Posted by Sharing Sustainable Solutions
(Editor’s Note: This is a very long article but worth the read!)
Economics Is About Meeting Human Needs
At its core economics is about the exchange of goods and services to meet human needs. It is a basic human activity and occurred long before there were economists and economic theories. Exchanges occurred because they benefited both parties, and did so without advertising, stock exchanges or global corporations. Exchanges of tools and raw materials between regions occurred even before agriculture emerged. Exchanges contributed to survival for some groups, as well as to “luxuries,” enriching life both literally and figuratively.1 Modern economic activities are of course much more complex and formalized, but the basic activity is simple, essential and virtually universal.
As human societies evolved and became more complex, and more goods and services were available, the rules and roles involved became more specialized and formal. With the differentiation in roles, power disparities developed and the benefits of exchange became more disproportionate within groups. Disproportionate benefits also occurred between regions, but moreso because some groups enjoyed advantages conferred by the environmental resources available to them rather than because of innate superior intelligence or abilities, or special relations with the Deity.2 The disproportionate benefits accrued to those with more power both within and between groups; and of course those with the power made the rules, further ensuring their disproportionate accumulation of benefits.
This enduring self serving dynamic has resulted in a modern economy characterized by enormous disparities of wealth between communities and nations, even as economic concepts and practices become more formal and complex. Indeed, the theories and practitioners of economics played a significant role in generating and maintaining these discrepancies. While modern economic theory purports to be a science, it could just as accurately be described as a socio-political justification for ensuring the most benefits accrue to those with the most power. Both descriptions would be partly right and partly wrong. Critical analyses of current neoclassical economic theory and practice identify both its weaknesses, and point to alternative conceptual frameworks which build on its strengths3 (also, see Defunct Economic Theories).
Economic activities confer many benefits on people around the world. Many aspects of classical economic theory contributed to the increased production and consumption of goods which conferred these benefits. However, there are also many aspects of neoclassical economic theory and practice that work against community, in terms of the just distribution or sharing of the economy’s benefits, and the ecological sustainability of its operation. Sustainable scale is about economics for community, that is, for “common unity.” This involves economic theories and policies which explicitly seek to preserve and enhance this common unity in terms of ecological sustainability and just distribution.
Homo Economicus or Economics for Community?
Neoclassical economic theory is based on the view that people are insatiably acquisitive, and that if individuals act in their own self interest to satisfy these needs, then the greatest good will occur for the largest number of people. This view of people as “homo economicus” is at the core of the idea that the market can provide the greatest good; it is the invisible hand of the market, through individuals acting in their own self interests, that creates the greatest social good.
This view of human nature is in sharp contrast with the view that humans are essentially social beings, whose happiness and well being are largely determined by their relationships with each other (see Understanding Human Happiness and Well Being). The notion of economics for community is based on a more holistic and scientific basis of the determinants of human well being. This view recognizes that market goods play an important but limited role, and that the non-market goods and services provided by community or nature are also essential factors. These very different views of human nature have enormous implications for our economy, our businesses, our communities, and our survival.
Market and Non-Market Goods and Services
Market goods are those that are exchanged in barter or trade; non-market goods and services are those that are not traded or bartered but are available either because they are provided by nature (see Ecosystem Functions & Services) or community. All manufactured goods are market goods; examples of non-market goods or services are things like community safety, care provided by friends and family, protection from UV radiation provided by the atmospheric ozone layer, and climate stability. Every individual’s total welfare is a combination of both market and non-market goods and services; both are essential for human well being.
Unfortunately, neoclassical economic’s search for continued growth seeks to include ever more non-market goods and services, wherever possible, into the market. Profits can only be made on market goods and services, so the more things that can be included in the market economy, the more profit is available. Once goods become market goods there is a tendency to exploit them as rapidly as possible to maximize profits, and move on and do the same with the next hot market item. In this way various renewable, as well as non-renewable resources are being depleted.
Economics for community holds that the non-market goods and services have intrinsic, non-monetary values that cannot be replaced by financial assets. It holds that rules are needed to respect this basic requirement for various non-market goods and services to ensure economic activities serve these broader values. Most ecosystem services are non-market services and need to be protected to ensure these services are sustainable. Ideally, governments are responsible for ensuring rules are in place to protect both market and non-market goods and services. Economic interests often distort this ideal and much greater protection is provided to market items.
Valuing Non-Market Goods
Non-market goods such as UV protection and democracy have intrinsic value beyond the monetary. These values have to do with ideals of justice, safety and security, aesthetic preferences and well being. However, many of these non-market goods and services can also be shown to also have monetary value, and various attempts have been made to identify these in dollar terms.4 There are a variety of methods for assessing the monetary value of non-market goods and services, and the exercise can be instructive to illustrate that these monetary values can be significant (e.g. the dollar value of global ecosystem services was identified to be more than twice that of the global money economy). However, it is important to accept that the essential non-market values of these goods and services are non-monetary and do not require monetary justification to be preserved.
The “When To Stop” Rule
From a sustainable scale perspective, neoclassical economic’s focus on continuous growth is a major cause of scale problems (see Causes of Scale Problems). Macroeconomic theory has no “when to stop” rule, no concept or procedure to determine when economic growth is producing more costs than benefits.5 Microeconomics does have such a rule; it is determined solely by market prices as they are affected by supply and demand. A macroeconomic “when to stop” rule that preserves ecological sustainability is needed to ensure economic growth does not exceed sustainable scale; this can only be determined by ensuring throughput does not exceed regeneration (see Sustainable Or Unsustainable), both for individual categories of throughputs (see Scale Relevant Solutions), and for economic throughput as a whole (see A Scale Synthesis).
A macroeconomic “when to stop” rule cannot be determined by market pricing, and thus cannot solely be the result of a series of microeconomic decisions. Given the current extent of global trade, “when to stop” rules for specific sectors (e.g. forestry, fisheries, mining, energy, etc) will need to involve global agreements both about the absolute levels of throughput, and the distribution among nations. Such rules would also have to consider both market and non-market items.
Clearly, more than economic policies are required to achieve the goal of sustainable scale. But current economic policies are responsible for exceeding unsustainable scale (see Causes of Scale Problems), and changes in many of these policies and practices are essential. A variety of suggestions are provided in this section.
Macroallocation of Market and Non-Market Goods and Services
Neoclassical theory and practice seek to include virtually all goods and services into the market economy. The more that can be included, the more the market can grow. This creates serious difficulties for sustainable scale, as many of the goods and services essential for human well being are not market goods or services, but are greatly affected by ever expanding market activities (eg. atmospheric ozone layer, global climate stability, etc; see Sustainable Scale Issues).
Economics for community recognizes the existence of non-market goods and the importance of preserving them and protecting them from legitimate market activities. Often, legitimate market activities at one level have significant negative non-market impacts at other levels (eg. clearing of forests for agriculture may make sense for the local farmer, but have negative consequences for regional hydrologic cycles and global climate). Economics for the global community requires that these non-market externalities are internalized; that theories and practices ensure ecological sustainability and just distribution in the optimal, macroallocation of market and non-market goods.6
Government Involvement in Non-Market Goods
Governments generally recognize the importance of non-market goods and tend to provide them in the form of public goods – health care, education, roads, streetlights, parklands, etc. Monetary policies are generally not helpful in the provision of non-market goods. Low interest rates to stimulate investment only works for market goods; even with low interest rates the private sector will not invest in non-market goods as the latter provide no profit opportunities. Investing in non-market goods is left to governments.
There are two types of non-market goods governments invest in, which have very different implications for sustainable scale. When governments invest in man-made non-market goods (eg. roads or hospitals) this injects money into the economy which is used to purchase market goods and encourages economic growth. Such government investment acts like direct investment in market goods and contributes to the throughput that must be accounted for in comparing throughput with regeneration of ecosystem services.
Governments also invest in non-market goods which are not man-made, but which protect or restore ecosystem functions (e.g. parklands, wetland or species habitat preservation, etc). Such investments contribute to maintaining sustainable scale by maintaining or increasing the regeneration of natural capital (see Natural Capital and Income, and Critical Natural Capital). Governments also have a variety of fiscal policy tools at their disposal to protect and enhance non-market goods relevant to sustainable scale.
True Cost Pricing: Pigovian Taxes and Subsidies
Economists have long known that every market product has external social and environmental costs (see EXTERNALIZED COSTS). One of the reasons that economic activities exceed sustainable scale is because the costs of unsustainable levels of throughput are not included in the market prices of the throughput, thereby giving a false accounting of the benefits of such activities.
Economist A. C. Pigou (1920)7 promoted the idea of incorporating the external cost into the price of products to accurately reflect the true costs. Pigouvian, ecological or green taxes are all terms for the same attempts at fiscal policies to internalize externalized environmental and social costs. If market activities confer a net benefit on community that are not reflected in the price of the goods sold, then a subsidy can be provided to acknowledge that contribution.
Such taxes ensure that only those market activities that generate net benefits to community will endure. If companies have to pay pigouvian taxes for the social and environmental costs of their activities, then they will seek to reduce these costs to zero, for the benefit of all. If they receive subsidies for net benefits to community, then they can be encouraged to provide non-market goods that contribute to sustainable scale.
By implementing a pigouvian tax a government is essentially creating a property right to the environment for the state, using a liability rule (see Supportive Public Policies: Property Rights), and ensuring that specific economic activities are a net benefit to community. Indeed, it might be argued that governments have the responsibility to do just that.
Is True Cost Pricing Effective?
A wide variety of pigouvian taxes have been used to reduce pollution and encourage environmental protection. Generally these taxes are designed to be introduced over a number of years to provide companies with time to adjust. If the annual increments are small enough to start, and the government policy is firmly committed to the tax over the long term, it is easier for companies to plan and adapt. Such taxes have been effective in:8
- reducing overfishing in New Zealand
- reducing water use in Chile
- reducing toxic wastes in Germany
- increasing recycling of demolition waste in Denmark
- reducing heavy metal discharges in the Netherlands
- reducing nitrogen use in agriclture in Sweden
- reducing nitrogen oxide emissions in Sweden
- reducing sulfur emissions in the United States.
A feature that can enhance the attractiveness of a pigouvian tax is for the government to agree to make it “revenue neutral” by reducing the least useful existing tax as the new tax is introduced (e.g. reduce taxes on income or labour which discourages hiring, as a pollution tax is introduced). In this way a broader program of tax reform can be implemented, which taxes “bads” (resources, land use or pollution) and not “goods” (employment, and ecosystem services). Several European countries have adopted “ecological tax reform” as part of their employment and environmental strategies.
Limitations
Ecosystems respond to quantity and quality of material throughput (see Understanding Scale), not prices. Controlling throughput via quotas and bans is more effective than manipulating prices. One of the challenges with relying on pigouvian taxes is the assumption we know what harm is being done by the activity being taxed. With the complex and emergent properties of ecosystem dynamics, these costs cannot always be anticipated. However, where harm is known, taxing it will help reduce it.
Additional challenges with pigouvian taxes are that the social and environmental costs of specific market activities can be difficult to identify precisely, and can change over time, requiring constant adjustments to the tax. This is problematic for businesses which need to plan ahead and prefer the simplicity of knowing in advance what their costs will be. Nonetheless, reasonable estimates of true costs are possible and adjustments can be made over time. But serious errors could lead to the costs not being covered by the tax and eventually exceeding sustainable scale. Ongoing review is essential.
There are two kinds of pigouvian subsidies, each of which have different impacts on sustainable scale. If a bonus or subsidy is granted to an industry to not pollute, then the industry might become more profitable and attract new entrants – thereby increasing the overall level of pollution. Subsidies or bonuses to industries which actually restore or increase levels of ecosystem function would not have this effect.
Combining pigouvian taxes or subsidies with quotas and or emission trading schemes (see Supportive Public Policies) can both set the absolute throughput limits required and provide the disincentives to ensure the quotas are respected.
A Pigouvian Tax on Advertising?
It might be argued that the close to $1 trillion dollars spent annually on advertising globally produces a variety of social and environmental costs, and should therefore be subjected to a pigouvian tax. Advertising obviously contributes to economic growth, a major cause of exceeding sustainable scale thereby imposing serious costs on current and future generations. Advertising encourages consumption of market goods by providing information about the benefits of such goods. Often this information makes people feel deprived if they do not have the good being advertised. It also ignores the potential costs to the purchasers by not providing full disclosure regarding the consequences of their purchases.
Advertising’s focus on market goods provides no information about the important benefits of non-market goods, except to the extent advertisers attempt to associate their products with these goods (eg. using your SUV to enjoy the wilderness). This leaves the public less informed of both the environmental and social costs of what is advertised and the critical services that ecosystems provide.
Civil society and governments attempt to take up this slack but generally do not have the financial resources available to compete with the private sector. A pigouvian tax on advertising could provide funding for such public information services. Combined with regulations of full social and environmental cost disclosure for all private sector advertising, such a tax would contribute to the optimal macro-allocation of market and non-market goods (see above).
Price Determined Not Price Determining
From a sustainable scale perspective allowing the market to determine prices for goods and services is problematic. Market pricing will not provide a “when to stop” price – a price that indicates that levels of throughput are about to become unsustainable. In fact, just the opposite occurs; as a natural resource becomes more scarce its price increases.
Higher prices generally lead to reduced demand. But as long as the resource can be provided for a price the market will bear then the resource is increasingly depleted – the exact opposite of what is required to prevent an unsustainable level of resource throughput. A major investment house recently projected a “super spike” of $50-110 for a barrel for oil due to increasing demand and decreasing availability.9 Clearly, prices cannot be relied on to achieve sustainable scale.
Rules and regulations that determine a sustainable level of throughput (from both a source and sink perspective) fix the quantity of the resource or emission allowed. This fixed quantity and how it is used will then determine the eventual market price. Such a regulation of pricing is required to achieve and maintain sustainable scale. The issue is what determines price – the market or the quantity deemed sustainable? Unrestrained markets do not set prices that will limit quantities to sustainable levels. Determining prices by regulating quantities is in direct opposition to an unfettered market – the goal of neoclassical economics.
Seigniorage: Following the Money
Money systems are a convenience; it is much easier to take an accepted currency to purchase food than to carry three pigs to exchange for several bushels of wheat. Issuing and regulating currency is a public good, facilitating and regulating market exchanges. Providing this service confers benefits on the provider. As the currency system facilitates exchange, the issuer of currency reaps some of the benefits of these exchanges.
In the past, this benefit accrued to the sovereign, then to the states which succeeded the kingdom. Today, however, almost all nations have granted the authority to create new money to financial institutions. While the states still impose regulations about how this can and cannot be done, many of the benefits which previously accrued to the state now go to these financial institutions. More importantly, a powerful policy tool has been given up by the state.
Seigniorage is the benefit that accrues from issuing currency. When states transferred this right from themselves to financial institutions they gave up two important benefits. The financial benefit from creating money no longer accrues to the state but to the financial institution; the state has foregone these revenues that now go to financial institutions. Taxpayers must make up the difference.
Secondly, because money creation is tied to loans, new money creation is tied to the economic growth required to repay the interests on those loans. The money supply is thus determined by the amount of loans made by financial institutions. The state has foregone the power to manage the money supply on the basis of social or natural capital. Monetary policy is locked into promoting economic growth, thereby contributing to ever increasing levels of material throughput, regardless of the degradation of critical natural capital (see Understanding Scale).10
If nation states were to reclaim the right of seigniorage they could both increase their revenues, and expand the policy levers they have to ensure economic activities maintain an overall level of well being. But well being is more than financial wealth and involves social and natural capital as well. All must be monitored and managed to ensure sustainable scale.
Limitations
Monetary reform which returns seigniorage to national governments is no guarantee that they will operate within sustainable scale. Such reform is, however, a necessary if not sufficient policy condition for governments to play a more active role in achieving and maintaining sustainable scale.
Measuring Wealth: GDP vs GPI
Gross Domestic Product (GDP) is widely taken as the most important indicator of national well being, and virtually all governments at all levels seek to increase their GDP. As a measure of economic activity only the GDP fails to capture the impact of economic activities and other public policies on the accounts of social and natural capital. Worse, increases in GDP can actually contribute to declines in these other accounts which monitor wealth in the broadest sense, including the flow of non-market goods and services that determine human well being and happiness (see Understanding Human Happiness and Well Being).
The GDP is an inadequate measure of wealth because it is limited to total expenditures, regardless of what those expenditures are for, and what their impacts are on social and natural capital stocks and flows. Expenditures for oil tanker spills on pristine coastlines, medical expenses for self-induced lifestyle illnesses and diseases, lawyer’s fees for divorce, and home security systems for domestic protection, are all examples of economic activities which contribute to GDP which also degrade social or natural capital. Analyses indicate that as much as xx% of GDP may be for these types of negative expenditures; increased GDP based on such negative measures is actually “uneconomic” in the sense that their costs outweigh their benefits.
What is true of GDP at a national level is also true of GWP at the global level.
“…there is a major flaw in measuring the quality and achievement of life by the total of economic production – (GNP/GDP)- the total of everything we produce and everything we do for money.” John Kenneth Galbraith (1999). One of the economists who developed the GDP.
“…the welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GNP… goals for ‘more’ growth should specify of what and for what.” Kuznets (1965) One of the economists who developed the GDP
Alternatives to the GDP
Various attempts have been made to overcome the shortcomings of the GDP, most notably the Genuine Progress Indicator, or GPI. This measure incorporates indicators of social and ecological, as well as economic, well being. It also subtracts the defensive expenditures (eg. crime, family breakdown and environmental degradation, etc.) normally included in GDP. Other advantages include its method of treating the costs of current activities to future generations, as well as the costs of current income disparities.
Comparisons of GDP and GPI in developed economies invariably show increasing divergences over the decades from about 1950, reinforcing the notion that economic growth beyond a certain level does not add to human well being or happiness.
Various jurisdictions are exploring use of the GPI in monitoring their well being, and as a policy tool for improvements. Analyses using the GPI are helpful in demonstrating how seemingly positive changes in some areas of importance can actually lead to negative changes in other important areas. Continued work is being done to improve the rigour and comprehensiveness of the GPI, as well as other broader measures of wealth.
Other Alternatives to the GDP
Other alternatives to expanding the GDP include “triple bottom line” reporting, which incorporate economic, environmental and social indicators of well being. In many cases these measures are developed by individual corporations who chose whatever non-financial indicators they wish, and which can change from year to year.
A more robust set of triple bottom line indicators are being developed by the Global Reporting Initiative, a UN sponsored attempt to develop alternative measures. This attempt involves accountants, business representatives, social scientists, civil society organizations and diplomats. They are attempting to develop rules for reporting on the social and environmental indicators that are as comprehensive, reliable and detailed as the rules for financial reporting.11 Progress is slow, but the initiative demonstrates the widespread recognition for an indicator of wealth or well being that is not restricted to the financial dimension as is GDP.
Limitations
One of the biggest limitations of the GPI, GRI, and similar measures, is that there is not a conceptual framework to guide what variables are included in the index, nor is there a framework to guide the relative weightings associated with each of the variables included. Currently, each of the multiple variables receives equal weighting; there is no differentiation, for example, between the negative costs of crime and family breakdown on the one hand, and degradation of ecosystems on the other.
This equal weighting reflects the developers’ acknowledgements that assigning weights to different variables raises the question of whose values are to be reflected in the weightings. The developers of the GPI have not yet addressed the issue of developing consensus regarding values, but recognize the need to do so. Those involved with the GRI are still struggling with an appropriate value framework to apply.
From a sustainable scale perspective, achieving ecological sustainability is a critical value. The concept of optimal scale (see Sustainable Scale) requires socio-political consensus of how we organize and manage our economy to remain within the limits of ecological sustainability. Both the GPI and GRI currently lack such an explicit value position which ensures ecological sustainability.
Fair Wealth Distribution: The Growth Issue
Under the current economic paradigm, economic growth is equated with increased wellbeing. There are many problems with this simplification, but the main one is that aggregate or total growth does not identify the distribution of economic benefits in society. If one person or one million people received the entire economic output, the total GDP would register no difference. Since growth is automatically equated with increased well-being and as the solution to poverty, there is always a bias toward growth.
If sustainable scale was exceeded, then GDP would register nothing, except a further increase in economic growth. If increased well-being is the goal of economics, than distribution of wealth becomes much more important than growth, and in fact a much more direct way to address poverty. It separates poverty reduction from growth as two separate and somewhat unrelated issues.
At the subsistence level there is evidence of a correlation between economic growth and poverty reduction. Beyond that level the correlation weakens and is more correlated with government policies. If we are to respect sustainable scale, then there will come a point at which no further economic growth as measured by material throughput is possible. At this point it will be impossible to continue the attempt to use economic growth as a solution to poverty. Then wealth distribution becomes a much more important issue than economic growth.
Fair Wealth Distribution: the Justice Issue
The increase in GWP has been fairly steady over the last several decades; those who hold up the GDP or GWP as the key measure of wealth and success point to this phenomenon as an indication that things are improving. They take it as an endorsement of current economic development practices, and call for more of the same. However, measuring the total amount of financial activities in an economy, as does the GDP, is only one way of determining if there is enough money available (putting aside for the moment the non-monetary determinants of wealth). Also of interest is just how those financial resources are distributed within a community, or a nation, or globally.
The multidecadel increase in GWP has been accompanied by an ever widening gap in the distribution of wealth – the rich get richer and the poor get poorer. In 2000, the world’s 358 billionaires had accumulated financial resources surpassing that of the combined annual incomes of countries with 45% of the world’s population.12 The United States, one of the richest countries in terms of GDP per capita, is also one of the countries with the greatest disparities in financial wealth. By the late 1990’s the top 1% of US households at the top of the financial wealth pyramid controlled about 30% of all the material wealth in the nation.13 Across the globe, the top 1% make more per year than the bottom 57% of people.14
A GINI to the Rescue
Economists have a way of measuring the distribution of financial wealth called the GINI coefficient. It ranges from a low of 0.0, where everyone would theoretically have the same amount of financial wealth, to a maximum of 1.0, where all financial wealth would be owned by a single party. In most developed countries the GINI has been steadily increasing over the past several decades, indicating ever greater concentrations of financial wealth in fewer and fewer hands. In the United States it is over 0.78 and rising.15 While the financial pie is growing, more and more of it is going to fewer people. Along with the concentration of financial wealth goes the concentration of political influence, disrupting the democratic process.
While the injustices of large disparities in financial wealth and political influence are undesirable in and of themselves, there is also an impact on activities which affect ecological sustainability. With large disparities, both ends of the financial wealth spectrum contribute to ecosystem degradation.
The United States, for example, with only 5% of the global population, consumes approximately 25% of the world’s resources annually.16 And within the US, those with the most financial resources consume a disproportionately high amount. At the same time, those at the low end of the financial spectrum, half the world, nearly 3 billion of the world’s poorest live on less that $2 a day also degrade the environment in numerous ways because they have little choice in their struggle for survival.17
Economic policies which target both a minimum guaranteed income and lower GINI coefficient could contribute to both sustainable scale and just distribution.
Guaranteed Minimum Incomes
A guaranteed minimum income ensures that every member of a community has sufficient financial resources to meet basic human needs. When people’s needs are met, they are less likely to degrade ecosystems, engage in violence and commit crimes. A guaranteed minimum income can thus provide public benefits as well as personal and environmental ones.
There are a variety of economic policies used by different jurisdictions to provide some sort of minimum income, including various welfare programs, unemployment insurance, minimum wages, and negative income taxes for the unemployed. Guaranteed employment at a living wage is also an option.
Funding for such initiatives could be made available from a variety of approaches that have not yet been widely used, such as resource trusts or land taxes. Both approaches are based on the notion that natural resources, including land, are owned collectively and the benefits derived from them should be shared collectively. Instead what typically happens is that governments grant rights to resources use that are many times lower than their real value, and generally to very few parties. These few individuals or corporations then exploit the resources for their own gain, rather than allowing the benefits to accrue to the broader community of citizens.
A similar dynamic occurs with land. Land is fixed and part of the common heritage of a nation. The market value of land is determined by proximity to others, i.e. by a social factor influenced by government regulations. Taxing land rather than the buildings on the land would return some of the land values to the community. The main point is that there are innovative economic policy solutions available to encourage more just distribution of wealth, a necessary condition for sustainable scale.
Maximum Incomes: A Cap on Wealth?
If there are absolute limits on the amounts of throughput that can be ecologically sustainable (see Sustainable Or Unsustainable), then it follows that there should be also be limits on the amount of income or wealth that can be accumulated by any individual on the basis of this throughput. This notion of an income or wealth cap is controversial. People from both developed and developing countries feel that anyone should be allowed to earn or acquire as much as they legitimately can (some even drop the legitimacy requirement).
The idea of an income or wealth cap is based on the idea that it is indeed legitimate to keep wealth that has been earned through one’s efforts or abilities, but not to capture wealth created by nature, society or the work of others. There is also the issue of intergenerational justice. If wealth accumulation is unlimited, then less and less will be available for future generations. If consumption must be limited to stay within sustainable scale, then it seems just that those with the greatest wealth should limit their ability to consume. The value of an additional $100 to someone with great wealth is immaterial, while to a poor family it could be the difference between life and death.
Accumulation of great wealth is not required to satisfy basic human needs, a comfortable level of sufficiency, well being or happiness. Great wealth does confer power and status, but these are personal and not community benefits. However, the envy that great wealth stimulates often results in others attempting to gain the same personal benefits, and stimulating economic growth to do so. More growth means more throughput, and increases the likelihood of exceeding sustainable scale. A greater public good accrues if wealth is capped and just distribution and sustainable scale are encouraged by economic policies.
Economic policies to cap incomes and wealth exist, and to some degree are used in some jurisdictions. Progressive income taxes exist in most countries, where taxes increase with income. If such taxes approached 100% they could be used to cap income. Consumption taxes, such as a VAT (value added tax), also help reduce consumption. A special tax on luxury goods would do the same.
A Material and Energy Throughput (MET) tax has also been proposed,18 as a way of capturing not just the market value of the good or service purchased, but the throughput value in terms of its impact on ecosystem function. Yet another approach would be to limit the range of salaries between the highest and lowest workers in a firm; a fixed ratio of, for example, 10:1 would ensure that the highest paid employees would have clear limits. Progressive wealth taxes are another option. Currently, almost half of accumulated wealth is inherited. The progressive wealth tax on real estate could be expanded to all forms of financial wealth.
Limitations
Recognition that there is an intimate connection between just distribution and sustainable scale is critical to achieving both essential objectives. While there are economic policy options available to achieve both, some of them are not widely known or accepted. There are also attitudinal obstacles to many of the policy options, based on misunderstanding of either the reality of biophysical limits, or the relationship between perceived personal freedoms and public goods. Given the urgency of achieving sustainable scale, these obstacles are challenges to be overcome.
Discounting Policies: What is the Future Worth?
Minimum incomes and wealth caps are means of increasing just distribution largely with the current population that shares the planet. Economic policies also affect future generations. Economic practices which consider the future costs of decisions made today apply a discounting approach to these future costs. The value of money today will be worth less in the future; the discounting rate adjusts present and future values to allow comparisons so decisions can be made which best allocate resources between the present and the future. Generally the discount rate is at or near the interest rate. This practice makes good sense for individual decisions, and over relatively short periods up to a few years.
For very long term decisions, and especially for ones that involve non-market goods and services, there are serious problems with the standard discounting approach. First of all, conventional discounting practice assumes that the way people discount the future is exponentially. If this were true then different values would be assigned to costs 100 or 110 years from no.
However, empirical studies show that people give more weight to what happens in the near future, but are indifferent to outcomes over very long periods of time. Therefore, applying conventional discounting practices to non-market goods and services, such as climate change, places less and less value on long term future costs, although this does not reflect the way people actually value the future.
The lesson for sustainable scale is that conventional discounting practices should not be applied to the non-market goods and services provided by ecosystems over very long time spans. But it is those long time spans that are relevant to sustainable scale. Whether improved discounting techniques, or totally different ways of assessing future value are needed, is an open question.
For example, hyperbolic (vs. exponential) discounting is said to more accurately reflects actual human preferences. Given that certain ecosystem functions are essential and irreplaceable to human well being (see Critical Natural Capital), our task is to preserve these essential services, and develop economic theories and practices that inform us how to best do so. Basing policy decisions on conventional techniques that lead to destroying life supports for future generations is equivalent to condemning our descendants to an increasingly miserable existence.
Economic Globalization
Economic globalization is the primary policy objective of most developed and many developing nations, as well as the World Trade Organization. The avowed aim is to integrate all national economies into a single global market, regulated by the same rules, including the reduction or elimination of trade barriers, and the inclusion of whatever non-market goods and services are convertible to market items.
Economic globalization is said to increase efficiency and bring gains to all parties. Many of the assumptions of economic globalization are questionable, especially from a social justice perspective. To the extent economic globalization increases wealth disparities between nations, it also contributes to injustice, and at least indirectly to sustainable scale problems. Our purpose here is primarily to focus on its direct contribution to problems with exceeding sustainable scale.
Economic globalization is based on the “Washington consensus” model of development, also called TINA (There Is No Alternative) by former British Prime Minister Margaret Thatcher.
The Washington consensus (TINA) model of development is based on the following factors which are designed to increase the country’s GDP or throughput of goods and services:
- Deregulation/Privatization
- Free movement of capital
- Free movement of goods (No trade barriers)
- Develop products for export
- Reduce public expenditures (structural adjustment)
Throughput to What End: Profit or Sustainability?
Increased GWP is an explicit goal of economic globalization. From a strictly economic perspective, increased GWP is desirable as it means economic growth and increased profits for those who make it happen. However, increased GWP also means increased material and energy throughput (see Sustainable Scale Issues), which is the key issue in determining whether sustainable scale is exceeded (see Sustainable Or Unsustainable). International trade has become a vehicle for the dominant policy goal of ever increasing economic growth. This goal is misplaced as it is in direct contradiction with basic physical laws.
Trade has existed between different peoples from the earliest records of human history. Goods were traded that were not available locally. Over time, classical economic theory articulated the notion of comparative advantage, identifying the conditions under which nations could trade to their mutual advantage, including even those goods that were available locally. However, economic globalization has violated several of those conditions, drawing into question the conceptual basis for its justification.
Where multiple competing firms were a precondition, we now have a few firms dominating the market; where having financial capital remain national was necessary, we now have global financing; where a moral framework was expected to ensure economic activities had social constraints, we now have an unfettered market where profit is the dominant value. The result is increasing disparities between nations, and increasing competition for increasingly scarce resources; more profits, more throughput and more unsustainable practices.
International trade which allows nations to efficiently supplement whatever their unique resource requirements might be to maintain an optimal population within a sustainable range is a possible alternative to international trade for the sake of profit. Each country has different needs to supplement its natural resources to maintain a reasonable quality of life within a sustainable scale. This assumes that each nation is attempting to manage its affairs to remain within sustainable scale, and only importing or exporting those items which allow it to do so.
Today’s trade regime is quite different. Markets, not sustainability criteria, determine what is imported or exported. Financial considerations trump ecological and justice issues. Resources are exported because they generate revenue, and goods are imported because they are “cheaper” than produced locally. The privatization schemes favored by global traders often involve the transfer of a public good (eg. water supply) from government to private sector control. The result is liquidation of national accounts of natural capital, destruction of communities as their industries are closed due to foreign competition, and social unrest resulting from a public good now being treated as an ordinary market commodity.
Exporting non-renewable resources often creates considerable ecological costs for the exporting country. Relying on non-renewable resources is economically, as well as ecologically unsustainable. Exporting renewable resources only makes sense if the exporting nation has an ecological surplus of the resource. Unfortunately, this is not always the case.
Even when the resource in question is not needed by the exporting nation, the externalized costs of environmental and social damage may outweigh the financial benefits of the trade. Importing non-renewable resources is also short sighted; the consequences of dealing with their ultimate depletion can be immense (see Energy). And to import renewable resources that are not surplus to the exporting nation’s sustainable needs is only to shorten the time over which these resources will remain renewable.
International trade is essential to a just and sustainable planet, but not if it is based solely on profit and promoting growth. Basing international trade on sustainability and justice criteria is as important as basing national economies on these same values.
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Originally posted @ Sharing Sustainable Solutions
