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GDP, potential GDP and Bank of Canada forecasts: 2005-13

While the euro-zone crisis reheated and both Canada and Britain attacked debt in their budgets this week, the global economy remains sluggish, income inequality is soaring and the climate crisis continues unabated.

There's a solution to all three of these problems, economist Dan O'Neill believes: the creation of a "steady-state economy," in which material and energy use are kept within ecological limits, the population remains stable, wealth is distributed more fairly.

It's well outside the mainstream – many may even disagree with his basic economic assumptions – but in the wake of the Great Recession and Occupy Wall Street, steady-state economics raises a tantalizing question: Can we be good without growth?

What specific proposals do steady-state economists advocate?

One example is changing the way we measure progress. At the moment, our main economic indicator is GDP – gross domestic product. This is simply a measure of money changing hands in the economy. If I go out and buy a beer a pub in Edinburgh, this contributes to GDP. If I buy a bicycle, it also contributes to GDP. If the government invests in education, this contributes to GDP.

But the problem is that if there's an oil spill off the coast of Mexico or the U.S., this also contributes to GDP. If we have more crime in society and pay to deal with it, this contributes to GDP. If we have more war, it contributes to GDP. Our main indicator of economic progress doesn't distinguish between beneficial economic activity and dysfunctional economic activity.

One way we could fix that is by something called the Genuine Progress Indicator, which is a measure that separates the good stuff from the bad stuff and sees how they compare over time. Another area that's been suggested is a completely different set of national counts, where we start to measure quality of life through surveys of happiness, well-being, life satisfaction and so on.

Austerity was in the news a lot this week, from the Cyprus bailout to the British budget. You've written that the choice between austerity and debt is false. What did you mean by that?

We seem to have these two options that are put in front of us: austerity or stimulus spending through more government debt. Both of these things have, as their end goal, growing GDP.

We have a third option, a better option, which is to forget about growth and make the transition toward a steady-state economy that shifts our goal from increasing GDP to improving people's lives.

This involves a very different package of changes than austerity or stimulus spending would have you believe, including bringing resource use within ecological limits, reducing inequality, reforming the financial system and reducing unemployment.

The stuff that's been happening in Cyprus is really crazy. I almost have trouble believing that the European Union tried to do what it tried to do, which is take a chunk of people's personal savings for a bailout of the Cypriot economy. People in Cyprus were not the ones to blame for the crisis in Europe. If we're serious about preventing anything like this from happening again, then we need to deal with the problems that caused this in the first place, which are largely in the financial sector.

The way things work at the moment is that financial institutions create most of our money through loans. Banks are allowed to create money effectively out of thin air and loan it to me because I promise to pay it back.

As I see it, the system creates three basic problems: It drives inflation because banks tend to create more money than is actually needed for exchange; it drives growth because people then go out and generate economic activity; and it creates periodic crises when the amount of debt gets to be too much.

The solution is blindingly simple. The solution is simply to prohibit banks from creating money, and transfer this power back to the government. The system we have now is called fractional-reserve banking. The alternative is a system called full-reserve banking, where a public institution like the Bank of Canada creates the amount of money that is needed in the economy, it transfers the money to the government, and the government then spends this money into existence.

It's a system that still has banks, but they act as financial intermediaries; they would only be able to re-loan existing money, which they could do at interest, but they wouldn't be able to create money. If you did this, the entire euro-zone crisis could never happen.

What was your reaction to the British budget?

The Conservative government has this idea that we need to have austerity in order to eventually have growth. Their rationale is that we want to balance the books in order to make the markets happy, so that this will hopefully generate private investment, which then generates economic growth. But the government's been trying to do this for five years now, since 2007, and GDP is now 2 per cent lower than it was five years ago.

Let's say you were a finance minister. What would your budget look like?

It would look pretty different. Greater funding in health care, education, environmental programs, because we need these things. How do we deal with that? We can increase taxes on resource use – on CO2 emissions, for example – and we can lower tax on income. The idea is taxing "bads," not goods. Investing in the infrastructure for a low-carbon economy, spending less money on defence, bringing in something called the citizens' income – a basic minimum level across society – and potentially also a maximum level of income.

This is been something that's been discussed in the public sector in the U.K., and of course in the banking sector because of people being angry about bonuses. Why not have a maximum income in society as a whole? Is there really any case for having anyone earn more than the prime minister?

Are things like the recession and the euro-zone crisis an opportunity for the steady-state economics movement to gain more of a following?

I think so, and I think that that has happened over the past few years just because people have become quite disillusioned with the system. You only have to look at things like the Occupy movement, and of course what's happening in Cyprus and Greece and Spain at the moment, to see that people are not convinced by the current model. They're looking for something different.

We need a steady-state economy for two main reasons: [Because] we live on a finite planet and we can't keep growing the economy forever, but also because growth just isn't working on its own terms any more. It's unsuccessful in improving people's lives. People aren't becoming any happier. It's not guaranteeing low levels of unemployment. What is growth actually getting us these days? Very little.

This interview has been condensed and edited.