Home · Book Reports · 2014 · Beyond Growth - The Economics of Sustainable Development

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Introduction

• what exactly “sustainable development” should mean

• regeneration of raw material “inputs” and absorption of waste “out-puts”

• involves replacing the economic norm of quantitative expansion (growth) with that of qualitative improvement (development)

• (SD) 1987 publication of the U.N.-sponsored Brundtland Commission report, Our Common Future, which defined the term as development which meets the needs of the present without sacrificing the ability of the future to meet its needs.

• John Stuart Mill, back in 1857, discussed this idea under the label “stationary state,” by which he meant a condition of zero growth in population and physical capital stock, but with continued improvement in technology and ethics.

• But Mill’s writings on the stationary state were forgotten, and most economics Ph.D.s from the past two decades have never heard of this concept because their teachers, who had heard of it, rejected it as unworthy of transmission.

• today’s standard (neoclassical) economic theory begins with nonphysical parameters (technology, preferences, and distribution of income are all taken as givens) and inquires how the physical variables of quantities of goods produced and resources used must be adjusted to fit an equilibrium (or an equilibrium rate of growth) determined by those nonphysical parameters. The nonphysical, qualitative conditions are given and the physical, quantitative magnitudes must adjust. In neoclassical theory this “adjustment” almost always involves growth. Today’s newly emerging paradigm (steady state, sustainable development), however, begins with physical parameters (a finite world, complex ecological interrelations, the laws of thermodynamics) and inquires how the nonphysical variables of technology, preferences, distribution, and lifestyles can be brought into feasible and just equilibrium with the complex biophysical system of which we are a part. The physical quantitative magnitudes are what is given, and the nonphysical qualitative patterns of life become variables. This emerging paradigm is more like classical than neoclassical economics in that adjustment is by qualitative development, not quantitative growth.

• With the Industrial Revolution, the idea of a stationary state, and classical economics in general, was retired to history. Neoclassical economics, with its subjectivist theory of value, shifted attention away from resources and labor and onto utility, exchange, and efficiency. The subjectivist and marginalist revolution, with its marginal utility theory of value, was certainly an improvement in the understanding of prices and markets. But that gain came at the cost of pushing physical factors too far into the background.

• One need only try to imagine 1.2 billion Chinese with automobiles, refrigerators, washing machines, and so on, to get a picture of the ecological consequences of generalizing advanced Northern resource consumption levels across the globe.

• The dominant model excludes ecological costs altogether, but even those models that recognize ecological costs, if they are based on present value maximization, also can lead to “optimal” liquidation.

• Environmental deterioration was held to be mainly a consequence of poverty, and the solution proposed was the same as the World Bank’s solution to other economic problems, namely more growth.

• While the World Bank’s report acknowledged a few conflicts between growth and environment here and there, the world was seen to be full of “win-win” opportunities for both increasing growth as usual and improving the environment.

• The evolution of the manuscript of Development and the Environment is revealing. An early draft contained a diagram entitled “The Relationship Between the Economy and the Environment.” It consisted of a square labeled “economy,” with an arrow coming in labeled “inputs” and an arrow going out labeled “outputs"nothing more. I suggested that the picture failed to show the environment, and that it would be good to have a large box containing the one depicted, to represent the environment. Then the relation between the environment and the economy would be clearspecifically, that the economy is a subsystem of the environment and depends upon the environment both as a source of raw material inputs and as a “sink’’ for waste outputs.

• The next draft included the same diagram and text, but with an unlabeled box drawn around the economy like a picture frame. I commented that the larger box had to be labeled “environment” or else it was merely decorative, and that the text had to explain that the economy is related to the environment as a subsystem within the larger ecosystem and is dependent on it in the ways previously stated. The next draft omitted the diagram altogether. By coincidence, a few months later the chief economist of the World Bank, Lawrence H. Summers, under whom the report was being written, happened to be on a conference panel at the Smithsonian Institution, discussing the book Beyond the Limits (Donella H. Meadows et al.), which Summers considered worthless. In that book there was a diagram showing the relation of the economy to the ecosystem, a diagram exactly like the one I had suggested. During the question-and-answer time I asked the chief economist if, looking at that diagram, he felt that the question of the size of the economic subsystem relative to the total ecosystem was an important one, and whether he thought economists should be asking the question, What is the optimal scale of the macro economy relative to the environment? His reply was immediate and definite: “That’s not the right way to look at it.”

• economy is subsystem of environment

• limiting factor shifts from man-made capital to our remaining natural capital, from fishing boats to the populations of fish remaining in the sea eat babies

• One way to render any concept innocuous is to expand its meaning to include everything. By 1991 the phrase had acquired such cachet that everything had to be sustainable, and the relatively clear notion of environmental sustainability of the economic subsystem was buried under “helpful” extensions such as social sustainability, political sustainability, financial sustainability, cultural sustainability, and on and on. We expected any day to hear about “sustainable sustainability.”

• In 1995, eleven important academic economists and ecologists signed a statement entitled “Economic Growth, Carrying Capacity, and the Environment,” and published it in the policy forum section of the journal Science.6 There was an explicit agreement among these important thinkers to the effect that (1) “the environmental resource base is finite,” (2) “there are limits to the carrying capacity of the planet,” and (3) “economic growth is not a panacea for diminishing environmental quality”

• One might have hoped that the authors would have carried the third insight a bit further to consider whether economic growth, in addition to being a false cure, might not also be a major cause of environmental degradationalong with population growth, which also gets short shrift. To make this case they would have had to separate economic growth (defined as expansion of GNP) into its quantitative, physical component (resource throughput growth) and its qualitative, nonphysical component (resource efficiency improvement). They might then have reached a further consensus that total throughput growth is indeed the major cause of environmental degradation, while improvements in resource efficiency, by allowing a reduction in throughput or a more benign mix of products, are sparing of the environment.

• solutions proposed: 1: 100% economy, “economic imperialism” = everything has a price, the subsystem = the total system 2: 100% ecosystem, “ecological reductionism”, no economy, what biologists/hard science would see 3: mix

• should stop expanding without completely destroying the subsystem

• In 1992 the World Bank had a report, “Development and the Environment”, that failed to address anything beyond basic health consequences. Ecological degradation was a consequence of poverty to the World Bank, and could be solved with growth.

• By coincidence, a few months later the chief economist of the World Bank, Lawrence H. Summers, under whom the report was being written, happened to be on a conference panel at the Smithsonian Institution, discussing the book Beyond the Limits (Donella H. Meadows et al.), which Summers considered worthless. In that book there was a diagram showing the relation of the economy to the ecosystem, a diagram exactly like the one I had suggested. During the question-and-answer time I asked the chief economist if, looking at that diagram, he felt that the question of the size of the economic subsystem relative to the total ecosystem was an important one, and whether he thought economists should be asking the question, What is the optimal scale of the macro economy relative to the environment? His reply was immediate and definite: “That’s not the right way to look at it."

• Once you draw the boundary of the environment around the economy, you have said that the economy cannot expand forever. You have said that John Stuart Mill was right, that populations of human bodies and accumulations of capital goods cannot grow forever, that at some point quantitative growth must give way to qualitative development as the path of progress.

• Pretty soon sustainable development was being defined to include even the right to peaceable assembly. The right to peaceable assembly is a good thing, but it is not useful to include all good things in the definition of sustainable development. The term had acquired such vogue that everyone felt that their favorite cause had to be a part of the definition or else be implicitly condemned to oblivion, and this natural confusion was abetted by those in the Bank who wanted to keep the concept vague, to dull its sharp edges enough to keep it from cutting into business as usualthat is, pushing loans in the interest of export-led growth and global integration.

• growth in this physical sense can be antieconomic, or negativethat, at the margin, throughput growth may cause environmental costs to increase faster than production benefits

• There are, I believe, three alternative strategies for integrating the economy and the ecosystem that have been discussed in the public forum.8 First, the strategy of “economic imperialism,” in which the subsystem, the economy, expands until everything is included. The subsystem becomes identical to the total system, everything is economy and everything has a price. Internalization of externalities has been carried to the limit and nothing remains external to the economy. This seems to be the implicit strategy of neoclassical economics.

• The second strategy is to shrink the economy boundary to nothing so that everything is ecosystem. This I call ecological reductionism. All human valuations and choices are held to be explicable by the same evolutionary forces of chance and necessity that presumably control the natural world. Relative values correspond to embodied energy content, and economies, like ecosystems, are governed by the dictates of survival. Some follow this position to its logical conclusion, and viewor at least affect to viewhuman extinction as no more significant than the extinction of any other species. This seems to be the implicit strategy of those many biologists and ecologists who operate on a philosophy of scientific materialism.

• The third strategy is the one adopted hereto view the economy as a subsystem of the ecosystem and to recognize that while it is not exempt from natural laws, neither is it fully reducible to explanation by them. The human economy cannot be reduced to a natural system. There is more to the idea of value than embodied energy or survival advantage. But neither can the economy subsume the entire natural system under its managerial dominion of efficient allocation. This vision of the earth as an alchemist’s centrally planned terrarium, with nothing wild or spontaneous but everything base transformed into gold, into its highest instrumental value for humans, is a sure recipe for disaster.

• goal from presidential counsel on sustainable develpment 2. Economic growth, environmental protection, and social equity should be interdependent, mutually reinforcing national goals, and policies to achieve these goals should be integrated.

• Maybe these goals should be mutually reinforcing, but frequently they conflict. To sort out conflicts and harmonies we must distinguish growth (quantitative increase by assimilation or accretion of materials) from development (qualitative improvement, realization of potential). The construct “gross national product” conflates these two totally different things, as does the usual concept of economic growth, thought of as growth in GNP. Quantitative increase of the scale of the economy by assimilation or accretion of material from the finite environment is not sustainable. Qualitative improvement and realization of potential may well continue foreverat least we cannot specify any obvious limits to its sustainability. Sustainable development therefore is development without growththat is without throughput growth beyond the regeneration and absorption capacities of the environment. The path of future progress is development, not growth. This distinction must be made or confusion is inevitable.

• The current thrust toward economic globalization is, short of the unappealing prospect of world government, likely to be contrary to sustainable development.

• it is an accepted principle in economics that in accounting income we must deduct for depreciation of capital in order to keep productive capacity intact. This principle remains, and only needs to be extended to natural capital as well as manmade. Depletion of natural capital is a cost and should be counted in the macro System of National Accounts, in micro project evaluation, and in the international balance of payments.

• E.J. Mishan put it, ‘‘While new technology is unrolling the carpet of increased choice before us by the foot, it is often simultaneously rolling it up behind us by the yard.”

• The connection between sustainability and international trade is important, but rather different I think from what the council has in mind. Nearly all policies for sustainability involve internalizing external environmental and social costs at the national level. This makes prices higher. Therefore free trade with countries that do not internalize these costs, or do it to a much lesser extent, is not feasible. In such cases there is every reason for protective tariffs. Such tariffs would be protecting not an inefficient industry or firm but an efficient national policy of cost internalization. Free trade among differing regimes of cost internalization will result in a standards-lowering competition, leading to a situation in which more and more of total world product is produced in countries that do a less and less complete job of counting costs

• religion was asked to supply the moral compass, while science would supply the vehicle.

• Alfred North Whitehead “Scientists animated by the purpose of proving that they are purposeless constitute an interesting subject for study. "

• We might add that religious persons animated by a belief in the Creator God, yet happily participating in the destruction of Creation, also constitute an interesting subject for study.

• During the meeting in Washington, D.C., of the Joint Appeal, the void of purpose was frequently glossed over in discussions with the phrase “for our children.”

• because in our society, where political correctness has come to include an antireligious attitude,

PART I ECONOMIC THEORY AND SUSTAINABLE DEVELOPMENT

• Economic growth has been tied to GDP

• microeconomic activities are seen as parts of a larger whole, and it is the relationship to the larger whole that limits the scale of the part to some proper or optimal size. The macroeconomy is not seen as a part of anything largerrather it is the whole. It can grow forever, and by so doing it removes the temporary constraints on each of its sectors that result from bottlenecks imposed by shortages in other complementary sectors of the economy. As long as the proportions are right, the total, and its parts, can grow forever. Each firm may still reach an optimal scale due to managerial limits, but the industry or sector can grow forever by adding new firms. Prices measure relative scarcity and guide us in keeping everything in the right proportion relative to everything elsebut there is no recognition of any absolute scarcity limiting the scale of the macroeconomy

• really it is a subsystem

• must remain within the regenerative and absorbative properties of the ecosystem

• There is much confusion about what, precisely, is supposed to grow as GNP grows. Many people speak of the “dematerialization of the economy” and the possibility that GNP can grow forever without encountering physical limits, because it is measured in value units rather than in physical units. Perhaps the best example of this is the development of computersnewer generations use less matter and energy to perform more complicated operations. The value of services increases, but the matter and energy required for those services diminishes. !! In this book such qualitative improvement in the state of the arts is referred to as “development”; increasing the number of computers, of whatever vintage, is referred to as “growth.” GNP accounting does not distinguish growth from developmentboth lead to an increase in the GNP, an increase in the value of annual goods and services, and are counted as “economic growth.” !! But conflating qualitative improvement and quantitative increase in the same value index leads to much confusion.

• Aggregation by prices into a value index does not annihilate physical dimensions.

• Even services represent the service of somebody or something for some time period, and consequently have a physical dimension.

• the notion that we can save the “growth forever” paradigm by dematerializing the economy, or “decoupling” it from resources, or substituting information for resources, is fantasy. We can surely eat lower on the food chain, but we cannot eat recipes!

• distinguish growth (quantitative expansion) from development (qualitative improvement), and urge ourselves to develop as much as possible, while ceasing to grow, once the regenerative and absorptive capacities of the ecosystem are reached (sustainable development)

• Entrophy_hourglass_Georgescu_Roegen.gif

• First, the hourglass is an isolated system: no sand enters, no sand exits. Second, within the glass there is neither creation nor destruction of sand, the amount of sand in the glass is constant. This, of course, is the analog of the first law of thermodynamicsconservation of matter/energy. Third, there is a continuing running-down of sand in the top chamber, and an accumulation of sand in the bottom chamber. Sand in the bottom chamber has used up its potential to fall and thereby do work, it is high-entropy or unavailable (used up) matter/energy. Sand in the top chamber still has potential to fallit is low-entropy or available (still useful) matter/energy. This is the second law of thermodynamics: entropy (or “used-up-ness”) increases in an isolated system. The hourglass analogy is particularly apt since entropy is time’s arrow in the physical world.

• Georgescu-Roegen argued that evolution has in the past consisted of slow adaptations of our “endosomatic organs” (heart, lungs, etc.), which run on solar energy. But the present path of evolution has shifted to rapid adaptations of our “exosomatic organs” (cars, airplanes, etc.), which depend on terrestrial low entropy. The uneven ownership of exosomatic organs and of the terrestrial stocks of low entropy from which they are made, compared to the egalitarian distribution of ownership of endosomatic capital, is for Georgescu-Roegen the root of social conflict in industrial societies.

CHAPTER 1: MOVING TO A STEADY-STATE ECONOMY

• Growth, as here used, refers to an increase in the physical scale of the matter/energy throughput that sustains the economic activities of production and consumption of commodities. In an SSE the aggregate throughput is constant, though its allocation among competing uses is free to vary in response to the market.

• Since there is of course no production and consumption of matter/energy itself in a physical sense, the throughput is really a process in which low-entropy raw materials are transformed into commodities and then, eventually, into high-entropy wastes. Throughput begins with depletion and ends with pollution.

• Growth development currently menas growth

• SSE therefore can develop, but cannot grow, just as the planet earth, of which it is a subsystem, can develop without growing.

• SSE is not static

• Ecological sustainability of the throughput is not guaranteed by market forces. The market cannot by itself register the cost of its own increasing scale relative to the ecosystem. Market prices measure the scarcity of individual resources relative to each other. Prices do not measure the absolute scarcity of resources in general, of environmental low entropy. The best we can hope for from a perfect market is a Pareto-optimal allocation of resources (i.e., a situation in which no one can be made better off without making someone else worse off).

• Markets singlemindedly aim to serve allocative efficiency. Optimal allocation is one thing; optimal scale is something else.

• keeps talking about “good life” w/o definition so far - address that the definitions are vague at best, they will vary being defined by the economic system

• think of the earth’s resources as a savings account. the ecological producton is the interest we can live off of forever. When we live beyond the interest we eat into the capital generating the interest, the earth’s current resources.

• present value-maximizing growth economy, which drives to extinction any valuable species whose biological growth rate is less than the expected rate of interest, as long as capture costs are not too high (Clark 1976).

• growth economy implicitly says that there is no such thing as sufficiency because more is always better, and that a twenty-year future is quite long enough if the discount rate is 10%. Many would prefer explicit vagueness to such implicit precision.

Biophysical Limits to Growth

• The biophysical limits to growth arise from three interrelated conditions: finitude, entropy, and ecological interdependence.

• The physical dimension of commodities and factors is at best totally abstracted from (left out altogether) and at worst assumed to flow in a circle, just like exchange value. It is as if one were to study physiology solely in terms of the circulatory system without ever mentioning the digestive tract. The dependence of the organism on its environment would not be evident.

• Environmental sources and sinks were considered infinite relative to the demands of the economy, which was more or less the case during the formative years of economic theory. Therefore it was not an unreasonable abstraction.

• technology and infinite substitution mean only that one form of low-entropy matter/energy is substituted for another, within a finite and diminishing set of low-entropy sources. Such substitution is often very advantageous, but we never substitute high-entropy wastes for low-entropy resources in net terms.

• The capital stock is an agent for transforming the resource flow from raw material into a product (Georgescu-Roegen 1971). More capital does not substitute for less resources, except on a very restricted margin. You cannot make the same house by substituting more saws for less wood.

• the concept of limits to growth threatens vested interests and power structures; even worse, it threatens value structures in which lives have been invested. . . . Abandonment of belief in perpetual motion was a major step toward recognition of the true human condition. It is significant that “mainstream” economists never abandoned that belief and do not accept the relevance to the economic process of the Second Law of Thermodynamics; their position as high priests of the market economy would become untenable did they do so. Earl Cook 1982, p. 1981 wrong page?

• “without the enormous amount of work done by nature in concentrating flows of energy and stocks of resources, human ingenuity would be onanistic. What does it matter that human ingenuity may be limitless, when matter and energy are governed by other rules than is information?” (Cook 1982, p. 194).

Ethicosocial Limits

• 1 The desirability of growth financed by the drawdown of geological capital s limited by the cost imposed on future generations.

• Time discounting makes ALL future resources worth nothing to the current generation, there is no incentive to conserve for the future b/c “I” won’t be there.

• 2 The desirability of growth financed by takeover of habitat is limited by the extinction or reduction in number of sentient subhuman species whose habitat disappears.

• Space limits our growth, we need more space so we expand into another specie’s area and extinct it; never giving value to what it produced; these species may be important to the ecosystem and our ultimate survival!

• 3 The desirability of aggregate growth is limited by its self-canceling effects on welfare. Keynes (1930) argued that absolute wants (those we feel independently of the condition of others) are not insatiable. Relative wants (those we feel only because their satisfaction makes us feel superior to others) are indeed insatiable, for, as Keynes put it, “The higher the general level, the higher still are they.” Or, as J.S. Mill expressed it, “Men do not desire to be rich, but to be richer than other men.”

• Since the struggle for relative shares is a zero-sum game, it is clear that aggregate growth cannot increase aggregate welfare.

• 4 The desirability of aggregate growth is limited by the corrosive effects on moral standards resulting from the very attitudes that foster growth, such as glorification of self-interest and a scientistic-technocratic worldview.

• Onthe demand side of commodity markets, growth is stimulated by greed and acquisitiveness, intensified beyond the “natural” endowment from original sin by the multibillion-dollar advertising industry. On the supply side, technocratic scientism proclaims the possibility of limitless expansion and preaches a reductionistic, mechanistic philosophy

• Expanding power and shrinking purpose lead to uncontrolled growth for its own sake, which is wrecking the moral and social order just as surely as it is wrecking the ecological order (Hirsch 1976).

• Neoclassical economics, like classical physics, is relevant to a special case that assumes that we are far from limitsfar from the limiting speed of light or the limiting smallness of an elementary particle in physicsand far from the biophysical limits of the earth’s carrying capacity and the ethicosocial limits of satiety in economics. Just as in physics, so in economics: the classical theories do not work well in regions close to limits. A more general theory is needed to embrace both normal and limiting cases. In economics this need becomes greater with time because the ethic of growth itself guarantees that the close-to-the-limits case becomes more and more the norm. The nearer the economy is to limits, the less can we accept the practical judgment most economists make

3 symptoms of growthmania:

• 1 Money Fetishism and the Paper Economy Money fetishism is alive and well in a world in which banks in wealthy countries make loans to poor countries and then, when the debtor countries cannot make the repayment, simply make new loans to enable the payment of interest on old loans, thereby avoiding taking a loss on a bad debt. Using new loans to pay interest on old loans is worse than a Ponzi scheme, but the exponential snowballing of debt is expected to be offset by a snowballing of real growth in debtor countries. The international debt impasse is a clear symptom of the basic disease of growthmania.

• Marx, and Aristotle before him, pointed out that the danger of money fetishism arises as a society progressively shifts its focus from use value to exchange value, under the pressure of increasingly complex division of labor and exchange.

• Based on Marx thoughts: 1 C-C’. One commodity (C) is directly traded for a different commodity (C’). The exchange values of the two commodities are by definition equal, but each trader gains an increased use value. This is simple barter. No money exists, so there can be no money fetishism.

• 2 C-M-C’. Simple commodity circulation begins and ends with a use value embodied in a commodity. Money (M) is merely a convenient medium of exchange. The object of exchange remains the acquisition of an increased use value. C’ represents a greater use value to the trader, but C’ is still a use value, limited by its specific use or purpose. One has, say, a greater need for a hammer than a knife but has no need for two hammers, much less for fifty. The incentive to accumulate use values is very limited.

• 3 M-C-M’. As simple commodity circulation gave way to capitalist circulation, the sequence shifted. It now begins with money capital and ends with money capital. The commodity or use value is now an intermediary step in bringing about the expansion of exchange value by some amount of profit, DM=M’M. Exchange value has no specific use or physical dimension to impose concrete limits. One dollar of exchange value is not as good as two, and fifty dollars is better yet, and a million is much better, etc. Unlike concrete use values, which spoil or deteriorate when hoarded, abstract exchange value can accumulate indefinitely without spoilage or storage costs. In fact, exchange value can grow by itself at compound interest. But as Frederick Soddy (Daly 1980) pointed out, ‘‘You cannot permanently pit an absurd human convention (compound interest) against a law of nature (entropic decay)” 1 “Permanently,” however, is not the same as “in the meantime,” during which we have, at the micro level, bypassed the absurdity of accumulating use values by accumulating exchange value and holding it as a lien against future use values. But unless future use value, or real wealth, has grown as fast as accumulations of exchange value have grown, then at the end of some time period there will be a devaluation of exchange value by inflation or some other form of debt repudiation. At the macro level limits will reassert themselves, even when ignored at the micro level, where the quest for exchange value accumulation has become the driving force.

• 4 M-M’. We can extend Marx’s stages one more step to the paper economy, in which, for many transactions, concrete commodities “disappear” even as an intermediary step in the expansion of exchange value. Manipulations of symbols according to arbitrary and changing tax rules, accounting conventions, depreciation, mergers, public relations imagery, advertising, litigation, and so on, all result in a positive DM for some, but no increase in social wealth, and hence an equal negative DM for others. Such “paper entrepreneurialism” and “rent-seeking” activities seem to be absorbing more and more business talent. Echoes of Frederick Soddy are audible in the statement of Robert Reich (1983, p. 153) that “the set of symbols developed to represent real assets has lost the link with any actual productive activity. Finance has progressively evolved into a sector all its own, only loosely connected to industry.” Unlike Soddy, however, Reich does not appreciate the role played by biophysical limits in redirecting efforts from manipulating resistant matter and energy toward manipulating pliant symbols. He thinks that, as more flexible and information-intensive production processes replace traditional mass production, somehow financial symbols and physical realities will again become congruent. But it may be that as physical resources become harder to acquire, as evidenced by falling energy rates of return on investment (Cleveland et al. 1984), the incentive to bypass the physical world by moving from M-C-M’ to M-M’ becomes ever greater. We may then keep growing on paper, but not in reality. This illusion is fostered by our national accounting conventions. It could be that we are moving toward a non-growing economy a bit faster than we think. If the cost of toxic waste dumps were subtracted from the value product of the chemical industry, we might discover that we have already attained zero growth in value from that sector of the economy.

• 2 Faulty National Accounting and the Treachery of Quantified Success Indicators GNP does not reveal whether we are living off income or capital, off interest or principal. Depletion of fossil fuels, minerals, forests, and soils is capital consumption, yet such unsustainable consumption is treated no differently from sustainable yield production (true income) in GNP. But not only do we decumulate positive capital (wealth), we also accumulate negative capital (illth) in the form of toxic-waste deposits and nuclear dumps.

• do not reflect the “informal” or “underground” economy

• underground economy in the United States range from around 4% to around 30% of GNP, depending on the technique of estimation (Tanzi 1983). The underground economy has apparently grown in recent times, probably as a result of higher taxes, growing unemployment, and frustration with the increasing complexity and arbitrariness of the paper economy.

• underground economy may represent a forced first step toward an SSE

• much of its basic motivation is tax evasion, although in today’s world there may well be some noble reasons for not paying taxes.

• Consider, for example, the case of management by quantified objectives applied to a tuberculosis hospital, as related to me by a physician. It is well known that TB patients cough less as they get better. So the number of coughs per day was taken as a quantitative measure of the patient’s improvement. Small microphones were attached to the patients’ beds, and their coughs were duly recorded and tabulated. The staff quickly perceived that they were being evaluated in inverse proportion to the number of times their patients coughed. Coughing steadily declined as doses of codeine were more frequently prescribed. Relaxed patients cough less. Unfortunately the patients got worse, precisely because they were not coughing up and spitting out the congestion. The cough index was abandoned. The cough index totally subverted the activity it was designed to measure because people served the abstract quantitative index instead of the concrete qualitative goal of health.

• Perversities induced by quantitative goal setting are pervasive in the literature on Soviet planning: set the production quota for cloth in linear feet, and the bolt gets narrower; set it in square feet, and the cloth gets thinner; set it by weight, and it gets too thick.

• phenomenon is ubiquitous. In universities a professor is rewarded according to number of publications. Consequently the length of articles is becoming shorter as we approach the minimum publishable unit of research. At the same time the frequency of coauthors has increased. More and more people are collaborating on shorter and shorter papers. What is being maximized is not discovery and dissemination of coherent knowledge but the number of publications on which one’s name appears.

• GNP is an index of throughput, not welfare.

• Throughput is positively correlated with welfare in a world of infinite sources and sinks, but in a finite world with fully employed carrying capacity, throughput is a cost. To design national policies to maximize GNP is just not smart. It is practically equivalent to maximizing depletion and pollution.

• do we need GDP? The world before 1940 got along well enough without calculating GNP, the TB patients were better off without the cough metric

• 3 The Ambivalent “Information Economy”

• Info Economy -> Knowledge Economy -> Wisdom Economy

• The main characteristics of such a wisdom economy were adumbrated by Earl Cook (1982) in his list of nine “Beliefs of a Neomalthusian,” and I will conclude by listing them:

• 1 “Materials and energy balances constrain production.” 2. “Affluence has been a much more fecund mother of invention than has necessity.” That is, science and technology require an economic surplus to support them, and a few extra but poor geniuses provided by rapid population growth will not help. 3. “Real wealth is by technology out of nature,” or, as William Petty would have said, technology may be the father of wealth, but nature is the mother. 4. “The appropriate human objective is the maximization of psychic income by conversion of natural resources to useful commodities and by the use of those commodities as efficiently as possible,” and “the appropriate measure of efficiency in the conversion of resources to psychic income is the human life-hour, with the calculus extended to the yet unborn.” 5. “Physical laws are not subject to repeal by men,” and of all the laws of economics the law of diminishing returns is closest to a physical law. 6. “The industrial revolution can be defined as that period of human history when basic resources, especially nonhuman energy, grew cheaper and more abundant.” 7. “The industrial revolution so defined is ending.” 8. “There are compelling reasons to expect natural resources to become more expensive.” 9. “Resource problems vary so much from country to country that careless geographic and commodity aggregation may confuse rather than clarify.” That is, “it serves no useful purpose to combine the biomass of Amazonia with that of the Sahel to calculate a per capita availability of firewood.”

• Earl Cook would have been the last person to offer these nine points as a complete blueprint for a wisdom economy. But I think that he got us off to a good start.

CHAPTER 2: ELEMENTS OF ENVIRONMENTAL MACROECONOMICS

• !! In practice we all start our own research from the work of our predecessors, that is, we hardly ever start from scratch. But suppose we did start from scratch, what are the steps we should have to take? Obviously, in order to be able to posit to ourselves any problems at all, we should first have to visualize a distinct set of coherent phenomena as a worthwhile object of our analytic effort. In other words, analytic effort is of necessity preceded by a preanalytic cognitive act that supplies the raw material for the analytic effort. In this book, this preanalytic cognitive act will be called Vision. It is interesting to note that vision of this kind not only must precede historically the emergence of analytic effort in any field, but also may reenter the history of every established science each time somebody teaches us to see things in a light of which the source is not to be found in the facts, methods, and results of the pre-existing state of the science. (Schumpeter 1954 p. 41)

• What is needed is not ever more refined analysis of a faulty vision, but a new vision. This does not mean that everything built on the old vision will necessarily have to be scrapped, but fundamental changes are likely when the preanalytic vision is altered. The necessary change in vision is to picture the macroeconomy as an open subsystem of the finite natural ecosystem (environment), and not as an isolated circular flow of abstract exchange value, unconstrained by mass balance, entropy and finitude. The circular flow of exchange value is a useful abstraction for some purposes. It highlights issues of aggregate demand, unemployment, and inflation that were of interest to Keynes in his analysis of the Great Depression. But it casts an impenetrable shadow on all physical relationships between the macroeconomy and the environment. For Keynes, this shadow was not very important, but for us it is. Just as, for Keynes, Say’s law and the impossibility of a general glut cast an impenetrable shadow over the problem of the Great Depression, so now the very Keynesian categories that were revolutionary in their time are obstructing the analysis of the major problem of our timenamely, what is the proper scale of the macroeconomy relative to the ecosystem? !!

The Environmental Macroeconomics of Optimal Scale

• The physical exchanges crossing the boundary between the total ecological system and the economic subsystem constitute the subject matter of environmental macroeconomics

• The term “scale” is shorthand for “the physical scale or size of the human presence in the ecosystem, as measured by population times per capita resource use.”

• This absolute optimal scale of load is recognized in the maritime institution of the Plimsoll line. When the watermark hits the Plimsoll line the boat is full, it has reached its safe carrying capacity. Of course, if the weight is badly allocated, the water line will touch the Plimsoll mark sooner. But eventually as the absolute load is increased, the watermark will reach the Plimsoll line even for a boat whose load is optimally allocated. Optimally loaded boats will still sink under too much weighteven though they may sink optimally! It should be clear that optimal allocation and optimal scale are quite distinct problems.

• We cannot serve both optimal scale and optimal allocation with the single policy instrument of the discount rate (Tinbergen 1952). The discount rate should be allowed to solve the allocation problem, within the confines of a solution to the scale problem provided by a presently nonexistent policy instrument, which we may for now call an “economic Plimsoll line,” that limits the scale of the throughput.

• Economists have recognized the independence of the goals of efficient allocation and just distribution and are in general agreement that it is better to let prices serve efficiency, and to serve equity with income redistribution policies.

• there are not just two, but three, values in conflict: allocation (efficiency), distribution (justice), and scale (sustainability).

• Scale has a maximum limit defined either by the regenerative or absorptive capacity of the ecosystem, whichever is less. However, the maximum scale is not likely to be the optimal scale.

• 1 The anthropocentric optimum. The rule is to expand scale (i.e., grow) to the point at which the marginal benefit to human beings of additional man-made physical capital is just equal to the marginal cost to human beings of sacrificed natural capital. All nonhuman species and their habitats are valued only instrumentally according to their capacity to satisfy human wants. Their intrinsic value (capacity to enjoy their own lives) is assumed to be zero.

• 2 The biocentric optimum. Other species and their habitats are preserved beyond the point necessary to avoid ecological collapse or cumulative decline, and beyond the point of maximum instrumental convenience, out of a recognition that other species have intrinsic value independent of their instrumental value to human beings. The biocentric optimal scale of the human niche would therefore be smaller than the anthropocentric optimum.

• sustainable development does not tell us which optium we want

Policy Outruns Theory: Tradeable Permits As a Forced Separation of

Allocation, Distribution, and Scale

• –Email JCD– Page 52-53 The tradeable pollution permits scheme, explained below, is a beautiful example of the independence and proper relationship among allocation, distribution, and scale. Consider step by step what this policy requires in practice. First we must create a limited number of rights to pollute. The aggregate or total amount of pollution corresponding to these rights is determined to be within the absorptive capacity of the airshed or watershed in question. That is to say, the scale impact is limited to a level judged to be ecologically sustainablean economic Plimsoll line must be drawn as the very first step. Far from ignoring scale, this policy requires that the issue of sustainable or optimal scale be settled at the beginning. It may be done on the basis of a carrying capacity estimate, a safe minimum standards estimate, or a cost-benefit study, but some limit to total pollution must be set. Second, the limited number of rights corresponding to the chosen scale must be distributed initially to different people. Perhaps equally to citizens, or to firms, or perhaps collectively as public property then to be auctioned or sold by the government to individuals. But there must be an initial distribution before there can be any allocation and reallocation by trading. Only in third place, after having made social decisions regarding an ecologically sustainable scale and an ethically just distribution, are we in a position to allow reallocation among individuals through markets in the interests of efficiency.

• A separation between allocation and scale requires that the total quantity of permits be fixed, but that the price at which the permits trade be free to vary.

• scale is not determined by prices, but by a social decision reflecting ecological limits.

• Tradeable permits have been considered the individualistic ‘‘free market” solution, without emphasizing that this market is free only after having been firmly and collectively fixed within scale and distributive limits.

• The greens (environmentalists), too, have shown considerable misunderstanding of this scheme, condemning it as “giving away licenses to pollute.” The point is that this scheme limits the total scale of pollution, –Email JCD–

• we can’t understand all the external costs to nature and then package them into the appropriate cost increases. Even if we could, nature does not have to let us consume her at whatever pace we want - thresholds, complex webs, etc make it unpredictable. Even even still, this also assumes each individual understands and makes “correct” choices.

• The relative price of shoes and bicycles is instrumental in allocating resources efficiently between shoes and bicycles, but is clearly not instrumental for deciding the proper range of inequality in wealth or income, nor for deciding how many people consuming how much per capita of natural resources is sustainable.

• Distribution and scale involve relationships with the poor, the future, and other species that are fundamentally social in nature rather than individual.

• Any tradeoff among the three goals (e.g., an improvement in distribution in exchange for a worsening in scale or allocation, or more unequal distribution in exchange for sharper incentives seen as instrumental to more efficient allocation) involves an ethical judgment about the quality of our social relations rather than a willingness-to-pay calculation.

• modern reduction of all ethical choice to the level of personal tastes weighted by income.

• Although discussed in terms of pollution, the logic of tradeable permits extends to controlling depletion as well. It can be applied regionally, nationally, and even internationally, as with carbon emission permits to limit the green- house effect. It can even be applied to population control as in the tradeable birth quotas suggested by Kenneth Boulding (1964). In fact, to my knowledge, Boulding’s was the first clear exposition of the logic of the scheme, although applied to the least likely area of acceptance politically. The tradeable permits idea is truly a paradigm for many sensible policies,

How Big is the Economy?

• Probably the best index of the scale of the human economy as a part of the biosphere is the percentage of human appropriation of the total world product of photosynthesis. Net primary production (NPP) is the amount of solar energy captured in photosynthesis by primary producers, less the energy used in their own growth and reproduction. NPP is thus the basic food resource for everything on earth not capable of photosynthesis. Vitousek et al. (1986) calculate that 25% of potential global (terrestrial and aquatic) NPP is now appropriated by human beings. 8 If only terrestrial NPP is considered, the fraction rises to 40%.

Cowboy, Spaceman, or Bull in the China Shop?

• economic polar extremes correspond to Boulding’s colorful distinction between the “cowboy economy” and the “spaceman economy.” The cowboy of the infinite plains lives off of a linear throughput from source to sink, with no need to recycle anything. The spaceman in a small capsule lives off of tight material cycles and immediate feedbacks, all under total control and subservient to his needs. For the cowboy, scale is negligible; for the spaceman, scale is total. There is no material environment relative to which scale must be determined; there is no ecosystem, only economy. In each of these polar cases, the only problem is allocation. Scale is irrelevant.

• only in the middle ground does scale not get conflated with allocation

• Economic calculation is about to be overwhelmed by novel, uncertain, and surprising feedbacks from an ecosystem that is excessively stressed by having to support too large an economic subsystem (Perrings 1987).

• since we cannot go back why not? to the cowboy economy, we have acquired a tendency to want to jump all the way to the spaceman economy and take total control of the spaceship earth. (The September 1989 special issue of Scientific American entitled “Managing Planet Earth” is representative of this thrust.) But, as environmentalist David Orr points out, God, Gaia, or Evolution was doing a nice job of managing the earth until the scale of the human population, economy, and technology got out of control. Planetary management implies that it is the planet that is at fault, not human numbers, greed, arrogance, ignorance, stupidity, and evil. We need to manage ourselves more than the planet, and our self-management should be, in Orr’s words, “more akin to child-proofing a day-care center than to piloting spaceship earth.” The way to child-proof a room is to build the optimal scale playpen within which the child is both free and protected from the excesses of its own freedom. It can enjoy the light and warmth provided by electrical circuits beyond its ken, without running the risk of shorting out those circuits, or itself, by experimenting with the “planetary management technique” of teething on a lamp cord.

• Our manifest inability to centrally plan economies should inspire more humility among the planetary managers who would centrally plan the ecosystem.

• Those who want to take advantage of the “invisible hand” of self-managing ecosystems have to recognize that the invisible hand of the market, while wonderful for allocation, is unable to set limits to the scale of the macroeconomy. Our limited managerial capacities should be devoted to institutionalizing an economic Plimsoll line that limits the macroeconomy to a scale such that the invisible hand can function in both domains to the maximum extent.

• The increase in measured national income and wealth resulting as formerly free goods are turned into scarce goods is more an index of cost than of benefit, as was recognized by the classical economist Lauderdale back in 1819 (Lauderdale 1819; Foy 1989).

A Glittering Anomaly

• Optimal scale of a single activity is not a strange concept to economists. Indeed, microeconomics is about little else. An activity is identified, be it producing shoes or consuming ice cream, and a cost function and a benefit function for the activity in question are defined. Good reasons are given for believing that marginal costs increase and marginal benefits decline as the scale of the activity grows. The message of microeconomics is to expand the scale of the activity in question up to the point where marginal costs equal marginal benefits, a condition which defines the optimal scale. All of microeconomics is an extended variation on this theme.

• there is no scale mentioned once you jump to macro

CHAPTER 3: CONSUMPTION: VALUE ADDED, PHYSICAL TRANSFORMATION, AND WELFARE

• We are consuming natural capital and calling it income

• Northern Countries need to reduce consumption

• Southern need to reduce population

Consumption and Value Added

• Man cannot create material thingshis efforts and sacrifices result in changing the form or arrangement of matter to adapt it better for the satisfaction of his wantsas his production of material products is really nothing more than a rearrangement of matter which gives it new utilities, so his consumption of them is nothing more than a disarrangement of matter which destroys its utilities. [Marshall 1961, pp. 6364]

• In the standard economist’s vision we consume only that value which we added in the first place. And then we add it again, and consume it again, etc. This vision is formalized in the famous diagram of the isolated circular flow of value between firms (production) and households (consumption), found in the initial pages of every economics textbook.

• For all the focus on value added, one would think that there would be some discussion of that to which value is being added.

• Barnett and Morse (1963) put it, Advances in fundamental science have made it possible to take advantage of the uniformity of matter/energya uniformity that makes it feasible, without preassignable limit, to escape the quantitative constraints imposed by the character of the earth’s crust. [p. 11]

• That to which value is being added consists of merely homogeneous, indestructible building blocksatoms in the original senseof which there is no conceivable scarcity.

• The importance of mere stuff is frequently downplayed by pointing out that the entire extractive sector (mines, wells, quarries, and so on) accounts for a mere 5 or 6% of GNP. But if the 95% of value added is not independent of the 5% in the extractive sector, but rather depends upon itis based on itthen the impression of relative unimportance is false. The image this conjures in my mind is that of an inverted pyramid balanced on its point. The 5 or 6% of the volume of the pyramid near the point on which it is resting represents the GNP from the extractive sector. The rest of the pyramid is value added to extracted resources. That 5% is the base upon which the other 95% reststhat to which its value is added. Value cannot be added to nothing.

• Adding value is more like multiplication than additionwe multiply the value of “stuff” by labor and capital. But multiplying a zero always gives zero.

Consumption and Physical Transformation

• “valued added by nature”

• Carbon atoms scattered in the atmosphere can receive value added only with the enormous expenditure of energy and other materials. Carbon atoms structured in a tree can be rearranged much more easily. Concentrated copper ore can hold value added, atoms of copper at average crustal abundance cannot. E

• From a utility or demand perspective, value added by nature ought to be valued equally with value added by labor and capital. But from the supply or cost side it is not, because value added by humans has a real cost of disutility of labor and an opportunity cost of both labor and capital use. We tend to treat natural value added as a subsidy, a free gift of nature. The greater the natural subsidy, the less the cost of labor and capital (value added) needed for further arrangement. The less the humanly added value, the lower the price, and the more rapid the use. Oil from East Texas was a much greater net energy subsidy from nature to the economy than is offshore Alaskan oil. But its price was much lower precisely because it required less value added by labor and capital. 3 The larger the natural subsidy, the lower its price and the faster we use it up!

• Thanks in part to this natural subsidy, the economy has grown relative to the total ecosystem to such an extent that the basic pattern of scarcity has changed. It used to be that adding value was limited by the supply of agents of transformation, labor and capital. Today adding value is limited more by the availability of resources that have been subsidized by nature to the point that they can receive value added. Mere knowledge means nothing to the economy until it becomes incarnate in physical structures. Low-entropy matter/energy is the restricted gate through which knowledge is incorporated in matter and becomes man-made capital. No low-entropy matter/energy, no capitalregardless of knowledge. Of course, new knowledge may include discovery of new low-entropy resources, and new methods of transforming them to better serve human needs (e.g., atomic energy). But new knowledge may also discover new limits and new costs (radiation associated with atomic energy causes cancer).

• As we come to an optimal, or mature scale, production is no longer for growth but for maintenance. A mature economy, like a mature ecosystem (E.P. Odum 1969), shifts from a regime of growth efficiency (maximize P/B, or production per unit of biomass stock) to a regime of maintenance efficiency (maximize the reciprocal, B/P, or the amount of biomass stock maintained per unit of new production). Production is the maintenance cost of the stock and should be minimized. As Kenneth Boulding (1945) argued almost fifty years ago,

• Any discovery which renders consumption less necessary to the pursuit of living is as much an economic gain as a discovery which improves our skills of production. Productionby which we mean the exact opposite of consumption, namely the creation of valuable thingsis only necessary in order to replace the stock pile into which consumption continually gnaws. [p. 2]

Consumption and Welfare

• The proper economic object is to transform natural into man-made capital to the optimal extentthat is, to the point where total service (the sum of services from natural and man-made capital) is a maximum. As discussed in the previous section, this occurs where the marginal benefit of services of more man-made capital is just equal to the marginal cost of natural services sacrificed when the natural capital that had been yielding those services is transformed into man- made capital. The theoretical existence of an optimal scale of the economic subsystem is clear in principle. What remains vague are the measures of the value of services

• Human welfare is not a function of consumption flows, but of capital stocks. We cannot ride to town on the maintenance costs, the depletion and replacement flow of an automobile, but only in the complete automobile, a member of the current stock of automobiles. Once again, Boulding (1949) got it right fifty years ago:

• I shall argue that it is the capital stock from which we derive satisfactions, not from the additions to it (production) or the subtractions from it (consumption): that consumption, far from being a desideratum, is a deplorable property of the capital stock which necessitates the equally deplorable activities of production: and that the objective of economic policy should not be to maximize consumption or production, but rather to minimize it, i.e., to enable us to maintain our capital stock with as little consumption or production as possible. [p. 79]

• This shift from maximizing production efficiency toward maximizing maintenance efficiency is the exact economic analog of the shift in ecosystems mentioned earlier, as they reach maturitythat is, from maximizing P/B to maximizing the reciprocal, B/P. As a mature scale is reached, production is seen more and more as a cost of maintaining what already exists rather than as the source of additional services from added stock. The larger something has grown, the greater, ceteris paribus, are its maintenance costs. More new production, more throughput, is required just to keep the larger stock constant against the entropic ravages of rot, rust, and randomization.

• Service/Throughput = Service/Stock * Stock/Throughput

• We can define growth as increase in throughput, holding the two right-hand ratios constant. Service thus increases in proportion to throughput as a result of growth. Development can be defined as an increase in service from increases in the two right-hand efficiency ratios, holding throughput constant. “Economic growth,” growth in GNP, is a conflation of these two processes: (1) growth (physical increase) and (2) development (qualitative improvements that allow more stock maintenance per unit of throughput, and more service per unit of stock). Since physical growth is limited by physical laws, while qualitative development is not, or at least not in the same way, it is imperative to separate these two very different things.

• Failure to make this distinction is what has made “sustainable development” so hard to define. With the distinction, it is easy to define sustainable development as “development without growthwithout growth in throughput beyond environmental regenerative and absorptive capacities.”

PART II OPERATIONAL POLICY AND SUSTAINABLE DEVELOPMENT

Chapter 4

Operational Policy and Sustainable Development by Investing in Natural Capital

###Shifting Investment toward Natural Capital

• One cannot substitute efficient cause for material causeone cannot build the same wooden house with half the timber no matter how many saws and carpenters one tries to substitute.

• man-made capital and natural capital are not substitutes, they are complimentary

• If factors are complements, then the one in shortest supply will be the limiting factor. If factors are substitutes, then neither can be a limiting factor since the productivity of one does not depend much on availability of the other. The notion of a limiting factor is familiar to ecologists in Leibig’s law of the minimum.

• that the world is moving from an era in which man-made capital was the limiting factor into an era in which remaining natural capital is the limiting factor. The production of caught fish is currently limited by remaining fish populations, not by number of fishing boats;

• if we subconsciously realize that production growth cannot continue, then the only way to cure poverty is to confront both sharing and population control.

• the landlord, who, as Adam Smith told us, loves to reap where he has not sown.

• [the shift] will require higher resource prices, and a higher risk of sharpening the labor-capital conflict. Environmentalism does not usually engage these larger issues of political economy. The challenge to environmentalists in the twenty-first century will be to confront these fundamental questions.

How to Invest in Natural Capital

• Natural capital is the stock that yields the flow of natural resourcesthe population of fish in the ocean that regenerates the flow of caught fish that go to market; the standing forest that regenerates the flow of cut timber

• The natural income yielded by natural capital consists of natural services as well as natural resources. Natural capital is divided into two kinds, as represented in the examples given: renewable (fish, trees), and non-renewable (petroleum).

• capital has traditionally been defined as “produced (man-made) means of production,” yet natural capital was not and cannot be produced by man. A more functional definition of capital is “a stock that yields a flow of useful goods or services into the future,”

• Also, there is an important category that overlaps those of natural and man-made capitalsuch things as plantation forests, fish ponds, herds of cattle bred for certain characteristics, etc., are not really man-made, but are significantly modified from their natural state by human action. We will refer to these things as “cultivated natural capital.” This is a broad category, including agriculture, aquaculture, and plantation forestry.

• a plantation forest has a natural capital component of sunlight, rainfall, and soil nutrients plus a man-made capital component of management services such as planting, spacing, culling, and control of diseases. In general, there seems to be a strong complementary relation between the natural and man-made components of cultivated natural capital. Nevertheless, cultivated natural capital does substitute for natural capital proper in certain functionsthose for which it is cultivated, such as timber productionbut not wildlife habitat or biodiversity in the case of a plantation forest.

• For renewable resource management, “waiting” investment simply means constraining the annual offtake. Keeping the annual offtake equal to the annual growth increment (sustainable yield) is equivalent to maintenance investmentthat is, the avoidance of running down the productive stock, equivalent to the Hicksian condition that capital remain intact.

• By definition, investment in renewable natural capital must the only passive. But more active investment is possible in cultivated natural capital. How far can we go with this type of investment? Can we cultivate an entire biosphere?

• No one knows how far we can rely on cultivated natural capital. However, we are currently so far away from the requisite understanding of ecosystems that their large scale redesign should be ruled out as at best quantitatively insignificant, and at worst qualitatively dangerous. As Paul Ehrlich has reminded us, ecological economics is a discipline with a time limit. We do not have time to learn how to create a cultivated “Biosphere II.” We must save the remnants of Biosphere I and allow them to regenerate by the passive investment of waiting.

• The basic idea is to convert nonrenewable natural capital into a renewable substitute, to the extent possible. The general rule would be to deplete nonrenewables at a rate equal to the rate of development of renewable substitutes.

• Although we cannot invest in nonrenewables, we can manage their liquidation in such a way as to increase direct passive investment in renewables and indirect active investment in measures to increase throughput productivity that make waiting (throughput reduction) easier.

• Think of the world initially consisting of only natural capitalour initial dowry. We convert some of it into man- made capital in order better to serve our wants. The extent to which we should continue this conversion is economically limited.

• Ecological Economic Efficiency = MMK Services gained/NK Services sacrificed [see picture for breakdown - pg 84]

• As NK is converted into MMKas we go from an “empty world” to a “full world” in both vision and realitywe want at each step to maximize the service from the increment of MMK and to minimize the loss of ecosystem service from the decrement of NK. But at some point, even if carried out efficiently, this process of conversion of NK into MMK will itself reach an economic limit, an optimal scale of the economic subsystem beyond which further expansion would increase costs faster than benefits. This optimal scale is defined by the usual economic criterion of equating marginal costs and benefits. This criterion assumes that marginal benefits decline and that marginal costs increase, both in a continuous fashion. It is reasonable to think that marginal benefits decline because humans are sufficiently rational to satisfy their most pressing wants first. But the assumption that marginal costs (sacrificed ecosystem services) will increase in a continuous fashion is problematic. As the human niche has expanded, the stresses on the ecosystem have increased, but there has been no rational ordering by human or providential intelligence to ensure that the least important ecosystem services are always sacrificed first.

Chapter 5

Fostering Environmentally Sustainable Development:

Four Parting Suggestions for the World Bank

• 1 Stop counting the consumption of natural capital as income. Income is by definition the maximum amount that a society can consume this year and still be able to consume the same amount next year. That is, consumption this year, if it is to be called income, must leave intact the capacity to produce and consume the same amount next year. Thus sustainability is built into the very definition of income.

• need to count “user cost” (depletion charges) as part of the opportunity cost of projects that deplete natural capital. depletion of source or sink depletion of nonrenewables or drawdown of natural capital stock

• balance-of-payments accounting, the export of depleted natural capitalwhether petroleum or timber cut beyond sustainable yieldis entered in the current account, and thus treated entirely as income. This is an accounting error. Some portion of those nonsustainable exports should be treated as the sale of a capital asset, and entered on capital account

• 2. Tax labor and income less, and tax resource throughput more.

• me in the face of high unemployment in nearly all countries, we are discouraging exactly what we want more of. The present signal to firms is to shed labor and substitute more capital and resource throughput, to the extent feasible. It would be better to economize on throughput because of the high external costs of its associated depletion and pollution, and at the same time to use more labor because of the high social benefits associated with reducing unemployment.

• It is value added that can be taxed out of existence, not throughput!

3. Maximize the productivity of natural capital in the short run, and invest in increasing its supply in the long run.

• 4. Move away from the ideology of global economic integration by free trade, free capital mobility, and export-led growthand toward a more nationalist orientation that seeks to develop domestic production for internal markets as the first option, having recourse to international trade only when clearly much more efficient. At the present time global interdependence is celebrated as a self-evident good. The royal road to development, peace, and harmony is thought to be the unrelenting conquest of each nation’s market by all other nations. The word “globalist” has politically correct connotations, while the word “nationalist” has come to be pejorative. This is so much the case that it is necessary to remind ourselves that the World Bank exists to serve the interests of its members, which are nation states, national communitiesnot individuals, not corporations, not even NGOs (non-governmental organizations). It has no charter to serve the one-world-without-borders cosmopolitan vision of global integrationof converting many relatively independent national economies, loosely dependent on international trade, into one tightly integrated world economic network upon which the weakened nations depend for even basic survival.

• the desirability and the possibility of a world government are highly doubtful, it will be necessary to make capital less global and more national. I know that this is an unthinkable thought right now, but take it as a predictionten years from now the buzz words and hot concepts will be “renationalization of capital” and the “community rooting of capital for the development of national and local economies,” not the current shibboleths of export-led growth stimulated by whatever adjustments are necessary to increase global competitiveness. “Global competitiveness” (frequently a thought-substituting slogan) usually reflects not so much a real increase in resource productivity as a standards-lowering competition to reduce wages, externalize environmental and social costs, and export natural capital at low prices while calling it income.

• The World Bank should use the occasion of its fiftieth birthday to reflect deeply on the forgotten words of one of its founders, John Maynard Keynes: I sympathize therefore, with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travelthese are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.8

PART III - NATIONAL ACCOUNTS AND SUSTAINABLE DEVELOPMENT

Introduction

• we found that empirical evidence that GNP growth has increased economic welfare in the United States since about 1970 is nonexistent. This conclusion is conservative, because we did not subtract the cost of harmful products such as tobacco or alcohol, nor did we make any adjustment for the declining marginal utility of income as aggregate income grows.

• GNP, an invention of the 1930s

• sometimes makes me think that we would be better off without any such measures at all. The mere existence of any numerical index of welfare is a standing invitation to the fallacy of misplaced concretenessto serving the inevitably distorted reflection of reality represented in the index instead of directly serving the reality itself. There is a limit to what one can do with numbersjust as there is a limit to what one can do without them. Finding the right balance is not easy

Chapter 6 - Toward a Measure of Sustainable Net National Product

Sustainable Income

• The central criterion for defining the concept of income has been well stated by Sir John Hicks: The purpose of income calculations in practical affairs is to give people an indication of the amount which they can consume without impoverishing themselves. Following out this idea, it would seem that we ought to define a man’s income as the maximum value which he can consume during a week, and still expect to be as well off at the end of the week as he was at the beginning. Thus when a person saves he plans to be better off in the future; when he lives beyond his income he plans to be worse off. Remembering that the practical purpose of income is to serve as a guide for prudent conduct, I think it is fairly clear that this is what the central meaning must be. [1946, p. 172]

• same idea at national level

• income should be net national product not gross

• sustainable income is reduntant

• net natioal product will be limited by bioavailability

• Let us then define the corrected income concept, “sustainable social net national product” (SSNNP), as net national product (NNP) minus both defensive expenditures (DE) and depreciation of natural capital (DNC). Thus, SSNNP = NNP - DE - DNC

Defensive Expenditures

• Cost as humans implode the biosphere, concentrations, collisions, like air pollution, or traffic

Depletion of Natural Capital

• This is entirely analogous to the depreciation of man-made capital.

• categories of natural capital are geological (nonrenewable) and biological (renewable).

Chapter 7 - On Sustainable Development and National Accounts

The Anomaly: An Impossibility Hypothesis

• how could the US restart if all the capital stock vanished? No more E. TX oil, no iron ore to get to offshore/Alaskan..

• if developing countries export low hanging fruit resources to get luxury items for elites from develped nations, the $ won’t be enough to get the now harder to access resources, making them more dependent on the developed countries

• Kuwait for example, high GDP but it is really capital consumption

• underdeveloped also assumed overdeveloped

Cost, Benefit, and Capital Accounts: An Alternative to GNP

• we should treat services from the material environment consistently with services from the human environment. We should always count only service as income, and that which renders service as capital.

• human providing service to human is counted as income, but the human’s birth is not

• Pigou (1970) rejected Fisher’s approach because “the wide departure which it makes from the ordinary use of language involves disadvantages which seem to outweigh the gain in logical clarity.”

From 1949, when he was still very much an orthodox economist, Kenneth Boulding (1969) argued the logic of Fisher’s view: I shall argue that it is the capital stock from which we derive satisfactions, not from the additions to it (production) or the subtractions from it (consumption): that consumption, far from being a desideratum, is a deplorable property of the capital stock which necessitates the equally deplorable activities of production: and that the objective of economic policy should not be to maximize consumption or production, but rather to minimize it, i.e., to enable us to maintain our capital stock with as little consumption or production as possible.

• 1 Accumulation (or “capital” in Irving Fisher’s sense) is the total inventory of consumers’ goods, producers’ goods, and human bodies. Accumulation takes two forms: a fund or a stock. A stock is an unstructured inventory of like things or of a homogeneous substance, which gets used a little at a timethat is, some gets totally used up before the rest is affected at all (for example, gasoline). A fund is a structured organic whole, all parts of which must participate together, and which depreciates as a whole (for example, an automobile). Stocks get “used up,” funds get ‘‘worn out.” Both require replacement.

• 2 Service is the satisfaction experienced when wants are satisfied (psychic income in Irving Fisher’s sense). Service is yielded by accumulations (stocks and funds). The quantity and quality of the stocks and funds determine the intensity of service. Service is yielded over a period of time, and thus appears to be a flow magnitude, but unlike true flows it cannot be accumulated.

• 3 Throughput is the entropic physical flow of matter and energy from nature’s sources, through the human economy and back to nature’s sinks; it is the flow that is accumulated into stocks and funds and out of which stocks and funds are replaced and maintained. The basic relationship between these three fundamental magnitudes can be seen by an identity. Let A equal accumulations (both stocks and funds), S equal service, and T equal throughput. Then S/T = S/A * A/T

• Service is the final benefit. Throughput is final cost. Accumulation is throughput “frozen” in structured forms and inventories in shapes and amounts appropriate to our purposes and to the duration required for their satisfaction.

• GNP = value of some services + value of throughput + value of change in accumulated stocks

• How much sense does GNP make when translated into these more basic magnitudes? Consider that service is benefit, throughput is a cost, and net accumulation is a change in stocks and funds. What sense does it make to add these incongruous magnitudes? Is it not as if a merchant’s bookkeeper added up receipts plus expenditures plus the change in inventory?

• Instead of one account, GNP, we should keep three accounts, one for each basic magnitude. We need the following:

• 1 A benefit account which would seek to measure the value of the services yielded by all accumulations (not just those rented during the accounting period, and not just those used by consumers, but also those used in production that is enjoyable and self-fulfilling).

• 2 A cost account which would seek to measure the value of depletion, pollution, and disutility of those kinds of labor that are irksome (and of “waiting” in Alfred Marshall’s sense). With separate accounts for costs and benefits we could occasionally ask if the extra benefits of further accumulation were worth the extra costs.

• 3 A capital account, an inventory of the accumulation of stocks and funds and their ownership distribution. Included in the capital account would be not only produced stocks and funds, but also natural capital such as mines, wells, and ecosystem infrastructure.

• 1 The accumulation of stocks and funds would be satsificed.

• 2 Service would be maximized, given the sufficient accumulation.

• 3 Throughput would be minimized, given the sufficient accumulation.

• Sufficiency and sustainability would be the criteria for choosing a level of accumulation. Efficiency would be achieved by maximizing service yielded per unit of accumulated stocks and funds, and by minimizing throughput per unit of stock or fund required for maintenance and replacement.

• Benefits include not only the service of rented assets, but also the service of owner-used assets which are currently omitted. Costs include depletion of natural capital, loss of current environmental service, and disutility of labor, all currently neglected in GNP, or, worse, implicitly treated as benefits.

PART IV - POPULATION AND SUSTAINABLE DEVELOPMENT

Introduction

• the rich get richer, the poor have more children. this virtually unlimited labor keeps wages down… on top of the other monopoly on production means

• what most attracted my attention while living in Northeast Brazil in the late 1960s was the effect of class differentials in fertility upon the distribution of income. Fertility in the lower class was over twice that of the upper classa condition that still obtains in many parts of the world today. The possibility of wages ever rising in the face of a virtually unlimited and rapidly growing supply of labor was nil. The rich got richer while the poor got children. An effective upper- class monopoly on the means of limiting reproduction was added to the traditional monopoly on ownership of the means of production to give an additional dimension of class dominance. It seemed to me that the social factors generating poverty were two: nonownership of the means of production (Marx); and nonownership of the means of limiting reproduction (Malthus). Although Marxists and Malthusians are traditional enemies, it seems to me that their respective understandings of the causes of poverty are logically consistent

Chapter 8 - Carrying Capacity As a Tool of Development Policy:

The Ecuadoran Amazon and the Paraguayan Chaco

• The remaining sparsely inhabited portions of the world (polar regions, deserts, tropical rainforests) have been “saved for last” for good reason. They are difficult to inhabit and have low average carrying capacity for human activities. Sparse populations are all that have ever been sustainably supported by the ecosystems of such areas. The concept of carrying capacity is an indispensable tool for planning the rational use of these areas, as has been demonstrated by Phillip M. Fearnside in his Human Carrying Capacity and the Brazilian Rainforest (1986) and earlier by G. Ledec, R. Goodland, J. Kirchner, and J. Drake, in their paper “Carrying Capacity, Population Growth, and Sustainable Development” (1985).

• For humans the calculation of carrying capacity is far more complex than for other species. Other species have “standards of living” that are constant over time (animals and plants do not experience economic growth, although consumption may vary over the life cycle). Also they have relatively uniform “standards of living” (i.e., per capita resource consumption levels) throughout their populations at a given point in time (no class inequality, with a few exceptions such as social insects whose class structure is genetic rather than social). And the technologies of other species are also relatively constantgenetically given endosomatic technologies that have coevolved with the environment and are consequently well adapted to it. Furthermore, the level of “international” or inter-ecosystem ‘’trade" among animals is relatively constant and limited. For humans these four constants become variables. The calculation of human carrying capacity requires, therefore, some assumptions about (1) living standards, (2) degree of equality of distribution, (3) technology, and (4) extent of trade.

• inertia and limits

• Use best agricultural land for food crops rather than cattle. Human carrying capacity can be increased by eating lower on the food chain, and by using the best valley land for agriculture and the hillsides for grazingthe opposite of the present pattern. Intensification of agriculture (irrigation) may offer some scope for raising carrying capacity as well.

• redistribution

• reinvest oil $ to reforest, fisheries, etc

• Perhaps one reason Ecuador does not perceive its situation as drastic is that the development banks are eager to lend it more money. The obvious conclusion for Ecuador to draw is that since it is creditworthy in the eyes of the development banks, things could not really be so bad. The development banks think things must not be so bad because Ecuador is willing to borrow at interest and obviously considers itself creditworthy without drastic policies. Each party takes comfort from the other’s optimism. Neither party has yet faced the facts.

• Attempting the impossible will waste unlimited amounts of resources and cause much conflict. The first rule of development policy therefore should be, “Do not attempt the impossible.” The first operational corollary of this rule is, “Respect carrying capacity.”

Chapter 9 - Marx and Malthus in Northeast Brazil:

A Note on the World’s Largest Class Difference in Fertility and Its Recent Trends

• To the Marxist notion of exploitation based on class monopoly of the means of production there must be added a notion of Malthusian or ‘‘Roman" exploitation based on class monopoly of the means of limiting reproduction. In ancient Rome (as in Northeast Brazil) the role of the proletariat was to procreate a plentiful supply of laborers and servants for the republic (i.e., the patricians).

• fertility rate differences in economic classes similar to segregation It is inconvenient to the oligarchy because it exposes another dimension of class exploitation. One might think, therefore, that Marxists would be eager to expose the facts. However, they are unwilling to admit any cause for poverty other than monopoly ownership of the means of production. Neo-Malthusian policies are especially distasteful to Marxists because they hold out the possibility of improvement by individual action, thereby weakening class solidarity and taking some wind out of the sails of their single cure for all ills, the class revolution. Consequently, the subject is neglected.

• the literal role of a proletariat is to proliferate. 18 The literal meaning of the word “proletariat” in ancient Rome was those with many children, the poorest class of society whose members were exempt from taxes and whose service to the republic was mainly in the procreation of children. Implicit in this literal meaning and explicitly developed in Malthusian and neo-Malthusian thought is the association of poverty with rapid proliferation. By Marx’s time the word had largely lost its Latin meaning, and Marx severed any remaining etymological connection with proliferation by redefining the word to mean nonowners of the means of production who must sell their labor to the capitalists in order to survive.

• logically the Marxian and Malthusian theories do not conflict. It is quite possible for one class to have a monopoly of both the means of production and the means of limiting reproduction. In fact, Marx himself tells us that mere possession of land and capital is not sufficient to make a man a landlord or a capitalist if there be lacking the requisite social correlative, the proletarian with no alternative but to sell his labor to the capitalist.

PART V - INTERNATIONAL TRADE AND SUSTAINABLE DEVELOPMENT

Introduction

• Ricardo assumes capital is immobile between nations = no more comparative advantage, see book “For the Common Good” cobb and daly?

Chapter 10 - Free Trade and Globalization Vs. Environment and Community

• The Case against Globalization by Free Trade:

1. Costs of Transport, Dependence, and Reduced Range of Occupational Choice
2. Standards-Lowering Competition to Externalize Costs
3. important to count all costs

• tarrifs to counteract externalized costs (i.e child labor)

• Globalism does not serve world communityit is just individualism writ large.

• We can either leave transnational capital free of community constraint, or create an international government capable of controlling it, or renationalize capital and put it back under control of the national community. I favor the last alternative. I know it is hard to imagine right now, but so are the others. It may be easier to imagine after an international market crash.

• 3 Natural Capital as Limiting Factor

• moving from no trade to some trade eases capital constraints, moving from less trade to more trade does not necissarily

• more trade = more simultaneous constraints, less national sequential constraints

• nations won’t learn from past nations mistakes

• 4 Intra-Industry Trade and Intellectual Property

• Intra-industry = import and export basically the same thing

• Roughly half of world trade is intra-industry tradethat is, simultaneously exporting and importing basically the same commodity. For example, the United States imports Danish butter cookies, and the Danes import U.S. butter cookies. Somewhere on or above the North Atlantic the cookies pass each other. Surely the gains from trading such similar products cannot be large. But regardless of their size, could not these gains be had more efficiently simply by exchanging recipes?

• In general, might not the free international flow of information be preferable to the flow of goods or capital? When you sell or give away information (as opposed to goods), you do not give it upyou still have it. What you give up is your monopoly, which is what gave the information its exchange value. But you still have the full use value. Once information exists, an argument can be made that its price should be zero for efficient allocation. But the cost of production of new knowledge is usually not zero, and so we reward inventors with a temporary monopoly. But might there not be a better way to reward creators of knowledge? Prizes? Grants? High salaries? Something that does not require that knowledge be kept artificially scarce?

• Knowledge is so largely a social product in any case that it is quite arbitrary and unjust to give property rights for minor applications of basic knowledge but not for the discovery of basic knowledge itself. Do the genetic engineers, eager to patent new organisms, share their royalties with Watson and Crick? Or with the teachers who taught them about the double helix? Or with the heirs of Gregor Mendel?

• The early Swiss economist Sismondi noted that inventions motivated by a desire to serve mankind are less likely to be socially destructive than inventions motivated by the desire for personal enrichment. Maybe he was right. Maybe the quality of the incentive is more important than the quantity. Maybe Thomas Jefferson was right in his statement, carved in stone at the University of Maryland’s McKeldin Library: “The field of knowledge is the common property of mankind.”

• Yet free traders emphasize the importance of strengthening intellectual property rights and making knowledge less and less “the common property of mankind.” Their argument is that unless new knowledge is kept expensive there will not be sufficient incentive to produce more of it. But even granting considerable force to that point, I am still inclined to favor the hypothesis that the benefit of rapid sharing of the knowledge we now have is greater than the cost of any consequent risk of slowing the creation of new knowledge. Following Schumpeter, one could argue that new knowledge has a natural but temporary monopoly by virtue of its novelty, and it is the loss of that novelty, as a result of sharing knowledge, that gives the incentive to discover ever newer knowledge. The use value of new knowledge gets imputed to the factors of production that put it into effect, as the exchange value of the knowledge is competed down to zero. Of all things, knowledge and information are what should flow most freely across national boundaries, and especially from North to South. Yet this is what today’s free traders least want to be free.

Refutation of two Common Objections

• While it may be true that free trade increases economic growth, the other link in the chain of argument, that growth increases welfare, is devoid of empirical support in the case of the United States since 1947.

• Nordhuas and Tobin 1972 - MEW - Measured Economic Welfare, Cobb and Daly 1989 - ISEW - Index of Sustainable Economic Welfare

• GNP and welfare corrolated less and less since 1929 very weak corrolation after 1947

• Ricardo comparative advantage, english cloth for portugese wine but don’t forget he said capital was immobile between countries labor also stays home

Classical vs Neoclassical views of Free trade

• Experience, however, shows, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and entrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek more advantageous employment for their wealth in foreign nations. -Ricardo

• By preferring the support of domestic to that of foreign industry, he (the capitalist) intends only his own security; and by directing that industry in such a manner as its produce may be the greatest value, he intends only his own gain, and he is in this, as in many other cases led by an invisible hand to promote an end which was no part of his intention. -Adam Smith

• capital staying at home is assumed good for the community

• smith argues that it is also good for the domestic preferring capitalist

Globalization and Immigration

• free trade going to lead to free immigration

• A former Texas commissioner of agriculture, Jim Hightower, made the following suggestion: “Let’s keep our factories and jobs here and move our corporate headquarters to Mexico, Korea, or wherever else we can get some reasonably priced chief executives.” Or maybe we could allow free immigration of cheap chief executives along with cheap labor.

Chapter 11 - From Adjustment to Sustainable Development:

The Obstacle of Free Trade

• on “adjustments”: To put the matter in other terms, we have three economic problems to consider: allocation, distribution, and scale. Allocation refers to the apportioning of resources among alternative product usesfood, bicycles, cars, medical care. An allocation is efficient if it corresponds to effective demand, that is, the relative preferences of the citizens as weighted by their relative incomes, both taken as given. An inefficient allocation will use resources to produce a number of things that people will not buy, and will fail to produce other things that people would buy if only they could find them. It would be characterized by shortages of the latter and surpluses of the former. Distribution refers to the apportioning of the goods pro duced (and the resources they embody) among different people (as opposed to different commodities). Distributions are just or unjust; allocations are efficient or inefficient. There is an efficient allocation for each distribution of income. Scale refers to the physical size of the economy relative to the ecosystem. The economy is viewed, in its physical dimensions, as a subsystem of the larger ecosystem. Scale is measured as population times per capita resource usein other words total resource usethe volume of the matter/energy throughput (metabolic flow) by which the ecosystem sustains the economic subsystem. Scale may be sustainable or unsustainable. An efficient allocation does not imply a just distribution. Neither an efficient allocation nor a just distribution, nor both, implies a sustainable scale. The three concepts are quite distinct, although relations among them exist, as noted above.

Why Free Trade Conflicts with Sustainable Development

• International free trade conflicts sharply with the national policies of (1) getting prices right, (2) moving toward a more just distribution, (3) fostering community, (4) controlling the macroeconomy, and (5) keeping scale within ecological limits.

• 4 Free trade and free capital mobility have interfered with macroeconomic stability by permitting huge international payment imbalances and capital transfers resulting in debts that are unrepayable in many cases and excessive in others. Efforts to service these debts can lead to unsustainable rates of exploitation of exportable resources, and to an eagerness to make new loans to get the foreign exchange with which to pay old loans, with a consequent disincentive to take a hard look at the real productivity of the project for which the new loan is being made. Efforts to pay back loans and still meet domestic obligations lead to government budget deficits and monetary creation with resulting inflation. Inflation, plus the need to export to pay off loans, leads to currency devaluations, giving rise to foreign exchange speculation, capital flight, and hot money movements, disrupting the macroeconomic stability that adjustment was supposed to foster.

• To summarize so far: Free trade sins against allocative efficiency by making it difficult for nations to internalize external costs; it sins against distributive justice by widening the disparity between labor and capital in high-wage countries; it sins against community by demanding more mobility and by further separating ownership and control; and it sins against macroeconomic stability. Finally, it sins against the criterion of sustainable scale, in a more subtle manner that will now be considered.

PART VI - TWO PIONEERS IN THE ECONOMICS OF SUSTAINABLE DEVELOPMENT

Chapter 12 - The Economic Thought of Frederick Soddy

• Almost always the men who achieve these fundamental inventions of a new paradigm have been either very young or very new to the field whose paradigm they change. Thomas S. Kuhn, The Structure of Scientific Revolutions

The Neglected Physical Basis of Economics

• “without phosphorus no thought” (Soddy 1949, p. 129)

• life derives the whole of its physical energy or power, not from anything self-contained in living matter, and still less from an external deity, but solely from the inanimate world. It is dependent for all the necessities of its physical continuance primarily upon the principles of the steam-engine. The principles and ethics of human law and convention must not run counter to those of thermodynamics. [Soddy 1922, p. 9]

• The last sentence is very significant because it provides the basis for many of Soddy’s criticisms of the economy as a presumed perpetual motion machine. For humans, like other heat engines, the physical problems of life are energy problems. Pre-nineteenth-century man lived on energy revenue (sunlight captured by plants, the “original capitalists”). Present-day man augments this revenue by consuming energy capital (coal, the “stored sunlight of Paleozoic summers”). While man can use fuel-fed machinery to lighten labor, he can feed his internal fires only with new sunshine, or rather the energy of new sunshine as transformed through the good offices of the plant.

• For Soddy the basic economic question was, How does man live? and the answer was, By sunshine. The rules that man must obey in living on sunshine, whether current or palaeozoic, are the first and second laws of thermodynamics. This, in a nutshell, is “the bearing of physical science upon state stewardship.” Wealth is for Soddy “the humanly useful forms of matter and energy” (Soddy 1943, p. 6).

The Major Confusion: Wealth Versus Debt

• Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest. . . . For sufficient reason, the process of compound interest is physically impossible, though the process of compound decrement is physically common enough. Because the former leads with the passage of time ever more and more rapidly to infinity, which, like minus one, is not a physical but a mathematical quantity, whereas the latter leads always more slowly towards zero, which is, as we have seen, the lower limit of physical quantities. [Soddy 1926, p. 70]

• The ruling passion of the age is to convert wealth into debt in order to derive a permanent future income from itto convert wealth that perishes into debt that endures, debt that does not rot, costs nothing to maintain, and brings in perennial interest (Soddy 1933, p. 25).

• No individual could amass the physical requirements sufficient for maintenance during his old age, for like manna it would rot. Therefore he must convert his non-storable surplus into a lien on future revenue, by letting others consume and invest his surplus now in exchange for the right to share in the increased future revenue. The revenue is “a river of perishable and consumable wealth, steadily flowing to waste whether consumed by human beings or by rats and worms” (Soddy 1924, p. 24). But since future annual revenue is limited, there is a corresponding limit on the extent to which present surpluses can be exchanged for perennial streams of future revenue.

• Snoddy emphasizes that present surplus accumulation can never be changed into future revenue in any physical sense, but only exchanged for it under social conventions. Although it may comfort the lender to think that his wealth still exists somewhere in the form of ‘‘capital," it has been or is being used up by the borrower in either consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues to be generated by future sunshine. “Capital,” says Soddy, “merely means unearned income divided by the rate of interest and multiplied by 100” (Soddy 1922, p. 27).

• You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy]" (Soddy 1922, p. 30).

• Soddy’s “acid test is that no monetary accountancy be allowed that could not be done equally well by physical counters” (Soddy 1943, p. 24).

The Monetary flaw

• The main defect in the economic system was, for Soddy, the practice of fractional reserve banking, whereby the private banking system was enabled to create money, thus appropriating what he called “the Virtual Wealth of the community,”

• The ancient prerogative of the crown has been usurped, not by the modern state, the crown’s legitimate heir, but by the private banking system, which “has corrupted the purpose of money from that of an exchange medium to that of an interest-bearing debt” (Soddy 1926, p. 296).

• Banks are like counterfeiters who lend false money, accept their own false money in repayment and destroy it, but receive the interest in real money transferred to them by the rest of the community and which is not destroyed.

• by continually changing the value of money as they create and destroy it, the banking system converts the pound sterling into a rubber yardstick, in effect making a mockery of all physical measurement standards, since “yards per pound” or “gallons per pound” become variable magnitudes, even though yards and gallons be fixed.

• A further contradiction arises from the interest-bearing national debt being used as collateral security by bondholders who borrow from banks. Banks create a deposit (new money) for the borrowing bondholder and charge him interest. The public is taxed to enable the government to pay interest on the bond to the bondholder who, in effect, passes the interest on to the bank. Soddy draws the conclusion that “taxes are thus paid to the bank for doing what the taxes were imposed to prevent being done, namely, the increase of the currency. Otherwise, there would have been no reason for the State to borrow at interest if it had not wished to prevent the increase of the currency” (Soddy 1926, pp. 195, 298). Soddy considers this the final reductio ad absurdum of the monetary system.

Reform Measures

• Three basic reforms are suggested by Soddy to restore honesty and accuracy to the economic system: a 100% reserve requirement for banks, a policy of maintaining a constant price-index, and freely fluctuating exchange rates internationally.

The Relevance of Soddy’s Economic Thought Today

• solar low entropy (Soddy’s revenue) is nearly infinite in total amount but strictly limited in its rate of flow to earth, whereas terrestrial low entropy (concentrated minerals in the earth’s crust) is strictly limited in total amount, but can be used up at a rate of our own choosing.

Economic development since the Industrial Revolution has been in the direction of ever less reliance on the abundant solar flow and towards this dependence on the relatively scarce terrestrial stock. That is what Soddy called the “flamboyant period,” destined to be short-lived.

• Flexible exchange rates have come into being already, and Soddy was arguing their virtues at a time when most economists were wedded to the gold standard.

Chapter 13 - On Nicholas Georgescu-Roegen’s Contributions to Economics:

An Obituary Essay

• biology texts don’t focus only on animals’ circulatory systems, they also talk about the digestive tract, usually before the circulatory system.

• Circulation of blood is to circulation of money as the digestive tract is to . . . (what?). It is not too big a simplification to say that Georgescu filled in the blank with the analogous concept: the one-way flow beginning with resources and ending with waste. To this concept he gave the name “entropic flow.” Others, such as Kenneth Boulding, have called it “throughput.”

• In addition to highlighting intergenerational conflicts, our chapter on distribution would point out that the “miracle of compound interest” can no longer be appealed to as the way to “grow” everyone in the present generation out of poverty. Growth cannot forever substitute for redistribution and population control in fighting poverty.

• The idea that poor countries can simply grow their way out of poverty and debt by spinning their circular flows of exchange ever faster would itself be retired from circulation, along with other Ponzi schemes.

• To conceive of capital as a near-perfect substitute for resources, as is frequently done under the influence of Cobb-Douglas type production functions, is to believe that one can make the same house with twice as many saws, but half the lumber.

• I close with the wish that my work should receive rigorous but impartial examination. I am in a strong position to insist on this request because I was forced to fight so many mistaken ideas generally considered correct, ideas that have thus become so much more dear to the heart of many, yes, very many people, because their position in life is partly or wholly dependent upon accepting these ideas as true. Giving up these ideas would put them in the situation in which I now find myself, namely, at a mature age to have to look for a new position. -Gossen 1853

• I am glad that at a mature age Nicholas did not have to look for a new position. Along with others of his friends I was saddened that his latter years were so marked by bitterness and withdrawal, brought on in part by the failure of the profession to give his work the recognition that it truly merited, and in part by his own irascible and generally demanding personality. So great was his bitterness that he even cut relations with those who most valued his contribution. But none of that diminishes the great importance of his lifework, for which ecological economists must be especially grateful. He demanded a lot, but he gave more.

PART VII - ETHICS, RELIGION, AND SUSTAINABLE DEVELOPMENT

Introduction

• gone from “progress” that has positve tones, to “change” which is neutral modern globalization/obama = change, not progress

Chapter 14 - A Biblical Economic Principle and the Sustainable Economy

• The principle, if it could be stated in the form of an eleventh commandment, would read: Thou shalt not allow unlimited inequality in the distribution of private property.

The Principle and Its Biblical Basis

The Principle in the Modern World

The Principle and the Steady-State Economy

• we will find the concept of a steady-state economy increasingly more relevant than that of the existing growth economy. It is meaningful as a way to keep the rich from leaning too heavily on the poor and the present generations from leaning too heavily on future generations. It is also relevant to keeping human beings from leaning too heavily on other creatures whose habitats must disappear as we convert more and more of the finite ecosystem into a source for raw materials, a sink for waste, or living space for humans and warehouses for our artifacts.

Chapter 15 - Sustainable Development: From Religious Insight to Ethical Principle to Public Policy

The Religious Foundations of Sustainable Development

• Not only humans matter, although we matter most. A person is worth many sparrows, but for that statement to mean anything a sparrow’s worth cannot be zero.

• The religious insight here affirmed, namely that this is God’s world and we are responsible for how we treat it, is so elementary that it is hard to say more about it.

• A.N. Whitehead’s remark is worth repeating: “scientists animated by the purpose of proving that they are purposeless constitute an interesting subject for study.”

The Ethical Principle of Sustainable Development

• Since utilitarianism is the basic ethic underlying economics, it is useful to compare the above statement with Jeremy Bentham’s utilitarian guide of “the greatest good for the greatest number.” Bentham’s rule has the virtue of brevity, but unfortunately it contains an impossible double maximation. You cannot have two “greatests” because it is possible to have either more people at a lower per capita good or greater per capita good for fewer people. Logically it would have to be either “greatest good for a sufficient number” or ‘‘sufficient good for the greatest number." The principle here advocated is the latter, with “number” defined as cumulative number over time.

Economic Policies for Sustainable Development

Summary and Conclusion