainability has to end. How it ends remains to be seen.
Which brings us to the upside of the sustainable economy. It is
not all doom and gloom, and reduced standards of living. In the sustain-
able economy, we probably will ultimately end up better off because
the things that are valuable get valued. Better-quality air, better-quality
water, better-quality seas, less global warming and more biodiversity
are all really quite nice. Much of what we buy is not necessarily what
we might really want if we thought about what it is doing to us. Do we
really want to be obese, have less healthy lives and a painful old age?
Do we really need to go to packed beaches strewn with litter through
ever-more-crowded airports? And do we really need all the stuff the

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 14 / Legacy: How to Build the Sustainable Economy

advertisers get ever better at targeting to us? Being sustainable can be

quite liberating.
The point about our environmental crises is that we are all in
this together. Just tackling climate change will require an economic
transformation on a scale never seen in economic history, from an
overwhelmingly fossil-fuel-based economy to one that is very different,
within the space of a couple of decades or so. Rising to this challenge
will be bracing, but it will also be exciting and packed with new ideas
and technologies, and could bring with it the sort of social cohesions
that past threats such as wars have brought. Keynes, writing in 1940
about How to Pay for War, proposed a switch from consumption to
investment for the war effort. We need a switch from consumption to
investing for our natural environment on a similar scale now. It was
done then, and it can be done now.

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 2 THE NEXT GENERATION

Sustainability is all about the future, and the sustainable

economy is one that has a future. It is about stewardship, about
­
­making sure we do not make such a mess of our planet that the next
generation’s possibilities are curtailed. How we think about the future,
and in particular the next generation, is the first building block of the
sustainable economy.
I recently gave a lecture to a large international group of stu-
dents finishing their school education, in which I set out some of the
environmental challenges they will face. Aged 15–18, these students
are the next generation who are coming of age. A few of them will
make it to 2100. It occurred to me that it was like presenting to people
born in the years immediately after the First World War and wonder-
ing what their world in 2020 would be like.
By 2050, this next generation will be in their mid-30s, many
with children of their own and already connected to the generation
after themselves. By 2075, they will be contemplating retirement. They
are the people we need to look in the eye and account for our steward-
ship – or lack of it – as we pass the baton on to them. And throughout
this chapter, it is this audience who are what the arguments are all
about.
If we are going to honour the current generation’s ­obligations to
them, we need to ask what their world will look like at these ­milestone
dates – how hot the climate is likely to be; how much biodiversity

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 16 / Legacy: How to Build the Sustainable Economy

might remain; what science they may have; and what technologies
might be available to them – from the baseline we are leaving behind.
The next generation will have its own legacy to pass on to the
generation that comes afterwards. What matters is that we leave an
inhabitable planet, and a robust legacy of assets. We should leave them
our houses, our infrastructures, our knowledge and ideas, our institu-
tions and an environment in a fit state, and only so much debt as to be
covered by new assets that we have created for them.
What matters is not about making sure they are happy and
have lots and lots of utility, and a higher GDP as environmental
economists would have us concentrate on. It is about equipping them
for their open-ended future, and not mucking up the planet so badly
that they lack the basics of an equitable and stable climate and lots
of biodiversity, and the core infrastructures and knowledge. We need
to treat them as new citizens and not just as the economists’ future
utility-​maximising machines. Whether, armed with these assets, they
are happy or sad is not our business, unless that sadness comes from
the depleted set of opportunities they confront.

Saints and Sinners

This is what we owe them, and is as far as we can reasonably be
expected to go. It is also what we are failing to achieve. The next gen-
eration, those people already with us, is as far as our altruism should
stretch. To see why this is the realistic limit of our concerns, rather
than all future peoples, ask yourself: how much do you really care
about the future compared with getting through today? Take a look at
what you’re going to spend on today. How far have you really thought
through whether your choices seriously take much account of the
imprint they will make on the next and future generations? You might
try to do some recycling, buy less plastic-wrapped stuff and eat less
meat, but few really think through the carbon embedded in their daily
routines. The finger points to all those foreign holidays, fast fashions
and fast foods.
Even if we do care a bit, carrying on as ‘normal’ remains the
default mode of our consumption. Amongst those who claim to be
environmentalists, the majority fly just as much as the rest of us, some-
times more so. When I was recently asked to fly to Bali to speak at a
conference on climate change, the organisers did not see the irony.

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 17 / The Next Generation

(I did not go.) Ask the many children who joined in the Extinction
Rebellion demonstrations what their holiday plans are and what
clothes and fashions they follow, and the answers are ‘normal’ too.
This is not meant as a personal criticism (though it is good to keep a
record of one’s own carbon footprint), but rather to provide an insight
into what constitutes the context for designing policies to better meet
our obligations. Assuming a world of environmental saints is not going
to get us sinners to take the practical and realist steps necessary to pro-
vide a decent legacy to the next generation.
This dose of realism stands in stark and remarkable contrast to
what some economists and philosophers claim – that there is no obvi-
ous reason to discriminate against people on the basis of when they
live – and the conclusions they then draw. Since nobody decides when
their lives are to be lived, it is argued that there is no good reason to
discriminate against those who will live in the future. The policy they
recommend is that we should be purely impartial, and forever.
Rather than look at human nature as it is and stretch out our
concerns to just the next generation, leading thinkers like Nick Stern
(on climate change) and Partha Dasgupta (on biodiversity) would have
us follow this impartiality principle.1 We should not focus more on
the needs of those living now and less on those in the future. All are
counted as one – now, tomorrow, in 2100 and in 10,000 years’ time.
We should be altruistic impartial saints. But we obviously do. We vio-
late this time-invariant impartiality principle all the time. It is basic to
our existence. Your spending probably illustrates this, and your carbon
and environmental diaries would spell this out. A possible reward in
the future is worth less than money in your pocket now. All of us do
this discounting of the future, ranking current consumption as more
important than postponed consumption, preferring instant gratifica-
tion to the possibility of our own future happiness, let alone that of
other people. This is not a sin, but rather a fact of our human nature.
Short-termism myopia is not without merit on an individual
basis. It is quite rational. Taking that holiday now rather than when
you are older and possibly dead makes a lot of sense. Better spend it
now than regret it later, or no longer have the opportunity to do so
at all. Many of our major personal decisions are complicated by not
1
See N. Stern (2007), The Economics of Climate Change: The Stern Review, HM Treasury,
Cambridge: Cambridge University Press; and P. Dasgupta (2021), ‘Final Report – The
Economics of Biodiversity: The Dasgupta Review’, 2 February.

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 18 / Legacy: How to Build the Sustainable Economy

knowing when we will die and not knowing how long our health will
hold up. Savings for pensions and putting aside something for a rainy
day postpone consumption. Take a look at your bank statements, and
the trade-offs you have made. How precautionary are you when it
comes to pensions, health risks and possible future rainy days?
For most of human history this myopia has been a pretty suc-
cessful strategy. The battle against nature, the battle for resources and
consumption now, has confronted a forgiving natural world, rich in
the cornucopia of the natural capital we have inherited. The battle
against nature has been pretty successful so far, but no longer. The
problem with building the sustainable economy on our own myopia,
our discounting the future to prioritise the present, is that it might (and
probably will) lead to environmental disaster. The interests of society
are not the same as the sum of the interests of the individuals who
make it up. It is not at all clear why society as a whole should follow
our individual myopic paths. Instead, rules are needed to keep us on
the straight and narrow.

Climate Change and Nuclear Power

To see why myopia is no longer going to work, take a very practical
question: is tackling future climate change a good economic investment
to make now from the perspective of our own personal interests? For
many people the answer is ‘yes’ if it does not cost them much (demon-
strating a bit of altruism), and ‘no’ if it does require them to pay a bit
more now for their energy. That is what opinion polls indicate: most
people say they think climate change is very important, but very few
are prepared to sacrifice income now to address it.2
The ramp-up of oil and gas prices in 2022 led politicians in
the US, the European Union (EU), China and India to roll back on
measures to phase out fossil fuels. Joe Biden reverted to encouraging
onshore and offshore US oil and gas production, Germany turned back
to coal and nuclear, China and India both turbocharged coal, and the
UK opened up drilling licences for North Sea oil and gas and even tried
(and failed) to lift the ban on onshore fracking. Many countries cut
fossil-fuel energy taxes and moved to subsidies of energy bills (funded
2
See, for example, YouGov polling which asks what steps people are prepared to take.
Note that none of these has an explicit cost attached to it: https://docs.cdn.yougov.com/
hdemoi825d/Internal_ClimateChangeTracker_220720_GB_W.pdf.

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 19 / The Next Generation

by borrowing) on a scale that puts it into the category of the Covid

interventions. As soon as the costs showed up on consumers’ bills, the
climate change measures took a back seat. At the first whiff of gunfire
in Ukraine, net zero policies went into retreat.3
This is what discounting the future looks like in action. In
2022, US President Biden, German Chancellor Olaf Scholtz, Chinese
President Xi Jinping and the then UK Prime Minsters Boris Johnson
and Liz Truss all prioritised the present over the future. Burning coal
now was prioritised over the consequences of the emissions to the cli-
mate later on.
A more sophisticated argument for acting on climate change is
frequently advanced: that although there will be costs to decarbonisa-
tion now, these will be smaller than the costs of global warming that
would be avoided. In other words, it is a good economic investment to
head off something worse.
The obvious problem with this argument is that your actions
(incurring the costs now) will have very little impact on global warm-
ing if others do not follow (and they are mostly not), with the result
that you will pay both for the costs of mitigation and the costs of
global warming. More importantly, the costs are very much now,
whereas any benefits (if they materialise) are mainly later, accruing to
the next generation. And this is regardless of whatever spin is made on
every negative weather event being declared evidence of climate change
now, without the balancing offset of the benefits now of warmer win-
ters, long growing seasons and new ice-free sea lanes in areas of the
world where most of the wealth (and quite a lot of the warming) is
concentrated.
This climate change example illustrates why the question of
whether to discount the future is anything but arcane and academic.
It goes to the very heart of how to shape economic policies – with
costs now to head off the damage (and hence costs) later on. Even at
a very low positive discount rate, things that happen later this century
to those students attending my recent lecture have little significance to
decisions made now.
Let’s illustrate this discounting issue with a much simpler
example than the big picture of climate change. Consider nuclear

3
See D. Helm (2022), ‘The Retreat from Net Zero’, 4 July, www.dieterhelm.co.uk/energy/
climate-change/the-retreat-from-net-zero/.

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power, one of the ‘answers’ to climate change that some advance. A

new nuclear power station may take around a decade to build (most
recent ones take longer). Once built it should run for say sixty years.
All the while it produces nuclear waste in the form of spent fuel, and
at the end of the sixty years there are a lot more radioactive materials
to be dealt with as the power station is decommissioned. The costs
of nuclear waste are large, but this is where discounting magics them
away. Assuming an admittedly implausible low cost of dealing with
the waste of £10 billion in 2090 when the station closes, if we discount
at say 5 per cent, then £10,000,000 in sixty years’ time is a minuscule
£500,000 today. In other words, it is so small as to be irrelevant to the
decision on whether to build the power station.
Lest you think this is a highly contrived and implausible out-
come, let me disabuse you. This is very much what happens. Few coun-
tries have any serious plans to start dealing with the waste of existing
nuclear generation, and even for already decommissioned nuclear
power stations, other than to dig big holes at some future date and
bury it. The analogy with climate change is obvious: all the waste that
carbon emissions are putting up in the atmosphere from burning fos-
sil fuels has been allowed to build up because this carbon waste is in
effect discounted. The nuclear waste and the carbon waste are treated
as future problems, and of little current economic value. This sort of
discounting is at the heart of our environmental problems, mirroring
our myopia, itself the reflection of our generational selfishness, our
partiality.
Since whether, why and how the future is discounted is such a
fundamental dimension of the sustainable economy, let’s take a more
forensic look at the underlying arguments for and against discounting.
Is there any justification for this sort of discounting that lies at the
heart of our neglect of the future? Are we just uncontrolled sinners, or
is there more to discounting and our relationship and responsibilities
towards the next generation than meets the eye?
There are at least three distinct arguments in play: (i) we
should not discount future utility at all because future people are just
as important as current people; (ii) we should discount because eco-
nomic growth means that future people will be better off; and (iii)
because of distributional reasons and a special concern about the poor,
we should discount to make current poor people better off as the rising
tide of economic growth, in theory, lifts all the boats.

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The Pure Impartiality Argument

Let’s unpack each bit in turn, concentrating on the first, about utility
and consumption. It is the one that raises the most profound ethical
questions. Whether to discount utility, our future happiness (if that
is what we are worried about), and, if so, at what rate, is perhaps the
most important single issue in designing the rules of the sustainable
economy. The famous economist and mathematician, Frank Ramsey,
remarked that to discount the future ‘arises merely from the weakness
of the imagination’,4 viewing the future through the lens of utility and
implicitly the utilitarian ethic of the greatest happiness to the greatest
number.
Let’s see why this is so misguided. Just in case you are seduced
by the argument that seemed so obvious to Frank Ramsey (and most
utilitarians) that we should take pure utility impartiality as a central
plank for the sustainable economy, making the future as important as
the present, especially when it comes to environmental issues, think
again. Recall that the ethical assumption, which pure impartiality relies
upon, is that we should treat each and every individual equally, and
hence any individual’s utility is as important as anyone else’s. This
means that future people are just as important as current people, how-
ever far into the future they live, and all people now, wherever they
live, are as important as each other.5
Superficially, this might sound good and reasonable, and, in
particular, pretty environmentally benign. It might be something both
economists and environmentalists could agree upon. But now think of
a couple of consequences. You should not care about your own chil-
dren more than about a child living in poverty in the slums of Lagos,
for example, and you should not care about your neighbour, your
town or your country more than about people in a Sudanese village,
for example. It is a generic impartiality between individuals, and it
includes the time dimension, but it also applies at any point in time.
This moves us a long way away from maximising our own utility, our

4
F.P. Ramsey (1928), ‘A Mathematical Theory of Saving’, Journal of Economics, 38(152),
543–59, at 543.
5
This ignores the problem Jonathan Glover highlights of the determination of what sort of
people there will be. Once the full consequences of artificial intelligence (AI) are taken into
account, those people may be very different from us. It is not obvious why we should care
about people in the future given these considerations. See J. Glover (1984), What Sort of
People Should There Be?, Harmondsworth: Penguin Books.

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 22 / Legacy: How to Build the Sustainable Economy

own personal preferences (like our preference for our own children
over others), to the requirement to care for all and everyone equally,
anywhere and everywhere.
This demands too much of us and human nature. It is hope-
lessly idealistic and never going to happen. As we move away from our
immediate circle of family, friends and those who share our localities,
countries and cultures, we care less. We have different preferences about
people now in our own countries than about people abroad, especially
when they do not share our language and culture. Migrants from poor
countries are often resented, borders are policed and it is even deemed
appropriate by, for example, the UK government to send some of them
to Rwanda. We care less about people not yet born whom we do not
know, and even less about people in hundreds and thousands of years
in the future. We do not care much about which people will live in this
distant future. Our actions now may cause these people to exist, or not.
We choose contraceptives and abortions in order to limit family size,
changing the chances of being born.6
Discounting the utility of future people at a point in time is just
a part of our human nature, open to modification, but not complete
rejection. It is why we vote for politicians who will look to our immedi-
ate problems, preferring, in the above example, the short-term boost of
coal burning in the energy crisis of 2022 over the longer-term impacts
on the climate, and tax cuts and more spending, funding by debts that
future taxpayers will confront as a result of our myopia.
We give very little of our income to those with less than us
if they are remote from us. Foreign aid is very low, and even its low
level is controversial. The maxim ‘charity begins at home’ appears
to be politically popular. Aid budgets are soft political targets.7 We
spend great efforts on gender equality at home, but not so much in
Afghanistan or Iran. At the 26th Conference of the Parties (COP26) in
Glasgow in 2021, it was a struggle to get world leaders to commit to
a climate fund of $100 billion per annum – a bit more than the annual
dividend of the oil company, Saudi Aramco, in that year. Delivering
even this sum has so far eluded the donors.

6
Derek Parfit’s non-identity problem gives an example of the choice between depleting and
conserving natural resources. This choice affects who lives in the future. D. Parfit (1984),
Reasons and Persons, Oxford: Oxford University Press, p. 362.
7
The priority for home use of vaccines first, cuts in foreign aid and the small sums trans-
ferred to assist developing countries and address climate change are all such examples.

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 23 / The Next Generation

Advocating policies based upon pure impartiality when it comes

to future generations runs into this brick wall of human nature. Any
credible environmental ethic, and the policies that follow, is unlikely to
have much chance of changing behaviours if it does so much violence
to our basic human instincts, such as preferentially caring for your own
children or deciding how many children to have.8
The pure impartiality approach runs into a further problem:
since the future is open-ended and might go on to infinity, there may
be an infinite number of people to care about in the distant future. It
is a point that Stern noticed in his 2007 review on the economics of
climate change, and he implausibly truncated his analysis by assum-
ing a 10 per cent chance of extinction by 2100.9 Otherwise, there is
no limit to the demands on us of future people. For utilitarians from
Jeremy Bentham onwards, it is even worse: they will want the greatest
number of people if each additional person at the margin gains positive
net utility.10 Indeed, not only should you care about other children as
much as your own, and probably even more so because a little extra
income to poorer children would disproportionately increase their util-
ity, but you should also have as many children as possible as long as
they are expected to live a life with net positive utility, even if they are
lives barely worth living. If that means that the average utility falls,
then so be it.
The utilitarian’s population is open-ended, until additional
people are either net-negative utility machines, or they reduce everyone
else’s utility so much as to offset all their gains. This is the ‘repug-
nant conclusion’, as stated by Parfit: ‘For any possible population of at
least ten billion people, all with a very high quality of life, there must
be some much larger imaginable population whose existence, if other
8
When Jean-Jacques Rousseau took his children to an orphanage rather than raise them
himself, or at least take responsibility for them, we are naturally appalled by his departure
from what most would regard as the essential partiality of parents to their own children.
See J.-J. Rousseau (1782), The Confessions of Jean-Jacques Rousseau.
9
See also H. Greaves and T. Ord (2017), ‘Moral Uncertainty about Population Ethics’,
Journal of Ethics and Social Philosophy, 12(2), 135–67.
10
There are two separate justifications of utilitarianism given that are relevant here: the
empirical and the purely ethical, and between the economists as they divide between them.
The first is derived from empirical claims about human nature: utilitarians, from Bentham
onwards, assumed that pain and pleasure are facts of human nature. When David Hume
and Adam Smith grounded economics in the context of the wider search for a science of
human nature, they were firmly in the first category. But when it comes to Stern’s and
Dasgupta’s impartiality and not discounting future utility, it is obvious that this is not
grounded in human nature. It is not a fact.

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 24 / Legacy: How to Build the Sustainable Economy

things are equal, would be better even though its members have lives
that are barely worth living.’11
For environmentalists who worry that there are already too
many people on the planet, it is the quality of lives well lived, not the
quantity that matters. For them, having too many people may harm
the quality of lives now and in the future. Better to have fewer people
living better lives. It is for them ‘repugnant’ as well as inimical to sus-
tainability.
In summary, the Ramsey view is wrong in so many ways –
in its focus on utility and happiness (the sustainable economy focuses
on assets); in its failure to come to terms with human nature and its
limits (the sustainable economy takes citizens as they are, and not as
utility-maximising consumers); and in its failure to make any distinc-
tion between different time horizons from now to infinity (the sustain-
able economy focuses on the next generation). It is another ethically
‘repugnant conclusion’.

The Economic Growth Argument

The second argument advanced for discounting is economic growth.
Future people will be better off because economic growth (in GDP
terms) leaves them a bigger economy (a bigger pie) and hence the
opportunity for more consumption. It is what lies behind governments
setting GDP growth targets (as if governments can magic up specific
levels of GDP growth). This might be called the ‘Chinese model’: set a
target, make people better off in GDP terms, irrespective of the debts
piled up on the next generation.
The argument runs as follows. You are almost certainly better
off than your parents, and therefore, if anything, your parents should
have consumed more to even up the utility between them and you. If
the same happens for your children (and those school students in my
lecture), you should get stuck into consuming more today to compen-
sate for the fact that they will be better off.
The flaw in this argument is pretty obvious. It depends upon the
assumption that economic growth actually occurs, that the next gen-
eration can be safely assumed to be better off, which in turn depends
11
On the repugnant conclusion, see Parfit, Reasons and Persons, pp. 381–8. See also H.
Sidgwick (1874), The Methods of Ethics, London: Macmillan and Co., Book iv, chapter
1, section 2.

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 25 / The Next Generation

upon whether it is sustainable economic growth. Where there is an

enhancement of the core assets that we pass on to future people, and
in particular growth in ideas and technologies, there may be a case for
applying a positive ‘economic growth’ discount rate representing that
expected economic growth, but only after allowance has been made
now for the damage to the environment, and the investments to rem-
edy some of the past damage. As will be explained in setting out the
accounting for the sustainable economy, sustainable economic growth
is likely to be significantly lower than GDP growth. Given the scale of
the remedial damage that we need to address, it is likely to be at a very
low rate. Using GDP economic growth to discount is wrong. Worse
still, pursuing a GDP growth target, and in the process disregarding the
environmental impacts, is incompatible with the sustainable economy.
Discounting of genuinely sustainable economic growth is fine.

The Distributional Argument

A third argument for discounting, given particular importance by Das-
gupta,12 concerns the distribution of income at a point in time. If there
is lots of inequality now, and if economic growth lifts the position of
the poorest, this might be a reason to prioritise the poor now over
the (assumed) less poor in the future (provided the economic growth
is sustainable and actually happens). Dasgupta is of course right to
recognise that concern for the next generation, and the current one,
has a distributional dimension. If we should treat future people on the
same utility basis as current people (and hence be purely impartial over
time), we should also treat all people now as of equal concern in the
(and his) utilitarian calculus.
There are great inequalities, and those in developed countries
treat people in poorer countries very differently from those in rich
ones, and within each country treat the rich differently from the poor.
No amount of ‘trickle-down’ economics will provide an excuse. Turn-
ing away obviously very poor people migrating in small boats is wit-
ness to strong discrimination. As long as sustainable economic growth
happens, and that it benefits the poorest, higher consumption now is
justified at the expense of the next generation because the poorer in
12
Dasgupta, ‘Final Report – The Economics of Biodiversity’, pp. 260–73; and P. Dasgupta
(2019), Time and the Generations, New York: Columbia University Press, especially pp.
79–86.

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 26 / Legacy: How to Build the Sustainable Economy

this generation are poorer than the poor will be in the next. But only if
these assumptions hold.
The above discussion tells us that what we assume about
discounting goes to the heart of the sustainable economy and how
it should be designed. It tells us that sustainable economic growth is
the main reason why we can have higher consumption over time, and
hence that this is a justification for discounting, because sustainable
economic growth will make the next generation better off. It tells us
that we will have to dig deeper into what causes sustainable economic
growth, and later on we will see that this is overwhelmingly about
new ideas and technologies. It tells us that not to discount utility is a
demand for sainthood, but at the same time we should have rules that
help us to be more than purely selfish when it comes to future people.
Finally, the above discussion tells us that we should be serious about
the poorest in any generation over and above the average, that social
justice at any point in time matters in the sustainable economy.

Limited Realistic Impartiality

The sustainable economy harnesses limited impartiality, working with
people as they are, and not with the utopia of pure impartiality. Opting
for a more limited element of impartiality opens up the path to define
the ethical foundations of the sustainable economy in a more practi-
cal, do-able and partial way. Looking forward through time, trying
to make all the future people happy, stretches both our sympathies
and our ability to predict what they will want. We need something
less demanding and more achievable. A more parsimonious ethical
assumption is to focus on the next generation, and to ensure that this
next generation inherits a set of assets at least as good as we did.
There is, of course, nothing magic about the next generation,
other than our direct connectivity with it. The next generation overlaps
with us, and they are our children and grandchildren. They are those
students in my lecture whom we met at the start of this chapter. It is
easier to see why we might, as a matter of fact, care more for them than
for subsequent generations.
By structuring our concerns in this way, a chain letter is cre-
ated through the future generations, each concerned with its succes-
sor, giving something immediate and tractable to work with. We can
be partial and at the same time take future generations into account,

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 27 / The Next Generation

going with the grain of human nature. We can assume with the phi-
losopher David Hume that, for our practical purposes of designing
the sustainable economy, human nature is pretty invariant, whilst at
the same time not closing off the opportunity to shape future human
nature through the way we educate the next generation.13
It is true that some decisions we should take now will have less
of an impact on the next generation, but rather more on much later
ones, like what we choose to do with our nuclear waste in the example
above. It is notable that we are very bad at taking these very long-term
decisions: nuclear waste remains largely unaddressed.
Until recently, this category of longer-term decisions included
climate change and biodiversity loss. But that is no longer true. Climate
change is already happening, and although it might get worse for sub-
sequent generations after the next one, in practice the damage by 2050
and 2100 will be very significant unless dramatic actions are taken now
by this generation. It is very real and very immediate.
Similarly with biodiversity loss. The Amazon is drying and
dying, as are most of the other great rainforests. The tundra is thawing
and the great rivers and oceans are heavily polluted. The time horizon
to really serious consequences is concertinaed back to us and the next
generation. If we fixed all these things for just the next generation,
think what a massive achievement that would be. Expecting more is
utopian.
This shortcut of focusing only on the next generation fits with
the approach to many of our current environmental problems, and
more generally in the provision of education and health and making
sure we properly maintain and enhance the physical infrastructures. It
makes the 2050 climate change target for net zero more appropriate
(even if badly defined and unlikely to be achieved), and it encourages
twenty-five-year environment plans. It is a timeframe we can make a
difference within, and hence gives grounds for hope that environmen-
tal progress can be made.
The focus starts at home, with the nation, and hence on what
can be done on a unilateral basis, and for the next generation, closer
to us and linked through family and children, rather than in, say, 100
generations’ time. However much Frank Ramsey might think that it

13
Hume thought our natural generosity was limited in scope. See J.A. Harris (2015), Hume:
An Intellectual Biography, Cambridge: Cambridge University Press, pp. 126–7.

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 28 / Legacy: How to Build the Sustainable Economy

should not matter when or where an individual lives, in fact it does to

us in this generation. It is not a lack of imagination, as Ramsey claims,
to treat future people as less important. On the contrary, it is a lack of
understanding human nature as it is and the possibilities and limits to
influencing it. Trying to construct an ethical theory and, worse, to pro-
pose actions and policies on the basis of it, without regard to human
nature, is a serious mistake. Utopia can wait whilst we sort out the
legacy for the next generation.

Citizens and Their Capabilities

In narrowing the focus to the next generation, some things matter more
than others. The utilitarian framework yields a narrow and simplistic
vision of what makes people tick, and how they should behave, and
underpins the consumerist approach to the economy and the environ-
ment. The sustainable economy treats people as citizens. Its citizens are
not autonomous. Citizens are part of somewhere, of their specific soci-
ety, and have entitlements, rights, duties and obligations from and to that
society, now and in the future. Citizens have a location and a national-
ity. In democracies, they have an equal vote, and participate in political
processes through some form of representative democracy. Consumers,
by contrast, are ‘agents’ and have budgets, and income and wealth that
define how much they can consume. They have these unequally.
Citizens’ human nature may be given, but their outlook is con-
ditioned by the society in which they are embedded and is reflected
through its history, its education system and its institutions. Germans
save more and worry more about balanced budgets than the British
because they have the historical experience of hyperinflation, defeat
and destitution before, during and after two world wars. Many Amer-
icans still carry the concepts inherited from their puritan ancestors,
whether they realise this or not.14 Citizens exist in time and the his-
tory that has gone before them. They are not abstracted from time
and history. Attitudes towards the environment and future people are
similarly conditioned.
Our behaviour is not best understood by abstracting from time,
as science does. Economics, despite its science envy, is not a ­science.

14
See G. McKenna (2007), The Puritan Origins of American Patriotism, New Haven: Yale
University Press.

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 29 / The Next Generation

There are no genuine controlled experiments: counterfactuals are

always hypothetical. Behaviour happens in historical contexts and
­citizens’ reactions vary over time according to their culture and society.
They are not abstracted from time such that they can match Ramsey’s
impartiality between any point in time, and the state cannot be fully
impartial between citizens now and at any future time.
If the culture turns towards being consumer-oriented, as
was encouraged in the 1980s and 1990s with ‘greed is good’, yup-
pies, Porsches and get-rich lifestyles, citizens are likely to behave in
more short-term and selfish ways, and quite differently to how they
would have behaved had they had recent experience of war, as for
example in the 1940s and 1950s. Consumption is a fashion which
thrives in the context of low social capital. Famously, the behaviours
of the super-rich of the Gilded Age in the pre-First World War US led
Thorstein Veblen to describe their behaviour as conspicuous consump-
tion,15 an echo of Adam Smith’s comment on the pursuit of baubles
in eighteenth-century Britain by the very rich.16 Think of the differ-
ing attitudes to slavery and women’s rights at different times. Culture,
media and political leadership do shape our behaviour.
Context dependency shapes the choices people make, and
social capital is the way this can be framed. The liberal tradition
leaves it to individuals to choose how to live their lives, and keeps
the state out of trying to make them happy. Happiness is one dimen-
sion of a life well lived, and it is for each of us to choose how to go
about this. This is John Stuart Mill’s On Liberty negative concept of
freedom from the state.17 The trouble with this classical liberal tradi-
tion is it leaves out the questions of the capability of its individuals to
make these choices in the specific historical and cultural contexts they
find ­themselves in, and hence is insufficient to underpin citizens in the
sustainable economy. Citizens need the resources, including the social
capital, to be able to enjoy their freedom. Enabling citizens to choose

15
T. Veblen (1899), The Theory of the Leisure Class: An Economic Study of Institutions,
New York: Macmillan.
16
A. Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, repub-
lished 1976, Oxford: Oxford University Press. See especially A. Smith (1759), The Theory
of Moral Sentiments, republished 1976, Oxford: Clarendon Press, Part iv: ‘Of the Effect
of Utility upon the Sentiments of Approbation’.
17
Mill wrote Utilitarianism at around the same time as On Liberty. The former can con-
tradict the latter, as famously demonstrated in A.K. Sen (1970), ‘The Impossibility of a
Paretian Liberal’, Journal of Political Economy, 78, 152–7.

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 30 / Legacy: How to Build the Sustainable Economy

requires ­positive ­freedom, following Isaiah Berlin’s distinction set out

in his Two ­Concepts of Liberty.18 This is further brilliantly developed
by Amartya Sen in his concepts of capabilities.19
The basic idea of positive freedom (as opposed to an exclusive
focus on economic efficiency) is that the state has to do stuff to facili-
tate the capabilities, but not go further to guarantee equality of out-
comes, and in doing this, the state should not focus on utility alone.20
In this it is parsimonious: what the sustainable economy should do is
make sure that citizens have the capacity to live good lives, and not
focus on trying to make people happy.
The feature that the sustainable economy adds is to try to sort
out which are the most important capabilities citizens need and how
they can be delivered. These are the primary assets: housing, heating,
energy, water, broadband, transport and so on. All of these depend
upon a combination of public and private initiatives, and all depend
upon the environment. The environment is not just another provider
of goods and services (eco-services), to be consumed to make people
happy (in utility terms). Rather, it is the essential building block for the
citizens’ capabilities, and one that the state should ensure is protected
and enhanced. It is ensuring an equal entitlement to all these capabili-
ties, and hence the assets that deliver them, that defines the economic
objective of the state, not GDP.
It would be a great advance to make sure that all citizens just
have access to some basic minimum level of these primary assets.
There would be a health service and an education system that grants
all citizens basic healthcare and basic education. It requires equality of
access to these minimum thresholds necessary to have the capability
to function, and that does turn out to be incompatible with the sorts
of inequality that have emerged in the last forty years. It is a strictly
limited impartiality, focused on these basic capabilities, and thereby
addresses inequality and social justice obliquely.21
In the sustainable economy, these assets need to be provided
not just to the current generation but to the next one. Sorting out how
18
I. Berlin (1958), Two Concepts of Liberty, Oxford: Clarendon Press, reprinted in I. Berlin
(1969), Four Essays on Liberty, Oxford: Oxford University Press.
19
A.K. Sen (2009), The Idea of Justice, London: Allen Lane.
20
A.K. Sen (1980), ‘Equality of What?’, reprinted in A.K. Sen (1982), Choice, Welfare and
Measurement, Oxford: Basil Blackwell.
21
See J. Kay (2010), Obliquity: Why Our Goals Are Best Achieved Indirectly, London:
Profile Books.

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 31 / The Next Generation

to do this is at the heart of the design of the sustainable economy, and

what the subsequent chapters set out.

The Next Generation’s Inheritance

Now that we have a focus on the next generation, and on citizens
rather than consumers, we are in a position to set out what the under-
lying ethic of the sustainable economy is – what it is for and what it
aspires to deliver.
A good starting point is the United Nations’ (UN) 1987
Brundtland Report’s definition of sustainability, which set the scene
for the focus on sustainability and the great burst of UN activity on
climate change.22
The Brundtland Report famously defined sustainability as:
‘[meeting] the needs of the present without compromising the ability
of future generations to meet their own needs’.23 As befits a UN report,
this definition is wide-ranging and all-embracing. To drive the sustain-
able economy, it needs to be narrowed down. The sustainable econ-
omy focuses on the needs of the present without compromising the
ability of the next generation to meet their own needs, and interprets
the ‘needs’ as capabilities to choose how to live their lives. This first
principle of the sustainable economy is what should be incorporated
into its constitution.
This principle needs operationalising, to sort out what this all
means for the design of the sustainable economy. Primary assets nec-
essary to meet this requirement have to be identified, and especially
the basic natural capital which underpins the economy. It is all about
assets, not utility, as enablers for citizens by giving them the capability
to choose how to live their lives, consistent with not undermining the
opportunities for the generation that follows.
The place to start is with the assets that matter most, and upon
which everything else depends. This is natural capital. Natural capi-
tal is what nature gives us for free. It is not practical or sensible to

22
This activity included the setting-up of the Intergovernmental Panel on Climate Change
and culminated in the UN Framework Convention on Climate Change (the UNFCCC)
and all the COPs since then, from Kyoto (in 1992) to Glasgow (in 2021).
23
United Nations (1987), ‘Report of the World Commission on Environment and Develop-
ment: Our Common Future’ (the Brundtland Report), Part I, section 3, para. 27, https://
sustainabledevelopment.un.org/content/documents/5987our-common-future.pdf.

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 32 / Legacy: How to Build the Sustainable Economy

keep every bit of natural capital intact, and to do no damage. Humans’

very existence involves doing damage. To date, we have pillaged and
raped nature to our own short-run advantage, with little or no con-
cern about the longer-term consequences. That will not do anymore.
In the sustainable economy, we need to make sure that when damage is
done, something else has to improve, so the overall state of the climate
and biodiversity does not go backwards. Attaining zero emissions is
implausible, and so is zero loss of biodiversity. It is the aggregate of
natural capital that has to be protected.
As set out in detail in my book, Natural Capital, the rule that
follows is that the aggregate level of renewable natural capital should be
kept at least constant, and there should be general primary asset compen-
sation for the depletion of non-renewables. Renewable natural capital is
the stuff that is alive, and which reproduces itself, whilst non-renewables
are things like minerals, which are dead and non-regenerative.
We could go further, demanding not only that the aggregate
level of renewable natural capital should be kept at least constant, but
also that the value of the economic rents from the depletion of non-
renewable natural capital should be re-invested in renewable natural
capital.24 Aggregate natural capital rules require special attention to be
paid to the maintenance and enhancement of renewable natural capital.
The two types of natural capital are crucial determinants of
the assets that provide the capabilities of the next generation to choose
how to live their lives. Without a stable climate and without lots of bio-
diversity, human life is going to be tough, and the next generation rule
will not be met. But these two types of capital are not the only ones.
They are necessary but not sufficient.
The next generation will need the other capitals too, all ulti-
mately dependent on natural capital. These include energy systems,
water and sewerage systems, transport systems and fibre and broad-
band communications systems. They will also require educational and
health systems, a supporting research and development (R&D) infra-
structure and human and social capital. Together with natural capital,

24
Helm, Natural Capital, chapter 3, and especially p. 64. There is considerable overlap
between these two rules and the concepts of strong sustainability and weak sustainabil-
ity in the wider environmental literature. See R.M. Solow (1993), ‘An Almost Practical
Step towards Sustainability’, Resources Policy, 16(3), 162–72; and J.M. Hartwick (1977),
‘Intergenerational Equity and the Investing of Rents from Exhaustible Resources’, Ameri-
can Economic Review, 67(5), 972–4.

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 33 / The Next Generation

these give the next generation access to participating in their society

and economy. An economy is made up of these systems, and it is the
sustaining of these systems that provides the main obligation on this
generation to the next.
Combining the other capitals with natural capital makes the
rules of the sustainable economy more comprehensive so that all the
aggregate levels of all the primary capitals should be kept at least con-
stant. Because it is about aggregates, it means that, where there is dam-
age, it must be compensated for.
If these rules are met, the environment will be in a much better
state, and the citizens of the next generation will have the main capa-
bilities to choose how to live their lives. Yet even this is not enough:
citizens of the next generation also need income to cover the necessities
and a social infrastructure. Some element of basic income has to be
added.
All of these capitals need to be properly defined, as does
basic income, to turn these abstract requirements into practical eco-
nomic policies. Subsequent chapters explain how the capital assets are
selected, how they are accounted for and what it means to maintain
them to meet our obligations to the next generation, and how a basic
income can contribute to social justice.

A Radical Departure
The sustainable economy requires a radical departure from conven-
tional economics. The approach is not based upon utility and utility-
maximising agents, but rather on citizens. It is not based upon GDP
and flows, but rather upon assets and capabilities. It is not based upon
pure impartiality, but rather it is parsimonious in the assumptions it
makes about the future. It is parsimonious too in its focus: it is not
focused on all possible future people, just the next generation. It is this
scaffolding upon which the components of what it takes to meet the
first principle can be constructed, requiring us to ensure that the next
generation has capitals at least as good as those we inherited, and espe-
cially renewable natural capital. The need to be parsimonious is further
necessitated because of our uncertainty about what the future holds for
us and the next generation, and this uncertainty reinforces the focus on
assets and capabilities rather than on utility and happiness. It is this
uncertain context to which we now turn.

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 3 TAKING PRECAUTIONS, BUILDING
RESILIENCE

The focus of the sustainable economy is on the next generation,

and that next generation can look after the one after them. Whether
humans last another 10,000 years, or even 100,000 years; whether
we go the way of all the other species, with extinction as our destiny;
whether an asteroid hits, or a pandemic wipes us humans out; these
are all interesting questions, but ones we do not need to answer. The
geological record is littered with such calamities, punctuated by mass
extinctions. There are lots of fossils, and ultimately that is probably
our destiny too.
These potential catastrophes have got a lot nearer after the
damage the twentieth century has wreaked on our environment. There
might not be the luxury of waiting to find out whether these long-​
distant catastrophes happen. For most of human history, the answers
to both the near- and far-term threats were thought to be in the hands
of the gods. But increasingly humans think that they uniquely can avoid
all these fates, and do so because of science, heading off asteroids and
developing vaccines for viruses and antibiotics for bacteria, and fixing
climate change by manipulating the atmosphere and biodiversity by
genetically engineering life.
This ‘masters of the universe’ approach to our future depends
upon the assumption that humans are benign, rational, and will
cooperate to head off existential challenges. Such confidence gets
quickly dented by the experiences of the twentieth century. In just a

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 35 / Taking Precautions, Building Resilience

blip of time of human life on earth, and an indiscernible scratch on

geological time, humans developed the capacities to destroy much
of life on earth. Nuclear war could do the job very quickly, and for
the second half of the twentieth century this was a very real pos-
sibility, casting its shadow of fear.1 In 2022, Vladimir Putin put it
back on the agenda again. So, too, could the escape of viruses from
laboratories and biological warfare, raising the possibility of uncon-
trolled diseases and death, from anthrax to the twenty-first-century
coronavirus.
These are all specific and very real threats, about which we
can do a lot. The more general environmental damage is much more
difficult, but at least this is no longer about ignorance of the causes or
indeed the broad consequences. That much science has delivered to
us. It is the inability to head off these very human-made threats to our
existence that is the concern.

The Scale of Our Ignorance

If we were certain all these bad environmental things were going to
happen, it would be about taking action, in the sure knowledge of the
consequences of that action. But in most cases, it is less clear. Though
we know a lot about the causes of climate change, we do not know
what the precise global temperature increase will be by 2100. It might
be limited to 2˚C warming, or even 1.5˚C. The increased concentration
of greenhouse gases in the atmosphere means that we are already on
a path towards 3˚C, and it could be even higher. The range between a
good and a bad outcome could be as much as 4˚C.
We do not know how much biodiversity will be left by 2100.
We do not know whether by then we will have wiped out half the
species on the planet or stabilised biodiversity. Whilst we can at least
measure the concentration of the greenhouse gases in the atmosphere,
we do not even have an agreed measure of biodiversity and we do not
even know how many species there are on the planet, partly because
most biodiversity is beneath our feet.

1
O.A. Westad (2017), The Cold War, London: Allen Lane. Thomas Schelling wrote that
one of the most surprising things is that no major nuclear weapon has been used since
Hiroshima. T.C. Schelling (2005), ‘An Astonishing Sixty Years: The Legacy of Hiroshima’,
Prize Lecture, Department of Economics and School of Public Policy, University of Mary-
land, 8 December.

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 36 / Legacy: How to Build the Sustainable Economy

We do not know whether by 2100 the rivers and the coastal

waters will be even more heavily polluted with yet more plastic, chemi-
cals and agricultural run-off, or whether they will be cleaner and full
of life. Will the seas be fished out and the sea floor scraped clean by
trawlers, or will there be a recovery and vibrant marine ecosystems?
The pervasiveness of our ignorance is reinforced by our inability
to forecast even a few years ahead. Economists’ forecasts of GDP growth
are notoriously inaccurate and there is no evidence that forecasting is
getting better. Economists struggle to forecast a recession a few months
in advance, and most did not see the financial crisis coming in 2007/8. It
was not just the late Queen Elizabeth II in the UK who wondered why
it had not been foreseen.2 Forecasts of fossil-fuel prices are just as bad.
Taking the projections of the International Energy Agency (IEA) since
the 1970s, one study showed that at any point in this period it was better
just to take the current price and extrapolate it, rather than to rely on the
IEA’s projections.3 Up until 2014, the oil price was heading ever higher.
Then it crashed. In 2022, there were lots of people certain it would carry
on going ever upwards, and even more certain that the gas price would
follow a rising trend. Possibly neither will.
Scarily, many are taken in by these sorts of forecasts and pro-
jections. Commentators hang on them, and behave as if they are true.
The vogue in 2022 for believing that gas prices will go on upwards for
the rest of the decade led opportunists to argue that, in these circum-
stances, all sorts of low-carbon technologies will be in the money. It
reflected the pernicious influence of lobbying we will return to again
and again, especially when it comes to systems and regulation. Wisely
perhaps these same opportunists are not themselves completely fooled,
for acting on such a forecast would be a powerful argument for the
removal of many of the subsidies these technologies rely upon to keep
afloat. Vested interests tend to take seriously only those forecasts that
suit their purposes. They do not campaign to take away the subsidies
upon which they depend.
It is not just the underlying trends that we are ignorant about;
it is also the technologies. As soon as the timescale opens up beyond the
next couple of decades into the second half of the century, our ignorance

2
Financial Times (2008), ‘Good Question, Ma’am’, 14 November, www.ft.com/
content/5b306600-b26d-11dd-bbc9-0000779fd18c.
3
See D.R. Helm (2018), Burn Out: The Endgame for Fossil Fuels, updated edn, New Haven:
Yale University Press, pp. 17–18.

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 37 / Taking Precautions, Building Resilience

about technologies starts to bite. If we knew what technologies would

be around in 2100, we would already have invented them. A moment’s
reflection on the fact that the modern internet and the iPhone and lap-
top are all post-1990 tells us how profound technical change can be in
just thirty years. Over a century, technologies can be transformational.
Recent advances of quantum computing, AI, graphene and genome
sequencing are already apparent, but we have less idea what precisely
they mean for the prospects of the next generation. We don’t know
whether there will be negative unanticipated consequences, as there have
been from DDT (the chemical compound Dichlorodiphenyltrichloroeth-
ane) and a host of chemicals spread over the land, and whether AI might
unleash a whole new set of authoritarian controls and warfare.
To reinforce the critical nature of this uncertainty, and how
the future usually turns out rather different to what we anticipate, con-
sider a thought experiment. Think back to any date, and then think
forward from that date five, ten and thirty years into the future. Five
years ahead, there are always surprises. The coronavirus is the latest
in a long line. Few foresaw the scale and destruction of the twentieth-
century world wars. They were both widely anticipated to be ‘over by
Christmas’.4 Few saw the fall of the Berlin Wall coming. The Soviet
Union was thought to be a given.
As the time horizon opens up, science fiction takes over. That
is another reason – beyond our limited impartiality discussed in the last
chapter – for the single generational perspective. Many countries now
have unilateral aims to be net zero by 2050, and the UK has added the
aim, through a twenty-five-year environment plan, to leave the natural
environment in a better state for the next generation.5 Achieving these
limited objectives would be a huge advance on where we are now.
Thinking beyond a year is often a major political challenge. Hence
the often-quoted remark by UK Prime Minister Harold Wilson in the
1960s: ‘a week is a long time in politics’.
There are pretty immediate political uncertainties to frame
what we do about the environment. Here are some things to ponder

4
On the First World War, see C. Clark (2012), The Sleepwalkers: How Europe Went to War
in 1914, London: Allen Lane.
5
Defra and The Rt Hon Michael Gove MP (2018), ‘A Green Future: Our 25 Year Plan to
Improve the Environment’, https://assets.publishing.service.gov.uk/government/uploads/
system/uploads/attachment_data/file/693158/25-year-environment-plan.pdf. This is now
embedded in the 2021 Environment Act.

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 38 / Legacy: How to Build the Sustainable Economy

in the quest to be sustainable even over the limited horizon of the next
thirty years. What will happen in Ukraine and Russia, after the Rus-
sian invasion and the Ukrainian fightback? The fall of the Berlin Wall
thirty years ago set in motion the current disaster. Will China invade
Taiwan? The fall of the nationalists and Mao’s Communist victory in
1948 set in motion the current threat by China to finish the business
with Taiwan. Will China, the US and Japan go to war seventy years
later? From a consumption perspective, will China’s economy double
or triple in size by then, with all the consumption that will bring? Or
will it stagnate like Japan’s has done since 1989? Will India and Africa
grow fast, replicating the Chinese experience of the last thirty years?
These are just some of the uncertainties we face over the next
thirty years. They are things that worry the young about their futures.
They are more than enough to try to get a handle on, and indeed, if we
do not, there might not be much left for the subsequent generations.
Beyond 2050, the fog of uncertainty is even greater. Would anyone in
1920 have forecast an extra 1 billion added to the world population by
1950, and just under 6 billion by 2000? Or that temperatures would
keep rising, in contrast to the concern in the 1970s, when global cool-
ing and another ice age was thought by some to be the big threat?6
Try another thought experiment. Write down what you think
now the world in 2050 may be like. Write down what you think the
share of fossil fuels in world energy will be, relative to the 80 per cent
today. Write down what you think the world population will be. Write
down the main wars that you think will have happened by then. Write
down by how much you think GDP in, say, the UK, the US, India,
China and Nigeria may have gone up or down. Write down what tech-
nologies you think will dominate by then: electric cars, hydrogen, how
you think quantum computing will go, whether you will be using cryp-
tocurrencies. Then seal the envelope and lock it away ready for you
to open in 2050, or leave it in your will for your inheritors to read. I
would be amazed if you or they are not surprised.
All this matters because we are doomed to work in this murky
world of uncertainty. Indeed, it is what makes human life so interest-
ing. When it comes to thinking through how the bold objectives to limit
climate change and protect biodiversity are going to be met, and how

6
The concern focused on orbital forcing, and the return of the ice age, within which the cur-
rent period can appear to be embedded, and on the emissions of aerosols.

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 39 / Taking Precautions, Building Resilience

we are going to get back onto a sustainable growth path, we should

always start with the realisation that the gap between what we assume
will happen and what might actually happen is very wide. We look
out of the back window at our past to steer the car, assuming the
future will resemble that past. When we close our eyes to many of the
­uncertainties, and what might lie around the bends in the road in front
of us, we condemn ourselves to the certainty that our mistakes will
commit us to. We treat the future as determined by the past, rather
than open-ended, created by the decisions we make on the basis of the
possibilities in front of us and our imagination.

How to Decide in Uncertainty

What should we do? How should we tackle these profound and
deep uncertainties to save our planet? There are two very different
approaches. One is to treat these circumstances as approximations to
certainties, and to do all the sorts of forecasting and predictions that
find their way into government budget forecasts, the Federal Reserve’s
and the Bank of England’s forecasts of inflation, and the IEA’s oil
projections. This is what modern economics excels at. The other is
to start with the assumption of radical uncertainty and work back by
providing some stakes in the ground, in particular taking measures
to make sure that the natural capital and the core infrastructures are
maintained.
Modern economics makes the heroic assumption that we act
as if we have probabilities over all future possible outcomes, allow-
ing us as rational individual consumers to choose between the sure
prospect of utility now as against the (discounted) expected utility at
some future date to maximise our subjected expected utility.7 It allows
economists to go straight to future utility, and not to waste too much
time on the underlying architecture of the economy. This is what lies
behind many of the economic forecasts and economists’ policy recom-
mendations. It allows the clever planner to shape the future. It is a
world for experts.
It is always possible to straitjacket behaviour into a probabi-
listic structure. Choices can always be rationalised as consistent with

7
For a survey, see P.J. Schoemaker (1982), ‘The Expected Utility Model: Its Variants, Pur-
poses, Evidence and Limitations’, Journal of Economic Literature, 20(2), 529–63.

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 40 / Legacy: How to Build the Sustainable Economy

you having subjective probabilities.8 But that does not mean you do.
Faced with the uncertainty unfolding before us, a better description of
your behaviours is that you use the toolkit of behavioural psychology,
to help deal with the reasonably familiar. Each of us relies on simple
heuristics, often translating them into a series of mantras, passed down
the generations. They are usually historically conditioned. Victori-
ans believed in thrift and the avoidance of debt; consumerist societies
embrace the opposites. ‘Neither a borrower nor a lender be’ is a heuris-
tic that would be incomprehensible to most of the current US and UK
populations, and to Keynesians in particular.9 But it would not be to
Germans, who prefer ‘save now, have later’. These are all part of the
shared and inherited social capital.
Environmental conservation is littered with such heuristics.
One is to be precautionary, especially where the environmental dam-
age might turn out to be irreversible. None is ‘optimal’, but then the
very concept of optimality is challenged by radical uncertainty.
Such heuristics can work roughly well, until we hit the
unknown unknowns, what in economics is known as ‘Knightian uncer-
tainty’,10 with the negative shocks and possible but highly improbable
‘black swans’.11 In these contexts, there are no heuristics to fall back
on, no rules of thumb, because there has not been enough time to try to
understand what is going on. Extrapolating from what has worked in
the past is potentially very dangerous, given that the past has brought
us to the current environmental cliff edge.
It is sometimes argued that the financial crash in 2007/8 and
the coronavirus in 2020 are just such black swans. They came out of
the blue, and most people had no obvious mental framework to com-
prehend what was going on. They left us very disconcerted. In time,
people got used to these events, read and understood more about them,
and then developed new rules of thumb about what to do if they hap-
pen again: using heuristics like ‘keep social distance’, ‘open windows’,
‘wear masks’ and ‘take Vitamin D’. In the financial crisis case, it might
be to save more to create a precautionary buffer, and in the virus case,

8
See L.J. Savage (1951), ‘The Theory of Statistical Decision’, Journal of the American Sta-
tistical Association, 46(253), 55–67.
9
In Act I, Scene III of Hamlet, William Shakespeare has Polonius saying ‘Neither a bor-
rower nor a lender be; / For loan oft loses both itself and friend.’
10
After F.H. Knight (1921), Risk, Uncertainty and Profit, Boston: Houghton Mifflin.
11
N.N. Taleb (2007), The Black Swan: The Impact of the Highly Improbable, London:
Allen Lane.

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 41 / Taking Precautions, Building Resilience

to stockpile essential items. For climate change and biodiversity loss,

it makes sense to do the capital maintenance, to build environmental
resilience. Sadly, there is not much evidence that many of these heuris-
tics are much more than passing enthusiasms. The next financial crisis
will probably see us as exposed as last time around. On future viruses,
public health measures taken now look precarious, and on climate
change and biodiversity loss, so far little has been done.

Resilience
The curious and potentially dangerous feature of reactions to these
sorts of possible shocks is that since we have no underlying deep causal
explanations – since they are shocks – the most likely behaviour is
indeed to carry on as before. The implication is that the greater the
uncertainty, the more predictable our behaviour. Applied to climate
change and biodiversity loss, this would be disastrous, yet it is a pretty
accurate description of what has been going on for the past thirty years.
Only as more information becomes available, and we are able to frame
the events with a causal theory, do we adapt and change, but crucially
after the shocks and in response to them, not in anticipation. Even
when we do know more, we go on with our existing consumerist ways
in a kind of parallel world, doing the same as yesterday even though we
know it is not sustainable. Recall, the share of fossil fuels in the global
energy mix remains at 80 per cent, the same as it was in 1970.
In the face of possible future shocks, we are not powerless to
prepare, even if we do not know the format they will take or when they
might appear and we do not have probabilities. In the two examples
above, financial shocks do happen, and by studying past events, we
can identify the main features. It is a bit like watching pre-earthquake
tremors ahead of a volcanic eruption. Similarly, there have been lots of
pandemics, and some of the consequences are known. Pandemics are
part of the human condition. Climate change has happened quite a lot
even in human times, and there have been great extinctions in geologi-
cal history. Financial shocks, pandemics and climate change are all in
this sense normal.
In these cases, the right response is to have the assets in place
to cope as and when the shocks happen. It is about having the capacity
to cope, about being resilient. The social care system could be capable
of handling isolation caused by the pandemic lockdowns, and have

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 42 / Legacy: How to Build the Sustainable Economy

had testing facilities. There could have been reserves to deal with the
fallout from the credit crunch. It is not the uncertainty that is neces-
sarily the problem, but rather having the assets capable of absorbing
shocks. Resilience, not expected utility based upon probabilities, is the
key requirement, so that future people are not left defenceless.
Take climate change. We have integrated assessment models
(IAMs)12 based upon probabilities, and hosts of energy models, and
over time these are updated as new information becomes available. We
have a schedule of costs for alternative low-carbon options, comprising
a supply curve. Optimising the solution to climate change is, in these
conventional models, about choosing the cheapest of these options
against the damage that climate change is expected (probabilistically)
to cause. Economists make the expected marginal costs equal to the
expected marginal damages, and then come up with a social cost of
carbon. Probabilities of marginal costs and marginal damages are then
discounted back to the present. The expected utility approach simply
multiplies the probabilities and the utilities together. This tells us how
to go about tackling climate change.13
Except that this is not what we are actually doing and for
good reasons. The 2˚C target has no foundation in this sort of mar-
ginal analysis.14 It is picked not because it is ‘optimum’ in an expected
utility way, but because it is a rough guess at what we might aspire to
achieve. We pick a target and then work back to thinking through how
we might achieve it. We decide what it would be tolerable for the next
generation to inherit, and what we might actually be able to achieve

12
See DeCanio for what is still one of the best critiques of IAMs. S.J. DeCanio (2003),
Economic Models of Climate Change: A Critique, London: Palgrave Macmillan. For a
further discussion, see W. Nordhaus (2019), ‘Climate Change: The Ultimate Challenge for
Economics’, American Economic Review, 109(6), 1991–2014.
13
It is how, for example, Stern’s critics, Nordhaus and Weitzman, go about it. W. Nordhaus
(2007), ‘A Review of the Stern Review on the Economics of Climate Change’, Journal of
Economic Literature, 45(3), 686–702; M.L. Weitzman (2007), ‘A Review of the Stern
Review on the Economics of Climate Change’, Journal of Economic Literature, 45(3),
703–24.
14
Various economists have tried to work out what the optimal degree of global warm-
ing might be. Of these, Nordhaus is perhaps the most prominent. In 2018, he suggested
unabated climate change would reach 4˚C warming, and compounded this with 3.5˚C
which would result from an optimal carbon tax. W. Nordhaus (2018), ‘Projections and
Uncertainties about Climate Change in an Era of Minimal Climate Policies’, American
Economic Journal: Economic Policy, 10(3), 333–60. See also K. Rennert, B.C. Prest, W.A.
Pizer et al. (2021), ‘The Social Cost of Carbon: Advances in Long-Term Probabilistic
Projections of Population, GDP, Emissions, and Discount Rates’, Brookings Papers on
Economic Activity, BPEA Conference Drafts, 9 September.

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 43 / Taking Precautions, Building Resilience

for them, not how to optimise the expected utilities through time, and
hence get the maximum happiness. Similarly, in working out how to
tackle the coronavirus, we did not start with the expected utility and
the life expectancy of people who might die, and compare the expected
economic utility value of those lives that might be lost against the costs
of saving them.15
The reason we do this is not just because we do not know the
probabilities and the utilities of future people. That sort of climate
change calculation cannot be made in any meaningful way. It is partly
because we are uncertain about what the technologies are going to be
even over the limited time horizon to 2050. Whether hydrogen will
prove a key technology, whether there will be new forms of nuclear
power, whether a new type of solar film becomes available, are all
uncertain. So too is the effectiveness of future vaccines and antibiotics.
None of these is amenable to probabilities. What we do know is that if
future generations are to be able to live good lives, it is a good working
assumption that they will need a climate that is no hotter than the 2˚C
target, and they will need a lot of biodiversity and protection against
horrible viruses and bacteria, to give them some sort of resilience to
these sorts of shocks. It is just conceivable that they might not need the
resilience these things bring, but not remotely likely. The open-ended
choices that make up the good life and conspire together to write the
future history of our life on earth are more than the sum of expected
subjective utilities.16 There is so much more to life than economists
assume. We should start the other way round to the conventional
economists’ approach: by defining the set of assets necessary for the
sustainable economy, make sure they are resilient and then leave open
how people choose to live their lives, safe in the knowledge that they
will have inherited a world in which they can in fact do so.
The sustainable economy is one that starts with this polar
opposite to the economists’ models. It assumes that we are profoundly
ignorant about the lives of future people and the environment they
will inherit. That is why the focus is on assets to facilitate options and
15
Some economists did: for example, R. Rowthorn and J. Maciejowski (2020), ‘A Cost–
Benefit Analysis of the Covid-19 Disease’, Oxford Review of Economic Policy, 36(S1),
S38–S55; and D.K. Miles, M. Stedman and A.H. Heald (2021), ‘Stay at Home, Protect
the National Health Service, Save Lives: A Cost Benefit Analysis of the Lockdown in the
United Kingdom’, International Journal of Clinical Practice, 75(3).
16
In the coronavirus case, we did not know in early 2020 whether vaccines would work.
Amazingly, we did not even know how badly testing and track-and-trace would work.

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 44 / Legacy: How to Build the Sustainable Economy

opportunities, rather than on trying to make future people happy in

the utilitarian way. The added twist – the working heuristic – is to be
precautionary about the fundamental systems that drive the economy,
and the renewable natural capital in particular. Nature gives us natural
capital for free, but we can so easily close it off from future generations
by our destructive ways. Once gone, that will be it forever. The sustain-
able economy is parsimonious and risk-averse when it comes to assets,
and especially natural ones. Precaution breeds resilience.

Asymmetric Risks
How much risk should we take with nature? Resilience and precau-
tion are not free. They have costs. The key question is not whether we
want to be resilient to future environmental and other shocks, but how
resilient. What if we are wrong? What if temperatures level out, or
even stabilise at a higher level, where there will be winners and losers?
What if the costs of mitigation are too great on the current generation,
and the future generations are just that much better off? What if there
are new technologies that deal with the problems and at much lower
cost? What if we can genetically engineer life in the future? For some, it
is quite possible to accept conventional theories of climate change and
at the same time argue that the urgency of action is overstated. They
just assume it will all turn out fine, in the best of all possible worlds, as
Candide did in Voltaire’s famous satire.17
The 1992 Rio Declaration on Environment and Development
takes a different stance: ‘where there are threats of serious or irrevers-
ible damage, lack of scientific certainty should not be used as a rea-
son for postponing cost-effective measures to prevent environmental
degradation’.18 This ‘precautionary principle’ is one of two secondary
principles central to the sustainable economy, and relies upon the claim
that there is asymmetric risk: be too cautious and there will be costs;
be not cautious enough and the losses will plausibly be much greater.
Asymmetric risk is familiar in the development of modern
medicines. Tests and trials and a demonstration that there will be no
harm are required before permitting general use of a new drug. Even

17
F.-M.A. Voltaire (1759), Candide, ou L’Optimisme.
18
United Nations General Assembly (1992), ‘Report of the United Nations Conference on
Environment and Development’, Annex I Rio Declaration on Environment and Develop-
ment, Principle 15.

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 45 / Taking Precautions, Building Resilience

with the coronavirus vaccines, trials were required. That’s why it took
several months to get from the quick few days taken to develop vac-
cines to the authorisation of their deployment. In practice, the vaccine
trials were rushed as the pandemic started spreading and people started
dying. The goalposts were shifted a bit. The reality of precaution is that
the decision to adopt vaccines is subject to a ‘beyond reasonable doubt’
test, and weighs up the importance of speed in saving lives against pos-
sible side effects.
In the case of genetic techniques, a similar precautionary
approach is taken. Many countries have banned genetically modified
organisms (GMOs) and, in the case of the EU, severely limited gene
editing. Those campaigning in the UK for BREXIT regarded this last
restriction on gene editing as a precaution too far, and saw BREXIT as
a way of relaxing this constraint.
In the case of the natural environment, there is a class of assets
that demand precaution because the consequences of a mistake can be
irreversible, and hence the asymmetries are large. The ‘cost-effective’
caveat is very unlikely to be binding. These are renewable natural capi-
tal assets, the things that nature gives us for free, and which can go on
reproducing themselves for ever, or until evolution catches up with
them. Make a mistake, take a renewable natural capital asset, say a
species, below the threshold above which it can reproduce and sustain
its population, then all the benefits of the species to us and the ecosys-
tems are gone forever. Extinctions are to be avoided for exactly this
reason. We should take a very precautionary approach to the loss of
biodiversity, especially where otherwise we are taking temporary gains
for the current generation at the expense of all future generations. The
current generation occupies the crease (in the cricketing analogy), but
presides over the benefits to all that come after it.
In the case of the climate, it is less straightforward. It might
be possible at some future date to geo-engineer the climate so that
its composition can be altered. The damage may be partially revers-
ible (already there are direct air capture technologies to extract car-
bon from the atmosphere), but it might not be entirely so. The climate
might be tipped into a new equilibrium or into a vortex of ever-higher
temperatures. The atmosphere might be lost, analogous to the way
Mars lost its water.
Given the asymmetry between the costs of mitigating climate
change now, and the open-ended destructive losses of these possible

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 46 / Legacy: How to Build the Sustainable Economy

(and some would say even plausible) scenarios,19 the precautionary

principle tells us what to do. Time should not be wasted with the
economists’ cost–benefit analysis and the IAMs discussed above, but
rather we should cut to the precautionary principle imperative, treat
the atmosphere as a renewable natural capital asset and hold the line as
best we can. Indeed, so important is this precautionary principle that it
merits consideration of ways of embedding it constitutionally.
The question of whether 2˚C is the right answer is at best an
academic one, and one about which there is profound uncertainty.
There is not the data to know the answer. The optimal climate cannot
be defined. The precautionary principle tells us to try to keep below
2˚C, just as it tells us to avoid extinctions and maintain the core eco-
systems.

Austrian Economics and Entrepreneurs

Armed with the precautionary principle, and its imperative to maintain
renewable natural capital, it is an obvious step to try to put in place
detailed plans to achieve this. But again we should be aware of our
ignorance and resist the temptation to assume that we know how the
future will pan out. Scientists and economists too often just assume they
know the answers or understate the uncertainties, and tell us precisely
what we should do to head off climate change and biodiversity loss.
They tell us how many wind farms should be built, how many nuclear
plants and how fast the fossil-fuel industries should be closed down.
Detailed plans, ten point plans, carbon budget plans and spe-
cific technology ‘winners’ are identified and then governments design
subsidies, regulations, standards and institutions to impose them.20
This is both seductive and dangerous. Our ignorance dictates other-
wise. Ignorance is not abolished by pretending that we can accurately
model future paths of technologies and investments. Such certainty
about planning also creates a further downside: it is manna from
heaven for all those lobbyists and vested interests who can capture
19
There is a considerable literature on tipping points. See, for example, T.M. Lenton, J.
Rockström, O. Gaffney, S. Rahmstorf, K. Richardson, W. Steffen and H.J. Schellnhu-
ber (2019), ‘Climate Tipping Points – Too Risky to Bet Against’, Nature, 27 November,
www.nature.com/articles/d41586-019-03595-0.
20
The most inane of these is the UK’s ‘ten point plan’, which boils action down to ten
points. HM Government (2020), ‘The Ten Point Plan for a Green Industrial Revolution’,
November.

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 47 / Taking Precautions, Building Resilience

the plans and their implementations, and the subsidies that so often
go with them. The net zero strategies are littered with such capture.
Worse, many are not working and some are counterproductive.
The nature and role of planning is a fraught topic, often
debated by pro- and anti- camps, without regard to the subtleties
of the different dimensions of planning, and it is a topic that recurs
throughout considerations of the sustainable economy, its regulation
and institutions. It is not just about scientific ignorance; it is about the
way incentives work to get to the answers. This is where the Austrian
school of economics comes in, largely ignored by conventional econo-
mists.21 The Austrians start in the right place with radical uncertainty.
It is not just that people have limited information; it is that this is all
they can have to take decisions and create the future. It is about push-
ing out the boundaries of the ideas and the technologies people create,
the primary source of economic growth. This is what is going on in
the numerous start-ups around new climate change technologies. One
new silver bullet after another is proposed: nuclear fusion, new types of
batteries, new solar films. Each tries to capture governments but each
is better tested in the climate change marketplace.
Hayek, the central figure in the Austrian school, argued that
in order to get the best out of people, there needs to be a competitive
market. This is not the perfect competition at the heart of the conven-
tional economic theories; in perfect competition, Hayek pointed out
that competition is dead, because the future is known and there are
only normal profits, leaving no incentive for market entry or exit.22
For Hayek and the Austrians, it is the possibility of profits that drives
entrepreneurs, and the competitive market sorts out the successes
and failures.23 Markets are in Joseph Schumpeter’s words ‘a process
21
The Austrian school is the name given to an eclectic group of mainly economists who
emerged out of the broader Vienna Circle. The key figure was Ludvik von Mises. See L.
von Mises (1949), Human Action: A Treatise on Economics, London: William Hodge.
Hayek and Popper provided the main philosophical and political underpinnings, with
Hayek developing its economics as well. Frank Knight and Joseph Schumpeter variously
promoted some of the main ideas, and many were taken up by the Chicago school of
economics, and more recently, in the policy context, Stephen Littlechild, the architect of
RPI-X regulation and a powerful advocate of privatisation and competition in the UK,
translated some of the key insights into practical policies.
22
F.A. von Hayek (1948), ‘The Meaning of Competition’, in Individualism and Social
Order, Cambridge: Cambridge University Press.
23
See chapter 30 in G.L.S. Shackle (1969), Decision Order and Time in Human Affairs, 2nd
edn, Cambridge: Cambridge University Press, and (1972), Epistemics and Economics,
Cambridge: Cambridge University Press.

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 48 / Legacy: How to Build the Sustainable Economy

of industrial mutation that continuously revolutionizes the economic

structure from within, incessantly destroying the old one, incessantly
creating a new one’. The possibility of profits lures in rivals, and their
ideas and innovations are tried out in the hard reality of competitive
markets.24 Economic evolution follows a path of market selection.25
Right now new hydrogen technologies are being tried out and will have
to compete with alternative ways to decarbonise unless, of course, they
are permanently protected by subsidies.
The point about this Austrian competitive process is that the
future cannot be defined in probabilistic terms. It is radical Knightian
uncertainty that makes the case for markets and competition. Scien-
tists, intellectuals and business entrepreneurs advance knowledge,
making the future up as they go along, on the basis of conjectures and
their refutations, to use Karl Popper’s terms.26 They scan the possibili-
ties, and then use their imagination to make decisions across a range
of possible future scenarios. All knowledge is tentative, and the way to
build it up is to try to knock down the conventional wisdoms. Many
entrepreneurs and innovators are fixated with particular possibilities,
often displaying beliefs that go well beyond the rational. This is the
world of Elon Musk, Bill Gates and Jeff Bezos, and the inventors of
innumerable new digital businesses. All are flawed, all take big risks
and most fail. Many are led by highly egoistic, dyslexic and irratio-
nally optimistic individuals. For new ideas and inventions, there are no
probabilities, because they do not exist until they are created.

Open Societies
The sustainable economy creates the space, through assets, to encour-
age trying out the conjectures, so that the new technologies can unfold.
It puts entrepreneurs, researchers, mavericks and eccentrics centre stage
in finding practical solutions to climate change and biodiversity loss.
24
J. Schumpeter (1942), Capitalism, Socialism, and Democracy, New York: Harper & Bros.
It is very much borrowed from Karl Marx. See K. Marx (1951),Theories of Surplus Value:
A Selection from the Volumes Published between 1905 and 1910 as ‘Theorien über den
Mehrwert’, ed. K. Kautsky, taken from Karl Marx’s preliminary manuscript for the pro-
jected fourth volume of Das Kapital, translated from the German by G.A. Bonner and E.
Burns, London: Lawrence & Wishart.
25
R.R. Nelson and S.G. Winters (1982), An Evolutionary Theory of Economic Change,
Cambridge, MA: Belknap Press.
26
K. Popper (1963), Conjectures and Refutations: The Growth of Scientific Knowledge,
London: Routledge & Kegan Paul.

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 49 / Taking Precautions, Building Resilience

The Austrian approach to competition and markets, and to

capitalism more generally, has always had a political economy under-
pinning. Popper was interested in creating a society (and a supporting
economy, though he did not much interest himself in economics) in
which this critical process of attempted refutation would have maxi-
mum scope, and where individuals could keep throwing up bold con-
jectures to be knocked down. The sort of society he had in mind was an
open one, and one free of determinism and certainty.27 Piecemeal cor-
rective measures to market failures could fall into a trend – a slippery-
slope argument.

The Problem with Planning

Hayek and the Austrians have a further insight which helps to explain
why the many policies and interventions in support of detailed plans
and picking winners will fail, and indeed have done so far, given how
little progress there has been to stop the increase of carbon in the atmo-
sphere over the last thirty years or to halt biodiversity loss. Hayek
generally prefers competitive markets to state planning because the
planners do not really know what they are doing. They think they
do and, certain of their knowledge, they try to ‘nudge’ us towards
what they think is in our best interests and even evoke the dark arts of
behavioural economics to help to get us to do what they want. But they
don’t know. Planners have to put themselves in our shoes, know all the
underlying preferences and motivations of the consumers, and all the
production costs, and all the (exogenous) technologies, now and into
the future by knowing the probabilities too, to pick the ‘right’ alloca-
tion of resources.28

27
K. Popper (1945), The Open Society and Its Enemies, 4th revised edn, 1962, London:
Routledge & Kegan Paul. He accused them of ‘historicism’, and with Hayek’s Road
to Serfdom, the two books set out not only the critique of Marxism and the Soviet
variant in particular at a time when many of the intellectuals in the West were being
seduced by both, but more generally Popper and Hayek claimed that state planning was
a stepping-stone towards these more totalitarian forms of government. Social democ-
racy and welfare states were the slippery slopes to ‘serfdom’. F.A. von Hayek (1944),
The Road to Serfdom, Chicago: University of Chicago Press. See also G. Orwell (1944),
‘George Orwell’s Review of Hayek’s The Road to Serfdom’, in G. Orwell (1988), The
Complete Works of George Orwell, vol. xvi: I Have Tried to Tell the Truth 1943–44,
London: Secker and Warburg.
28
See F.A. von Hayek (1948), Individualism and Economic Order, Chicago: University of
Chicago Press.

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 50 / Legacy: How to Build the Sustainable Economy

This is the sort of thinking that lies at the heart of great plans
for tackling climate change, with a certainty that is often staggering.
Past energy strategies, energy plans, specific technology supports and
a remarkable number of speeches that purport to provide us with a
silver bullet are littered with this sort of thinking. The UK’s Climate
Change Committee (CCC) produces five-year carbon budgets, and sets
out, technology by technology, the route to the 2050 targets. There are
elements of Soviet-era ‘tractor plans’ here.
For this to work, government ministers have to be very clever, and
avoid capture by vested interests and corruption. They need to be sceptical
and have doubts, rather than the sorts of naive certainties many politicians
echo. Even where well-intentioned, the track record is often appalling,
before we add in such capture.29 Whereas the markets punish the mistakes
of businesses, the state faces only weak sanctions, if any at all. Think of
the UK example of Boris Johnson and his garden bridge, bendy buses, the
bridge to Northern Ireland, faith in ‘sustainable’ aviation fuel and his ‘ten
point plan’. Think of all the jobs in these vested interests that ministers and
their advisers take up upon leaving office or even come from. It is no won-
der that the path to the sustainable economy remains elusive. It is elusive
by design. This ever-present risk of capture and the distortions caused by
lobbying is a cancer at the heart of attempts to tackle the great environ-
mental problems of our time and to get to the sustainable economy.
In Hayek’s world, the beauty of the competitive market is that
each of us only needs to know the current prices and have the liberty
to choose and experiment. It is a stark warning against making the
jump from the recognition that we face existential challenges in cli-
mate change and biodiversity to the assumption that the state (or the
CCC in the UK case) knows best and that, if only we can move to state
planning, all will be well. Experts can fix climate change if only stupid
politicians and us the voters would pay attention. The lazy and easy
jump from recognising the environmental challenges to state planning
turns out to be, if not Hayek’s Road to Serfdom, at least a hazardous
and often very costly approach.
A Hayekian economy is one with a constitution of liberty,
keeping the competitive markets open.30 The economy of conventional

29
See D. Helm (2006), ‘Regulatory Reform, Capture, and the Regulatory Burden’, Oxford
Review of Economic Policy, 22(2), 169–85.
30
F.A. von Hayek (1960), The Constitution of Liberty, Chicago: University of Chicago
Press.

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 51 / Taking Precautions, Building Resilience

economists tries to pick the equilibrium path on the basis of assumed

exogenous preferences, probabilities and exogenous technologies. This
Austrian openness in the presence of fundamental uncertainty con-
strains the role of the state because it recognises that not only are mar-
ket participants ignorant about the future, so too are governments.
What Hayek (and many neoliberals who have followed his
lead) understates is the need to ensure that the assets – the core infra-
structures – are in place to set the context within which the choices
are made, and the need for the state to force polluters to face up to the
costs of their pollution: the polluter pays (a key secondary principle of
the sustainable economy). It is the difference between the negative lib-
eralism of John Stuart Mill, and the positive liberal approach of Isaiah
Berlin and Amartya Sen we met in chapter 2. Some planning and some
state provisions are essential, and they will turn out to be quite a lot
bigger than Hayek had in mind. It will also turn out to be essential for
competitive markets to work as Hayek wants them to. Markets and
system planning (and support for R&D) turn out to be complements,
not substitutes. It is not a simple choice between planning or competi-
tive markets, but rather about what kind of planning is essential for the
sustainable economy and its markets to prosper.

Technical Progress and the Sustainable Economy

Technical progress has a starring role in the sustainable economy.
There is no plausible explanation for why and how technical advance
actually takes place. This is another of the great insights of the Austri-
ans, who put innovation and specific technological progress as central
to the way they think about the architecture of an economy, full of
individuals free to create history, and, with it, creatively destroy what
went before, to make bold conjectures and then face the music of
their refutations. But what the Austrians neglect is that they do this
within the framework of both support for science and state provi-
sion of many of the great system public goods. The problem with
R&D and innovation is that ideas once discovered are public goods,
and private markets have a big incentive problem with public goods.
They are not rivals – we can all benefit simultaneously, and it is hard
to exclude people from their benefits. Entrepreneurs cannot capture
all the profits, nor should they. We can – and should – benefit from
Darwin’s theory of evolution. They need public support and patents

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 52 / Legacy: How to Build the Sustainable Economy

to create private property rights. It is the market and the state, not the
market or the state.
Technical progress of the sort needed in the sustainable econ-
omy to address climate change and biodiversity loss rests upon funda-
mental research, and this tends to be done by universities and research
laboratories supported by the state. Private charities and rich indi-
viduals may contribute, but altruism is unlikely to be even remotely
adequate. These research institutions are core assets necessary for the
sustainable economy to have the capability to innovate. They are an
essential part of building in resilience to unknown unknowns that may
cause shocks to future people. Fundamental climate science relies on
fundamental physics, and fundamental genetics research helps us to
understand how to protect biodiversity.
The Austrian economists are right about the dangers of direct
state support for a specific technology and the legions of lobbyists that
lie behind each one. But they go too far. The core infrastructure assets,
and natural capital in particular, will not spontaneously be created and
maintained. The generational ethic, the key principle of the sustainable
economy, will not be met solely by reliance on competitive markets.
Whilst Hayek is neither a conservative nor a laissez-faire economist,
and recognises the need for a constitution of liberty, and hence a state,
and he does mention public goods, he does not put these infrastruc-
tures at the core of his ideal economy. This is where he and I part
company. In many infrastructures, as systems, there is no choice but to
do some planning for all the faults that Hayek identified. The question
is about what sort of planning is appropriate.
In the sustainable economy there would be lots of fundamental
research. This is not only further from the market, but open-ended. All
sorts of research projects have no obvious use and application – until
one turns up. Einstein’s theory of relativity transformed science, and
this has fed into lots of things we now consume and take for granted.
Darwin’s theory of evolution is the foundation for modern genetics;
quantum physics may deliver quantum computing. Our modern world
is defined by the unexpected results of such fundamental research.
The sustainable economy would allow for lots of poten-
tially wasteful R&D. It might bring us new materials for captur-
ing solar power, new ways of using nuclear power, new materials
for ­building and new ways of capturing carbon. It might also bring
new ways of protecting the genetic variety of plants and animals,

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 53 / Taking Precautions, Building Resilience

and new u ­ nderstanding of how ecosystems work, and their capacity to

­sequestrate carbon. Or it might not. Mostly it will fail. The key point
is that a scientific research basis is a critical part of resilience in the face
of fundamental uncertainty.

The Sustainable Economy Based upon Uncertainty

To sum up. The Austrians have the right idea: start with an assump-
tion of radical uncertainty and then work out how best to organise the
economy and the wider open society to embed trial and error, human
ingenuity and entrepreneurial forces. Forget about probabilities and
exogenous and given preferences, exogenous technical progress and
rational consumers maximising utility. Allow the Amazons, Apples,
Microsofts, Googles and Facebooks to innovate and have their prod-
ucts and services tested in the markets, even if the subsequent monopo-
lies need breaking up and regulating. The planners have the wrong
idea when they start with the assumption that governments and their
committees and advisers are better than markets, replace competition
with the state picking the winners and try to nudge and persuade us
that they are right. Typically it is losers who pick governments.
We need to be clear about what we don’t know. We don’t
know what future people’s preferences will be. We don’t know what
technologies they will have. We don’t know what their options would
be if they were deprived of primary assets, such as natural capital. We
don’t know what would make them happy, even if we wanted to make
them happy. Ignorance is the pervasive context of human endeavour,
and it is what makes life interesting. A perfectly competitive general
equilibrium is not only one where, as Hayek rightly pointed out, com-
petition is dead, but it is also profoundly boring. It is not the human
condition.
What we can do is provide future people with the capabilities
within which to make their choices. To do this we want to transfer to
them lots of ideas and technological opportunities, and we want to
have an economic system that promotes and encourages that techno-
logical advance. We also want to make sure they have the infrastruc-
ture systems within which to function.
The main foundation to face uncertainty is the set of
­sufficiently well-maintained primary assets, and then citizens can bet-
ter ­accommodate the shocks that may come. This is about resilience,

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 54 / Legacy: How to Build the Sustainable Economy

­ otably in the face of asymmetric risks. It is hard to think of any shock

n
that is unforeseeable in general. Tsunamis, pandemics, asteroids, sud-
den methane escapes from the tundra, volcanoes, severe weather –
these would all be shocks, but they are also shocks we could prepare
for. In each case, having the resilience that the primary assets provide
in place and properly maintained is a good starting point. We do not
know with any precision what will confront the next generation, but
we can enable future people to better cope by ensuring that they have
the assets so that they have the capabilities to respond. The sustainable
economy has a good chance of sustaining itself in the face of the known
unknowns, and most of the unknown unknowns are in fact known in
outline. Donald Rumsfeld’s famous triad should be rewritten: knowns,
known unknowns and known shocks.31
Uncertainty is pervasive, fundamental and it requires that the
sustainable economy is designed around it. Assets are the essential
building blocks, to which we now turn.

31
D. Rumsfeld (2002), US Department of Defence news briefing, 12 February.

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 4 THE CAPITALS

Imagine you visit Russia. Someone asks you what it is like,

and in particular about its economy. You might google its GDP. It is
about 80 per cent that of Italy.1 Would this be a good answer to the
question? What about its vast oil and gas reserves, its northern forests,
the great Lake Baikal, the Arctic resources? What about the cities, the
roads and railways? And then there are its military and its reliance on
the commanding heights of the state and the oligarchs who loot them –
Gazprom, Rusal, Rosneft and so on.
A better answer would highlight the fundamental difference
between Russia and Italy. Russia is overwhelmingly dependent on its
natural capital. It has been exploiting and using up its natural capital
since its early origins – first timber and animal furs, then coal and now
oil and gas. Oil and gas now make up around 40 per cent of govern-
ment revenues and around 20 per cent of its GDP. All natural resources
make up about 60 per cent of its GDP, and whilst its GDP is quite
small, Russia is the world’s fourth largest carbon polluter.
This answer reveals something very different from Russia’s GDP.
It is focused on the core assets of the economy, and in particular its natu-
ral capital endowments, and their exploitation. These are what matters,

1
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=RU. See for a variety
of economic data on Russia: https://datacommons.org/place/country/RUS?utm_medium=
explore&mprop=amount&popt=EconomicActivity&cpv=activitySource per cent2CGross
DomesticProduction&hl=en.

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 56 / Legacy: How to Build the Sustainable Economy

though assets and the systems they are embedded in hardly feature in
economics textbooks. These are all critical for pollution and its control.
There are four core capital asset classes that matter for the
sustainable economy: natural capital, physical capital, human capital
and social capital. These differ from the rest of the capitals in the econ-
omy because they mostly come as systems, and are necessary for the
economy to function, because all economic activity goes through them.
These systems, in which the capitals are embedded, are mostly highly
capital-intensive with low to zero direct usage costs (near-zero mar-
ginal costs), and the infrastructures they comprise are best regarded
as assets-in-perpetuity, and all span the obligations to the next genera-
tion. The contrast with the conventional economists’ approach is stark:
economics is all about the margin and marginal cost, and about flows
of outputs, discounted back to the present. The focus of the sustainable
economy could not be more different. This is a world far away from
short-term use and throw-away consumerism.
The key feature of a system is that everything depends upon
everything else. Systems do not come in marginal bits. Each bit that is
added has an impact on the system as a whole. Add a new motorway
to the road network and it will change the traffic flows throughout the
system and change the road system’s resilience to closures. Add a nature-
based flood alleviation scheme upstream in a river catchment, and it will
affect water quality and biodiversity all the way down the catchment to
its estuary and beyond. Connect up a rural area to broadband and mobile
phone networks and every household and business will be able to fully
engage in the digital economy, and the structure of that rural economy
will be open to new businesses and enterprises relying on a digital market-
place. Take away a keystone species, and the whole ecosystem shudders.
Not only does everything in each system depend upon every-
thing else in that system, but each system depends upon the other
systems too. The energy network depends upon the communications
system, and the transport and water systems depend upon energy, and
so on. All of them depend upon natural capital.

Natural Capital – the Primary Asset

Natural capital is the primary building block of the sustainable econ-
omy. It is what nature gives us for free. It is our inheritance, which has
evolved and developed over the last 4 billion years. Everything we are

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 57 / The Capitals

and have is ultimately derived from this natural capital inheritance.

Temporarily in our specific geological time, it has given us our specific
lives and the lives of all the other creatures on this planet: the fungi,
the plants, the mammals and the invertebrates. In a state of constant
flux in geological time, climate change is normal. Extinction is normal.
Both have been necessary to produce us. Over aeons of geological time,
or perhaps much sooner, we too will go from ashes to ashes. But just
not right now. We need the stability to let the world roughly remain as
it is, not because it is in any sense ‘optimal’, but because it is the one
we have evolved in and are adapted to.
To recap, natural capital comes in two types: renewable and
non-renewable. Renewable natural capital renews itself. It is alive and
it reproduces and keeps on giving until evolution catches up with it.
Most of our food comes from life that has this characteristic, whether
we think of the renewable natural capital as species, genes or com-
plete ecosystems. Once we drive it below the critical thresholds, it stops
being renewable, and goes towards extinction, thereby extinguishing
its benefits forever. That is at the heart of our current environmental
crises. It is first and foremost about fixing renewable natural capital.
There are lots of conservation projects to save individual spe-
cies that are still hanging on from extinction, usually focused on big
mammals, birds and reptiles with human-friendly faces and images. It
helps too if tourists like them. Saving the tigers, the Galapagos tortoises
and the Andes condors comes to mind. At often very great expense,
some of these projects are successful, at least temporarily. Attempts are
also made to protect key habitats, often very late in the day. Stopping
fishing the once superabundant cod on the Canadian Grand Banks pre-
serves a remnant population that might, at some distant date, make
it back to abundance.2 Some ‘rewilders’ believe that, humans having
modified the entire planet, nature will bring lots of species back from
the brink if only it is left to its own non-human devices, creating an
apartheid between places where we live and places we are excluded
from. This is largely a delusion – indeed, in almost all rewilding proj-
ects, active conservation is being practised rather than nature being left
alone. Reintroducing wolves, beavers, sea eagles, tigers and cheetahs to
old habitats is about as intensively interventionist as it gets.

2
Even if it is too late for the Great Auk the fishers plundered, the last pair to be shot in
Iceland in 1844.

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These sorts of specific interventions have their place, but the

really big challenges for the sustainable economy are to maintain
whole ecosystems, like the Amazon, to protect the oceans as a whole
and to keep the balance of greenhouse gases in the atmosphere. These
big systems are what really matter in the scheme of renewable natural
capital and hence the future of life on earth. They are the assets which
we have a duty to bequeath to the next generation in good shape. The
biodiversity crisis is not about individual species, but rather about
whole ecosystems on a global scale within which the biodiversity of
life functions and reproduces itself, and the climate crisis is not about
just the emissions and sequestrations of one of the greenhouse gases in
a specific location, but the concentration of all of them in the global
atmosphere.
Life also depends on the earth’s mineral-rich crust, which con-
tains our non-renewable natural capital, and all the minerals that we
rely upon. These, together with the impacts of what we do, determine
the atmosphere, the landforms and the oceans. Our natural capital
includes the legacy solar (and therefore ultimately legacy nuclear from
the sun’s nuclear fusion) energy packed into the fossil fuels that still
make up that 80 per cent of our energy, and our petrochemicals and
plastics. It includes the iron ores out of which we make steel, and all
the chemical elements which we combine in ever more ingenious ways,
and all the limestones and chalks to make cement. It holds the cobalt,
lithium, nickel and copper essential to the development of electric car
batteries and wind turbines. There is no decarbonisation without dig-
ging up lots and lots of these minerals. Next time you see claims about
‘clean energy’ and ‘zero-emissions cars’, ask where the minerals come
from, ask how they are mined and then ask how they are refined to
make the batteries and the turbines.
This non-renewable natural capital is the stuff that does not
have that property of life to reproduce itself. We have a rich endow-
ment from which we have created our modern world. Non-renewable
natural capital does not go away because we transform it into some-
thing else. Energy cannot be destroyed, and hence we do not strictly
consume it. Rather, we transpose it into some other form, for example
into heat, creating pollution in the process. This is true for all the other
minerals too, and it is why we have lots of landfill sites full of the
waste products. In theory, much non-renewable natural capital can be
recycled, using other non-renewable natural capitals to help recover

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 59 / The Capitals

and reformulate. But recycling always needs more resources and it is

never a closed-loop cycle, as some advocates misleadingly claim.
Because we tend to use stuff once and throw it away, it is help-
ful to call this non-living and non-renewable stuff. Even if it is recy-
clable, it cannot reproduce itself. One day, someone might start mining
landfill sites, but for the time being most of our wastes are buried. It
is one of the reasons why it is possible to talk in theory about running
out of certain minerals, and in particular depleting mines and oil and
gas wells. Yet even here, the bounty that is our non-renewable natural
capital inheritance is so great that there is little we are in fact in danger
of running out of, despite the repeated dire warnings. There is enough
oil, gas and coal to fry the planet many times over, lots and lots of iron
ore, and we are never going to run short of the key building blocks of
our modern economies, the cement, steel, petrochemicals, aluminium
or fertilisers made from these minerals.
Abundance has in the past meant that non-renewable natural
capitals are treated as free (and renewables too, like the cod on the
Grand Banks). They have been plundered at will, safe in the knowledge
that their supplies are practically inexhaustible. As a result, at near-
zero resource cost, natural capital has until very recently rarely seen the
inside of an economics or management textbook or been part of finance
ministers’ economic policies. Without cost, there was assumed to be no
resource allocation question that needs answering, and economics is all
about the allocation of scarce resources. For the non-renewables, it is
not that the resources are limited; rather, it is that their extraction and
use can have serious and sometimes dire environmental consequences,
and the environment is the ultimate scarce resource. There is, as often
remarked, only one earth. These associated costs should be priced –
polluters should pay. It will require restraints in the face of abundance
to reduce the environmental damage.

Physical Capital, Network and Infrastructure Systems

Out of the non-renewables, vast amounts of physical capital have
been created, using bricks, cement and steel made by the applica-
tion of fossil-fuel energy. The stock of houses has a value in conven-
tional accounts way in excess of natural capital. Houses are the ways
many of us hold our wealth. In the UK, for example, the housing
stock is valued at £7.56 trillion ($8.7 trillion) as at March 2021. This

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c­ ompares with the implausible value placed on UK natural capital

by the Office for National Statistics, at £1.2 trillion in 2019.3 The
US housing stock comes in at about $43 trillion (£36 trillion) by
comparison. Factories, other buildings, machines, vehicles, power
stations, wind farms and solar panels all form part of human-made
physical capital. Most of these assets have limited lives, and some
very short ones. Much of the physical capital stock turns over on
aggregate inside a decade.
There is however one special form of physical capital that lasts
much longer. It comprises the core physical system network infrastruc-
tures. Think electricity networks, water and sewerage works and pipes,
rail and road networks and communications networks. Whilst little
effort has gone into protecting and enhancing the natural capitals,
government efforts have gone into these physical infrastructures, with
most ending up as natural monopolies regulated by, and often owned
by, the state. Ensuring their provision has become a core state respon-
sibility. They are crucial assets in the sustainable economy.
They don’t usually start off this way. There are very few exam-
ples where a state decides that it needs a new system infrastructure and
sets about creating it. Typically, instead there is an initial ‘wild west’
free-for-all, driven by start-ups, entrepreneurs and very much in the
Austrian spirit of creative destruction. The most recent examples are
fibre networks and electric car charging networks. It starts with inven-
tion, followed by local developments and with full integration at a later
stage as monopolies form and the state steps in.
Early systems included transport, from roads to canals, ports
and railways. Until the late nineteenth century, roads were notoriously
bad, and travel involved much time and discomfort. Getting from
London to Edinburgh took several days by horse and carriage, and
involved overnight stops at coaching inns. Roads had from an early
time been provided by military states, the Romans being the stand-out
example. Turnpikes, bridges and private roads developed, based upon
local monopoly. Modern roads are mostly state roads, though there
are many examples of tolled private motorway concessions from the
state.4

3
For details of how the accounts are constructed, see www.ons.gov.uk/economy/environ​
mentalaccounts/methodologies/naturalcapital.
4
For example, after the Battle of Culloden in 1746, the military built roads across highland
Scotland to maximise control over the defeated clans.

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 61 / The Capitals

Railways grew after the invention of the steam engine, and ini-
tially they provided single links between population centres and grad-
ually developed into a mania as investors sought permissions and
monopolies over specific routes.5 As with roads, military consider-
ations were an important influence, notably in the First World War to
get the troops and munitions to the front lines. The opening up of the
American West was driven by the coming of the railroads. The result-
ing railways, put together by different and sometimes competing com-
panies, still haunt the rail sector of many countries today, comprise
a patchwork of gauges and connectivity, and in many countries have
been nationalised.6
The absence of adequate systems has led in some cases to the
state deliberately stepping in to plan and provide public infrastructure.
The London sewers were built in the nineteenth century after the Great
Stink.7 Municipal authorities took the lead on health grounds. Man-
chester and Birmingham secured water supplies from reservoirs in the
Lake District and the Elan Valley in Wales respectively, and all took on
waste as a municipal function.8 To these were added streetlighting and
then electrification. For most of Europe these remain a local or regional
function today. The exceptions in electricity are France and the UK,
both of which nationalised their electricity industries after the Second
World War, and created powerful large, integrated companies to plan
and deliver the networks to meet the growing post-Second World War
demand for electricity. France has renationalised EDF. Water remains
publicly owned and locally controlled in most of Europe and the US.
The exception is England and Wales, but still at the regional rather

5
See G. Campbell (2014), ‘Government Policy during the British Railway Mania and the
1847 Commercial Crisis’, in N. Dimsdale and A. Hotson (eds.), British Financial Crises
since 1825, Oxford: Oxford University Press.
6
William Gladstone’s attempt to create an integrated railway institution failed. See W.
Quinn and J.D. Turner (2021), Boom and Bust: A Global History of Financial Bubbles,
Cambridge: Cambridge University Press.
7
There was an intense debate, in which John Stuart Mill took a very active part correspond-
ing with the Metropolitan Sanitary Association, about ownership and the integration of the
multiple private water companies in London. This correspondence was published in 1851
as ‘Public Agency v. Trading Companies. The Economical and Administrative Principles of
Water-Supply for the Metropolis’ and is partly reprinted in A.L. Harris (1959), ‘J.S. Mill
on Monopoly and Socialism: A Note’, Journal of Political Economy, 67, 604–11. See also
N. Tynan (2007), ‘Mill and Senior on London’s Water Supply: Agency, Increasing Returns,
and Natural Monopoly’, Journal of the History of Economic Thought, 29(1), 49–65.
8
J.A. Hassan (1983), ‘The Impact and Development of the Water Supply in Manchester,
1568–1882’, Historic Society of Lancashire and Cheshire, 133, 25–45.

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than the national level. In all these cases, cities around the world have
taken on many of these responsibilities, and especially for water and
sewerage.
This piecemeal and bottom-up development of new system
infrastructures was repeated for the new communications from the
1980s onwards. The internet developed in an anarchistic and very Aus-
trian way, but gradually the services concentrated around a small num-
ber of very large companies, known as ‘Big Tech’. What started out as
new and exciting technological innovations gradually became general-
purpose technologies,9 and in due course access to the web, email and
modern broadcasting became essential. As banking, shopping and gov-
ernment services and welfare support went online, not having access
to these new systems became a competitive disadvantage to businesses
and led to social exclusion. As with electricity and the railways, the
state is now stepping in to complete the new networks and ensure that
they are universally available. They, like access to transport, water and
electricity, are critical to decarbonisation, and protecting and enhanc-
ing natural systems: so important are they, that all have become uni-
versal service obligations (USOs). Citizens must have access to them,
and the sustainable economy cannot do without them. They are key
capabilities and critical to social justice.
Once the initial burst of enthusiasm and entrepreneurship is
over, and the systems consolidate, they need a plan, and a set of institu-
tions, private and public, to deliver the plan. Despite the critique of the
Austrians and Hayek against the very concept of planning noted in the
previous chapter, the infrastructures require a plan for two separate
reasons. The first is that these systems are mostly natural monopolies,
so there is no competition to discipline them in the Austrian trial-by-
markets. The second is that because the rest of the economy depends
upon them, there needs to be a precautionary cushion of excess capac-
ity in each system to handle shocks. The precautionary principle starts
to bind. The systems have to be resilient, beyond the normal market
equilibria. This resilience extends to the protection of citizens, who
need to be able to rely upon these systems for their own personal resil-
ience. It is a public good, and will not be adequately provided without
intervention.

9
N. Crafts (2021), ‘Artificial Intelligence as a General-Purpose Technology: An Historical
Perspective’, Oxford Review of Economic Policy, 37(3), 521–36.

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 63 / The Capitals

To these two there is now a third reason for some planning,

because the systems are all highways for most of the pollution in the
economy. This means that unless the overall environmental objec-
tives of the sustainable economy are designed and developed in ways
that facilitate low-carbon activities and the protection of biodiversity,
they will not be met. Providing electric car charging points and a grid
capable of handling the new electric transport demand and the decen-
tralised, intermittent and low-density wind and solar generation is
necessary (but not sufficient) to achieve the overall net zero targets.
Providing adequate sewage treatment is necessary for maintaining bio-
diverse rivers and lakes. The plan may be as simple as a target for fibre
coverage, or it may be as complicated as the detailed decarbonisation
of energy and transport systems.

Ideas, Knowledge and Human Capital

The third type of capital is human, which has largely replaced manual
labour as the stuff that is combined with physical and natural capital
to produce economic output. This transition was driven by fossil fuels.
The tractors and artificial fertilisers transformed agriculture away from
both manual labour and horse power, and digitalisation and robot-
ics are about to take it one stage further, to the point where there are
‘hands-free hectares’.10 This transformation of agriculture, which once
dominated employment in most pre-industrial economies, allowed
workers to flood into industry and cities, and now as these factories
are digital too, labour in the old-fashioned manual sense is increasingly
being marginalised.
What people now mostly do at work is apply ideas, science and
the technologies these bring, in an increasingly digital way to guide the
paths of physical and natural capitals towards the economic outputs.
They don’t even have to physically go to a workplace to produce out-
puts. They can work from home, as realised during the Covid lock-
downs.
Each generation inherits a body of knowledge and the tech-
nologies that go with it, and in the sustainable economy this is one
of the capital systems that are passed on. It is typically better than

10
‘The Hands Free Hectare Project’, Harper Adams University, 30 June 2019, www.harper-
adams.ac.uk/news/203518/the-hands-free-hectare-project.

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 64 / Legacy: How to Build the Sustainable Economy

this: each generation gets a better stock of knowledge and technolo-

gies. What facilitates the transition from one generation to the next
is the provision of education, which has to be continuously passed on
because people die.
The stock of ideas and technologies exists independently of
any individual, just as natural capital does. It has a life of its own.
Passed down through the monasteries and religious schools through
to secular schools, universities and now a host of other institutions
and websites, it is a key enabling asset to address our global environ-
mental crises. Science allows humans uniquely to understand what
they are doing to our planet, and gives them the ideas and technolo-
gies to protect it.
Though it is often claimed that it is ‘pure’ research that does
exactly this, and has produced lots of surprises for the benefit of
humans, the actual evidence is more nuanced. There is a case for let-
ting scientists come up with whatever they do when left to their own
devices, as long as they are provided with incomes and funding for
their research and experiments. That is what many of my colleagues at
Oxford do. But even that research, pure or otherwise, starts with ques-
tions, and these questions arise out of two related contexts: the existing
body of theory and knowledge; and the specific actual challenges of the
sustainable economy.
Take the example of climate change. Current theories and
models are the product of centuries of research into fundamental phys-
ics, research into the greenhouse gases, research into the atmosphere,
data on long-term temperature records going back thousands and mil-
lions of years, all to give us the current conjectures on the determinants
of climate change. To these physical theories and empirical evidence,
centuries of research into energy is added, the innovations and inven-
tions that gave us the Industrial Revolution, and detailed work on
specific ways of measuring, capturing and substituting away from
carbon-intensive production. Then there is the emerging science and
understanding of sequestration of carbon by the seas, and by forests
and soils, based on the biological sciences.
The questions that are addressed and which motivate this
research are multiple. Climate change brings them together, and the
Intergovernmental Panel on Climate Change is a remarkable example
of attempting to provide this synthesis and, in the process, throw up
new questions and challenges.

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Karl Popper, whom we met in the previous chapter, described

this approach to knowledge and ideas in a remarkable series of books
and papers, most notably in the Logic of Scientific Discovery (1934),
Conjectures and Refutations: The Growth of Scientific Knowledge
(1963), and Objective Knowledge: An Evolutionary Approach (1972).
This body of work is more respected by practising scientists than it is
by mainstream philosophers.11 Be that as it may, the main part of his
description of how science works and how the body of knowledge is
built up remains revolutionary, and it lends itself to our assets-based
and systems approach to the sustainable economy. Consequently it is
worth exploring in further detail.
Popper regards the scientific process as starting with the posing
of specific conjectures. He does not think that there is any determinis-
tic model of how these come about nor where they come from. In this
respect, his approach is very Austrian. Scientists are rather like entre-
preneurs, motivated by all sorts of things.
Now Popper’s radical bit. Scientists do not try to establish
truths; they try to refute conjectures made by others (and by them-
selves). They are engaged in falsification. All knowledge and ideas are
tentative. The task of the scientists is a continuing one of knocking
down the old, and making new conjectures that can better capture our
empirical world, until they in turn are rejected. It is a scientific version
of Schumpeter’s creative destruction.
Whilst science does not quite match up to Popper’s stringent
requirements, and scientists often end up defending existing paradigms,
the threat of empirical testing remains powerful. Paradigms can resist,
and it takes time to change them and allow for what have become
known as Kuhnian revolutions.12 Whatever the actual processes of sci-
entific discovery, and partly due to the resilience of established para-
digms, at any point in time there is a body of knowledge that is still
standing, yet to be refuted. That is our current knowledge. It includes
the theories of Einstein, after Newton had been found ­wanting. It

11
P. Godfrey-Smith (2016), ‘Popper’s Philosophy of Science: Looking Ahead’, chapter 4
in J. Shearmur and G. Stokes (eds.), The Cambridge Companion to Popper, Cambridge:
Cambridge University Press, pp. 104–24. Popper did not help his philosophical reputation
by claiming to have solved Hume’s problem of induction. See also A. O’Hear (1980), Karl
Popper, London: Kegan & Paul.
12
T. Kuhn (1962), The Structure of Scientific Revolutions, Chicago: University of Chicago
Press.

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 66 / Legacy: How to Build the Sustainable Economy

includes Darwin, after the creationist theory had been knocked away.
And so on.
This body of knowledge is a primary asset, the basis for the
economies and societies built up over the centuries. It is the best we
have, and it will change over time. It should grow, and hence provide
further underpinnings to sustainable economic growth. It is what we
inherit and what should be bequeathed to the next generation. It is the
chain letter down the generations. We do not need to worry about the
generation after next; we simply need to make sure we pass the baton
on in good shape. If and as it grows, sustainable economic growth can
take place.
There have been dark ages in the past. There have been closed
societies, totalitarian ones, which prescribe and try to destroy bits
of the knowledge systems, even burning books. The Taliban regime
in Afghanistan again reminds us that dark ages are not purely his-
tory. Women are denied education. This is the link between Pop-
per’s theory of science and his theory of the open society discussed
in the previous chapter, and it is a link that Hayek would hold to as
well. It is one of the reasons why there needs to be a constitution of
liberty, and why totalitarianism is such a terrible threat.13 It is why
many totalitarian societies find it hard to match the innovation and
scientific progress of the democracies, and why they are typically so
environmentally awful.
You might think that one difference with the approach to nat-
ural and physical systems is that the protection and enhancement of
the knowledge system and its intangible assets exist in the ether, inde-
pendently of states and public interventions. On the contrary, without
some supporting framework, they will fragment and perhaps fall apart.
This is because the knowledge system, and the infrastructure within
which new ideas are generated, is a public and not a private good.
Private markets do not do much to add to the body of knowledge:
they tend to exploit the public goods for private ends, applying ideas
in practical businesses. Our understanding of climate change and the
ecosystems within which biodiversity is embedded comes from pub-
lic institutions rather than private companies. Universities tend to be
state-driven, as is the funding of much research, even if augmented by
private donations. There are examples of maverick, brilliant individual

13
Hayek sets this out in The Constitution of Liberty.

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scientists outside this mainstream framework, but they are isolated

exceptions.
For the knowledge system, recent attempts to apply the econo-
mists’ cost–benefit analysis to research grant applications is an exam-
ple of using inappropriate disaggregate techniques. Very few bits of
research are separable from the general research endeavour. Whilst
there are specific questions which, if we answered them, have specific
benefits, most problems are not like this. For example, the develop-
ment of vaccines for coronavirus led to the new mRNA (messenger
ribonucleic acid) techniques, using gene editing, which may translate
into specific targeted methods of addressing cancers and help develop
a form of personalised medical interventions. They may change
crops too. It is very hard to keep any specific bit of research in its
box. Because the potential benefits are open-ended, it is particularly
damaging to apply crude discounting to them, and hence create a bias
towards shorter-term near-market progress. With research, it is rarely
clear what the benefits will be, and which to discount. The benefits of
scientific advances are forever, open-ended and hence of much greater
value than specific projects subjected to cost–benefit analysis. Scientific
knowledge is best considered as an asset-in-perpetuity and shares with
sustainable natural capital this open-ended property.
Popper described these assets as his World 3 of objective knowl-
edge, as distinct from the physical universe of World 1 and the human
consciousness of experience and thought of World 2.14 This World 3
body of knowledge could be regarded as the outcome of a process akin
to natural selection: the theories which have so far survived the com-
petitive challenge of empirical testing. It is a neat way of encapsulating
the system asset which needs to be maintained and enhanced for the
next generation, and the source of sustainable economic growth, and
hence a critical bit of the architecture of the sustainable economy.
Now contrast this with the economists’ approach to human
capital. Gary Becker, the great Chicago school economist on all this,
described human capital as essentially a discrete investment activity
with marginal costs and damages. Each of us ‘chooses’ how much
human capital to acquire on an autonomous basis. We invest as if we
are entrepreneurs, looking for profit. We are personal ‘factories’ built

14
K. Popper (1979), Objective Knowledge: An Evolutionary Approach, revised edn, Oxford:
Clarendon Press, chapter 3.

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out of this investment, and our acquired knowledge has a capital value,
which yields a flow of income, in the form of higher wages. It is an indi-
vidualised hyper-capitalism in which we are all little capitalists playing
out our lives in the competitive marketplace.15
As an economic theory, it goes some way to explaining the dif-
ferential returns in wages to those with university education over those
without, and why unskilled and poorly educated people have done so
badly in recent decades, notably in the US. Not surprisingly, more edu-
cation tends to lead to higher productivity and higher wages.16 But
this rather obvious claim only gets us so far. It may be that it is also
social position that counts, and educational attainment is the outcome
of inequality as much as university degrees. Education can be a screen-
ing device. But in any event, it does not deal with the wider benefits of
education to society as a whole, or to the incentives to invest in Pop-
per’s World 3, which is primarily a public rather than a private good.
The body of ideas, knowledge and technologies exists independently of
the bits of it that are acquired by individuals. Becker’s human capital is
really about specific aspects of education and educational choices, not
the public good of science. As long as human capital is assumed to be
just a set of discrete atomistic investments, human capital decisions are
examples of forgone consumption now for more consumption later, in
effect part of the allocation of time (the ultimate personal asset).17 In
contrast, the systems public goods approach sees education enhancing
not just for the narrow investment decisions but also wider sustain-
able economic growth because it helps to apply science, and it is the
science that is the primary cause of that sustainable growth. Universal
education and the development of the primary asset of science are both
necessary parts of the sustainable economy.
For both narrow economic reasons and because education pro-
vides a core capability, it is not surprising that governments have taken
on the duty to provide education, and to largely fund it too. Where it

15
This is the model Becker developed and which has dominated the economics of educa-
tion ever since. See G. Becker (1964), Human Capital, 2nd edn, New York: Columbia
University Press; and D.J. Deming (2022), ‘Four Facts about Human Capital’, Journal of
Economic Perspectives, 36(3), 75–102.
16
See the survey of empirical evidence on human capital in K.G. Abraham and J. Mallatt
(2022), ‘Measuring Human Capital’, Journal of Economic Perspectives, 36(3), 103–30.
17
See Becker’s brilliant 1965 paper ‘A Theory of the Allocation of Time’, Economic Journal,
75(299), 493–517, and more generally his A Treatise on the Family, Cambridge, MA:
Harvard University Press, 1981.

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 69 / The Capitals

does not, in particular in higher education in the US and increasingly

in the UK, the results become highly skewed to the elites who can buy
access to human capital and then exploit the benefits.

Social Capital
The fourth type of capital that comes in systems is called ‘social capi-
tal’, the hardest to define, being intangible, and the most difficult to
advance. It has long been observed that societies function best when
the citizens share a common outlook, a common set of beliefs and a
focus on the good of the whole community, as well as on their own
short-term self-interests. The sustainable economy cannot work with-
out a fabric of social capital, and one that is well maintained. Religions,
national identities and shared cultural histories, with their associated
rituals, bind societies together.
There have been many attempts to explain, for example, the
coming of capitalism by religion, and to identify the Protestant religion
as especially sympathetic to industrialisation and market economies.18
Correlation – Protestantism and economic growth – does not in itself
provide a causal explanation, and social capital is one of those very
slippery concepts that tends to get defined in ways that suit those doing
the defining. Of the characteristics of a society that might contribute to
a successful economy, trust and the respect for the property of others
stand out. There are lots of paths in different societies to establishing
these core social assets. Contrast Iran with the US, and the US with
Germany: very different cultures, but all built into their specific social
capital.
Exchange and transactions between individuals always depend
upon an element of trust. Markets cannot function without it. Parties
engaged in trade must ask themselves: why is the other party selling
this to me, or buying it from me? What do they know that I do not
which makes the price we agree one each wants to accept? If I sell my
house to you at an agreed price, is that because I know it is worth less?
The answer is that trade tends to open up possibilities to each of us of

18
M. Weber (1905), The Protestant Spirit and the Rise of Capitalism, reprinted 2002, Lon-
don: Penguin Books; R.H. Tawney (1926), Religion and the Rise of Capitalism: A Histori-
cal Study, London: J. Murray; and M.J. Wiener (1981), English Culture and the Decline
of the Industrial Spirit, 1850–1980, Cambridge: Cambridge University Press. See also
B.M. Friedman (2021), Religion and the Rise of Capitalism, New York: Alfred A. Knopf.

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 70 / Legacy: How to Build the Sustainable Economy

exchange, specialisation and comparative advantage, and is a vital part

of our ability to function and thrive. Comparative advantage suggests
that each of us specialises. Some are better at growing and making food
than others because they have acquired specific human capital skills,
and some have better climates and better access to natural resources
than others.
In the case of the house, quite detailed contracts are written
to certify what exactly the house is that I am selling. But even when it
turns out that the roof is in a poorer state than you were led to believe
when you bought the house, enforcing the contract terms is quite dif-
ficult. You have to carry an element of trust in the seller, otherwise the
contract is going to be immensely complicated. It turns out that most
transactions are overwhelmingly based upon trust, built up through
repeated transactions. This trust is also based upon the other person
being part of a culture in which untrustworthy behaviour is frowned
upon, and social conventions ostracise those who behave in untrust-
worthy ways.19
Societies without these shared cultural norms find trade and
exchange harder and thus are worse off. Where greed, short-termism
and narrow opportunism are encouraged, such as in the yuppy culture
of the 1980s, and the ‘greed is good’, ‘loads of money’ mentality is
promoted politically, productivity suffers. Think of the post-pandemic
working-from-home issue. It is harder for employers to monitor what
you are doing at home rather than in the office, but working from home
cuts your commuting costs and has other benefits. Does the employer
trust the employee to be working 9 to 5? If trust is present, there is
great scope for high outputs because there is less stress and costs are
lower. If not, then working from home is less prevalent than it could
be. Cultural norms, such as the German attitudes to savings, are more
likely to create (and reflect) social solidarity and understanding.
A second aspect is trust and the limiting of crime (including
environmental crime). Markets rely on a prevalence of honest transac-
tions. They rely on us not stealing most of the time, and societies with
a greater degree of social capital tend to have lower crime rates and
hence have lower costs. Think of how much economic activity is spent
on crime prevention. Think of all those locked houses, those passwords

19
J. Son and Q. Feng (2019), ‘In Social Capital We Trust?’, Social Indicators Research, 144,
167–89.

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 71 / The Capitals

and protective measures on the internet. In this latter case, the intrigu-
ing possibility is that the more remote and anonymous trade is, the less
trust and the more scope there is for crime and the higher costs. As the
world gets more virtual, this may lead to higher levels of crime. Inevi-
tably, the sustainable economy will be undermined.
At the country level, low social capital helps to explain the
economic difficulties of Russia, with its political corruption and the
short-termism this induces in its population. It explains why Putin has
tried to cultivate the Russian Orthodox Church, to buy into its social
capital.
Social capital is a key part of the inheritance of the next gen-
eration. There is a reason for the protection and enhancement of the
institutions that nurture this form of capital, including education.
Social capital is especially important when it comes to climate change
and biodiversity loss. The reason is the powerful incentive to free-ride
on the provision and protection of these great environmental assets.
Whether you do anything to reduce your emissions will have almost
no effect on climate change, just as if you vote it will not determine the
outcome of an election. The reason is that we are all too insignificant
to make a difference. Climate change requires the Chinese, the Indians
and the Africans, and your neighbours next door all to simultaneously
take steps to reduce their carbon footprints. If any of these people take
active steps, you get the benefits (less climate change) and no costs if
you make no effort yourself. You have a powerful incentive to free-
ride. Social capital leans into the wind of free riders, limiting their
impact.
Thinking as a greedy, self-interested individual, why not party
whilst others take on the costs of reducing emissions? This scares envi-
ronmental activists a lot, and for understandable reasons. If each of us
realised that this free-riding incentive is sufficiently serious such that
it is very unlikely that we will collectively head off significant climate
change, and if it turns out to cost us individually quite a lot to do our
small contributing part, then even if we are not ourselves selfish, it is
not hard to conclude that we should not bother to act in a hopeless
situation. Why bother either if some others are not, or if no one else is
bothering? In neither case will your action make any difference. This
gives environmentalists an understandable urge to tell an optimistic
story, to say we can each make a difference and that it will not cost
much, even if it is not true. Indeed that is what is going on.

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 72 / Legacy: How to Build the Sustainable Economy

But it is not working, though the manipulation of the media

has led to many actually believing they can make a difference and that
the costs are low, despite the evidence to the contrary. The alterna-
tive is to fall back on social capital and in particular the shared ethi-
cal outlook, to stress that ‘we are all in this together’ and we have to
act collectively in the collective interests. This demands that we both
recognise the free-rider incentives and yet suppress our narrowest self-
interest for the greater good. Getting people to do this depends upon
whether they do in fact see the world this way and see themselves as
part of a cohesive society, and hence whether there is enough social
capital. It is the sort of ‘togetherness’ that enables countries to fight
wars, for the young (predominantly men) to sacrifice their lives. It is
the social equivalent of ‘team spirit’ that motivates a group of sports
players to work together, even if it reduces their own personal chance
of scoring a goal.
Social capital is acquired from parents and schools, and from
the media. All of these in turn grow out of the history and culture
of the society, and it is for this reason that these parts of education
are especially important aspects of the capital assets we should pass
on to the next generation. What matters in the absence of religions is
that there are rules which govern our behaviours and the way we treat
each other and the wider environment. In the sustainable economy, the
overriding rule is set by the first principle, that it is our duty to pass on
a set of assets at least as good as we inherited, and that this is embed-
ded in institutions. It is a reason to treat radical institutional reform
with scepticism, especially since such institutions (and any radical new
ones) take generations to build up. Institutions, like social rules, need
to evolve.
The sustainable economy is made up of the four capital sys-
tems: natural, physical, human and social. These systems are what
we should pass on to the next generation. They are what the aggre-
gate rules derived from the first principle require us to maintain and
enhance.
But how to do this? The next step is to shine the torch on the
state of these assets, to understand the sorry state some of them are in
and work out how to maintain and enhance them where appropriate.
To do this we need a balance sheet and some accounts.

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 5 SUSTAINABLE ACCOUNTING AND
THE BALANCE SHEET

William the Conqueror is famous for at least two things: win-

ning the Battle of Hastings, thereby conquering England; and com-
missioning the Great Survey, better known as the Domesday Book.
Remarkably, neither exercise has been repeated since then: England
has not been successfully invaded and there has been no ‘Great Survey’
of the assets of the country.1 To meet the first principle of the sustain-
able economy, a somewhat similar survey is now required, howbeit for
a very different purpose. To be good stewards of the capitals, and the
systems they are embedded in, especially the natural capital, requires
accounts that answer the question: how well is this generation looking
after them? To fill these accounts in, a baseline is needed.
The assets and systems approach lends itself to balance sheets
and national accounting that are very different from the way the cur-
rent GDP accounts are put together. The current national accounts
answer a different question: how well is the economy doing in terms
of flows of consumption, production and income? And, more nar-
rowly, is the government balancing its books in cash terms? Neither of
these questions addresses the stewardship of the sustainable economy,
and in particular the primacy of maintaining its capitals, so that the

1
Although there was a ‘1873 Return of Owners of Land’. Local Government Board (1873),
‘1873 Return of Owners of Land’, presented to both Houses of Parliament by Command
of Her Majesty, Volume 1, HMSO 1875.

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 74 / Legacy: How to Build the Sustainable Economy

c­ onsumption is sustainable and we are not living beyond our sustain-

able means. Neither provides an assessment of the liabilities, environ-
mental or otherwise. Getting the question right is the most important
thing for accounts, telling us what the accounts are for and hence
whether they tell us anything useful.
To construct the national accounts of the sustainable economy,
the starting point is the capital maintenance of the core systems. This
is all about making sure that the assets are not in decline. It requires a
baseline of the set of assets the current generation inherited. Remedial
investment may be required to bring the baseline up to scratch. Next
come enhancements and improvements to these assets. With mainte-
nance and remedial investment and enhancements properly incorpo-
rated, the sustainable economy balance sheet can be constructed. This
sets the frame for the macroeconomics and how the aggregates for
investment, savings and consumption should be determined. These are
the accounting issues for the sustainable economy: the maintenance of
all the main capitals (natural, physical, human and social); plus reme-
dial investments; plus enhancements.

Capital Maintenance
Renewable natural capital is an asset-in-perpetuity, provided the
stocks do not fall below their critical thresholds. For practical pur-
poses, key physical system network infrastructures can also be treated
as assets-in-perpetuity, as are ideas and new technologies. So too is
social capital, built up over past generations. These are all assets the
first principle requires us to protect and pass on to the next generation.
Within this wider context, there are also many limited-life assets, like
vehicles, many buildings and equipment that depreciate through use
and hence the capital is used up, and there are many borderline cases.
Cathedrals are best thought of as assets-in-perpetuity; modern blocks
of flats are not.
Almost any asset can be maintained in perpetuity if enough
is spent on its maintenance. A car could be kept in pristine condi-
tion if it is continually repaired, and its parts replaced. There are
many examples in museums and collections of very old vehicles that
work just as well as when they were manufactured, and sometimes
even better. The reason we do not maintain all but the museum tro-
phies is not that we cannot, but rather because of the advances in

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 75 / Sustainable Accounting and the Balance Sheet

technology. A 1930s Model T Ford car is very inefficient compared

with a current Ford model. The new models are faster, more comfort-
able, vastly more fuel-efficient and much cheaper. In due course, with
decarbonisation, new electric models should be much less polluting
and therefore it will be better to replace the current petrol and diesel
models with these.2
These simple examples illustrate the two ways the value of
assets can be kept intact: existing physical assets can be maintained;
or a set of assets necessary to deliver the services can be maintained,
recognising that the physical configurations might change. In the latter
case, different types of pipes and wires, different materials and dif-
ferent ways of coordinating can replace existing assets to deliver the
services, as technical change comes along.
In the case of renewable natural capital, physical preserva-
tion is the correct and only way to keep the benefits to future genera-
tions open-ended. To maintain renewables, we have to both limit our
consumption of them and engage in spending to protect the environ-
mental systems within which they can reproduce. Although there are
many environmentalists who think that the cost of capital maintenance
would be close to zero if only we left the environment alone, and that
the best way to do this is to rewild, the reality is that humans have
changed the natural world so profoundly that there is no wild to get
back to. As a result, as managers of the land, sea and air, the protec-
tion of renewable natural capital, and maintaining its value at least
constant, typically requires proactive capital maintenance spending. If
renewable natural capital is allowed to depreciate, as assets in main-
stream economic and business accounting are, then it eventually ceases
to be renewable, lost forever.
Since capital maintenance is a cost of delivering the services,
not an investment, it should be a first charge on the revenues of the
country, municipalities or businesses. For assets-in-perpetuity, it
should be deducted from the profit and loss account and should not
be a balance sheet adjustment through depreciating the asset. This
simple point has very radical consequences, rewriting our national
accounts and restating how well we are doing and what our sustain-
able consumption can be. Depreciation is a repayment of capital, and
hence capital consumption. It requires capital investment to replace

2
M. Scott (1991), A New View of Economic Growth, Oxford: Oxford University Press.

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 76 / Legacy: How to Build the Sustainable Economy

what has been consumed. Maintenance is just a running cost, a cost

of operations.3
Capital maintenance might be to clear up pollution, create and
enforce protected areas, protect peat bogs, and for other land con-
servation measures. In particular, since the biodiversity that remains
is the biodiversity that has evolved and adapted alongside humans,
many of the human landscapes need to be maintained to protect what
we have shaped. Alpine meadows work because of the grazing rou-
tines; water meadows function as specific farming techniques, and their
plant, insect and animal lives are dependent on this being maintained.
Hedges require laying. Simply rewilding means setting capital main-
tenance to zero and will often be detrimental, especially so where it
causes a reversion to a uniform ecosystem. Much rewilding is actually
a type of asset depreciation. It cannot be repeated too often that the
sustainable economy is not an economy with only nature, and without
people and human interventions.
It has begun to be appreciated how great the cost of capital
maintenance of the atmosphere is, to prevent further damaging climate
change. Let’s assume that our first principle includes the duty of the
current generation to bequeath to the next at least as good an atmo-
sphere, and hence a climate, as it inherited. Though there are some
interesting arguments about whether the current climate is optimal, it
is nevertheless the one we and nature have adapted to. Over a period
of more than 10,000 years, there can be ice ages and warm periods, but
for now, the current climate is what we should concentrate on main-
taining. It is the climate most suited to the needs of the next generation.
The simple fact is that we are failing to do so because the required
capital maintenance is not being carried out. Indeed, we have already
given up on anything better than a 2˚C warming, and remedial action
back to 0˚C warming is not contemplated.
Suppose we now decide to maintain the climate, and stop
global warming beyond 2˚C. The costs of doing at least this should
come from current revenues and not from borrowing. It is maintenance
not investment. Imagine if this sum was deducted from the national
current accounts. The fiscal position would be radically worse, and
this is a measure of how far we are living beyond our environmental

3
See ‘Concepts of capital and capital maintenance’, https://annualreporting.info/intfinrep​
stan/8-concepts-of-capital-and-capital-maintenance/, accessed 23 December 2021.

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 77 / Sustainable Accounting and the Balance Sheet

means just in respect of the climate. The sustainable economy would

have a revenue-raising charge on pollution of the atmosphere and an
expenditure on the capital maintenance of the energy, transport, water
and other core physical infrastructures to render them net zero. It is a
very big and radical ask.
Nature gives us our climate for free. Natural ecosystems are
made of carbon and they sequestrate it.4 The green biomass on land
and in the seas, plus the natural absorption of the seas and the weath-
ering of rocks,5 all combine to soak up the emissions and have helped
to create our current climate. This has changed over long time periods.
Nature gave us the carboniferous periods when the fossil-fuel deposits,
and especially the coal, were created in a giant sequestration burst. At
other times, there has been a very different balance.
The capital maintenance of the atmosphere requires not just
stopping the emissions, but enhancing the ability of the earth’s ecosys-
tems to take back the carbon we emit. Restoring peat bogs, protecting
the great rainforests, and returning to a greater tree cover are all exam-
ples of capital maintenance. The units for capital maintenance should
be ecosystems, not individual species, and these great ecosystems
include the catchments of rivers, large and small, the coastal fringes,
marshes and mangroves, and of course the oceans. A glimpse at how
far we are from the sustainable economy is provided by recalling the
observation that parts of the Amazon are now net emitters of carbon.6
For man-made physical system infrastructures, capital mainte-
nance is to protect the services that the assets enable, without undue
pollution. The bundle of assets-in-perpetuity which deliver the services
(such as electricity, clean water, sewerage, transport and communica-
tions network systems) may change over time. Lead pipes were once
widespread for water supply; now they tend to be plastic. Once the
electricity networks used oil-filled cables; now they use modern wires.
Telephone calls used to be made via copper wires; now internet access
and calls are made possible with smartphones and fibre.

4
This is reflected in the division in chemistry between organic (carbon) chemistry and non-
organic (inert) chemistry.
5
The weathering of rocks, the chemical breakdown of minerals in mountains and soils,
sequestrates carbon from the atmosphere and transforms it into stable minerals. This nota-
bly includes the creation of carbonic acid as carbon dioxide and water combined in soils
and oceans.
6
L.V. Gatti, L.S. Basso, J.B. Miller et al. (2021), ‘Amazonia as a Carbon Source Linked to
Deforestation and Climate Change’, Nature, 595, 388–93.

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 78 / Legacy: How to Build the Sustainable Economy

The extent of these changes can be overstated, but neverthe-

less the general rule is for operational capital maintenance rather than
setting the physical capital assets in stone. In some cases, like commu-
nications, this has mattered a great deal over the last thirty years, but
now the fibre-optic cables may last fifty or even a hundred years. The
natural gas pipes have been used for the last forty years, but now many
need to be upgraded and altered to take hydrogen. The water pipes,
reservoirs and sewers may last fifty or a hundred years.
Technical change demands pragmatism in considering what
exactly capital maintenance means in terms of the asset composition.
For natural and social capital, capital maintenance is tied to the con-
figuration of assets as they currently stand, and for human capital,
ideas and technologies it is built on the current theories and hypotheses
(Popper’s World 3). For physical system utility infrastructures, it is a
moving feast.
All this has very radical implications for us and what we need
to do to live within our sustainable means. Consider the implications
of charging capital maintenance for just the main physical infrastruc-
tures to us as citizens and taxpayers and what it means for national
accounts. When your bike or car hits a pothole, you know that it is
because the roads are not being properly maintained. This sort of
neglect tends to result from political considerations and expediency.
When governments and local authorities find they need to placate their
voters, the roads may be given less priority over other consumption
spending. In the early 1980s and in the post-2007/8 austerity, the pot-
holes got bigger and more numerous in the UK, however ‘shovel-ready’
the maintenance might have been. They are generally worse now after
the pandemic. Across the EU and the US, the state of roads, railways
and bridges is widely acknowledged to be poor and they cope very
badly with droughts, floods and heatwaves. They have little resilience.
For the climate, the rise in oil and gas prices in 2021/2 led to a political
downgrading of the relative importance of the capital maintenance of
the climate, inducing a retreat from net zero.
Suppose that national accounts prepared by the national sta-
tistical offices were required, with regular audits, to set out the state
of the infrastructure systems, report the capital maintenance require-
ments and any shortfalls, and set these against the current revenues.
There would be no more capital consumption subsidising current con-
sumption. Capital maintenance would be on a pay-as-you-go basis.

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 79 / Sustainable Accounting and the Balance Sheet

The scale of the adjustment would be enormous, showing that, in addi-

tion to living beyond our wider environmental and social means, we
are also living beyond the means of our physical infrastructure systems.
These are examples of our excess consumption now at the expense of
future generations. The physical manifestations are reflected in power
cuts, hosepipe bans, potholes, defective bridges and broken rails. The
accounting manifestations are in the depreciation numbers.
Capital maintenance of human capital focuses on the transmis-
sion of knowledge between the generations. Each generation must be
educated in a continuous process. The calculation here is in one sense
easier. We could simply take it as the cost of education and charge it
against current revenues. Indeed, this is roughly what is done. Attempts
to fund education through borrowing and hence finance it through debt
have not been a great success anywhere for school education, and have
had at best mixed results at the university level.7 Pay-as-you-go by each
generation funding the education of the next has been the norm for
good reason. We gained our education for free and we should provide
it to the next for free, so that the basic human capital assets are passed
on at least intact to the next generation. The sustainable economy
does not rely on student loans, or a specific graduate tax. Education
is not primarily an investment in asset enhancements, but a capital
maintenance generational necessity. Capital maintenance in education
is the steady-state charge. (The really interesting questions are about
who should be educated and how the human capital should be spread
across the population. Not everyone needs to understand nuclear phys-
ics for the knowledge assets to be maintained.)
On top of education, there is the research base. Much of this is
enhancement not capital maintenance, adding to our stock of ideas and
technologies. The research base needs protecting, but the output of the
research adds to the knowledge and hence improves the prospects for
the next generation. This is investment not capital maintenance.
Maintenance of social capital focuses on the provision of a wider
social cohesion and hence on cultural values and communities. New
methods of social interaction, such as WhatsApp, Twitter (now X), Ins-
tagram and TikTok, emerge alongside older local networks based on

7
L. Dearden, E. Fitzsimons and G. Wyness (2011), ‘The Impact of Tuition Fees and Support
on University Participation in the UK’, IFS Working Paper W11/17, 5 September, Institute
for Fiscal Studies.

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 80 / Legacy: How to Build the Sustainable Economy

books, magazines and religions. The set of assets is largely intangible,

and while many of them can take a long period of time to build up, they
can be quickly dissipated. Shared history makes social capital location-
dependent, and much social capital maintenance is about the support for
voluntary organisations and charities. Though more diffuse and harder
to measure, capital maintenance is not zero cost. Each generation should
provide for the maintenance of social capital.
Taking each of the capital assets in turn, and working through
the capital maintenance for each, provides an economy-wide estimate
of the overall aggregate baseline against which sustainable consump-
tion can begin to be defined. Even though this would be a radical depar-
ture from the status quo, holding the line, particularly for renewable
natural capital, is hardly a great achievement. This aggregate baseline
is already greatly depleted. Given the damage the current generation
has done, and is responsible for, there are many aspects of core systems
where remedial action to repair the damage is required to improve the
inheritance of the next generation. Education and social capital are just
a couple of examples. But only after we have properly accounted for
and carried out the capital maintenance.

Remedial and Enhancement Investments

The scope for improvement over and above the capital maintenance
for our system assets and this generation’s remedial responsibilities is
considerable. We could have a much better natural environment, bet-
ter communications, a decarbonised electricity system and much better
water and river catchments, and bequeath these better assets to the
next generation. We could have even more ideas and technologies and
greater trust and social cohesion. This is where investment comes in,
on a systems basis.
These considerations provide a distinction between two sorts
of investment, both of which are advances on the current baselines.
Remedial investment makes good damage in this generation relative
to the assets it inherited; new investment enhances the overall stock of
assets. In theory, we could go back iteratively through the damage past
generations have caused too, but for pragmatic reasons, and because
the sins of past generations are not our fault, we should pragmati-
cally stop the analysis at our generation. The results would be so radi-
cal anyway, even from this limited within-generation perspective, that

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anything over and above this would be politically extremely difficult.

There is a symmetry here too: we should care about the next genera-
tion because we are closely connected to it; we should address the pol-
lution and the damage this generation has caused to natural capital
because we are the responsible party.
Let’s start with remedial investments. Take renewable natural
capital. We need a baseline, and we have a rough idea of the state of
the natural environment in the years immediately following the Sec-
ond World War and increasingly detailed data since then. In the UK,
natural historians have painstakingly documented the decline of our
natural fauna. It is a very sad story, punctuated by some successes
which need to be balanced off. Much of the total loss of the 97 per cent
of water meadows,8 and 50–75 per cent of the insects,9 has happened
since that war. The asset deficit is clear. It would be impractical to put
them all back. But that is no excuse for not recognising the damage in
the accounts and not doing at least some remedial works.
Biodiversity has been hammered by modern agriculture, plas-
tic pollution and atmospheric pollution. Capital maintenance requires
that we do not make matters worse, that for the carbon content of
the atmosphere we hold the current line, now over 420ppm (as at the
time of writing). But what about the 100+ppm we have added since
before the Industrial Revolution? That baseline might be somewhere
around 275ppm.10 Should investment be made as reparations for all
the damage done, just as it is often demanded from perpetrators to
compensate for the destruction wrought during wartime, and notori-
ously so in 1918 after the First World War, and now in respect of
Ukraine? The point here is a fundamental one: there is no ‘optimal’
baseline to get back to.
If we were to put right all the environmental damage done in
just this generation and choose as a baseline the state of assets which
we inherited from the last generation, it would require an enormous
correction and would seriously reduce our standard of living. This

8
Environment Agency (2022), ‘Working with Nature’, Chief Scientist’s Group report, July,
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/1094162/Working_with_nature_-_report.pdf.
9
C.A. Hallmann, M. Sorg, E. Jongejans et al. (2017), ‘More than 75 Percent Decline over
27 Years in Total Flying Insect Biomass in Protected Areas’, Plos One, 18 October, https://
journals.plos.org/plosone/article/file?id=10.1371/journal.pone.0185809&type=printable.
10
‘CO2 and Greenhouse Gas Emissions – Our World in Data’, https://ourworldindata.org/
co2-and-other-greenhouse-gas-emissions.

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 82 / Legacy: How to Build the Sustainable Economy

would be the case even if all the investment made in new ideas and
technologies and in some new physical assets was subtracted. China,
for example, might set all its new hard infrastructure and educational
gains against the destruction of its three main rivers, the widespread
land pollution, the massive coal-related emissions and the pollution
of the South China Seas. If the true economic costs of China’s expan-
sion over the last thirty years were properly accounted for, the balance
might even be negative.11
The key point about the accounting for remedial investments
is that they have to be paid for by the current generation. Using debt
finance, with debt falling on the next generation, is only consistent
with our intergenerational rule, the first principle, if it is a positive
improvement above the baseline back in the early post-Second World
War context we might have arbitrarily chosen, but practically, selected
as the start line for the current generation. (We could have simply set
it at say 1970 or 1990 or even 2000 – any one of these would create
a major remedial requirement.) We did the damage and we need to
repair and enhance the environment back to where it was. That is why
it should be charged to our current account as a repair to our balance
sheet.
In the case of genuine new enhancements, the additional assets
are created which the next generation will benefit from. While, on
the environmental front, it has largely been a downhill path, in other
dimensions of the economy there have been positive advances in this
generation which the next generation will benefit from. The next gen-
eration will get a full fibre network and communications system on a
whole new level. In the UK, they may (or may not) get HS2 whether
or not it is value for money.12 They may also inherit a significantly
decarbonised energy system. Some of this will be an operational way of
maintaining the system services, and some, like fibre, will be a consid-
erable enhancement over and above the copper wires it replaces. The

11
See, for example, K. Arrow, P. Dasgupta, L. Goulder et al. (2004), ‘Are We Consuming
Too Much?’, Journal of Economic Perspectives, 18(3), 147–72, especially Table 3. In so-
called inclusive wealth type calculation, China escapes the negative numbers because very
high values are ascribed to educational advancement and the relief of poverty. See also
E.C. Economy (2010), The River Runs Black: The Environmental Challenge to China’s
Future, Ithaca: Cornell University Press.
12
S. Glaister (2021), ‘HS2: Levelling Up or the Pursuit of an Icon’, Institute of Government,
July, www.instituteforgovernment.org.uk/sites/default/files/hs2-levelling-up-stephen-
glaister.pdf.

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 83 / Sustainable Accounting and the Balance Sheet

service provided is vastly enhanced compared with that which could be

provided by copper.
It is in the new and additional human capital and the ideas
and technologies where enhancement is likely to be most apparent.
Each generation inherits a better body of science and its applications
than the previous one, making future generations better off. It is what
constitutes genuine economic growth and hence allows for an element
of discounting. Enhancements in the arts are harder to identify and
very hard to evaluate. It is not clear that there is ‘progress’ in litera-
ture. These arts cases are best regarded as capital maintenance only.
Enhancements in social capital are at best aspirational. Maintaining
trust is a huge ask, before thinking about how to create a more socially
cohesive society.
The first principle of the sustainable economy suggests that
these genuine enhancement benefits should be charged to those who
will benefit from them, and hence the new enhanced assets should come
with the debt liabilities. This, and not remedial investment or capital
maintenance, is where borrowing is justified, and the total borrowing
should reflect the enhancement investments that are being made. Debt
on the balance sheet should be equal to or less than (if the investments
have high returns) the new asset enhancements it facilitates.

The Contrast with Existing Accounts

We now have a conceptual framework that enables us to construct
the sustainable economy’s national accounts and its balance sheet,
which in turn guides us to an understanding of what the sustainable
level of consumption is, consistent with a sustainable growth path. It is
remarkably different from what our current national income accounts
report, and it shows just how misleading GDP is as a measure of both
what we can spend and how the economy is growing. It transforms our
understanding of macroeconomic policy and of the scope for tax cuts
and extra current spending.
The assets approach is based upon stocks (assets); almost all
modern macroeconomics, and especially Keynesianism, is focused on
flows. The key difference between the sustainable economy’s accounts
on the one hand, and what the current national accounts and GDP
really record on the other, is between an assets-based long-term per-
spective and a flows-based short-term account. They answer very

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 84 / Legacy: How to Build the Sustainable Economy

different questions. GDP is the culmination of the vision of Keynes

and Keynesians. Neither it, nor the Keynesian economic policies con-
structed upon it, answer the question of whether we are being good
stewards of our natural, physical, human and social capitals, and hence
whether we are fulfilling our obligations to the next generation.
Assets are about the longer-term sustainability of an economy.
Keynes was never seriously interested in the long run. His concern
was recessions and unemployment, and especially the Great Depres-
sion of the 1930s, and later how to pay for the Second World War.
For the Keynesians who followed, the macroeconomic problems are
about short-term effective demand, not supply, and, provided that the
economy is using its capacity to the full, it can motor ahead, creating
cumulative improvements from which the economics of the grandchil-
dren, Keynes thought, would look very rosy.13 The future is a set of
overlapping short periods.
This is all very relevant to the (absence of) balance sheets and
the neglect of assets. The national accounts which Keynes encour-
aged Richard Stone14 and others to develop were all about the flows
of income, expenditure and output, and GDP measured them in gross
rather than net forms. Gross meant that no proper account was taken
of capital maintenance. The economy is a vast circulating machine of
flows, where income = expenditure = output.15 The accounting task for
them is to estimate output (and output gaps compared with full capac-
ity utilisation) and then to manipulate consumption and investment
(effective demand) to increase that output up to full employment. This
was the answer to a very different question. It is one we shall tackle
more extensively in developing the concept of sustainable consumption
when we come to the macroeconomics of the sustainable economy.
The sustainable economy approach starts in a very different
place and asks a different question about the accounts. The question
is whether the assets, rather than the flows, are being maintained and
enhanced, in order to work out the longer-term economic outlook and
to calculate the sustainable level of consumption consistent with this.

13
See J.M. Keynes (1931), ‘Economic Possibilities for Our Grandchildren’, reprinted in J.M.
Keynes (2010), Essays in Persuasion, London: Palgrave Macmillan.
14
L. Johansen (1985), ‘Richard Stone’s Contributions to Economics’, Scandinavian Journal
of Economics, 87(1), 4–32.
15
See W. Beckerman (1968), An Introduction to National Income Analysis, London: Wei-
denfeld and Nicholson.

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 85 / Sustainable Accounting and the Balance Sheet

This does not rule out short-term stimuli and measures to better use
existing capacity in the labour and capital markets. Idle workers are
not good, full stop. But it does create a deep conflict between the view
that consumption is too high to match the maintenance of the natu-
ral, physical, human and social capitals, and hence standards of liv-
ing have to adjust downwards, and the Keynesian preoccupation with
taking current wages as the baseline and then increasing consumption.
Because the assets approach puts the emphasis on capital maintenance,
remedial investment and asset enhancements, from the baseline that
consumption is already too high, the ‘output gap’ should be measured
against the long-run sustainable growth path and sustainable con-
sumption path, not the GDP path.

The Assets Balance Sheet

Let’s now consider the national accounts with the sustainable econ-
omy in mind. The starting point is the conventional balance sheet, that
accounting framework familiar to most businesses and organisations
(but not economists and economics textbooks). The balance sheet is
a statement of assets and liabilities. The assets are listed and, where
appropriate, valued. Liabilities are then similarly documented, com-
prising, in particular, debt. The balance sheet balances: an organisation
where liabilities exceed assets is bust. The balance sheet is a modern
version of William the Conqueror’s Domesday Book.
Starting with the national assets, these should contain the main
system network infrastructures for which the state is the guarantor, as
well as incorporating natural capital. They should add in the ideas and
technologies (World 3) and social capitals too. That is what a compre-
hensive asset side of the accounts would contain.
It is immediately obvious that national accounts do not do this,
other than in specialist satellite accounts. Why? Partly because they
include only publicly owned assets, and not private ones. When the
great nationalised utilities were privatised, they moved from the public
national to the private company accounts. There was no correspond-
ing recording of the decline in the asset base for the state. The proceeds
were treated as cash income, making the governments of the day look
in better shape. This is classic GDP accounting at its worst.
There is no perfect hard-and-fast rule about what should be
on the state’s balance sheet and what should be in private company

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 86 / Legacy: How to Build the Sustainable Economy

accounts. It depends upon which question the accounts are supposed

to provide an answer to. The criterion currently used is that the state’s
accounts should include only those assets that depended on taxpay-
ers for their remuneration and as a generator of their liabilities. They
should be taxpayer accounts, just as William Gladstone had once pro-
moted in the Victorian era.16 When the utilities were privatised, pro-
vided they received no state support, the assets were taken onto the
companies’ balance sheets, and the interest and the dividends remuner-
ating them were charged to customers’ bills.
This all assumes that what matters is ownership and the neat
distinction between consumers and taxpayers. Citizens are both, and
what actually matters is those aspects of the economy that are deter-
mined by, and rely on guarantees from, the state. These include the great
system infrastructures, with their long-term assets, a big gap between
marginal and average costs, monopoly and public good excess capacity
margins. Most of the owners of these have some sort of explicit (and
sometimes implicit) guarantee from the state that their assets will not
be expropriated and that they can finance their functions. No govern-
ment can let them fail. If the question is about the sustainability of the
economy, all the main infrastructures should be on the government’s
books. These are citizens’ accounts, given the state’s role is to ensure
that these provide their services and meet the duties to the next gen-
eration. Only governments can guarantee this. Indeed, so essential are
these functions that they should form a requirement of the sustainable
economy’s constitution.
One particularly interesting case relating to the physical infra-
structure, relevant to the sustainable economy, is agriculture. In devel-
oped countries, agriculture is no longer the driving force in the economy,
and in the UK’s case produces only around 0.5 per cent of GDP. Much
of this is made up of explicit subsidy, supplemented by a host of implicit
subsidies.17 This is repeated across much of the world, and notably in
the US and EU. On the criterion of reliance on the state and the implicit
guarantee, quite a lot of agriculture should be on the national balance

16
H. Matthew (1979), ‘Disraeli, Gladstone, and the Politics of Mid-Victorian Budgets’, His-
torical Journal, 22(3), 615–43.
17
In the UK, these include exemptions from business rates and inheritance tax, subsidised
diesel and a host of payments for flood damage, livestock deaths and other events. Cru-
cially, the agricultural industry does not pay for the considerable pollution it causes,
including the carbon emissions, and water and air pollution.

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 87 / Sustainable Accounting and the Balance Sheet

sheet. This is true of most developed countries, with the exception prob-
ably of New Zealand, which abolished its subsidies, though, even here,
it might be argued that land ultimately belongs to the citizens, and own-
ership is more leasehold than freehold from a generational perspective.
A further example is provided by energy, and in particular
power generation. Almost all UK investments rely on a contract with
the state (through, for example, contracts-for-differences, feed-in tar-
iffs and capacity contracts), not customers. In the nationalised days,
the assets of the Central Electricity Generating Board (CEGB) in the
UK were those of the state. Today, they are treated as private. Argu-
ably, they should all be back on the state’s balance sheet now that the
state is again the primary contractor and guarantor.18 They are in this
sense also citizens’ assets. In the EU, there is a host of supports and
guarantees, and the US is tiptoeing in this direction too. There would
be a credit on the national current account for the income net of the
subsidies, as there was in the nationalised industries.

Asset Valuation
The next problem is how these assets should be valued on the balance
sheet. Here, there is a shortcut. Recall that these are mostly assets-in-
perpetuity. Once built, they are not going to be depreciated and no debt
should be set against them in the balance sheet because they should
already have been paid for. In consequence, the overall asset value is
not very interesting. Where valuation of the assets matters is for reme-
dial investment and where enhancements take place. If assets have been
allowed to deteriorate because they have not been properly maintained,
the balance sheet needs an adjustment downwards for the value of the
impaired or lost assets and their services. Where enhanced, there is a
positive adjustment upwards. Both of these are crucial for the inter-
generational accounts. But there is no need to try to value the plants
and the animals and the ecosystems in which they abide and rely upon.
These only require a qualitative list, an asset register. Nor do we need
an empirical valuation of social capital or even current human capital.19

18
When the assets were owned by the CEGB, and on the government’s account, customers
paid most of its costs.
19
C. Mayer (2013), ‘Unnatural Capital Accounting’, Natural Capital Committee, https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/516947/ncc-discussion-paper-unnatural-capital-accounting.pdf.

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This point is missed on many economists engaged in cost–­

benefit analysis. The conventional economic argument is that ­everything
has a price, either explicitly or implicitly through its shadow value.20
It leads to inane and silly arguments about the value of bats and birds
and flowers. Renewable natural capital assets are not to be bought and
sold (in discrete units), all with neat prices to insert into the competi-
tive marketplace. Renewable natural capital is not just another sort of
capital: it is a special type of capital because it is renewable and hence
can go on delivering its benefits in perpetuity at little or no cost other
than capital maintenance. Only in very exceptional cases would one
want to get rid of it, and only then does the question of compensation
arise. Similarly it is silly to try to say how much the equation E = mc2
is worth, or to put a monetary value on trust.
It is here that the Keynesian approach to the accounts has a
positive contribution. If the economy is about the circular flows, there
is cash spending on consumption and investment by government, and
this is all one aggregate flow. The way this was carried over to the great
nationalised industries, and hence the systems we are most concerned
about, was through the principle of pay-as-you-go. The current genera-
tion paid for the building of power stations out of current revenue, and
each generation did the same. It was an intergenerational chain letter,
biased to the benefit of future generations. The nationalised industries
had virtually no debt. Provided that the government maintained the
assets, there was no need for a balance sheet valuation. Pay-as-you-go
solves the problem of intergenerational capital maintenance responsi-
bilities. It did so too in education, including in universities. There were
no tuition fees. There were of course costs to meeting the capital main-
tenance requirements, but these do not require valuation of the under-
lying assets. We do not need to value the London Underground or
the London sewers. We just need to maintain them. Where underlying
assets were sold in privatisations, the opening valuation was somewhat
arbitrary and circular, in effect, capitalisation of the revenue stream
from customers’ bills which had evolved in the public sector to make
pay-as-you-go add up in cash terms and by the arbitrary application of
a rate of return.21

20
A shadow price arises for goods not traded in markets. It is an estimate of what the price
would have been had the goods been traded, reflecting both demand and costs.
21
See I.C. Byatt (1986), ‘Accounting for Economic Costs and Prices: A Report to HM Trea-
sury by an Advisory Group’ (the Byatt Report), 2 vols., HMSO. For detailed comment, see

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 89 / Sustainable Accounting and the Balance Sheet

A balance sheet is needed to show whether the assets are main-

tained and the balancing of enhancement investment against debt
finance. It is all the more important because the pay-as-you-go principle
was widely abandoned in the 1980s, and it is now not only enhance-
ments that are paid for by future generations through debt finance, but
even current spending and capital maintenance and remedial spending
are partly funded by borrowing too.22 It was (and continues to be) a
great betrayal of future generations, little noted at the time. All this
should be reflected in a decline in the balance sheet, and a writing-up
of the consequent liabilities. Properly accounted, it should shame the
current generation.
As the debt piles up, but the assets do not, what stops the gov-
ernment from going bankrupt is the assumption that all these liabilities
will be guaranteed and honoured by the next generation. In contrast
to the sustainable economy, the current approach relies on an increase
in liabilities and a higher standard of living of the current generation
that will be paid for by the next generation. In effect, the increase in
liabilities is offset by a promise to pay on behalf of the next generation,
assuming that they are going to honour this. The liabilities on future
generations should be reported for all to see in the national accounts.
They should be reported annually in finance ministers’ budgets.
It remains to be seen whether future generations will in fact
pay, or whether governments have to implicitly default through infla-
tion, exchange rate depreciation and even allow outright explicit
default. In the UK, inflation and the exchange rate declines have been
the implicit preferred routes for defaulting for the last 100 years. No
accountant would sign off these accounts for a private entity.

Incorporating Capital Maintenance into the Accounts

The remaining accounting point relates to how to handle the profit and
loss account – current revenue, current expenditures and the current
balance. For the state, this includes all of its educational, health and

G. Whittington (1988), ‘The Byatt Report: A Review Essay’, British Accounting Review,
20, 77–87. On applications to asset value, see D. Heald (1989), ‘The Valuation of Power
Stations by the Modern Equivalent Asset Method’, Fiscal Studies, 10(2), 86–108.
22
Transport for London is a recent addition to the list of public companies borrowing
to cover current expenditures. See https://tfl.gov.uk/info-for/investors/borrowing-pro​
gramme.

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 90 / Legacy: How to Build the Sustainable Economy

social welfare provisions, the police, the army and much of the local
government services. These are not relevant to the capital account, pro-
vided the capital maintenance (and remedial spending) is paid from
current revenues, as it should be for our generational rule.
There should be an additional charge against this revenue
line, so that the budget ‘balance’ on the current account (analogous
to companies’ profit and loss accounts) is net of the total of this cap-
ital maintenance and remedial spending. This means that the costs
of maintaining the natural capital asset base intact, the costs of the
decarbonisation and the costs of maintaining the great physical sys-
tems (and the costs of ‘making good’) would all be deducted before
the finance ministry decides how to spend what is left. They are all
pay-as-you-go.
There is little doubt that the net revenue left for spending after
the deduction of capital maintenance would be significantly lower. If
the government sought nevertheless to maintain the current spend-
ing level, and unless tax was raised, borrowing would be higher. The
higher the borrowing to cover current spending, including capital
maintenance, the greater the burden that is shifted from this genera-
tion to the next, and the greater the violation of the intergenerational
equity first principle, for this is not enhancement investment to create
new assets. This is one measure of how far we are living beyond our
means, for which sustainable, asset-based national accounts should
give an estimate.
It remains to sort out savings and the funding of investment
for enhancements (but not remedial investments). If, as is currently the
case in the UK (and the US), saving is very low,23 then it is foreigners
who do much of the lending. If, in addition, the current account of the
balance of payments is consistently negative, then again it requires for-
eign inward financial flows. There has to be a capital inflow to balance
the external current-account deficits, so that the balance of payments
balances. This is one reason why so many of the UK’s (and some US)
assets, including much of its infrastructure systems, are now owned by
foreign companies. Quite a lot of land, especially in the UK, is also in
foreign hands. It is another consequence of living beyond our means:
selling off our core assets to foreigners to pay for our lifestyles, by buy-
ing more imports than the exports we sell. It is the selling-off of capital

23
The exception is saving during the pandemic.

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 91 / Sustainable Accounting and the Balance Sheet

to boost current spending, an exercise that the Labour government

of the 1970s and then, on a greater scale, the Thatcher government
that succeeded it in 1979 accelerated by selling off the nationalised
industries (as well as council houses), and most European governments
followed suit.24 Everyone in the UK, US and the EU has been in the
business of this creative accounting.

Changing the Questions

Macroeconomics, as it has developed over the twentieth century, has
had almost nothing to say about the development and sustaining of
the asset bases of economies and especially renewable natural capital.
Yet this has not stopped a confluence emerging between those on the
left who want a bigger state; those Keynesians who regard the cur-
rent difficulties as the consequence of deficient effective demand; and
environmental activists who want to reduce pollution, notably from
carbon, but also generally to upgrade natural capital through large-
scale borrowing.
None of these parties has shown much, if any, concern about
the consequences of the debt this implies, and none has questioned
the opening level of consumption and its relation to sustainability. For
environmentalists, the benefits from a loss of demand during the lock-
downs for aviation (and transport in general) and for a host of hos-
pitality expenditures (in other words, a reduction in environmentally
damaging consumption) should have been not only welcomed, but
reinforced by a desire to limit any rebounding in consumption gener-
ally. What unites all these parties (the environmentalists and the politi-
cal left and indeed even centre-right Conservatives) is their hostility to
‘austerity’, by which they mean measures to reduce fiscal deficits and
hence to limit consumption. It is classic ‘cake-ism’: more consumption
and a better environment. In the case of Covid, all wanted a return to
the level of consumption and living standards that prevailed before the
pandemic broke out.
The assets-based accounting rules set out here would reveal
the true scale of the deceit that those Keynesian policies disguise. They
would reveal that such deficits increase the gap between current and

24
The Labour government at the end of the 1970s started selling off BP. Council houses
were the biggest item in the first Thatcher government from 1979 to 1983.

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 92 / Legacy: How to Build the Sustainable Economy

sustainable capitalism. The debt which plugs this gap is a liability

placed on the young and the next generation to support our unsustain-
able lifestyles now. It is a large-scale increase in liabilities on the bal-
ance sheet with the counterpart being future citizens as customers and
taxpayers. It is a gross violation of the duty to leave the next generation
with a set of assets at least as good as the current generation inherited.
Proper accounts shine a bright light on this deceit, analogous to Wil-
liam the Conqueror’s attempt through the Domesday Book to shine a
light on what he had stolen.25

25
The Napoleonic Wars (1803–15) kicked off income tax to cope with the national debt
incurred to fund them. See M. Slater (2018), The National Debt: A Short History, Lon-
don: C. Hurst & Co. Publishers Ltd. See also E. Chancellor (2022), The Price of Time:
The Real Story of Interest, London: Penguin Books; and B.S. Bernanke (2022), 21st Cen-
tury Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19, New
York: W.W. Norton & Co.

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 6 POLLUTER PAYS

Sustainable consumption is defined net of the capital mainte-

nance spending on the current national account. Together with reme-
dial investments, this knocks back the current consumption level. That
leaves a further adjustment that needs to be made: adjusting the prices
to internalise pollution costs. Sustainable consumption is net both of
capital maintenance and of the costs of pollution.
Polluters should pay for the pollution they cause. This is a sec-
ondary principle of the sustainable economy, alongside the precaution-
ary principle. Ultimately, it is you and me who buy the stuff, and hence
we are the ultimate polluters. Since we are currently not paying the full
costs of that pollution, it is another reason why we are living beyond
our environmental means, and hence implies one more notch down in
consumption.
This adjustment is likely to be large. In most economies, it is
the polluted who mostly pay, and worse some polluters are actually
subsidised, notably in agriculture. A world where polluters pay would
have widespread carbon taxes on domestic production and imports,
pesticide and fertiliser taxes, ammonia and air pollution taxes, higher
prices for water to reflect the damage of abstraction, higher prices for
sewage disposal, taxes on plastic, palm oil and cement, and so on.
All that stuff listed in your carbon diary and your wider envi-
ronmental impacts diary would be more expensive, and those alternative
lower-polluting things would benefit from relatively lower prices. No

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 94 / Legacy: How to Build the Sustainable Economy

prices would go down absolutely, and the sum of all of those that go up
would be a measure of the costs of the pollution you and I are causing.
Trade would go down: all that polluting carbon-intensive stuff imported
from China would be more expensive, as would the hardwood and beef
from the cleared Amazon rainforest. Food prices would rise, as would
many of the use-once clothes and anything wrapped in plastic.
In response, companies would try to minimise packaging, plas-
tics and waste to bear down on costs. Entrepreneurs would seek new
ways of reducing pollution to cut costs. Local organic food would be
relatively cheaper, as would locally produced products. There would be
significant re-shoring of major industries as importers were caught by
the polluter-pays principle. As an example at the global scale, building
the new road through the Amazon – the BR-3191 – to enable loggers
to get more hardwoods out to sell in international markets would not
be so attractive, given that the full environmental costs of the destruc-
tion by the loggers would make the price of the timber incredibly high.
The new set of corrected relative prices would change the structure of
the world economy and each national economy in profound ways and
change your shopping habits. This is what it means to put the environ-
ment at the heart of the economy.
Getting people to pay for their pollution, and to pay for the
capital maintenance, is a tough ask. But it would be necessary to meet
the requirements of the sustainable economy. It is a further require-
ment if we are to live within our means. The fact that we may (and
almost certainly will) resist does not make the problems go away. As
ever, what is not sustainable will not be sustained. The climate will
get ever hotter, the rivers will continue to decline and biodiversity will
continue to go down.

Pollution and Market Failure

In the 1920s and 1930s, when the great economic theories, both con-
ventional and the Austrian, which shape the way we live now, were
being developed, very little thought was given to the environment.
It was largely an afterthought, as it would continue to be through-
out the great industrialisations of the twentieth century. On the

1
See P.M. Fearnside (2022), ‘Amazon Environmental Services: Why Brazil’s Highway
BR-319 Is So Damaging’, Ambio, 51, 1367–70.

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 95 / Polluter Pays

­ acroeconomic front, Keynes did not appear to care much about it at

m
all, being keen to increase output and reduce unemployment, not con-
serve nature. On the microeconomic front, the primary market failure
considered was monopoly. Marx had predicted that capitalism would
end up with monopoly, and hence monopoly capitalism, whilst the
mainstream economists focused on the conditions for a perfectly com-
petitive general equilibrium, with efficient prices that fully reflected
costs, but had no monopoly mark-up.
The market failure paradigm persists today as the main way
to analyse how markets measure up against this perfectly competitive
equilibrium, how far prices deviate from their ‘correct’ level and how
to identify cases for potential interventions. Back then, some had begun
to recognise that pollution might be one of those market failures that
needs addressing, though in the great summaries of the mainstream
theoretical outlook, notably Hicks’s Value and Capital, they are hardly
prominent. It is not even in the book’s index.
Arthur Pigou, in his Economics of Welfare,2 is widely credited
with being the first major economist to take environmental consid-
erations seriously. The environmental problem as he saw it was that
there were certain costs which were not internalised in market prices
(externalities), and since all prices should fully incorporate all costs in
an efficient economy, the way to address the environment was through
the application of what become known as a Pigouvian tax to correct
for these externalities and hence ensure a more efficient outcome. It is
rarely recognised that if fully applied to all externalities, Pigou’s taxes
would have been much more radical than all and any of Keynes’s ideas.
The vector of prices, which is the solution to the economic allocation
of resources, would be very different. Put another way, in every cir-
cumstance there is always pollution, and hence all market prices are
wrong, distorting choices and outputs.
In the economics textbook, the marginal costs and marginal
damages are adjusted to include the pollution costs, and hence the new
equilibrium price is where the social marginal costs equal the social
marginal damages. Putting aside the technical issues of what happens
to income when the price is adjusted,3 the neat theoretical comparison

2
A.C. Pigou (1920), The Economics of Welfare, Basingstoke: Palgrave Macmillan.
3
In comparing the two equilibria, there is an income and a substitution effect. Hence, in
estimating the impacts, there is a technical issue about whether the new equilibrium should
be income-compensating, as described for example in the general analysis of price changes

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 96 / Legacy: How to Build the Sustainable Economy

of the new equilibrium, inclusive of the externality costs, has three

problems: that the marginal costs and marginal damages have to be
estimated; that there are no additional market failure distortions like
monopoly which might interfere with the corrections; and how the tax
revenues are spent.
How would the economists know the social marginal costs
and social marginal damages? There are no controlled experiments, so
the experts have to rely on engineering, statistical and other tangential
evidence. On many bits of these calculations, they face radical uncer-
tainty, peering into the future, and cannot observe what would happen
if these marginal costs and damages changed marginally. As we shall
see later in this chapter, there is no obvious agreed way to estimate
the social cost of carbon, and many of these exercises are conducted
in the context of deep vested interests and lobbying.
Supposing for a moment the experts get the right answer. If the
rest of the economy is distorted by market power, then c­orrecting
the particular prices for the externality will be a correction to a price
which is already distorted for other reasons. A monopoly may be charg-
ing a price above costs already, so the externality tax is an additional
price increase. Put together, these price increases will be excessive. This
is called the problem of the second best,4 and is very prevalent.
The theory of the second best suggests that making one mar-
ket correction while ignoring other market imperfections in a ceteris
paribus fashion can be counterproductive, since it can exacerbate the
substitution effects between the corrected prices and all the others,
widening the misallocation of resources. The perfect in particular cir-
cumstances can actually be the enemy of the general good. We could,
for example, unilaterally decide to limit territorial carbon emissions
in, say, the UK (we have), but having fixed our carbon markets and
emissions accordingly, we could make global warming worse by the
incentive thereby created to buy imports rather than produce at home.
This is a classic example of the second best,5 and it helps to explain

in J.R. Hicks (1939), Value and Capital: An Inquiry into Some Fundamental Principles of
Economic Theory, Oxford: Clarendon Press.
4
On the second best, see the classic paper: R.H. Lipsey and K. Lancaster (1956), ‘The Gen-
eral Theory of Second Best’, Review of Economic Studies, 24(1), 11–32.
5
This is why unilateral carbon pricing requires a carbon border adjustment mechanism.
See Helm, Net Zero, pp. 120–4; and D. Helm, C. Hepburn and G. Ruta (2012), ‘Trade,
Climate Change, and the Political Game Theory of Border Carbon Adjustments’, Oxford
Review of Economic Policy, 28(2), 368–94.

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why, despite all the efforts in the UK (and the EU), raising the cost of
unilateral territorial carbon emissions has not limited the growth of
carbon concentration in the atmosphere. It may have even made emis-
sions worse.
The final problem is what to do with the money. Pollution
taxes raise revenue, and where the demand is inelastic (demand
holds up even as prices rise), potentially the amounts can be large.
That is why general taxation goes after fossil fuels and tobacco and
alcohol (another second-best problem), and historically has gone
after salt. There are two broad approaches: recycle back into general
taxation, spending on capital maintenance, health, education, pub-
lic goods and welfare; or targeted spending on creating substitutes
for the non-polluting technologies, such as low-carbon energy. Both
options raise the possibility of what is sometimes called the ‘double-​
dividend’ from pollution taxation. We will return to this point later
on, notably in considering the inflows to the national fund and
national dividend.
But before we do, there are a couple of other aspects of the Pig-
ouvian tax approach to note. What the adjustments to include social
costs and damages show is that it is only in very special cases that
the optimal level of pollution is zero. To an economist, this is pretty
obvious, but not to many environmentalists. Human economic activ-
ity changes the world from what it would be without humans. Almost
everything we do has costs and benefits not only to ourselves but to all
the rest of the natural world. Just the act of breathing inhales oxygen
and expels carbon dioxide. Only where the impacts have really big
detriments – say mercury discharged into a river – is the optimal level
of pollution zero. But if it were generally zero, then the human times
are pretty much over.
Pigou and his followers, armed with their techniques for
estimating marginal social costs and damages, move on to interven-
ing to correct the market failures, by adjusting the prices (though
they could regulate these by adjusting the output).6 Such corrections
of market failures are worth doing only if the resultant expected
‘government failures’, caused by political incentives, corruption,

6
In theory, they could change prices, outputs or regulate rates of return. See D.M. Newbery
(1997), ‘Rate-of-Return Regulation Versus Price Regulation for Public Utilities’, Depart-
ment of Applied Economics, Cambridge University, www.econ.cam.ac.uk/people-files/
emeritus/dmgn/files/palgrave.pdf.

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l­ obbying, imperfect information and capture, are expected to be less

than the identified costs of the market failures. They usually are not.
Hence, most market failures go unchecked for fear of making mat-
ters worse. In the case of externalities, this means that there is, by
default, lots of pollution which continues despite being inefficient,
on the grounds that government interventions would make things
even worse.
The most that can be said for this mainstream market and
government failure paradigm is that it is a classification that enables
us to look at any market and at least diagnose some of its problems.
It points us not only to externalities, but also public goods, monop-
oly and informational failures. It illustrates that almost all prices are
wrong. What it is less good at is working out what to do when there
is little prospect of getting the prices right. Intervening depends on
whether governments know what they are doing, and that the gov-
ernment intervening is not swayed by lobbying from oil companies,
farmers’ unions, renewables advocates and indeed lobbyists for every
interest affected by interventions. The costly failure of many climate
change policies is best explained by climate lobbying. Looking at both
market failures and government failures requires that experts do their
homework properly. Not surprisingly, those on the left focus on mar-
ket failures, and are optimistic about governments getting the right
answers; those on the right worry more about the failures on the gov-
ernment’s side.
A classic recent example can be seen in the cost estimates pro-
vided by the UK CCC for the trajectory to net zero in the UK. This
is pitched at the (implausibly low) 1 per cent per annum of GDP.7
How could it cost so little to switch from a carbon-intensive economy
(around 80 per cent dependent on fossil fuels) to a low-carbon one
in a matter of less than three decades? The answer is that the CCC
(and then the Treasury) assumes that all the interventions necessary to
decarbonise will be perfectly executed. There will be no government
failures. Indeed, the Treasury’s interim report of its ‘Net Zero Review’

7
Climate Change Committee (2020), ‘The Sixth Carbon Budget’, December, www.theccc​
.org.uk/wp-content/uploads/2020/12/The-Sixth-Carbon-Budget-The-UKs-path-to-Net-
Zero.pdf; and (2020), ‘Building Back Better – Raising the UK’s Climate Ambitions for
2035 Will Put Net Zero Within Reach and Change the UK for the Better’, 9 December,
www.theccc.org.uk/2020/12/09/building-back-better-raising-the-uks-climate-ambitions-
for-2035-will-put-net-zero-within-reach-and-change-the-uk-for-the-better/.

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 99 / Polluter Pays

has a whole chapter on market failure, and an annex too, but fails to
mention government failure at all.8
To the extent that there are remaining costs, a Keynesian mac-
roeconomics perspective assumes that the spending will increase aggre-
gate demand and hence spur economic growth. Investment, on this
analysis, is not a cost, and there is no need to forgo consumption to
provide the savings to finance it. None of this is remotely credible. That
this is at best naive is demonstrated below in chapter 7 when we come
to the macroeconomics framework.

The Alternative – Coase Bargaining

Pigou and the conventional market failure paradigm have not gone
unchallenged. An alternative school of thought, associated with the
Chicago successors to the Austrians, as staunch defenders of markets
and opponents of intervention, offered an ingenious answer to the
externality problem: to deny it existed. In a famous paper in 1960, ‘The
Problem of Social Cost’, Chicago school economist Ronald Coase sug-
gested that, if left to themselves, externalities would be internalised by
bargaining between the affected parties.9 If, for example, an upstream
chemical plant polluted the river with its effluent, a downstream fish
farm would find its output and profits damaged as it faced the costs of
cleaning up the pollution. In Coase’s bargaining model, the fish farm
could bribe the chemical firm not to pollute so much if the chemical firm
had the right to pollute, and if the right to clean water lay with the fish
farm, it could sue for compensation. The outcome, in the absence of any
transaction costs, would be to internalise the pollution between the two
parties at the optimal level. It would be the outcome that would have
resulted if the two firms had merged together to jointly profit-maximise.
Coase’s remarkable paper triggered a focus on property rights,
and on the law as the bastion for the guarantee and sacred protection
of those rights. It aligned with Robert Nozick’s Anarchy, State, and
Utopia,10 in which the economic borders of the state are confined to

8
HM Treasury (2020), ‘Net Zero Review 2020: Interim Report’, December, https://
assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/1004025/210615_NZR_interim_report_Master_v4.pdf. Its final report is slightly
more nuanced.
9
R. Coase (1960), ‘The Problem of Social Cost’, Journal of Law and Economics, 3, 1–44.
10
R. Nozick (1974), Anarchy, State, and Utopia, Oxford: Basil Blackwell.

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 100 / Legacy: How to Build the Sustainable Economy

the minimum protective state, and it echoed Hayek’s The Constitution

of Liberty. The economic problem, including the environment, became
a problem of the law, a matter of making sure that everything is owned
by someone and property rights are enforced. In effect, the problem is
solved if the environment is fully privatised.
The difficulties that Coase’s approach faced mirrored the dif-
ficulties the conventional economists had with the theory of perfect
competition. It is an argument largely based on assumption, and the
assumptions required for Coase’s result to hold are so restrictive as
to render the outcome of bargaining reaching the optimal level of
pollution a very special (utopian) case. Coase assumes zero transac-
tion costs, so that the legal enforcement of the property rights would
not need expensive lawyers and judges, just as Adam Smith needs
his invisible hand (and the modern version of the general competi-
tive equilibrium needs a costless auctioneer)11 to make markets work,
equating supply and demand. In all these cases, the game is over
before it started. The results are in effect just the working out of the
assumptions.
As for Pigou, knowledge of the extra environmental mar-
ginal costs and damages is often notable by its absence, and the esti-
mates presented are often the result of lobbying and spending on
‘expert evidence’ by the incumbents. The uncertainty is multifaceted
and has a serious time dimension too. Much pollution is diffuse, and
the great pollution problems are about regional and global ecosys-
tems, and beyond individual countries’ legal systems. The impacts
of the pollution tend to show little respect for legal institutional
boundaries. Burning the Amazon rainforests might make sense to
some Brazilians, and burning coal might appeal to some Chinese,
but possibly not to most of the other 8 billion people on the planet
as the earth’s systems are undermined. The added difficulty of non-
marginal environmental systems is that they are not disaggregated in
neat, discrete legal property units. Addressing these multiple issues
is about bargaining over the whole Amazon system, not specific trees
or hectares.
That both Pigou’s and Coase’s approaches are hamstrung
by their assumptions does not of itself render them of no value in

11
An alternative is given in A. Chandler (1977), The Visible Hand: The Managerial Revolu-
tion in American Business, Cambridge, MA: Belknap Press.

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 101 / Polluter Pays

c­ onsidering how to tackle pollution. Coase makes us concentrate on

the rights and duties of ownership, rather than on who owns them.
Taken seriously, the environmental, social and governance (ESG)
movement – the attempt by shareholders to influence the behaviours
of corporates on environmental, social and governance issues – has
realised that these rights and duties can be changed. Pigou makes us
take pollution taxes seriously.
Coase’s approach adds one more challenging implication. For
Coase, the distinction between polluter and polluted is irrelevant. It is
about who owns the rights. In the Amazon case, the polluted could pay
the polluter not to pollute. That indeed is what the Brazilian govern-
ment continually suggests,12 demanding to be paid not to cut down
more of its rainforest. Other developed countries could pay the Chi-
nese not to burn coal. India argued at COP26 that developed countries
should pay for its transition to net zero.
These are all examples where there is no agreed and binding
legal framework or enforcement mechanism. It opens up the possible
role of the state as proactively defining and newly assigning property
rights over environmental assets.13 For Coase, the crucial point is just
that everything should be owned. Ownership is a necessary condition
for addressing pollution. Hence, some economist-minded environmen-
talists have tried to extend ownership to the sea, building on the UN’s
1982 Convention on the Law of the Sea, and to divide up and auction
everything from fishing quotas to carbon permits and carbon offsets.
The remedy for pollution is to privatise environmental assets as much
as possible.
Pigouvian taxes also require property rights in a negative
form – property obligations and liabilities. To own something is to be
responsible for it and assigning responsibility is necessary to designate
who should pay the tax to correct Pigou’s externalities. Unowned com-
mons cannot be taxed. If nobody owns the open oceans, no one can be
held responsible for polluting and then overfishing. They are literally
beyond the law.

12
That indeed is what Brazil has proposed. See news reports including www.reuters.com/
business/environment/brazil-demand-us-pay-upfront-stalls-deal-save-amazon-forest-​
2021-04-15/.
13
See T.H. Tietenberg and L. Lewis (2018), Environmental and Natural Resource Econom-
ics, London: Routledge.

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The Polluter-Pays Principle

For Coase, the reason why there is no distinction between whether it
is the polluter or the polluted who should pay is that it is just a mat-
ter of who has the property rights at the outset. It is about economic
efficiency, and considerations of fairness, responsibility or stewardship
have no part to play. Coase does not advocate that the polluter should
pay, but rather that property rights should be taken seriously.
Putting aside the ineffectiveness of the Coase approach against
the scale of environmental damage and the systems nature of the atmo-
sphere and biodiversity, why then might it be better, both in terms of
efficiency but also on wider moral grounds, for the polluter to pay?
Why should the polluter-pays principle be universally applied? How
might it be effected in the case of Brazil?
There are two separate justifications for the polluter-pays prin-
ciple: economic and political. The economic case starts with the obser-
vation that the price of polluted goods is too low, and hence output will
be too high. We consume too much of the polluted goods, and thereby
live beyond our environmental means. Add up all this excessive con-
sumption of polluting goods and you get a measure of the aggregate
excess consumption over the sustainable consumption growth path.
The optimal pollution may not be zero, but if the polluter does not pay
then it will be excessive.
If the polluter is paid not to pollute by the polluted then the
polluter’s income will not be reduced. It will be the same, if the pay-
ment equals the cost of reducing the pollution. Output will therefore
remain higher than is consistent with the sustainable economy. In the
Brazilian example, money will flow to the Brazilian government to
offset the loss of income from not cutting down the rainforest. It can
then be spent on other activities, many of which might be polluting
and the aggregate level of consumption will remain above the sustain-
able level.
There is also an incentive implication. If the polluter pays a
pollution price, this is translated into an incentive for the polluter to
seek out less-polluting methods of production or just to lower output.
A carbon tax encourages the polluter to switch to less-intensive carbon
fuels (gas rather than coal, for example) and wind, solar and nuclear
electricity generation, and the higher price reduces the general demand
for fossil fuels. The oil company is worse off than it otherwise would

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 103 / Polluter Pays

have been. Over time, it will be encouraged to first switch away from
and then, if the costs are high enough, to exit fossil fuels.
Now consider the Coase possibility of paying the oil company
not to pollute. The (perverse) incentive might be to increase pollution
to attract a higher price, and the output of oil and gas is unlikely to fall
much. In Brazil’s case the prospect of being paid not to cut down the
rainforest might actually encourage it to increase the rate of destruc-
tion in advance. That arguably has been the case since 2014, and after
COP26, with a fund being made available to pay polluters to stop
chopping down rainforests by 2030.14 Not surprisingly, since the pros-
pect has been opened up of being paid to protect the Amazon, the
rate of destruction recently accelerated. Farmers who similarly face the
prospect of being paid not to strip out carbon from the soils, and even
better being paid to put it back, might increase the destructive farming
methods ex ante. Carbon offsets offset more carbon, the poorer the
baseline is. It might pay to trash the soils in advance of being paid to
put the carbon back again. There is here a policy asymmetry between
polluter and polluted pays. The former avoids the perverse incentive
problem; the latter positively encourages perversion.
If the prices are corrected to internalise the pollution, and
hence the polluter pays, the competitive economy takes on the chal-
lenge of reducing pollution. Entrepreneurs look for new technolo-
gies and ways of capturing emissions, for example through carbon
capture and storage (CCS) and natural carbon sequestration. That is
what even oil companies, faced with carbon prices, are now trying
to do, challenged by a plethora of new entrants with new business
models. With carbon prices in the EU and the UK rising sharply
towards €100 and £100 respectively at the end of 2021, and stabilis-
ing after Covid through 2023, these incentives are greatly increased.
Ironically given the very different schools of thought, Pigouvian
taxes might be the best way of improving the effectiveness of the
Austrians’ model.
The political case is one of fairness, and making those who
harm others pay is a basic requisite of fairness that pervades most legal
systems. Again, there is an irony here, given that the Austrians rely so
heavily on the law. It turns out that their concept of the law differs
markedly from the one that embeds fairness and justice. For Coase and

14
https://ukcop26.org/glasgow-leaders-declaration-on-forests-and-land-use/.

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 104 / Legacy: How to Build the Sustainable Economy

Hayek (and Nozick too), the law is the enforcement of contracts and
hence property rights. Fairness and justice demand much more. They
do not take the property rights as given.
Fairness and justice are critical parts of social capital. We do
not want to pay the criminal protection money in order not to steal
or murder. We assign the duty not to harm others a central role in a
civilised society. This general legal principle is supported by consid-
eration of capabilities and the interests of the poor. Pollution tends
to have its biggest impacts on those worst-off in society. Air pollu-
tion damages the lungs of the urban poor most, and hence physically
stunts their ability to fully participate in society. Slum dwellers around
the world live among the waste, rubbish and sewage of the rich. The
Mafia’s attitude to pollution and its cannibalisation of waste industries
plays out most forcibly on the poor who cannot avoid living with the
immediate consequences. The polluter-pays principle, as a reflection
of the demands of justice, is therefore a candidate for constitutional
protection.
The argument could be extended. The job of the state is to
protect and enhance nature as the key system infrastructure, as a core
capability for citizens, not only because it is efficient to do so, but also
because of fairness and justice considerations. This is a key part of
Sen’s theory of justice we met in chapter 2. Clean air, clean water and
access to nature are essential, and the state should prevent the pollu-
tion of air and water, and the destruction of biodiversity, because its
prevention aligns with justice to all citizens. Making polluters pay is
in consequence an essential function of the state, and one that is very
recent, as the world’s population has grown and the environment has
deteriorated.
Making polluters pay is really radical and would result in
radically different prices. This would, in both the conventional and
Austrian worlds, transform the environment. Consider how land use
might change. In many developed countries farmers are heavily sub-
sidised, and some polluting agricultural methods benefit from these
subsidies. Farmers argue that if we want them to reduce fertiliser and
pesticide use, protect the carbon in the soils and generally protect
nature, we have to pay them to do so. They own the land and hence
claim the right to pollute. They demand a Coasian bargain from the
taxpayers, and have built very powerful lobbying organisations to
hammer this home.

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 105 / Polluter Pays

Imagine if the carbon content of fertilisers is taxed, and the

biodiversity loss caused by pesticides is charged to the chemical pro-
ducers. The prices to farmers of fertilisers and pesticides would go up.
Imagine, too, if the emissions through carbon loss from the soils and
peatlands were taxed at the same rate as emissions from power sta-
tions, creating a common price of carbon. Costs would go up, farmers
would switch to lower-input technologies, and their pollution of the
atmosphere and the damage they inflict on biodiversity would fall too.
Because food prices would rise, consumers would have a lower overall
level of aggregate consumption.
The shock in both energy and grain prices caused by Russia’s
invasion of Ukraine and the blockade of the Black Sea ports is a proxy
for such pollution taxes in raising energy and food prices, and explains
why there need to be supporting policies to protect the poor, dispro-
portionately hit. The increase in energy prices has in turn increased the
costs of fertilisers and pesticides and caused a reduction in these inputs.
Crops are less fertilised and less heavily sprayed. The increase in the
underlying fuel costs is a rough proxy for a carbon tax.
Consider a UK example of how radical the impacts might be.
Ceasing farming on some of its most productive land in the peat-rich
Fenlands might follow from a carbon pollution price. Even at a low
price of carbon, the peat lost, blowing off this land, is so great that
when combined with a carbon tax on the fertilisers and the pesticides
tax too, the carbon taxation might render some of the agriculture there
uneconomic.15 While almost all of the attention has been on emissions
and overwhelmingly on electricity generation, largely to the exclusion
of sequestration, a carbon tax would bring transport, heating, trees
and soils into play.

Setting Pollution Taxes the Austrian Way

Taxes are just ways of adjusting prices, but the way the taxes are
set differs between those, on the one hand, who assume they can
15
See A.R. Graves and J. Morris (2013), ‘Restoration of Fenland Peatland under Climate
Change’, Report to the Adaptation Sub-Committee of the Committee on Climate Change,
Cranfield University, Bedford, www.theccc.org.uk/wp-content/uploads/2013/07/Report-
for-ASC-project_FINAL-9-July.pdf; and P. Landshoff (2020), ‘The State of the Fenland
Peat: Why Peatland Loss Is a Serious Challenge and What We Can Do About It’, 21 May,
www.zero.cam.ac.uk/who-we-are/blog/state-fenland-peat-why-peatland-loss-serious-
challenge-and-what-we-can-do-about-it.

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 106 / Legacy: How to Build the Sustainable Economy

calculate precisely what the pollution costs are, following Pigou, and
those, on the other, who take uncertainty seriously, following the
Austrians, respectively. Conventional economists, following Pigou,
try to equate the social marginal costs of reducing emissions with the
social marginal damages, coming up with an estimate of the ‘right’
Pigouvian price. The Austrians doubt that there is a right price
because of the central role that uncertainty and lack of a defined
future play in their mindset, as discussed in chapter 3. Instead of
trying to get the ‘right’ answer straight away, they could go for an
initial tax and see what happens (provided of course they are not
seduced by Coase’s argument). This is in effect learning-by-taxing,
experimenting in a fog of uncertainty to learn from the market reac-
tion. The wider the coverage of the tax, the more consistent the
learning-by-taxing will be.
In the carbon tax case, the strategies are very different. The
Pigouvians try to estimate the social cost of carbon by estimating
the marginal damage of carbon emissions, as against the marginal
costs of abatement. The Austrians could instead set an arbitrary car-
bon tax, and let the market then reveal these marginal costs and
damages, and then iterate a better approximation that meets the
­targets.
A third option is to create new property rights in carbon,
effectively making it a private good, and then the Coase process of
bargaining might work as polluters bought and sold the permits. The
advantage of the tax over the permits is that, as the consequences are
observed, the tax can be adjusted, whereas adding or reducing the
number of permits may prove more difficult.16 Worse, the political
attraction of manipulating the issue and circulation of permits is much
less transparent than simply changing the taxes. The permit approach
is much more prone to lobbying than taxes are. This difference can be
seen in comparing the actual volatile prices in the EU emissions trad-
ing scheme (EU ETS) with the smoother price that a carbon tax would
yield.17

16
See on EU ETS https://ec.europa.eu/clima/eu-action/eu-emissions-trading-system-eu-ets_
en; and A.D. Ellerman, V. Valero and A. Zaklan (2015), ‘An Analysis of Allowance Bank-
ing in the EU ETS’, Working Paper, EUI RSCAS, 2015/29, Florence School of Regulation,
Climate, https://cadmus.eui.eu/handle/1814/35517.
17
See graph on EU ETS since its inception: https://tradingeconomics.com/commodity/​
carbon.

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 107 / Polluter Pays

Pollution and the Link to Living beyond Our Means

If, as seems a reasonable assumption, pollution across all major econo-
mies, indeed all economies, is excessive, and if this can be reduced by
imposing pollution taxes so that prices fully reflect the environmental
costs, then the aggregate consequence of pricing pollution will be to
reduce demand for pollution-ridden products, and this will add up to
a reduction in total demand. The standard of living will go down, so
that we live within our sustainable means.
The reason why consumption goes down is because we – the
citizens and the consumers – are the ultimate polluters. In the example
above, raising input prices for things like fertilisers, pesticides and fuel
to farmers raises their costs. The farmers are not polluting for their
own sakes, but in response to the incentives they face. They are pol-
luting for us, the consumers. We pay less for the food produced by
the chemical applications, and the reason we pay less is that someone
else – other citizens – ultimately end up on the recipient end of the
pollution from the excess carbon and other emissions. It is easy to
blame the supermarkets for pressing farmers to lower prices, but super-
markets are competing for our business. We buy 2-for-1 bargains, the
cheapest intensively reared chickens and the cheaper imported meat.
Supermarkets can sell only as much organic, high-welfare and low-
environmental-impact meat as we are willing to pay for. The chickens
and the imported meat are cheap because they do not internalise the
pollution costs in their production.
The importance of this point cannot be overestimated. The
polluters are us, the principals, and the oil and gas companies and
the farmers are our agents. When people vote against increases in fuel
taxes and food prices, they are voting to protect their polluting habits
supported by the cheaper food and cheaper petrol and diesel. They are
voting to make other people pay, those immediately affected by the
pollution, and the next generation who will get the climate change.
Not to pay for the pollution we cause is selfish. The consequences of
that excess pollution which the absence of proper pollution prices
causes cannot be escaped. That is one of the main reasons our environ-
ment is in a mess.
Some argue that a lower standard of living is not the inevi-
table result of pollution pricing because there will be revenues from
the taxes and these can be recycled back to consumers, rather than to

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 108 / Legacy: How to Build the Sustainable Economy

g­ overnments, who can then spend the money on other things. Consum-
ers will not necessarily be worse off. There can be a substitution effect
without an income effect; we are not, on this argument, living beyond
our means, but simply consuming the wrong things.
Whilst the spending of environmental taxes offers lots of oppor-
tunities, the ‘no-worse-off’ result is very unlikely for two reasons. The
first is that there need to be comprehensive non-polluting substitutes
available at an equivalent cost. But for much of our economic activities
there are few if any substitutes. Consider carbon. It is true that electric-
ity can be generated in low-carbon ways, but at higher costs compared
with fossil fuels, despite the claims, primarily by interested parties, to
the contrary.18 Oil, in particular, is an incredibly useful high-energy-
density fuel. Although the relative costs are disputed, and indeed may
one day be lower,19 the full costs of intermittent low-density wind and
solar power, once all the costs of transmission, distribution, back-up
and most importantly the minerals (cobalt, lithium, copper and nickel)
are fully factored in (including all the pollution caused by their mining
and refining), remain higher.20 If the demand for electricity is inelastic,
then the costs of the final outputs consumed will go up as a result of
the pollution taxes. It is a similar case for transport. The carbon tax
encourages investment in substitutes, but they take time. If and when
substitutes are available at no extra cost, then few will pay the tax and
the standard of living will hold up. In this nirvana, there are no climate
change mitigation costs at all; it costs nothing to switch to net zero
technologies, and all the subsidies, regulations and carbon taxes can
simply be abolished.
The second reason why the no-worse-off result is unlikely
is that the pollution taxes raise money needed to invest in the less-
polluting technologies. Restructuring the economy takes time. It
requires lots of investment and lots of new ideas and new technologies
to bring forward low-carbon alternatives and to reduce their costs.

18
See Helm, Net Zero.
19
See Helm, Burn Out. The argument is that, as and when the world decarbonises, the
demand for oil will fall, as will its price, as production is concentrated on low-cost
resources, such as those in the Middle East. The marginal cost of oil from Saudi Arabia
may be as low as $5 a barrel, creating the result that the more successful decarbonisation
is, the more competitive the fossil fuels become.
20
On equivalent firm power auctions, see D. Helm (2017), ‘Cost of Energy Review’,
Independent Review for the Department of Business, Energy and Industrial Strategy,
October.

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 109 / Polluter Pays

This is what can in the end increase the sustainable level of consump-
tion – but not yet. Thinking more generally, and including all the dam-
age done to the biodiversity and other dimensions of nature on top of
carbon and other air pollution, leads to the conclusion that the lack of
full and proper pollution pricing is one of the main ways our consump-
tion outruns the environmental capacity to cope with it.
In order to meet the conditions for sustainable economic
growth, we would need to internalise all the main externalities. This
is a primary function of the state, and a grossly neglected one. It adds
pollution pricing to the capital maintenance and enhancements of
natural capital, and the provision of the core system infrastructures.
It further aids the protection and maintenance of the natural capital
assets and the natural system infrastructures since it reduces the harm
caused by current economic activities. There would be less need for
capital maintenance of natural capital assets because there would be
less damage. A market economy will be efficient if the assets are main-
tained and enhanced, if the system infrastructures are in place, and if
all environmental externalities are internalised at what would be the
right prices.
When environmentalists, like for example James Rebanks,21
rail against economists and blame them for the environmental damage,
driven as they see it by the pursuit of efficiency, they equate efficiency
with cost cutting, and they thereby display a deep ignorance about the
critical role efficiency plays in protecting and enhancing the environ-
ment. Economics is about the allocation of scarce resources. Doing this
inefficiently is not good for the environment. It is in fact very bad for
both the environment and the people who will have to pay the cost of
the pollution.

Polluter Pays in the Absence of Global Enforcement

How can the polluter-pays principle work in the global context?
Overcoming pollution between jurisdictions makes Coase bargain-
ing even more difficult, since there is no agreed court to appeal to.
Some very limited efforts have been made to shape international
agreements, like the Law of the Sea, the UNFCCC and the Conven-
tion on Biological Diversity, but none is really enforceable. In the

21
J. Rebanks (2020), English Pastoral: An Inheritance, London: Penguin Books.

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 110 / Legacy: How to Build the Sustainable Economy

Brazilian example, if other countries pay Brazil not to cut down

more of the Amazon, how can they be sure that Brazil will stop, and,
if it does not, what security for their payments do they have through
courts?22
Since the two main environmental problems – climate change
and biodiversity loss – have global dimensions (and in the case of carbon
emissions the problem is completely independent of specific locations),
global agreements and treaties depend on each country forgoing the
obvious free-rider advantages. Pricing can, however, make an impres-
sion on the incentives. It is not possible to force a country to use an
international pollution tax, but it can be applied to that part of domes-
tic production that is exported and traded.23 Suppose the UK and the
EU unilaterally impose a carbon tax or an ETS on a territorial produc-
tion basis but ignore imports. One way in which EU terrestrial emis-
sions can be reduced is by ceasing domestic production and importing
instead. That indeed is what has been going on with increased imports
of carbon-intensive goods from, in particular, China. If the UK and EU
impose a carbon tax or an ETS, and China does not, there is in effect
an extra incentive to produce in China as its relative competitiveness
will have been improved by the amount of the tax. It is a perverse tax
when production and transport from China are more carbon-polluting
than production in the EU. It is in effect a pollution subsidy to China
in our example.
The answer in this case is to apply the pollution tax to all
goods consumed in the UK and the EU, regardless of the location of
their production, in recognition that it is consumption that is the cause
of the pollution, regardless of where it is produced. There would be
exemptions if China imposed a carbon tax similar to that in the UK
and the EU, and China would be incentivised to do so because it would
then keep the tax revenues rather than pay them to the UK Treasury
or European Commission. It is an obvious way to extend the pollution
tax beyond the borders of a specific country, and thereby engender
some further cooperation, without resorting to the ineffective Coase
bargaining. There might still be diplomatic pressure where there is
multiple and mutual engagement between states, but the ­payoffs may

22
See Dasgupta, ‘Final Report – The Economics of Biodiversity’.
23
It could also be made a requirement of a future revised World Trade Organization trade
deal.

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 111 / Polluter Pays

be sufficient to offset these in other areas. The EU has finally proposed

a carbon border adjustment mechanism, making this a live policy
option, rather just than a threatened idea.24
If fully implemented, citizens of the EU would genuinely no
longer be causing climate change if and when they reach net zero. But
otherwise, on a carbon territorial production basis, they will still be
causing climate change, as they would be in the UK without a border
tax. Whilst it is not true, in the words of John Gummer, chairman of
the CCC, that ‘by reducing emissions produced in the UK to net zero,
we also end our contribution to rising global temperatures’, it would
be true if carbon taxes were applied on a consumption basis, including
imports.25

Why not Regulate and Prohibit Polluting Activities?

The striking feature of the above discussion about making polluters
pay by pricing our pollution is that so far it is not the main way in
which public policy has gone. There are very few pollution taxes, and
very few assignments of property rights. Instead, the overwhelmingly
dominant approach is to use regulation: for the state to define how
much pollution is to be allowed, and which things to ban. It reflects our
preference not to be explicitly confronted by the costs of the pollution
we cause by our consumption with in-your-face taxes.
It is easy to see the appeal of regulation. It provides a sense
of certainty, especially when it comes to banning products. It allows
experts (economists) to pick the ‘right’ answer, using cost–benefit
analysis. Banning things has a reassuring certainty. The EU has had
bans on GMOs, neonicotinoids and a host of chemicals. For others, it
sets ‘acceptable’ limits. Drinking water must not contain more than x
amount of a variety of chemicals, bathing beaches must meet a list of
minimum conditions and car exhaust emissions must be below speci-
fied levels.

24
See European Commission (2021), ‘Proposal for a Regulation of the European Parliament
and of the Council Establishing a Carbon Border Adjustment Mechanism’, COM(2021)
564 final, 14 July; and for the more general argument for border taxes, see Helm, Hep-
burn and Ruta, ‘Trade, Climate Change and the Political Game Theory of Border Carbon
Adjustments’.
25
Climate Change Committee (2019), ‘Net Zero: The UK’s Contribution to Stopping Cli-
mate Change’, May, p. 8, www.theccc.org.uk/publication/net-zero-the-uks-contribution-
to-stopping-global-warming/.

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There are two general objections to this regulatory approach.

The first is that it is open to capture by lobbyists and vested interests.
The second is that the state is in an informationally very inferior posi-
tion compared to the market.
The history of capture of regulatory standards is long and
detailed. Take two current examples: the proposed ban on the use
of peat in horticulture; and the treatment of biomass as a renewable
energy. In the peat case, the damage is well known, comprising emis-
sions, the loss of carbon sequestration, biodiversity losses and impacts
on water retention and flooding and on water quality,26 and yet it is
widely used in the horticultural sector as a compost and potting mate-
rial. As we keep repeatedly noticing, lobbying plays a big part: the
industry says it is taking voluntary measures, and protests that there
are not good substitutes readily available, and many gardeners carry
on using it, or buying plants grown in it. Why, if regulation is the pre-
ferred route, is this not simply banned in both cases? Why rely on vol-
untary steps by the polluters? Belatedly, the UK government is going to
ban the domestic use of peat.27
Biomass benefits from considerable subsidies, and there are
deep vested interests bent on capturing these subsidies. Take the burn-
ing of wood pellets in power stations. The emissions are exempt from
carbon taxes and permit requirements, and the burning itself is sub-
sidised. Biomass has been making up over 50 per cent of all claimed
renewables in the EU, and its status as being in the renewables class
yields considerable economic rents.28
The uncertainty leads to decisions that have unintended and
unanticipated consequences and reinforces capture by the lobbyists
with specific superior information. For example, the regulation of bio-
fuels in the EU has mandated that a proportion be included in fuels
for vehicles. The fuel of choice has been made from palm oil, itself

26
Peat has also been used extensively as a fuel in power generation in Ireland. See www.seai​
.ie/data-and-insights/seai-statistics/key-statistics/electricity/.
27
The UK government has recently changed its position on peat. See www.gov.uk/
government/news/sale-of-horticultural-peat-to-be-banned-in-move-to-protect-eng​
lands-precious-peatlands; and www.wildlifetrusts.org/news/governments-set-low-bar-
phase-out-gardeners-use-peat.
28
The Drax power station in the UK is paid subsidies indexed in real terms through to
2027, for example, equating to just under £1 billion per annum. See graph of the growth
of DRAX subsidies over time at https://ember-climate.org/insights/research/subsidies-for-
drax-biomass/. Its emissions from burning the pellets are exempt from pollution charges,
and these emissions do not count against the net zero target.

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 113 / Polluter Pays

produced by clearing existing forests, notably in South East Asia, and

sometimes grown on peat soils. The strong regulatory pressure towards
diesel rather than petrol because of emissions regulation led to seri-
ous unintended public health damage through air pollution, notably in
urban areas. Palm oil and diesel are dreadful examples of the perverse
impacts of well-intentioned policies.
In the US and the EU, these regulatory rules and their for-
mulation are the outcome of processes conducted by institutions that
have an element of transparency, though in the US the environmental
administration leads are appointed by each president and hence there is
always a key political element. These blemishes pale into insignificance
when compared to those in authoritarian regimes. The cases of Russia
and China show what happens when regulation is overtly political in
the absence of an independent legal system capable of enforcing the
law and the constitution. It is no accident that Russia and China have
such terrible environmental outcomes.

Better Prices
Prices are the key way in which information about costs is transmitted
in an economy. They matter to firms in revealing the costs of inputs to
producers, and to consumers in revealing the costs of production. The
gap between the two is profit, and it is the possibility of excess profits
that motivates entrepreneurs. All compete for prizes. The Austrians are
right about this.
Prices are never perfectly right. Economies are riddled with
imperfections. They can be improved upon, without trying to perfect
them. The most glaring gap in prices is pollution, and if pollution costs
are not reflected in prices, the economy will be an unsustainable one.
Pricing pollution is a necessary condition for the sustainable economy.
The polluter should be made to pay. In the case of renewable natu-
ral capital, the prices applied to the services provided by these assets
should be set so as to stay well above the thresholds, and indeed above
safe limits, to prevent the loss of the benefit, not just now, but in per-
petuity. This applies to species, habitats, ecosystems and, of course, to
carbon emissions and sequestrations. The gap between the economic
efficient outcomes and our unsustainable pollution is consequentially
immense.

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 7 PUBLIC GOODS AND
ZERO MARGINAL COSTS

The polluter-pays principle applies because markets do a very

poor job on their own in tackling pollution, but it is not sufficient, nor
is it a strictly stand-alone problem. Pollution goes through systems.
The car pollutes as it drives down the motorway, the coal pollutes
as the electricity generated from it goes through the electricity system
and the sewage goes through the rivers. All go through the natural sys-
tems, directly or indirectly.
These systems will not be well provided without public sup-
port. All have their own market failures. Most of them are in part or
in whole public goods and natural monopolies. All of them have high
fixed and sunk capital costs and low variable costs. For many, the vari-
able costs (the marginal costs) are close to or at zero. There is little or
no extra cost for producing an extra unit of output. This is the zero
marginal cost problem and all systems need to be designed, supported,
maintained and enhanced with this in mind.
Zero marginal cost is nothing new, but is becoming much
more pervasive across the economy. It is at the heart of decarbonisa-
tion: nuclear and wind and solar are all near-zero marginal cost tech-
nologies. The wind and sunshine are free, and the costs of nuclear fuel
are trivial compared with the capital costs of building a new nuclear
power station. In all these cases, it is the high initial capital invest-
ment that dominates the economics, and once built the running costs
are relatively small. More generally, digital technologies share this

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 115 / Public Goods and Zero Marginal Costs

c­ haracteristic, and as more and more of the economy becomes digi-

talised, with Big Data and AI and in due course probably quantum
computing, zero marginal costs are going to become the norm. This is
an economic revolution in the making.
Zero marginal cost will define the cost structures of the sus-
tainable economy. There will still be some marginal costs of pollution
which require pollution charges, but the maintenance of the systems
and their enhancement will need to be funded and financed on the
basis of their overwhelmingly fixed capital costs. That presents a whole
series of new challenges.

Public Goods
Public goods mean something very precise in economics and it is dis-
tinct and different from the public interest. There are many things that
are in the public interest but which are not public goods, whereas the
provision of public goods is typically in the public interest. Conflating
the two sometime suits lobbyists and vested interests. Farming lob-
byists, for example, try to reinterpret the new agricultural policy of
‘public money for public goods’ as meriting subsidies for anything in
the public interest, and then conflate the public interest with the inter-
ests of farmers. Again, lobbyists obstruct the path to the sustainable
economy, in this case erroneously claiming that food, a private market
good which is in the public interest to produce, is a public good. Defini-
tions matter if lobbying and capture are to be resisted.
Recall the discussion of the Coase approach to pollution, and
his focus on property rights. These are at the centre of the incentive
problems in respect of public goods too. Technically, a public good is
one which is non-rival and non-excludable, contrasted with a private
good, which is rival and excludable, and contrasts with an externality,
which is rival but non-excludable. Public goods (and externalities) are
a problem of defective property rights. Non-rivalry means that if you
consume a good, so can I and everyone else, and at no extra cost (i.e.
zero marginal cost), both now and in the future. The classic example is
broadcasting: if you watch a film, so can everyone else without harming
the quality of your experience. The only way a private business would
produce this is if it could exclude you, unless you pay, for example
by claiming a copyright enforceable through the courts and control-
ling your access to a platform to watch it on. ­Subscription allows all

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 116 / Legacy: How to Build the Sustainable Economy

the subscribers to watch or listen at the same time, so Netflix, Spotify

and the BBC licence fee do not price each viewing and listening even
though they do exclude the non-subscribers. Contrast this with food:
it is excludable and rival. If you eat it, I can’t; and you and I can be
excluded.
The problem with even this broadcasting example of creat-
ing excludability to the general service is that it excludes. The optimal
amount of the good to produce is that which satisfies all the demands,
whether or not everyone can pay the subscription or licence fee. Some
people will place a very high value on watching and listening. Others
less so. But each gets a bit of benefit, and if the aggregate of all these
benefits can be delivered without changing the costs of delivery, then
price should be equal to zero, the zero marginal cost, for the optimal
economic benefit, which happens to be the maximum economic benefit
because it costs nothing to deliver to each extra person.1 Put simply,
for the system public goods with zero marginal cost, no one should be
excluded and the price should be close to zero, as it is for example in a
number of free-to-use services. Where these are primary assets as part
of the requirements for the citizens’ capabilities to participate in the
economy and society, there is a coincidence between the economically
efficient outcome and maximising the citizens’ capabilities.
These circumstances of zero marginal costs for additional users
of the system or service arise in industries with lots of capital fixed and
sunk costs, and increasing returns to scale: the average costs per unit
fall with each extra unit of output. It is for this reason that public goods
tend to natural oligopolies or even pure natural monopolies. Competi-
tion can actually be bad: for if there are competing capital structures in
place, the average cost goes up. One water and sewerage system, one
electricity grid and one motorway system are much more efficient than
two or more competing systems.2 Think of the duplication costs of
multiple overlapping fibre networks and electric car charging networks
which are currently being encouraged in many countries, compared

1
This is the Samuelson formulation. P.A. Samuelson (1947), Foundations of Economic
Analysis, Cambridge, MA: Harvard University Press. Formally, Pareto optimality is
achieved when the sum of the marginal benefits equals the marginal cost, which is zero,
rather than where the marginal benefits equal the marginal cost.
2
The case of multiple fibre networks turns on whether the cost of additional cable is so
cheap as to render these duplication inefficiencies sufficiently small relative to the gains
from competition.

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 117 / Public Goods and Zero Marginal Costs

with the costs of concentrating on a single integrated fibre and car

charging network. For renewable natural capital, there is and can be
only one ecosystem.
Modern examples include Amazon, Google and Apple. Putting
more stuff, digital or physical, through these platforms does not cost
extra, just as putting an extra parcel on a postal delivery van which
is making the journey anyway does not add any extra marginal costs.
Ideas and knowledge are the ultimate public goods, with open-ended
increasing returns to scale in their diffusion and applications.3 Trust,
the key feature of social capital, tends to display similar character-
istics. A generally trust-rich society benefits all, even those criminals
who free-ride upon it. Man-made network systems, natural systems
and human and social capital all have these non-rival characteristics.
Zero marginal cost does not however mean that the provision
of these system public goods is without costs. Quite the contrary. It
is just that they are fixed. Someone has to pay, and this is where the
funding question becomes central to their provision. If customers are
not charged for use, there has to be some other basis for recovering the
costs. Average and marginal costs are not the same thing. Marginal
costs are those costs that are incurred by adding an extra unit of out-
put, given the system. Average costs are those that average out the total
costs, and hence in the systems where fixed costs dominate, the average
cost equals these fixed costs, divided by the number of units of output.
Where there are some elements of variable costs, these can be
separated out. Access to the system or platform (at zero marginal cost)
should be priced at zero, but some uses of the system have positive
costs, and these might be priced accordingly. For example, in electric-
ity, this could be divided into a use of system charge (the fixed element,
sometimes called the ‘standing charge’) and a use charge for energy
transmitted through the system networks which will have marginal
costs if it is generated from, for example, gas, but not if it is gener-
ated from nuclear, solar or wind, which are all technologies with near-
zero marginal costs. As, if and when nuclear, solar and wind, all with

3
Romer argues that it is these increasing returns to scale that lead to economic growth, and
offset the Marxian view that the rate of profit must fall as scale economies from physi-
cal capital are exhausted. See P.M. Romer (1987), ‘Growth Based on Increasing Returns
to Specialization’, American Economic Review, 77(2), 56–62. See also C.I. Jones (2019),
‘Paul Romer: Ideas, Nonrivalry, and Endogenous Growth’, Scandinavian Journal of Eco-
nomics, 121(3), 859–83.

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 118 / Legacy: How to Build the Sustainable Economy

near-zero marginal costs, increasingly dominate the generation of elec-

tricity, so both generation and networks together drive the marginal
price to zero, the electricity industry morphs into a capacity system,
rather than a commodity market.4 Since you either are or are not a cus-
tomer of the system as a whole, you cannot switch. The result is a de
facto monopoly, with the important consequence that who pays what
contribution to the fixed costs can take account of social justice con-
siderations because no one can escape paying. It is switching between
suppliers that inhibits cross-subsidies to poorer customers.
Viewing public goods through the zero marginal cost lens is
very different from the perspective of the public interest. It is also dis-
tinct from arguing that there are social and other benefits. It may be
in the public interest to provide the social benefits of a free healthcare
system to all, free of charge, but many areas of healthcare have con-
siderable marginal costs, not least because of the labour involved in
operations, treatments and consultations. Each hospital patient adds
extra individual costs. These may be provided free of charge because
it is widely agreed that, as a matter of social justice, access to these
services should depend upon need, not ability to pay. Making the price
zero when the marginal cost is not creates problems of excess demand:
if healthcare is free at the point of demand, but not zero marginal cost,
some form of rationing will typically be required. Queues are the way
this is manifest in the UK.
It is important to sort out those bits of the sustainable economy
that do and those that don’t have zero marginal costs. Some aspects of
healthcare do also have public goods characteristics. Examples include
vaccination and immunisation, where if the population is fully vacci-
nated, then herd immunity is created, and all benefit from the reduced
risk of infection. It is true that there is the (marginal) cost of each
vaccination, but the benefits accrue to all for free, including the unvac-
cinated.
The ultimate public good is renewable natural capital. Nature
provides at zero marginal cost its great bounty. It is not only non-
rival and non-excludable now, but potentially forever. Privatisation
of nature creates barriers to access for citizens, and private interests
should never be allowed to determine the future of natural assets and
in particular their ability to reproduce and stay renewable. Campaigns

4
See Helm, ‘Cost of Energy Review’.

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 119 / Public Goods and Zero Marginal Costs

for access to the countryside reflect its public good, and controls over
the use (or abuse) of peatlands, moorland and the seas are necessary to
prevent harm. Protected areas should be just that: open to citizens now
and in the future. What all this tells us is that a purely private market
economy cannot meet the requirements of the sustainable economy.

Digitalisation and More Zero Marginal Costs

This gap between private and public will get bigger. Over time, there
is likely to be a significant further erosion of marginal costs across the
twentieth-century economy we have inherited and which was designed
around marginal costs for a range of activities, for two reasons: first,
as in the wind, solar and nuclear examples, high marginal cost produc-
tion may be replaced by low marginal cost production; and, second,
because digitalisation is a zero marginal cost driver, changing the very
nature of production.
The electricity case illustrates a wider point. The twentieth-
century great economic and population expansions were driven by fos-
sil fuels, primarily coal and oil and then nuclear and gas. These all
display variable costs, making spot wholesale energy markets impact
on the whole economy. It is why, for example, despite an increasing
amount of electricity coming from near-zero marginal cost renewables,
the price of electricity followed the gas price shock in 2021 through to
2022 and beyond. This is because the gas power stations are the ones
we rely upon at the margin to ensure there is enough supply to meet
total electricity demand. Gas is the marginal fuel, with marginal costs.
But all the rest (nuclear, wind and solar) have no marginal costs, and
hence make a windfall profit at citizens’ expense when the price of gas
shoots up.
As more and more of the economy is digitalised, two over-
lapping things happen: labour is replaced by capital; and information
technologies push and broaden technologies towards zero marginal
costs. Consider a couple of examples. Online shopping is an automated
process. A virtual shop sets up an IT system, supporting apps and web-
sites. Algorithms do the ordering and accounting, not only fulfilling
orders at close to zero marginal cost, but increasingly matching goods
and services to people through advertising based on Big Data scraped
from multiple past individual decisions and choices. A physical shop
has heating, lighting and insurance, and it has shop assistants to deal

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 120 / Legacy: How to Build the Sustainable Economy

with individual customers and their payments. The virtual shops and
service providers have some remaining positive marginal costs primar-
ily in the messy business of dealing with customers, and it is not sur-
prising that major efforts have gone into replacing the option to call
and speak to a human with AI and related chatbot services. It is all
about driving out the residual marginal costs. Many customers of mul-
tiple products, including those of energy, water and transport utilities,
have, as a result, been dealing with chatbots, not people.
A further example is provided by agriculture. Traditionally,
farmers worked the land, and gradually farm workers have been
replaced by machines. In the UK, cheaper EU labour has been deployed
at scale to pick the crops and do other more menial tasks in abattoirs,
particularly since the expansion of the EU to include Eastern Euro-
pean countries from 2004 onwards. The shock of BREXIT and the
anti-European immigration policies have driven up the cost of labour.
(There is always a wage that someone will accept for these tasks; it is
just that it turns out to be a lot higher for UK workers than that paid to
Eastern Europeans.) The result has been to speed up the digitalisation
of farm work, increase the use of robots and add these to the gather-
ing of data-rich mapping and granular digital detail of soils, crops and
so on. Farming has always been a fixed-cost business: land is the key
factor input. Digitalisation changes the ratio of fixed to variable costs
further, with the marginal costs edging down. Even the fertilisers may
tend towards lower marginal costs if they are made using zero marginal
cost sources of electricity. The marginal costs – the farm workers – are
squeezed out.
What these examples illustrate is a major change in the under-
lying technologies and, in turn, a significant change in the importance
of public goods in the sustainable economy. As the new digital tech-
nologies proliferate, as everything is gradually digitalised, as the key
assets become data, manipulated by AI, as fossil fuels are replaced with
near-zero marginal cost nuclear, wind and solar, so the balance of the
economy changes, and with this comes a radical shift in production
and production costs, and hence in the fundamentals of markets, mar-
ket design and the role of prices. These two examples give an insight
into what is to come. Digitalisation will transform almost all economic
activity. The coming of Big Data and AI on the back of the internet will
make every sector of the economy have closer to zero marginal costs.
The very nature of work changes, as it, too, becomes the application

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 121 / Public Goods and Zero Marginal Costs

of fixed human capital to an ever-greater sphere of activities. Manual

labour, the essence of marginal cost activity, will retreat further. In a
fully digital world, it is reduced to a rump of personal services. Even
here, it is surprising how much can be done by robots.
The scale of these changes will be made all the greater by
new technologies to handle the mass of data. Quantum computing
goes beyond digitalisation, utilising the space between the 0 and 1 of
conventional computing. It is several orders of magnitude faster and
capable of handling vastly more data.5 The information technology
revolution may have only just started.
What this means is that public goods in the sustainable econ-
omy of the next generation will move from a series of important cases
to the mainstream, and the focus of the economy will be on their provi-
sion and the problems of incentivising their creation, investment and
maintenance when the optimal (marginal) price is close to zero. This
changes the game from just the simple correction of variable pollution
charges discussed in the last chapter, to one where the provision of
public goods is ever more important, and necessary for the limitation
of pollution. Carbon has a marginal cost (howbeit small). The energy
systems increasingly will not.

Why Markets Fail to Deliver

This big structural change towards more and more zero marginal cost
production of goods and services raises the importance of the incen-
tives, or rather the lack of incentives, for private businesses to produce
them. It is here that the monopoly dimension comes in.
If digital technologies tend towards continuingly greater and
greater returns to scale, and if the marginal costs are always as a conse-
quence below the falling average costs, marginal cost pricing will result
in losses. Where the marginal cost is zero, marginal cost pricing yields
no revenue at all. Why, then, would businesses produce these sorts of
public goods? How could they possibly recover their costs and make
profits?
One answer notable in the broadcasting case, and the digital
platforms, is to sell something else. Big Tech and broadcasters take

5
On the potential of quantum computing, see www.imf.org/en/Publications/fandd/issues/​
2021/09/quantum-computings-possibilitiesand-perils-deodoro.

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your data, a by-product of your use of the service. The data is a posi-
tive externality you produce; it has a value for other companies who
want to exploit the data about your choices to sell you and others
something else.6 Advertising-funded services are rife across the media.
You produce your data free of charge to them, at zero marginal cost,
and the Big Tech and media companies commoditise it and sell it on
at a positive price. The bigger the audience of users, the more valuable
the data is in aggregate, and hence scale not only shapes the costs of the
platforms themselves, but also the value of the data.
This model tells us that there is an alternative. You could
own your data and sell it, thereby capturing the profits from doing
so. Behind the quite separate arguments about privacy lies a serious
economic issue. To ensure you cannot do this (own your own data and
sell it), you are asked to ‘consent’ to cookies and the site visited can
then use your data, free of charge. In return, you get the public good,
the network, for free, howbeit the one that produces the greatest by-
product value to the provider.
Suppose one day governments legislate to make you the proud
owner of your data, and thereby give you the property rights. What
could Big Tech do? There are several answers, most of which are
common to the other mainstream networks. Big Tech could create a
monopoly and impose a user charge. If you want to use the service,
even though you are zero marginal cost to the platforms, you have
to pay. The monopoly could be protected by all sorts of barriers to
entry to prevent others entering the market and bidding down the price
towards the marginal cost. It becomes a market in capacity, in the sys-
tems and assets, not the marginal use of the system.
When new technologies come along with these network and
system properties, there is typically a ‘land grab’. Businesses scramble
to gain as much market share as possible, hoping to end up with enough
market power to impose high enough capacity charges to recover their
costs. The great railway boom in the late 1840s is the classic example,
and now there is the great land grab in rolling out fibre and car charg-
ing networks. Once they can charge you a user charge, the public good
becomes a club good. You can be excluded from what is still a non-
rival service, and interoperability barriers limit your ability to switch.

6
When nature provides you with the sight of a kingfisher, you capture the image with a
camera, and then the photo can be shared and even commoditised.

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 123 / Public Goods and Zero Marginal Costs

Winning market power is the prize, but the temptation to

exploit a monopoly once created is typically so great as to lead inevi-
tably to government intervention. The systems of the sustainable econ-
omy cannot be left in the hands of unregulated private monopolies.
With no competitors to check pricing, the incumbent has an incentive
to both ramp up the prices and enjoy what Hicks called ‘the quiet life’.7
Profits are maximised by higher prices and lower outputs. Why bother
with capital maintenance, why invest in updating systems, when there
is nowhere else for their customers to go? Why bother to innovate?
Indeed, why not squeeze out potential entrants and rivals to protect
existing assets and prevent new technologies rendering them stranded?
Even if the profits are very high, any competitor entrant knows that the
incumbent could retaliate by lowering its price and since it has a large
market share, this is a very credible threat.
The result is suboptimal and there are lots of historical exam-
ples where it becomes seriously suboptimal. Why? Because the mar-
ginal cost is zero and hence demand that could be satisfied at no extra
cost is not being met as the price is pushed up by the monopolist; and
because the impact of lower-quality networks and less intervention is
felt throughout the economy.
It is not just that there will be an economic loss from the poorer
quality itself, but also that the resulting service failures from a poor
network are asymmetric in their impacts. If the electricity networks are
of excess capacity and hence have greater resilience to shocks, some-
one has to absorb the extra costs of the extra capacity margin; and it
can be spread over the whole population of users. But if these are of
poor quality, poorly maintained and underinvested, resultant power
cuts have much larger impacts on all. In a context of uncertainty, it
pays not only to have too much rather than too little capacity, but
higher quality too. This asymmetry is felt on motorways with the costs
of traffic jams, and it can be a huge factor in water. A failure of water
systems stops much economic activity, whether it comes from failures
to provide sufficient capacity in flood defences or failure to over-size
water treatment works and water storage facilities.
When it comes to renewable natural capital, it is much bet-
ter to be comfortably above the thresholds from which the assets can

7
J.R. Hicks (1935), ‘Annual Survey of Economic Theory: The Theory of Monopoly’, Econo-
metrica, 3, 1–20.

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 124 / Legacy: How to Build the Sustainable Economy

reproduce and sustain their populations, than just below. The safe lim-
its give resilience and avoid the risks of the renewables natural capi-
tal becoming non-renewable. From the perspective of the sustainable
economy, the precautionary principle points to the need to regulate the
quality and quantity of the core systems, to have excess rather than
deficient supply.
An example that will most likely come to dominate these con-
siderations in the physical networks supporting sustainable economy
is the resilience of cyber networks, and in turn their reliance on resil-
ient electricity supplies. The systems are now intimately intertwined.
No electricity means no internet and no internet provision can mean
no electricity. The costs of a major communications network failure
are asymmetrically so much larger than the costs of over-provision.
Just a short-term interruption in the payments systems can cause panic
and bring much activity to a halt. That is why a cyber-attack is central
to any offensive hostile military action. Taking down the electricity
system is such a serious threat that in consequence many more busi-
nesses are investing in their own stand-alone electricity generation,
even if the costs are much higher than reliance on the nationwide
system.
The desirability of the resilience that having excess supplies
of public goods brings further disincentivises businesses from provid-
ing them. Excess supply capacity is an additional pure public good,
separable from the public good itself. It is designed to deliver resilience
in the face of possible future shocks. If these shocks are not amenable
to probabilistic calculation, then in the sustainable economy the level
of this provision is a matter for the state. At the level of the planet, it
makes little sense to consider these margins for the climate and bio-
diversity as a matter of cost–benefit analysis. Resilience is, as noted,
particularly relevant to the safe limits above the thresholds for renew-
able natural capital.
In theory, a business could invest in these sorts of excess sup-
ply services, but they are unlikely to be sufficient, because the business
can capture only some of the costs unless regulation forces someone to
pay the full additional costs. If the benefits from over-capacity in fibre,
electricity, water and transport are all at zero marginal costs, the clas-
sic public goods problem remains.
At the national level, whichever way you look at it, the monop-
oly route looks the most attractive for the private sector. It represents

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 125 / Public Goods and Zero Marginal Costs

the best bet to get the fixed and sunk costs back. It is perhaps no acci-
dent that as the digital technologies develop, so too has the concentra-
tion of markets, helped by the digitalisation of the financial markets
that in turn assist in the processes of mergers and acquisitions which
help to create and reinforce these monopolies.8
The monopoly question arises in both the private and the pub-
lic sector. Recall that it is generally less efficient to have competing
providers of public goods. Monopoly may throw up problems, but
competition could raise costs. There are essentially two solutions to
the monopoly problem: designate monopolies and regulate them; or
nationalise them.
In theory, the nationalised model shortcuts the choice of out-
put, investment and cost-recovery mechanisms. The state can choose
the output and prices without having to engage in the regulatory games
that the private monopolists might play, and without the asymmetries
of information that come from separating principals (the state) from
agents (the private monopolies). But in practice, there are countervail-
ing inefficiencies on the public sector side. Investment may be con-
strained by public finances, there may be political lobbying over the
location of investments, and the principal–agent problems do not go
away. The public sector can choose the balance between customer
charges and tax funding, and has the option of providing the services
free of charge, but it does then have to consider the impacts on the
overall national budgets.9 Either way, the monopolies will need regu-
lating, a task we will return to.

The Coordination Problem in Systems and Infrastructures

The public goods elements considered so far comprise the production
of the good or the service and their regulation, and the excess capac-
ity margins to create and sustain resilience. The sustainable economy
needs both. To these, there is a third element: coordination of the sys-
tems and infrastructures.

8
The evidence of recent increasing concentration and associated market power is to be
found in T. Phillipon (2019), The Great Reversal: How America Gave Up on Free Markets,
Cambridge, MA: Harvard University Press.
9
The Labour Party proposal to make broadband free of charge is an interesting case-study.
See Labour Party (2019), ‘It’s Time for Real Change, Labour Party Manifesto 2019’, www​
.labour.org.

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 126 / Legacy: How to Build the Sustainable Economy

Coordination is something markets are supposed to be good

at. Through prices and markets, supply and demand are brought into
equilibrium and goods and services are allocated accordingly. But
when it comes to the main system networks, the coordination requires
that the prices are right in each system, so that they mesh together into
the sustainable economy. The electricity networks need to be built in
tune with the development of digitalisation, and all the networks need
to take account of the common data and communications infrastruc-
ture that increasingly supports, and is gradually dominating, all the
other networks.
A moment’s reflection on the zero marginal cost and the
monopoly issues discussed above tells us that network coordination is
unlikely to be optimally provided by private markets. Imagine a new
business called ‘National Coordination plc’. How would it go about
its tasks? Who would pay and how would the free-rider incentives be
overcome? It is most likely that coordination would be underprovided
and ad hoc in its provision, as is witnessed in most countries.
A better way of thinking about coordination is to ask what the
objectives are and what the aspects of each system that depend upon
the others are. The UK’s National Infrastructure Strategy makes a big
play of the importance of resilience (as do the parallel plans in the EU
and the US), but does not define how much of what sort of resilience
is required, who is to decide how much and how it is to be paid for.10
Resilience gets discussed in the silos of each system, with each system’s
regulator. Who simulates the impact on all the systems of a series of
shocks that might happen? Suppose there is a cyber-attack on the elec-
tricity grid? How is this taken into account by the water sector and
the water regulator? Suppose there is a heatwave or a drought? Or a
pandemic? Suppose critical upstream natural capital is damaged by
land clearance? How are the resulting flooding risks to be taken into
account?
These examples illustrate a central point: the sustainable state
needs a systems plan, and this is a role for the state not the private
monopolies. The plan needs to be supported by an institutional struc-
ture. Someone has to be in charge. It can’t be simply left to Austrian

10
HM Treasury (2020), ‘National Infrastructure Strategy: Fairer, Faster, Greener’, Novem-
ber, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attach​
ment_data/file/938539/NIS_Report_Web_Accessible.pdf.

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 127 / Public Goods and Zero Marginal Costs

economics-style competition. In chapter 9, it is proposed that this is a

role for a system operator with a system plan on the basis of system
regulation.
A plan has to prioritise and focus on the primary public goods.
Some public goods are more important than others, and the sustain-
able economy will be one that ensures that the main ones are delivered
before worrying about the minor ones. Which ones really matter?
The answer is framed in terms of the assets that are required
for citizens and businesses to flourish, and the ones through which
much of the economy flows. We can try to work out some core prin-
ciples to distinguish between them, but a more pragmatic approach
starts with those that are definitely inside the boundary, before mov-
ing to the outer rings. To achieve the provision of just these, and their
capital maintenance, would be a major first step.
They include the primary or core assets identified in the capa-
bilities and citizens’ approach set out in chapter 2, supporting the capi-
tals identified in chapter 4. For citizens to flourish, they need energy,
water, transport and communications, and they need renewable natu-
ral capital. They need human capital and social capital. They also need
health and education assets, though not all of these are public goods.
These are the primary assets. No citizen and no business can thrive
without them.
That is the easy bit. The next question is harder: how much
of each public good is required? We could resort to principles and
sophisticated technical arguments, but as we have already seen cost–
benefit analysis will not sort this out (because they are systems rather
than discrete projects) and there are no practical economic tools for
working out optimal public goods and optimal systems that provide
them, other than saying that they should be large enough to incor-
porate all the demands and be resilient against shocks, subject to the
overall resources available.
A pragmatic approach is the best place to start. On energy, it is
a system capable of providing each citizen with the capacity that makes
system access possible and a resilience that limits the chances of an
interruption. It would have been helpful to have built in some resilience
to Russia choking off gas supplies to Europe. The affordability crisis
in 2022 demonstrated just how big the asymmetry between a resilient
energy system and an inadequate one is. Many of the citizens will not
be able to pay, and hence funding will have to be a mix of customer

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 128 / Legacy: How to Build the Sustainable Economy

and taxpayer charges. On communications, a broadband network with

system access is needed so that all citizens can access the basic services
in the economy, including banking and education for children.11 Resil-
ience in the event of a Chinese invasion of Taiwan to interruption in
the supply of chips would be a good idea, as well as to the supply of
critical minerals from China. On water, clean drinking water and a
sewerage system that prevents river water quality falling below a set
of minimum standards and addresses storm overflows are essential.
Resilience to droughts, flood and storms in the face of climate change
is needed. On transport, a road system which facilitates the charging
of electric cars and has a low probability of serious congestion, and a
rail system which facilitates at least city access (instead of cars) and a
supporting bus network are also essential.
In order to provide these systems, there needs to be coordi-
nation between them. All of them require a set of assets, and since
these core services are likely to be needed for the rest of the century
at least, they should be treated as assets-in-perpetuity, as described in
chapters 4 and 5. All of them will need capital maintenance to ensure
that the services they provide do not deteriorate, and as the bundle
of system public goods changes with technological progress, they will
need enhancements. All should go into the national balance sheet. All
should use the same accounting basis.12
The most difficult part of defining the primary public goods
and the assets required to deliver them is renewable natural capital,
what nature gives us for free at zero marginal cost and which it can
carry on delivering for free at zero marginal cost forever. What climate
would be best? How much biodiversity is optimal?
Tempting though it might be to try to answer these questions,
it is neither theoretically nor practically possible to do so. Nor is it
necessary. With the renewable natural capital, we are where we are.
As noted, it is not feasible to try to work out whether the concentra-
tion of carbon in the atmosphere prior to the Industrial Revolution
was optimal. Those who lived through the very cold conditions of the

11
During the Covid-19 pandemic lockdowns, when children were taught online, it turned
out that many were excluded for lack of broadband access.
12
An example of what happens when different accounting rules are used between gas and
electricity networks. Electricity was historical cost; gas used current costs and this affected
the location of new gas power stations. See D. Helm (2003), Energy, the State and the
Market: British Energy Policy since 1979, Oxford: Oxford University Press.

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 129 / Public Goods and Zero Marginal Costs

seventeenth century would probably have taken a very different view.

Similarly, we noted that, given that we do not even have a good and
practical definition of biodiversity, it is impractical to try to work out
even the optimal number of species. The reason is obvious: the natu-
ral assets all depend on their supporting systems, and defining opti-
mal rainforests or optimal soils is not amenable to analysis unless first
the optimal condition of all the other ecosystems is determined. The
numerous economics articles and books on optimal public goods are
of limited practical relevance.13
Given how radically the provision of these public goods would
be compared with the status quo, the scale of the challenges to make the
economy sustainable is obviously considerable. Public goods are not in
a good place now. The provision of these systems of core assets requires
a step change from what is currently happening. The renewable natural
capital is not being maintained (it is going backwards), the electricity
system and the transport charging systems lag the net zero requirements
and the mobile, broadband and future networks for the digital economy
are only now being created. Drinking water quality is mostly holding up,
but the rivers and the sewerage side is grossly inadequate, and water sup-
plies are jeopardised by housebuilding, high consumption and climate
change. The global gap between what is needed just to hold the line and
what is happening is huge. The academic question of what the optimal
public goods systems would look like is just that – academic.

Paying for Public Goods

Given the scale of the challenge, how should public goods be paid for?
In theory, if the marginal cost is zero, the price should be zero at the
point of use. This means that the revenues required to remunerate the
core assets and to pay for the capital maintenance must come as a sys-
tem charge from some combination of current customers and current
taxpayers and future customers and future taxpayers. Pay-as-you-go
places the costs of these systems on the current generation. Pay-when-
delivered pushes the enhancement costs onto future users.
The public goods problem is, at heart, a problem of the lack
of property rights, the non-rivalry and the non-excludability we met

13
C. Jones (2005), ‘The Optimal Provision of Goods’, chapter 10 in C. Jones (ed.), Applied
Welfare Economics, Oxford: Oxford University Press.

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 130 / Legacy: How to Build the Sustainable Economy

earlier. We can either try to rectify the failures in the property rights,
or the state can step in. In both cases, someone has to pay, and the
only option which allows all and anyone to use the systems is one in
which there is no access charge, and hence no access barriers, and no
user charges. This is a neat approach: it is economically efficient and
it separates out the provision from the revenue-raising. The revenue to
cover system costs becomes in the very general sense a taxation ques-
tion. The non-marginal costs can be a tax on all users on an ability-to-
pay basis; a local tax in the case of municipalities and the application
of this taxation classification to water and sewerage; or from direct
taxation. Having social tariffs for poorer citizens allows for everyone
to have access to these systems, and hence provide the capabilities to
choose how to live their lives.
Yet this solution of zero access and use charges, and a general
capacity charge, is almost never applied. The mainstream approach is
to create a property right, and demand that users purchase some sort
of licence to access the good or service. There are explicit or implicit
licences for road users, for broadcasting, and there are even require-
ments for access to all but the basic health services in most countries.
You pay a licence or subscription fee – a fixed charge – to access broad-
band. Even planning and other services from local government often
come with a fee. Almost all licences collect money. Indeed, that is their
primary purpose.
The obvious question is why charge for licences. If the free
provision of these services is economically efficient, why do we not
pay more tax and then have more public services free of charge? The
answer goes to the heart of the sustainable economy. Voters demand
more public goods, but also lower taxes. They want to free-ride, and
where governments resort to borrowing, pass the costs on to the next
generation. It is a well-known incentives problem, to which all sorts of
technical solutions have been proposed, all essentially trying to con-
front us with the cost implications of the public goods we demand.
Since we are not prepared to vote for the taxes to pay for these public
goods, the second best is to introduce user charges and create licences
as property rights. Privatisation is part of this second-best approach,
and it has accelerated this shift to user charges. The likely alternative is
to have limited or even non-existent public goods. In this regard, it is
noticeable that European countries tend to have more and better public
goods provision and higher taxes, whereas the US has the opposite.

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 131 / Public Goods and Zero Marginal Costs

Rethinking the Provision of Public Goods

Piecemeal charging to meet the systems maintenance and investment
requirements has become endemic as the nationalised industries have
been disaggregated, dismantled and privatised across many countries
since the 1980s. Piecemeal charging is often a consequence of the way
competition has been introduced to undermine monopolies, unbun-
dling has taken place, and the emphasis on customer choice has con-
fused the distinction between choosing the services that go through
the systems and the impossibility of aggregating individual choices to
define ‘optimal’ systems. Statutory monopolies focused on the delivery
of systems have been replaced by the gradual unpeeling of the monop-
oly activities.
Ironically, as this agenda has unfolded, the state has repeat-
edly had to step back into a monopoly role, nowhere so obviously as
in the case of electricity generation, where, in the UK, it has come full
circle back to a CEGB-style central planning role, and across Europe
the concept of a central buyer (implicitly or explicitly the state) has re-
emerged. The state is the contracting party again, and not the custom-
ers of electricity. In water, disconnection ceases to be a legal option if
customers do not pay, and large-scale state subsidies of the railways and
buses have come back to displace the ambition to make these services
rely entirely on user charges. Museum charges have had to be abolished.
The great experiment of privatisation, unbundling, liberalisation and
user charges has not lived up to the expectations of its proponents, and
it is in retreat almost everywhere, and most notably in the UK.
For natural capital, this privatisation agenda has not been a
positive one, though much deterioration took place before Marga-
ret Thatcher and Ronald Reagan came along. Natural capital public
goods are almost everywhere neglected. That is, after all, why we have
environmental crises. There is no evidence that privatisation is improv-
ing them.
If the taxpayers are to pay for more of the provision of pub-
lic goods in the sustainable economy, then it matters which taxpayers
make what contributions. If users are to pay fixed charges, then it mat-
ters which users make what contributions, given that most of the costs
are for fixed capital. The issue of social justice cannot be disentangled
from the question of citizens’ access to these public goods. That is the
subject of chapter 8.

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 8 SUSTAINABLE CONSUMPTION,
DEFICITS AND DEBT

How much can we sustainably spend? How much can we b ­ orrow

and for what? What does living within our means actually mean? How
far are we adrift, over-spending at the expense of the next generation?
The balance sheet approach to national accounts shapes the
answers. The rules are that debt should be incurred only where it
enhances the assets, and that otherwise the sustainable economy should
be on a pay-as-you-go basis after the application of the polluter-pays
principle. We can spend the surplus from taxation after paying for the
capital maintenance of the core system assets. That way we can look
the next generation in the eye and ensure that their capabilities will not
be impaired by our excessive consumption.
To some, these may seem like very old-fashioned Victorian
ideas and they are anathema to conventional modern economics, and
to Keynesian macroeconomics in particular. The concept of sustain-
able consumption faces a formidable mainstream challenge. Keynes-
ians do not follow a capital maintenance rule because there is no
account for capital maintenance. To Keynesians it is all just spending,
and part of aggregate demand. Far from curtailing spending to the
sustainable path, Keynesians’ aim is to maximise aggregate demand
up to the full capacity of the economy, and indeed Keynesians expect
higher demand to cause more capacity to come on stream. Spending
is generally a ‘good thing’, and the worry for Keynesian economists
comes when the news headlines are all about falling retail sales. When

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 133 / Sustainable Consumption, Deficits and Debt

this happens, the policy response is to find new ways of boosting back
that spending, for example by increasing government spending. Cut
taxes, increase spending, cut interest rates, all to get growth going
again. This should give all those environmentalists who see this as
the way to lots of environmental spending and borrowing, resulting
in extra ‘green growth’, pause for thought. Many Keynesians now
exacerbate our problems: they encourage debt to fund current con-
sumption, encouraging consumption beyond our sustainable means.
Environmental concern and Keynesian economic policies don’t gener-
ally mix.
There are deep philosophical undercurrents to what is pre-
sented as the technical economic argument, as science rather than
political economy. Keynes’s focus on consumption was always more
than a piece of economic theory. It had much deeper roots, and it has
become entrenched in the paradigm of a consumer-led economy. The
idea that consumption has to be limited, that it can sometimes even
be bad, and that in particular it can exceed the capacity of the envi-
ronment to cope, were not concerns for Keynes. He was a prisoner
of his times, as we all are. His economics was part of the rebellion
against all things Victorian. Keynes, Lytton Strachey and the Cam-
bridge Apostles rejected the moral strictures, and especially the moral
constraints, of their parents’ generation.1 Keynesian economics is best
viewed through the lens of the Bloomsbury Group and the rejection of
the broader Victorian outlook.2 Its validity ultimately depends upon
the assumption that the Victorians were generally wrong about the
virtues of thrift and savings, the fear of debt and the constraints they
tried to live within.
We live in a Keynesian world, one that is incompatible with the
sustainable economy. Keynesians have achieved this mainstream status
for two reasons: first, they have a theory, taught in all the main univer-
sities, dressed up as science, which dominates economics; and second,
it gives the politicians we elect a free pass to pander to our preference
for more spending and less taxes, even if this means borrowing from
1
See R. Skidelsky (2010), Keynes: The Return of the Master, vol. i, chapters 1–3, London:
Penguin Books.
2
For a general review, see L. Edel (1979), Bloomsbury: A House of Lions, London: The
Hogarth Press. The classic anti-Victorian statement is L. Strachey (1918), Eminent Victori-
ans, London: Chatto & Windus. See also P. Levy (1975), ‘The Bloomsbury Group’, chapter
8 in M. Keynes (ed.), Essays on John Maynard Keynes, Cambridge: Cambridge University
Press.

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 134 / Legacy: How to Build the Sustainable Economy

the next generation. Boris Johnson expressed it succinctly: ‘My policy

on cake is pro having it and pro eating it.’3
The consequences have been far from happy. The last twenty-
five years of this Keynesianism have produced asset bubbles, including
housing and land price bubbles, a global financial crisis and a Covid-
induced expansion of debt, an increase of another 40ppm in the carbon
concentration in the atmosphere, and an acceleration in the destruction
of major ecosystems and the biodiversity they had been home to. The
environment cannot stand more of the same.
Like most paradigms that become conventional wisdoms, the
origins of today’s Keynesians lay with very different problems, and it
has morphed from being a solution to unemployment in the 1930s to
being the answer to boosting economic growth. The context was that
wages failed to adjust to the weakened economic circumstances in the
post-First World War period that the British economy found itself in,
and there was a slump followed by the Great Depression.
In order to puncture the current enthusiasms for Keynesian
policies, let me take you back to what may seem a very academic
debate about sticky wages and inflexible labour markets. Bear with
me, as it turns out to have a major consequence for the sustainable
economy and creates a very special difficulty about the transition to
the sustainable economy and how to avoid a deep economic recession
and unemployment if consumption is reduced back onto the sustain-
able path. We need to work out how consumption can fall back to the
sustainable level without triggering a major recession.
Bear in mind too that sticky wages are just another way of
saying that we resist any attempts to make us live within our means
if it makes us worse off. We always want more income and resist the
pressure to make us pay for the costs of great shocks like the Covid
pandemic and the costs of addressing climate change and biodiversity
loss. This includes not just workers, but pensioners too. At issue are
the very different theories about how the labour market works, with
profound consequences for designing social justice into the sustainable
economy, and the role of investment and savings, and how much the
current generation should set aside spending for savings to repair and
enhance the primary assets.

3
L. Barber, ‘No More Mr Nice Guy’, interview with Boris Johnson in The Guardian, 19
October 2008, www.theguardian.com/culture/2008/oct/19/boris-london.

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 135 / Sustainable Consumption, Deficits and Debt

The Victorians and the ‘Classical’ Theory

Analogous to how the sustainable economy is developed as a reac-
tion to the Keynesian models that it challenges, and as the major envi-
ronmental problems of our age replace those that Keynes focused on,
Keynesian theory was developed in reaction to and rejection of what
went before, the so-called classical theory and conventional wisdoms
of the Victorians underlying it.
Classical economics had very much a supply-side approach to
the economy and it built upon the central idea of Adam Smith, that
a decentralised economy, left to its own devices, with each of us self-
interestedly pursuing our own utility, could be the best way to organise
an economy. This fitted with Smith’s deep scepticism about the cor-
ruption of government and the drag of its spending on the economy.
It was at the time, and still is, a very radical idea – that the best way
to organise an economy and a society is for each to pursue their own
interests, rather than cooperate. Self-interest becomes a virtue, not a
vice, as long as it is tempered by competition. Given this, the policies
the Victorians subsequently trumpeted – the nightwatchman minimal-
ist state, and free trade – would be amongst the best ways to organise
an economy.
There is no role for proactive macroeconomics. Money has no
real function over and above its role as a means of exchange and a
store of value, and could be treated as one of many goods, with a sup-
ply, a demand and a price (the interest rate). It has no significant gen-
eral effects on the economy, as all markets clear all the time. Money,
credit and banking are bit-part players, facilitating not shaping the real
economy. They are useful servants, but nothing more.
In this perfect theoretical world, refined and developed by
economists in the nineteenth and early twentieth centuries around util-
ity and marginal analysis, involuntary unemployment does not exist;
wages equal the marginal product of labour, so that the labour mar-
ket clears. If wages are too high, or just sticky, the unemployment
that results is voluntary; if workers want a job, they have the option
of accepting lower wages. Unemployment is a supply-side problem,
caused by market failure, and in particular by attempts by trades
unions to raise wages above their marginal products. Striking railway
staff destroy railway jobs. Zero-hours contracts create employment.
Minimum and living wages are the way to destroy jobs.

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The rules of the game of this older classical economics tradi-

tion were: savings equal investment, and Say’s Law, which states that
supply creates its own demand.4 The classical economists like Smith,
Marx and Mill viewed the economy as a supply-side exercise in com-
bining the fixed factor of production – land – with the variable factor –
labour (treating capital as embodied labour). This is how they got to
the labour theory of value. More labour meant more economic output.
More land, for example the discovery of North America and the grad-
ual development of colonies, temporarily relieved the constraint of the
fixed factor. But ultimately no one is making more land and, following
Thomas Malthus, more labour would be checked by limits on food
supplies. For Malthus, population increased geometrically, whilst food
production increased arithmetically. It would all end up in a stationary
state, whether Marx’s communist utopia or Malthus’s hell on earth
as reflected in the Irish potato famine in the mid-nineteenth century.5
The bit missed by the classical economists, and surprisingly by Adam
Smith, whose Wealth of Nations was published in 1776 just as the
Industrial Revolution was getting going, was the impact of technical
progress, opening up the prospects for growth in both food supplies
and industrial output rather than a stationary state of affairs.6
What could possibly go wrong? The answer for many Vic-
torians of Adam Smith’s persuasion came when the state interfered
too much with the normal operation of markets, straying beyond its
nightwatchman’s role. Worse, organised labour, with socialism as its
motivating political theory, would, by driving up wages and reducing
hours, drive a wedge between the costs of labour and its productivity.
The macroeconomic theory challenge, to the extent that there
was one, was to explain the trade cycles that bedevilled the nineteenth-
century economy, and how investment could first run ahead and then
be too little to maintain a steady growth path. There might be irra-
tional exuberance, later highlighted by Joseph Schumpeter and the

4
J.B. Say (1803), A Treatise on Political Economy. See also T. Sowell (1972), Say’s Law: An
Historical Analysis, Princeton: Princeton University Press; and D.P. O’Brien (1975), The
Classical Economists, Oxford: Clarendon Press, especially pp. 159–62.
5
K. Marx and F. Engels (1848), ‘The Communist Manifesto’, in K. Marx (1969), Karl Marx
and Fredrick Engels: Selected Works, vol. i, Moscow: Progress Publishers, pp. 98–137;
T.R. Malthus (1798), An Essay on the Principle of Population as It Affects the Future
Improvement of Society, With Remarks on the Speculations of Mr. Godwin, M. Condorcet
and Other Writers, London: J. Johnson.
6
Smith, An Inquiry into the Nature and Causes of the Wealth of Nations.

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 137 / Sustainable Consumption, Deficits and Debt

Austrian economists, and there might be an excessive expansion in

credit-fuelled booms. Both irrational exuberance and credit needed to
be carefully constrained, and the stability of the currency and the Gold
Standard disciplined the market players and especially speculators. Get
credit right, if necessary by manipulating the bank rate (the interest
rate), and that was about as far as the state should interfere. (For most
of the nineteenth century, there was no inflation, arguably because of
the Gold Standard.) A good dose of the Victorian values might insulate
those exposed to the cycle since they would have saved for such rainy
days.
Growth itself was explained by increases in population and
fluctuations in agricultural output at the mercy of weather, itself some
thought was partly explained by sunspots, which were believed to influ-
ence agriculture output, and later, by changes in technology.7 Classical
economists opposed trade restrictions, and were vehemently opposed
to mercantile protection, particularly from Smith onwards, persuaded
by David Ricardo’s theory of comparative advantage. Abolishing the
Corn Laws had centre stage in their ambitions.
As the realities of the unemployment in the 1920s and 1930s
sunk in, it would be a mistake to think this classical theory was
dead and buried. Keynes moved on from his concerns in the 1920s
about the Gold Standard (which he had supported, albeit at a lower
exchange rate) and manipulating the bank rate, and looked for fur-
ther levers to tackle mass unemployment. In doing so, he naturally
focused on the labour market (unemployment was the problem) and
considered how to tackle the stickiness of wages. He defined himself
in opposition to those who thought the solution lay in cutting wages,
which, his opponents claimed, would have recognised that the costs
of the First World War had made the country worse off (a bit like
Covid now) and improved its competitiveness in the context of a
fixed exchange rate.

7
William Jevons investigated the link between sunspots and agricultural output, and hence
the business cycle. See S. Peart (1991), ‘Sunspots and Expectations: W. S. Jevons’s Theory
of Economic Fluctuations’, Journal of the History of Economic Thought, 13(2), 243–65.
Robert Solow famously said: ‘You can see the computer age everywhere but in the produc-
tivity statistics.’ This became known as ‘the Solow Paradox’. R.M. Solow (1987), ‘We’d
Better Watch Out’, book review, New York Times, 12 July, p. 36. For a sceptical view
about the prospects for technology-led growth, see R.J. Gordon (2016), The Rise and Fall
of American Growth: The U.S. Standard of Living since the Civil War, Princeton: Princ-
eton University Press.

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 138 / Legacy: How to Build the Sustainable Economy

Keynesian Policies
Keynes’s general theory was less general and less revolutionary than
he and his followers claimed. It was more an evolution on fast-moving
theoretical and practical grounds.8 But it was a revolution in economic
policy. What Keynes eventually did was to shift the lens through which
the economy was viewed. He switched from the supply side of the clas-
sics and the Victorians to the demand side. He made aggregate demand
the key variable and the central focus of policy. Demand created its
own supply, not Say’s supply creating its own demand. This was new,
radical and different.
Keynes took the world as he found it as largely given and that
included much of the supply side. He had limited interest in industry
(despite the various commissions he sat on). On the cotton industry
and his involvement with the famous Liberal ‘Yellow Book’, and with
Lloyd George’s various policy initiatives, Keynes saw large industries
as essentially corporatist and more like extensions of the state. He
viewed management as needing to move towards a wider public inter-
est perspective. With an academic’s distain for commerce, he thought
that most of the captains of industry were at best average, if not often
stupid. Keynes saw no prospect of lowering wages: they were sticky
and they would remain sticky, whether they were sustainable or not.
Workers were not willing to reduce their consumption, as they are
unwilling to do so now, and if wages were cut, he saw a vicious circle
of falling demand and hence even higher unemployment. Consumption
had a floor, regardless of whether it was sustainable. Breaking through
that floor risked causing a depression.
There were two main interpretations of Keynes’s ‘general’
theory that emerged following its publication, both focused on sticky
wages. The first was the attempt, pursued ever since, to give Keynes’s
theory conventional, mainstream legs, less a revolution in economic
theory as Keynes had claimed. Don Patinkin’s famous restatement in

8
The classical theory Keynes had in mind was all about money, interest, credit, savings and
investment, and he had the banking system and the setting of interest rates very much to the
fore. Many ‘classics’ like Knut Wicksell did too. See K. Wicksell (1907), ‘The Influence of
the Rate of Interest on Prices’, Economic Journal, 17(66), 213–20. Keynes’s theory turned
out to be much more of an evolution from theirs, not the theoretical revolution he and his
followers claimed. His Treatise on Money preceded the General Theory, and carried on a
long tradition. J.M. Keynes (1930), A Treatise on Money, London: Macmillan. Keynes was
as much a prisoner of defunct economists of the past as his interlocutors.

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 139 / Sustainable Consumption, Deficits and Debt

Money, Interest, and Prices,9 as well as Paul Samuelson’s exposition

in his Foundations,10 took the guts out of Keynes’s theory, rendering
it a special case of the general equilibrium construction. That special
case was to add wage rigidity into the labour market model, and show
how this could lead to unemployment. Essentially, the special case was
the market failure of wage adjustment, caused by either money illusion
(confusing real and nominal wages) or union monopoly power. This
approach of trying to provide microeconomic foundations carries on
today. The ‘consensus’ new Keynesian models are of this variety, as
was the new classical synthesis of the 1980s.11
A less-noticed interpretation, and one very relevant to our
concern with the sustainable economy, was provided by Hicks (which
went beyond the IS–LM model for which he is famous). With hind-
sight in 1955, he wrote that ‘it is hardly an exaggeration to say that
instead of being on a Gold Standard, we are on a Labour Standard’.12
In effect, the economy, and money and credit in particular, had to
adjust to the given wages. We might today rewrite this as the claim
that environmental policy needs to adjust to given consumption, with
the environment a luxury good, affordable in good times, but not for
example when the cost of living and energy prices are rising, as in 2021
and 2022.
This idea can be generalised. If workers decide what their wages
are going to be, and hence demand a particular standard of living, this
can be accommodated in two ways. There could be redistribution from
the rich to the workers and from capital to labour. Labour could get
more of the national income at the expense of profits.13 The alternative
is that this ex ante nominal Labour Standard is adjusted in real terms
by inflation and devaluation, so that real wages are not given. In other
words, something else has to give to deliver full employment, and the
answer is indirect, but really a version of the old theory that wages are

9
D. Patinkin (1965), Money, Interest, and Prices: An Integration of Monetary and Value
Theory, New York: Harper & Row.
10
Samuelson, Foundations of Economic Analysis.
11
See T.J. Sargent and N. Wallace (1975), ‘“Rational” Expectations, the Optimal Monetary
Instrument, and the Optimal Money Supply Rule’, Journal of Political Economy, 83(2),
241–54.
12
J.R. Hicks (1955), ‘Economic Foundations of Wage Policy’, Economic Journal, 65(259),
389–404; and in (1982), Money, Interest and Wages: Collective Essays on Economic
Theory, vol. iii, Oxford: Blackwell, pp. 193–209.
13
D. Bergholt, F. Furlanetto and N. Maffei-Faccioli (2022), ‘The Decline of the Labor Share:
New Empirical Evidence’, American Economic Journal: Macroeconomics, 14(3), 163–98.

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 140 / Legacy: How to Build the Sustainable Economy

driven to their marginal products by competitive forces. On this view,

the Labour Standard is an illusion, a money illusion.
It is not hard to see both of these factors at play since the
1920s and 1930s: the UK has been devaluing for 100 years since then,
to continually recalibrate the current account of the balance of pay-
ments given a declining relative competitiveness, and there have been
periods of inflation, notably in the 1970s, the early 1990s and from
2020 onwards. Both force consumers and workers to live within their
means. The breakdown of the Bretton Woods architecture in the early
1970s was in response to inflation, and that inflation had the labour
troubles of the 1960s behind it, before the Organization of the Petro-
leum Exporting Countries (OPEC) oil shocks.
In the period after 1990, and particularly after 2000, the
coming of zero-hours contracts, cheaper migrant labour and cheaper
Chinese goods has been a notable example of enforcing competitive
(low) wages, and employment has been high. Having gained wage bar-
gaining power in the 1960s and 1970s, workers lost that power from
1980 onwards, and thereafter capital gained at the expense of labour
in national income, with technology encouraging further substitution
away from traditional types of work. As minimum wages and living
wages are imposed, the inflation option opened up again in the post-
coronavirus world and in the face of high private and public debts.
QE is just one example of monetising the debts. The inability, post-
BREXIT, to hire British butchers, lorry drivers and seasonal agricul-
tural labour reflects an ex ante desire to live beyond the UK’s means.

From the Labour Standard to the Consumption Standard

The Labour Standard has a broader context. It could be argued that
a democratic voting system will always seek to protect standards of
living, and politicians will find it necessary to promise ever-higher con-
sumption. The generalisation of the Labour Standard is what I call the
Consumption Standard. In the aftermath of the 2000 stock market
crash, the subprime crash in 2007/8 and the lockdown crash in 2020,
governments strove to underpin consumption by increasing debt and
lowering the cost of public, corporate and private borrowing. This
was true even in the context of ‘austerity’. The government strived to
protect voters from the consequences of the shocks that would (and
should) otherwise have made them worse off. Voters insisted upon

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 141 / Sustainable Consumption, Deficits and Debt

this. It morphed into its modern version, ‘cake-ism’,14 with debt under-
pinning the Consumption Standard.
Of course, the consumers and workers were, and are, in real-
ity worse off, as they will be because of climate change and biodiver-
sity loss, and the consequences of the financial excesses and asset price
adjustments that follow. The political trick is to treat consumption as
the target, and then to use the macroeconomic instruments to meet it
in money (rather than in real) terms. This eventually involves devalua-
tion, inflation and monetarising the debt. The real value of consump-
tion cannot be shielded permanently, unless the debt burden falls on
the next generation, breaking the first principle of the sustainable econ-
omy. It is not sustainable and hence will not be sustained. Eventually,
living beyond our means has to stop, unless the next generation pays
for it, and it is limited by environmental damage and inflation. There is
no free lunch as the cake-ists claim.

Investment
Concentration on aggregate demand does not automatically lead to
higher consumption. Demand equals consumption plus investment for
the domestic economy. Keynes (though not modern Keynesians) was
at pains to put investment rather than consumption at the heart of his
General Theory (but not so much his policies), even though (extraor-
dinarily) he had no credible theory of what actually determined invest-
ment, and thought that this was about ‘animal spirits’ and the mindsets
of those generally rather stupid businessmen. This is the controversial,
some say notorious, chapter 12 of the General Theory.15 It offended
mainstream economists because animal spirits did not have a micro-
economic utility-maximising underpinning, pointed to a very different
(and Austrian) theory of human nature, as discussed in chapter 3, and

14
‘But this strategy shows how we can build back greener, without so much as a hair shirt
in sight.’ See HM Government (2021), ‘Net Zero Strategy: Build Back Greener’, October,
p. 9.
15
Keynes wrote: ‘Even apart from the instability due to speculation, there is the instability
due to the characteristic of human nature that a large proportion of our positive activities
depend on spontaneous optimism rather than on a mathematical expectation, whether
moral or hedonistic or economic. Most, probably, of our decisions to do something posi-
tive, the full consequences of which will be drawn out over many days to come, can only
be taken as a result of animal spirits – of a spontaneous urge to action rather than inac-
tion, and not as the outcome of a weighted average of quantitative benefits multiplied by
quantitative probabilities.’

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 142 / Legacy: How to Build the Sustainable Economy

sat separately and out of place with the rest of his book. Keynes’s con-
tinuous engagement with Hayek (his principal theoretical adversary in
the great debates of the 1930s) will have informed his views on entre-
preneurs and he expressed a lot of sympathy with Hayek on matters of
wider political economy.16 If animal spirits were the ultimate driver of
investment, it is hard to see how his theory could drive them forward,
or what economic policies could make people more animal-spirited.
Whatever the causes of investment, it is the problem of invest-
ment that helps Keynes theoretically explain why the economy once in
recession can get stuck in an unemployment equilibrium. This is where
his liquidity trap comes in. For Keynes, investment drives (or should
drive) savings, not the other way around, as he ascribed to the views
of the ‘classicals’. The Victorians, in Keynes’s caricature, thought sav-
ings accumulated to facilitate investment. Whereas the Victorians had
triumphed thrift as a moral virtue, Keynes thought that thrift could be
the problem. What mattered was how savings translated into invest-
ment, and here the issue was the prospect of profits from enterprise and
all those animal spirits that profits were supposed to excite. Investment
was the pull factor; there was no supply-side push. The interest rate
was secondary, but the economy would get stuck in unemployment
because businesses lost confidence, and held cash balances rather than
investing in new enterprises. Once stuck in this liquidity trap, the inter-
est rate would not help much. And wages would not adjust.
The Victorians start with thrift and ethics and then show how
virtuous this personal set of values is for the economy. Indeed they
went further, with a deep fear of debt, a form of guilt (in German
Schuld means both debt and guilt – the two are conflated). The prudent
Victorians save, and then invest their savings in the family business,
government bonds, the new utility bonds and in the emerging joint
stock companies. For the Victorians, retained earnings played a key
financial role. This money underpinned the great industrial boom, built
the railways and facilitated the emerging municipal utilities. It is what
built the sewers.
16
Keynes wrote after reading Hayek’s Road to Serfdom: ‘The voyage has given me the
chance to read your book properly’, ‘In my opinion it is a grand book. We all have the
greatest reason to be grateful to you for saying so well what needs so much to be said.
You will not expect me to accept quite all the economic dicta in it. But morally and philo-
sophically I find myself in agreement with virtually the whole of it; and not only in agree-
ment with it, but in a deeply moved agreement.’ See further N. Wapshott (2011), Keynes
Hayek: The Clash that Defined Modern Economics, New York: W.W. Norton.

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 143 / Sustainable Consumption, Deficits and Debt

This thrift is forgone consumption. At the heart of this

nineteenth-century model is a focus on the long term, as it is for the
sustainable economy. It is a model close to that pursued by China since
1980 until the global financial crisis in 2007/8, and Japan until the late
1980s. In these and other great economic transformations (including
Germany after the Second World War), the core feature was very high
savings. In both China and Japan, this exceeded 30 per cent of GDP
for significantly long periods. Consumption was suppressed both by
a risk-averse population and the deliberate hand of the governments.
The Germans, Japanese and Chinese had good historical reasons for
being very personally risk-averse. They were all very thrifty.
In all these cases, the important success factors were first the
savings themselves, and then how these savings were channelled into
investment. In the case of Germany and Japan, the notionally private
banking system played this role; in China, it was the state and state-run
financial institutions that did this job. In all three cases, like Victorian
Britain, it worked. When it began to fail, Japan and China tried to
boost consumption and used Keynesian deficit spending to do so. In
Japan’s case, this has been a thirty-year failure; in China, the results of
trying to boost domestic consumption are just beginning to play out,
as its great property bubble collapses. In both cases, declining fertil-
ity and eventually declining populations might further undermine the
Keynesian policy measures. Fewer workers relative to pensioners is not
consistent with maintaining living standards.
Keynes might claim that Victorian success was because there
were lots of very profitable investments to make in the Victorian econ-
omy, and the savings were the consequence, not the cause of, a virtu-
ous circle encouraging enterprise. Investment begat profits which begat
more savings. Yet, if it is enterprise that is the driving force, then the
question Keynes might have asked is why the profitable opportunities
were so absent in the 1920s and 1930s in Britain. This would have
driven him to take seriously the supply side and productivity growth.
The opportunities that the new technologies provided were consider-
able. It was a great age of technical progress. It was not low wages that
suppressed demand, but rather the want of enterprise itself and a lack
of competitiveness that sticky wages reinforced.17

17
This plays into Martin Wiener’s theory of decline, and its deep cultural roots. See Wiener,
English Culture and the Decline of the Industrial Spirit, 1850–1980.

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 144 / Legacy: How to Build the Sustainable Economy

In the late 2010s, increasing the minimum wage and generally

rising wages were argued to be a positive contribution to raising pro-
ductivity, though there was scant evidence to suggest they did much
to shift the poor performance. The Uber economy, whilst it lasted,
pointed to a more mainstream pre-Keynesian response, as did the flow
of migrant labour from Eastern Europe. Both provided cheaper labour.
The remarkable fact is that, following the financial crisis in 2007/8,
productivity growth stopped, and has remained close to zero ever
since, despite the opportunities provided by the current great burst of
technical progress.
If Keynes had delved further into the primacy of enterprise,18
he might have engaged more with the fact that the Victorian model
was remarkably successful, helping a very small island and a very small
population dominate the global economy and make sterling the global
currency. Quite why it was so successful is not a question that Keynes
spent much time on, sharing the Bloomsbury general prejudices against
all things Victorian.
The UK economy only exceeded the Victorian economic
growth performance in the period 1945–70, and arguably for non-
Keynesian reasons. In retrospect, the period looks more like a weaker,
catch-up version of the German, Japanese, Korean and now Chinese
models, not a period when demand management was the key determi-
nant, indeed if at all.
The turn to boosting consumption is a counsel of despair, a
dose of short-termism and a belief that it is better that people do some-
thing in employment rather than waste their potential on the dole.
There is after all so much to be done, and with idle people on tap, there
is an essential common-sense argument that the tasks and the people
ought to be applied to each other.
An obvious question to ask is: if wages do not fall to clear the
labour market and utilise those idle hands, why should government
borrowing funding and financing increased government spending work

18
He would probably have fallen back on Sigmund Freud, who was fashionable at the
time among Keynes’s circle. This is also part of what lies behind the psychological
chapter 12 and its ‘animal spirits’ in the General Theory. But if it is an exogenous psy-
chology, or perhaps national culture emerging out of history, and, in Britain’s case, the
searing experience of the First World War, then it is not clear how society might snap
out of doom-and-gloom, other than to go for a bit of hedonism and stop being Victo-
rian. It fits with the general revolt against the perceived strong big stick of Victorian
morality.

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 145 / Sustainable Consumption, Deficits and Debt

any better? Keynes’s answer (or rather Richard Kahn’s answer19) was
the famous multiplier, a bit of magic that made borrowing and spend-
ing now pay for themselves and more. It looked too good to be true.
The government could borrow, increase public works, and the result-
ing spin-offs in increased demand in terms of the spending of wages
would lead to secondary and tertiary, and indeed effectively infinite,
rounds of demand increases through the economy. Kahn much later
remarked there is no obvious reason ‘why the multiplier is not infi-
nite’.20 The resulting higher tax yields would make the stimulus self-
financing or better, the purest form of cake-ism.
It was a nirvana that Keynesians returned to after the 2007/8
financial crisis, and again after the Covid-19 lockdowns, and it lurks
behind the ‘green deals’ in the UK, EU and US. Deficits do not matter
because debt does not matter, because spending funded by debt would
more than pay for itself. It is a magic debt tree. It would all work
up to the point where full employment was achieved. But since many
Keynesians believed that there is a general underconsumption tendency
in modern economies, this mattered less.
Keynes had private investment as the vehicle, but he and the
Keynesians slipped to advocating increasing investment in public works,
the sort that the Victorian municipalities went for with sewers, water
supplies, railways and so on, and in principle compatible with the asset
enhancement of the sustainable economy. But as this also took time
(not much is genuinely shovel-ready), Keynesians slipped back further
to just increasing spending to increase aggregate demand.21 More con-
sumption had the political merit of improving standards of living now,
whereas investment was more long term and hence likely to reap its
benefits to voters later. In contrast, Franklin D. Roosevelt’s New Deal
in the US did have more investment, notably in dams and infrastruc-
tures. Later China’s great expansion gave preference to investment over
consumption, at least initially. After the Second World War, Britain
19
R. Kahn (1931), ‘The Relation of Home Investment to Unemployment’, Economic Jour-
nal, 41(162), 173–98.
20
R. Kahn (1984), The Making of the Keynes’ General Theory, Cambridge: Cambridge
University Press, pp. 101–2, quoted in R. Skidelsky (1992), John Maynard Keynes: The
Economist as Saviour, 1920–1937, vol. ii, London: Macmillan.
21
Keynes was a member of the Executive Committee of the Liberal Industrial Inquiry,
and its report has become known as the ‘Yellow Book’. Keynes was largely responsible
for ‘Book II: The Organisation of Business’. Liberal Industrial Inquiry (1928), Britain’s
Industrial Future, Being the Report of the Liberal Industrial Inquiry of 1928 (the ‘Yellow
Book’), London: Ernest Benn; second impression, with a foreword by David Steel, 1977.

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 146 / Legacy: How to Build the Sustainable Economy

and Europe suppressed consumption with high taxes to boost the great
post-war reconstruction. Keynes himself promoted just such a policy
of suppressed, or at least delayed, consumption in his 1940 proposals
in How to Pay for the War – high tax to fund high war investments,
funded by a capital levy after the war ended.22 All very Chinese.
A further line that Keynes took was on the problem of where
the savings went, and in particular into investment outside Britain, as
a counterbalance to the then current-account trade surpluses.23 He
wanted these savings to be spent at home, not abroad. Despite his
earlier support for free trade, he came to favour home over abroad,
another break with the classical economists who were united in their
opposition to protectionism. This pool of funds should, he argued, be
added to the potential fire power for tackling home unemployment.
To the extent that he thought through this dimension of dealing with
unemployment, he also favoured population control to limit the work-
force,24 but presumably exporting surplus labour might have done the
trick, as it had during the eighteenth and nineteenth centuries, with the
Scottish and Irish rural poor, and, in Scotland’s case, the Clearances.
It did not take long for the magic of the multiplier to come
under attack. One line of attack was expectations, where Keynes
escaped one of the biggest holes in his multiplier by focusing only on
the short term. He greatly neglected what would much later be called
the neo-Ricardian effect and the neo-Ricardian equivalent theory,
developed by Robert Barro.25 If the government borrowed now, might
not people expect taxes to be higher tomorrow to pay it back? And if
so, might they not reduce their spending now, expecting to be poorer
tomorrow to pay the interest and the debt back? Fiscal policy could
thereby be rendered impotent. Indeed, it could be worse. Not only
would there be unintended consequences of government spending, but
the incentives facing government, and its vulnerability to capture by
vested interests, would mean that its spending would be inherently less

22
J.M. Keynes (1940), How to Pay for the War: A Radical Plan for the Chancellor of the
Exchequer, London: Macmillan.
23
A current-account deficit reflects a desire to buy more imports than can be paid for by
exports, and hence requires foreigners to lend us the money to pay for the excess of
imports.
24
He also thought that the quality of the labour force was a matter of concern, hence his
flirtation with and support for euthanasia.
25
R.J. Barro (1974), ‘Are Government Bonds Net Wealth?’, Journal of Political Economy,
82(6), 1095–117.

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efficient than that of the private sector. The public sector would ‘crowd
out’ the private sector, an idea that Smith had made one of the themes
of his Wealth of Nations.
The public choice literature, and the theory of institutional
sclerosis caused by vested interests and the bête noire of the sustain-
able economy, the lobbyists, set out by Mancur Olson,26 showed how
a less-than-zero-sum game could be created. Just as the multiplier
painted a picture of the ripples of more spending increasing output and
employment and producing the money to pay for the initial outlay,
so expectations contracted the benefits, including expectations of the
inefficiency of government spending. There would be even more to pay
back in due course. People are rational and they cannot be fooled all the
time. They learn and react in a dynamic way. Economic growth would
not be cumulatively built on the initial fiscal expansion, and hence the
future would not pay for the current spending stimulus. On the con-
trary, such fiscal deficit funding could make matters worse. ‘Going for
growth’ based on fiscal deficits would actually have the opposite effect
and might add to inflation too.
Although there is little evidence that people measure up to the
stringent rationality of Barro’s theory, especially when it is the next
generation who will have to pay back the debt, there developed an
empirical analysis of the impacts of fiscal policy which encouraged a
deep scepticism. While it became fashionable to argue that the great
golden age of economic growth and its associated full employment in
the period 1945–70 was the result of applying Keynes’s General The-
ory, the facts hardly bear this out. It is not hard to see a general post-
war tide lifting all boats, built on sustained investment, underpinned
by the profitable opportunities of reconstruction and new technologies.
Furthermore, that investment had very important supply-side dimen-
sions: it was centred on rebuilding and expanding the energy indus-
tries, roads and housing – all key systems infrastructure assets and all
key parts of the sustainable economy. Only later would the UK great
white elephants, like Concorde and the AGRs (advanced gas-cooled
reactors), start to deliver negative-value public investments. (Most
countries have their terrible examples too.)
As noted, and contrary to the Keynesian reinterpretations of
history, the post-war path in the UK (and in major European countries

26
M. Olson (1982), The Rise and Decline of Nations, New Haven: Yale University Press.

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 148 / Legacy: How to Build the Sustainable Economy

and the US) was characterised by very high taxation, and the state
directing the surplus from consumers garnered by these taxes through
to physical infrastructure investment. As electricity demand increased
at around 7 per cent for each year of 3 per cent economic growth,
the power stations were built on a pay-as-you-go basis going beyond
capital maintenance to include enhancements for future benefits, paid
for out of current consumption and current tax revenue. There was
not much on the consumer side until well into the 1950s and 1960s;
people were forced to be savers. Rationing carried on well after the war
into the mid-1950s. To claim that this post-war economic growth was
achieved by manipulating aggregate demand through government sur-
pluses and deficits has little foundation. It is true that there was a stop–
go cycle, and an electoral cycle, but for the UK the ever-present threat
to sterling after the devaluation of 1948 repeatedly put the brakes on.
What drove the final nail into the coffin of simple post-Second
World War Keynesian remedies was the experience of the 1970s. The
UK suffered two years of near 25 per cent inflation, followed by three
years of near 10 per cent inflation. It was in effect a massive default
on the debt. The very Keynesian fiscal medicine administered by the
Edward Heath government in 1972, aiming at 10 per cent GDP growth
over three years onwards, fuelled the inflation that followed, as did
Arthur Burns’s policy of not raising US interest rates as US inflation
took off, further exacerbated by the OPEC oil price shocks. By 1976,
even the UK’s Labour leadership recognised that ‘you can’t spend your
way out of a recession’.27 It is echoed in the great post-2007/8 financial
crisis and pandemic spending of 2020–2.
When the economic crises struck in 2000, 2007/8 and 2020–3,
the UK (and eventually the EU) gradually gave up on any semblance
of fiscal rectitude. With inflation suppressed in part by Chinese export
competition, the shift of emphasis came back to managing the business
cycle, just as American economist, Robert Lucas, famously declared
that economists had solved the problem of managing cycles (and
Gordon Brown famously stated that there would be no more ‘boom-
and-bust’). By the time that the coronavirus pandemic hit in 2020, it
was clear that trying to head off recession with ever-greater fiscal and
monetary policy would not usher in higher economic growth or raise
the productivity growth much above zero, even if it bought time, and

27
J. Callaghan (1976), Prime Minister, speech to Labour Party Conference.

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up until 2020 it looked like the labour market reforms of the 1980s
and 1990s had indeed made the labour market flexible, creating what
became known as ‘The Great Moderation’. As mentioned, zero-hours
contracts were a reflection of labour being priced into employment,
and in the UK case large numbers of European immigrants were both
absorbed into the labour market and thereby a lid was kept on wages.
This was the opposite of Keynes’s population control: the UK popula-
tion started to rise sharply. Labour supply went up, and so did employ-
ment. It looked surprisingly as if a greater supply of labour was leading
to higher demand for it.
The post-2000 period has also been a period of unprecedented
monetary laxity. Negative real interest rates for two decades had never
been witnessed in economic history. By mid-2022, the real interest rate
in both the UK and the US was around minus 6–8 per cent. Negative
real interest rates encouraged both a spending boom and a series of
asset bubbles, little investment but lots of financial engineering. Had
Keynes been around, this would no doubt have attracted his criticism.
It was a case of animal spirits in financial markets, rather than the
sort of investment he had in mind. That the financial engineering was
caused by the monetary policy would not have been wasted on him,
and the coming of QE would have reinforced the criticism.

Modern Monetary Theory and the Magic Money Tree

The extreme point of Keynesian (but not Keynes’s) policies is reflected
in the ‘Modern Monetary Theory’ (MMT),28 an approach designed to
bolster the case for QE and unlimited fiscal expansion, up to a point
of inflation. It is perhaps the greatest general economic policy threat to
the sustainable economy, despite its advocates advancing this as a way
to pay for decarbonisation. The advocates of MMT share with many
Keynesians the assumption that the economy is almost always prone to
under-utilisation of capacity, and hence they argued that this inflation
point is far off, and more of theoretical than practical concern. It did
not take long for this complacency on inflation to prove dangerously
wrong.29

28
N.G. Maniw (2020), ‘A Skeptic’s Guide to Modern Monetary Theory’, AEA Papers and
Proceedings, 110, 141–4.
29
For a popular version of MMT, see S. Kelton (2021), The Deficit Myth: How to Build a
Better Economy, London: John Murray.

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The idea is simple and one that has beguiled many cash-
strapped rulers in the past. It is that it is possible to print an unlimited
amount of money in a country’s own currency. This is indeed strictly
true: there is no limit to QE, whereby the Bank of England and the
Federal Reserve and the European Central Bank (ECB) print money to
‘buy up’ debt issued by the Treasuries (and once the Treasuries stop
issuing, buy up private debt as well). The Treasuries keep issuing, and
the central banks keeps buying, and the Treasuries then spend the pro-
ceeds. By early 2021, the Bank of England had, for example, bought
around half of all UK government debt.
MMT goes further: there should be no interest paid on this
debt, because it is riskless. This is only true in the sense that central
banks ‘buy’ the debt at a price they choose. Were they to subsequently
sell the debt to the market, unless the private financial institutions are
compelled to buy it (which MMT advocates might force them to do –
exchange controls might do the job), the market will price the risk, and
almost certainty at more than zero interest. Indeed it already has.
In earlier times, this would have been called monetarising the
debt, or even debasing the currency. It was attractive to the medieval
King John and a number of successors, and it has been tried in many
countries, including Zimbabwe. The 2020 episode of QE by the Bank
of England, the US Federal Reserve and the ECB arguably follows
MMT fairly closely. MMT advocates would quarrel only about the
amount, and argue that it should be an order of magnitude greater. It is
seductive politics too: it breaks free from the usual question about who
will pay it back and when, and therefore the consequential eventual tax
rises and expenditure cuts. A recent example is the argument for pay-
ing for net zero policies with debt, itself financed by QE. It is another
example of pure cake-ism.
MMT comes as close as it is possible to get to the idea that debt
does not matter, notably when it is held within a country and hence
directly challenges our approach to debt in the sustainable economy,
as only appropriate to finance asset enhancements. In the MMT world,
the debt is owed to the citizens who are themselves the recipients of the
spending and the taxpayers who avoid higher taxes. Only overseas lend-
ers need to be repaid. If the real interest rate is zero then there is no net
cost. At one leap, governments can spend as much as they like on social
care, healthcare, infrastructure projects and indeed widespread indus-
trial subsidies. They can spend an unlimited amount of money on ‘green’

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 151 / Sustainable Consumption, Deficits and Debt

stuff too. Taxes can be reduced since they are not needed to continue to
pay for services because new debt can be issued to pay for them instead
at zero cost. At the limit, taxes are not needed.30 Capital maintenance
and capital enhancements to meet our obligations to the next generation
can all be easily and costlessly met by printing money. It is the antith-
esis of our balance sheet rules and the requirements of the sustainable
economy. Worse, it helps dig an even deeper environmental hole.
This is a nirvana for those in favour of big government and
many environmentalists on the political left, and on the right those like
Donald Trump and Liz Truss who want unfunded tax cuts. But, like
miracles, it is too good to be true: an economy has to live within its
means and the resources it can command. There is a good reason why
monetarising debt tends to result in inflation, and using QE to finance
government spending and then even to finance the interest on the debt
ends in implicit or explicit default. For a relatively small open economy
like the UK, if the money markets expect the government to monetarise
the debt, the incentive is to switch out of sterling. Where there is also
a current-account deficit that needs to be financed, a crisis can quickly
develop, with capital inflows falling sharply, as they did in the 1960s
and 1970s. The balance of payments can then balance only at a sharply
reduced exchange rate, and that in turn means a lower standard of liv-
ing and imported inflation. Whereas the UK has been gradually devalu-
ing for a century, MMT could induce a full currency crisis. Inflation
and devaluation are the likely results. What staved this off in 2020 and
2021 was that all other major countries were doing the same thing. But
none of these countries has staved off inflation. The US, EU and UK all
experienced rising inflation rates by the end of 2021, and by the second
half of 2022 inflation rose to 10 per cent. As with the 1970s, the infla-
tion started and then (in the 1970s) oil prices pushed it up sharply and
(in 2022) Russia’s invasion of Ukraine kicked up inflation further as
oil and gas prices rose.

The External Position

For both conventional Keynesians and MMT theorists, the focus
is the nation state considered largely in isolation from the world
economy. Keynes accepted that UK industry was sclerotic, in need

30
See Kelton, The Deficit Myth, pp. 31–7.

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of rationalisation and fundamentally uncompetitive. He just thought

there was not much that could be done about this, an attitude some
take to the zero productivity growth now. The MMT theorists start
(and end) with sovereign currencies. As already noted, by 1930
Keynes was beginning to favour protectionism. The MMT theorists
largely neglect the link between the currency and domestic prices and
policies.31 The calls for protectionism are again growing, including
amongst environmentalists.
This is just not credible for a small open economy like the UK,
which relies on services and on imported manufactured goods, and
increasingly on imports of non-renewable natural capital. The trade
position matters. With 8 billion people, the world economy is to all
intents and purposes a source of unlimited effective demand for goods
and services. There is no lack of potential demand, and if there are
Keynesian aggregate demand problems, these can be solved by increas-
ing exports and outcompeting imports, as Germany, Japan, Korea and
China had done. The central problem for the UK is that home produc-
tion is not competitive: wages are relatively high, capital equipment
dated, the infrastructure is often poor and productivity is stagnant.
UK workers want to live beyond their competitive means, as well as
beyond their environmental means. UK pensioners want to carry on
spending, forcing the young to pay for them. Whereas the US, as a
very large economy that trades much less of its GDP, can take a more
relaxed view about its trade deficits, and is protected by the global
dominance of the dollar, the UK has no such luxury.
It would be better for Keynesians to argue that a world slump is
a special world situation warranting special short-term world demand-
side measures, and admit that the medium-term problem is sorting out
productivity, competitiveness and the environment. For the MMT the-
orists, unlimited monetary easing through the sovereign printing press
is a backdoor route to devaluation, unless everyone else is doing it too
(again a special circumstance as in the 1930s’ protectionism). A falling
currency means a lower standard of living and rising prices. It is an
enforced return towards a more sustainable consumption path. MMT
is not a free lunch. It is a dangerous delusion.
The retreat to protectionism in its various forms is an admis-
sion of domestic failure, a temporary bail-out which continues to

31
See again Maniw, ‘A Skeptic’s Guide to Modern Monetary Theory’.

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 153 / Sustainable Consumption, Deficits and Debt

r­einforce that failure. The difference between the Thatcherite posi-

tion in the 1980s and that of the Keynesians now is in essence that
the former attempted to improve productivity as a route to improving
competitiveness through supply-side measures. That the Thatcherites
failed, despite relaxing exchange controls and positively opening up
the UK economy to the shock of foreign competition, reducing the
trades union power they inherited and lowering tax rates, is a measure
of the scale of the challenge, and it may be that the UK is more content
to allow the gradual decline since the British empire in the nineteenth
century to continue through a series of punctuated devaluations and
bouts of inflation. Not even the temporary boost of North Sea oil and
gas could bridge the gap. The seductive argument that BREXIT frees
the UK up to engage in proactive industrial policies (meaning subsi-
dies) is itself an admission of competitive failure. In any case, match-
ing the US subsidies in the Inflation Reduction Act (2022), the CHIPS
and Science Act (2022) and the Infrastructure Investment and Jobs Act
(2021) is not a sensible option for the UK.

Moving on from the Keynesians

The Consumption Standard reflects a desire to maintain living stan-
dards whatever the external circumstances, and especially in the con-
text of recessions, external shocks like Covid and inflation. Keynesian
economic policies aim to do just this, because maintaining consump-
tion is either thought to be a good thing per se, or because it holds up
demand and leads via the multiplier to GDP economic growth.
The Consumption Standard stands in contradiction to the sus-
tainable consumption path, the level of consumption which is consis-
tent with passing on the assets to the next generation in at least as
good a state as we inherited them, the first principle. The sustainable
consumption path is the path of spending, which is consistent with liv-
ing within our means, and especially our environmental means.
In criticising the Keynes theory and the Keynesian policies,
two glaring problems remain for the sustainable economy: how to
ensure full employment; and how to do this in a context that requires
an adjustment down from the current Consumption Standard to the
sustainable consumption path. This requires social justice, and in the
next chapter the key steps are set out: the provision of a USO for
the core primary assets to participate in the economy; a return to

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 154 / Legacy: How to Build the Sustainable Economy

the flexible labour market, but protected by an element of universal

basic income; and a stake in the national dividend. These measures
turn out to be even more important as the economy moves towards
digitalisation and more zero marginal costs, and capital increasingly
replaces labour. The Keynesians have been broadly wrong in their
policy recommendations for the twentieth and early twenty-first cen-
turies, except in very short-term responses to very sudden shocks.
They have brought us the legacies of debt and inflation, and much
environmental damage too. This is true not only in the UK, from
which the examples discussed in this chapter are largely drawn, but
for most developed and fast-developing countries too. These policies
will be even more inappropriate in the twenty-first-century world of
digitalisation and the advances in ideas and technologies that will
marginalise manual labour even more.

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 9 SOCIAL JUSTICE

In the transition to the sustainable economy, citizens will have

to adjust to a lower level of sustainable consumption from which to
build out sustainable economic growth. The level of consumption will
go down before it can gradually rise again, to pay for the capital main-
tenance, the costs of pollution and to save enough to fund the invest-
ments. The poor will be particularly hard hit, and the clear implication
is that such a transition can be made only in the context of a radical
rethink of social justice. If some citizens already find it hard to have the
capabilities to fully participate in society and the economy, the transi-
tion to the sustainable economy presents a whole new challenge. There
can be no sustainable economy without social justice.
That challenge is compounded by the macroeconomics, and the
incompatibility of much of the current Keynesian policies with the sus-
tainable economy. If consumption is net of capital maintenance and if
debt is only for enhancements to natural and the other capitals, then def-
icit funding of current spending, negative real interest rates and QE have
no place in the sustainable economy. That means getting off the Labour
Standard and returning to flexible wages and rethinking minimum and
living wages, while at the same time achieving social justice. Social jus-
tice must handle flexible wages if we are to get away from the Keynesian
policy framework which has done so much harm to the environment.
How to get from here to the sustainable economy, with its hits
on consumption, and have flexible wages? The answers are: ­citizens

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 156 / Legacy: How to Build the Sustainable Economy

should have access to the primary assets, through USOs backed up by

social tariffs; and citizens should be entitled to an element of universal
basic income, tied to the national balance sheet and an annual divi-
dend. With both pillars in place, the sustainable economy sustains both
the environment and its citizens.

The Universal Service Obligations

All primary assets carry USOs: access to them has to be provided to
each citizen regardless of that citizen’s ability to pay. It is their right.
This does not mean that citizens should not contribute to the costs.
This is their obligation. Recall that the four core physical systems
and renewable natural capital all have low to zero marginal costs.
Recall that if price equals marginal cost, then for many and probably
most poorer users, the marginal cost is very close to zero, so charg-
ing them zero would be consistent with the marginal cost pricing
principle.
The obvious problem we have already encountered is that
since marginal cost is below average cost and often zero, there will not
be enough total revenue to remunerate the assets. Hence, there either
needs to be some people paying more than their marginal costs or the
taxpayer makes up the shortfall. Loss-making nationalised industries
are an example of this mixed model. The introduction of a fixed capac-
ity charge for system access allows for this element to be raised across
the entire customer base.
There is little chance of getting the pricing precisely right, but
from the USO perspective the important point is that the poorest are not
excluded. With a new system like broadband, where the marginal cost
is zero, the challenge is to put in place sufficient capacity to ensure that
the system is never congested. Since the overall cost of over-capacity is
typically very small, and the costs of deficient networks are substantial,
the cost of the excess is not a great burden and can also be made up of a
mix of user charges for those who can afford to pay and taxpayer con-
tributions for those who cannot. Like the roads, bridges and railways,
once the system is in place, it can last, subject to capital maintenance,
for a very long time.
The provision of health and educational USOs is common to
most developed countries. The systems of healthcare vary, and user
contributions vary too. Even in the UK National Health Service (NHS),

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users often pay for food and other facilities and conveniences, and the
health service benefits from some demand going elsewhere to the pri-
vate sector as it does in education.1
Although, in the case of the internet, energy, water and trans-
port, it is pretty clear what the service comprises, and hence it is not
hard to define the USO, it is not so clear-cut in health and education.
Some health treatments are excluded from free provision, and some
services are rationed. In education, class sizes can often be quite large,
and additional support limited. The level of provision in both cases is
an important consideration and will vary over time. For example, pupil
access to laptops and tablets was not necessary ten years ago, but now
these enable a higher level of provision without necessarily deploying
as many resources. Such resources proved crucial during the coronavi-
rus lockdowns.
It is no accident that these basic primary assets feature strongly
in the design of the broader welfare states constructed after the Sec-
ond World War across Europe. Even the US, notably with Lyndon
B. Johnson’s reforms of the 1960s, provides a welfare safety net. To
the municipal utilities of the first half of the twentieth century, the
post-war added the NHS and free education in the UK in the 1940s,
and it nationalised the core infrastructure systems. Electricity and rail
were fully nationalised, joining the Post Office, with communications
incorporated within it. Although the details varied, the nationalised
model was pervasive across Europe until the 1990s, whilst in the US,
rate of return regulation of private utilities had somewhat similar con-
sequences. In exchange for monopoly, the USO had to be met.
A critical feature of post-war nationalisation is that not only
was ownership transferred from the private sector to the public, but
competition was banned. These were statutory monopolies. Users could
not shop around and go elsewhere, leaving the nationalised industries
to decide how and from whom to recover their costs. The recovery
of the average costs was in effect made into a taxation problem. The
USO could be applied and there could be widespread cross-subsidies.
It made social justice much easier.
For example, the electrification programme was more expen-
sive as the rural and peripheral areas were brought into the system

1
In the UK, 7 per cent of pupils attend private schools, and yet their parents pay taxes that
contribute to the funding of state schools. Students widely contribute to university costs.

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 158 / Legacy: How to Build the Sustainable Economy

coverage. It obviously costs more to provide electricity to the tip of

Cornwall than to the major cities. In a statutory monopoly, these
peripheral areas could be cross-subsidised from the densely populated
areas. It is a consideration now with the roll-out of fibre, and it was a
key consideration as natural gas replaced town gas.
The rationale comes back to the concept of citizens rather than
consumers. Each citizen has a right to participate in the society and to
have the chance to reach their potential. Access to these systems needs
to be common, even though the costs vary, and prices cannot reflect
the full network costs of peripheral connections without many being
unable to pay. The extreme example of this is the postal service, where
a postage stamp costs the same for the delivery of letters and parcels
to the Outer Hebrides, off the west coast of mainland Scotland, as to
central London from any location. It needs a monopoly to prevent
cherry-picking competitors.2
Privatisation had the potential to break down cross-subsidies,
especially since the ambition was to combine private ownership with
competition, allowing customers to switch supplier. Private suppliers
have less interest in poorer and peripheral customers. These customers
are more likely to have bad debt records, and, for the supplier, servic-
ing a customer with a smaller value of consumption has the same fixed
costs as dealing with bigger customers, and hence reduces the profit
margin. Not only did privatisation move from pay-as-you-go to pay-
when-delivered, hence shifting the cost of investment onto the next
generation, but it also potentially threatened the delivery of the USOs
to current customers.
Regulators, challenged on the distributional consequences,
suggested that the government should use welfare payments to top up
the incomes of the poor, rather than requiring incumbent companies to
cross-subsidise.3 Prices should equal costs in an efficient market. Dis-
tributional issues are a matter for government and the welfare system.
Furthermore, citizens’ inclusivity should be achieved by money rather
than goods, and all goods and services should be treated alike. There
would then be no special assets or goods; none would be primary. In
a liberal and rationalist manner, giving the poor money would leave

2
Debates about ‘levelling up’ and whether to introduce differentiated pay in the civil service
on a regional basis are about common entitlements of citizens within a country.
3
An early example was the E factor, which the then head of Ofgem, Clare Spottiswoode,
argued should be transferred to the taxpayers.

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 159 / Social Justice

them free to choose, with the implicit assumption that they would
behave in the same manner as the educated elite who supported such
ideas. They would not spend their limited money on ‘booze and fags’,
fast food and lottery tickets.4
Competition is not a problem without solutions, and public
ownership is not necessary for the delivery of USOs. But some ele-
ment of monopoly is. Recall that the core networks remain natural
monopolies, and hence their charges can reflect the USOs. They do not
need to differentiate by geography, for example.5 Once the UK govern-
ment became a central buyer for electricity in the 2010s, by contract-
ing for almost all new generation, these charges became in effect cost
pass-throughs from which there is no escape for customers. The central
buyer is a monopoly, as well as the networks.
All these central buyer costs, plus those of the network natural
monopolies and the growing series of other levies and obligations, have
eroded those already limited elements between which customers can
switch suppliers and hence competition can drive these sectors. The
direction of travel after privatisation has ironically been away from
broadening the domain of customer choices and competition, towards
a greater role for monopoly charges and cost pass-throughs. Expansion
of the competitive domain has been more about competition to provide
these monopoly and government-contracted investments and services,
and less about retail competition. Where retail competition has been
tried, notably in electricity supply, the results have often been bad, and
in some cases disastrous. In electricity, UK retail competition ran into
serious problems in 2022, with half the suppliers going bust, and with
switching grinding to a halt. Domestic retail competition never got off
the ground in water, and failed in railways. For all the rhetoric about
competition and customer choice, most of the core system utility net-
works are still monopolies. In broadband and fibre, competition and
switching are already very limited.
Even where there is duplication of networks, it is perfectly pos-
sible to impose an overall user charge, just as it is possible to apply a tax
like value-added tax (VAT). For example, each business customer has

4
George Orwell’s Down and Out in Paris and London (1933) and The Road to Wigan Pier
(1937) were attempts to explain to the elites just what being poor was all about.
5
Economists regularly propose zonal and locational network charging, without taking
account of how poverty and access to USOs are geographically distributed. There is a good
social reason why network charges often have postage-stamp characteristics.

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paid climate levies, and domestic customers share the costs of energy
efficiency measures like smart meters. The issue is not the ability to
recover these costs, but rather the precise mechanism and in particular
the use of system charges. As we shall see later on, by designating sys-
tem regulators and the system operators, and locating the USO duties
with them, cross-subsidies to ensure that the USOs are met can sit in
harmony with the otherwise competitive supply of the services that
flow through these core system networks.
Other assets that are essential to citizens’ capabilities, such
as housing and food, have USO characteristics. Local authorities are
required to house the homeless. The costs come from local taxation,
and local government budgets are topped up by central government.
The extent and quality of this housing is one of those boundary issues
around the USOs. There is no right answer, but we know what wrong
answers look like. A civilised society which treats its citizens fairly will
not allow homeless people to live on the street. But when it comes to
food, what constitutes the food itself is open to debate. Here, gov-
ernments have typically opted to provide money rather than goods,
although food banks now offer widespread direct provision and could
become a USO, and there is much debate about both the level and the
content of school meals. Obesity is more prevalent amongst the poor,
for both children and adults. Some types of food are more primary
than others.6

Social Tariffs and Cross-Subsidies

Recovering the costs of the systems under monopoly is a matter of
choosing the balance between taxpayers and customers, and between
different sorts of customers. What makes the development of social
tariffs possible, differentiating between customers, and ensuring social
justice for the USOs, is defining some costs as non-switchable.
Amongst the myriad of possible social tariffs, there are fun-
damental choices to be made. There are two broad types of social

6
The Dimbleby ‘National Food Strategy’ starts to distinguish ‘bad food’ and proposes that
the state guides choice by taxing sugar. It is not clear whether the rationale is to protect
individuals from the consequences to themselves of too much sugar, salt and meat, or to
reflect the externality costs to society of the health consequences, in terms of health and
productivity. See H. Dimbleby (2021), ‘The National Food Strategy: The Plan – An Inde-
pendent Review for Government’, 15 July, www.nationalfoodstrategy.org/.

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 161 / Social Justice

tariff: charging less to the poorer customers; and providing an ini-

tial block of supplies at lower cost to all customers. Most current
social tariffs are based upon targeted assistance to particular groups
of customers designated as ‘poor’. The help to these customers can be
provided by lower charges contributing to the network costs, or for
specific help in reducing consumption, such as energy and water effi-
ciency. Groups of customers can be exempted altogether (for example,
provided with free rail and bus travel), or given discounts (for exam-
ple to students, elderly and welfare-dependent categories). These costs
are recovered from the rest of the customers or taxpayers.
The problems with targeted assistance are multiple. Identify-
ing who is poor requires that poverty is accurately measured, and that
those entitled to the extra help actually claim the benefits to which
they are entitled. In practice, the identification problem is anything but
straightforward. Is it income? What about those with no income but
with wealth? Is it age-related? Does the household count or just the
individual? Are the number and ages of children relevant as depen-
dants? Is poverty relative or absolute?
All these questions need answers, before we come to the prob-
lems that means-related benefits cause to incentives for people to work
and accept wages appropriate to their productivity, and who has what
access to the data, and how regularly the data is updated. There is also
the politicisation of the targeted benefits. Given that in some devel-
oped countries (and in China too) the population is ageing, a growing
number of voters are either pensioners or soon to become pensioners.
Protecting pensions can then trump all the other deserving poor, as
older people hog the benefits budgets through both state pensions and
aged-related social tariffs.
The universalisation principle that underpins the idea that all
citizens are treated equally points to an alternative approach to social
tariffs. Instead of trying to identify and target the poor, all citizens
could be provided with an initial block of services at a common lower
price. This could be managed where the citizens’ bills are calculated on
the volume of the service they use – how much water and electricity
they use, and how many rail and bus journeys they take. The zero mar-
ginal cost pricing principle for access would be violated, but, provided
the initial block is very low cost, there is a trade-off advantage. If the
tariff is fully volume-related then it can be graduated to rise with vol-
ume, but the access problem can then get exacerbated.

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After the initial block of the USO on a social tariff, the tariff
can rise in blocks, and these subsequent blocks can recover not only
the rest of the network and monopoly costs, but also the implicit cross-
subsidy in the initial social tariff block.
There are other advantages of taking this second route. It is
massively simpler to administer, it does not require detailed informa-
tion on the circumstances of each customer, and there are fewer data
protection issues. It leaves incentives largely in place, since the social
tariff block is independent of wages and income. In putting citizens
rather than consumers in the driving seat, this route keeps faith with
the capabilities approach. There will of course be special cases and
special needs which will add more complexity back into the charging,
but these can be very targeted cases, and leave the bulk of the problem
met through the social tariff initial block.
The initial block could be free if the state paid this contri-
bution to the total system network monopoly costs. This would get
closer to zero marginal costs access and hence be even better from a
capabilities perspective. In effect, the initial block of costs would come
from the taxation regime and the better-off would be contributing
more even if the tax system was flat rate, as discussed below. From
an overall accounting perspective, whether taxpayers or customers
pay for this initial block of system costs makes no difference to the
economy as a whole. The costs have to be paid. It is just a question of
who pays what.

Universal Basic Income

With energy, water, transport and communications, and with natural
capital, citizens should have primary assets to draw upon, both now
and in the future. The various social tariffs are one method of achiev-
ing this. But there is more to a decent life than access to these primary
assets. Food, clothes and the ability to access nature and to engage in
social life all require money. Although many of these requirements can
be mediated through assets, including a sustainable agriculture, sus-
tainable clothing production and materials, and social capital, in prac-
tice all developed economies provide for cash payments over and above
access to the basic assets. In the presence of both pervasive uncertainty
and government failures, there will be lots of incompleteness in map-
ping the capabilities onto social justice.

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 163 / Social Justice

The mainstream approach to insufficient money coming in is

to direct payments to those in poverty. Some in the liberal tradition
regard this as an insurance problem, handling the risk of bad things
that might randomly happen to people. This is the route taken by Wil-
liam Beveridge in his famous wartime report, ‘Social Insurance and
Allied Services’,7 and much earlier in the Bismarck scheme in Germany
in the late nineteenth century. Pensions and health insurance schemes
are the prime examples.
Beveridge’s assumption was that the target was absolute
poverty, and back in the 1940s he calculated that this would, with
reasonable economic growth and his scheme fully implemented, be
effectively abolished in a couple of decades. Thereafter, the costs
would wither with the problem: people would have enough to eat
and the public services would provide the other reliefs to the causes
of poverty as economic growth increased incomes. He also had full
employment in mind.
Poverty, however, turned out to be not purely absolute in an
abstracted way from society, but to have a relative element to add to
these absolute measures.8 What counts as being poor depends on what
others have, and how the capabilities shift over time. Not having a
fridge or even electricity supply in 1900 would not count as evidence
of poverty, but it would now.
Whereas for the capability approach it is poverty that counts,
for socialists the aim is to reduce inequality. This is a purely relative
concept and it could be achieved at any level of absolute poverty. We
could all be equally starving. Eliminating inequality blunts the incen-
tives that drive a market economy, and indeed that is the point for
those who wish to replace capitalism and the profit motive with social-
ism and the focus on public duty and service, with the state deciding
who gets what and all dependent upon the state. Why would anyone
go to work except if instructed by the state?
This incentive issue lay at the heart of the debates between
capitalists and socialists in the 1930s and in the Austrian economics we
met earlier. The backdrop was the great experiment in Soviet ­Russia.

7
W. Beveridge (1942), ‘Social Insurance and Allied Services’, Cmd. 6404. See also J. Harris
(1997), William Beveridge: A Biography, revised edn, Oxford: Clarendon Press.
8
A.K. Sen (1983), ‘Poor, Relatively Speaking’, Oxford Economic Papers, 35(2), 153–69;
and ‘Equality of What?’.

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 164 / Legacy: How to Build the Sustainable Economy

Hayek and the Austrians on one side of the debate, and Oscar Lange9
and socialist economists on the other, argued out the relative merits
of markets versus planning. Hayek was much more concerned with
this debate than he was with Keynes and the Keynesians, and his great
contribution was his theoretical critique of the Soviet system. This was
on two fronts: one about human nature and what motivated people to
come up with new ideas and be entrepreneurial; and the other radical
uncertainty of the sort discussed in chapter 3. For Hayek, the mar-
ket had two supreme advantages: it provided incentives for people by
opening up the prospect of profits, and it was more informationally
efficient than planning. For him, the market enabled freedom, and
needed a constitution of liberty to protect it, and it would be more
efficient than state planning.
This ruled out socialism (it was bound to fail), but it did not
remove the poverty problem and it did not deliver social justice. The
Soviet Communist model offered in the post-First World War context
an alternative to that of the US, and one with much greater equality.
As George Orwell pointed out in his review of Hayek’s Road to Serf-
dom,10 the trouble with competition is that someone wins and someone
loses.11 Hayek and the Austrian school were rather less sympathetic
about concerns for the losers. One reason for the lack of sympathy was
the link to unemployment and the extent to which state support would
undermine the flexibility of wages.12
As with the social tariffs, this problem will never go away as
long as poverty relief is targeted and explicitly or implicitly means-
tested. Why work for a wage below the value of state benefits? It was
the reason why so many economists have traditionally opposed a

9
O. Lange (1938), On the Economic Theory of Socialism, Minneapolis: University of Min-
nesota Press.
10
Orwell, ‘George Orwell’s Review of Hayek’s The Road to Serfdom’.
11
G. Orwell (1968), The Collected Essays, Journalism and Letters of George Orwell, vol. i,
London: Secker and Warburg.
12
Indeed, one of the reasons Keynes took money wages as fixed was because of unemploy-
ment pay. See R. Skidelsky (1983), John Maynard Keynes: Hopes Betrayed, 1883–1920,
London: Macmillan; R. Skidelsky (1992), John Maynard Keynes: The Economist as Sav-
iour, 1920–1937; and R. Skidelsky (2000), John Maynard Keynes: Fighting for Freedom,
1937–1946, London: Macmillan. It was a point taken up by Lionel Robbins in the Coun-
cil of Economic Advisers to Ramsay MacDonald’s government in 1930. See S. Howson
and D. Winch (1977), The Economic Advisory Council, 1930–39: A Study in Economic
Advice during Depression and Recovery, Cambridge: Cambridge University Press; and L.
Robbins (1934), The Great Depression, London: Macmillan.

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 165 / Social Justice

­ inimum wage, because it effectively legislates for sticky wages at the

m
bottom of the income distribution, and hence the Labour Standard.
Is there any way to both eliminate poverty and avoid blunt-
ing the incentives to work and thereby entertain flexible wages whilst
generating social justice? One answer is universal basic income, the
payment of money independent of income to all citizens. Basic income
is a USO: everyone is entitled to get it, irrespective of other income or
wealth.13 It provides one route to the completion of the provision of
basic capabilities to all citizens, providing money rather than goods for
those things not already covered by the system infrastructures, health-
care and education.14 Basic income plus USO access to natural capital
and the other core systems provide social justice.
There is of course a snag: the jam is spread across the entire
working population, and hence it is very expensive (older people can
be covered by state pensions, and children by child benefit).15 Further-
more, it is also wasteful, in that the billionaires do not need the basic
income payment, whereas the poor do. These high costs would be par-
tially offset by the more efficient functioning of the labour market,
and in particular the effective abolition of involuntary unemployment,
since everyone could choose a job if the wage was low enough to meet
their marginal product of labour if they wanted to. All unemployment
would be voluntary. Basic income is net of the abolition of all means-
tested unemployment benefits. Tax revenues would be higher as a result
of employment gains. Wages would be fully flexible. There would be
no need for the manipulation of aggregate demand, à la Keynesians,
for employment reasons.
Yet, the results would still be expensive, which raises the ques-
tion of whether there is a modified version of the basic income that
might meet these objectives of eliminating poverty whilst maintaining
incentives to work.
It is not hard to think of ways to modify basic income, for
example by cutting off the top half of the distribution, and therefore

13
The concept has a long history, from Thomas More’s Utopia, Bertrand Russell, through
to a Swiss referendum in 2016. See T. More (1516), Utopia. For a more recent exposition,
see P. van Parijs and Y. Vanderborght (2017), Basic Income: A Radical Proposal for a
Free Society and a Sane Economy, Cambridge, MA: Harvard University Press.
14
Biden’s $1,400 helicopter money comes close to this on a one-off basis in 2021.
15
The furlough support schemes during the Covid-19 pandemic lockdowns gave some taste
of what broad employment protection schemes look like.

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 166 / Legacy: How to Build the Sustainable Economy

those for whom the minimum wage would not have been an obstacle
to employment. Provided that the basic income is paid to a big enough
number to very comfortably clear what would otherwise be the mini-
mum (or living) wage, it would address the work incentive difficulties
of the minimum wage and hence make sure that no one had insufficient
income in society. Like the social tariffs discussed above, it provides for
all citizens to have sufficient to be able to participate in the economy
and society. Whilst critics argue that limiting the entitlements to basic
income is a move in the direction of means-tested benefits, it remains
very different for the bit of the distribution that matters – the poor.
And it still radically alters their incentives.

Inequality and the Problem of the Ultra-Rich

If poverty could be abolished though basic income plus USO access to
natural and other capitals, and healthcare and education, would there
be any reason to worry about inequality? Consider the consequences of
not worrying about the difference between an annual income of, say,
£50,000, £100,000 and £500,000. If it is poverty and not equality that
is the concern, these different annual incomes should not matter.
Consider one radical option to raise the money for the systems
access and the modified basic income: a flat single rate for both income
and capital gains, set at whatever level reaches the total current spend-
ing requirements including capital maintenance. All exemptions and
special tax treatments could be abolished, on the grounds that the state
is pretty bad at ranking what is more deserving of special treatment,
in part because it is so easily captured by tax lobbying. A crude and
simple tax system would radically reduce the costs of tax collection
and of minimising taxation deadweight costs incurred to accountants
and financial advisers. Similarly, the costs of welfare provision under
the present means-tested and complex rules of entitlement would be
replaced by the single basic income. The cost of administrating welfare
payment systems is a significant part of their total budgets, and the cost
of tax collection represents a significant percentage of total receipts
once the private costs of accountants are also included. The interaction
of the two adds yet another layer of costs.16

16
National Audit Office (2017), ‘A Short Guide to Department for Work and Pensions’,
NAO, London; (2017), ‘HM Revenue & Customs 2016-17 Accounts’, NAO, London.

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 167 / Social Justice

Under the modified basic income and a flat-rate tax, the very
large social security and tax bureaucracies could be radically slimmed
down. They would no longer be significant industries in their own right
probably in total employing over 1 million people, and hence on a par
with the NHS in the UK.17 Together, this would be an enormous saving
which could be diverted to a more generous basic income. The incentives
in the economy would be preserved, as the possibility of higher rewards
would not be blunted by increasing marginal rates as incomes rise. Mod-
ified basic income and radical tax simplification go hand in hand.
Some may argue that the ultra-rich would remain a problem,
and that allowing some individuals to own more than the GDP of some
small countries is divisive and tends to break social unity. They tend
to be ultra-polluters18 and their detachment from society can under-
mine social institutions and hence be detrimental to social capital. If
these arguments are taken seriously, there are various ways of address-
ing them while keeping to the broad outline of a flat-rate tax system.
There could be a special second rate of higher tax applied to incomes
and capital gains over a given threshold. This could, for example, be
£500,000. It could be higher, and the higher it is set, the smaller the
number of individuals involved. Above £1 million per annum, in the
UK there are only a few thousand individuals to consider, out of a pop-
ulation of over 65 million. Similarly, there is a relatively small number
of very high-wealth individuals.
There are several options beyond higher marginal tax rates on
incomes. One is to address the causes of these high incomes and wealth
directly, and in particular executive pay, and set a maximum ratio
between the top and bottom paid in an organisation. This might appeal
to concepts of fairness and worth, but would inevitably be complex in

17
The total direct employment comprises 100,000 for the UK Department of Work and Pen-
sions and around 70,000 for HM Revenue and Customs. The total number of accountants
in the UK is 380,000. See Financial Reporting Council (2021), ‘Key Facts and Trends
in the UK Accounting Profession’, www.frc.org.uk/getattachment/e976ff38-3597-4779-
b192-1be7da79d175/FRC-Key-Facts-Trends-2021.pdf.
18
For estimates of billionaires’ carbon footprints, see R. Wilk and B. Barros (2021), ‘Private
Planes, Mansions and Superyachts: What Gives Billionaires like Musk and Abramovich
such a Massive Carbon Footprint’, The Conversation, 16 February, https://theconversation
.com/private-planes-mansions-and-superyachts-what-gives-billionaires-like-musk-and-
abramovich-such-a-massive-carbon-footprint-152514. See also O. Lai (2021), ‘Billion-
aires’ Single Space Flight Produces a Lifetime’s Worth of Carbon Footprint: Report’, 15
December, https://earth.org/billionaires-single-space-flight-produces-a-lifetimes-worth-of-
carbon-footprint-report/.

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 168 / Legacy: How to Build the Sustainable Economy

the application and open to widespread evasion. If it is wealth that is

the problem above a defined threshold, then a wealth tax is the obvious
path to take, supported by a serious inheritance tax. The key point here
is that modified basic income, and tax simplification, are not barriers
to addressing what might be called gross inequality. If the ultra-rich are
a threat to social capital, the answer is to address this group head on.
A flat-rate tax plus a wealth tax can be very different in social justice
terms from just a flat-rate tax.
From the 1980s onwards, several countries experimented with
radical simplification, and steps towards the flat-rate approach.19 The
difficulties came both for the obvious political reasons and also because
none was radical enough, failing to fully integrate all the various other
dimensions of the tax system, notably capital gains tax, and to address
the problems of poverty discussed above. Ever since, layer upon layer
of complexity have been added back.
Even in the more radical version described above – a basic
income for those below a threshold and a flat-rate tax – some further
complexity is inevitable in practice. As with social tariffs, there are
people with specific individual needs who will require extra support.
There are special tax categories for people who live overseas. But the
important point is that basic income starts simple and allows some
limited complexities, whereas the existing social security system and
the tax regimes start very complicated, and tend to get increasingly
complex.20 All of these extra complexities to the flat-rate approach
already exist in current tax regimes, so the modified basic income pro-
posal does not make matters worse. Few argue that the complexity that
has been added to tax regimes in the last three decades has resulted in
a much more equal distribution and poverty has not gone away. The
evidence is unambiguously to the contrary. Complex tax regimes have
become ever more complicated, and the overall scale of inequality has
risen very sharply.
Even with the above modifications, questions remain about
the level of the basic income. How high should it be in order to

19
In the 1980s, Chancellor Nigel Lawson developed a two-rate system for UK income tax,
at 20 per cent and 40 per cent with thresholds for each. The Czech Republic introduced a
flat-rate 15 per cent on gross income in 2008, but by 2013 a higher rate was added.
20
There are good political economy reasons for assuming that complexity grows once estab-
lished in public policy because of rent-seeking, lobbying and capture. See Helm, ‘Regula-
tory Reform, Capture, and the Regulatory Burden’. See also D. Ulph (2014), ‘UK Tax
System Complexity: Causes and Consequences’, Tax Journal, 17 December.

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 169 / Social Justice

a­ bolish poverty (net of the system assets USOs)? How does it relate to
the capacity of the economy to pay and hence to a stable sustainable
economy?

Basic Income and National Dividends

A basic income is a special type of USO entitlement. It is a claim by
citizens on the sustainable economy and its transition to a sustainable
consumption path.
The capacity of an economy to support some or all of its citi-
zens depends on how well the economy is doing, and on consumption
not being allowed to outstrip that underlying performance. Borrow-
ing from the next generation to support current spending is ruled out.
The ultimate constraint is the maximum sustainable level of consump-
tion consistent with the requirement to ensure that systems are passed
down to the next generation in a properly maintained form. Given we
are living beyond our sustainable means, once pollution charges are
added, public goods are provided and assets properly maintained, and
the transition via decarbonisation is paid for, the impacts on the poor
are going to be considerable. There is no escaping the consequences
of living within our sustainable means. The events in energy and food
markets in 2022 and the associated ‘affordability crisis’ gave a taster of
how painful this could be.
In the debates of the 1930s, Lionel Robbins argued that unem-
ployment was high because workers demanded wages that failed to
reflect the destruction of capital in the First World War. They had, in
effect, not come to terms with the diminished circumstances caused by
the war, and the need to pay off the debts incurred. UK industry was,
in the 1920s and 1930s, uncompetitive; the UK could not pay its way
in the world, and the Gold Standard simply made this explicit, rather
than being the cause of the underlying problems.
What if this is true now? What if the UK is uncompetitive with
Chinese industry, German factories and US tech giants? What if the
things that the UK remains good at, like finance and professional ser-
vices, are a function of hysteresis, a legacy from the past that makes
switching elsewhere sticky? Now add in BREXIT, and the placing of
the UK’s service industries outside the EU and its single market, indeed
outside all the major trading blocs around the world. As the major
economies move away from open global trading (and especially the US

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 170 / Legacy: How to Build the Sustainable Economy

and China, and the EU and China), where exactly will the ‘sovereign’
UK end up?
And what if the buying-off of recession across the UK, EU
member states, the US and China in 2000, 2007/8 and in 2020 through
monetary and fiscal stimuli has been an exercise in keeping the standard
of living artificially high globally, at the expense of the next generation
not just in the UK, but in all these countries? What if the coronavirus
pandemic and the lockdowns had real costs which have made us all
worse off? All may want a world-class and well-funded health service,
a major upgrade of education and the new social care systems, all free
of charge at the point of demand, but can we afford them with a bal-
anced budget on the current account after paying for capital mainte-
nance? Is not Robbins’s point again highly relevant?
It is not in the immediate interests of the current major benefi-
ciaries of the social security payments to argue for restraint, nor would
the poor want to limit basic income payments, since these are a pro-
portionately higher part of their total income. The poor currently have
no direct stake in the overall performance of the economy. An obvious
remedy is to give them a stake, in the form of a share in the national
dividend.21 This would be more like equity and come with the broader
equity incentives. It would be directly tied up with the national balance
sheet, and the delivery of the intergenerational requirements, net of
capital maintenance.
It could work as follows. The national balance sheet is estab-
lished as described in chapter 5. It has the assets on one side and the
liabilities on the other. The publicly owned assets, which make up
most of the national balance sheet, belong ultimately to citizens, as
ultimately do the system assets in the regulated utilities. But so too
does all the debt. The assets yield a return on the capital employed. The
debt interest is subtracted, to give a net return, and this could then be
distributed to all the citizens.
To make it simple, let’s assume that all the systems are in state
hands. The cost of capital would be passed through to the required
rate of return, which would reflect equity risk and therefore be above
the cost of government bonds.22 Recall that when some of these assets

21
For an early discussion on this, see ‘The National Dividend’, chapter 3 in Pigou, The Eco-
nomics of Welfare.
22
For the nationalised industries, this was last formally described in the 1978 White Paper.
HM Treasury (1978), ‘The Nationalised Industries’, Cmnd. 7131, HM Treasury.

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 171 / Social Justice

were privatised, they were sold in return for a cash payment. To leave
citizens no worse off, this cash payment should have been added to
the balance sheet, most likely to pay down debt, and hence reduce the
liabilities side to balance the reduction on the assets side. Since the gov-
ernment of the day argued that privatised utilities would be more effi-
cient than nationalised ones, there should have been a premium paid.
If this dividend on the portfolio of assets on the balance sheet
is paid to all citizens, then this basic dividend takes up some of the role
of the modified basic income payments, and it is asset-related. Any gap
would be made up from tax revenues. The dividend might go up and
down according to how well the economy is doing net of capital main-
tenance and in particular how well the assets are performing. It would
be as if citizens had a portfolio of shares in all the utilities, public or
privately owned, the intellectual capital (Popper’s World 3 we met ear-
lier) and the natural environment. The dividend is the level of payment,
net of the requirement to maintain the assets intact.
The incentives on the system network utilities would be rather
different. Instead of the massive financial engineering (and massive is the
right word), gearing up the private balance sheets, the citizens’ dividend
would be net of the debt servicing costs on the national balance sheet.
It might be countered that these are mostly now purely private
businesses paid for by customer bills, not taxpayers. The response is
that this is a fiction: the assets, as represented by the regulatory asset
bases (RABs), are guaranteed by the regulator and hence ultimately
the state. The private utilities are running state-guaranteed assets. For
this reason, the RABs should be added back onto the national balance
sheet, thereby expanding the national dividend to include the cost of
capital of the RAB. The sustainable economy could be even more radi-
cal, and add back the electricity generation backed by state contracts in
its single-buyer model, which have RAB-like characteristics.23
Giving citizens equity in the core infrastructure systems could
go further, to include land, given agriculture is everywhere heavily
subsidised, and in effect farmers are in receipt of implicit state guar-
antees. The land has multiple uses, and citizens have a stake in this
because they pay not only for the subsidies, but also for the use values.
The UK planning system encourages land value uplift for develop-
ments, which could go to a land development tax, for example. Land

23
New nuclear and now CCS projects are to have explicit RABs.

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 172 / Legacy: How to Build the Sustainable Economy

is much more than a cultivated field: it is a vital national asset and a

natural capital one too. The national balance sheet might incorporate
not only the state’s directly owned land, of which there is lots, includ-
ing that belonging to the Ministry of Defence, but also rights over
notionally private land, including development rights. Interestingly,
it was land that provided the main item in William the Conqueror’s
Domesday Book.

Citizens’ Equity
The discussions of macroeconomics are in the main about debt,
money, credit and interest rates. They are rarely about equity, and yet
the concept of equity goes to the heart of the citizens’ model and the
sustainable economy. Equity is a stake in the assets and therefore in
the outcomes. It carries risks. It can go wrong. When governments pick
losers and pursue vanity projects, fail to properly conduct procurement
and waste resources, this is a loss not to ‘them’, but to all of us. Much
of the money spent in the pandemic on personal protective equipment
and track-and-trace was, for example, wasted, yet few seem to care
much about the consequences.
If citizens have a direct stake, they should care more, and
when it comes to elections, citizens as voters might be more willing to
demand that politicians and governments explain their stewardship of
the citizens’ assets. Citizens should be provided with evidence of that
stewardship, audited by institutions like the UK National Audit Office,
with an annual report on the national balance sheet and the manage-
ment’s performance. National accounts, on a sustainable basis, would
really matter; they would help to determine how much money was paid
out as the modified basic income. Government failures would reduce
the basic income. That would sharpen up political debate and account-
ability, especially if debt was not an option to cover up the mistakes.
The stewardship concept goes deeper. The government is a
steward because the balance sheet is open-ended. These are mainly
assets-in-perpetuity, in the current generation’s custody for all future
generations. The national accounts are a report on how well current
politicians are doing in meeting their duty to ensure that these assets
are maintained, and that the next generation is on course to inherit a
set of assets at least as good as the current one, and hence meet the first
principle of the sustainable economy.

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 173 / Social Justice

Equity further breaks the link between social security and

wages. It is a return on capital separate from the return on labour, and
becomes ever more relevant as digitalisation cuts into labour. There
will still need to be top-ups to basic income to relieve poverty, taken
directly from taxation revenues. The return on capital assets is the citi-
zen’s stake in the economy; the return on labour is the income from
individual effort. Basic income is calculated as the return on citizens’
equity plus a tax-derived top-up.
This equity approach would have a big impact on corporate
governance, noticeably on the systems that have been privatised. The
board of a water company would report to citizens as well as private
shareholders and debt-owners. There would be less scope for paying
themselves supernormal salaries. The citizens are unlikely to see the
merit of paying an annual remuneration of £3 million to a chief execu-
tive officer, especially where there are manifest management failures.
This could be further reinforced if, in these privatised utilities, citizens
had a right to sack the managers and impose more reasonable execu-
tive pay.24 In effect, utilities would return to being more like public
corporations.

Citizens’ Debt and Liabilities

The concept of citizens having a direct stake in the national balance
sheet has one implication that might make for a reluctance to go down
this path. Having a stake in the assets and a return on them provides
for a positive payment. But having a stake in the debt imposes the
opposite. It is a liability, and hence a responsibility, of current citizens
and not just a debt passed on to the next generation when the debt
is incurred to prop up current spending, not asset enhancements and
investments. The liabilities side of the balance sheet is piling up, with-
out corresponding assets on the other.
In a business, borrowing to cover current costs would point
towards bankruptcy. The accountant would ask for a guarantee from
the business owners that they can and will meet the debts. It would
have to be an equity injection. In the stewardship model where citizens

24
This is not the same as proposals to widen the duties of directors, as per some stakeholder
capitalism models, as proposed, for example, by Professor Colin Mayer (see C. Mayer
(2019), Prosperity: Better Business Makes the Greater Good, Oxford: Oxford University
Press). It is a reporting function to the ultimate shareholders, the citizens.

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 174 / Legacy: How to Build the Sustainable Economy

have a direct stake, the accounting call is for them to make good on
these debts being incurred for current consumption. It would be analo-
gous to Keynes’s proposal for a capital levy after the Second World
War to pay for some of the war costs incurred.25
What is now in fact by default going on is that the guarantee
is being provided by the future citizens. The implication is that, once
intergenerational accounting is brought into play and the constraint
on the national balance sheet is applied, the next generation will
inherit a set of assets at least as good as those the current generation
inherited. The debt finance of current spending would be replaced by
a pay-as-you-go mechanism. Current citizens would have to pay for
the increased current spending. That part of the debt which represents
genuine enhancements, after capital maintenance and remedial invest-
ment, would be the only debt assigned as a liability to future citizens.
Debt for current spending, including capital maintenance, is,
in effect, a negative USO. This debt is a liability shared by all citizens.
It lowers their expected future income stream, and/or those of the next
generation, and hence their standard of living. The national balance
sheet lays bare what is really going on, and the extent to which the
current generation is living beyond its means, at least in respect of the
state’s assets and liabilities. Balancing the books becomes a binding
constraint if the economy is to be sustained, and if it is not, there will
be a day of reckoning as and when it is not sustained. In the context
of the very large deficit spending during the pandemic, this liability
has shot up. We are worse off: the citizens’ equity concept makes this
explicit. We are back to the Robbins point above.
What, then, about the case for unbalanced books, made in par-
ticular by Keynesians we met earlier? This does not apply to good invest-
ments: they add assets on one side of the balance sheet against the cost
of financing them on the other. No problem here as long as they really
are good investments and as long as there are sufficient savings for the
investments. The issue comes when Keynesians advocate increased cur-
rent spending backed by debt (and, as recently, the debt backed by QE).
Recall the Keynesian argument is that the spending will pay for itself
since the unemployed will be employed, and the multiplier will work its
magic. The extra current expenditure will boost effective demand, lead-
ing to cumulative growth and will therefore be self-financing.

25
Keynes, How to Pay for the War.

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 175 / Social Justice

But recall too that the rationale for the Keynesian medicine to
restore full employment is that there are inflexible labour markets, and
money wages are given. In the basic income/citizens equity model, the
wages can be flexible and all unemployment is voluntary. The separa-
tion of the relief of poverty from the determination of wages should
solve the problem. The reason why it might not is market power in the
labour market, and the actions of trades unions. But it is also possible
that monopoly market power may be applied on the producer side,
keeping output below the competitive level. It may be that the prices
in the market economy do not reflect all the costs. The citizens’ USOs
plus modified basic income can solve poverty, but the economy may
not necessarily be efficient. For this, the prices have to be ‘right’, which
in turn involves the state setting the rules – the market constitution –
to ensure that market failures do not distort the outcomes. Citizens’
USOs, the national dividend and basic income need an institutional
scaffolding. This has two parts: in the regulation of the systems and in
the constitution.

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 10 DELIVERING THE SYSTEM PLANS

The core system infrastructures of the economy have to ­provide

the USOs. As natural monopolies, in whole or in part, and with low to
zero marginal costs, they cannot be left for themselves to decide how
best to meet the objective of leaving the next generation with a set of
assets at least as good as it inherited. The state needs to regulate them.
Regulating the systems of the sustainable economy requires not only
ensuring that the systems are properly maintained and efficiently run,
but also that they are resilient to shocks, particularly environmental
ones. There is also the public decision as to how to allocate their costs.
The boards of private companies cannot decide what is in the public
interest or who should pay what.
Post-Second World War regulation was straightforward. It
was internalised inside government across Europe and the UK. The
state owned the infrastructures and told them what to do. The boards
answered to ministers. Though much was achieved in providing the
assets to underpin the great era of post-war growth, the trouble with
this model is that the nationalised industries became tools for the
achievement of particular short-term political objectives, and these
were focused on the general election cycles. They ended up being less
than perfect in pursuing the public interest.
The job of politicians is to win elections; it is not solely to
achieve the overall objective of maintaining and enhancing assets. This
has a particular twist, biasing decisions to the short run: utility prices

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 177 / Delivering the System Plans

impact on voters, and specific investments take place in key political

constituencies. Unsurprisingly, the overall short-term spending took
priority over capital maintenance and longer-term investments.
That for the most part the nationalised industries did build
the power stations, motorways and the national gas system, keeping
up with and supplying the golden age of economic growth, should not
however be forgotten, and did so on a pay-as-you-go basis and hence
closer to the sustainable economy rules. Whilst it remains fashionable
to decry the nationalised industry model, it is not clear that it was actu-
ally worse than what followed.1
In the 1980s, as privatisation unfolded and the nationalised
approach was largely abandoned, regulation came to mean the regula-
tion of the now private monopolies, and the promotion of competition.
The new mantra was: ‘Competition where possible, regulation where
necessary.’ Investment, operating costs and strategy moved to the con-
trol of managers of the companies, directed by their private owners,
subject to the rules about the outputs and the delivery of required ser-
vices. The question was no longer (if it had ever been) how to be good
stewards of the assets, but rather how to limit the abuse of market
power, by price caps and by competition. The role of the state became
overwhelmingly negative, leaving the private sector to decide what to
build, and how to maintain assets. There was an explicit abandonment
of system planning.2 The questions became focused on incentives for
maximum cost efficiency.
The results have not lived up to the ambitions of privatisation.
Profit-maximising private utilities have, unsurprisingly, not prioritised
asset maintenance and enhancements. The consequence is apparent
across many developed countries. The transport, communications,
energy and water systems are generally not fit-for-purpose. This mat-
ters at any time as part of the intergenerational bargain, but it matters
more so now as climate change and biodiversity loss alter the con-
straints on these systems.3

1
The US also achieved these outcomes, using rate of return regulation of predominantly
private companies. In all cases, natural capital took second place and suffered accordingly.
2
See N. Lawson MP (1982), ‘The Market for Energy’, speech to the British Institute of
Energy Economics, Cambridge, June, reproduced in D. Helm, J. Kay and D. Thompson
(eds.), (1989), The Market for Energy, Oxford: Clarendon Press.
3
On water, see D. Helm (2020), ‘Thirty Years after Water Privatization – Is the English
Model the Envy of the World’, Oxford Review of Economic Policy, 36(1), 69–85.

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 178 / Legacy: How to Build the Sustainable Economy

If the objective is to provide citizens now and in the next gen-

eration with the assets so that they are free to choose how to live their
lives, and if this includes limiting climate change and biodiversity loss,
and is best seen through the lens of the core systems that provide the
capabilities, then the practical question that regulation has to answer
is how best to make sure the maintenance and enhancement of the
underlying assets, whether privately or publicly owned, are carried
out. Regulation becomes positive and proactive, ensuring system plans
are delivered, so that the intergenerational objective of the sustainable
economy’s first principle is met.

The System Regulation Model

The systems approach points to system regulation, to provide an over-
arching coherence within and between the infrastructures. It is a very
much more integrated, and longer term, approach, very different from
the atomised competition model, and the unbundling and disaggregat-
ing of the networks.
For all the main systems, there needs to be a ‘plan’ as to how
to meet the first principle of the sustainable economy and a prime role
of regulation is to make it happen. Turning a monopoly into a com-
petitive market will not deliver the required results because these are
natural monopolies with long lifespans, significant externalities and
elements of public goods. The citizen has rights to the USOs, and is not
just a consumer with a budget constraint responding to prices set in
competitive markets.
The plan has to take account of multiple outputs and multiple
periods, bearing in mind the secondary principles of polluter pays and
precaution. It needs to be a plan for the short run, the medium run and
the long run. The short run is about matching demand and supply at
each instance, ensuring resilience with enough spare capacity.4 It is about
operating efficiency, not investment (which in the short run is fixed), and
it has been the focus of the fixed-price, fixed-period regulation in the UK
pursued by Ofwat, Ofgem and the other offices for sectoral regulation
over the last three decades. Ironically, this replicates the short terms of
the political cycles in the nationalised industries noted above.5

4
It is Alfred Marshall’s short run, when the capital stock is fixed.
5
It is an unhappy feature of water regulation in the UK, for example, that the periodic
reviews happen to coincide with the build-up to general elections, adding a further short-
term bias.

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 179 / Delivering the System Plans

The medium term is about the decade-long outlook, and

largely about investment within the existing structures of the systems.
It is about upgrading sewerage works, about new platforms at train
stations, and about roundabouts and road extensions and accommo-
dating electric car charging networks. It is about augmenting, improv-
ing and decarbonising the existing systems. Technology is largely given,
subject to incremental improvements, so it is capital maintenance and
remedial investments for the sustainable economy.
The long run is about the choice of system and it is the most
important for the sustainable economy. In energy, it is about a par-
tially decentralised largely net zero system, based on digitalisation, Big
Data and AI, new generation, storage and demand-side technologies,
and about the integration of transport, heating and agriculture into the
energy sector, as they electrify. It is about technological change. In real
time, this may be a matter of a few decades or indeed even within a
decade. The long run is now forcing itself into the medium- and short-
run time horizons, given both the speed of technical change and the
urgency of net zero and the protection of biodiversity.
The system plan needs to have all these dimensions, all taking
natural capital fully into account, and not just the short term that the
current price cap regulation is mainly focused on. Five-year price caps
tend to neglect the medium and longer terms. To make sure all three
time dimensions are put together consistently, some general accounting
rules need to be applied. These are the rules which ensure that the over-
all objective of the sustainable economy is met. These accounts, which
we met earlier in chapter 4, have two key elements, capital mainte-
nance and capital enhancements, and both need to be reflected in each
of the system balance sheets, and then aggregated into the national
accounts and the national balance sheet. These are not the same as the
company accounts of the existing utility businesses, many of which
were based on historical cost and depreciation, and which often cover
only the parts of the systems the specific companies are responsible for.
They are also not the same as regulatory accounts which the utilities
are required to produce. They are the system accounts, incorporating
all the system assets, regardless of who owns them.

Knowing What You Have Got

In order to know whether capital maintenance has been sufficient and
to measure the impact of enhancements, there needs to be a baseline,

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 180 / Legacy: How to Build the Sustainable Economy

showing what system assets there are and what state they are in. It is
a massive advantage to this system regulation model that new digital
technologies make this task much easier to carry out, and to repeat
ad infinitum.
The starting point is natural capital and its ecosystems. This
can be set at the national (and even global) level as the overall base-
line.6 Renewable natural capital as a whole has to be prevented from
declining as the most basic necessary condition to ensure that the over-
all objective of the first principle is met. The baseline is a measure of
assets, not flows, although flows can be helpful indicators. If the pollu-
tion load in a river goes up, it tells us that something is fundamentally
wrong with the assets, the rivers through which the pollution flows.
A natural capital baseline reads off from satellite data and,
where appropriate, drone and on-the-ground information, mapping the
assets and identifying what condition they are in. It measures the trees
and the soils, the peat and the rivers and water bodies, and the recre-
ational assets; it creates layered natural capital maps which can be re-
run at regular intervals to see how well the underlying assets are doing.
Similar exercises can be undertaken for the physical assets,
assessing the condition of the bridges, ports, railway tracks and the
electricity pylons, and so on. For the less tangible assets, the state of
human capital in each sector can be surveyed, looking at the quality of
the workforces. Baselining social capital is much harder, though there
are proxies for measuring trust, and lots of data on crime.
We can now know a great deal more about all the critical
systems, all the time, and as the data is continually augmented and
updated, our detailed knowledge gets better and better. This is a mas-
sive advantage in designing, maintaining and enhancing the sustainable
economy. It is remarkable that baselining and, in particular, the use of
new technologies to map utility networks and assess the conditions, is
so far largely a foreign land to regulators. It is a remarkable fact that
none of the existing utility regulators in the UK does almost any of
this, and the UK Environment Agency lacks proper digital mapping.
Even more remarkable is how little system digital mapping is done by
the utilities themselves. Some UK water companies do not have even
the most primitive data about their pipes and sewers, and hence do not
understand leakages and raw sewage discharges.

6
This is the obvious starting point for the twenty-five-year environment plan.

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 181 / Delivering the System Plans

A sophistication of the plan is to check resilience: how well the

systems can cope with shocks. It is possible to remotely identify risks
to resilience, like trees overhanging power lines, and to spot damaged
train rails and road potholes by continual remote sensing.7 Resilience
scenarios test whether, if there is a prolonged heatwave, there will be
enough water, and whether the rails will buckle. These can all be simu-
lated as scenarios against the baselines, in multiple stress tests, continu-
ally repeated and updated in real time. Yet another remarkable fact
is that, in the context of the 2022 failure of nearly half the electricity
supply companies in the UK, not even proper financial stress-testing
had been carried out.8

The System Regulators

The plans need to be developed and updated, and someone has to do
this. Under price cap regulation, this is typically subsumed into the short-
term (five-year) business plans. The privatised companies have licences
which dictate the very general outputs they have to deliver, such as clean
water, security of electricity supply, and so on. It is left to the companies
to decide how best to achieve them, and to put together business plans
for the next five years which their directors believe will fulfil their licence
conditions. The regulator then comes in and challenges the companies,
mainly on their efficiency assumptions and the cost of capital.9
In the system regulation model,10 the licence conditions for
outputs are transferred from the private companies to the system
regulator. The latter then has the duty to ensure that the assets are
maintained, to work out from the plan the enhancements required and

7
This would no doubt have identified the impending disaster that Storm Arwen in Novem-
ber 2021 would cause to the electricity distribution networks in Scotland and the north of
England, where the trees that should have been trimmed back fell on the power lines.
8
Ofgem commissioned its own inquiry into its failures, and unsurprisingly it was somewhat
bland, www.ofgem.gov.uk/publications/ofgem-publishes-report-its-regulation-energy-­market.
9
Indeed, it is revealing that the National Infrastructure Strategy introduced in November
2020 devoted a whole chapter to resilience – implicitly recognising that this area had been
neglected. HM Treasury, ‘National Infrastructure Strategy: Fairer, Faster, Greener’. Also,
Ofwat, in its 2019 price review, stressed financial rather than physical and environmental
resilience. See Ofwat (2017), ‘Ofwat’s Price Review: Delivering More of What Matters.
Our Final Methodology for the 2019 Price Review – Executive Summary’; (2017), ‘UK
Government Priorities and Our 2019 Price Review Final Methodology’; (2017) ‘Welsh
Government Priorities and Our 2019 Price Review Final Methodology’, 13 December.
10
See D. Helm (2019), ‘The Systems Regulation Model’, 12 February, www.dieterhelm​.co​
.uk/regulation/regulation/the-systems-regulation-model/.

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 182 / Legacy: How to Build the Sustainable Economy

ensure that these are delivered. The privatised companies are one way
of getting this done. They become the contractors to achieve the system
outcomes that the plan sets out, all consistent with the overarching
objective of the first principle.11
The domains of systems are not the same as the current licence
coverage of the privatised utilities. They cover all the main activities
within the system, not just some. In water, for example, the current
approach separates out flood defence and land use through agriculture
from the water and sewerage companies, and from the surface drain-
age parties like the highways.
The overall duty of the system regulator in the water case is
focused on the river catchment as a whole, within which the parts
are set, rather than distinct and separately regulated silos, as at pres-
ent. In England and Wales, Ofwat regulates the water companies, the
Department for Environment, Food and Rural Affairs (Defra) and the
Treasury oversee the Environment Agency, and a series of institutions
covers farm subsidies. The Office for Environmental Protection holds
Defra, the Environment Agency, Natural England and indirectly the
water companies to account against statutory environmental targets.
In the UK, in electricity and gas there is one regulator for the economic
activities, Ofgem, and separate regulators for air quality and emis-
sions trading, separate nuclear regulation, as well as a system operator
for transmission, now to be separated out. Hydrogen, offshore and
onshore upstream oil, gas and coal all come under different (and some-
times overlapping) regulatory bodies. Whilst pragmatism dictates how
these system-wide plans are implemented, the wider system domains
remain a central organising concept and focus for the sustainable econ-
omy. This would be a radical departure from the current institutional
arrangements. It would dramatically simplify regulation and cut back
administrative costs.
The system regulators have to be in the public and not private
sectors. They are assigned the public duties, and these have to be deliv-
ered independently and impartially. The companies themselves have
vested interests, and there are different ways of cutting up their own
business plans to best maximise their profits. This matters because oth-
erwise there is a large principal–agent problem between the state and

11
This model is already applied to electricity generation, where bidders compete for con-
tracts.

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 183 / Delivering the System Plans

the private sector. It is not just that the objectives differ (public versus
private interests), but there is also a sharp informational asymmetry
if the private sector in effect decides on the plan. Capture is an ever-
present damage to avoid through institutional design.
It has been suggested that one way around this within the
existing regulatory structures is to try to make the boards of the private
utilities incorporate wider ‘stakeholders’ representing other interests
beyond narrow profits. Why not appoint an environmentalist, or have
an advocate for the environment on the board, someone whose prior-
ity is the sustainable economy? Why not add a former regulator, who
will take a broader view, or a consumer champion who will look to the
customers’ interests?12
This is the sort of structure that ‘stakeholder capitalism’ advo-
cates promote. It is very popular with environmentalists and finds its
most recent incarnation in the financial markets’ fashion for ESG. If
we get all the interests round the table then the boards of the private
companies will choose outcomes consistent with the public interest.
This is a dangerous illusion, and for lots of reasons. The over-
all objective of maintaining and enhancing the assets is not the result of
a summation of the wishes of the various interests. It is a hard, largely
empirical exercise, requiring expertise. The stakeholders themselves
will have their own interests. We are yet again back to lobbying and
the risks of regulatory capture, and with the switches from gamekeeper
to poacher, from regulators to the regulated, and sometimes the other
way around.13
There is a democratic question here too: stakeholders are not
elected, and they are not accountable to ministers, parliament or the
electorate. Their interests are not equivalent to those of citizens. They
are accountable to the companies and the company boards on which
they sit and, particularly where they are non-executive, their futures
can depend on the chair and chief executive officers. The chair may
have particular pet projects, the chief executive officer may want a spe-
cific legacy, and the board is often shaped with this in mind, rather than

12
In the case of ex-regulators, this is the ‘revolving door’ problem.
13
Examples of careers in respect of senior positions at Ofwat include Jonson Cox, chair
of Ofwat, who was previously Chief Executive Officer of Anglian Water; Cathryn Ross
joined BT and then Thames Water after being Chief Executive of Ofwat; and Rachel
Fletcher joined Octopus Energy after being a Senior Partner at Ofgem and Chief Executive
of Ofwat.

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 184 / Legacy: How to Build the Sustainable Economy

the board leading and the company executives following. The state of
our rivers, energy systems and the roll-out of fibre networks should
not be decided by these unelected individuals. The companies are there
to deliver the outcomes, not decide what they should be. None of this
suggests that the various interested parties should not contribute to the
system plans; it is just that they should not decide their contents. They
should be consultees, not decision-makers.
The system regulators are public bodies, with public duties,
many of which are currently in the private companies’ licences. Their
primary interest should be to ensure the system plans are delivered and
that polluters pay and public goods are provided. In the sustainable
economy, it is the responsibility of the system regulators to ensure this,
not the responsibility of unaccountable ‘stakeholders’.

The Delivery of the Plan

System regulators have the duty to develop and implement a system
plan for the short, medium and long term. The way the plan is assem-
bled and revised should be transparent. A website open to all citizens
is an obvious part of this process. The development of the plan and its
evolution can start with guidance from the government of the day, the
guidance itself subject to parliamentary scrutiny and approval. This
should all be within a constitutional context which protects the inter-
ests of future generations, set out in the next chapter.
In some cases, this is straightforward. For example in the UK,
all sectors need to have regard to the Climate Change Act 2008 and
the 2019 net zero amendment. The statutory targets under the Envi-
ronment Act 2021 will also be requirements, not options. Other com-
ponents require judgements about the ways in which the first principle
can be met, in the context of the capital maintenance requirements and
the overall opportunities for enhancements. This could be made a legal
requirement in a new Systems Regulation Act, as part of the legislation
needed to set up the system regulators.
With the plan uploaded to the website, with continuing oppor-
tunities for contributions and amendments and with perhaps also an
advisory group of relevant parties with technical expertise, each system
regulator can start to break down the system requirements into man-
ageable chunks. A good way to start is to list on the website all the
capital maintenance and enhancement requirements consistent with the

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 185 / Delivering the System Plans

s­ ustainable economy and to invite initial expressions of interest for the

delivery of any and all of them. This is an information-gathering exer-
cise, and it is inclusive. There may be many businesses and organisa-
tions, including trusts and charities, that may be able to contribute to
delivery. It is the right forum for the stakeholders, rather than through
the boards of companies. It helps to build social capital by its inclusivity.
From the initial responses, the system regulators will learn a lot
about who might bid, which bits are most attractive to whom, which
bits will elicit lots of competitive bids and which bits might get little or
no interest at all. This helps in designing the next stage: the rolling sys-
tem auctions for those bits that are amenable to competitive bidding.
This introduces an Austrian flavour to the system regulation: entrepre-
neurs can bring new ideas and new technologies to the virtual auction
rooms. Some areas are obvious candidates for competition. Auctioned
contracts for renewable electricity generation and auctioned capacity
contracts in electricity have resulted in dramatic reductions in costs.
Where they are possible, the great advantage of auctions is that they
cut through lobbying and incumbent vested interests. They all have to
make their bids. They enhance competition.14
Pragmatism is the order of the day. The system regulators will
have different time dimensions and some contracts can be let for very
short periods, and others for the medium and longer term. There will
be a mix of contracts, and contracting will be a continuous process.
This is actually much more like a competitive market: there are few, if
any, examples where bundling everything in a single fixed-price, five-
year period is efficient. In fact, it is very un-Austrian. Prices and con-
tracts vary all the time in markets.15

Residual Monopoly and Contract Regulation

Where possible, auctions provide a good way of both widening the
number of possible providers while at the same time minimising costs.
By focusing on outcomes, they take us away from socialist planning.

14
But not always; auctioning large franchises in railways has not proved so successful.
15
It is ironic that Michael Beesley and Stephen Littlechild, in proposing the RPI-X approach,
thought that making final prices rigid in the five-year straitjackets was a good way of
mimicking an Austrian market. M. Beesley and S. Littlechild (1989), ‘The Regulation
of Privatized Monopolies in the United Kingdom’, RAND Journal of Economics, 20(3),
454–72.

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 186 / Legacy: How to Build the Sustainable Economy

But not all activities within a system will be amenable to competitive

supply, and there will inevitably be residual monopoly elements. Some
of these areas, such as the coordination of the particular bits of the sys-
tem and the building of major new assets, could even be undertaken by
competing potential suppliers. This is reflected in the fact that existing
incumbent utilities subcontract many of their own projects.
The day-to-day system operation, as opposed to the system
planning and auctions, can often be devolved to a single supplier. Take
the operation of regional or national electricity systems. These require
real-time matching of supplies with demand, and the ability to react
immediately to problems in networks and power stations.16 In the face
of Russian interruption of gas supplies to Europe, operators have to
game-plan possible emergency measures. This is not a job for a regula-
tor, but for a specific operational company. It could be let as a limited-
term franchise contract or more permanently remain with the network
owner. The economic border of the state stops at system design and
coordination; the private companies and other organisations can do
the work.17
Similar considerations apply to natural capital and ecosys-
tems, where design and coordination are critical. What is required is
distinct from who provides it. The environmental objectives are not,
for example, set by farmers and landowners. They get subsidies –
­contracts – to carry out environmental measures, but they should not
decide what these measures should be. This distinction matters most
where there are major landowners who want to be the ones who decide
on landscape-wide changes, be it historically with sheep and the great
Scottish Clearances, or the new ultra-rich who want to ‘rewild’.18
For some time and in some cases, perhaps permanently, there
will still be a number of activities for which the current incumbents
will be the only practical option. This means that there will be a central

16
When, for example, a wind farm and a power station simultaneously dropped off the UK
network in August 2019, the system operator had to come up with emergency measures both
to maintain the frequency on the system and bring on other power stations. Ofgem (2020),
‘9 August 2019 Power Outage Report’, 3 January, www.ofgem.gov.uk/publications/
investigation-9-august-2019-power-outage.
17
See Helm, ‘Cost of Energy Review’.
18
See D. Helm (2022), ‘Natural Capital, Carbon Offsetting and Land Use: A Dis-
cussion Paper’, May, Scottish Land Commission, www.landcommission.gov.scot/
downloads/628de8eb9c11a_Land%20Lines%20Natural%20capital-carbon%20
­offsetting%20and%20land%20use.pdf.

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 187 / Delivering the System Plans

monopoly element for water companies, electricity and gas network

companies, railway network companies and possibly for broadband at
the centre of the communications sector. How to regulate these?
Price cap regulation for fixed periods is no longer appropriate
under the system approach, for three reasons. First, the incumbents
will no longer have many of the licence conditions, including the duty
to supply. These are transferred to the system regulator. Second, the
contracts are not best set as all-embracing five-year fixed-price ones.
Third, the incumbents need not be restricted to narrowly defined activ-
ities, such as in electricity supply, networks and generation.
Taking each of these in turn, the transfer of the licence condi-
tions to the system regulator in respect of resilience and security of
supply (as well as other duties such as net zero, the protection of natu-
ral capital and the USOs) changes the role of incumbents from having
responsibility for the system to having responsibility to fulfil a contract
or contracts. These contracts are special only in their tailoring to the
specific context. In wider markets where conditions dictate that there
is only one credible bidder, it will be a negotiated contract, awarded
on the basis of agreed rates of return. But even here, it is possible that
other companies may bid for the incumbent contracts. For example,
one water company may bid against another, and similarly for the
energy networks.
The pluralisation of contracts is the result of having a system
plan with a short, medium and longer term. The system regulator
offers multiple contracts for different periods to ensure capital mainte-
nance and planned enhancements, and can even invite initial bidders to
specify the time period in their offers.
The third consequence of the system regulator having taken
over the core licence conditions is that there can be a relaxation of
the restrictions on companies’ activities. The separation of network
functions from other activities was necessary in order to home in on
the specific licence requirements. This unbundling, which formed a
big part of the creation of liberalised markets and the introduction of
competition, was partly to avoid networks biasing investment to ben-
efit their other activities, including the supply of services through the
networks. This is no longer a problem in the system regulation model
since the contracts are set by the regulator and the incumbents are at
arm’s length. The result is that these restrictions can be removed, and a
single licence issued limited to ensuring that the contractors are fit and

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 188 / Legacy: How to Build the Sustainable Economy

proper to be engaged in core systems. The network operators in elec-

tricity, for example, can deploy their skills in storage and batteries, into
demand-side investments and even into generation. They can be more
Austrian. The silo approach can be abandoned, less and less relevant
in a period of rapid technical change. The system regulator gets more
control, there is more competition to do the works and there is more
scope for innovation, while reducing the growing regulatory intrusion
into the detailed activities of the private businesses. Regulation can
thereby be reduced.
The problem in applying the system regulation model to both
health and education is that the outputs are hard to specify with preci-
sion, and where they are, they can distort behaviour towards the meet-
ing of measurable targets. No one appears to have any clear idea of
the detailed capital maintenance requirements, or indeed the enhance-
ments. Incumbent managers and staff campaign for more money, and
political parties compete over who can spend the most, and employ the
most nurses, teachers, police and so on. Repeated attempts to reform
the school syllabus and to set targets for health outcomes and waiting
times neglect the incompleteness of imposed contracts. Children’s edu-
cation is not measured simply by the number of top grades (especially
when a very large proportion of any cohort is given top grades), and
health outcomes are not simply gauged by the waiting times or how
many tests are carried out. In both cases there is a caring function,
tailored for each individual.19
The incompleteness of contracts does not stop progress. On
the contrary, incompleteness makes a coherent system plan all the
more important, recognising uncertainty, the possibilities of shocks
like coronavirus and explicit budgeting for resilience. Both education
and health need system plans, rather than tick-box targets.

Generational Links
In most current models, regulation not only attempts to ensure the effi-
ciency of the incumbent monopolies and to enforce the licence require-
ments on outputs, but also guarantees that the private companies can

19
The fictitious ‘Mr Chips’ was not revered for the number of top grades his pupils achieved,
but how he inspired them, their standards and the impact on the way they lived their
lives – whether they were good citizens as well as exam-passing machines. J. Hilton
(1934), Goodbye, Mr Chips, London: Hodder & Stoughton.

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 189 / Delivering the System Plans

finance their functions. This is a critical element which helps to mini-

mise the cost of capital, by ruling out the expropriation of investors
by forcing prices down to the (relatively low or zero) marginal costs,
rather than remunerating their (relatively high) average costs. Fixed
and sunk capital costs are thereby guaranteed.20
When the companies were privatised in the UK, they took
the core system assets with them.21 These assets represented the past
investments, which had been paid for in a pay-as-you-go fashion. Past
consumers had paid for future assets, just as they had inherited the
investments of their predecessors, right back to the Victorian sewers.
At privatisation, this intergenerational chain was broken twice: once
for the old assets; and again for new assets, which would be paid for
through the repayment of debts by the next generation. In effect, the
government sold the past (customer-paid) assets for a pile of cash,
which it promptly spent on the current generation through lower taxes
than would otherwise have been the case. It thereby violated core
requirements of the sustainable economy and its first principle. Cus-
tomers effectively paid twice.
The transferred assets went onto the private balance sheets
and the regulators allowed these to earn a rate of return, reflecting
the statutory duty to ensure that they could finance their functions.
Since these investments had already been paid for by past customers
and taxpayers, there is a good case to be made that these assets should
have remained in the privatised accounts at an opening value of zero.
The companies would then operate and maintain the assets, recover-
ing their costs and making a return on new investments. It is the new
investments that need to be protected from pure marginal cost pricing,
and as the assets are enhanced, these are added to the RAB. The RAB
should then be a core contract between the generations.
A problem the RAB assets cause to the system regulation model
is in determining to whom they belong. There are several models. As
new assets are created, they could stay with the incumbents, on their
balance sheets, or they could transfer upon completion to the system
regulators. The former limits the scope for auctions and ­competition

20
It remains to sort out whether this is a guarantee that operating and capital maintenance
costs will be covered from current revenues, whilst enhancements are covered by the duty
to honour the resulting investment costs.
21
The UK privatisation of the assets is different from the French example of letting fran-
chises, keeping public ownership of the assets in a number of cases.

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 190 / Legacy: How to Build the Sustainable Economy

and entrenches the incumbents. The latter – as a build, transfer and

operate model – creates assets on the public balance sheet, and in
particular on the system regulators’ accounts. This option is quite
close to a nationalised industry with compulsory ­contracting-out of
the works.
A third option is to create separate tradeable RABs.22 These are
placed into a holding company or similar vehicle, and debt-financed.
Since the assets exist, they have an accounting value and the actions
of managers can make no difference to these accounting numbers, so
there should be no equity risk, which is transferred to consumers and
taxpayers via the duty to finance functions. The debt is pretty close to
government bonds since it has an implicit government guarantee and
may be held mostly by pension funds.23
Now we have: the system regulators developing and imple-
menting the system plans and auctions and letting contracts over the
short, medium and long term; the creation of new assets by private
companies; and the completed projects going into the RAB account
and being refinanced with debt. The incumbent utility in effect ‘sells’
its completed new assets into the tradeable general RAB funds largely
held by pension funds and other long-term infrastructure investment
vehicles. The tradeable RAB fund represents the enhancement assets of
the systems and is rather like a sovereign wealth fund. It in turn can
be added to the national balance sheet, as a core element of the inter-
generational bargain. From it, contributions are made to the citizens’
dividend and hence to part of the basic income.

Closing Down the Economic Regulators

The system regulatory model allows for a much cleaner and more con-
sistent regulatory architecture for the state to exercise the relevant con-
trols and to meet the requirements of the sustainable economy. This is
both top-down and bottom-up.
The top-down dimension comes from a wider national infra-
structure plan and its consistency with the overall planning regime. The

22
D. Helm (2008), ‘Tradeable RABs and the Split Cost of Capital’, January, www.dieterhelm
.co.uk/regulation/regulation/tradeable-rabs/.
23
Some existing utility debt has been bought by the Bank of England through QE. This is
effectively what is going on in the UK in the RAB model being applied to new nuclear
power stations.

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 191 / Delivering the System Plans

sustainable economy requires an overarching long-term infrastructure

plan for all the capitals – natural, physical, human and social. There
have been a number of attempts to set out a national infrastructure
plan, and often these have descended into a list of projects rather than
an overarching coordination across the systems. In part, the failure
to do this led to the setting-up in 2015 of the National Infrastructure
Commission in the UK.
The bottom-up dimension allows for the clearing away of
much of the regulatory bureaucracy that has emerged since privatisa-
tion in the late 1980s and into the 1990s. The numerous ‘offices’, one
for each infrastructure system, have focused on the economic regula-
tion of the specific monopolies, not the systems and not the environ-
mental, social and other dimensions. In the system regulation model,
they are not needed and can be closed down.24 It adds to the bonfire
of social security and taxation administration, which the basic income
and flat-rate taxes facilitate, proposed in respect of social justice.
In the case of water, not only can Ofwat be closed down, but
the production activities of the Environment Agency are separated
out so they can compete for the catchment works (and probably best
transferred out of the government sector), and the environmental reg-
ulatory function can be consolidated within a single regulatory body.
This should be an Environmental Protection Agency.25 In the case of
energy and transport (and agriculture), the CCC provides an over-
arching set of carbon budgets, which the system regulators will need
to meet. Both should be given the first principle as their overarching
objective. The resulting clarity provides a blueprint for regulation in
other countries.

Regulating the National Dividend and the Wealth Fund

When it comes to the USOs, basic income and the national dividend,
the regulatory issues here are partly technical and partly constitutional.
The technical issues arise in the context of the definition of inflows and
outflows.

24
See Helm, ‘Cost of Energy Review’, on closing Ofgem.
25
In practice, this is going to be partly the Office for Environmental Protection under the
Environment Act. The relationship between the Office for Environmental Protection and
the Environment Agency is unfinished business.

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 192 / Legacy: How to Build the Sustainable Economy

The easiest institutional model is of a national fund with a cash

inflow and with an immediate cash outflow. The fund in this model, like
many charities, is a collection and distribution agency. The technical
questions are about deciding how big the national dividend inflow is,
and the nature of the distributions both in timing and the entitlements.
Recall this is a national dividend, based on the assets on the
national balance sheet. These include the assets directly owned by the
state, and possibly the RABs guaranteed by the state. The fund could,
for example, assume that the sustainable economic growth rate is
around 2 per cent per annum, and apply this to the ring-fenced assets
in the government’s control or ownership. As the growth rate goes
up, so too it might be assumed does the national dividend. An Oxford
college might take 3 per cent from its endowment per annum as a
dividend to spend on its current activities. Many charities with endow-
ments follow a similar path, although some are more aggressive.
It might be reasonable to apply the expected sustainable eco-
nomic growth rate to the state-owned assets and state-guaranteed RABs.
It should in theory be close to the risk-free rate, the return on government
bonds. Where the state owns assets but chooses to provide these free of
charge, for example the health and education assets, national parks and
a host of other public goods, the citizen dividend is still relevant. It is
just that it is paid in kind, not cash. There should be an explicit account
of this, and the citizens’ annual dividend statement should set these out
as, in this example, a notional return (after the capital maintenance has
been met). It applies only to the returns on enhancements and enhance-
ment investment, not to the existing assets, which are in perpetuity.
That leaves the determination of sustainable economic growth.
It cannot be GDP, which is a flows concept and takes little account of
changes in the value of the underlying assets or of the capital main-
tenance required. The national balance sheet with debt liabilities set
against assets, and with capital maintenance deducted from current
revenues, produces very different numbers to GDP.
An example illustrates some of the measurement issues. As a
result of the coronavirus lockdowns, many economies increased bor-
rowing to pay for current spending, including for example the UK’s
public payment of 80 per cent of wages through furlough. This financ-
ing increases the debt on the balance sheet, and is typically unfunded.
It is current expenditure paid for by borrowing. Either public expen-
diture will have to fall, or taxes will have to rise in the future, net

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 193 / Delivering the System Plans

of sustainable economic growth, by a sufficient amount to bring the

current side into positive territory so it can pay off the balance sheet
debt over time, or some form of default will be needed to write off the
debt, whether outright or through inflation and currency depreciation.
Selling off assets (as with privatisation) does not improve the position;
neither does printing money.
In this example, it is obvious that we are all much worse off,
echoing the point made by Robbins about the economic consequence
of the First World War. The lockdowns have done permanent damage,
and hence the permanent level of income and consumption consistent
with asset value protection and proper capital maintenance is going to
be lower. The national dividend should therefore be cut.
The problem is knowing by how much. One way of deciding
the amount is to split the declared national dividend into two parts: a
permanent income basic amount on a risk-averse basis (say 1 per cent),
and an ex post payment adjustment in light of what actually happens.
Given the scale of environmental problems that may happen this cen-
tury, 1 per cent might actually turn out to be on the high side, so there
would have to be some sort of clawback mechanism (as there would
be for the Covid spending). If the outlook dims further, a mechanism
might also be needed to cut the basic risk-averse amount. Conversely
with, for example, rapid technical progress, it could be raised.
The above are all technical questions, and best dealt with by
independent statistical bodies and a trust model of control over the
fund itself, with legal protection under a constitution. These institu-
tions will have to resist the inevitable political pressures. Politicians
seeking re-election will want to pander to the immediate interests of
their electorate. There will be inevitable pressures to paint a rosy pic-
ture of the economic prospects, talk up technical progress, talk down
conflicts, pandemics and the possibilities of war, and try to raise the
basic payment and increase the ex post payment too.
The distribution of the fund is straightforward provided
it genuinely is on a per citizen basis, with no adjustments. It can be
paid to the electoral roll on a fixed amount per annum (or quarterly
or monthly to help low-income households with limited capacity to
borrow and save to cope with fluctuations in their household bud-
gets). There could be a cut-off above a certain income and wealth level
(reflecting a modification to basic income). There are also decisions to
be made about specific and special needs. These matters arise because

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 194 / Legacy: How to Build the Sustainable Economy

of citizens’ different health needs, locations and other personal con-

straints. To avoid the fund trustees making these decisions, there are
two options: government can pay for any additional social security
and health needs directly out of additional taxation, independent of
the national dividend and basic income payments; or the government
could give public guidance. In the latter case, it is imperative that if
some payments to some citizens go up, others go down. This will par-
ticularly need constitutional oversight.
The cash-in, cash-out model of the fund sidesteps the question
about whether the dividend component of the basic income is too expen-
sive. No taxes are raised. It is the surplus (or deficit) after taxes have
been collected and expenditure deducted. Redistribution is about cur-
rent taxes and current spending: the dividend is the citizens’ share in the
returns on the assets, and the assets facilitate the citizens’ capabilities
and the associated USOs. The dividend is ultimately a return on equity.
The risk of political interference is not limited to the pay-outs.
Governments might try to get the fund to leverage itself and start
investing in assets directly, making it a form of national investment
bank.26 This is indeed what happens in some sovereign wealth funds.
It is, however, only a problem if the fund owns the assets against which
leverage can be built up. The cash-in, cash-out fund does not itself have
any assets; these belong to the state and the core system infrastructure
owners in the form of RABs. Once the fund gets assets, its functions
are different. In the sustainable economy, the state focuses on ensuring
that the assets are maintained intact (a current spending obligation, of
no relevance to the national dividend, since the dividend is net of the
capital maintenance) and ensuring investment in asset enhancements
that add to the balance sheet, net of the extra debt on the balance sheet
to fund the investments. In the investment case, assets and liabilities go
up, dependent on whether the investment turns out to deliver a positive
economic return net of the cost of capital.

A New Institutional Architecture

The institutional regulatory architecture of the sustainable economy
is designed to separate out the overarching political choices from

26
It might also seek to influence the choice of trustees, as US presidents do in proposing new
appointments to the Supreme Court.

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 195 / Delivering the System Plans

the effective delivery of the objectives and weights that the political
process dictates. It is designed to have regard to the short, medium
and longer terms. Of these periods, it is the longer term that is least
likely to feature in political party rivalry and the immediate com-
petition for votes. The institutions of the sustainable economy are
designed to lean against the wind of short-term expediency, which
promotes the consumption of current citizens without due regard to
future citizens.
The system regulation model does just this. It starts with a set
of accounting rules, separating out capital maintenance from capital
enhancement, and all within the framework of a national balance sheet,
independently constructed, updated and reported on. In this, it repli-
cates the accountability and scrutiny of company accounts. The over-
arching national infrastructure plan fits into this accounting context.
There follow the system plans, for catchments, regional and national
energy systems, for road, rail and city transport infrastructures, and for
broadband, fibre and mobile coverage.
These systems are all part of the national balance sheet because
they are all underwritten by the state, whatever the formal property
rights say. Ultimate control lies with the state, and indeed it is control
that is one of the touchstones for accounting bodies in the allocation
of assets between the private and public sectors. The question as to
whether taxpayers or citizens as consumers pay is a subsidiary point,
and less significant than it may seem.27
The health and education systems are part of the national
assets and there is no reason why the same system regulatory approach
should not be applied here, including a cost of capital requirement to
represent the risks.
The overall returns on this portfolio of state-controlled assets,
net of capital maintenance, are available as a dividend. This could go
into a cash-in, cash-out fund, paid to all citizens as a basic dividend.
The fund has to be independent of day-to-day interference, and to set
an ex ante risk-averse dividend and an ex post correction. The amount
paid may not be enough to take everyone out of poverty, but addi-
tional adjustments to income should come out of current revenues and
hence taxation.

27
During the coronavirus pandemic, it became clear that the state stood behind those sys-
tems and many of the companies in difficulty.

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 196 / Legacy: How to Build the Sustainable Economy

The citizen now has: USO provisions for natural capital, water,
transport, energy and communications, and for health and education,
plus an annual basic income dividend payment (topped up from taxa-
tion). These enable each to have the capabilities to participate in soci-
ety, and provide the wider industry with the core inputs and routes to
market, together with a labour force that is enabled to contribute to
the national endeavour.
Putting in place institutional structures for the system regula-
tors and the governance of the fund requires a new constitution, bring-
ing the interests of citizens now and the next generation into the frame,
all within the overall objective of maintaining and enhancing the assets
over time.

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 11 A NEW CONSTITUTION

The sustainable economy’s first principle requires that the

interests of the next generation are taken into account. The next gen-
eration inherits as good if not better assets so that they can choose how
to live their lives. What generations beyond this do is outside the scope
of the sustainable economy.
These interests are flagrantly overlooked by the current gen-
eration. The systems are not properly maintained, let alone enhanced.
When it comes to the environmental damage that continues to be
caused by current unsustainable economies, the intergenerational rule
is being systematically broken. Current spending is supported by bor-
rowing, and the bias is the other way around, with the next generation
subsidising the current one.
To prevent this disregard of the interests of future generations,
and in recognition of their inability to vote, there needs to be some con-
stitutional device to embed their interests, some form of a generational
constitution. Without this constraint on majority rule by the current
generation, and with constitutions ignoring the future constituency, we
are doomed to more of the same. Drafting a precise constitution is a
matter for legal experts. Here the focus is on the concept and the broad
principles.

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 198 / Legacy: How to Build the Sustainable Economy

The Case for Constitutions

Most countries have constitutions and most of these are written down.
Some are manipulated and ignored. Russia’s constitution, for example,
stated the maximum period a president could serve, until this is over-
turned. Even China had a constitution with a time limit on its presi-
dency until it, too, is overturned. Putin and Xi Jinping show a callous
disregard of the rules when it suits them. Neither of these examples is
evidently better than the UK, which is one of the few democracies that
does not have a proper written constitution. If one day the UK elects
a Trump, then the absence of a constitution may be much regretted. It
is the US constitution which prevented a Trump being a ruler rather
than an elected president, and it is the checks and balances between
the executive (the President), legislature (Congress and the Senate) and
judiciary (the Supreme Court) branches of government, and the inter-
actions between all of these, that provided some stability in the US
during the Trump presidency.1
The sheer variety and experience of constitutions begs the
question of what a good constitution might look like. Liberal political
theory provides a conceptual way of thinking about a constitution,
from John Locke onwards.2 The liberal idea is to take the individu-
als, ‘founding fathers’, and ask them to come up with a set of rules
which should frame and constrain the actions of governments (and
hence limit a dictatorship of the majority of current voters over current
minorities and the next generation’s interests). From Locke to Rawls,
the liberal constitution envisages an abstracted context in which, in
ignorance of the subsequent positions in society (or simply ignoring
them in John Stuart Mill’s representative democracy3), each individual
works out what would be a just society in which the rights of each
are respected and the outcomes are fair and reasonable. It is a form of
social contract.

1
It would have been more difficult in the US to break international law, as the UK pro-
posed to do over the Northern Ireland Protocol agreed as part of the BREXIT arrange-
ments.
2
J. Locke (1680), Two Treatises of Government.
3
Volume xix of The Collected Works of John Stuart Mill contains a number of Mill’s essays
on politics and his book Considerations on Representative Government. J.M. Robson (ed.)
(1963–91), Collected Works of John Stuart Mill, 33 vols., Toronto: University of Toronto
Press, London: Routledge & Kegan Paul, https://oll.libertyfund.org/title/robson-collected-
works-of-john-stuart-mill-in-33-vols.

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 199 / A New Constitution

The most famous recent version of the liberal constitution is

provided by John Rawls.4 In order to derive the principles of his ideal
state of justice, Rawls assumes that his delegates meet together in what
he calls a veil of ignorance over their subsequent position in society.
These are reasonable (and, in Rawls’s case, rational) people, able to
think beyond their immediate circumstances. They must be educated
enough to understand the choices in front of them, and not be so poor
themselves that they can focus only on immediate needs. It is a deliber-
ately informationally restricted choice.5
In this veil of ignorance, Rawls claims his two principles of jus-
tice will be chosen. These are first that each person is to have an equal
right to the most extensive basic liberty compatible with a similar lib-
erty for all, and second that social and economic inequalities have to be
attached to offices and positions open to all (Rawls’s equality of oppor-
tunity principle).6 These inequalities have to be to the greatest benefit
of the least advantaged members of society (Rawls’s difference prin-
ciple), translated into economics as maximin – maximise the benefits to
the least well-off – and raising the question of who exactly is the least
well-off, and in what units. Thus we have: an overriding priority of
liberty, equality of opportunity and the difference principle. Although
Rawls does not require equality of outcomes, or the utilitarian great-
est happiness to the greatest number, he is nevertheless both equality-
leaning and quite close to utility maximisation, once the diminishing
marginal utility of money is brought into consideration.
Abstraction is the crucial liberal element. It treats the autono-
mous individuals as coming together for purposes of mutual self-interest.
This is in contrast with more communitarian traditions which see society
as moulding the individuals as part of that society, following Jean-Jacques
Rousseau.7 It is also at variance with conservative traditions, which stress

4
J. Rawls (1971), A Theory of Justice, Oxford: Oxford University Press.
5
Ibid., pp. 136–42, section 24, ‘The Veil of Ignorance’. On p. 137 he states: ‘as far as pos-
sible…the only particular facts which the parties know is that their society is subject to the
circumstances of justice and whatever this implies. It is taken for granted, however, that
they know the general facts about human society.’ Rawls goes on to list them, to include
‘whatever general facts affect the choice of the principles of justice’.
6
The two principles are listed in Rawls, A Theory of Justice, p. 60: ‘First: each person is to
have an equal right to the most extensive basic liberty compatible with a similar liberty for
others. Second: social and economic inequalities are to be arranged so that they are both
(a) reasonably expected to be to everyone’s advantage, and (b) attached to positions and
offices open to all.’
7
J.-J. Rousseau (1762), The Social Contract; and The Confessions of Jean-Jacques Rousseau.

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 200 / Legacy: How to Build the Sustainable Economy

the slow evolution of social institutions and the special relationships built
up through history, in the tradition of Hume and Edmund Burke.
One curious and decisive feature of the veil of ignorance is
Rawls’s assumption that the participants will all be risk-averse. If they
are self-interested, each will want to make sure that if they turn out to
be the worst-off in the society that follows, they will be looked after.
This is a personalised version of the precautionary principle. Assuming
this is why Rawls can assert that his individuals, in the veil of ignorance,
choose the principle that any inequality is justified only if it is to the
benefit of the worst-off in society, in case it is them. There is no room
for Dragon’s Den, Love Island and a host of popular media focused on
success, winning and prizes.
Personal risk aversion is a very demanding and quasi-­socialistic
principle, and very different from the risk aversion in respect of sys-
tems in the sustainable economy. Modern capitalist and authoritarian
societies are organised rather differently, with large incentives to make
supernormal profits to motivate enterprise and investment. Rawls’s
approach is certainly not like the sort of society envisaged by Keynes
with his animal spirits, and it is at odds with the Austrian tradition
focused on incentives and entrepreneurs.
In theory, the Keynes and Austrian approaches could be rec-
onciled by presenting a sort of trickle-down argument, where all the
inequalities that result lift all boats, especially for the worst-off in
the society. Capitalism in this trickle-down model has the unintended
consequence of making the poor better off than they would be in
a society that aimed directly for equality.8 It is what Keynes might
have supported as an unintended consequence of his multiplier, with
demand-side stimuli creating the ‘means to prosperity’.9 The evidence
for ‘trickle-down’ is scant, and equality does not motivate capitalists:
they go after profits, and the competitive process erodes these so that
innovation, technical progress and lower prices are all delivered, in
the process also employing all those who want jobs at their marginal
product or above. Capitalists do not go about trying to meet Rawls’s
difference principle.

8
The claim against was presented as the Laffer curve.
9
See J.M. Keynes (1933), ‘Means to Prosperity’, reprinted in J.M. Keynes (2010), Essays in
Persuasion, London: Palgrave Macmillan. Writing in 1933, Keynes states that his scheme
‘embodies an advance towards economic equality greater than any that we have made in
recent times’, p. 368.

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Being at the Table

Who to include? The key feature of the sustainable economy is that it
is concerned with the economy over time. The next generation mat-
ters. But future people are not here and cannot take part in the con-
stitutional conventions writing the rules. How then to bring the next
generation to the table? The critical principle is of fairness between
the generations, and with it the idea that the current generation, like
its predecessors, has a duty to act as good stewards.10 This is what
our first principle requires. The next generation should not be treated
differently to the current one. Each generation comprises leaseholders,
not freeholders, of the assets, natural or otherwise.
Amongst the reasons why we might want the next generation
at the table is that they may have different preferences to ours. But
this is hopeless: we cannot know how these might differ, and hence it
is reasonable to assume that human nature is everywhere and always
the same. It follows that we do not need them at the table because they
may be different. Current people are in this sense representative of
future people.
In any case, in the capabilities approach the detail of prefer-
ences does not matter because we are not trying to predetermine those
choices. Crucially, we are not trying to make future people happy or
to equalise utility across the generations in an effort to gain the great-
est happiness over all time. The aim is more limited: to allow the next
generation to exercise their choices in the ways that best suit them. We
thereby escape the utilitarian’s difficulties.
In the sustainable economy, the next generation must be
empowered with the assets which provide for their capabilities to make
their choices. The constitutional rule between the generations is a con-
tract for the transfer of assets from the current to the next generation,
and a contract which specifies the state of those assets and the duty of
the current generation to be good stewards of those assets, which are
temporarily in its care. The contract also transfers debts, incurred only
in exchange for passing on enhanced assets. The balance sheet is the
account that reflects both the stewardship (the capital maintenance)
and the enhancements.

10
Rawls has a ‘just saving rule’ to address this question, but it is not grounded on assets,
capital maintenance and the sustainable economy set out here.

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 202 / Legacy: How to Build the Sustainable Economy

The stewardship approach to meeting the requirements of the

sustainable economy has the advantage that there is no need to be
precise about exactly who is and who is not in the next generation. It
merely requires that the capital maintenance and other considerations
are met. There may be specific cases where the time horizon makes a
critical difference to adjudicating on compliance. There always will
be, in any constitutional arrangement. This is for a supreme court to
decide upon.
The rights embedded in this constitution are not simply the
maximisation of freedom to exercise choices. The constitution includes
the right to do what you want, subject to not harming the ability of
others to do so, with ‘others’ including future citizens as well as cur-
rent ones. But the contract between the generations also requires more
than a negative refrain from harm to the next generation. It is more
than Mill’s On Liberty, Hayek’s Constitution of Liberty or the first of
Rawls’s principles, and requires certain positive actions. Only Rawls
spells this out in his second principle.
The negative freedom from interference from others that the
liberal right advocates neglects the positive aspects of stewardship
and the extent to which the assets have to be created and sustained
by society. The negative liberty picture of atomistic individuals in the
economists’ perfect competition model assumes that the assets are all
discrete, atomistic and small. It neglects the creation of the great sys-
tem assets and the protection of the environment, the assets at the heart
of the sustainable economy. These will not arise spontaneously from
individual actions. They require positive intervention, and a significant
role from the state.

Formalising Sticky Rights

Constitutional rules can never be absolute. There are no fundamental
human rights to which any individual has an absolute trump card in
respect of other citizens.11 This is easily seen by looking at any of the
individual rights in the American constitution. The right to bear arms is
an example; another is religious freedom. In the first case, it is possible
to construct cases where this would be a bad idea, and in the second,

11
See R. Dworkin (1977), Taking Rights Seriously, Cambridge, MA: Harvard University
Press, and his discussion of rights as trumps.

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 203 / A New Constitution

there can be bad religions. Even the right to life is not sacrosanct to
each and every individual in every situation. The police do, from time
to time, legitimately shoot and kill people. People die in pandemics
even if, with enough resources, they could be saved. Soldiers die in
defence of constitutions. Special forces kill Al-Qaeda leaders.
Rather, what a constitution does is make certain rights and
rules sticky, hard but not impossible to overcome. Changing them
requires going through a process which is typically subject to review,
appeal and legal judgments. There are supermajority rules, extended
periods to allow reconsideration, court hearings and adjudications,
referenda and ‘independent’ regulators. Revisions must be feasible: the
job is just to make them difficult when it can be argued that they might
damage the interests of the next generation.
There is no perfect constitution: they are the products of their
time of writing and specific historical circumstances, with very uncer-
tain prospects and uncertain futures. Our age is one with new massive
challenges. In our time, climate change and biodiversity loss are liter-
ally life-threatening.
Constitutions are designed to protect citizens from oppressive
majorities. They are limits on democracy, and also protections against
dictators. They allow for an orderly change of governments, rules for
the election of governments and rules for their removal. Minorities are
protected from abuse by powerful majorities. Protecting future genera-
tions from the possible tyranny of the current generation is an exten-
sion of this idea.
Constitutions are contracts between the members of a society
at a point in time and over time. The contract sets out the principles
that govern conduct. It lays down how these relationships will play
out, how the law of the contract will be governed and how violations
will be dealt with. The contract can be interpreted as a set of property
rights, but, as we saw previously, there are no absolute property rights,
and public goods pose special problems.

The First Principle

The first constitutional principle of the sustainable state is that each
generation, as steward of the assets it inherits, must look after them
and bequeath the next generation a set of assets at least as good as
those it inherited. This should be written into the constitution.

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This general principle of course requires interpretation, about

which there will be public arguments and debates. As time passes, so
technology, ideas and knowledge change. There is a difference between
a rule that says that a specific set of physical assets must be maintained
and one that says that the aggregate set of assets must be maintained,
between a rule that gives priority to renewable natural capital over the
man-made and human and social capital and a rule which protects all
capitals. Some assets could be replaced by others.
Against this physical flexibility, it is possible to compare differ-
ent operational outcomes. It might be that the capabilities can be held
constant over time, but the physical values of the assets change as long
as the operating values are as good.12 To mainstream economists this is
simply a recognition of substitutability within the bundle of assets. The
next generation can get more iPhones, but there may be fewer swallows.
It is immediately apparent that full flexibility is unlikely to
deliver the desired outcome because some assets, particularly renew-
able natural capital, are more important than others. But so too is full
rigidity. This means that some assets should be physically maintained
in almost all circumstances (subject to a judicial or other process) and
others can be quite flexible. A great deal of physical capital has a lim-
ited life anyway, and buildings and equipment are constantly chang-
ing. On the other hand, biodiversity is largely given and extinctions
are not just now but for all times. Even those bits of biodiversity that
do not have any obvious use now may do to future generations. They
are options, and once gone impossible to recreate unless we get really
good at genetic recreation and environmental reconstruction to allow
the resurrected species to flourish. The written constitution will need
to prioritise some assets over others, and especially renewable natural
capital, providing special protection. It needs targeted stickiness.
There are various ways some flexibility could be institution-
alised. There could be a generational timescale for formal constitutional
rules, with a presumption of no change unless clearly demonstrated
to be relevant. There could be independent bodies to review which
assets are maintained. Part of this reviewing function is statistical and
related to the accounting rules and conventions; part is analogous to the

12
On operating versus physical capital maintenance, see J. Edwards, J. Kay and C. Mayer
(1987), The Economic Analysis of Accounting Profitability, Oxford: Clarendon Press; and
G. Whittington (2017), Value and Profit: An Introduction to Measurement in Financial
Reporting, Cambridge: Cambridge University Press.

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 205 / A New Constitution

Law Commission, in looking at past legislation and making recommen-

dations for changes.13 Part could be a once-in-twenty-five-years consti-
tutional convention. Laws such as the Climate Change Act (amended)
2019 and the Environment Act 2021 set out statutory targets. These
would have to be consistent with the constitutional rules, with the poten-
tial to appeal to a supreme court where there are allegations that they
have fallen short of the requirements of the principles of the constitution.
The next step in a written constitution is to set out the rights,
duties and obligations of citizens (not consumers) within this frame-
work of assets. The central argument is that the entitlement of citizens
is to the primary assets, and that these comprise the basic systems (the
natural, physical, human and social capitals) which are the framework
for the economy to function and for citizens to thrive. These USOs vary
over time. They now include, for example, broadband. There cannot
be a simple constitutional list, but there can be a process for deciding
what they are and how they are changed over time. Where there is
doubt, a supreme court could adjudicate.
Arguments about the boundary between what is and what is
not in this category should not distract us from the core aspects all
agree should be included. These might include the major utility net-
works, health and education. The constitution defines the general
entitlements of citizens, and the process of deciding whether they are
fulfilled. There will be borderline cases.
The USOs include the entitlement to the national dividend,
reflecting the return on assets that all citizens have a stake in. In the sus-
tainable economy, these include the RABs for all the main privatised utili-
ties, as well as the return on assets directly owned by the government.
Both are public assets. That return can come through the provision of
the USO at below cost, and through a return to reflect the cost of capital.

Embedding the Polluter-Pays and Precautionary

Principles
In meeting the overarching objective, there are two further principles
essential to the sustainable economy. The first is the polluter-pays prin-
ciple. Internalising the costs of pollution is a necessary condition of the
sustainable economy.

13
See for a description www.lawcom.gov.uk/.

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 206 / Legacy: How to Build the Sustainable Economy

There will be debates and disputes about who is the ultimate

polluter and establishing responsibility. But then there are always
debates about property rights, and the polluter-pays principle is in
effect the right to protection from damage to property by other parties.
The principle introduces stickiness by putting the question of responsi-
bility for pollution into the constitutional context.
The second is the precautionary principle. The institutions that
oversee compliance with this principle will have to make judgements
about the gap between expectations and uncertainties. We do not
know the full consequences of global warming; nor do we know how
great the warming will be on the basis of the measures we are taking.
Similarly, we have little idea how biodiversity will turn out as a result
of a variety of policies that might or could be adopted.
The implication is that, for all the key systems, a margin for
resilience should be introduced above the mean expected outcomes,
to ensure that the next generation is most likely to end up a bit ahead.
There are two reasons for this: it takes account of irreversibility and
asymmetries; and of the damage already done. Some catch-up resti-
tution is needed anyway. The first reason relies on the idea that the
benefits to the next generation of avoiding risk are greater than the
costs today of meeting them, because the bad outcomes are likely to
be asymmetrically large and, in the case of renewable natural capi-
tal, irreversible. The second reason is an ethical one. Whatever the
starting baseline for defining the current generation, there is little
doubt that the natural capital and the climate have in fact been dam-
aged by the current generation, and that the line is not being held,
notwithstanding the technological advances that will benefit future
generations (although not all technological advances are necessarily
desirable).
In constitutional terms, it is impossible to specify the size of
this precautionary margin. The constitution of the sustainable econ-
omy should require institutions and individuals, in discharging their
functions, to have regard to the precautionary principle in respect of
these primary assets. In practice, this will mean that any official chal-
lenged in the courts for failing to do so will need to show how assess-
ments have been made and what steps have been taken to implement
them. The precautionary and the polluter-pays principles are what
goes in the constitution, while the process is the pragmatic means to
meet it.

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What Should Be Passed Down the Generations

Regarding the first overarching principle to leave at least as good a
set of assets for the next generation, some consensus will be needed
on which assets are deemed most important. The constitution should
make provision for, and give priority to, primary assets, those consid-
ered of primary importance for capabilities.
This does not mean that other assets are unimportant, or that
they might not become primary in due course. The constitution could
simply state the importance of primary assets in general and leave it
to governments and the courts to decide the particular cases that fall
inside and outside this category.
The intermediary position is to set out the general headings
and provide some steers within each. Taking them in turn, natural
capital assets fall into the primary category, because to be deprived of
them makes it very difficult for any individual or business to function.
The sustainable economy needs sustained natural capital. It is a fair bet
that it always will do.
Some types of natural capital are nevertheless more important
than others. All the really important ones are renewable natural capi-
tal: stuff that nature gives us for free and keeps on giving us in perpetu-
ity provided the stocks are not depleted to levels below which they can
reproduce themselves. There are overlapping types of renewable natu-
ral capital at the species level, at the catchment and local ecosystems
level, and at the global level, right up to the climate. The constitution
would require that all these levels of natural capital be kept at least
above the thresholds, to the extent that national boundaries allow. The
constitutional protections might extend to protected areas, lands and
marine areas set aside for current and future generations.
The other main type of natural capital is the non-renewables –
stuff that can, unless recycled, be used only once (except over extremely
long time periods). More mineral deposits may eventually be formed,
but not enough for millions of years to add to the resource base. These
sorts of natural capital cannot be maintained as stocks, even if there is
some recycling. This is true also of the minerals needed for l­ow-­carbon
technologies, notably for electric car batteries and wind and solar
generators. Someone uses them and, in order to meet the sustainable
economy requirements, there must be compensation for their use now
by the current generation for the next generation who will not be able

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 208 / Legacy: How to Build the Sustainable Economy

to consume them. Recycling has costs, even if it mitigates some of the

depletion. The accounts should show the intergenerational spreading
of the benefits.
Intergenerational accounts are key to demonstrating com-
pliance with the first principle, and identifying violations. The non-
renewables appear on the balance sheet, and as they are run down,
there needs to be a corresponding and compensating adjustment. This
can be to increase other assets, and in particular enhanced renewable
natural capital, and could include contributions to future national
dividend payments. The constitutional duty to maintain assets intact
implies that conformity with these requirements does require that these
accounts are kept and the balance sheet asset valuation cannot fall net
of liabilities. It would otherwise be impossible to show how actions
complied with the overarching first principle.
Human capital maintenance and enhancement are driven in
the main through education and R&D. Education is a USO in the
sustainable economy, a primary asset. Because people die, education
needs to be continuously invested in to maintain the stock of human
capital intact. The ideas, knowledge and technologies are assets-in-
perpetuity, but only if people have access to them. The constitution
can reflect this both by protecting basic and core R&D, as well as the
research infrastructure that goes with it, and by enshrining a duty
to provide universal education. The special additional requirement
is to compel citizens to participate in education. It is a right and an
obligation.
Physical capital comes in many different shapes, forms and
sizes. For the bulk of the private sector there is no need to require con-
stitutionally that it is protected. Frequently, depreciation applies, since
physical assets decay and technology changes their economic values.
However, there are some forms of physical capital which, though theo-
retically limited, in practice are best seen as assets-in-perpetuity. These
provide citizens and businesses with water, energy, transport and
communications. Since these are critical for capabilities, the general
constitutional requirement to provide citizens with capabilities will be
met through the provision of these basic system infrastructures. The
principle is about the capabilities; the application is about the provi-
sion and capital maintenance of these systems. Citizens have a right to
energy, water, transport and communications – and of course nature –
reflected in USOs.

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 209 / A New Constitution

Finally, there is the complex and culturally dependent social

capital. This is all about trust and resilience. It will be hard for a con-
stitution to legislate for social capital, other than as a general principle,
and hard for courts to decide whether this requirement is being met.
A general reference is what is probably required here, recognising that
it will be difficult to enforce. For example, commitments to religious
freedoms may be included, but commitments to specific religions are
to be avoided. Freedom of speech might require protection. Many con-
stitutions make reference to these rights, without filling in the details.
They flag them, leaving lots of leeway for interpretation. The flags have
value even in such complex circumstances. Asking questions and shin-
ing a torch on what is going on is almost always a useful first step.

Limiting Government Discretion and the Importance

of Rules
These rights and obligations need to be embedded in a constitution,
otherwise they may be neglected as and when parliamentary majorities
from time to time see it expedient to do so. A constitution is a limit to
discretion by governments. The constitution is a set of rules, rules of
the game that governments have to follow.
Historically, those keenest on limiting discretion have been con-
servatives, and conservative liberals in particular. The historical backdrop
is the French Revolution: the fear that, in the absence of rules, revolu-
tionary forces can tear up existing institutions. For those on the right,
there is an assumption that revolutions lead to tyrannies. In the cases of
the French Revolution in 1789, the Russian Revolution in 1917 and the
Chinese Revolution in 1949, the evidence supports this hypothesis, elo-
quently set out by Burke and reinforced by Alexis de Tocqueville.14
Although many environmentalists find themselves on the left,
and want to overturn ‘capitalism’, the central idea that there should
be limits on discretion when it comes to nature is one that should
appeal to them, as well as to conservatives. Discretion to cut down the
rainforests, to destroy ancient woodlands and to build coal-fired power
stations is in conflict with the idea that there should be rules to protect

14
See E. Burke (1790), Reflections on the French Revolution, London: James Dodsley; A. de
Tocquevillle (1835), Democracy in America, London: Saunders and Otley; and T. Paine
(1792), Rights of Man, London: printed for J. Parsons as an alternative perspective.

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 210 / Legacy: How to Build the Sustainable Economy

natural capital. The absence of such constraints has not produced

good outcomes. The sustainable economy principle of ensuring that
the value of assets does not in aggregate go down, and the limitation
on substitution between different asset classes, puts rules in the way of
marginal calculations and discretion. Moreover, simple compensation
rules and net gain policies tend not to be enough, not least because they
get limited to individual assets, not ecosystems of natural capital.
Admittedly, the proposals for a new constitution are them-
selves revolutionary, in a sense similar to that in the context of the
American Revolution. To develop the constitution outlined here would
be a radical departure from the discretionary state that has built up
piecemeal since the English Civil War and the Glorious Revolution
of the seventeenth century. But then there is little chance of protect-
ing natural capital, and having regard to the next generation, without
entrenching these rights in a new constitution. Once in place, as with
the American Constitution entrenching the American Revolution, the
new constitution should be hard to change.

Ways of Amending Constitutions

Hard to change does not mean impossible. Constitutions are not strait-
jackets, but rather tight coats. Circumstances change, and there needs
to be a way of amending constitutions. Around the world a number
of devices have been tested and introduced. There are supermajori-
ties requiring, say, two-thirds or more of a parliament to approve.
Sometimes, the ability to change the constitution not only requires a
supermajority but restricts this to an upper house or senate. Others use
referenda, and some, like the Swiss, on a very regular basis.15
There is a particular dimension of this limit to discretion which
comes up in the sustainable economy. Some decisions have medium-
and longer-term horizons, in a context in which parliaments cannot
typically bind their successors. An example is climate change and the
adoption of targets for net zero by 2050. While new information may
lead to ex post revision of the target, the very existence of long-term
targets and plans can condition expectations and significantly reduce
costs. If everyone knows that there is a legal requirement to meet net

15
The Swiss example does not necessarily protect the environment. In June 2021, proposals
to address climate change were rejected, for example.

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 211 / A New Constitution

zero by 2050, which is likely to be upheld by a supreme court under

a constitution, and hence that the target will not be easily weakened,
and if the energy sector knows there is a plan for fibre provision, and a
target for the roll-out of electric vehicles, and the water sector knows
that there is a requirement to increase tree cover in catchments, all
their decisions can be implemented at lower cost. These commitments
enable the system regulators to plan with less uncertainty and to do so
consistently. Electric cars, for example, are likely to work better if the
electricity networks are developed to cope in harmony.16
In all these examples, the constitution cannot mandate these
planning activities in detail. Rather, they form part of the reasonable
steps that governments should take to ensure that their conduct is con-
sistent with the overarching first principle of leaving the next generation
with a set of assets at least as good as those it inherited. Governments
will need to show that they have acted in good faith, taken due notice
of the polluter-pays and precautionary principles, and the system plans
are one of the core ways of demonstrating this. Otherwise, the con-
stitution should provide for legal challenge. It is an obvious step to
align statutory duties of system regulators with the constitution’s first
principle and also the polluter-pays and precautionary principles. The
constitution embeds these.
This constitutional approach feeds through into the stickiness
of these longer-term plans. If, for example, the government makes pro-
posals for transport which take out ancient woodlands, there could
be a constitutional challenge since this violates the principles.17 There
may be circumstances where this damage to renewable capital is nev-
ertheless justified. The power of constitutional stickiness is that com-
pensatory offsetting benefits would need to be very considerable. The
principles mandate this.
In practice, membership of the EU provides for some such stick-
iness. The EU Directives are underpinned by the European Court of
Justice. The EU Air Quality Directive mandates that citizens should be
protected from urban air pollution breaching certain thresholds, and
governments can be challenged through the courts for failures. A gov-
ernment of an EU member state could try to change the Directive, but

16
In regulation, this is sometimes called the ‘fair bet principle’. See, for example, Ofcom
(2020), ‘Full Fibre Must Be Fair Bet’, Dame Melanie Dawes speech to FTTH Council
Europe, 3 December.
17
See again HS2. Glaister, ‘HS2: Levelling Up or the Pursuit of an Icon’.

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 212 / Legacy: How to Build the Sustainable Economy

it does not have sole power to do this, and in practice once a Directive
is in place, it would need a majority coalition of member states and
then the European Parliament to abolish it. Directives have a number of
features that mirror constitutional constraints. They create stickiness.
‘Taking back control’, the slogan of the UK BREXIT campaign,
could be interpreted as a desire to break free of rules and constraints in
the name of whatever the current parliamentary majority in the House
of Commons dictates in the interests of the current generation. It is
already apparent that this control is and will be used on occasion to
weaken environmental constraints.18 Removing stickiness is likely to
be to the overall detriment of the environment, even if there are specific
counterexamples from time to time.
Outside the EU, there is no such protection in the UK, and the
UK courts will struggle to hold the government to account for air qual-
ity violations, for example. An early example of the difficulties is the
Climate Change Act. Under this Act, the CCC proposes five-year roll-
ing carbon budgets, setting them for the next fifteen years. Parliament
either accepts the proposals or the government has to come up with a
new carbon budget which would have the same effect. The record of
meeting the carbon budgets so far is poor,19 but there is no constitu-
tional court to appeal to since there is no constitution that this failure
violates. The European Court of Justice, by contrast, could be (and
was) appealed to for violation of the Air Quality Directive, and indeed
it found against the UK government and required remediation. This is
constitutionalism and the supporting courts in action, limiting discre-
tion and developing and enforcing medium- and longer-term targets
that are not easily changed.

Proving the Rules Are Being Followed

Central to the sustainable economy and its constitutional protection is
that any government can be held to account and hence have its perfor-
mance measured against the overarching principles, and especially the

18
C. Burns and A. Jordan (2021), ‘Environmental Regulation in the Post-BREXIT Era’,
23 March, www.BREXITenvironment.co.uk/2021/03/23/environmental-regulation-post-
BREXIT/.
19
Climate Change Committee (2020), ‘Reducing UK Emissions: 2020 Progress Report to Par-
liament’, 25 June, www.theccc.org.uk/publication/reducing-uk-emissions-2020-progress-
report-to-parliament/.

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 213 / A New Constitution

first principle. This requires government to maintain intergenerational

accounts. The accounting framework for the sustainable economy is
designed precisely to answer the stewardship question, and to shine a
torch on how well the government is doing in meeting the overarching
principle. Put another way, unless there is a way of measuring whether
the net natural and other assets are going up in value or down, holding
a government to account is going to be extremely difficult, whatever
the constitution says.
The first principle requires that the assets are maintained.
Meeting this condition would be radical, because it would force the
capitals to be maintained and, in the process, require either less spend-
ing elsewhere or higher taxes. By not paying for capital maintenance
out of current revenues, we are living beyond our means, and the mani-
festation of this is in the deterioration of the asset base. This is the
climate change, the biodiversity loss, the deterioration of catchments,
the potholes in the roads, and so on. It is why our infrastructures are
often poor.
In the constitutional approach, a budget presented to parlia-
ment which did not provide for proper levels of capital maintenance
could be struck down by the courts. Governments proposing to reduce
taxes and pay for current-account spending by borrowing would face
legal challenge. This possibility would encourage finance ministers to
set out how they are in fact meeting their capital maintenance obliga-
tions. In particular, ministers could not pretend that they are control-
ling public expenditure by putting off maintenance. Cutting capital
maintenance, allowing the potholes in the road to get bigger, would
fall foul of the courts. All budgets would be under the scrutiny of the
offices protecting the constitution.
This may sound very intrusive and it could encourage vexa-
tious legal challenges, but this need not be the case. All governments
have to do is comply with the constitution, and there could be inde-
pendent bodies, for example an enhanced office for budget responsi-
bility, with the duty to check and opine on whether the constitutional
requirements have been met. It could be built into the budgeting pro-
cess. It need not delay action: the challenges would be ex post, and
need not hold up implementation.
More generally, the balance sheet and the accounts presented
by government could be audited by an independent body. This is
something that happens in some countries automatically. In France,

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 214 / Legacy: How to Build the Sustainable Economy

there is an accounts court (Le Chambre des Comptes). The differ-

ence between the current situation and the constitutional one is that
reporting on accounts and accounting practice would have teeth: if the
accounts are found to be inconsistent with the constitution then legal
action could follow. Put simply, it would be constitutionally illegal to
cook the books, rather than as at present just embarrassing to have
this pointed out.

Embedding the Intergenerational Constitution

The gap between the overarching constitutional principles and the way
the constitution is interpreted and implemented is mediated by a range
of institutions, all ultimately within the oversight of a supreme court.
These are bodies that can be created to ensure that the first principle
is properly embedded in practical outcomes. This is a key role for the
regulatory institutions. The core headings are: the systems, the citizens’
entitlements and the macroeconomic frameworks.
Each of these has a substantive role in the sustainable econ-
omy. Plans must be consistent with the first principle. In the sustainable
economy, the system regulators for each of the main infrastructures
have this planning function, guided by central government and con-
sistent with the constitution. The system regulators have the duty to
ensure resilience, security of supply and other long-range objectives
like net zero. They can use markets to auction the system requirements,
but not the systems themselves. Private companies or other organisa-
tions deliver them.
To meet the citizens’ entitlements to fully participate in society,
the USO requirements link to the national dividend. There will need
to be a cash-in, cash-out fund with trustees, and the national accounts
will need to show the surplus year-by-year net of capital maintenance.
Much of this is technical and about the arithmetic and payments pro-
cedures, but there will also be some discretion over the projected eco-
nomic growth. For this reason, the precautionary principle could entail
a two-part payment, ex ante and ex post, as already outlined. It is the
job of the fund’s trustees to ensure that the rules are followed. The
trustees’ articles (its internal constitution) will need to be consistent
with the overall constitution, and open to legal challenge.
The macroeconomic implications of the overarching consti-
tutional first principle are considerable and radical. The sustainable

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 215 / A New Constitution

economy rules should include: balancing the current account of the

national accounts, net of capital maintenance, with limited discretion
to allow for exceptional surpluses and deficits; providing a mechanism
for a fund to build up so that deficits resulting from or in response
to crises are temporary; and ensuring that the balance sheet is non-
declining. This means that any and all investments that enhance
assets’ values can be matched by debt and the state can borrow to
invest. Increases in debt are matched by the assets the borrowing cre-
ates. Projects that do not add value – trophy projects – would most
likely fall foul of this rule and would need some funding contribution
deducted from the current accounts. This is not a cap on debt per
se, as for example in the German debt rules,20 but rather a rule that
assets must be created to match or exceed debt liabilities except in
exceptional, limited and temporary circumstances. It leaves govern-
ment and its primary macroeconomic policy institutions, like the Bank
of England, open to legal challenge.
The rules for monetary policy include an interest rate to be set
in real terms in line with expected sustainable economic growth, link-
ing the present to the future and setting the returns and hence incentives
for saving. This can be enshrined in the mandate set by governments
to the central bank. The government must make sure that the mandate
itself is consistent with the first principle.
In terms of institutions, it is surprisingly simple to follow the
above rules. Much of the institutional architecture is in place, even in
the UK, and without a constitution. The current-account balance is an
accounting exercise with limited discretion over the short-term deficits.
This could be a task added onto the existing UK Office for Budget
Responsibility, backed up by the existing National Audit Office, all
under constitutional oversight.
Setting interest rates following the rules above could remain
with the Bank of England and its Monetary Policy Committee. There
are already rules (like the 2 per cent inflation target), and the sustain-
able economy macroeconomic rules could supplant them. In the US,
the Federal Reserve already carries out these functions, and in the
EU, the ECB has the relevant powers. The sustainable economy rules
require a forecast of sustainable growth and a feedback correction rule;

20
The debt limit, enshrined in the German constitution, limits new public debt to a maxi-
mum of 0.35 per cent of GDP.

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 216 / Legacy: How to Build the Sustainable Economy

and the process for setting the interest rate is again under the eye of the
courts and the supreme court. The Bank of England would have to set
out clear reasons for the decisions it takes. This procedure is an exten-
sion of what it already does. The difference in the sustainable economy
is that it could be challenged.
As regards QE, this would be treated as an extreme and emer-
gency measure, and there would be an automatic adjustment to the
national balance sheet. In order for the balance sheet to continue to
add up, there would need to be a provision for repairing the damage
done by QE, and the Bank of England, the US Federal Reserve and the
ECB would be required to set an exit strategy before they embarked
on QE.21

The Stability Benefits

The advantages of the sets of rules above, and the institutions to
deliver each of them, are measured by not only fulfilling the overarch-
ing objective, the first principle, but by doing so in a predictable and
inherently stable way. It turns the macroeconomic financial instability
and short-term planning cycles for the infrastructure systems into a
predictable and stable macroeconomic framework and medium- and
longer-term system planning. The extra dimension added in the sus-
tainable economy is that all of the above must be carried out con-
sistent with the first principle, and also with the polluter-pays and
precautionary principles.
The sustainable economy rests on sustainable consumption,
that is consumption that can be sustained by the current generation
without prejudicing the opportunities and capabilities of the next
generation. With the rules for systems and system planning, for the
national dividend and for the setting of interest rates and the budgets
for governments, the level of sustainable consumption is predictable
and need not change significantly from year to year.
It is also likely that the sustainable economy constitution will
help to maximise the sustainable consumption path because it will

21
There is a similar example relating to the exercise of QE by the ECB – the German
courts have examined its consistency with the overarching constitution of Germany
and found it initially worrying. See also House of Lords Economic Affairs Committee
(2021), ‘Quantitative Easing: A Dangerous Addiction?’, 1st Report of Session 2021–2
HL Paper, 16 July.

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 217 / A New Constitution

enhance productivity. Instead of the last two decades of extreme finan-

cial instability, repeated economic and financial crises and very low
productivity growth, the proper maintenance and enhancement of the
infrastructures will feed through to lower costs for every business,
the employment opportunities will help enhance human capital and
the national dividend will contribute to flexible labour markets.
Long-term credible and stable investment plans will lower the
costs of capital. Households will be able to save and invest in the con-
text of greater financial stability, and the state will be able to ensure a
smoother flow of savings into investments, and enhance those invest-
ments where they improve the balance sheet by targeting savings for
investments into the four capitals, financed primarily by debt. Borrow-
ing will be for investment, not consumption, for the future people and
not for the present. Social capital, and especially trust between the gen-
erations, will be enhanced.
Constitutions are never perfect, and there are costs as well
as benefits from going down the constitutional route. But without
constitutional protection of the interests of the next generation, the
chances of getting to the sustainable economy are slim. Constitutions
are imperfect ways of creating stickiness in the face of actions that
benefit the current generation at the expense of the next. They are not
once-and-for-all, as the social contract theorists like Rawls would have
us choose in a veil of ignorance. They are live frameworks of rules,
sticky but nevertheless capable of evolution. It remains for the detail to
be filled in to translate the principles of the sustainable economy into a
practical and workable constitution.

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 12 CONCLUSIONS: IT COULD
GO EITHER WAY

There is only one credible position to take. We can expand our

horizons and grow and prosper. We can make this a green and prosper-
ous land. But that prosperity is not likely to materialise on the current
economic model, because it is seriously flawed both in its objectives and
in its inner workings. We will not ‘save the planet’ by more of the same.
What is required is a very radical recalibration. It is not markets and
capitalism themselves that are the problem; it is the ways they are being
channelled in the twenty-first century by largely ignoring the environ-
mental consequences. We have a choice, a pathway we could take. The
challenge is urgent. To get onto a sustainable consumption path, and
thence onto a sustainable economic growth path, requires some brave
and more radical surgery. We don’t have time to wait and see.
The sustainable economy is very different from the existing
economic model. Its ambitions are limited to leaving the next genera-
tion with a set of assets at least as good as we inherited. This first
principle of the sustainable economy requires very limited foresight.
No economic forecasts, no focus on ever-rising GDP. Just the basics:
making sure that future citizens have the basics to choose how to live
their lives. And not the future generally, but limited to the next genera-
tion specifically.
As we stare into the unknown world of the next generation, try-
ing to make them happy gives way to something more solid: making sure
the assets are in place. It turns the spotlight back onto us and what we are

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 219 / Conclusions: It Could Go Either Way

doing to the planet, and especially its natural capital. What we have to do
is in fact very simple: we have to do the capital maintenance, and follow
the polluter-pays and precautionary principles. It is us who are taking
risks with the planet, and us who are the polluters and who are not pay-
ing for the pollution we cause and us who are putting the next generation
at risk. It is us as citizens who are not fulfilling our obligations.
The rules of the sustainable economy are simple too: to follow
these principles, we should not behave with the kind of blatant selfish-
ness currently on display. We should not saddle the next generation
with piles of debt raised to pay for our current consumption. The next
generation can be burdened with debt only where they are blessed with
new assets worth at least as much as the liabilities that are incurred to
make the investment, to enhance their future. Building better assets,
better ideas and knowledge and enhancing natural capital are good
things to borrow for.
Right now, the next generation is being screwed by us. As
populations age, as the majority becomes skewed to the pensioners,
the demands for more public services grow, but not the correspond-
ing willingness to vote for higher taxes. The young are inheriting lots
of debt, lots of climate change and a lot less biodiversity. They are
also getting increasingly inadequate infrastructures. Instead of mak-
ing sure the energy, water and transport systems are in good shape for
the challenges of this century, the old systems of the twentieth century
are often patched up with sticking plasters. Water leaks out of the
pipes, sewers cannot cope, energy networks struggle to accommodate
the new demands from electric cars and the roll-out of fibre looks to
the consumers in densely populated cities, and less the citizens in the
more peripheral and rural areas.
This is not some accident that has befallen the young. It is very
much by design of the economic orthodoxies of our time, which match
the interests of the majority – a majority that is increasingly focused
on the old. The prevalence of Keynesian economic policies panders to
this narrow electoral base, to the inevitable tyranny of this majority.
A focus on aggregate demand, on keeping up consumption, has not
produced higher productivity and higher GDP growth, its measures of
success. It has at times brought very negative real interest rates, fiscal
deficits and, consistent with this paradigm about how to manage an
economy, it has ended up with QE, as many rulers in the past also did.
In ordinary language, this is printing money.

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 220 / Legacy: How to Build the Sustainable Economy

Perhaps it is not too extreme to claim that the first principle

has been turned on its head: the next generation will inherit a set of
debts and degraded assets to maximise the benefits to the current gen-
eration. Worse, the polluted should pay, and we should sail as close to
the wind as possible when it comes to taking risks with climate change
and biodiversity loss. If these are the principles, we are doing pretty
well at meeting them.
It is at the heart a consumerist ideology, spending now and to
hell with the consequences. Old-fashioned values, like thrift and saving
for a rainy day, about paying one’s way, are thrown out of the win-
dow. The Victorian approach that Keynes and Bloomsbury so dispar-
aged is dead and buried. Conspicuous consumption, which was once a
criticism hurled at the rich and famous, has been democratised through
the new forms of communication, and ‘influencers’ are the high bar
of disposable fashions and ‘image’. If this is what Keynes wanted, he
should rest easy in his grave.
What should make him less easy are the consequences of his
success. Whereas, for Keynes, the economic prospects of the grand-
children were an ever-enlarging set of consumption possibilities, it has
turned out for them to be a less happy place, and a potential disaster
for the environment.
It is at this late hour that choices have to be made. They ‘have’
to be made because the consequence of an unstainable economy is that
it will not be sustained and the point of no return is approaching fast.
In making this choice, the missing bit is being able to envisage what
that sustainable economy would actually look like. Its architecture is,
like the problem itself, at heart remarkably simple.
Its starting point is its most fundamental one. It is to throw
off the central idea that humans are best regarded as consumers
only, and the sole path to happiness, the maximisation of utility, is
to achieve the highest level of consumption. There is more to life
than spending, and turning economics away from pure consumerism
towards citizens, recognising that citizens have common and equal
rights and responsibilities, shifts the focus dramatically. The central
concern is making sure that these citizens have the capabilities to
thrive. Citizens are of course also consumers, but they are also more
than just consumers.
Putting citizens centre stage and recognising that we have very
fuzzy glasses to peer into the future leads to the second radical point

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 221 / Conclusions: It Could Go Either Way

of departure: the centrality of assets, and in particular primary assets.

This is why the first principle is defined as leaving the next generation
with a set of assets at least as good as the current one inherited. It is
all about systems and assets rather than utility and flows, creating the
platform for the young to launch themselves into adulthood, to build
careers and families and do all this to the maximum of their capacity.
Choices are made now in the radical uncertainty which is the
human lot, and what makes life so interesting. There is little that is
more boring than certainty as to what the future may hold. Imagine if
you know how your life was going to unfold, and when you are going
to die. It is all predetermined and there is nothing you can do about it.
That is what certainty entails. Living such a life would probably not
be a life worth living. Instead, we should embrace the uncertainty that
is at the heart of the human condition, and be risk-averse about it. We
should be precautionary, as good Victorians would have been.
In living our lives as good citizens, and accounting for our
behaviour, the idea of a day of reckoning is quite helpful. It contains
the idea that we should account for our conduct. To do this, the sus-
tainable economy asks for accounts. The sustainable economy has
proper accounts with balance sheets that reflect the assets, and their
management in perpetuity. They tell us what assets we have and how
well we are protecting and enhancing them, whether we are being good
stewards on behalf of the young in the next generation.
The sustainable economy has a simple measure of this. It is the
test of whether the assets are being properly maintained, so they don’t
depreciate, and hence we avoid consuming the capital. Capital main-
tenance is the central organising concept to achieve the first principle.
It is what needs to be done, before we can spend. What we can safely
and responsibly spend is after deducting capital maintenance before
determining the amount of spending consistent with sustainable con-
sumption and growth.
Only when the natural ecosystems are protected and properly
managed, the energy system delivers low-carbon electricity securely,
the water system delivers drinking water and cleans up the sewage, the
trains, buses and electric cars have networks to travel on, and everyone
has access to fibre communications can enhancements be brought into
the picture and borrowing be contemplated.
Borrowing to spend does not wash in the sustainable economy,
except in the event of a big and sudden economic shock, and even

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 222 / Legacy: How to Build the Sustainable Economy

then there has to be a recognition and a plan to repay it. Three recent
shocks have shown how easy the borrowing bit is, and how hard the
repayment catch-up is to deal with: the financial shock in 2007/8, the
Covid pandemic and the energy price crisis. There are no signs that
the borrowing associated with each of these shocks will be repaid, and
no clear plans to do so. Default is the likely exit, and inflation is the
traditional means. It is now and it was in the 1970s. The debt is not
sustainable and hence will not be sustained.
Many governments have tried to commit to credible financial
rules, and ‘borrowing for investment only’ is the one that repeatedly
gets invoked, for good reason. It is the right fiscal rule. The problem is
that it is investment not capital maintenance that counts, and creative
governmental accounting often gets health and education and a host
of other things conveniently renamed as investment. It is the right rule,
and in the sustainable economy it has a clear and hard meaning. The
hard bit is that in the sustainable economy, it is actually followed in
practice. The watchwords of the sustainable economy are: ‘shine the
torch’. Look closely, peer through the fabric of lies and wishful think-
ing that underlie many national accounts, and ask what is really going
on. Don’t believe the political hype about ‘things can only get better’,
that ‘growth will pay for itself’, and that tax cuts and more spend-
ing are what make for a stairway to heaven. Shining the torch on the
ambulance queues, what is actually going on in the classroom, at the
state of the infrastructures, at the rising debts and rising inequalities,
reveals a story that few politicians – and us who vote for them – wish
to acknowledge, let alone do something about.
The polluter-pays principle makes markets the servants of the
overall objectives, not the carriers of destructive subsidies to pollut-
ers. It is hard to overestimate how radical this would be. Take the
2022 energy price crisis. If and when oil and gas prices fall back to
a better reflection of their (non-carbon) costs of production, and if
then a proper carbon tax is added back to reflect the scale of the
damage from carbon emissions and at a level necessary to meet the
net zero targets on a sustainable basis, the high energy prices experi-
enced in late 2022 would become the norm. The fact that consumers
clamoured for bail-outs, and had insufficient funds to pay the bills, is
a measure of just how big the switch to polluter pays would actually
be. Add in taxes on methane, and the environmental damage from
mining all those minerals needed for electric car batteries and for the

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 223 / Conclusions: It Could Go Either Way

magnets in wind turbines, and energy in a useable form would be

treated as a scarce resource (energy itself is anything but scarce). This
is not a message that governments want to give in extolling the virtues
of net zero. They would have us believe that decarbonisation is the
route to cheaper energy and hence more disposable income to spend.
It probably won’t be, and serious decarbonisation is going to hurt –
probably a lot.
The sustainable economy is radically challenging. Making us
the polluters pay, making us pay for the capital maintenance of the
core primary assets and especially renewable natural capital, and mak-
ing us save to invest in enhancing these assets is going to require a big
adjustment to our spending and the ways we live our lives. There is
quite a lot of pain in getting onto the sustainable path. In the macro-
economic mess that most countries are in, and after two decades of
monetary and fiscal stimuli, and QE, there is little scope for tax cuts,
more and more unsecured borrowing and dithering over paying for
carbon and other pollution. These will only make matters much worse.
The shock would be profound. It upends the consumerist world
all are so addicted to. There would be immediate and more long-term
casualties. They would not just be the oil and gas and coal companies,
the fertiliser and plastics manufacturers, and the conventional steel and
cement makers. They would be citizens’ bottom lines. The sustainable
economy has to deliver social justice, not just in steady state, but to
manage the transition from here to there, and to do so without creating
a global slump and mass unemployment, and dire poverty too. It has
to do it from a starting line that the last two decades have made much
more unequal.
The good news is that there are plenty of sources of funding
available once we are prepared to think radically enough, and admit
that tax and welfare sticking-plaster changes are wholly inadequate
for the challenges ahead. And, in focusing on citizens, there are plenty
of resources to tackle their capabilities to participate in society now
and for the young in the next generation. Again, simplicity is both the
right call, and perfectly plausible to achieve. Complexity is the enemy
of effective relief of poverty and ensuring efficiency in both spending
and taxation. In the sustainable economy, there are two bits to all this:
the provision of broadly universal services and a modified universal
income paid to a significant number of citizens from a combination
of taxation and a national dividend, so that wages are flexible, and

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 224 / Legacy: How to Build the Sustainable Economy

that the Keynesian encouragement of ever-greater unfunded fiscal defi-

cits is abandoned.
The obvious question which haunts this book is whether or not
there is any chance that the framework set out here will be adopted,
whether the voters will elect leaders on a policy platform like this, and
whether the autocrats in countries like China and Russia will see it in
their interests to follow. Or even whether any political leader is actu-
ally prepared to confront us with the consequences of our selfish ways.
It has to be admitted that the prospects are slim. The immedi-
ate politics has focused on ‘the cost of living crisis’, yet more borrow-
ing to cover current spending, and even tax cuts. If anything, there is
an acceleration in the pursuit of the sorts of economic policies that got
us into this mess. In a world of Xi Jinping, what chance is there that
the world’s largest polluter will change tack? Faced with drought and
serious environmental shocks already, China’s response is to double
down on buying more coal. Putin’s Russia, underpinned by the great
Russian fossil-fuel industries, does not take kindly to carbon taxes and
decarbonisation. Putin’s priorities are territorial expansion and mili-
tary aggression, not addressing the environmental crises. Helping to
wreck the planet should be treated as just as serious as Putin’s horrors
in Ukraine. For both, he should be an international pariah. In the US,
the ghost of Trump lurks.
Rather than despair, there are two ways of advancing against
this gloomy outlook. The first is to tell people about the upsides of tak-
ing the path in this book, stressing the benefits to the current as well
as future generations, and explaining why an enlightened self-interest
might actually be better met through the benefits of a more environ-
mentally benign consumption and growth path. The second is to spell
out what might happen if we ignore the environmental destruction all
around us, and what the consequences might be when the unsustain-
able hits the brick wall and is no longer sustained.
The upsides are impressive. In Green and Prosperous Land, I
set out the opportunities within just the UK, for the urban areas, the
rivers, agriculture, the uplands and the coasts. Better air quality in cit-
ies, trees and green spaces improving mental and physical health and
for children to play, improving river quality and thereby lowering the
costs of cleaning it up for water supplies, and diverting the subsidies to
farmers to pay for greener public goods. Once properly accounted for
and brought into the evaluation of both current spending and future

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 225 / Conclusions: It Could Go Either Way

investment, these are all projects that have positive economic values.
Add in the carbon sequestration opportunities from better land and
coastal management, many of which are both cheaper than some cur-
rent emissions reductions opportunities, and offer up the many other
returns to the natural capitals over and above the carbon offsets.
These are all no regrets, even before the biodiversity gains are
added on top, and make economic sense as soon as sensible pricing is
introduced. Just doing all these sensible things now would make a big
difference, and show people the great upside potential of the sustain-
able economy. Recall that not to price pollution is to court inefficiency,
since an efficient economy includes all the costs. Proper pricing changes
the patterns of world trade, benefits the local over the global and stops
carbon leakage. What’s not to like about all this?
And there is another different and optimistic reason for radical
change. Part of what makes us human is our inherent sociability. We
care about others and especially about our relatives and very specifi-
cally our children. If we build the sustainable economy, we can look
them in the eye with the integrity that comes from behaving in an ethi-
cally acceptable way. Our lives are better if we can realise a better
future for them. A life worth living is one that has principles and a
sense of doing the right thing.
The final upside cuts against many of the more gloomy envi-
ronmentalists. These are the no-growthers. Many green activists tell us
that not only should we mend our ways, but we should also forsake
all future aspirations for economic growth. This is profoundly wrong.
The sustainable economy can and will grow, and potentially strongly,
as a result of the growth of ideas, knowledge and technology. This
is investment that can be financed legitimately through debt, creating
new and better assets and hence passing on the liabilities associated
with them to the next generation. This is in one sense a pretty obvious
point: all economic growth is now driven by this form of capital, Karl
Popper’s ‘World 3’, the bundle of theories and hypotheses that have
stood the test of repeated attempts to bring them down, and all the
new additions to this body of knowledge. The bit of growth that we
benefit from now comes from the huge advances in technology in the
late nineteenth century, what the Victorians gave us in evolution, and
modern organic chemistry, all built on great theoretical leaps forward.
The reasons why the citizens of the sustainable economy can regard the
step away from current unsustainable consumption to the sustainable

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 226 / Legacy: How to Build the Sustainable Economy

consumption path as a temporary set-back is because ideas, knowledge

and technology are marching on at an incredible pace.
The choice is whether to make sure there is a world within
which this great advance in this form of capital can be realised and
enjoyed, or whether we blow this great opportunity by destroying the
climate and the biodiversity, the natural capital upon which the whole
edifice of economic life is constructed. In all but the very short term, it
is a great bargain to switch to the sustainable economy, and a disaster
in the making not to do so.
That brings us back to the downsides of not acting now. These
are already upon us and the consequences are going to get much worse.
If our leaders are not persuaded to act in ways that grasp the oppor-
tunities in front of them, they (and therefore we) will have to confront
the consequences, and there have been a number of attempts to spell
out why the costs of action now to head off the worst impacts are
lower than those we will have to pay when the unsustainable is not
sustained.
The risk is that climate change continues unabated. Indeed,
that is what is most likely going to happen. People will move, some
people will starve and ecosystems will cross tipping points. The era
of mass migration would make what is now going on in the Mediter-
ranean look like a picnic. The Arctic warming is already pointing that
way, and rises in sea level will accelerate. The tundra might melt and
the consequent methane leakage might have planetary impacts. The
question is whether the consequences are revealed too late in the day
to turn the situation around.
What tips the balance is whether the interests of the next
generation get a fair hearing. If the young and the next generation
were properly at the table, it might all be rather different. That’s why
the sustainable economy needs a constitution. To turn the situation
around, we need to embed the future in our deliberations. That con-
stitution would entrench the rights of the next generation and ensure
the stewarding of the natural and other assets so that their life chances
are as good as ours. This is because they would have the capabilities to
choose how to live their lives. We do not owe them equal happiness,
whatever happiness means. But we do owe them our duty to be good
leaseholders and to hand over a better world, both environmentally
and with more and better ideas and technologies. We do not need to
worry about the distant future. If we leave a decent inheritance to the

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 227 / Conclusions: It Could Go Either Way

next generation, it will be their duty to look after the one after that. It
would in any case be an enormous step forward.
When the American rebels got rid of the British in the eigh-
teenth century, they sat down to start again, from first principles, and
to write these down in their new constitution. Two hundred and fifty
years later, it is still standing, having seen off a number of less-than-
perfect presidents and broadly protected individual rights against the
tyranny of the majority. Now is the time for another such radical
departure, to see off the tyranny of the current selfish generation over
the next. Again, it is about principles and citizens.
We come back to the choice. The sustainable economy is within
our reach. We can do this. There have been previous examples in his-
tory when consumption has had to give way to investment in order to
meet a higher-order objective. Sadly, these have generally been during
and immediately after wars. The challenge for our age and our genera-
tion is whether the global environmental threats are big enough yet
to motivate radical change. There are lots of upsides in moving to the
sustainable economy, which a war economy does not yield. But it does
require us, the current generation, to mend our economic ways and put
the planet on a sustainable path. It requires quite radical change, not
just a tilt of the tiller. It can and should be done. Whether now turns
out to be what the great naturalist Edward Wilson called ‘nature’s last
stand’ will be shown in time. It is for history to reveal how it will end.
The legacy we leave is for us to choose.1

1
See chapter 3, ‘Nature’s Last Stand’, in E.O. Wilson (2002), The Future of Life, London:
Little, Brown.

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 INDEX

accounts, for a sustainable economy, see citizens’ debt and liabilities, 173–5
sustainable accounting system regulation model, 194–6
agriculture what should be passed down, 207–9
marginal costs associated with, 120 Barro, Robert, 146–7
physical infrastructure, 86–7 basic income
polluter-pays principle, 104–5 and national dividends, 169–72
assets universal provision, 162–6
asset valuation, 87–9 Becker, Gary, 67–8
balance sheet, 85–7 Bentham, Jeremy, 23
capital maintenance, 74–80 Beveridge, William, 163–4
national accounts, 83–5 biodiversity
remedial and enhancement capital maintenance, 76, 81–2
investments, 80–3 contemporary context, 1–2
system regulation model, 188–90 forecasting and uncertainty, 35–9
universal service obligations (USOs), global agreements, 109–11
156–60 interventions, 57–8
what should be passed down, 207–9 limited realistic impartiality, 27
assets-in-perpetuity, 6–7, 74, 87 mass extinctions, 34–5
asymmetric risks, 44–6 biomass as renewable energy, 112
auctions, 185–8 black swan events, 40–1
Austrian school of economics Brundtland Report, 31
economics and entrepreneurs, 46–8
pollution taxes, 105–6 capability approach, 104, 163–4
average costs, 117, see also marginal costs capital, see also natural capital
human, 63–9, 83, 208
balance of payments, 90–1, 140 natural vs. other capitals, 55–6
the balance sheet, 73–4, see also physical, 59–63, 208–9
sustainable accounting social, 29–30, 69–72, 103–4, 209

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capital maintenance first principle, 203–5

asset valuation, 88 formalising sticky rights, 202–3
education and R&D, 208 for future generations, 197, 207–9
sustainable accounting, 74–80, 89–91 limiting government discretion and
system regulation model, 179–81 the importance of rules, 209–10
capitalism proving the rules are being followed,
the importance of rules, 209–10 212–14
and religion, 69–70 stability benefits, 216–17
carbon dioxide a sustainable economy, 12–13, 226–7
carbon taxes, 95–8, 106 ways of amending, 210–12
contemporary context, 1–2 consumption
forecasting and uncertainty, 35–9 basic income and national dividends,
catastrophes in human history, 34–5 169–72
citizens’ accounts, 85–6 citizens and their capabilities, 28–31
citizens’ debt and liabilities, 173–5 contemporary context, 1–14
citizens’ equity, 172–3, 191–4 from the Labour Standard to the
citizenship Consumption Standard, 140–1
capabilities, 28–31 living beyond our means, 107–9
social tariffs, 160–2 our legacy, 223–4
universal basic income, 162–6 polluter-pays principle, 9–11, 93–4
universal service obligations (USOs), pure impartiality, 21–4
156–60, 169–72 social capital, 29–30
classical economics, 135–7 sustainable consumption, 132–4,
climate change 153–4
asymmetric risks, 45–6 sustainable consumption and
capital maintenance, 76–7 investment, 141–9
constitutional principles, 210–11 contract regulation, 185–8
contemporary context, 1–2 cost–benefit analysis, 88
forecasting and uncertainty, COVID-19 pandemic
35–9, 42–3 impact of lockdowns, 192–3
global agreements, 109–11 labour market and productivity,
limited realistic impartiality, 27 148–9
and nuclear power, 18–20 cross-subsidies, 160–2
research and knowledge, 64 cultural norms, 70
system regulation model, 184 culture of a society, 72
Coase, Ronald, 99–100
Coase bargaining, 99–101, 106 data, and digitalisation, 121–3
competitive markets, 47–51 debt
conservation interventions, 57–8 citizens’ debt and liabilities, 173–5
constitutions fiscal deficits, 147
being at the table, 201–2, 226–7 Keynesian theory, 147, 148
benefits of, 198–200 Modern Monetary Theory (MMT)
embedding the intergenerational approach, 149–51
constitution, 214–16 national accounts, 88, 91–2
embedding the polluter-pays and our legacy, 218–27
precautionary principles, 205–6 remedial investments, 82

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sustainable accounts, 8–9 marginal costs and public goods,

Victorian era economics, 142–3 117–20, 123–4
decentralised economy, 135–7 physical infrastructure, 86–7
demand, see supply and demand enforcement
digitalisation, and zero marginal costs, fairness of the polluter-pays principle,
119–21 103–4
discounting the future polluter pays in the absence of global
distributional argument, 25–6 enforcement, 109–11
economic growth argument, 24–5 enhancement investments, 80–3
nuclear power, 19–20 entrepreneurs, and Austrian economics,
pure impartiality, 21–4 46–8, 51–3
throughout human history, 18 environmentalism
distributional argument, impartiality altruism towards the next generation,
principle, 25–6 16–18
limiting consumption, 91–2, 153–4
economic context overpopulation, 24
Austrian economics and self-interest and social capital, 71–2
entrepreneurs, 46–8 equity approach, 172–3
forecasting and uncertainty, 39–41 European Union (EU) membership,
ideas, knowledge and human 211–12
capital, 63–9 externalities
polluter-pays principle, 102–5 Coase bargaining, 99–101
economic growth living beyond our means, 107–9
classical economics, 135–7 marginal costs/damages, 95–6
contemporary trends, 1–14 market failure, 98–9
fiscal deficits, 147 Pigouvian taxes, 95
forecasting and uncertainty, 36
impartiality principle, 24–5 fairness, polluter-pays principle, 103–4
living beyond our means, 107–9 fertilisers, agricultural, 104–5
our legacy, 225–6 financial crisis (2007/8), 144–6, 148–9
social capital, 69–72 forecasting, challenges of, 35–9, 41–4,
sustainable consumption and see also uncertainty
Keynesian theory, 132–4 fossil fuels
economic policy contemporary context, 1–2
classical economics, 135–7 and net zero, 18–19
Keynesian theory, 138–40 physical capital, networks and
Modern Monetary Theory (MMT), infrastructure, 59–63
149–51
pollution and market failure, 94–9 generational differences
Thatcherite, 152–3 altruism towards the next generation,
education 16–18
attainment and human capital, 68–9 citizens and their capabilities, 28–31
capital maintenance, 208 a constitution for future generations,
funding for, 79 197, 207–9, 214–16
system regulation model, 188 limited realistic impartiality
energy industry towards, 26–8

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generational differences (cont.) the pure impartiality argument, 21–4

the next generation, 15–16, 31–3, time-invariant, 17
201–2 inequality, 166–9, see also social justice
our legacy, 218–27 inflation, 148
pure impartiality, 21–4 inflows, institutional model, 191–4
social capital, 71 informational failures, 98–9
system regulation model, 188–90 infrastructure systems, 59–63, see also
uncertainty about the future, 37–9 system regulation model
global population, see world population basic income and national dividends,
global temperatures, 1–2, see also 169–72
climate change coordination problem, 125–9
governments, see also constitutions foreign ownership, 90–1
EU membership, 211–12 national accounts, 86–7
externalities and government nationalised industries vs.
failure, 98–9 privatisation, 177–8
following constitutional rules, our legacy, 219
212–14 rethinking the provision of public
limiting government discretion and goods, 131
the importance of rules, 209–10 integrated assessment models
our legacy, 218–27 (IAMs), 42–3
greenhouse gases, 35–9, see also carbon interest rates, 149, 215–16
dioxide; climate change the intergenerational constitution,
gross domestic product (GDP) 214–16, see also generational
discounting and economic differences
growth, 24–5 International Energy Agency (IEA), 36
forecasting and uncertainty, 36 investments
a sustainable economy, 7, 192–3 asset valuation, 87–9
capital maintenance, 74–80
Hayek, Friedrich von, 47–51, 142, 164 remedial and enhancement, 80–3
healthcare, system regulation sustainable consumption, 141–9
model, 188 system regulation model, 188–90
Hicks, John, 123, 139 Italy, natural capital example, 55–6
human capital, 63–9
capital maintenance, 79, 208 job market, see labour market
constitutional principles, 208 justice, polluter-pays principle, 103–4
enhancement investments, 83
human population, see world Keynesian theory, 84, 138–40
population citizens’ debt and liabilities, 174–5
consumption and green growth,
impartiality principle 132–4
citizens and their capabilities, 28–31 Modern Monetary Theory (MMT)
distributional argument, 25–6 approach, 149–51
economic growth argument, 24–5 nation state and the world economy,
limited realistic impartiality, 26–8 151–3
the next generation, 31–3 our legacy, 220

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protectionism, 151–3 zero marginal cost in the sustainable

sustainable consumption, 153–4 economy, 114–15
Knightian uncertainty, 40–1, 47–8 market competition, 47–51, 135–7
knowledge, as part of human market failure
capital, 63–9 Coase bargaining, 99–101
externalities, 98–9
labour market marginal costs/damages, 121–5
classical economics, 135–7 Pigouvian taxes, 97–8
COVID-19 pandemic, 148–9 pollution, 94–9
Keynesian theory, 134, 138–40, 148–9 public goods, 114–19
Labour Standard, 140–1 theory of the second best, 96–7
and the Consumption Standard, 140–1 mass extinctions, 34–5
Keynesian theory, 139–40 media, and social capital, 72
law, see regulatory structures microeconomics, 94–9
learning-by-taxing, 106 minerals, use of natural capital, 58
liberal political theory, 198 Modern Monetary Theory (MMT),
licensing, system regulation model, 149–51
181–4, 187–8 the external position, 151–3
limited realistic impartiality, 26–8 monetary policy, 215
living standards, see standard of living monopolies
lobbying coordination problem, 125–9
externalities, 98–9 externalities, 98–9
public goods, 115 market failure, 121–5
regulating and prohibiting, 111–13 residual monopoly and contract
Locke, John, 198 regulation, 185–8
myopia, 16–18
macroeconomics, 91–2
citizens’ equity, 172–3 nation state, Keynesian theory,
classical economics, 135–7 151–3
constitutional principles, 214–15 national accounts, 83–5, see also
pollution and market failure, 94–9 sustainable accounting
social justice, 155 asset valuation, 87–9
Malthus, Thomas, 136 debt as part of, 88, 91–2
marginal costs, 95–6 foreign ownership of assets, 90–1
coordination problem, 125–9 sustainable consumption, 132–4
coordination problem in systems and national dividend, 191–4
infrastructures, 125–9 National Infrastructure Commission,
digitalisation and zero marginal costs, UK, 190–1
119–21 nationalised industries
distinction from average costs, 117 foreign ownership, 90–1
market failure, 121–5 vs. privatisation, 131, 177–8
paying for public goods, 129–30 rethinking the provision of public
public goods, 114–19 goods, 131
universal service obligations (USOs), natural capital
156–60 capital maintenance, 74–80

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natural capital (cont.) from the Labour Standard to the

natural vs. other capitals, 55–6 Consumption Standard, 140–1
for the next generation, 31–2, 207–8 limiting government discretion and
non-renewable and renewable, the importance of rules, 209–10
5–7, 57–9 open societies, 48–9
other capital dependent upon, 32–3 our legacy, 218–27
as primary asset, 56–9 polluter-pays principle, 102–5
as public good, 118–19 the problem with planning, 49–51
a sustainable economy, 7–14 polluter-pays principle
system regulation model, 179–81 in the absence of global enforcement,
negative interest rates, 149 109–11
neo-Ricardian effect, 146–7 Coase bargaining as alternative,
neo-Ricardian equivalent theory, 146–7 99–101
net zero in constitutional terms, 205–6
constitutional principles, 210–11 impact on consumption, 9–11, 93–4
cost estimates, 98–9 justifications for, 102–5
and fossil fuels, 18–19 market failure, 94–9
networks, infrastructure systems, 59–63 our legacy, 222–3
non-renewable natural capital, 5–7, 57–9 pollution taxes (Austrian school
nuclear power, 18–20 approach), 105–6
pollution
open societies, 48–9 capital maintenance, 77–8
operational capital maintenance, 77–8 living beyond our means, 107–9
Orwell, George, 164 market failure, 94–9
outflows, institutional model, 191–4 prices, 113
outsourcing net zero, 101 regulating and prohibiting, 111–13
overpopulation, 24 remedial investments, 81–2
taxes (Austrian economics approach),
pay-as-you-go principle, 88–9 105–6
peat, ban on, 112 Popper, Karl, 65–7
pesticides, polluter-pays principle, population, see world population
104–5 poverty
physical capital, 59–63, 208–9 distributional argument, 25–6
Pigou, Arthur, 95, 100 inequality and the problem of the
Pigouvian taxes, 95–8 ultra-rich, 166–9
Austrian approach, 105–6 pure impartiality, 21–4
global agreements, 110–11 social insurance, 163–4
planning social justice, 12
Austrian economics and precautionary principle
entrepreneurs, 46–8 asymmetric risks, 44–6
system regulation model, 190–1 Austrian economics and
politics, see also constitutions entrepreneurs, 46–8
EU membership, 211–12 in constitutional terms, 205–6
forecasting and uncertainty, 37–9 price, incorporating pollution costs,
Keynesian approach, 138–40 113, see also Pigouvian taxes

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price cap regulation, 181–4, 187 polluter-pays principle, 111–13

privatisation the sustainable economy, 12–13
vs. nationalisation, 131, 177–8 religion
rethinking the provision of public and capitalism, 69–70
goods, 131 social capital, 72
universal service obligations (USOs), remedial investments, 80–3
156–60 renewable natural capital, 57–9
prohibiting pollution, 111–13 capital maintenance, 75
property rights contemporary context, 5–7
carbon taxes, 106 cost–benefit analysis, 88
Coase bargaining, 99–101 as public good, 118–19
and public goods, 115–16 research and development (R&D), 208
prosperity, 218, see also the sustainable residual monopoly, 185–8
economy resilience, 41–4
protectionism, 151–3 revolutions, 209–10
Protestantism, 69–70 rewilding, 57–8
public goods risk, asymmetric, 44–6
coordination problem in systems and risk aversion, 200
infrastructures, 125–9 Russia, natural capital example, 55–6
externalities, 98–9
marginal costs, 117–20, 124–5 Schumpeter, Joseph, 47–8
market failure, 114–19 second best, theory of, 96–7
paying for, 129–30 Smith, Adam, 135–7
rethinking the provision of, 131 social capital, 69–72
universal basic income, 162–6 capital maintenance, 79–80
universal service obligations (USOs), constitutional principles, 209
156–60 consumption, 29–30
public interest, distinction from public polluter-pays principle, 103–4
goods, 115 social contract, 198, 217
social justice
quality of life, see standard of living basic income and national dividends,
quantitative easing (QE), 149–51, 216 169–72
distributional argument, 25–6
Ramsey, Frank, 21 educational attainment and human
Rawls, John, 199 capital, 63–9
regulating pollution, 111–13 inequality and the problem of the
regulators ultra-rich, 166–9
closing down the economic infrastructure, 62–3
regulators, 190–1 pure impartiality, 21–4
system plan delivery, 184–5 the sustainable economy, 11–14,
system regulation model, 181–4 155–6
regulatory asset bases (RABs), 171, universal basic income, 162–6
188–90 universal service obligations (USOs),
regulatory structures 156–60
global agreements, 109–11 social tariffs, 160–2

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socialism, universal basic income, social justice, 11–14

162–6 technical progress, 51–3
stakeholders, system regulation model, zero marginal cost, 114–15
183–4 system regulation model, 178–9
standard of living, see also consumption closing down the economic
the Consumption Standard, 153–4 regulators, 190–1
from the Labour Standard to the delivery of, 176–8, 184–5
Consumption Standard, 140–1 generational links, 188–90
living beyond our means, 107–9 knowing what you have got, 179–81
progress since 1900, 2–3 a new institutional architecture,
sustainable consumption, 83–5, 153–4 194–6
state, see governments; nation state regulating the national dividend and
Stern, Nick, 23 the wealth fund, 191–4
stewardship concept regulators, 181–4
citizens’ equity, 172–3 residual monopoly and contract
as constitutional principle, 203–5 regulation, 185–8
for the next generation, 201–2
subsidies, sustainable consumption, taxation
160–2 global agreements, 109–11
supply and demand inequality and the problem of the
classical economics, 136 ultra-rich, 166–9
investment, 141–9 living beyond our means, 107–9
sustainability, Brundtland Report, 31 Pigouvian, 95–8, 106
sustainable accounting, 7–9, 73–4 pollution taxes the Austrian way,
asset valuation, 87–9 105–6
assets balance sheet, 85–7 revenue raised by pollution taxes, 97
capital maintenance, 74–80, 89–91 social justice, 11–12
consumption, 132–4 sustainable economic growth, 192–3
contrast with existing accounts, 83–5 taxpayer accounts, 85–6
macroeconomics, 91–2 technology
remedial and enhancement asymmetric risks, 44–6
investments, 80–3 capital maintenance, 77–8
sustainable consumption, 132–4 digitalisation and zero marginal costs,
and the Consumption Standard, 153–4 119–21
cross-subsidies, 160–2 ideas, knowledge and human
investments, 141–9 capital, 63–9
social justice, 155–6 physical capital, networks and
social tariffs, 160–2 infrastructure, 59–63
universal basic income, 162–6 the sustainable economy, 51–3
the sustainable economy, 3–14 system regulation model, 179–81
based upon uncertainty, 53–4 Thatcherite policy, 152–3
natural capital, 7–14 time-invariant impartiality principle, 17
the next generation, 15–16 trade, protectionism, 151–3
our legacy, 218–27 trade unions, 152–3
radical departure from conventional trickle-down economics, 25–6
economics, 33 Trump, Donald, 198

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uncertainty veil of ignorance, 199

asymmetric risks, 44–6 vested interests, 115
Austrian economics and Victorian era economics, 135–7, 142–3
entrepreneurs, 46–8
and decision-making, 39–41 wages
and forecasting, 35–9 financial crisis (2007/8), 144–6
the problem with planning, 49–51 Keynesian theory, 134, 144–6
in regulatory rules, 112–13 social justice, 12
resilience, 41–4 water regulation, 182, 191
the sustainable economy based wealth fund, 191–4
upon, 53–4 wealthy individuals, and inequality,
technical progress and the sustainable 166–9
economy, 51–3 world population
unknown unknowns, 40–1 classical economics, 136
universal basic income, 162–6 contemporary context, 1–2
universal service obligations (USOs), overpopulation, 24
156–60, 169–72, 176–8 uncertainty about the future, 38
utilitarianism
citizens and their capabilities, 28–31 zero marginal cost
pure impartiality, 21–4 digitalisation, 119–1
the sustainable economy, 33 market failure, 121–5
the sustainable economy based upon public goods, 116–18
uncertainty, 53–4 in the sustainable economy, 114–15

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https://doi.org/10.1017/9781009449212 Published online by Cambridge University Press