Frank Rotering: An Economics for Humanity

PART 4 - THE ECOLOGICAL FRAMEWORK (page 2)

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According to these principles, there is no absolute prohibition against entering a threshold range, but the risk and consequences of ecological collapse cannot be imposed on an unwilling society.

The analytical method presented below assumes that the societies involved have made an informed and voluntary decision to incur the risk of ecological collapse in order to gain the potential health benefits.

c. Analytical Method

Because marginal analysis does not apply to thresholds, a different logic is required - one developed specifically to address risk and uncertainty. Statisticians have developed several decision-making criteria to deal with such cases. Among the best-known are maximin, minimax regret, and expected monetary value. (I will not address these in detail here. If you are interested, please look them up on the web or in a statistics text.)

Both maximin and minimax regret have been used to address environmental issues, but neither can incorporate the fact that the probability of threshold collapse tends to increase exponentially. Only expected monetary value permits this, making it is the most useful criterion for dealing with thresholds.

To apply any of these criteria, we list the alternative actions (flow levels) and the potential realities (actual threshold levels) we might encounter. For each combination of action and reality, we estimate the "payoff" that would result.

For the expected monetary value criterion, we additionally assign a probability to each reality, and then calculate the money we expect to gain from each action. As one statistics text puts it, "The expected payoff for this action is then the sum of the individual payoffs, weighted by their associated probabilities." (Statistics for Business and Economics, Paul Newbold, 1990, p. 842)

My suggested method retains the essential aspects of expected monetary value, but transforms this into expected threshold cost (ETC). The aim is not to estimate the monetary gain from business decisions, but the loss in human health from ecological collapse. An example is shown in the matrix below, using arbitrary units.

At left are the flow levels associated with the increasing quantities of an output. At the very top are the minimum flow levels that, according to the physical sciences, will cause threshold collapse, with the probability of collapse in parentheses underneath. At right is the expected threshold cost for each flow level. The expected health loss due to collapse - for present and future generations - is 100 units.

In this example, the marginal range is 1-4. At a flow level of 5 the probability of ecological collapse is greater than zero for the first time. This probability increases exponentially as flow levels increase. At flow levels of 25 and beyond, the probability of ecological collapse is 100%. The threshold range is therefore 5-25.

At a flow level of 1, there is a zero estimated chance of collapse, so the ETC is 0. At a flow level of 6, the probability of collapse is 0.05. If collapse occurs, the health cost is 100 units. Multiplying the probability by the potential cost results in an ETC of 5, as shown at right.

At a flow level of 11, we have passed the flow level of 5, with a 0.05 probability of collapse, and the flow level of 10, with a 0.10 probability of collapse. We have to account for the cumulative effect of these probabilities. We therefore multiply each by the potential cost and add the results, resulting in an ETC of 15.

This calculation is done for each flow level until we reach 26. The probability of collapse here is 100%, so ETC is 100 units. Flow levels greater than 26 will also have an ETC of 100 units. Note that, while flow levels increase linearly, ETC increases exponentially.

In figure 4 this threshold method is integrated with the marginal analysis introduced earlier.

At the top of figure 4 is the marginal analysis for the optimum quantity of a final output. This is similar to the graph introduced in the human framework, except that intrinsic value and labour cost have been omitted to minimize clutter. Ignoring thresholds, the optimum output level is (QM), which is now referred to as the marginal optimum.

At the bottom of figure 4 is the threshold logic. The net effectual value curve is simply effectual value minus input cost from the marginal graph. This is the net gain we would achieve in the absence of a threshold range. The expected threshold cost curve is exponential, as explained.

The point where the two curves cross marks the new optimum. This is the quantity where the rising costs associated with threshold collapse first exceed the declining value associated with increased quantity. This point is called the threshold optimum (QH). The red arrow shows the decrease in optimum levels resulting from the threshold logic.

Figure 4: Threshold optimum for a final output

To see the consequences of applying this method, assume that a threshold is pervasive and that collapse would entail massive deaths and declines in human health. The expected threshold cost in this case will be a vertical line from the 0% point. The method will therefore prevent entry into the threshold range.

Conversely, if the collapse entails no health impact, the curve will be horizontal. The method will then permit quantity to increase beyond the threshold range, to the marginal optimum.

Reality is obviously more complex than depicted here. Several flows are typically involved in one final product, and one flow is typically involved in several final products. However, these complications can be addressed with straightforward extensions to the above method. At this stage we should focus on the ethical foundation, coherence, and usefulness of the method itself.

6. IMPORTS AND EXPORTS

One important issue has not yet been addressed: how should human economics deal with imports and exports? This is a critical consideration in an era of globalization. Pollution-intensive industries are increasingly being transferred to the Third World, while outputs with high intrinsic value are being shipped back to the overdeveloped countries.

My suggested principle here is that the consuming society takes credit for an output's consumption and bears responsibility for its production. The basis for this is that in a humane economy, consumption drives production and not vice versa.

In analyzing a society's economy, we therefore add the value and cost of imports to the value and cost of domestic production. We ignore the value and cost of exports.

Thus if a society imports a vehicle, it transfers the vehicle's intrinsic value, and the natural and labour costs incurred in its production abroad, to its own economic accounts. If it exports potatoes, it transfers the intrinsic value, natural cost, and labour cost of their production to foreign accounts.

7. OPTIMUM QUANTITIES AND FLOWS

It is now possible to outline the full logic for maximizing human well-being while respecting ecological constraints, and to derive the five critical quantities and flows.

I start with the current value and cost curves, as was done in the human framework, but without assuming that the optimum quantity has been reached. See figure 5 below.

Figure 5: Increasing current gains

The shaded area indicates the current gains - the health benefits derived from the present consumption and production for this output. (QC) is the current quantity, and (QM) is the current marginal threshold.

If we leave the value and cost curves unchanged, gains can be increased by increasing output to the marginal optimum, as shown by the yellow arrow. If output quantity is currently greater than the marginal optimum, quantity must be decreased instead. In either case, the marginal optimum will result in health benefits referred to as maximum current gains.

This marginal optimum, when applied to all outputs in an economy, constitutes what Herman Daly and I call the economic limit to growth. Further growth can only be justified if the value curves are shifted up, the cost curves are shifted down, or both. These changes are shown in figure 6 below.

Figure 6: Increasing maximum current gains

The yellow arrow at top shows the result of improved distribution or consumption of the output, which increases effectual value. The yellow arrow at bottom shows the result of reduced labour or natural cost in producing the output, which decreases input cost. These shifts will drive the marginal optimum to the right, as indicated by the blue arrow.

If we continue these changes to their feasible maximums, we arrive at the result depicted in figure 7 below. The health benefits here are referred to as maximum marginal gains.

The optimum in figure 7, when applied to all outputs in an economy, constitutes the absolute limit to growth. Growth beyond (QM) is never justified, even in the absence of ecological limits, unless we provide an ethical rationale for producing quantities beyond those required to satisfy our vital needs.

Figure 7: Decreasing maximum marginal gains

The last step is to apply the threshold logic. The result is shown in figure 8.

Figure 8: Maximum threshold gains and the target optimum

The target optimum is the output quantity that results in maximum threshold gains. This defines the maximum gains achievable when thresholds are taken into account. I call this the target optimum because this quantity, with its associated value and cost curves, constitutes the ultimate aim for each final output.

The target optimum, when applied to all outputs, constitutes the ecological limit to growth. This is also the output level referred to in ecological economics as the economy's optimal scale. (But see my criticism of ecological economics on this point below.)

We can now define the five critical quantities and flows.

1. The optimum quantity for a FINAL OUTPUT is the target optimum established above.
2. The optimum quantity for an INTERMEDIATE OUTPUT is the minimum quantity required to produce the target optimums of all associated final outputs.
3. The optimum flow for a NONRENEWABLE resource is the flow required for the optimum quantities of all associated final and intermediate outputs, at peak ecological efficiencies.
4. The optimum flow for a RENEWABLE resource is the same as for #3. Threshold effects have already been considered in establishing the optimum quantities for the associated final outputs.
5. The optimum flow for a WASTE is also the same as for #3. Again, threshold effects have already been considered.

In brief, we derive the optimum quantity of a final output by maximizing its associated health gains and applying threshold logic. We then work backwards through the production chain to find the optimum quantities of its associated intermediate outputs and flows.

Applied to the economy as a whole, this logic maximizes a society's well-being while accounting for ecological constraints. In other words, it achieves the objective of human economics.

8. DEFINING SUSTAINABILITY

Feasta's aim is to "explore and promote the characteristics - economic, cultural and environmental - that a society must have in order to be truly sustainable" (website). Feasta's definition of a sustainable system is "one which is capable of being continued unchanged for hundreds of years without causing progressive deterioration in any of the factors which make it up." (Feasta Review #1, p. 5)

This definition of sustainability has several deficiencies. Citing an unchanging system is a static, conservative posture that few outside the group are likely to share. The time period specified is arbitrary. Progressive deterioration for many resources cannot, in fact, be stopped - fuel supplies and mineral availability inexorably decline.

In my view, the concept of sustainability should be tied not to a social state, but to the maximum justifiable rates at which a society can consume the earth's resources. If a society stays within these limits, it is sustainable; if it exceeds them, it is not. This leaves a society free to change, and allows us to rationally set depletion rates. Let me explore this idea further.

Imagine the progression of human history, from the current generation to succeeding generations, into the indefinite future. Each generation has the right to consume so as to meet its vital needs and the responsibility to protect the environment. Now imagine a fixed quantity of a resource, such as oil. Assume that oil is irreplaceable for certain critical needs. How should it be distributed among the generations?

Equal distribution is logically impossible, because there is an unknown number of future generations. Distributing all the oil to the current generation is ethically indefensible: we only have the right to meet our vital needs, and we must protect the environment. Leaving it all for future generations is also indefensible: this does not allow the current generation to meet its needs, and it robs the future, because our health is the basis for their health.

Using the suggested approach, we would consume the quantity of oil required to reach the target optimums of all outputs in the economy, at peak ecological efficiencies. We would leave the rest for future generations.

To summarize: There is no better use for any resource or waste flow than meeting the vital needs of the present generation. When applied to present and future generations, this establishes the optimal temporal allocation of natural flows, and provides a rational basis for defining a sustainable society.

9. ECOLOGICAL ECONOMICS

I had intended to offer a detailed critique of Herman Daly's work at this point, but now feel that this is beyond the document's scope. I will instead offer a brief assessment of ecological economics.

Historically speaking, ecological economics has been a necessary reaction to the environmental ignorance of standard economics. Unfortunately, it has never progressed beyond this role. It has replaced the narrow perspective of capitalism with an equally narrow ecological perspective. At its core, it has retained most of the ideologically slanted concepts of the mainstream discipline.

The fundamental problem with ecological economics is that it has not rethought economics as a whole, from the ground up. Its focus on the ecological sins of standard economics has caused it to compress the pluralistic variety of economic reality into a single conceptual structure. This has resulted in errors which now impede our intellectual progress. Let me cite two.

1. The lack of a human framework means that ecological economics has no independent, human-based conceptions of value and cost. As a consequence, it has no basis for defining optimum outputs and flow levels. Although it uses the term, it has no conceptual foundation for optimal scale.

The best that ecological economics can do is to identity the largest economy that the underlying ecosystem can support. Optimal scale, however, should refer to the ideal economy for humanity, not just its maximum size for nature.

2. The lack of a functional framework means that ecological economics does not possess an analysis of capitalism. This has led it to perpetuate a serious error - the use of "capital" to refer to stocks of human and natural wealth.

"Capital" properly refers to the various forms of expanding exchange-value in a capitalist economy. Using the term for other stocks or wealth exacts a steep intellectual price - the conflation of separate conceptual realms and the inevitable confusion that ensues. This is of little consequence in popular discourse, where "capital" can be effectively employed as a metaphor. In theoretical work, however, such laxity is fatal.

The human and ecological frameworks can help us define an economy that meets the goal of human economics: the maximization of human well-being, subject to ecological constraints.

Such a definition is useful in freeing us from the ideological influence of capital, and it will be critical if we attempt to build new social structures. However, to guide activism, influence public policy, and manage existing societies, more is required. We must understand not only our ends and constraints, but also the means provided by an economic system to achieve those ends. For much of the world, this implies a detailed examination of capitalism.

The final component of human economics is therefore the functional framework, which in my version addresses capitalism exclusively. This framework is based on the economic concepts of Karl Marx, as expressed in Grundrisse, Capital, and Theories of Surplus Value. I rely heavily on Marx because, in the history of economic thought, his are by far the most incisive insights into capitalism's inner workings.

Despite the current political climate, I am convinced that we must rediscover the economic side of Marx if we are to fully understand capitalism - a system that poses immense obstacles to our initiatives, but that also presents us with broad opportunities to realize humanity's economic aims.

I will offer the functional framework for publication on the Feasta website if this turns out to be appropriate in the context of the group's discussion.

Comments can be sent to Frank Rotering at frank_rotering@yahoo.com

Introduction to Frank Rotering's articles on the Feasta website