Why capitalism should have listened to the King of Bhutan
The idea of incorporating gross national happiness into mainstream economic thought has long been a subject reserved for debating societies and 'lefty' thinkers. As politicians are cornered into taking immediate action on climate change, capitalism is in for a big surprise.
Decisions made at COP26 will have huge implications for the concept of capitalism and the pursuit of growth.
Incorporating sustainability and well-being into mainstream economic thought is no longer a taboo.
Happiness does not increase along the same lines as wealth but plateaus, according to the World Happiness Report 2021.
It has been almost 50 years since the term ‘gross national happiness’ came into being. Coined by the fourth king of Bhutan, Jigme Singye Wangchuck, he declared the measure of greater importance than its well-known, much larger sibling, gross domestic product (GDP).
The concept of gross national happiness had generally been considered an amusing and idiosyncratic quirk of a small, poorly developed nation surrounded by mountains and its powerful resource-hungry neighbours China and India. But it has now taken on considerably wider significance as we question how capitalism and the seemingly endless pursuit of growth aligns with the urgent need to slash carbon emissions and fight climate change.
According to the University of Oxford’s Oxford Poverty & Human Development Initiative, gross national happiness “implies sustainable development should take a holistic approach towards notions of progress and give equal importance to non-economic aspects of well-being”.
The sole pursuit of growth
It is this sense of equality that has driven Bhutan’s economic and social policy and the creation of the Gross National Happiness Index, which is calculated based on 33 metrics. They include typical socio-economic factors such as living standards, health and education, but also incorporate culture and psychological well-being, a concept that informs the country’s government and businesses.
The benchmark inspired the United Nations ten years ago to promote the concept of “sustainable happiness and well-being” – one that now influences economic thought within the organisation.
For rich countries, there may be more effective ways for society to boost happiness than by solely pursuing more economic growth. Piya Sachdeva, Schroders
There is plenty of evidence to support the notion that happiness does not mirror the trajectory of growth. In fact, according to the World Happiness Report 2021, it tends to plateau when the average income in society hits $70,000 a year. This led Schroders economist Piya Sachdeva to recently reflect: “For rich countries, there may be more effective ways for society to boost happiness than by solely pursuing more economic growth.”
However, the capital markets have not yet embraced abandoning GDP as the bedrock of measuring success; after all, any policy that threatens the pursuit of perpetual growth as measured by production will still be laughed out of a corporate boardroom. Profit is always king. And where it cannot be created through operational efficiency and/or increased sales margins, then more stuff must be sold.
The beauty of capitalism – if it can phrased as such – is that its direction of travel is true. Anyone working for a large company knows its core objective and is incentivised to achieve it. And any company that relies on the capital markets to support its ambitions knows full well how they respond if its path to growth falters.
It wasn’t altruism…
Being able to put a price on something is the fundamental component of capitalism. As much as there is fierce debate about whether investors should stick by oil companies, that debate is not about morality, but whether such an allocation makes long-term financial sense given the regulatory and political backdrop.
When Engine No. 1 convinced other shareholders to recast the composition of Exxon Mobil’s board, it did not do so out of an altruistic desire to make the US oil giant a nicer company. The hedge fund simply felt the current crop of executives were undermining the future value of the stock.
With almost $100trn of capital estimated as necessary to achieve net-zero emissions by 2050, of which the private sector is expected to stump up a huge proportion, it makes intuitive sense that a highly efficient and focused financial system is needed to ensure the smooth allocation of that capital to where it is needed.
In this context, the outcome (reaching net zero) is the only important factor, not the drivers of that outcome – be it cold, calculating capitalism or otherwise.
Well, yes. To a point.
Because capitalism can only function when there is political will for it to exist. Its boundaries are set by policy and by the social contract that governs the relationship between governments and the people they represent. The capital markets therefore respond to economic and political developments that frame the opportunities for capital growth. When the boundaries become too small, capitalism fails to support itself.
For now, that relationship is intact, but there are signs it is fraying at the seams – and the implications for everyone are huge.
Take the UN-convened Intergovernmental Panel on Climate Change’s latest report. The science is conclusive: the only scenario in the research in which 1.5°C warming by the end of this century would be avoided is the one that abandoned economic growth as an ultimate goal.
As Capital Monitorremarked recently, “it’s no longer just environmentalists who argue that slowing global warming is incompatible with economic growth”.
Gross national happiness on the agenda?
With COP26 now almost upon us, the time for political solutions has arrived. As the environmental stakes increase and the vocal and natural warnings grow menacingly stark, the pressure for governments to lay down more exacting rules to tackle climate change are higher than ever before.
Those promoting the idea of ‘degrowth’ – the need to reduce global consumption and production and replace GDP as the primary financial metric of success – are getting louder. Becoming less taboo as a concept, it is being whispered more frequently in the corridors of power.
Some argue that if enough capital is efficiently applied to areas that directly support the reduction in carbon emissions then nothing needs to change – GDP remains supreme. This outcome seems unlikely, as it would require a very delicate balance between growth, divestment from ‘dirty’ companies and increasingly speculative investment in new green technology and infrastructure – where assets are presently hard to come by.
It also ignores the implications of continued consumerism and the inexorable increase in disposable income. More than one billion Asians are set to join the global middle class – households where per-capita spending is between $11 and $110 a day – by 2030, according to World Data Lab. If production and consumption, as measured by GDP, is what drives this remarkable growth, then our transition to net zero just becomes harder.
Huge decisions will likely be made on the back of COP26 that will have implications for how capital markets are expected to perform and support political ambitions. It seems increasingly possible that the owners of capital will either die alone in the pursuit of growth or share a bed with the concepts of sustainability and social well-being.
When Bhutan’s fourth king conceived the concept of gross national happiness, the rest of the world failed to take it seriously. Look who’s laughing now.
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Daniel Flatt launched Capital Monitor title in April 2021 after joining the New Statesman Media Group from Haymarket where he was most recently editorial director of its multiple award-winning portfolio of finance and investment publications.