World 3 Model


Energy Use

 Sustainability, Economic Illusions, and Taxes
Looking Beyond the WTO , Corporations, and Other Scapegoats

By Norton Smith

Admittedly the term sustainability is a subjective concept, perhaps an unreachable goal, but to make any progress there must be accurate roadsigns and a functional economic vehicle. Currently we lack both elements. The common definition of sustainability as the ability to "meet current needs without sacrificing the ability of this generation or future generations to meet their own needs" can be flexed to fit almost any lifestyle by the use of economic fantasy. The current indicators of social and economic well being create an illusion of progress that if left unchallenged will destroy the foundations of our livelihood. The problem is basically twofold; first, economic theory is hopelessly out of touch with the reality of six billion people crowded onto a planet with finite resources, and secondly, the free market system, which does an excellent job of allocating capital and labor, by its very nature cannot solve the problems of the distribution of wealth, or the overall scale of the economy.

Very few economists ever considered the upper limits of growth on a macroeconomic scale. It has always been assumed that scarce raw materials could be replaced by more abundant ones in order to keep prices competitive. Theory has never included the obvious truth that we live on a planet that has finite resources. Economists resolutely cling to the idea that both environmental problems and unjust distribution of wealth can be overcome by continued economic growth. To make the trickle down theory work, however, requires the resources to sustain unlimited growth. In economic theory this is possible, but common sense and a quick look at the rate we are using up our world's resources argues that the theory is not valid. The 1990's version of the myth would have us believe that in this "information age" we will be able to maintain our economic growth with continually decreasing input of raw materials, however, there is a limit since some basic materials and energy will always be required and access to these will place the upper limit on growth of population and consumption. In short we cannot eat or drink ideas or capital.

Our current situation developed quite logically. As technology increased the productivity of the worker, we have been faced with the task of creating jobs fast enough to employ the labor force displaced by more efficient machinery. We have done that successfully by creating new desires to consume the growing productive capacity. In the process we have lost sight of the basic understanding that it is not consumption that leads to satisfaction, but capital. In other words we derive pleasure from having a car, or a pair of skies, not from their deterioration and replacement. A sustainable economy will depend on minimizing the throughput of material necessary to maintain capital stocks, rather than continuing to grow production and consumption in an effort to create more jobs and more wealth. As Herman Daly says "science has abandoned the belief in perpetual motion, but economists still cling to perpetual growth."

One of the foundations of the illusion of growth is the failure of economists to distinguish between capital and income. The calculation of GNP is a case in point. GDP accounting does not reflect the environmental costs of production, nor does it account for the loss of capital stocks in the form of renewable and non renewable resources. Cutting a forest to produce newsprint adds to the plus column along with the cost of repairing the damage caused by erosion from the logging, cleaning up the pollution from the paper mill, and disposing of the waste paper in the landfill. There is no deduction for the loss of the forest, soil loss, the depletion of fossil fuel, or the loss of the ecosystem's capacity to sequester carbon and supply oxygen. It is true that many of these factors are extremely difficult to quantify, but that cannot justify ignoring them. Unless all the costs are considered, including the loss of "environmental services" such as the sequestering of carbon and production of oxygen by the forest, it is impossible to weigh the effects of human activity and make rational choices.

This process of "internalizing externalities" requires more than just a change in formulas. Many external factors do not affect the cost to the consumer of the product. Acid rain affects the environment downwind of the power plant, regardless of the location of the end user of the power. Charging the power producer and thus its customers for the added environmental cost of pollution may reduce the pollution, but does not compensate the downwind populations who may even be in a different country.
Even more deeply imbedded in the current economic mythology of unlimited consumption is the concept of interest. It seems innocent enough to charge for the use of money, especially when we are the lender, but the concept fosters the consumption of resources in the present at the expense of future users. First it places pressure on business to produce a return high enough in each time period to pay the interest on it debt. If the business was financed exclusively through equity (shared ownership in the enterprise) the owners would be more apt to take a long term view of the business strategy. Even more damaging however is the practice of discounting the future value of money. If the interest rate is 8% then $1000 ten years in the future is really worth $463 because that amount invested at 8% will be worth $1000 at the end of the ten years. By the same logic, what is the cost of cleaning up a toxic waste site fifty years in the future? The discounted cost of clean up is then $21.32 for every $1000 - hardly worth worrying about. If we look one hundred years in the future, that same $1000 expense is only valued at 45 cents today. With that kind of faulty reasoning influencing business it is clear why there is little concern for the depletion of natural resources, or rise in sea level that will not affect us for 50 to 100 years. The solution of course is to think of the future as if we were an equity investor or a partner - which we are - and therefore have a strong interest in maintaining a livable planet.

Another counterproductive hangover from the early days of the industrial revolution is the income tax. By adding to the cost of labor, the income tax encourages business to substitute raw materials for labor. To add to the problem governments often subsidize raw materials extraction by offering inexpensive rights to mine public land and by giving depletion allowances to oil and gas producers. A far more appropriate solution would be a tax on raw material consumption, and no tax on labor which would encourage more efficient use of energy and materials, while simultaneously encouraging the creation of more jobs.
On an international level, the reduction of trade barriers has increased the ability of net importers like the U.S. to export their environmental degradation to less developed countries. Even with environmental and labor laws, trade in its very essence is a means to increase the consumption of natural capital without having to suffer the consequences locally. We import oil, minerals, wood, and agricultural products without loss to our own supplies of these assets or depletion of our soils and water. The exporter of raw materials, however, is permanently depleting its natural capital for the sake of current income, thus establishing a long term dependency on wealthy consumer nations.

Another downside to increased trade stems from the loss of national sovereignty. To effectively control resource depletion on a global scale requires policy decisions that set internationally agreed on limits for the use of community assets such as the air, and the oceans. Free trade undermines the ability of a nation to make and keep such agreements because it loses the ability to control its economic borders, and thus its control of the movement and consumption of regulated materials.

Another way to look at sustainability is the concept of the ecological footprint of a person or nation. According to William Rees at the University of British Columbia, the average American requires 5.1 hectares of land to produce his food, forest products, water, and sequester the carbon released from fossil fuels. The available productive land in the United States is 2.81 hectares per person, which means that almost half of the natural capital consumed by the U.S. is appropriated from other countries though trade or else is adding to a natural capital deficit (degradation of the ecosystem). In Europe the footprint is somewhat smaller, at three hectares per person, but the population density is much higher, leading to footprints ranging from 2.5 times land available in Austria to nearly 20 times land available in the Netherlands. His figures are conservative, and can be challenged because sequestration of carbon in forests is at best a short term solution, and does not begin to address the depletion of fossil fuels, but it serves as a valuable tool for comparison. The bottom line shows that the footprint of the present population at current levels of consumption already exceeds the land available, so to increase the consumption of the less developed nations to bring them into the first world would require the resources of several planets if the world population was to live at the consumption levels of Europe.
The footprint concept brings us directly to the issue of scale. It is clear that no matter how efficiently resources are allocated, and how accurately we can charge the cost of pollution or resource depletion to the source of the problem, there is still some maximum size for the economy beyond which the ecosystem is severely impaired and the quality of life deteriorates. There is no mechanism in macroeconomic theory for addressing this issue. Economic theory is based on the summation of choices made by each individual seeking to optimize his individual sense of fulfillment. Fishing is the classic example of the tragedy of the commons - as fish stocks diminished, larger ships were built and factory ships roamed farther from port. To pay for the increased cost, the ships had to catch more fish, which meant covering more area and caching smaller fish. The result is clear in the 90% drop in Cod stocks on the Grand Banks, and serious depletion in other areas. Economics is only concerned with price and supply, not with the sustainability of the enterprise. Consequently as long as a business can earn a rate of return that is higher than the current interest rate, it is better off depleting the resources now and finding another business in the future.

International cooperation has been successful in the instance of ozone depleting chemicals, but there is a need for much more comprehensive agreements. To date, the more difficult issues have either been ignored or addressed with token reductions. The Kyoto Protocols called for a 5% cut in CO2 emissions below 1990 levels which is minimal compared with the 60% -70% cuts that will be necessary to stabilize the CO2 levels in this century. More basically, most nations have not even begun to address the population issue in a realistic way, and those that have, like China have been constantly criticized for their actions. The concept of setting limits on the consumption of raw materials whether in the form of a carbon tax, limitations on over-pumping of groundwater for irrigation, or a tax on the extraction of metal ores, is a long way from acceptance.

We have looked at the failure of current economic theory to provide accurate information needed to make decisions compatible with a sustainable society, and we have looked its failure to address the issue of the optimal scale of the economy. A third factor in creating a sustainable world is the distribution of wealth. There has been a lot of criticism of capitalism on the grounds that it leads to the oppression of workers for the enrichment of the owners. This is a legitimate criticism and is an inescapable tendency of the system. One merely has to look at the mathematics of compound interest to see why in a market system any discrepancy in wealth tends to be increased at an exponential rate. For instance if a worker has $1,000 in the bank earning 7% interest and the employer is getting the same 7% return on $2,000, at the end of 10 years both investments will double so the employer will have 4 times the capital as the worker. In another 10 years this "greedy capitalist" will be 8 times more wealthy than the laborer without taking unfair advantage of anyone. Of course in real life the wealthy investor has opportunities to earn a higher rate of return which further exaggerates the differential savings rate.

In the past, this inequality, coupled with a traditionally higher birth rate among the poor has been a boon to the ruling classes by insuring a large supply of cheap labor. Large differences in wealth, however, deny the possibility of a sustainable world. In addition to the issue of justice, poverty is intimately linked to war, to higher birth rates, and to uncontrolled sacrifice of environmental resources for short term survival. It is impossible to keep a settler in the Amazon from burning the forest if his survival depends on clearing a new field. Nor is it possible to prevent a villager in India from cutting the last tree in the forest to cook his rice when he has no other way to live. The vast differential in wealth that exists today correlates directly with political power and in the inability of the third world nations to protect their assets from exploitation by the first world nations. This forces the economically less powerful nations to make decisions that favor short term consumption rather than long term planning.

Since the industrial revolution, the first world nations have relied on growth to raise the standard of living of the entire population fast enough to keep everyone more or less satisfied. The labor movement, and the progressive tax system have helped, but without growth the plight of the worker would be far worse. In the future growth is not an option, the economy will not remain static, however, and without some external control, wealth will continue to be concentrated in an increasingly elite minority by the functioning of compounding of returns on investment. Achieving some level of parity between rich and poor nations, and between rich and poor individuals is essential, but will not happen by itself, but requires some external policy to insure a more even distribution of income.

The emphasis on maximizing short term profit has led to the growing size and power of the corporation. The corporation is becoming the power base for world govenment, resulting in the corruption of the democratic principal, and a socio economic system that reponds to the desires of the consumer, not the needs of its citizens now or in the future. The corporations are responsible for many environmental abuses and should be held accountable. Looking deeper, however, we see that they are merely doing what they were created to do, that is making the most economically profitable choices available at the present time. By changing the economic values on which corporate leaders base their decisions, many corporate abuses would cease. Given the appropriate motivation, it is possible, perhaps even likely that the corporation would become the leader in the environmental movement, simply because the corporation can respond more quickly to changes in costs than a government can create effective legislation. In other words it would be more effective to create an economic structure in which survival is more profitable than environmental destruction rather than attempting to legislate the end result detail by detail. Imposing restrictions, such as air quality controls or limits on water use, only serve to divert consumption to some other resource, but do not address the core issue of reducing throughput. One positive example, is the pledge by several large corporations to voluntarily reduce CO2 emissions by more than called for in the Kyoto Protocols.

With population and consumption already exceeding the earth's carrying capacity, and economists and national leaders still advocating growth, it is clear that economic theory is at odds with common sense, and any logical path to self preservation. To get off this self destructive path requires a rethinking of the basic tenants of our economic and social policies. To do this may not be possible in a political system that has degenerated from a democracy to a dollacracy (from one person one vote to one dollar one vote), but in order to make changes in either the political or the economic realm requires a citizenry and leadership with complete and accurate knowledge of the consequences of their actions, and a willingness to look deeply into problems rather than merely blaming the opposing political party, corporations, or the current scapegoat.

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