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14
Nov

Economies That Mimic Life – Leaders of an Emerging Renaissance

All economies are living systems in the sense that their primary assets – people and Nature – are living. As will be shown in this brief, they work best when they operate on symbiotic principles that have sustained life for billions of years. Sensible as this holistic vision sounds, it nevertheless represents a paradigm shift from the orthodox perspective of most economists who see the economy as a machine that works on mechanistic principles, which can be reduced to mathematical equations.

The assumptions underlying the emerging paradigm virtually oppose those of traditional theory – especially in the value they place on life. As shown in the following table, these differences are particularly evident in their underlying core beliefs and practices. While in some cases, these can be clear lines of demarcation, I present them here as leanings.

Comparison of Working Assumptions and Practices

As we shall see later in this brief, life-mimicking economies today produce exceptional results in terms of: quality of life (health, education, opportunity), GDP/person, innovation, competitiveness, credit ratings, ease of doing business and individual freedom. In addition to surpassing the US in many of these areas, countries with the most evolved life-mimicking economies are now gaining advantages while the US is backsliding.

The key to success in this emerging paradigm is cultural. It resides in the ways countries care for their core living assets and in how they replicate the circular processes of Nature – processes that convert the waste and decay of some species into nutrients for the growth of others.

This is not a familiar mental model to people accustomed to traditional capitalist thinking. To them, business and economy are rational instruments to manage the complex, often chaotic, behaviors of Nature and society. Nevertheless, when you compare the two models side-by-side, it’s easy to see how this mechanistic view, in its devaluation of life, subverts the very source of our economic wellbeing.

To physicist-historian Thomas Kuhn, such subversion creates “anomalies” (negative feedbacks, such as ecosystem degradation, social discord and compounding debt), which undermine a system from within. In response to such self-destruction, people begin to search for new ideas and solutions. That’s why the new economic paradigm mimics life and why it operates so differently from the traditional model in terms of its working assumptions and practices.

Because of such differences, Kuhn would say the two models are “incommensurable,” which means that one cannot be understood in terms of the other. Consequently, efforts to merge the two can’t work because of culture clash.

The operating leverage in the life-mimicking approach to economics resides in humanity’s genetic affiliation with life – a biophilic instinct wired into our DNA over thousands of generations.[1] Because of this cultural sense of purpose, people become inspired and engaged in cultures that respect life.

In parts of the world where respect for life is a widely-held value, people are more apt to network and share life-affirming ideas – qualities that have generated high living standards in addition to ecological restoration. Nowhere is this more evident than in Kalundborg (Denmark), the industrial world’s first circular economy.

Kalundborg: The World’s First Circular Economy

Fifty years ago, Kalundborg was a small industrial city in a small country with few natural resources. Its two largest industries were an oil refinery and an electric power station – both of which ran on imported fossil fuels. Its two other industries were a small manufacturer of pharmaceuticals and enzymes plus a plasterboard plant: not what you’d imagine as the forerunners of a future innovation and economic hotspot.

To overcome these structural challenges, local companies collaborated on ways they could harvest each other’s waste streams so that valuable resources, such as water, energy and functional byproducts, could be recycled and reused to the benefit of all.

As Kalundborg’s network of exchanges evolved from the late 1970s onward, a continuous stream of new ventures was created and a world-class learning center emerged to explore new ways of generating value from waste. The net result: the city today is one of the world’s most dynamic urban economies with a stable, growing tax base, meaningful employment, lower utility costs (for water and energy) and a cleaner healthier environment.

To illustrate the city’s innovative web of exchanges, consider Inbicon: a subsidiary of the electric utility. Today it takes in 30,000 tons per year of low-value wheat straw supplied by local farmers, which is then processed using waste steam from the utility plus locally manufactured enzymes to produce at an annual rate: 5.4 million liters of bio-ethanol for the refinery, 13,100 tons of lignin pellets for use as boiler fuel at the utility, 11,200 tons of molasses for use as a livestock feed supplement plus bio-nutrients that can be returned to farmers as fertilizer.

At yearend 2015, Kalundborg’s collaboration network consisted of 32 bilateral or trilateral commercial agreements centered on exchanges of energy (9 projects), recycling of waste products (11 projects) and recycling of water (12 projects). Through the combined efforts of its community, the network now conserves three million cubic meters of water per year and has lowered its annual CO2 emissions by 275,000 tons. Copenhagen Economics, a consultancy, estimates cost savings at Kalundborg to be in the vicinity of 500 to 600 million Danish crowns ($72 to $87 million) a year, which is considerable for a city with a population of 16,400.

The real synergies, however, are in the spirit of civic engagement and collaboration, where companies and citizens freely share ideas on optimizing resources and creating new value out of waste. One indicator of this engagement can be found in the shareholder returns on Kalundborg’s two resident exchange-listed companies (Novo Nordisk and Novozymes). From the turn of the millennium to September 2017, Novo Nordisk’s market capitalization grew 19-fold from $6.5 billion to $123.4 billion and its sister company Novozyme’s grew 11-fold from $1.5 to $16.3 billion. Together, the two generated $132 billion in shareholder equity ($140 billion less $8 billion) for a combined return of 1,650 percent. By comparison, the average share growth on the S&P 500 over the same period of only 67 percent.

Adding to the success of these two companies and the synergies they have created through local partnerships, the Novo Group (which includes Novo Holdings and the Novo Nordisk Foundation) has become a catalyst for spreading bio-economy know-how and venture-funding throughout the Nordic community. This has earned Kalundborg the nickname of Northern Europe’s ‘Biocon Valley.’

Today Kalundborg is known as a “symbiosis” – defined as “a collaboration between different organisms for mutual benefit.” Its Symbiosis Center, founded in 1996, is a collective headquarters – a “pitstop between research and market,” where citizens and companies can brainstorm new ideas and facilitate new projects for turning local wastes into value added resources for new enterprise.

“The Symbiosis came about as the result of a spirit of collaboration and a response to the question: Is it possible that a waste product of one company could actually be a raw material for another?”
– Michael Hallgren, SVP, Novo Nordisk

 

Of greater importance, the evolution of Kalundborg’s symbiosis over the past four decades has inspired a circular economy renaissance in its region. Just as 14th Century Florence launched a renaissance in northern Italy (and later the whole of Europe) by breaking away from the restrictive norms of feudal authority, Kalundborg’s break from the corrosive norms of traditional economic thinking has spread through the Nordic community (Denmark, Finland, Sweden, Norway and Iceland) and has begun to influence economic thinking in the rest of the world.

The critical elements of this renaissance are intangible: human intelligence and imagination amplified by shared vision, values and collaborative behavior. Unlike tangible natural resources, which are finite, these intangibles, which we call “social capital,” are potentially infinite. By optimizing this cultural resource, Nordic economies today are world productivity leaders in spite of their small size (combined population of only 26 million people), cold weather climates and narrow base of natural resources.

By maintaining and growing their social capital, Nordic economies manage by means (MBM). That’s because human intelligence and relationships are the means of achieving economic progress. Stylistically, this approach is fundamentally different from the more conventional method of managing by results (MBR), where quantitative goals, such as GDP and national income, are the focal points of economic policy and planning.

Seen through these lenses, the Nordic economic renaissance has a unified cultural core. People prefer working towards goals that are meaningful to them rather than producing abstract numbers, such as GDP and national income. That’s why the Nordic community today is blessed with a swell of entrepreneurial activity: producing abundance out of scarcity and new value out of waste.

Evidence of Nordic Success

Every year the World Economic Forum (WEF) publishes “Global Competitiveness Ratings” covering 137 countries. In its recently published 2017 – 2018 ratings, Sweden, Finland, Norway and Denmark were rated well within the top decile.[2] Iceland also received a high rating, but likely missed the top decile because of its small population (335,000).

Important factors in these competitiveness ratings include social capital indicators, such as labor market flexibility (including workers’ rights), social cohesion, public-private collaboration, transparency, health and education – qualities where the Nordics excel. As evidence of this, Nordic countries were world leaders in the 2017 global Social Progress Index: a composite of social and environmental indicators that capture three dimensions of social progress (basic human needs, foundations of wellbeing and opportunity). Among the 128 countries surveyed, the Nordics were rated: Denmark (1), Finland (2), Norway and Iceland (tied for 3) and Sweden (8). The US was ranked 18th.[3]

These social progress ratings are affirmed by the annual Global Retirement Index (GRI) and its Quality of Life sub-index prepared by the French investment company, Natixis Global Asset Management. In their fifth annual rankings (2017), which covered 43 industrial nations, Norway ranked 1st on the GRI scale with Iceland 3rd, Sweden 4th, Denmark 8th and Finland 12th. The US, by comparison, was ranked 17th in spite of its presumed national wealth. Since retirement security is an indicator of cultural values and social caring, these are significant findings.

On the Natixis quality of life sub-index, the Nordics had five of the top six scores led by Denmark at 1st followed by Norway and Finland tied for 2nd, Sweden tied with New Zealand for 4th and Iceland 6th. The US, again, was ranked 17th.[4]

When we tip the scales towards quantitative measures of GDP per person at purchasing price parity, Norway was rated 2nd among the world’s advanced economies ($63,811) with Sweden 7th ($46,441), Denmark 8th ($45,686), Iceland 9th ($45,276) and Finland 15th ($39,423) – all credible results. By comparison, the US was rated 5th with GDP/person at $53,272, thanks in large part to its market size, diverse resource base, technology prowess and currency advantage (the US dollar is the world’s key currency).[5]

Looking more deeply into these advanced economies, it’s interesting to note that the Nordics also perform well on the critical variable of education. In a 2017 poll of 209 nations, titled the “World’s Best Education Systems,” they again earned top honors with Finland (1), Denmark (4), Norway (6) and Sweden (9). Iceland was not rated (probably too small). The USA, by contrast, was ranked 20th. In making these selections, the poll rated each country on five educational levels: early-childhood enrollment rates, Elementary Math, Science and Reading scores, Middle- School Math, Science and Reading scores, High School Graduation rates, and College Graduation rates.[6]

Social cohesion is another important variable because it generates trust, which lowers the transaction costs of doing everything from starting a business to running a government. According to a detailed 2013 study by Bertelsmann-Stiftung, Denmark, Finland, Norway and Sweden have the developed world’s highest levels of social cohesion. (Iceland was not included in study.)

“The three most important socio-economic factors associated with social cohesion are national wealth as measured by gross domestic product (GDP), a country’s income gap as measured by the Gini coefficient, and its level of development towards a modern information society as measured by the Knowledge Index.”
– Berlelsman Stiftung [7]

 

Bertelsman’s finding was further affirmed by a November 2015 World Bank report titled “Among wealthy nations, Nordic countries are leading the pack on sustainable development.” [8] One of the key indicators in this report was carbon emissions per capita, where the Nordics lead due to the high priority they place on renewable energy (wind, solar, biomass, hydro, geothermal).

The Socialist Myth

When traditional economic thinkers describe the Nordic world today, the word we most often hear is ‘socialist.’ But this is a misnomer: a remembrance of a past era when they were among the first developed economies to experiment with big government and aggressive public spending. Over the past quarter century this model has changed decisively as the Nordics rebooted their economies towards more freedom and entrepreneurial activity.

Sweden provides a classic case of this transition. Its public debt/GDP ratio, which rose into the mid-70% range in the early 1990s (and nearly killed its economy) is now 41.6 percent. To accomplish this radical transformation, it restructured government programs, swinging from a deficit of more than 12% in 1994 to a fairly regular pattern of budget surpluses extending from 2000 to 2017.[9] Sweden has also put its state pension system on a more solid position by replacing its former defined-benefit system with a defined-contribution one.  

During the same time period, Denmark, Norway and Finland also generated more surpluses than deficits. Although Iceland’s experience was more volatile, due to a 2008 national banking crisis, its national budget returned to a surplus of 1.3% in 2016. As a result of such fiscal restraint, public debt/GDP ratios in the Nordic countries are now lower than average for the Euro area and substantially less than the USA.

As the Nordics brought their government budgets under control, they began in 2003 significant reductions in corporate tax rates. According to KPMG, during this transitional time, Denmark’s rate dropped from 30% to 22%; Finland’s fell from 29% to 20%; Sweden’s went from 28% to 22%; Norway’s declined from 28% to 24%; and Iceland’s rate varied between 18 and 20 percent. The US corporate tax rate, by comparison, is 35 percent. [11]

Data on R&D spending is also notable. According to 2014 United Nations data, Finland, Sweden and Denmark were all global leaders, spending more than 3% of their GDPs on R&D versus 2.75% for the US. Iceland’s lower rate of 2.03% was more in alignment with the global average while Norway’s expenditures of 1.71% were slightly below average (due to the heavy influence of its energy industry).[12]

Congruent with data on R&D spending, the Nordics were also leaders in the World Intellectual Property Organization (WIPO) 2016 Innovation Index, which ranks 128 countries and economies around the world, based on 82 indicators. Here we find, Sweden (2), Denmark (6), Finland (8), Iceland (13) and Norway (22). In the same survey, the world’s three largest economies, The US, Japan and China were ranked 4th, 16th and 25th respectively.[13]

In further support of Nordic economies, the region’s leading banks, although small by global standards, are among the world’s best capitalized and most efficient in terms of operating cost ratios. The credit ratings of the six largest Nordic banks are as follows: Handelsbanken (Aa2/P1), Nordea (Aa3/P1), Swedbank (Aa3/P1), Skandinaviska Enskilda Banken (Aa3/P1), DanskeBank (Aa3/P1) and DNB Bank (Aa2/P1). Interestingly, few US and European banks met these standards.[14]

All six Nordic banks prioritize cost control over revenue growth. Handelsbanken pays no annual bonuses to executives and gives branch managers control over lending, which reduces bad loan risks. Its efficiency ratio of operating expenses to revenues is 45% (low is better) compared to 58% at JP Morgan Chase and Citigroup, 54% at Wells Fargo and 47% at Bank of America.[15]

Adding to these economic advantages, the World Bank’s 2017 “ease of doing business” survey of 190 nations placed the Nordics in the top tier with Denmark (3), Norway (6), Sweden (9), Finland (13) and Iceland (20). Among the world’s largest economies, the US ranked 8th, Japan 34th and China 78th.[16]

The Fraser Institute’s 2016 Human Freedom Index, which rates 157 countries on personal, civil and economic freedom, adds credibility to these findings. In its composite rating we find: Denmark (5), Finland (9), Norway (13), Sweden (15) and Iceland (25) with the US rated 23rd. Notably, on its sub-index of personal freedom all five Nordics scored well ahead of the US.[17]

Interestingly, Iceland, which is often omitted in world surveys because of its small population, is rated as a leader in R&D, innovation and ease of doing business – reflecting its determination to become a world center for data storage. To compete in this market, Iceland turns its geographic disadvantages (remote location, cold climate) and its primary natural resource (renewable hydro and geothermal energy) into strategic assets because data centers require large amounts of energy and cooling.

Considering the foregoing surveys, it appears the Nordic Renaissance is well on its way. A 2013 feature article in the Economist – written two decades after the mentioned rebooting of Nordic economies – brilliantly summarizes the turnaround, which continues to gather momentum as its synergies become self-reinforcing.

“There are compelling reasons for paying attention to these small countries on the edge of Europe. The first is that they have reached the future first. They are grappling with problems that other countries too will have to deal with in due course, such as what to do when you reach the limits of big government. And the Nordics are coming up with highly innovative solutions that reject the tired orthodoxies of left and right.” 
– The Economist [18]

 

Looking to the Future

In spite of the successes of the Nordic Renaissance, the ideal of life-mimicking economies gets scant publicity in the US and in the world’s foremost economic journals. Even the Ellen MacArthur Foundation, which is dedicated to promoting circular economy solutions, is mute on the operating leverage of life-affirming cultures, which is the essential energy source of the Nordic Renaissance. [19]

The purpose of this brief is to address these deficiencies with real data and to awaken leaders everywhere to the pragmatic realities of what works best and why. The hoped-for goal in doing so is an economic future of living in harmony with Nature and each other and towards relieving the onerous debt burden that presently hangs over the world economy.

In sum, economies that mimic life succeed because they operate as sub-systems of life – not mechanisms that are separate from and above life. In addressing this core oversight of neo-classical economic theory, these economies release new symbiotic energies. Through their organic cultures of open collaborative networking and freedom of expression, they harvest the insights of many rather than just the few at the top of a hierarchical pyramid. This, in itself, releases synergies where, like Nature, the whole becomes more than sum of its parts.

Finally, while many see the Nordic Model offers a “Middle Way,” I disagree. It is, instead, a complete paradigmatic change, whose core assumptions and values are incommensurable with those of the neo-classical model. Because of its internal coherence (vis a vis the self-destructiveness of the neo-classical model), its results are demonstrably superior.

________________________________________________________________________________________________

[1] Ref: Stephen R. Kellert and Edward O. Wilson, The Biophilia Hypothesis. Island Press. 1995.

[2] http://www3.weforum.org

[3] http://www.socialprogressindex.com/

[4] https://ngam.natixis.com

[5] https://tradingeconomics.com

[6] http://worldtop20.org

[7] http://www.bertelsmann-stiftung.de

[8] http://blogs.worldbank.org

[9] https://tradingeconomics.com

[10] https://tradingeconomics.com

[11] https://home.kpmg.com

[12] http://www.theglobaleconomy.com

[13] http://www.wipo.int

[14] Credit ratings on the largest US banks and European banks ranged between HSBC (Aa3/P1) at the high end and Citigroup (Baa1/p2) and Deutsche Bank (Baa2/P2) at the low end.

[15] http://www.bankregdata.com

[16] https://en.wikipedia.org

[17] https://www.fraserinstitute.org

[18] “Northern Lights,” The Economist. February 2, 2013. Page 2.

[19] In its publication, “Schools of Thought” (https://www.ellenmacarthurfoundation.org/circular-economy/schools-of-thought/cradle2cradle), The Ellen MacArthur Foundation describes mimicking Nature as a product design process (biomimicry) rather than a cultural approach to organization and innovation.











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