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Volker Heinemann discusses Justice and Inter-generational equity in economics

Justice and equity

I believe that the ultimate goal of the economic activity is the provision of a sustainable level of goods and services to all people globally. It is equally important that goods and services are produced and distributed in a way that the wider concerns like social and environmental justice are maintained and that for example absolute limits as far as resource use is concerned are respected. The respect for these wider concern the economy has to incorporate, results in the requirement that justice and responsibility form a core part of green economic action and the required reforms to economic policy and theory.

Deliberately unequal distribution of income, work and wealth, all closely related subjects, results in individual action to avoid being among the loosing parts of society that introduce an element of aggressive individualistic behaviour to economic action that is in contradiction with the wider goals of the economy. Different political families are actively utilising this pressure by way of widening the income distribution or by selectively using so called 'incentive' approaches or encouragement of competitive behaviour to maintain the conventional economic path towards ever more consumption and production, in fact to maintain the traditional scarcity as a basis for a conservative society.

We recognise the benefits that correctly set incentives and competition delivers for the economy and the wider society. It is however important not to fall into the trap where those concepts become a goal in its own right based on un-reflexive linear thinking or just the desire to disallow any true progress in society towards a more culturally based society where the focus has shifted away from ever more material consumption and increased activity.

Equity and the development of a modern economy

We are concerned that without a shift away from a society that bases its activity of the pursuit of self interest towards a society where wider values like social cohesion and co-operation play an important role, it will not be possible to achieve any significant progress towards a sustainable future. Considerations of justice and equity are core elements that need to be the foundation of a modern society. A society that sets itself the ethos of excessive promotion of self interest and the deliberate division of society into winners and losers, might maintain ever continuing growth in material values and the class structure of traditional societies but will most certainly not maximise human well-being and reach the level of sustainability that is required to maintain a decent level of social cohesion. Equity and justice set the right tone for all other detailed economic considerations, a focus on such values makes green economic policies distinct from other political families that base economic goals of promoting the self interest of specific stakeholders in the economy or the aim to maintain the status quo of traditional scarcity.

Cumulative effects as a market failure

In addition to the wider philosophical considerations there are more immediate issues that require that justice and equity including inter-generational equity are priorities for the economic agenda. A modern economy needs to value the performance of the individuals within it to maintain an adequate level of efficiency, innovation and progress. It is however the case that an unregulated economy tends to concentrate advantages and options for further benefits over time. An individual who has obtained a high income has the possibility to invest his money to obtain capital income, take additional risks to increase his wealth, can obtain a better education for his children and passes on wealth by way of inheritance. In a card game the deck of cards gets shuffled before every new round, in the economy opportunities and misfortune can accumulate as long as no corrective action is taken. Such a society without a re-distribution of opportunities is in effect not only not a just society but a society that does not truly honour the individual performance. It honours cumulative effects, scarcity rents and inherited endowment but not performance and initiative. We hold the opinion that appropriate regulation can achieve justice and equity for all people involved and at the same time contributes to a society that realises the benefits of an efficient, innovative and performance based economy. Uncorrected cumulative effects are one of the main obstacles to social justice and at the same time an obstacle to modernising the economy because traditional structures are maintained and protected by fierce lobbyist activity.

Inter-generational equity

One of the prime concerns in recent times is the issue of inter-generational equity. This subject is particularly debated on the background of ageing populations in many of the developed countries but there are further issues that have an effect on inter-generational equity like increased public debt that has to be dealt with by future generations, resource depletion due to over-consumption, transfer of unsolved ecological problems or generally the passing on of a socially and equitably unsustainable economy for future generations to sort out.

The issue of intergenerational equity is widespread and complex. We are aware that it is very difficult to identify who benefits disproportionally and who suffers unjustifiable burdens. Given the different elements of the problem described above it appears to be the case that an increasingly rich economy, measured in conventional terms of GDP gains, passes on a significant number of unsolved problems to future generations.

We holds the belief that future generations have to be considered in current decision making with equal value to current generations. The common practice in economic theory to discount future values based on the believe that current activity is more beneficial than the same activity in the future might reflect the individualistic view of people today, but it should not form an undeniable fact of a science that has to maintain a decent level of objectivity in its discourse. As far as global, long term and holistic issues are concerned, discounting future values is inappropriate to arrive at objective rules for how to deal with current and future problems. The consensus needs to be that current generations need to pass on a society including the economy that does not over burden future generations. Every generation needs to maintain a sustainable level of development as to fulfil this goal. As far as ecology is concerned this means that natural resources should not be overexploited, as far as public investments are concerned, the projects financed need to be for the benefit of future generations, hence they need to be designed with the requirements that exist in the future as far as the structure of the economy is concerned. The public debt passed on to the next generation need to be in a sensible relationship to the increased gain future generations can obtain from the public projects financed by debt.

Pensions

As far as pensions for older people are concerned similar considerations based on the objective economic transfers are required. The ageing populations in developed countries cause problems as far as the real economy is concerned. Will it be possible to produce all the goods and services required in 15-20 years where the relationship between pensioners and active working population has worsened? Such problems require assessment of how productivity levels can be increased to maintain the possibility that the shrinking active working population can produce the goods for their own consumption and at the same time produce the goods for the increasing number of economically inactive citizens. This problem rests within the real, not the financial part of the economy and can as a consequence only be solved in the real economy. We are concerned that in recent times in various European countries a debate has been initiated to reform the existing pension systems, that are based on solidarity by transferring the current GDP between generations, towards funded systems where individuals are accumulation own savings to fund their pensions in the future. As this transfer does not address issues of the real economy it is irrelevant to tackle the true pension problem but in addition causes more concerns as to the effects increased savings have on the development of the economy, questions related to the volatile nature of the financial markets where these funds are supposed to generate stable returns and that yet another public system based on solidarity is destroyed and replaced with an individualistic scheme that fails to answer all the questions of the real economic problems that are underlying the trend towards an ageing population.

Yet again a sensible reform of the financing of the GDP transfer pension systems, not a change in the system as such as a sensible alternative proposal, appears to combine social justice and real economic issues beneficially without the need to chose between the two.

Solidarity and competition

Based on the above comments, we believe that a modern economy requires that issues like solidarity, equity and justice on the one hand and competition and efficiency on the other are to be looked at from a more inclusive perspective. The two aspects are not contradicting each other but with appropriate policies the different social and economic values can be achieved simultaneously or at least the harsh promotion of only one set of issues can be comprehensively avoided. The European group is promoting economic policies that comprise the benefits of both concepts, solidarity and competition, and avoids pushing the economy to one extreme based on short term individual interests. The long term, holistic view of green economics based on a well defined concept of sustainability ensures that we utilise the strengths that lie in its cultural diversity across Europe in a way other political families with their narrow focus cannot achieve.

Volker Heinemann 17th November 2007 written for the green group economics policy working group in the European Parliament

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