Economics Needs A Radical Reset To Become Truly Sustainable

Sustainability must form the core of economic theory and policy, rather than being an afterthought in order to have any chance at making a positive impact, according to a new paper from Rotterdam School of Management Erasmus University (RSM).

The argument, set out by Hans Stegeman, Chief Economist and Group Director Impact & Economics at Triodos Bank, in his dissertation; 'Transforming Economics for Sustainability', states that as long as sustainability does not form the core of economic theory and policy, attempts at creating sustainable change remain superficial, fragmented and ultimately ineffective.

"If you keep looking through old worldviews, you never make the transition to a new economy. And if you don't do that, the end of our current economic system is inevitable. It will collapse," Stegeman says.

His paper sets out the structural problem that exists in economic practice. Economic theory, it notes, has historically developed as a response to the problems of its time.

In the post-World War II period, the emphasis was on material scarcity and reconstruction – hence the focus on growth, productivity and efficiency. But many of those assumptions, Stegeman shares, have since solidified into economic orthodoxy, even though modern challenges such as climate change, biodiversity loss and structural inequality are fundamentally different.

"We still treat environmental damage and social inequality as external factors," states Stegeman.

"But if we take sustainability seriously, that must be our starting point."

The central question Stegeman addresses in his dissertation is: how can we integrate sustainability – defined as the condition of a system that maintains itself both ecologically and socially continuously and indefinitely – into economic theory, policy and practice?

Stegeman’s paper identifies five key insights:

1. There is no single form of wellbeing: What people need to live well varies by situation. Ecological recovery requires something different than social connection. Policymakers must therefore better examine which type of wellbeing should be central in a particular domain.
   

2. Interconnected systems create knock-on challenges: Economic, ecological and social systems are interdependent. Economic activities often directly impact the environment, while social systems determine how people interact with their surroundings. When one system reaches certain limits, it can negatively affect other systems. For example, climate change (an ecological problem) can lead to food shortages (an economic and social problem).
   

3. We must abandon the idea that adding up all personal choices gives a good picture of what is good for society as a whole: Collective interests may conflict with individual preferences. This is precisely where social relationships and institutions play a crucial role in finding positive routes forward.
   

4. Worldviews shape institutions: What is seen as 'realistic' policy is often based on prevailing mindsets rather than actual necessity.
   

5. Gradual improvement is not enough: For major problems like climate change or biodiversity loss, we often think we can improve step by step. But this idea comes from a worldview where systems are stable and natural steady growth leads to solutions. In reality, many systems work with tipping points: if we react too late, the whole system collapses.

Based on these insights, Stegeman’s paper makes several policy recommendations, advocating for thorough adaptation of macroeconomic models with ecological boundaries and social foundations at their centre, fiscal and financial instruments focused on promoting long-term public value rather than short-term efficiency, and new forms of collaboration where different groups can participate in decision-making.

Sustainability, he concludes, should no longer be seen as a brake on the economy, but as the foundation for a new form of economic progress.