Center for the Advancement of the Steady State Economy
Regular Contributors:  Herman Daly, Brian Czech, Brent Blackwelder, James Magnus-Johnston, and Eric Zencey. Guest authors by invitation.

Oil and Real Estate Bubbles in Canada: What Goes up Won’t so Smoothly Come Down

by James Magnus-Johnston

Johnston_photoFive years ago, I noted how unsustainable Canadian economic growth is fuelled by debt, which is leveraged to increase the prices–and ‘profitability’–of assets like oil holdings and real estate. It might as well be called “phantom growth,” because it’s bound to disappear in due course. When prices are high, the debt-based Ponzi scheme functions; when prices sustain lows, the scheme unravels. With Canada’s oil and real estate sectors both apparently slowing down, will it lead to a ‘Minsky moment?’

Economist Hyman Minsky studied financial instability as a result of debt accumulation, and his work was largely ignored by mainstream economists. He noted that debt-heavy capitalist economies exhibit inflations and deflations that tend to spin out of control–inflation feeds inflation and deflation feeds deflation. The ‘Minsky moment’ is the moment where our financial system begins to experience deflationary stress due to price shifts. Historically, government interventions to contain debt spirals were not terribly competent, and–other factors notwithstanding–the sheer volume of debt that has been leveraged makes the global economy poised for contraction. Canada’s recent dependence upon asset inflation makes it particularly vulnerable.

Where has all the Money Come From?

Debt has been leveraged in several investment streams, including derivatives, securities, and ordinary debt. After 2008, international quantitative easing–essentially the creation of money from nothing–has partly facilitated further investment in unconventional and costly oil production methods. As long as international prices and investment levels remain high, it is feasible for unconventional oil to achieve a return on the huge amounts of money and energy required to get it out of the ground. But the longer oil prices remain low, the longer investors will be exposed to defaults.

Investors include ordinary folks by virtue of our holdings in pension funds and RRSPs. Laricina Energy has defaulted on financing extended by Canada’s largest pension fund, the public Canadian Pension Plan Investment Board. We can likely expect defaults to international investors as well, which should create upward pressure on interest rates as investors try to cover exposure to losses.

Photo Credit: Robert Fairchild

These debt-fuelled investments likely won’t come down as smoothly as they went up. Photo Credit: Robert Fairchild

Optimism in the resource extraction industry–despite its disproportionately small role in creating jobs for Canadians–has fostered optimism in other parts of the economy, including real estate. One Canadian commentator remarked that the causes for slowdown in the two sectors are “completely unconnected.” They’re quite well-connected when you notice that in both areas, investors are ‘conservatively’ lending their money to what they think are sure bets, with the expectation of certain returns. In both cases, debt has been leveraged systemically to push prices higher.

Deutshe Bank has proclaimed that Canada is the most overvalued real estate market in the world, by as much as 63%. Canada’s current Bank Governor, Stephen Poloz (who is subject to ‘home country bias’) concedes that the market is overvalued, but by only 30% in his estimate–if only prices were quite so objective! As defaults in other sectors of the economy put upward pressure on interest rates, investment slows. Sure bets become bad bets, and real estate ‘growth’ will evaporate, too.

Debt and the Growth Imperative

Growth–even when it’s illusory or damaging–is an imperative in debt-heavy economies because the economy must expand by at least the rate of interest; if this doesn’t happen, the risk of default is potentially catastrophic. As Richard Douthwaite writes, the choice is between growth and collapse in a debt-based banking system due to the contagion of default–not growth and stability. In order to feed the growth imperative, we’ve normalized the practice of using debt to gamble on unsound high-return investments. In a saner banking system that didn’t require growth at the rate of interest, deflation might be cause for relief among millennials who have been priced out of the real estate market, or among those who have general concerns about the long-term consequences of unconventional oil production.

But in an overgrown lending system that feeds phantom growth, what goes up doesn’t so smoothly come down. After a string of defaults in the unconventional oil sector, credit would tighten, oil prices would react with further unpredictable volatility, and the banking system could require either the kind of government bailout we saw in 2008, or a ‘bail-in,’ where bondholders would cover some of the losses by providing equity for the bank. Canadians have likely forgotten by now that the federal government passed legislation in 2013 that allows banks to take money from bondholders.

Most importunately, unsustainable debt drives the expansion of the physical economy as a self-reinforcing (‘positive’) feedback, despite the fact that we’re pushing up against the planet’s physical limits. Debt is the engine of growth which drives climate change and rapid biodiversity loss.

The Steady State Solution to Overleveraging

It’s insane to require growth just to pay for the invented convention of ‘interest,’ which is at odds with basic physics and the fundamental geochemistry of the planet. But that’s how we roll these days. We celebrate the overexuberant rise in home values, all too willing to count this rise as positive GDP growth. We encourage spending money on products faster than it’s earned, and the debt-backed economy commands us to repeat this inherently unstable practice until the bubbles burst and the financial system collapses.

If we’re staring down the barrel of another inevitable financial crisis due to the fact that instability is built right into the system, why don’t we try doing things a little differently next time? When confronted with another need for a bail-out, rather than “priming the pump” and resurrecting a dead financial system, governments should gradually reduce the ability of banks to leverage so much. Maybe we could even begin to invest in more meaningful things, like small businesses that re-localize and de-carbonize the economy.

As Herman Daly suggests, increasing the fractional reserve requirement would have the effect of reducing risky lending. He writes,

With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a depositor (and not available to him during the period of the loan), thereby re-establishing the classical balance between abstinence and investment. With credit limited by saving (abstinence from consumption) there will be less lending and borrowing and it will be done more carefully–no more easy credit to finance the massive purchase of “assets” that are nothing but bets on dodgy debts.

By decreasing the potential to ‘leverage’ assets, the relationship between real savings and investment would be restored, and we wouldn’t be encouraging periodic wild swings in the economy and spending money we don’t have on things we don’t need. After all, when confronted with rapid biodiversity loss, climate change, and other serious planet-wide problems, indulging the whims of a risk-prone banking system seems to me an unnecessary distraction, particularly if what goes up doesn’t so smoothly come down.

A Population Perspective on the Steady State Economy

by Herman Daly

DalyA steady state economy is defined by a constant population and a constant stock of physical capital. In a way it is an extension of the demographer’s model of a stationary population to include non living populations of artifacts, with production rates equal to depreciation rates, as well as birth rates equal to death rates. The basic idea goes back to the classical economists and was most favorably envisioned by John Stuart Mill.

The population problem should be considered from the point of view of all populations–populations of both humans and their things (cars, houses, livestock, crops, cell phones, etc.)–in short, populations of all “dissipative structures” engendered, bred, or built by humans. Both human bodies and artifacts wear out and die. The populations of all organs that support human life, and the enjoyment thereof, require a metabolic throughput to counteract entropy and remain in an organized steady state. All of these organs are capital equipment that support our lives. Endosomatic (within skin) capital–heart, lungs, kidneys–supports our lives quite directly. Exosomatic (outside skin) capital supports our lives indirectly, and consists both of natural capital (e.g., photosynthesizing plants, structures comprising the hydrologic cycle), and manmade capital (e.g., farms, factories, electric grids).

In a physical sense, the final product of the economic activity of converting nature into ourselves and our stuff, and then using up or wearing out what we have made, is waste. What keeps this from being an idiotic activity–depleting and polluting, grinding up the world into waste–is the fact that all these populations of dissipative structures have the common purpose of supporting the maintenance and enjoyment of life. As John Ruskin said, “there is no wealth but life.”

Ownership of endosomatic organs is equally distributed, while the ownership of exosomatic organs is not, a fact giving rise to social conflict. Control of these external organs may be democratic or dictatorial. Our lungs are of little value without the complementary natural capital of green plants and atmospheric stocks of oxygen. Owning one’s own kidneys is not enough to support one’s life if one does not have access to water from rivers, lakes, or rain, either because of scarcity or monopoly ownership of the complementary exosomatic organ. Therefore all life-supporting organs, including natural capital, form a unity with a common function, regardless of whether they are located within the boundary of human skin or outside that boundary.

Our standard of living is traditionally measured by the ratio of manmade capital to human beings–that is, the ratio of one kind of dissipative structure to another kind. Human bodies are made and maintained overwhelmingly from renewable resources, while capital equipment relies heavily on nonrenewable resources as well. The rate of evolutionary change of endosomatic organs is exceedingly slow; the rate of change of exosomatic organs has become very rapid. In fact the collective evolution of the human species is now overwhelmingly centered on exosomatic organs. We fly in airplanes, not with wings of our own. This exosomatic evolution is goal-directed, not random. Its driving purpose has become “economic growth,” and that growth has been achieved largely by the depletion of non renewable resources.

Although human evolution is now decidedly purpose-driven, we continue to be enthralled by neo-Darwinist aversion to teleology and devotion to random. Economic growth, by promising more for everyone, becomes the de facto purpose, the social glue that keeps things from falling apart. But what happens when growth becomes uneconomic, when it begins to increase environmental and social costs faster than production benefits? How do we know that this is not already the case? If one asks such questions, one is told to talk about something else, like space colonies on Mars, or unlimited energy from cold fusion, or geo-engineering, or the wonders of globalization, and to remember that all these glorious purposes require growth, in order to provide still more growth in the future. Growth is the summum bonum–end of discussion!

In the light of these considerations, let us reconsider the idea of demographic transition. By definition this is the transition from a human population maintained by high birth rates equal to high death rates, to one maintained by low birth rates equal to low death rates, and consequently from a population with low average lifetimes to one with high average lifetimes. Statistically such transitions have often been observed as standard of living increases. Many studies have attempted to explain this correlation, and much hope has been invested in it as an automatic cure for overpopulation. “Development is the best contraceptive” is a related slogan, partly based in fact, and partly in wishful thinking.

Planned Obsolescence - James Provost

Our products must transform from high production and planned obsolescence to low production and durability. Photo Credit: James Provost

There are a couple of thoughts I’d like to add to the discussion of demographic transition. The first and most obvious one is that populations of artifacts can undergo an analogous transition from high rates of production and depreciation to low ones. The lower rates will maintain a constant population of longer-lived, more durable artifacts. Our economy has a GDP-oriented focus on maximizing production flows (birth rates of artifacts) that keeps us in the pre-transition mode, giving rise to low product lifetimes, planned obsolescence, and high resource throughput, with consequent environmental destruction. The transition from a high maintenance throughput to a low one applies to both human and artifact populations independently. From an environmental perspective, lower throughput per unit of stock (longer human and product lifetimes) is desirable in both cases, at least up to some distant limit.

The second thought I would like to add is a question: does the human demographic transition, when induced by rising standard of living, as usually assumed, increase or decrease the total load of all dissipative structures on the environment? Specifically, if Indian fertility is to fall to the Swedish level, must Indian per capita possession of artifacts (standard of living) rise to the Swedish level? If so, would this not likely increase the total load of all dissipative structures on the Indian environment, perhaps beyond capacity to sustain the required throughput?

The point of this speculation is to suggest that “solving” the population problem by relying on the demographic transition to lower birth rates could impose a larger burden on the environment, rather than the smaller burden hoped for. Of course indirect reduction in fertility by automatic correlation with rising standard of living is politically easy, while direct fertility reduction is politically very difficult. But what is politically easy may be environmentally ineffective.

Also, even if a nation follows the demographic transition and achieves a balance between births and deaths, there is still the problem of immigration. In the US, Canada, and Western Europe, for example, nearly all population growth is due to net immigration. A mix of genuine humanitarianism and legitimate refugee needs on the one hand, with class-based cheap labor policies and ethnic politics on the other, has made immigration control politically divisive. If population pressure in pre-transition countries is eased by net emigration, while the benefits of population equilibrium in post-transition countries are erased by growth from net immigration, does that not weaken the basic causes of the demographic transition itself? In the face of increasingly open borders, high fertility seems less likely to be brought down by the automatic demographic transition. True, high-fertility immigrants into low-fertility countries eventually adopt the fertility behavior of the receiving country, but that takes a generation or more.

In a finite world, some populations grow at the expense of others. Homo sapiens and Mechanistra automobilica are now competing for land, water, and sunlight to grow either food or fuel. More nonhuman “bodies” will at some point force a reduction in human bodies. This forced demographic transition is less optimistic than the voluntary one induced by chasing a higher standard of living by engendering fewer dependents. In an empty world we saw the trade-off between products and people as motivated by desire for a higher standard of living. In the full world, that trade-off is forced by competition for limited resources.

The usual counter to such thoughts is that we can improve the efficiency by which resource throughput maintains dissipative structures. For example, a car that lasts longer and gets better mileage is still a dissipative structure, but with a more efficient metabolism that allows it to live on a lower rate of throughput. Likewise, human organisms might be genetically redesigned to require less food, air, and water. Indeed smaller people would be the simplest way of increasing metabolic efficiency (measured as number of people maintained by a given resource throughput). To my knowledge no one has yet suggested breeding smaller people as a way to avoid limiting the number of births, and neither do I. We have, however, been busy breeding and genetically engineering larger and faster-growing plants and livestock, as well as building larger exosomatic organs, so that we become smaller relative to the other organisms we depend on, although we remain the same size absolutely. So far, in the empty world, the latter dissipative structures have been complementary with populations of human bodies, but in our finite and full world, the relationship has become competitive.

Indeed, if we think of population as the cumulative number of people ever to live over time, instead of those simultaneously living, then many artifact populations have long been competitive with the human population. That is, more consumption today of terrestrial low entropy in non-vital uses (Cadillacs, rockets, weapons) means less terrestrial low entropy available for tomorrow’s vital use of capturing solar energy (plows, solar collectors, dams, windmills). The solar energy that will still fall on the earth for millions of years after the material structures needed to capture it are dissipated, will be wasted, just like the solar energy that currently shines on the barren moon.

If our ethical understanding of the value of “sustainability” (longevity with sufficiency) is to “maximize” cumulative lives ever to be lived, subject to a per capita consumption level sufficient for a good life, then we must limit the load we place on the earth at any one time. Fewer people, and lower per capita resource consumption, facilitated by more equitable distribution, mean more (and more abundant) lives for a longer, but not infinite, future. There is no point in maximizing the cumulative number of lives lived in misery, so the qualification “sufficient for a good life” is important, and requires deep rethinking of economics, and a shift of focus from growth to sufficiency, including sufficient habitat for other species. It also requires rethinking of the traditional pro-natalist dogmas of the fundamentalist branches of most religions, including Christianity, Islam, and Judaism. The modern secularist religions of Marxism and Scientism likewise proselytize for the Ecumenical Church of Growthism while ignoring population.

Crossroads on Global Infrastructure

Massive Global Infrastructure Projects Could Prevent Achievement of a Sustainable Economy While Undermining Life Support Systems of the Earth

by Brent Blackwelder

BlackwelderPlans by the world’s most powerful countries are well underway to spend trillions of dollars for new mega-infrastructure projects to rejuvenate the global economy. The hope of the G-20 nations, the World Bank, China, and other powerful actors is that the infusion of several trillion dollars for infrastructure will boost the growth of GDP by 2.1% over current trends by 2018 and rescue a “sluggish” global economy.

The new feature of this approach to infrastructure involves expanded use of public money (taxes, pension funds, and aid) to offset the risks involved in huge projects. The approach also relies heavily on public-private partnerships, where the issue of accountability and failed projects has been a serious concern.

Those seeking a sustainable, true-cost, steady state economy should be alarmed at the new approach to global infrastructure because trillions of dollars spent on mega-projects in the energy, transportation, agriculture, and water sectors could put a sustainable, true cost economy further out of reach. Reviews of completed projects in these sectors have raised questions about corruption, cost overruns, fiscal accountability, human rights abuse, and the alarming destruction of natural resources.

Who are the Major Players?

The primary mover of a global infrastructure plan has been the G-20 nations (see here for the list of member countries). Afraid of being marginalized by the G-20, the World Bank has jumped into the scramble. In October of 2014, the World Bank launched a new Global Infrastructure Facility to reclaim the leadership on global infrastructure from the G-20. Just before the G-20 Summit last November, the World Bank and the IMF, along with seven multilateral development banks, issued a press release announcing their intention to provide $130 billion annually for infrastructure financing.

In 2014, China launched the Asian Infrastructure Investment Bank with 21 Asian countries as founding members, along with $100 billion in capital.

The Crossroads

A momentous choice is before us. On the one hand, the G-20, the World Bank, and other international lending institutions want more mega-highway projects, more centralized electric power plants and electricity grids, more mega-dams and gigantic irrigation schemes with huge water transfers, and the like.

On the other hand, an entirely new approach to infrastructure is possible. An approach that, for example, eschews big central electric power plants and relies more and more on decentralized wind and solar investments and avoids the horrendous mistakes made in the past in transportation, energy, water, and agriculture. Those interested in a true cost, steady state economy should advocate change in the massive new infrastructure lending so as to support projects that enable society to stay within the carrying capacity of planet earth. Such projects could lead the way toward a different type of global economy as they shift away from the business-as-usual approach in energy, transportation, water, and agriculture.

We know the impact of too many of these schemes is the destruction of ecosystems and undermining of the life support systems of the earth. They are pushed by the economic or finance ministries that have little understanding of the limits to growth, the significance of biodiversity, and the functioning of ecosystems that make life on earth possible. Environmental ministries are likely to have little influence in the choice of mega-projects.

There is not enough time to present the infrastructure investment choices in energy, agriculture, water, and transportation that would be made in a steady state economy, so I will mention a couple of examples in the transportation sector.

Freight Trucks - futureatlas dot com

We need infrastructure projects that don’t rely on highways at the expense of public transportation and rail. Photo Credit: futureatlas.com

Consider the unsustainability of the US transportation system that has focused almost entirely on highways to the neglect of passenger and freight rail and public transportation. The US is a poor transportation model for the world. Even with state and federal gasoline taxes, the revenues are insufficient to halt the massive deterioration of road and bridge networks, to say nothing of billions of dollars of backlog in deferred maintenance. The United States let passenger railroads go to hell and allowed the movement of more and more freight by trucks rather than trains (which are three to four times more energy efficient than trucks). This proved to be the wrong infrastructure choice.

Decades ago, some US bankers were questioning the viability of maintaining the infrastructure to support sprawling suburbs. A Bank of America report likened the servicing of sprawling suburbs to the nightmare that a military commander would face in trying to keep a 1,000-mile-long battlefront line supplied with food and ammunition.

Take a look, for example, at transportation required to supply our food. One study in Germany focused on a container of yogurt on a grocery store shelf where all of the ingredients were available locally, but in this case had traveled over 1,000 kilometers to reach the distribution center. A greater emphasis on local food production could result in dramatically reduced “food miles” and utilize a much smaller transportation network–an affordable network that could be maintained.

We are at a critical moment where two approaches to infrastructure are diverging. The infrastructure path of a true cost economy can lead to smaller-scale, smarter infrastructure and a healthier earth. The proposed path of the G-20 and World Bank, on the other hand, will replicate and intensify numerous unsustainable projects and cause human civilization to exceed the carrying capacity of the earth. Scientists point out that we are already consuming about one-and-a-half planets’ worth of resources. Infrastructure choices need to be made to alleviate rather than exacerbate this situation.

Note: For more information see the report by Nancy Alexander, “The Emerging Multi-Polar World Order: Its Unprecedented Consensus on a New Model for Financing Infrastructure Investment and Development,” Heinrich Böll Foundation.

A Stick in the Stocking: Santa’s Supply Shock

Filed under: Brian Czech,Economic Growth,Environment,Sustainability — Tags: , , ,
Brian Czech @ 10:00 am

by Brian Czech

BrianCzechIt’s déjà vu all over again: another oil “supply shock.” Seems like we’ve had one every few weeks for the past few months. Santa stuck another one in the Christmas stocking, and by New Year’s Eve crude oil prices fell to Great Recession levels.

Frankly, though, an oil supply shock is hardly . . . well, hardly shocking by now! Furthermore, this is the kind of oxymoronic “shock” people enjoy, or at least most people in a growth-obsessed economy. We have a sudden increase in production and therefore drop in price, due mostly to OPEC. The drop in price sort of undermines the meaning of shock, no? Gas is below $2/gallon. “If such is a shock,” we say, “bring it on!”

Historically, though, the phrase “supply shock” would evoke deprivation, pain, and fear. In the 19th century the most notorious supply shock was the dramatic decrease in the availability of whale oil in the 1860s, due partly to the side-tracking of the New England whaling fleet during the Civil War. Sperm whale oil had been the predominant domestic fuel, used in household lamps as well as for heating, and adjusting to different fuels wasn’t easy.

In the 20th century, perhaps the biggest supply shock was the OPEC oil embargo of 1973. This time, there was no other significant fuel to adjust to, and the embargo resulted in a historic stock market crash. Now that’s a supply shock.

We can see from the examples that a supply shock tends to get its name from the “bigness” of the supply in question. A sudden shortage of smelt wouldn’t warrant a “supply shock” headline, because smelt are a bit player in the economy. A supply shock is more macroeconomic than micro. In the examples above, major fuels were the supplies in question.

Gas Can - Bryan Costin

Fuel isn’t just any commodity–dramatic changes in its supply can lead to supply shocks. Photo Credit: Bryan Costin

“Fuel” might sound like just another commodity, but the name says it all; it fuels the economy, not just smelt fishing. When the availability of fuel suddenly declines, that’s a shock indeed, a shock to the system, the economic system.

Oddly enough, this latest supply “shock,” resulting in a rapid drop in price, also caused a stock market tumble, just like the OPEC oil embargo. This time it wasn’t a full-fledged crash, at least not yet, but the Dow Jones dropped 315 points the weekend of December 12. We can chalk it up to the general insecurity caused by any major price shift, but we would be prudent to note yet one more case of Wall Street vs. Main Street. Here we all had cheaper fuel–with all that obviously meant for our household budgets–and Wall Street felt threatened.

It would be tempting to turn this into anti-Wall Street polemic, but the inequality of Big Capital is not even the main issue here. Rather, recent talk of “supply shock” is a wake-up call for the sustainability of Big Capital, the little man, and everyone in between. The latest news of cheap oil notwithstanding, we are moving inexorably into the era of Supply Shock, in which natural resources and environmental services become the limiting factors for human wellbeing; so limiting in fact that wellbeing declines quickly and ubiquitously.

Sure, at first glance Santa’s little “supply shock” of 2014 runs in the face of any limits-to-growth argument. But frogs feel fine as the water warms, too. When OPEC pulls out the stops for oil production, with whatever motives it might have–say for example to slap the Russian economy–it’s like a bigger gun to shoot ourselves in the foot with. In this case the gun is the global economy, and the foot is our climate, our biodiversity, and environmental protection at large.

And of course as the environment is whittled away from under us, so too is our kids’ and grandkids’ economy. A growing and then bloating economy is actually a threat to environmental protection, economic sustainability, national security and international stability.

I propose that we stop calling these short-term fuel gluts “supply shocks” and instead call them “supply parties.” We all know the parties must end, and the longer we party, the bigger the real shock, the after-shock, will be. When the suite of resources such as oil, natural gas, minerals, timber, fisheries, soil, rangeland–and oh yes, that cheap thing called “water”–are at a collective all-time low, relative to demand, and when climate change, biodiversity loss, and environmental unravelling are in full swing, and when our agriculture, extraction, manufacturing, and services are devastated by the loss of our natural capital, we’ll know we’re in the age of Supply Shock.

We’ll have been naughty, and Santa will have known. What’s that going to get us?

Peace, Love, and the Gift

by James Magnus-Johnston

“You can’t have community as an add-on to a commodified life” Charles Eisenstein

Johnston_photoFor many Westerners, Christmas Day is one of the most sacred days of the year. Perversely, perhaps, the holidays are also marked by excessive materialism, consumerism, and the creation of false needs. Today happens to be “Boxing Day” in Canada, Black Friday’s Christmas equivalent, marked by mad and even obscene rushes for the best post-holiday deals. How have we reached such a disconnect between the meaning of our traditions and the way we practice them?

It might be hard to see with our consumer lens, but there is a deeply important connection between the sacredness of December 25th and the practice of gifting. As Charles Eisenstein has eloquently and passionately argued, gifts are an expression of love that begins with the gift of life itself:

We didn’t earn being born, being fed as babies, having an earth to live on, air to breathe, water to drink. All came as a gift. Ancient cultures often recognized this explicitly; theirs was a gift cosmology that was echoed in their economic systems.

Therefore our natural state, he says, is gratitude. And therefore, we have a built-in desire to give and be generous.

An obsession with money, on the other hand, has contributed to “alienation, competition, and scarcity, destroyed community, and necessitated endless growth.” Today, money acts as a profane separator when seen as an end in itself rather than a means to an end. Rather than understanding money as a tool that helps facilitate the exchange of goods or truly improve our quality of life, we tend to see money–its accumulation and growth–as the ultimate end. Undoubtedly, money is required to move us towards a level of material sufficiency, but beyond sufficiency, more money won’t make you happier. Are you dissatisfied with your life regardless of how much money you’re making? Will the growth imperative behind the accumulation of money improve the planet’s life support system?

Millennia of ancient thought–including that of the Christian tradition–reminds us that traditional gift practices are expressions of love. Expressions of love aren’t luxury items any more than the planet’s life support system is. Expressions of love keep human beings connected, because they remind us that we actually need one another! Eisenstein writes,

One thing that gifts do is that they create ties among people–which is different from a financial transaction. If I buy something from you, I give you the money and you give me the thing, and we have no more relationship after that. . . But if you give me something, that’s different because now I kind of feel like I owe you one. It could be a feeling of obligation, or you could say it’s a feeling of gratitude. What’s gratitude? Gratitude is the recognition that you’ve received, and the desire to give in turn. And that’s why we are driven to give. Because everything we’ve received is a gift.

Gifts - Andy Noren

Let’s take a step back from the excessive materialism of the holiday season to think about why we really give gifts. Photo Credit: Andy Noren

Peace, love, and community are fostered through the gifts we provide for one another not only on December 25th, but throughout every day of the year. In the grand cosmic scheme of things, gift practices can make us more aware of the miracle of life itself, and the gift of existence we received–and continue to receive–from planet earth and the universe, or God, depending on your inclination.

The purpose of our existence can’t be quantified in monetary terms. Perhaps as this year comes to a close, it’s worth taking a moment to consider the gifts you received at birth or the gifts you have honed and developed throughout your life. Why are you here? Are you able to express your innate gifts? Do you need to unplug from the formal economy to explore and give of yourself more meaningfully?

If you can’t make more money exploring your gifts and skills, embrace the challenge. If we are to degrow the economy towards a steady state, we’re going to need to be a whole lot more generous, a whole lot happier, and more grateful for what we have already. Gift practices might shrink the formal economy a little, but they will engender precisely the love and community that we often feel is missing in modern life.

Charles Eisenstein’s full book “Sacred Economics” is available on his website at http://sacred-economics.com.

The Guardian and Monbiot versus Forbes and Worstall

Dalyby Herman Daly

In his Guardian column, criticizing growth as “The Insatiable God,” George Monbiot writes:

Is it not also time for a government commission on post-growth economics? Drawing on the work of thinkers like Herman Daly, Tim Jackson, Peter Victor, Kate Raworth, Rob Dietz and Dan O’Neill, it would investigate the possibility of moving towards a steady state economy: one that seeks distribution rather than blind expansion; that does not demand infinite growth on a finite planet…

It is no surprise that we at CASSE strongly agree with Monbiot. Nor does it come as a surprise that a columnist for Forbes, Tim Worstall, would disagree. What is surprising is that Worstall uses me in support of his position (with which I disagree) and against Monbiot (with whom I agree). How does he manage such a reversal? By conflating growth (quantitative physical increase) with development (qualitative improvement), and claiming that 80% of GDP increase is due to qualitative “growth” (total factor productivity), and is therefore independent of increase in physical resource use–when in reality the “total” factor productivity increase in question is mainly caused by an increase in physical resource throughput. This requires further explanation.

In a previous article, also criticizing Monbiot, Worstall states his position more completely, as quoted below, [my brackets inserted].

Value add [added] is economic growth, not more stuff. And we can take this insight to an extreme as well, that extreme being the steady state economy proposed by Herman Daly. In this world resources are only abstracted from the environment if this can be done sustainably. And we recycle everything of course [not energy or highly dispersed materials]. So, in such a world can we still have economic growth? We have no more access to more stuff to make stuff out of: so is growth still possible? Yes, of course it is. For we can still discover new methods of adding value to those resources that we do have available to us through our recycling. Daly calls this qualitative growth rather than the quantitative growth that we cannot have. [Actually I speak of “qualitative improvement” to emphasize that technology is not a cardinally measurable quantity that can properly be said to grow]. But there’s absolutely no difference at all between this and the more conventional economic descriptions of growth. Qualitative growth is akin to growth through an increase in total factor productivity as opposed to growth via the use of more inputs [only remember that “more inputs” should include natural resources, but does not]. And Bob Solow once pointed out that 80% of the growth in the market economies in the 20th century came from tfp (total factor productivity) growth, not the consumption of more resources. We’re just using different words to describe exactly the same thing here [not really].

Now if this were true we could keep resource throughput constant, avoiding most of the increasing environmental costs of growth, and still have 80% of historical GDP growth. Once matter-energy throughput is stabilized at an ecologically sustainable level we could presumably have significant GDP growth forever with minimal environmental costs, thanks to increasing total factor productivity. I would be happy if that were true, but I am pretty sure that it is not. Nevertheless, if Forbes believes it, maybe they would then endorse a policy of limiting resource throughput (cap-auction-trade or carbon tax), and be content with still significant GDP growth based only on total factor productivity increase? Don’t hold your breath. Worstall explicitly discounts any notion of resource scarcity, so why limit throughput? But, just for good measure, he argues here that even with resource scarcity, technology can, by itself, provide most of our accustomed growth, as it supposedly has in the past.

Worstall’s source for the 80% figure is the “Solow Residual,” which is commonly misinterpreted as a measure of total factor productivity. As calculated, it is a measure of “two-factor” productivity, the two factors being labor and capital. The Cobb-Douglas production function that underlies this calculation omits natural resources, the classical third factor. This means that it cannot possibly be an accurate analytical representation of production. It is like a recipe that includes the cook and the oven, but omits the list of ingredients.

Photo Credit: Claire.Ly

As natural resources becomes increasingly scarce, can we afford to ignore their contributions to increases in production? Photo Credit: Claire.Ly

Value added has to be added to something, namely natural resources, by something, namely labor and capital. The cook and the oven add value to the ingredients, but nothing happens without the ingredients. Our empty-world economic accounting attributes all value to labor and capital, and treats natural resources in situ as superabundant free gifts of nature. But in today’s full world, resources are not only scarce but have become the limiting factor. Leaving the limiting factor out of the analysis makes the Cobb-Douglas production function not only incomplete, but also actively misleading.

Nevertheless, Worstall’s 80% figure comes from respected economists who have used the Cobb-Douglas production function in a statistical correlation–an exercise to see how much of increased production can be statistically explained by increases in labor and capital. The residual, what is not explained by labor and capital increase, is attributable to all causes other than labor and capital, including, for example, technology improvement and increased material and energy throughput (natural resource use).

A large residual indicates weak explanatory power of the theory being tested–in this case the Cobb-Douglas theory that production increase is due only to capital and labor increase. But instead of being embarrassed by a large unexplained residual, some economists were eager to “explain” it as an indirect measure of technological progress, as a measure of improvement in total factor productivity. But is technology the only causative factor reflected in the residual? No, there are surely others, most especially the omitted yet rapidly increasing flow of natural resources, of energy and concentrated minerals. The contribution of energy and materials from nature to production is also part of the residual, likely dwarfing technological improvement. Yet the entire residual is attributed to technology, to total factor productivity, or more accurately “two-factor” productivity, in the absence of natural resources, the classical third factor.

As the natural resource flow greatly increases, and capital and labor transform that growing resource flow into more products, then of course the measured productivity of capital and labor increases. This increased “total” factor productivity, due mostly to increase in the ignored factor of natural resources, is then appealed to as evidence of the unimportance of natural resources, given the “empirical finding” that total factor productivity improvement (technology) “explains” so much of the observed increase in production. This reasoning is clearly specious. It is the increased resource use that explains the increase in total factor productivity (i.e. two-factor productivity), which cannot then be used as a reason to discount the importance of its own cause, namely an increased flow of natural resources. Indeed, the unimportance of natural resources could not possibly be an empirical finding of any statistical analysis based on the Cobb-Douglas production function, because that function assumes the unimportance of natural resources from the beginning by omitting them as a factor of production. This is a big confusion and Worstall is not the only one misled by it.

In conclusion, I think the Guardian and Monbiot’s position is not in the least weakened by the criticism from Forbes and Worstall, but that reliance on the Cobb-Douglas production function should certainly be weakened.

The Role of Cities in Moving Toward a Sustainable Economy

by Brent Blackwelder

The story of a hippy flower-child who leveraged big economic decisions that ushered in renewable energy and sensible land-use for Austin and the State of Texas.

BlackwelderI encounter many young adults who are discouraged by America’s failure to respond to big issues affecting the future of Planet Earth and human civilization. They do not see much opportunity to make major changes, especially at the governmental level. But empowering examples can illustrate how significant changes can be made in governance at many levels. Cities can and have provided some model changes, but we will never get to a sustainable, steady state, true-cost economy when major energy and land-use decisions continue to take us in the opposite direction.

Cities like Seattle, San Francisco, Portland (Oregon), and Chicago have led the way with enlightened environmental and economic policies. In Washington, DC, I served on Mayor Gray’s “green ribbon” panel to help fashion a comprehensive green plan for the nation’s capital.

This post focuses, however, on a lesser known city, Austin, Texas, that made big economic decisions that changed the dynamics in energy, transportation, land-use, and self-reliance.

The post is about what a hippy flower-child was able to do in Austin by getting elected to the city council. Max Nofziger left his family’s farm in northwest Ohio over 40 years ago and went to live in Austin. He was a hippy and initially made his living selling flowers on street corners, but managed to get elected to the city council and his persistence and rationality helped lead the way for some significant changes.

Working at first with the leaders and organizations in Austin who were advocating wind and solar power, Max began an improbable run in the 1980s for city council on an anti-nuclear, pro-solar platform with a “Run-for-the-Sun” campaign theme. Even though he lost four races–two for city council and two for mayor–he kept educating the public and used common sense logic when he spoke.

His popularity with the voters grew and he got 20% of the vote in his second run for Mayor. Recognizing Max’s growing support, the newly elected mayor appointed him to the advisory board for the local utility. Max helped in some basic clean energy efforts, such as defeating a lignite coal power plant proposal, getting solar panels placed over the 3-M Company’s parking lot, and helping close the antiquated and dirty gas plant in one of Austin’s poorer neighborhoods.

The key long-term action was to get Austin to build the first wind farm in Texas in 1994-5. The success of this city-owned facility helped convince the State legislature in the late 1990s to pass a five-year plan to incentivize wind power in Texas. Governor George Bush signed this legislation, which proved so successful that it was renewed for a second five-year period while Bush was President of the United States. Today, Texas is the number one state in wind power, with 12,755 megawatts installed and 7,000 currently under construction.

Max was influential in two big land-use decisions–the Austin International Airport and the Convention Center. He helped avert land-use idiocy and save hundreds of millions of tax dollars.

In the 1980s, there was widespread support for a new city airport to replace the half-century-old small airfield that abutted increasingly crowded neighborhoods. Voters approved a new site, but it was one that wealthy developer interests had purchased in anticipation of making big money.

Then a momentous global surprise occurred as the Berlin Wall came down. One immediate repercussion was that the Air Force decided its Bergstrom base in Austin was no longer needed. Max realized that Austin owned the land the Bergstrom airport was on and the city could now reclaim it. With the Air Force’s decision to close the base, the city could have use of the fully functional airfield with its 10,000-foot runway. This choice would save the city at least $500 million in land and runway construction costs.

The problem was that all the politicians had received contributions from the developer interests and were not about to change; however, Max was able to obtain a referendum on the siting choice and it won easily.

Austin-Bergstrom Airport - Shay Tressa DeSimone

More than a sensible land-use decision, the Austin-Bergstrom Airport reflects the city’s culture and commitment to local food and artists. Photo Credit: Shay Tressa DeSimone

Not content with a victory on the siting decision, Max led an effort to make sure the new airport terminal reflected Austin culture, featured local food, and provided facilities for local artists to perform. Despite initial opposition by agribusiness food lobbyists, the plan went ahead and continues to be a success. There have been over 7,000 music performances to date.

This example illustrates a significant reuse of perfectly good resources, as well as prevention of a waste of taxpayer money on developer enrichment schemes. Incorporating good architecture for the terminal and boosting the city economy with local food and performances by local musicians points to the importance of looking comprehensively at all the changes that are possible with major land-use decisions.

The second important land-use decision was on the siting of the Austin Convention Center. As a city council member, Max knew the developer lobby had “pre-selected” the place they wanted for the Center, and had greased the pockets of decision makers to ensure that it was selected, even though it was a poor site from the standpoint of requiring a lot of driving and creating congestion. Max proposed a sensible location that would help avoid traffic jams and unnecessary driving, and would be near the evening entertainment zone. Top architects were hired to design the facility and solar collectors were put on the roof, which had the additional advantage being visible to interstate auto traffic and educating the public on the efficacy of solar.

The energy and land-use decisions that Austin made enabled progress to occur toward a prosperous, sustainable economy. Had they gone in a different direction, there would be less hope for achieving a sustainable, steady state, true-cost economy.

Hedonism, Survivalism, and the Burden of Knowledge

by James Magnus-Johnston

Johnston_photoIn my last post, I asked whether human beings are naturally predisposed to deny the precarious reality of our planet’s health, which would help explain the undeserved endurance of the growth narrative. Self-imposed ignorance, in other words, is bliss. It absolves us from the responsibility of action.

What about the rest of us? For those of us that have ‘quit denial,’ so to speak, can conscious awareness be channeled to motivate positive action? Or is hope futile in the face of an enormous task?

A recent article by Madeline Thomas in Grist featured the headline, “Climate depression is for real. Just ask a scientist.” Scientists’ intimate understanding of climate change has led to depression, substance abuse, suicide, and post-traumatic stress disorder. Camillie Parmesan, who shared the Nobel Peace Prize for her work as a lead author of the Third IPCC Assessment Report, became “profoundly depressed” at the seeming futility of her work. She had been screaming from the scientific rooftops, yet the best we could offer in response was little more than a call for more carbon-intensive growth.

Evolutionary psychologists Ajit Varki and Danny Brower believe that some of the earliest humans fell into depression due to their awareness of mortality, while others were able to carry on without becoming crippled by this realization. Mind-over-reality became humanity’s defining characteristic, enabling us to maintain sanity in the face of danger. On a society-wide basis, anxiety and depression could cause an avoidance of procreation, which would be an evolutionary dead-end.

We’re now confronting not only our individual mortality, but perhaps even the mortality of our species, according to a few controversial voices. Ecologist Guy McPherson is among those who have suggested that near-term human extinction is inevitable. James Lovelock, author of the Gaia hypothesis, believes that climate catastrophe is inevitable within 20 years. With an awareness of the rate of species loss and climate change, among other symptoms of breakdown, it isn’t hard to fall into paralysis and despair.

But others seem able to carry on without being crippled by this realization. Proponents of the steady state economy are among those who remain optimistic in the face of long odds, and generally, I think we fall into one of three camps: survivalists, hedonists, and denialists.

Photo Credit: hardworkinghippy

The survivalists among us are easiest to spot. Photo Credit: hardworkinghippy

We all know the survivalists among us. They’re the lot that want to voluntarily extricate themselves from known civilization before the imagined $h!t hits the fan in some kind of imagined catastrophic event. They dream of a semi-pastoral existence in the agrarian hinterlands, far from the commercialized zombies who wouldn’t know how to take care of themselves without the convenience of a department store. They’re hard workers who romantically hope to re-kindle the low-carbon self-sufficiency of generations past.

Then there are the hedonists, and I’d be willing to wager that a great many well-educated millennials fall into this category, sometimes by accident. Hedonists might accept the ecological challenges we face and withdraw from the growth-obsessed formal economy. But rather heading for the hills, they do what they love. I think these are many of the artists, dumpster-divers, and coffee-enthusiasts among us. You can’t measure their contribution to change in terms of GDP. Both McPherson and Lovelock seem to prescribe hedonism, with Lovelock calling for us to “enjoy life while we can” because “in 20 years, global warming will hit the fan.” McPherson, for his part, calls upon us to “passionately pursue a life of excellence,” and practice the radical generosity associated with hospice care. For the hedonist, “carpe diem” is the modus operandi. They’re always asking themselves: what must we do, knowing that we only have a little bit of time left?

And finally, the denialist. A little bit of overconfidence and denial can come in pretty handy from an evolutionary perspective, because it keeps us from obsessing about the abysmal end. In this case, I’m not referring to outright denial of climate change–the “climate deniers.” I’m referring to those of us who accept planetary life support breakdown, but hope that maybe–just maybe–human civilization has enough wiggle room to squeak by. Just enough methodological uncertainty to restore this blue dot to health. After all, careful skepticism is the essence of good science. Hydrogeologist Scott Johnson, for instance, has written a long rebuttal to the claims of Guy McPherson. Denialists would be more inclined to lean on the kind of methodological uncertainty emphasized by Mr. Johnson, and reject the kind of claims offered by McPherson and Lovelock.

I fall into each of these camps from time to time. As a survivalist, I hope to learn how to garden a little bit every summer and support the DIY economy. As a hedonist, I will do what I love and passionately engage in conversations about catalyzing the steady state economy, because I believe it sets a new standard of excellence for the 21st century. In fact, all things considered, I believe the steady state economy represents a balanced “middle way” between the ignorance and paralysis. And with a healthy dose of denial, I will continue to hope that somehow, the margin of error is just wide enough to turn spaceship earth around.

Animal Welfare: Seeing the Forest for the Denizens

by Brian Czech

BrianCzechIf you’re a Huffington Post reader, your love of animals has been nurtured by “Hedgehogs Being Adorable,” “Baby Hippo Has Won Our Hearts,” and other such gems. The Post, The Animal Blog, and various animal-lover media take a heartfelt approach to the appreciation of animals–wild as well as domesticated–reminding us of the needs and vulnerabilities of our fellow creatures. It’s a refreshing approach, compared to the stodgy science and economics of conservation.

And it’s important. Mahatma Gandhi said, “The greatness of a nation and its moral progress can be measured by the way in which its animals are treated.” Abraham Lincoln said, “I care not much for a man’s religion whose dog and cat are not the better for it.” Animal welfare is a barometer of national “goodness” in a sense that resonates with our common sense.

Yet if we are serious about animal welfare, we have to get beyond the mere adoration of hedgehogs and hippos. We have to face up to the big-picture, systematic erosion of wild animal welfare. It’s all around us and getting worse by the day, and our public policies precipitate it.

The most prevalent source of animal suffering is habitat destruction. Habitat includes food, water, cover, and space. When any of these elements are destroyed or depleted, wild animals suffer and often die more miserable deaths than if killed by hunters or predators.

Some animals survive an initial wave of habitat destruction only to be stranded in an unfamiliar, unforgiving environment. When a food or water source is destroyed, wild animals may starve, die of thirst, or suffer from malnutrition and the associated agonies. When thermal cover is lost, animals expend valuable time and energy trying to regulate body temperature. This lowers the time and energy available for feeding, playing, and mating. When hiding cover is lost, wild animals experience fear and stress, seeking cover from predators that may or may not be present.

What kind of a life does that sound like? It would be like getting thrown out of your home, into a perilous world with no social net, no health system, no Salvation Army, and no street corner to beg from. Yet it’s the life we’ve been forcing animals into by the million. How can we stop?

Nervous now, future worse: pronghorn antelope at the edge of a growing economy. Photo Credit: Michael Shealy

Nervous now, future worse: pronghorn antelope at the edge of a growing economy. Photo Credit: Michael Shealy

We often hear of “human activity” being the cause of habitat loss. That’s a start, recognizing our basic role in the problem, but we have to dig deeper to detect precisely what type of human activity is problematic. After all, the habitat destruction caused by humans beings isn’t spiritual activity, or neighborhood activity, or political activity (at least not directly), but almost always economic activity.

The macroeconomic nature of the problem is evident when we consider the causes of species endangerment. These causes are essentially the sectors and byproducts of the whole, interwoven economy, starting with agricultural and extractive sectors such as mining, logging, and livestock production. These activities directly remove or degrade the habitat components required by wild animals.

Another major cause of endangerment is urbanization. Urbanization reflects the growth of the labor force and consumer population as well as a variety of light industrial and service sectors. Few types of habitat destruction are as complete as urbanization. While extractive activities can be a traumatic experience for the denizens of wildlands, logging, ranching, and even mining usually leaves some habitat components. But when an urban area expands, it does so with pavement, buildings, and infrastructure. These developments are devastating to most of the animals present.

The economic system extends far into the countryside, too. Roads, reservoirs, pipelines, power lines, solar arrays, and wind farms are examples.

It would be hard to conceive of a more prevalent danger to animals than roads. Roads and the cars upon them leave countless animals mangled and left, during their final hours, to be picked apart by wild and domestic scavengers. Power lines induce electrocution, a significant source of bird death and crippling. Power line collisions cause their share as well. Wind farms and solar arrays, thought to be the keys to “green growth,” are the latest hurdles for migratory birds.

Pollution is an inevitable byproduct of economic production. Pollution is an insidious and omnipresent threat to wild animals. Whether it’s nerve damage from pesticides, bone loss from lead poisoning, or one of the many other horrible symptoms of physiology gone wrong, pollutants ensure some of the most excruciating diseases and slowest deaths in the animal kingdom.

Climate change is another threat to species, although its mechanisms are less direct. Temperature is a key factor in the functioning of ecosystems and the welfare of the animals therein. Climate change is pushing polar bears and other polar species off the ends of the earth; at what point will this climate-controlled conveyor belt stop? Climate change, too, is a result of a growing (and fossil-fueled) economy.

We should give thanks for the Humane Society, International Fund for Animal Welfare, and Society for the Prevention of Cruelty to Animals. These and related organizations do the good work that Gandhi and Lincoln would have endorsed. Yet when is the last time you’ve heard these organizations give a hoot about economic growth, the single biggest threat to animal welfare?

And why does no one put in a word for our furry and feathered friends when Congress, the President, and the Fed pull out all the stops for GDP growth? Where are the advocates of humane treatment of animals, when the biggest decisions are made about the rate of habitat loss and therefore animal suffering? When a hundredth percentage point less in GDP growth could save hundreds of thousands of animals a year?

Why don’t we have a mainstream media, which isn’t afraid to expose nastiness to horses and chickens, talking about the millions of animals suffering at the cumulative hand of economic growth? Has economic growth become the inconvenient truth for animal welfare?

It’s definitely inconvenient–and that’s an understatement–for millions of animals.

Use and Abuse of the “Natural Capital” Concept

by Herman Daly

Herman DalySome people object to the concept of “natural capital” because they say it reduces nature to the status of a commodity to be marketed at its exchange value. This indeed is a danger, well discussed by George Monbiot. Monbiot’s criticism rightly focuses on the monetary pricing of natural capital. But it is worth clarifying that the word “capital” in its original non-monetary sense means “a stock or fund that yields a flow of useful goods or services into the future.” The word “capital” derives from “capita” meaning “heads,” referring to heads of cattle in a herd. The herd is the capital stock; the sustainable annual increase in the herd is the flow of useful goods or “income” yielded by the capital stock–all in physical, not monetary, terms. The same physical definition of natural capital applies to a forest that gives a sustainable yield of cut timber, or a fish population that yields a sustainable catch. This use of the term “natural capital” is based on the relations of physical stocks and flows, and is independent of prices and monetary valuation. Its main use has been to call attention to and oppose the unsustainable drawdown of natural capital that is falsely counted as income.

Big problems certainly arise when we consider natural capital as expressible as a sum of money (financial capital), and then take money in the bank growing at the interest rate as the standard by which to judge whether the value of natural capital is growing fast enough, and then, following the rules of present value maximization, liquidate populations growing slower than the interest rate and replace them with faster growing ones. This is not how the ecosystem works. Money is fungible, natural stocks are not; money has no physical dimension, natural populations do. Exchanges of matter and energy among parts of the ecosystem have an objective ecological basis. They are not governed by prices based on subjective human preferences in the market.

Furthermore, money in the bank is a stock that yields a flow of new money (interest) all by itself without diminishing itself, and without the aid of other flows. Can a herd of cattle yield a flow of additional cattle all by itself, and without diminishing itself? Certainly not. The existing stock of cattle transforms a resource flow of grass and water into new cattle faster than old cattle die. And the grass requires sunlight, soil, air, and more water. Like cattle, capital transforms resource flows into products and wastes, obeying the laws of thermodynamics. Capital is not a magic substance that grows by creating something out of nothing.

While the environmentalist’s objections to monetary valuation of natural capital are sound and important, it is also true that physical stock-flow (capital-income) relations are important in both ecology and economics. Parallel concepts in economics and ecology aid the understanding and proper integration of the two realities–if their similarities are not pushed too far!

The biggest mistake in integrating economics and ecology is confusion about which is the Part and which is the Whole. Consider the following official statement, also cited by Monbiot:

As the White Paper rightly emphasized, the environment is part of the economy and needs to be properly integrated into it so that growth opportunities will not be missed.

—Dieter Helm, Chairman of the Natural Capital Committee, The State of Natural Capital: Restoring our Natural Assets, Second report to the Economic Affairs Committee, UK, 2014.

If the Chairman of the UK Natural Capital Committee gets it exactly backwards, then probably others do too. The environment, the finite ecosphere, is the Whole and the economic subsystem is a Part–a completely dependent part. It is the economy that needs to be properly integrated into the ecosphere so that its limits on the growth of the subsystem will not be missed. Given this fundamental misconception, it is not hard to understand how other errors follow, and how some economists, imagining that the ecosphere is part of the economy, get confused about valuation of natural capital.

Natural Capital, James Wheeler

How can we correctly price natural capital in a full world? Photo Credit: James Wheeler

In the empty world, natural capital was a free good, correctly priced at zero. In the full world, natural capital is scarce. How do we take account of that scarcity without prices? This question is what understandably leads economists to price natural capital, and then leads to the monetary valuation problems just discussed. But is there not another way to recognize scarcity, besides pricing? Yes, one could impose quotas–quantitative limits on the resource flows at ecologically sustainable levels that do not further deplete natural capital. We could recognize scarcity by living sustainably off of natural income rather than living unsustainably from the depletion of natural capital.

In economics, “income” is by definition the maximum amount that can be consumed this year without reducing the capacity to produce the same amount next year. In other words, income is by definition sustainable, and the whole reason for income accounting is to avoid impoverishment by inadvertent consumption of capital. This prudential rule, although a big improvement over present practice, is still anthropocentric in that it considers nature in terms only of its instrumental value to humans. Without denying the obvious instrumental value of nature to humans, many of us consider nature to also have intrinsic value, based partly on the enjoyment by other species of their own sentient lives. Even if the sentient experience of other species is quite reasonably considered less intrinsically valuable than that of humans, it is not zero. Therefore we have a reason to keep the scale of human takeover even below that indicated by maximization of instrumental value to humans. On the basis of intrinsic value alone, one may argue that the more humans the better–as long as we are not all alive at the same time! Maximizing cumulative lives ever to be lived with sufficient wealth for a good (not luxurious) life is very different from, and inconsistent with, maximizing simultaneous lives.

In addition, speaking for myself, and I expect many others, there is a deeper consideration. I cannot reasonably conceive (pace neo-Darwinist materialists) that our marvelous world is merely the random product of multiplying infinitesimal probabilities by infinitely many trials. That is like claiming that Hamlet was written by infinitely many monkeys, banging away at infinitely many typewriters. A world embodying mathematical order, a system of evolutionary adaptation, conscious rational thought capable of perceiving this order, and the moral ability to distinguish good from bad, would seem to be more like a creation than a happenstance. As creature-in-charge, whether by designation or default, we humans have the unfulfilled obligation to preserve and respect the capacity of Creation to support life in full. This is a value judgment, a duty based both historically and logically on a traditional theistic worldview. Although nowadays explicitly rejected by materialists, and by some theists who confuse dominion with vandalism, this worldview fortunately still survives as more than a vestigial cultural inheritance.

Whatever one thinks about these deeper issues, the point is that determination of the scale of resource throughput cannot reasonably be based on pseudo prices. But scale does have real consequences for prices. Fixing the scale of the human niche is a price-determining macro decision based on ethical and religious criteria. It is not a price-determined micro decision based on market expression of individual preferences weighted by ability to pay.

However the scale of the macro-limited resource flow is determined, we next face the question of how to ration that amount among competing micro claimants? By prices. So we are back to pricing, but in a very different sense. Prices now are tools for rationing a fixed predetermined flow of resources, and no longer determine the volume of resources taken from nature, nor the physical scale of the economic subsystem. Market prices (modified by taxes or cap-auction-trade) ration resources as an alternative to direct quantitative allocation by central planning. The physical scale of the economy has been limited, and the resulting scarcity rents are captured for the public treasury, permitting elimination of many regressive taxes. Dollars become ration tickets; no longer votes that determine how big the scale of the economy will be relative to the ecosystem. The market no longer conveys the message “we can grow as much as we want as long as we pay the price.” Rather the new message is, “there is only so much to go around, and dollars are your ration ticket for a part of the fixed quota, not a vote that can be cast for growth.” Equitable distribution of dollar incomes (ration tickets) will then be seen as the serious matter that it is, to be solved by sharing, not evaded by growth, especially not by uneconomic growth.

Unfortunately, the more common approach in economics has been to try somehow to calculate that price that internalizes sustainability and impose it via taxes. The right price, given the demand curve, will result in the corresponding right quantity. However, there is a two-fold problem: first, methods of calculating the “right” price are usually specious (e.g. contingent valuation); and second, we don’t really know where the shifting demand curve is, except on the blackboard. In fixing prices, errors in demand estimation result in variations in quantity. In fixing quantity, errors result in variations in price. The ecosystem is sensitive to quantity, not price. It is ecologically safer to let errors in estimation of demand result in price changes rather than quantity changes. This is one advantage of the cap-auction-trade system relative to carbon taxes. Although a great improvement over the present, carbon taxes attempt to ration carbon fuels without having really limited their supply. Nor are the “dollar ration tickets” limited, given the fractional reserve banks’ ability to create money, and the Fed’s policy of issuing more money whenever growth slows down.

A monetary reform to 100% reserve requirements on demand deposits would be a good policy for many reasons, to which we can add, as a necessary supplement to a carbon tax. It would not be necessary as a supplement to cap-auction-trade, but should be adopted for independent reasons. A good symbol should not be allowed to do things that the reality it symbolizes cannot do. One hundred percent reserves would require the symbol of money to behave more like real wealth, at least in some important ways. But this is another story.