Over the past century, economists have taken great lengths to legitimize their field as a true science that is comparable to other sciences like physics and chemistry. They have done so by applying ever more abstract mathematical equations to what otherwise, in many cases, would be plainly obvious concepts. For example, when asked to simplify the work that won him the Nobel Prize in 1981, James Tobin said, “I guess I proved: Don’t put all your eggs in one basket.” (http://www.nber.org/)
Despite the fancy equations, economics is just the study of one, universally understandable, thing: human behavior. And just like physics, human behavior is bound by natural laws. One such law says that humans, as investors, will prefer investments with higher expected returns per unit of risk to investments with lower expected returns per unit of risk. The most efficient investments are located on what is called the efficient frontier (left). Nobody imposed this law on our world, it simply exists and there is nothing we can do about it. To me, it is as universally true as E=mc^2.
When Tim Jackson spoke about a “paradigm shift” towards a sustainable economic system, he referenced a search engine called Ecosia (http://ecosia.org/faq.php#2) as an example of a new business model which would, along with other similar new models, propel us towards sustainability. I could not disagree more with Mr. Jackson. By supporting Ecosia, which gives away more than 80% of its revenues to the World Wildlife Fund, Mr. Jackson is hoping that the natural economic law stated above will cease to exist. He might as well have said, “Let’s try to forget about gravity and try something new called ‘walking on air.’”
In fact, there is not much new about Ecosia. It is a private business that supports a charity. Many companies support charities. McDonalds allocates a portion of its revenue towards the Ronald McDonald House. The only difference between McDonalds and Ecosia is that McDonalds doesn’t allocate 80% of its revenues towards the Ronald McDonald House. If it did, it would have less capital to allocate towards its primary business, leading to lower business performance. Its competitors, which would not allocate 80% of their revenue towards the Ronald McDonald House, would have more resources available to out-innovate McDonalds. Eventually, McDonalds would be driven out of business or, more likely, into a hostile takeover. After that, the amount of revenue being allocated to the Ronald McDonald House would be 80% of zero. I predict that ultimately, a similar sequence of events will unfold for Ecosia. No company can violate the laws which govern human behavior indefinitely.
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| Try my new paradigm |
The readings in Wheeler this week focused on the concept of monetizing the environment. Over the course of this class, I have become convinced that this is the only viable way to move the world economy towards sustainability. This is because the concept does not advocate the overturning of the current economic system, which is simply not possible to do with success. Please reference any communist country for proof of this. Instead of overturning the system, a monetization of the environment aims to incorporate “externalities” into the system. This is accomplished, very simply, by placing a price tag on everything that provides an environmental service but is currently regarded as free. My proposed carbon dioxide emissions allowance futures exchange, for which I recently posted a business plan (http://v515brian.blogspot.com/), is a good example of what I believe must happen in the absence of government action on emissions. This is just a start.
There are many more search engines similar to Ecosia, one of which is good search - donating money to your specific charity of choice every time you search..
ReplyDeleteI think the point you (and Wheeler) bring up about monetizing the environment is key. It might not be the only way to go, but I also think it's one of the best. One of the best ways to motivate many individuals and corporations is through affecting their bottom line. If it's more expensive to pollute than to not pollute, then, logically, fewer companies will choose to pollute.
In addition to directly incorporating externalities into the system, we can also see it being indirectly incorporated (if looking at the problem from a larger scale). For example, check out China's motivation for their stricter policies on emissions regulation and global warming. They're not "cracking down" (obviously a very relative term) because it's a "good thing to do" (perhaps this sounds like an approach we're familiar with...? US)
In China, emissions regulation is tied to the economic welfare of the nation. China loses about 6% of its total gross domestic product to damages caused by water and air pollution. This negative externality from pollution is one motivation for the NPC to entitle the State Council with power to create climate change policy and regulations... Would it be possible for other governments to internalize these externalities in a similar way?
Brian, I do think you are right that monetizing the enviroment seems like the best option. However, I think to make the impact that is truly needed, a "paradigm shift" of societies values of what matters and how much something is worth, does need revision. even if we monitize the reduction of CO2 to be hugely beneficial and necessary, if the people don't move away from loving their cars, the impact needed won't be reached.
ReplyDeleteYou mention that overturning the "current economic system" won't work, while at the same time advocating doing exactly that.
ReplyDeleteIn order to "monetize the environment" you say we must place a price tag on everything that provides an environmental service (which is essentially every available natural resource), but there is no way to place a price tag on something that by its very nature can't have an owner. So if we were to put a price on all of the resources that make up our world, we first have to redesign our system of property rights in such a way that EVERYTHING is owned by someone. This is the only way that all of it can be assigned a purely economic value through the system of economics you're proposing we use. Doing this would be a pretty significant upending of our current economic system in its own right and would create plenty of new problems that would flow in to take the place of the problems we're trying to solve. But even if that were a possibility, that's still not something that can be done without government action.
One way or the other governments have to be involved. So do the governments of the world make every natural resource ownable (Mount Google-Everest, The BP-Amazon River) so that they (the resources) can play within the confines of being economics goods and services that are subject to price and quantity interactions (and how would we ever agree on how to divide up the oceans and atmosphere anyway?) or do the governments just enact regulations focused on protecting those natural resources in the first place? Neither is easy, but I posit that the latter is far more feasible. Either way, your suggestion of doing it without government involvement will never work, the governments' got to be involved at some point.
Secondly, I want to point out that at its very best and most efficient/effective functioning, economics only provides a very simple model of behavior. The real world is far too complex to always fit in line with the predictions that an economic model makes and the harder we try to fit things that don't naturally lend themselves to that model, the more likely we are to ultimately end up with circumstances and consequences that defy that prediction.
The other problem with trying force our natural resources into a purely economic model is that the environment is finite and not able to effectively adjust to market prices. When we run out of natural environment, it doesn't matter how high of a price we put on it at that point, there's not going to be more.
Finally, I'm not in love with the idea of corporations (who's primary objective is to make a profit) getting to have an even greater say in the fate of our world, which is what would happen if that whole world was fully monetized.
Thanks for everyone's comments!
ReplyDeleteJennifer - Really good point regarding China's GDP. I studied in Beijing a few years ago and was amazed by the pollution there. Every morning was cloudy until the pollution burned off by mid-afternoon. Also, due to the clearing of forests around the city, sand storms from central China would occasionally blow through the city, which was disgusting.
Reen - I wish I could believe that it is possible to change society's values based on altruistic arguments alone, but I just don't. However, I think people will love their cars less when it is more expensive to drive them.
Scott - I appreciate your comments but it seems like you've not understood my post. I did not propose that there is no role for government in the creation of environmental markets. On the contrary, my proposed carbon futures market depends on the expectation of future government regulation. I am only proposing that a market can be created in advance of government regulation through a futures contract.
Also, I'm not sure that creating a new system of laws regarding property rights constitutes an overturn of the current economic system, it just seems like some new laws. To me, creating new laws seems more realistic than attempting to prevent humans from wanting to buy new and exciting items, as Tim Jackson suggested in his "new paradigm."
Brian,
ReplyDeleteStimulating post! Corporations, associations, governments and individuals must all balance margin and mission to thrive. Margin-only entities will fail as certainly as mission-only concerns. The current economic paradigm will shift, either voluntarily or involuntarily, because the current economic paradigm is based on infinite growth (or its illusion, as we have seen) on a finite planet. This violates the more fundamental laws of math and physics. How that paradigm shift can be made less disruptive to civilization is a key question with opportunities for both margin and mission. We know how to operate in the black and the red. How do we operate in the green? Monetizing aspects of ecosystem services may be one piece of that puzzle.