Sunday, April 5, 2009

An outsider's view on the need for economic reform

I am, by practice and way of thought; an engineer, although theoretically minded enough that I probably should have been a physicist. Over the past few years my interests have grown to focus squarely on the issue of future energy sustainability and the social reform required to make that sustainable. Given my background this would suggest that I work on technology X, compared to technology Y, and energy source Z, blah blah.. which I do. However, over the past several years I have become much more interested in the need for an interdisciplinary approach to this problem, whose sources, implications, and evidences lie in so many different aspects of our society: agriculture, politics, economics, ethics, marketing, even religion, etc. And as we approach anything that can be adequately considered along the lines of the beginnings of a "solution" it is something that addresses just as wide of a range of facets of life.

Before diverting too much, what I am currently most interested in, perhaps because I know the least about it, is the economic system's role in this "energy crisis." As I understand it, there are two fundamental issues with regard to our economic system's design that hinder our ability to proceed towards an energy sustainable and ecologically balanced future.

1) Ecological systems and natural capital are absolutely necessary in supporting life and human welfare, and thus must represent a large portion of total economic value; yet these systems and resources are consumed or damaged in processes contributing to economic value with zero market representation. (1)

2) Our success is (loosely) defined as economic success and progress, meaning increasing profit and GDP, and this is our approach to solving issues of poverty etc. Thus, we perpetuate economic growth. However this growth is counter to the steady state operation of the world as it already struggles to support the oversized economy of today. (2)

Costanza (1) provides an assessment of ecosystem and natural capital market values, justifying this need based on evidences such as the economic effects of the hypothetical situation that they were completely removed, or the costs and requirements if we were to replicate these in a future artificial environment. This reasoning could be used to establish their actual economic value at infinite. In one publication (3) the two collaborate to develop solid policy recommendations based on these contentions from Costanza combined with the issues relating to differentiating between "the concepts of growth (material increase in size) and development (improvement in organization without size change)" as "growth cannot be sustainable indefinitely on a finite planet." Additionally focusing on the notion that macroscopic economic measures (GDP, GNP) which we focus on, "measure mainly growth, or at best conflate growth and development." (3)

The conclusions from this effort follow the need for efficiency increases, rather than throughput, and to limit the human scale to within the carrying capacity of the world. However, as they are the most recent and the most economic-specific, I would like to reprint the 10-point policy summary from Daly's publication for closing and discussion, which is at the forefront of my current consideration, with the hopes of sparking discussion of the inherent difficulties with some of the suggestions, or which are more controversial; as these things are less obvious to myself.

1. Cap-auction-trade systems for basic resources. Cap limits biophysical
scale according to source or sink constraint, whichever is more stringent.
Auction captures scarcity rents for equitable redistribution. Trade allows
efficient allocation to highest uses.

2. Ecological tax reform—shift tax base from value added (labor and
capital) and on to “that to which value is added”, namely the entropic
throughput of resources extracted from nature (depletion), through the
economy, and back to nature (pollution). Internalizes external costs as
well as raises revenue more equitably. Prices the scarce but previously
unpriced contribution of nature.

3. Limit the range of inequality in income distribution—a minimum income
and a maximum income. Without aggregate growth poverty reduction
requires redistribution. Complete equality is unfair; unlimited inequality is
unfair. Seek fair limits to inequality.

4. Free up the length of the working day, week, and year—allow greater
option for leisure or personal work. Full-time external employment for all is
hard to provide without growth.

5. Re-regulate international commerce—move away from free trade, free
capital mobility and globalization, adopt compensating tariffs to protect
efficient national policies of cost internalization from standards-lowering
competition from other countries.

6. Downgrade the IMF-WB-WTO to something like Keynes’ plan for a
multilateral payments clearing union, charging penalty rates on surplus as
well as deficit balances—seek balance on current account, avoid large
capital transfers and foreign debts.

7. Move to 100% reserve requirements instead of fractional reserve
banking. Put control of money supply and seigniorage in hands of the
government rather than private banks.

8. Enclose the remaining commons of rival natural capital in public trusts,
and price it, while freeing from private enclosure and prices the non rival commonwealth of knowledge and information. Stop treating the scarce as
if it were non scarce, and the non scarce as if it were scarce.

9. Stabalize population. Work toward a balance in which births plus inmigrants
equals deaths plus out-migrants.

10. Reform national accounts—separate GDP into a cost account and a
benefits account. Compare them at the margin, stop growing when
marginal costs equal marginal benefits. Never add the two accounts.

1 - Costanza, Robert, "The Value of the World's Ecosystem Services and Natural Capital" Nature May 1987, Vol 387:253-260.

2 - Daly, Herman E., "A Steady State Economy" Sustainable Development Commission, UK University of Maryland, April 24, 2008.

3 - Costanza, R., Daly, H., "Natural Capital and Sustainable Development" Conservation Biology, Vol. 6, No 1, March 1992, 37-46.


Ideamotor said...

I'm just going to discuss (1) - cap and trade.

As I only hinted on my previous post, I think cap and trade schemes could turn out to be very bad policy.

The paper you highlighted indicates support for cap and trade schemes for "basic resources" but I would like to highlight my point through a discussion of food and greenhouse gases.

Imagine if the world made a cap and trade system for existing food where we basically said this is how much food you can produce from now on. Or as indicated by the paper you could define the limit by the source - i.e., set the limit higher as production increases because we already have shortages of food (or shortages caused by existing imbalances in how this food is distributed. In any rate, with a cap and trade system, the existing food would then given to the highest bidder.

This would be devastating. As previously mentioned, we already have a large portion of the world populace already without adequate food. This scheme would ultimately drive up the price for existing food and increase the portion malnourished substantially.

A scheme such as this for greenhouse gases would actually be even worse, because greenhouse gases are not considered a "basic resource". The limit would then be arbitrary. A better plan would cap the limit at what can prevent catastrophic global warming. However, as we has seen in class - greenhouse gases are created in just about all types of growth - a good chunk is created with land use alone.

If the world were to put a limit on greenhouse gases we would create de facto neocolonialism against India and China. Obviously, this isn't going to happen but my point stands: cap and trade schemes just give those with adequate resources continued and 'sustainable' access to those resources. This applies on the country, company, and individual scales.

Boiler_Up said...

I think ecological tax reform will make sense to be implemented in US. I just want to add up some more information in addition of your posting. Basically tax reform is not a totally new approach and it has actually been applied to some of the European countries. This tax reform was introduced by Ernst Ulrich von Weizacker from Germany and the main goal of it is to achieve sustainability and at the same time promoting both full employment via reduction of payroll taxes as well as increasing international competitiveness through technological innovation [1]. On a recent conference held in Minnesota, David Morris of the Institute for Local Self-Reliance said that the nation can benefit from imposing stiff pollution or energy taxes if the revenue generated is used to reduce taxes on income and investment [2]. Our current tax system is inefficient since it taxes things that we encourage people to do (e.g. buying houses) but on the other hand it didn’t taxes things that we should discourage people to do (e.g. carbon emission from car). Ecological tax will basically offset these inequalities by taxing the value that is added into the product as you mention in your discussion. Although these proposal was opposed by certain resource-intensive industry, it will definitely be a great alternative and a win-win solution for both government and consumers.

1Dresner, S. (2002). The principles of sustainability. London, UK: Earthscan Publications.
2Morris, D. Retrieved from