University investments and economic growth

In its current consultation on its investment policy, the University of Edinburgh reminds us that its Strategic Plan aims to make a socially responsible contribution to the world in three key areas: health, economic growth, and cultural wellbeing.  The social reasons for seeking to promote health and cultural wellbeing are readily understandable, but what about economic growth?  Unlike health or wellbeing, which are values counted among fundamental human rights, economic growth is not a direct good for people.  It is at most a proxy for measuring the potential means to achieve the wealth that may in turn be good for people.

The assumption that economic growth is a good thing implies a judgement about macroeconomic morality.  I want to examine that assumption and how it relates to the principles of responsible investment. A commitment to such principles means being prepared to forego a financial return if that could only be achieved at the expense of unacceptable costs being inflicted on people or planet.  The University of Edinburgh has already taken this kind of stand with regard to investments in tobacco and drones technology. It is thus committed to certain principles of microeconomic morality.

If the microeconomic and macroeconomic principles come into conflict, this can yield a dilemma for the socially responsible investor.


A potential dilemma for the socially responsible investor

To protect its financial capital the University needs the economy to furnish investment opportunities combining appropriate levels of risk, socially responsible practices, and a rate of profit not less than inflation.  That last implies economic growth, and, in that respect, the microeconomic and macroeconomic imperatives mentioned are aligned.  But suppose the buoyancy of the wider economy itself were premised on irresponsible practices (because, for instance, it has the buoyancy of bubbles that will in due course burst, or because it depends on environmental destruction, or slavery, or colonisation, or militarisation, or organised crime).

The responsible investor would face a potential dilemma.  On the one hand, attempting to pursue microeconomic morality and profit would then be liable to moral hazard (“our hands are clean and it really is a pity that the system making these profits possible for us has dirt elsewhere in it”).  Yet, on the other hand, were the benefits of the macroeconomic irresponsibility renounced, this could mean foregoing hope of preserving the value of funds over time.  This is a potential dilemma, of course, rather than an actual one, since it rests on a mere supposition of macroeconomic irresponsibility, and because a university is, as an economic actor, too small in the global scheme of things either to be held responsible for the way they are or meaningfully to stand against them; therefore it does not have to take the decision, and, even if it did, nothing much would follow in consequence.

Why care about this merely potential dilemma? Bear in mind that the decision to become a socially responsible investor, as distinct from the usual kind, is a voluntary decision because there is no systemic norm to require it.  That does not necessarily mean the immanent norms of macroeconomic arrangements are seriously irresponsible, but this possibility cannot be ruled out as utterly implausible.  So as long as that is an open question, the socially responsible investor cannot simply ignore it, on pain of embracing the moral hazard horn of the dilemma.  For the message would be: “Ok, so suppose the system does make possible our profits in ways we would not approve of, either way, we’re not directly involved so we can still be distinguished from the investors who do not claim to be socially responsible microeconomic actors.”  In this ‘clean hands wringing’ position, it would probably be wiser to avoid ethical topics in public statements of intent.

If one wishes to maintain a stance of social responsibility, then, one is obliged to take some active interest in the question of whether the macroeconomic circumstances in which growth is an immanent imperative are not egregiously irresponsible.

On the value of economic growth

Because it is so widely assumed these days that economic growth is a good thing, we easily overlook the chains of reasoning the assumption depends on.

Positive reasons have to do with economic growth making greater wealth available for the provision of useful goods and services that improve the quality of life for members of societies. The presumption is, furthermore, that this means all members, with growth making everyone better off, although we know that ensuring some wealth really does trickle down to the disadvantaged requires intervention.  So it is not a sufficient condition of general social well-being.  But is it a necessary one?  There are reasons for doubt.  For one, there are problems about the criteria used in identifying and measuring economic growth: they are not necessarily a good indicator even of material wealth, since they measure the value of transactions rather than production; less clear cut still is how far increased growth correlates with greater social wellbeing, happiness or health.  Furthermore, if indicators of growth are tied to the volume of monetary transactions in an economy, then taking them as measures of something positive can even appear downright perverse.  This is notoriously the case, for instance, regarding environmental issues: an economic activity that generates serious environmental pollution can be accounted a positive contribution to GDP, and then the cost of subsequent clear-up efforts can appear as a further positive entry.  As for thinking about the advance of human development, we can certainly imagine the idea of an economy that has grown enough and with social goals oriented to how we might do better rather than more, measuring advancement against criteria other than those standardly used to measure economic growth.

Nevertheless, it may be claimed, the reality is a world that depends on a system with an inbuilt growth dynamic, and a sufficient argument in favour of growth would be the negative one: without growth, this economy is vulnerable to the eroding effects of inflation, and so abandoning it would spell economic ruination and all the social ills that would follow as a consequence.

If the negative argument is based on speculative thoughts about risks of forsaking the goal of growth, however, then before accepting it we should at least seek to assure ourselves that continuing to push for growth is itself not likely to lead to a ruinous outcome.  Yet we know that the predictive power of economists regarding systemic risks is liable to disappoint. By that same token, I think we must therefore also ask what is the basis of predictions that the continuing achievement of economic growth will be a good thing.

There are, in fact, some things we do know on the basis of reliable evidence.  Our University refers to them when it commits to being judged in the long term by its performance in helping the world become one where ‘energy, food and water resources are secure for all’ (The University of Edinburgh, Social Responsibility and Sustainability Strategy 2010-2020). These are among an array of challenges that have arisen in this era of great economic growth, whose benefits and costs have spread unevenly: with socio-economic inequalities in much of the world becoming sharper, and environmental damage becoming critical in countless domains, it is not beyond the bounds of possibility that these issues are causally interrelated, or that reversing the trend regarding inequality and the environment might mean reversing the trend of economic growth too.


What does this mean for University’s investment policy?

There are three main points I would make.

First, while the university, as an investor, has a positive incentive to subscribe to the macroeconomic morality of growth, this incentive does not emanate from any core value of a university as an academic institution.  At the root of the incentive is the existence of an economic system in which inflation is endemic; were there not the inflationary pressures in that system, there would not be that source of financial depreciation to protect against.  The need therefore to engage in constant financial activity, just to stay in the same place as regards the value of capital funds, is appropriately likened to a treadmill. The practical imperative is to maintain economic growth – over and above the pursuit of goals regarded as more intrinsically valuable – in order deal with the problems that economic growth brings about.

Second, given that the university does need to invest, it should do so in as responsible a manner as possible, and I would affirm that some combination of the approaches proposed for consultation appears appropriate.  For one thing, it seems right to take a clear negative stand on companies engaged in activities that evidently compromise the future of people and planet. A red card for the fossil fuel companies, for instance, could be in order.  A public gesture of this kind could, of course, have repercussions for a university’s research incomes, but once the principle of taking negative stands is accepted, such risks have to be addressed openly.  Meanwhile, the funds thereby divested could be redirected towards businesses that recognize ecological constraints and aim to create real benefits for people, net of social and environmental costs.  A portion of the funds could appropriately go to the university’s in-house projects and start-ups: with respect to these, there is likely scope for some richer, imaginative, conceptualisation of the scope of active investment.  For the rest, it would be wise to go with those established companies and funds that we can in good faith imagine being appraised as socially responsible investments from a perspective of a few decades hence.

My third point is that imagining future perspectives encourages us to be mindful of a bigger picture than when considering only more immediate issues.  One aspect of this is to be wary of putting too much faith in technological solutions to socio-economic and environmental problems. As businesses develop increasingly sophisticated approaches to solving a specific problem, they may not necessarily contribute to a holistic solution to the constellation of interconnected problems that a broader sense of responsibility would counsel us to keep in view.  Indeed, it is always possible that solving one problem entails causing or exacerbating others.

While we should certainly check that companies we invest in observe the principles of microeconomic morality that we endorse, we should recognize that individual businesses are not responsible for macroeconomic circumstances (at least if we bracket the very large corporations and the financial sector, until my next blog).  These ultimately depend – in principle, at least – on political decisions.  Those decisions in turn depend on the social values prevailing in a polity.  Since a core aim of our university is to enlighten the society and polity we are part of, we should not knowingly mislead.  I would suggest that making open commitments to the goal of economic growth under the conditions as we know them could be misleading in a way that would implicate the university in moral hazard.

So, I believe, the University should be careful about affirming economic growth as a core objective.  I do not think it can be said that the future is assured to lie in perpetual growth; conceivably, our best hopes for the future could lie in freeing ourselves in orderly fashion from the treadmill that makes the pursuit of growth appear our only macroeconomic option.  For we do not know for sure that the alternative could not be a systemic crash – affecting finance, economy, peace, security and ecology – of unprecedented scale.



We in the affluent west have been experiencing six decades of historically unprecedented peace and material affluence within our territories; we would be unwise to assume that the movement of history has now conveniently stopped yielding big and unexpected changes.  Perhaps as we prepare to mark the centenary of the start of the First World War, we will reflect on just how much that is totally unexpected can happen in the course of a human lifetime or two, and sooner than anyone is ready for.

At present, the dash for growth may still seem like the only game in town; yet the next big game might be a more pernicious one if we do not do all we possibly can to nurture understanding of how change for the better might ensue.  The University of Edinburgh publicly emphasises the need to do so.  It points out in its strategic documents that ‘due to the social, environmental and economic disruption we face today, a “business as usual” approach will lead to a “perfect storm” of food, water and energy shortages by 2030.’  Recognizing this, I’ve suggested, means being careful in understanding how, rather than part of the solution, economic growth could be part of the problem.

Departing from the growth paradigm is all but inconceivable in terms of received wisdom.  But core objectives of this university are ‘to understand what is occurring, to question accepted wisdom, to challenge simplistic analysis and to communicate with others. In doing so we will help develop holistic solutions to the challenges facing the planet and its people.’  (The University of Edinburgh, Social Responsibility and Sustainability Strategy 2010-2020)

And where might departing from the growth paradigm lead us?  That will be the topic of reflection for my third blog of this series.

Tim Hayward


[This blog, reblogged from Global Justice Academy, is an abridged version of a longer paper that can be accessed here