Forty years ago was a crucial turning point in human affairs, though it was poorly understood, disputed and even denied at that time. Three events stand out for their particular significance: the end of the Gold Standard in 1971, the publication of The Limits to Growth in 1972, and the first oil crisis in 1973. They marked the end of an era of rapid economic development for the industrialised countries, unalloyed optimism and unquestioned faith in capitalism, the beginning of a period of increasing doubt and uncertainty, which has now culminated in a multi-dimensional crisis of unparalleled proportions. Since then, the world has been wracked by increasing financial instability demarcated by more than 200 monetary currency crises and 145 large-scale banking crises. The average growth rate in Western Europe declined progressively from 6.1% in the 50s to 4.8% in the 60s and 2.3% in the 70s, then fell to less than 2% since 1990. The initial quadrupling of oil prices, an alarming reminder that non-renewable resources are actually non-renewable, spurred price inflation in the late 70s, which was only kept under control by tight monetary policy, slower growth, and rising levels of unemployment and income inequality in the decades that followed.
Slower economic growth, financial instability, rising levels of unemployment and inequality, and depletion of scarce resources seem to be inextricably linked together, a gruesome set of omens prophesying the failure of free market, industrial capitalism and an early end to the exhilarating rates of growth witnessed by the industrialised nations in the aftermath of the Second World War. The current international financial crisis, economic contraction in some countries, slower growth in many others, high unemployment and rising inequality in OECD countries today appear, in retrospect, to be a natural outcome of a long historical trend. Recent global concern regarding climate change arising from the increasing and unsustainable consumption of fossil fuels seems only to confirm the deepest suspicions of those who believe that something is fundamentally wrong with current economic theory and the prevailing industrial growth model. But none of this was very clear at the time it was taking place. It was at this crucial juncture in recent history that Club of Rome published its landmark report The Limits to Growth, stirring vigorous debate and raising fundamental questions about humanity’s future economic prospects.
Today we are poised like the 15th century Portuguese sailors who were urged by Henry the Navigator to navigate around the Cape of Bahador, and feared to travel to what so many believed was the edge and end of the world. As the whole world grapples for new ideas and practical solutions to fundamental economic and ecological challenges, it may be reassuring to discover that a significant groundwork has already been laid for the new theoretical perspectives so desperately required. Orio Giarini has been an eye-witness to these unfolding events, a keen observer of each step in the process, a critical analyst of prevailing ideas, and a cauldron for the brewing of new perspectives that gradually distilled over decades into profound insights. An unusual mix of academic economist, business practitioner, scientific research manager and original thinker, his four reports to the Club of Rome present provocative questions and fresh insights that press back the borders of conventional thinking in economics and extend beyond to the entire field of social sciences, challenging our very conception of knowledge. Raised in the fading old-world humanistic cultural values of Trieste, he learned to think freely and unconventionally while on Fulbright Scholarship at the University of Texas, acquired a disciplined realism and practicality during years directing industrial and scientific research at the Battelle Institute in Geneva, and learned to peer beyond the veil into the unchartered waters of uncertainty for almost three decades as founding Director of The Geneva Association, a global think tank established by the most important leaders of the world’s insurance companies.
1. Origins of the Club and the Report
Revolutionary advances often begin with a crisis. That is true of intellectual revolutions as well. The crisis of the early 70s was pre-eminently a crisis of the mind. It arose from a study commissioned by an informal think tank established by Aurelio Peccei and Alexander King in April 1968, a month prior to the largest ever general strike and massive public protests in France concerning the economic and social evolution of democracy. Peccei’s rich and varied experience working in China before WWII, as one of the leaders of anti-fascist resistance during WWII at Fiat in Argentina after the war, and back in his native Italy as vice president of Olivetti and an important consulting group in the 1960s, exposed him to a wide range of social and economic conditions. The Cold War confrontation between the USSR and USA combined with the persistence of poverty and rapid population growth in developing countries made him acutely concerned about the increasing vulnerability of the world to global disaster. He set forth these concerns in a book on global interdependence and planetary challenges entitled Chasm Ahead (1969).
Peccei was an industrialist. His co-founder was a scientist. Alexander King was at that time director-general of education and science at the Paris-based Organisation for Economic Cooperation and Development. A Scot by birth, a chemist by education, he coordinated Anglo-American military research during WWII, and later served as chief scientist at the British Department of Scientific and Industrial Research and then as director of the European Productivity Agency in Paris during the 1950s. He emerged from this experience with a strong commitment to work for the peaceful application of science for the betterment of humanity. These two were joined by Saburo Okita, a key economic adviser to the Japanese government who later became Foreign Minister; engineer Eduard Pestel, President of the Volkswagen Foundation, who founded the Institute for Applied Systems Analysis and Forecast eV (now Pestel Institute) and later became Minister of Science and Arts in Lower Saxony; and Hugo Thiemann, Director General of the Battelle Institute of Geneva, who requested Giarini to attend meetings and organise the first official conference of the Club of Rome at Berne in June 1970.
That meeting proved decisive. Hasan Özbekhan had been charged by the Club with preparing a project to describe and analyse the world “problematique” and launch a debate on possible solutions. Özbekhan was an American intellectual of Turkish descent, who had produced some reports for OECD on how to develop a modern economic plan. When he frankly confessed to Club members in Berne that his proposal had almost no chance of producing useful results, Jay Forrester of MIT’s Sloan School of Management brashly offered as an alternative to apply systems analysis to develop a model of global interdependence. Forrester drew up the basis for what would become the Club’s famous report on limits to growth during his flight back to the USA. Incorporating data on population growth, industrialisation, food production, pollution and depletion of resources within a single model, he produced graphs illustrating that the world’s development would reach unsustainable levels within forty years, leading to a blind alley or a planetary crisis. After his preliminary text was endorsed by the Club’s executive committee at a meeting in Boston, Forrester entrusted verification of the simulations, assumptions and data to his assistant, Dennis Meadows, who drew on other university resources to organise special sectoral studies on key issues.
Forrester’s model highlighted a serious increase in pollution (already so very apparent in the rivers and urban centers of the Western world), the impacts of continued high rates of population growth, and the negative environmental effects of rapid economic growth. Coincidentally, this was the time when Battelle Institute was conducting research sponsored by major corporations examining the hypothetical impact of a quadrupling of oil prices. Prophetically, the actual price of oil did rise from $3 a barrel to $12 between 1971 and 1974.
2. Intellectual Challenges
Like the worldwide protest movements of the late 1960s, which spread like wildfire because they were negative expressions of positive social urges for greater freedom, social equality, human dignity and self-affirmation, The Limits to Growth portrayed the dark face of the benevolent God of infinite human well-being aspiring to liberate growth from its negative stigma by challenging the superstitions that support its irresponsible, destructive and extravagant excesses. No one had anticipated the magnitude and intensity of fervor that would be generated when the report was published in 1972. Journals were inundated with articles, often written or inspired by economists, loudly and vigorously denouncing the false conclusions and deceptive logic applied in the report, challenging the very notion that a crisis or a slowdown in economic growth was at all likely. Harsh attacks by many economists centered on one point: according to them, the report under-rated the infinite or almost infinite capacity of research. Many confidently proclaimed that as soon as resources became scarce, pricing mechanisms would stimulate research which would in turn supply new solutions. These authors apparently believed that discovery and invention were merely a matter of short term investment. Conveniently forgetting the long list of qualifying and rarely realisable conditions required for equilibrium between supply and demand taught in every first year economics course, this faith in the power of price to dictate results was tantamount to belief in myth or magic.
Giarini’s experience directing long term research and technology development projects at Battelle did not support this blithe assessment. While fully cognisant of the remarkable achievements of modern science and technology, he knew firsthand the inherent risks involved in all research activities and the very high probabilities of failure. In pharmaceutical research, for instance, less than one in a hundred new ideas reaches clinical trials and fewer than ten percent of those ever reach the market. He realised that it was simply unrealistic to assume research could always be relied upon to generate any specific set of desirable results within a given budget and timeframe. Otherwise, how to explain why a cure for cancer and low priced electric cars had not been developed long ago? He was astonished by the unquestioning faith of those who believed that the fundamental research was, in modern society, a factor totally within the economic system and subject to the same law of supply and demand that governed the production of toothpaste and TVs. This view failed to take into account limiting conditions, inertia, perceived risk factors and structural rigidities. But more fundamentally, he was struck by the fact that opponents of the report failed to recognise the inherent uncertainty of future events. Later, he was to observe the same attitude of confident absolutism among prophets of economic and ecological doom. Here too, he found unquestioned conviction that extrapolation from past and present trends was proof of future catastrophe. The end of growth was a foregone and inevitable conclusion. Here too, the inherent uncertainty of future events was overlooked, which meant not only the possibility of unexpected failures, but equally the onset of unanticipated discoveries. As none had expected the quadrupling of oil prices in the early 70s, whoever imagined or anticipated the sudden emergence and exponential growth of the Internet since the mid-90s?
Gradually, the controversy over the Club of Rome report spread from the economists to the political arena in Europe. European Commission President Sicco Mansholt broadened the debate regarding ecological problems. Conservative French economist Raymond Barre and others condemned the report’s dire economic prognosis as a provocation for social unrest. Secretary General of the French Communist Party, Georges Marchais, denounced it as a conspiracy of the industrial right to undermine labor union wage negotiations. Some Soviet intellectuals hailed it as a sign of the coming crisis of capitalism. Both the praise and vehement attacks on the report helped spread the word and boost circulation of the book, which was translated into ten languages and eventually sold over 10 million copies. Unexpectedly, quotations from the report regarding growth, ecology, population growth even found their way into academic text books. In spite of repeated efforts to emphasise the environmental and demographic issues, to the dismay of Peccei and King, the Club became widely regarded as an advocate of “zero growth”. Academia and public opinion generally found themselves on opposite sides of the debate, but eventually it was public opinion that held sway. Calls to respect the environment, conserve natural resources, and strive for sustainable growth became increasingly frequent.
2.1 Scientific Certainty vs. Social Reality
The wide gulf between economic thinking and actual economic reality points to a more profound gulf in knowledge underlying failures of modern economic theory as well as social theory in many other fields – the profound disconnect between theory and human life. The remarkable success of the natural sciences in earlier centuries had generated a blind confidence in the ability of science to measure, analyse, and deconstruct reality and then reassemble it in a more perfect configuration and working order. The mathematical precision of astronomical projections by Copernicus and Galileo, the infallible accuracy of the laws of motion which Newton deciphered, and countless other discoveries had created a widespread belief, which matured into a pervasive and unquestioned assumption, that a similar application of mathematical principles to economic and social life could lead to equally valid principles. Ironically, physicists had abandoned this simplistic notion almost a century earlier when Heisenberg first postulated his uncertainty principle. Yet, 19th century belief systems continue to pervade the social sciences.
2.2 Equilibrium vs. Evolution
Furthermore, while the motion of objects, the behavior of gases and other physical processes could be accurately defined by equilibrium equations, it became apparent that social processes could never be adequately explained based on laws of equilibrium, because society undergoes a continuous process of development and evolution. Giarini argues that the well-known economic principle that the supply equals demand is not a law at all, but only a tautology. Economic systems very rarely and only transiently reach anything close to equilibrium. Indeed, as Soros and others have observed in diagnosing the current international financial crisis, markets tend to be inherently unstable, moving far from equilibrium before swinging back in the opposite direction. This is especially true of financial markets which are subject to unregulated speculation and profit-taking.
But Giarini’s challenge goes even further. He argues that the very nature of economy is evolving and that the rules and formulas applicable to the old industrial economy which is receding are decreasingly relevant to the knowledge-based service economy which is emerging. Without our realising it, the fundamental laws of economics have changed. Indeed he contested the widespread viewpoint of many both within and outside the Club of Rome that the report conclusively establishes finite limits to growth. Rather, he argued that the report proved the inherent limitations of the existing industrial model of economic growth, not any inherent limits to growth itself.
2.3 Divorce in the Social Sciences
The Limits to Growth pointed to one of the major reasons for this disconnect between theory and reality – a specific instance of a more fundamental schizophrenic malady – the tendency of the modern mind to dissect reality into slices and then further detail them into smaller and smaller segments which become increasingly separated and unconnected to the larger whole of which they form a part. He discovered this tendency not merely among theorists, but among business practitioners as well as scientists. The plight of humanity which the Club of Rome identified arose from a tendency to focus on economic growth for its own sake divorced from its wider impact on society and the environment. Theoretically, this translated into a narrowing and specialisation of focus – the divorce of economics from political science, society, ecology and culture; the divorce of economic growth from employment and social welfare; and, as we now witness with increasing dismay its consequences, the divorce of financial markets from the real economy. Long ago he concluded that this fragmentation gives rise to a partial, fragmented and grossly distorted view of reality. More importantly, it gives rise to uni-dimensional strategies that sooner or later run into brick walls or threaten to bring down the entire edifice of civilisation.
The controversy presented repeated occasions for serious reflection on fundamental assumptions underlying modern economics and prompted him to return for fresh insights to the great classics of economics, from Adam Smith to John Stuart Mill, by way of Marshall and Schumpeter. His reading compelled him to undertake a fundamental reassessment of the entire role of economy in the wider field of social existence. He was aided in this effort by continuous opportunities to interact and exchange views with other leading thinkers of the day. In addition to Aurelio Peccei, Alexander King, and other original members of the Club of Rome, his thought was stimulated by interactions with Nobel economist Jan Tinbergen; Karl Schwab, founder of the World Economic Forum; Michel Albert, Director General of the European Community and later President of the second largest French insurance group, Assurances de France; and many other prominent thinkers. In 1986 he set up the organising committee for the Risk Institute, whose members came to include Nobel physicist Ilya Prigogine; science philosopher Karl Popper; futurists Alvin and Heidi Toffler; Raymond Barre, former EU Vice President before he became the first President of the Geneva Association and then the French Prime Minister; and Fabio Padoa, Managing Director of Generali Insurance in Trieste and founder of the Geneva Association.
This article was originally published in Volume 1 Issue 4 of Cadmus Journal in April 2012.