Types of Economies and their Implications for Sustainability

What are the different economic systems and what is a sustainable economy? These are important questions that need to be asked in light of the fact that the prevailing economic systems are not working. It is becoming increasingly clear that we require a paradigm shift to address pressing social and environmental problems. The brown economy continues to dominate and it is driving many of the world’s most pressing problems. There are however alternative economic systems like the green economy and the blue economy which are capable of meeting the needs of current generations without compromising the needs of future generations. Sustainable economies like these can help us to realize the United Nations’ Sustainable Development Goals (SDGs).

The SDGs offer a comprehensive and widely accepted summary of the most important social and environmental issues in the world today. As such the SDGs can help us to assess the utility of different economic alternatives. Looking through the lens of the SDGs can help us to understand the weaknesses of our current structures, and give us an idea of how we can respond to the challenges of our times. 

Recent events are forcing us to consider new economic paradigms. The Covid-19 pandemic that gave rise to the plague economy has revealed fault lines that we can no longer ignore and the dangers of fossil fuels are being highlighted by Russia’s war against Ukraine. Our dependence on dirty energy is funding genocide and exposing vulnerabilities to blackmail from corrupt dictatorships. 

The repercussions of these dramatic events are reverberating around the world and calling us to confront deeply entrenched weaknesses in our economic systems.  Our economic system has failed to address long-standing threats like climate change, biodiversity loss, disease, water scarcity, and inequality.

Current economic paradigms are myopically fixated on growth and this is not sustainable. We are forced to concede that our economies are not equipped to deal with a wide range of serious environmental and social issues. We tinker at the margins while ignoring entrenched realities that make solutions difficult if not impossible.  Our ability to respond is constrained by short-term thinking. We can not deal with key issues as long as publically held firms have a fiduciary responsibility to deliver profits to shareholders and companies dismiss environmental threats as ‘externalities’. Exploitation and environmental degradation are inevitable corollaries of our economic system. These failures have far-reaching consequences. This includes radical polarization that threatens the basic principles of pluralistic democracy. The problems that inaction augurs are exploited by cynical politicians for political gain. In the U.S. and elsewhere, the political right is fueling culture wars and eroding participatory democracy.    

What are the major economic systems?

Before we examine the capacity of different approaches to address the challenges we face we need to reassess prevailing economic models. Here is a brief summary of four types of economies: The traditional economy, the command economy, the market economy, and the mixed economy. Each of these economic systems has overarching implications for the environment and the management of the climate crisis. Economic systems determine the way a state or nation allocates its resources and apportions goods and services. The philosophical orientations of different economic systems determine what is produced and the methods by which it is produced. It also dictates how it is distributed and consumed. Here is an explanation of each of these four economic systems and their respective environmental and social implications as assessed by their impacts on the SDGs.

1. The traditional economy

The traditional economy is a culture that is based on traditions, customs, and beliefs. This economy is centered around family and a hunter-gatherer nomadic society. They employ a barter trading system A prime example is Indigenous communities which flourished for millennia before colonialization. , Nomadic subsistence hunter-gather communities were the basis of human existence for millennia prior to the beginning of sedentary agriculture around 12,,000 years ago. In this economic system, decisions are made by a community and every member contributes and shares in the proceeds. Traditions are passed from one generation to the next and this makes them stable and predictable. The people who participate in a traditional economy tend to show respect for the land and biodiversity taking only what they need and as such, they tend to minimize adverse environmental impacts. With its focus on environmental stewardship and respect for the land, this approach seamlessly addressed many of the 17 SDGs. However, there are concerns about the ability of such an economic system to work at the scale of large populations like big cities.  

2. The command economy

The command economy is a centralized system in which a centralized government owns the means of production and controls pricing.  Socialism is the most widely practiced form of this type of economy and in this economic system, the government owns and operates all of the factions of production in the interest of the state. In such a system governments have the authority to impose national standards like emission caps. Command economies have been criticized for ignoring the rights of individuals as well as pricing and other inefficiencies that result in over or under production.

State-controlled economies have tremendous potential to realize many of the SDGs but highly centralized economic and political systems commonly violate human rights and as such, they work against the ideals embedded in many SDGs including GOAL 16: Peace and Justice Strong Institutions. While a command economy may claim to seek equality, in practice such economies disproportionately benefit the ruling class which violates GOAL 10: Reduced Inequality.

3. The market economy

The market economy is an economic system in which private interests own and operate profit-focused enterprises. In this type of economic system, persons own and operate the factions of production. Key to this economy is a market-based pricing system for goods and services which are predicated on the availability of supply versus the amount of demand. Free market capitalism is the prevailing market economy in the world today and in theory, it is governed by the tension between maximizing private profit and competitive forces that drive down prices. Competitive capitalists claim this leads to efficient market-based pricing. 

In practice unfettered capitalism is preoccupied with growth, this drives environmental degradation and contributes to social malaise. One of the main tenets of capitalism is trickle-down economics, however, this has not been borne out by the data. This type of economic system often allows individuals and industries to exploit resources without concern for human and environmental impacts. The profit incentive drives activities and commonly results in significant environmental degradation and economic disparity between people. In the purest form of the market economy, known as laissez-fiare economics, the government does not intervene. It is important to note that this type of economy does not exist in its purest form because almost all governments regulate how businesses and private individuals are allowed to operate. In practice, free-market capitalism is almost always tempered by varying degrees of government involvement. 

The environmental and social toll associated with the wanton extraction and exploitation of finite resources is in direct conflict with most SDGs, however, some argue that market economies contribute to GOAL 8: Decent Work and Economic Growth and GOAL 9: Industry, Innovation, and Infrastructure.

4. The mixed economy

The mixed economy is a combination of both private and state control. This incorporates elements of the market economy (capitalism) and the command economy (socialism) in which free enterprise and centralized authority coexist. This blend of free markets and state control is the dominant economic system in the vast majority of developed nations in the world today. 

When applied to environmental concerns, this system can apply state-imposed regimes of regulation, while still benefiting from the efficiencies of market pricing that leverages the power of the profit incentive. This system has the advantage of benefiting from efficient capital allocation alongside state-imposed regulatory regimes that can mandate reform through a combination of incentives and regulation. A salient weakness of this form of economy emerges when political and social divisions preclude bipartisan agreement, nonetheless, when it comes to achieving the full range of SDGs this may be the best economic system in the world today. 

Examples of sustainable economies

Now that we have reviewed the four major economic systems, we need to understand some of the possible permutations of a sustainable economy. Here are four examples of sustainable economies: Sustainable capitalism, circular economy, inspiration economy, and resilience economy.

1. Sustainable capitalism

Sustainable capitalism leverages the ability of companies and investors to mobilize the capital needed to address problems like those contained in the SDGs.  Sustainable capitalism resists short-term thinking and endeavors to maximize long-term economic value creation. It does this by reforming markets to address real needs while factoring in costs and stakeholder concerns. 

Sustainable capitalism fosters long-term value creation through five key actions: The identification and incorporation of risks from stranded assets, integrated reporting mandates, ending the default practice of issuing quarterly earnings guidance, aligning compensation structures with long-term sustainable performance; and encouraging long-term investing with loyalty-driven securities. 

Sustainable capitalism also invites efforts to reinforce sustainability as a fiduciary issue, create advisory services for sustainable asset management, expand sustainable investment and integrate sustainability into education at all levels. We also need to redefine growth beyond GDP and temper the focus on profit maximization.

2. The circular economy

The circular economy is a sustainability paradigm that may prove to be instrumental in realizing the SDGs. There is no waste in this model, everything is designed to last, be shared, reused, repaired, or recycled.  This type of economy strives to minimize inputs and eliminate waste by closing the loop with life cycle analysis.  In this paradigm, everything required for production must be accounted for, and producers must take responsibility for all the stages in a product’s life cycle from cradle to grave. This includes everything from the resources required to make an item right through to end-of-life recycling. 

A circular economy will enable us to sustainably address our basic needs using the resources that are available to us. Here growth is restrained by the available means. Minimizing the need for natural resources may enable us to respect planetary boundaries and live within the earth’s carrying capacity.

3. The resilience economy and the inspiration economy

The resilience economy is designed to increase the human capacity to deal with shocks (climate disasters, supply chain interruptions, etc). It acknowledges diversity and humanizes the economy while preserving it for future generations. This is an economy that is structured to be adaptive. A subset of this economy is the climate-resilient economy or climate-resilient green economy (CRGE) which prioritizes minimizing exposure to climate hazards while reducing emissions and conserving biodiversity. 

Another type of economy that contributes to sustainable development is the Inspiration Economy which recognizes the cultural potential of goods and services as they relate to the unique characteristics of each region.  The focus is not on pay but on the ability to foster inspiring solutions known as ‘inspiration currency’ and this augurs equality between people independent of gender, class, or race.  An inspiration economy is a radical departure from where we are today. It is independent of materialistic solutions as well as ruling economic systems and political policies. This economy is about the intrinsic resources or intrinsic power within community settings. 

There are some who believe we may be able to achieve our goals through sustainable capitalism, others think that capitalism is incompatible with the SDGs. Most look at the mixed economy as the way forward although there are those who believe we need an entirely new economic system. Whatever approaches we may want to consider, we should start by acknowledging that we have a perilous propensity to be myopically preoccupied with growth. The utility of an economic system should be determined by its ability to address the SDGs. 

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