The Myth of Self-Sufficiency Part II: I was wrong, a little bit…

In my first blog, “The Myth of Self Sufficiency,” I used the law of comparative advantage in order to advocate against the concept of economic self-sufficiency promoted by Roseland.  I explained that the end result of self-sufficiency is a reversal of the process of specialization, which increases efficiency and is the driver of progress.  I will use this current blog post to admit that I was partially incorrect.  A form of self-sufficiency is possible.  However, it cannot be implemented via the method of “import-substitution” that Roseland describes.   Below is a brief walk through my newly revised thinking: 

The only way a community will be self-sufficient is if local goods and services are less expensive than their non-local equivalents.  Because this is not currently a reality, in order to accomplish this task, the government would need to artificially inflate the economic costs of non-local goods and services through taxes.  This has been done before in numerous economies and is called import-substitution.  The problem with import-substitution is that it decreases the competitive environment of industry.  As inefficiencies increase, disparities grow between the real prices of local and non-local goods and services.  Once this occurs, the unofficial economy will find a way to bring cheaper , non-local goods into the local economy in order to correct the imbalance.  This usually ends in a loss of tax revenue for the government, a monetization of government debt, and finally an implosion of the import-substitution system.

What I have realized (perhaps later than the rest of you) since writing my first blog is that the actual barrier to self-sufficiency is the recognition of only economic costs.  Instead of artificially increasing price through regulation, an alternative method for implementing self-sufficiency would be to recognize “true costs.”  But when I say “true costs,” I do not exactly mean economic costs + environmental costs.  I believe that environmental cost is just another term for “unspecified economic cost.” 

At this point, I imagine that most business managers, even if they don’t believe in climate change, would be willing to hedge their bets against its potential economic costs.  In other words, they would be willing to pay a premium, however small, as “insurance” against the negative effects of climate change.  I would argue that this premium is in fact,  "unspecified economic cost" or “environmental cost." 

This “insurance” and “premium” relationship is just another way to describe a call option.  And I would argue that the premium on a Carbon call option is the environmental cost component of “true cost.”  If U.S. businesses were provided access to such options, the cost of insuring against the potential costs of carbon usage would begin to be incorporated into prices, resulting in “true prices.”  Does the U.S. government need to implement regulation to “create” a cost of carbon, or "carbon tax?"  Not necessarily.  Creating a private U.S. market for carbon options would make less carbon-dependent local businesses more competitive than non-local businesses, and would ultimately move local economies toward self-sufficiency.

Personal Project

For my personal project I am aiming to launch a web-based business that will promote sustainabile consumption on the part of individuals.  While the business plan is still being formulated, the objective is to create positive financial incentives in exchange for altered patterns of consumption.  If the concept is ultimately successful, that will great.  If not, I'm hoping to learn a lot in the process.

The Myth of Self-Sufficiency

Nobody knows how to make a pencil.  Nobel Prize winner Milton Friedman would often cite this truism in order to explain how free markets worked.  Friedman explained that the wood, graphite and rubber components of each pencil are sourced from disparate locations across the globe, with the cooperation of thousands of workers who will never meet, ultimately coming together through a complex structure of prices that make up the free market system.

The contributions of each party within the pencil supply chain can be thought of as representative of human progress.  In the beginning, everybody had to do everything.  Each party was responsible for its own food, clothes, energy, etc.  It was only through specialization that humanity discovered a win-win situation.  It turned out that each party within a trade network had its own comparative advantage and that increased trade between parties resulted in increased productivity and a higher quality of life for all parties.

Interestingly, in our readings by Roseland and others, it seems that promoters of sustainable communities would like to reverse this process through what they call "import-substitution," and "self-sufficiency."  These sustainability advocates argue that total energy consumption will decrease once humanity has tightened its distribution systems by promoting local production and realizing the ultimate goal of "self-sufficiency."  I disagree with this unproven concept and believe that self-sufficiency should not be required within a sustainable community. 

It seems obvious that an unknown proportion of the energy costs saved by reducing the size of distribution networks will most certainly be added back to humanity's aggregate energy consumption by rolling back the aforementioned productivity gains won by specialization.  The net energy savings in this new system might even be negative.  The real problem is not trade itself, but transportation costs.  Instead of attempting to create impractical, "self-sufficient" communities, advocates of sustainable living should focus on engineering practical solutions to lowering the costs of trade.