As we approach what many anticipate will be the most important budget in years – with the economy remaining in a state of flux and the possibility of a third recession on the horizon – there couldn’t be a better time to re-evaluate what is meant by growth and reconsider the metrics by which we measure this.

I was privileged to attend a lecture last night by former Vice-President of the United States, Al Gore, hosted by responsible investment charity ShareAction (formerly FairPensions), where he set out an argument in exactly these terms.

If politicians and economists pause to consider how they see the future, it is often too easy to think about short term gain and ignore the fact that two of our most important macro tools for effecting positive change need urgent repair and reform: democracy and capitalism.  While acknowledging what Gore views as the ultimate superiority of a capitalist system – its ability to allocate resources efficiently, balance supply with demand, promote freedom and unlock human innovation – what we must take action to avoid, and indeed must rectify at this point, is the “hyper-variety of inequality” that the economic status quo has sadly given rise to. Wealth inequality in the US, for example, is now higher than it is in Egypt or Tunisia; while in October last year, the top 1% in America received 93% of income growth.

This is a deviation from the way in which capitalism is truly intended, Gore argues.  It is the result of an excessively narrow and unquestioning acceptance of GDP as the most important measure for defining growth.  Such an approach leaves no space for considering other important externalities – negative (such as pollution) or positive (such as investment in social services, art or music); these factors are not considered under current methods for evaluating economic success, or for informing national policy decisions.  As a result, societies such as the US are “chronically under-investing in public goods” and continuing to ignore enormous problems such as climate change, which are a direct result of the way in which the current system is structured.

These issues could be avoided, Gore says, if our metrics for measuring growth were more sophisticated.  Investors need to fully integrate a “safety culture” surrounding their decision-making processes, which considers the long-term implications of their investments in economic, social, and environmental terms.  Shareholders need to use their power to hold companies to account and demand that they uphold these changes in day to day practices.  Financial incentives need to be realigned so that share managers are not rewarded simply for maximising short-term profits, but for embedding longer-term thinking at the centre of their business activities.

Achieving these things will certainly be a challenge, but it is nonetheless possible through the support of inspirational organisations like ShareAction, who empower both individual and institutional investors to promote responsible investment.  In the words of Gore, “democracy hasn’t risen to this challenge yet; but it can and it must.”  Something to think about ahead of tomorrow, Mr Osborne.

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