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Economics of progress and need for nature restoration

How did we reach where we have reached today?

If we ask a question why do we need economics in the first place – “for progress” will be the quick response. Having said that current economics should be about progress, we will see in this paper that conventional economics is not all about progress. It deals merely about allocation of resources based on competing wants. As buyers and sellers of these wants meet in the marketplace to bargain, the resultant prices of needed commodities and services emerge - which are fair and beneficial to both parties. In the real world, the choice is never free; and infinite number of buyers and sellers is also not a reality. Therefore the resultant price is a result of the relative strength of buyers and sellers.

The “free choice” does not exist - as all the factors which are not supposed to interfere such as subsidies on the policy side and advertisements on the operation side among others– very much interfere leading to severe distortion in “fair” price. Another important assumption apart from the assumption of “free choice” is that the distribution of wealth in the society is given at any point in time. In reality distribution of income is never equitable due the existence of private property. In addition the inequitable distribution of resource ownership does not help either

The private profit motive leads to artificial lowering of prices of natural resources and labor. At the same time this motive treats nature’s services as free and therefore results in lower income for labor and owners of natural resources. This lowering of income among the majority of people leads to a failure of demand and recession from time to time. This happens due to failure of demand arising out of lack of purchasing power. Severe recession from time to time has given rise to state intervention in economic affair; the data for this cyclic recession is well known and publicly available.

It was expected that state investment in basic necessities would lead to a trickledown effect creating large scale employment and generation of income among the masses. This was then expected to lead to revival of demand. Yet the faith in free competition continued among economists and state intervention was felt necessary only during recession. Market was still supposed to be the main arbiter in distribution of wealth.

Technologies developed during World War II were used during peace times to covert production systems to a gigantic scale, weapon were needed to be produced in very large numbers in very short timescales. This facet then became so ingrained in the production system that mass production became a fundamental dimension of modern industry after the World War II. As demand for necessities of life is limited, mass production essentially implied production of items of consumption, which are over and above daily necessities. This also led to “creating” markets and wants. In effect mass production involved production of intermediate goods and induced people to buy these goods, which were not essential commodities. Such as buying far more clothes than one would ever need, and buying other goods such as cosmetics. This whole machinery of demand creation came into existence. The inducement to create the machinery of demand creation was not based on equitable distribution of wealth. That meant that the prices of natural resources and labor continued to remain low and nature’s services continued to be treated free.

Instead - new credit instruments were evolved and to service these, an infrastructure of middlemen like bankers, credit societies, landing agencies proliferated. State intervention continued not in the form direct investments but in the form of state subsidies to keep the price of natural resources artificially low. Due to credit instruments quantity and circulation of money in the economy increased leading to rise in money income but fall in real incomes, or income after adjusting for inflation.

Mass production and its role in depleting resources

Mass production of intermediate goods and emergence of the service sector based on technological advances made during this time created the illusion that man-made capital such as saws and natural capital such as trees is interchangeable! Merely at looking at the examples we realize that it is indeed not possible to achieve this interchangeability. Man-made capital can only use natural capital, if the natural capital exists in the first place.

Mass production created strain on non renewable resources (such as coal and oil) on one hand and created enormous waste which could not be absorbed by natural processes on the other. Pollution of atmosphere, water and soil was the result. The state was again called in to intervene, this time to enact legislation to prevent pollution. However, technology was further developed to reduce pollution. This created an illusion that man made capital can be a good substitute for natural capital.

Demand continued to be artificially enhanced through a philosophy that aggregate demands are infinite and aggregate production can me made infinite. This was the start of the economics of “more” – that is growth economics.

Progress Vs. perceived progress

All of us want to progress and want to move towards improved well-being. Definition of progress as provided by the Webster’s dictionary is “gradual betterment”. This betterment must be with respect to majority of people and not limited to a select few. Ideally this has to do with balancing of the availability of resources, renewability of resources, and allocation of resources and fair distribution of wealth among the current population base. If progress must deal with these elements, the economics of progress must deal with all of these too.

Today’s economics can well be termed as economics of “more” – that is growth economics. This economics is a post world war II phenomenon and arose out of advances in technology! Technology became available to produce things with less and less people at faster and faster pace through automation. This excessive production has led to need for extraction of ”more” natural resources and creation of more and more waste. This meant that the producer could always produce surplus and one needed to “market and sell” these surpluses. This also meant urgent need to induce increase in consumption – somehow.

As real income or income after adjusting for inflation did not increase for the masses, there was no real increase in purchasing power of the masses and they were offered increased consumption on credit leading to increased indebtedness. Places where the habit of savings was not encouraged, capital formation did not come through savings but came through credit instruments. This led to all-round increase in indebtedness, not only of the state but also of the entrepreneurs. This also refers to the profligacy of the state in case of developing nations – spending beyond means is what this alludes to.

Optimum distribution of wealth in the society was never seriously looked into by economists. However, Karl Marx did try to provide an alternative to this malfunction in distribution of wealth, although without much success. However, this UTOPIA of state managed optimum distribution of wealth degenerated into benefits of state management usurped by the elites in the communist party.

Consumption driven trickle-down effect

Another interesting phenomenon must also be noted – More consumption at the “wealthy” end spurs need for more services and products, leading to more “stuff” being produced by more people. These are the same people who start earning more and start asking for more, with an expectation that the lowest element of the ladder will achieve that elusive progress if this pyramid keeps growing before we exhaust all the natural resources that we have! All of this was wonderful till we realized that for this “more” of everything we must depend on nature. Considering that natural capital is finite, we have to use Natural Capital wisely and restore as much of this capital that is not irreversibly lost. In this economics of “more”, we have taken nature for granted. We have assumed that these natural resources that we bank on are indeed infinite and free. Unfortunately neither is true. The economics of “more” can only be sustained by keeping the prices of natural resources low or zero. Historically, this was due to the monopolies established by western European countries on natural resources from their colonies. This enabled them to extract minerals like coal and oil and agricultural products such as cotton at extremely low prices. Economic growth was spurred as these low input prices led to high profits.

Technology, scale and diversion of energy & materials

Advances in technology based on availability of cheap energy and materials increased the scale of production enormously. This technology continued to use enormous amount of fossil fuels leading to substantial increase in CO2 emission and other GHGs – thus contributing to global warming and climate change. Climate change is just one serious side effect of the economics of "more".

Increased scale led to compulsion to sell. Large population was therefore looked upon as a large “market’. Depletion of natural resources and serious damage to natural processes led to increasing the load on the natural capital even further! It must be understood that population is a deceptive denominator; aggregate consumption is a better measure of extent of use and destruction of natural resources for communities and nation states. However, increase in aggregate consumption did not lead to optimum distribution of consumption among the population. Large population meant that the piece of cake per head remained so small that for some it meant starvation and poverty. Taking due measures to manage and control population is equally important in promoting progress.

It is popular belief among traditional economists and expert technologists that man-made capital and natural capital are interchangeable. This is a complete fallacy. One can very easily see this through a simple example – you can make as many saws (Man-made capital) but you can use these only when you have enough trees (Natural capital)! The point is we cannot interchange saws for trees. You may be able to make better or different saws through technology but it is still necessary that we indeed have trees if we were to use these saws. The point is - the days of taking natural capital for “granted” are over. Such is the dependency of technology on nature. Technology cannot exist in a vacuum and in promoting use of technology, which in turn uses more natural capital; we are destroying our chances of living well in not so distant future. Not only is this limited to use of natural capital but we also create enormous amounts of waste in the process and expect our planet to digest that too! The absorptive capacity of the planet is also limited and one has to respect that to get on to the path of sustainability.

Distribution imbalance and impact on peace

If we believe that “peace” is an integral element of progress, we must also look at how the resource use can be equitable. A well-known historical event of French revolution is an excellent example of how unequal distribution of resources and income triggered social unrest and revolution. We need to ensure that the infrastructure that the governments build has such characteristics that social equity is built in. Interestingly, if we take into cognizance conservation and judicious use of natural resources, the policies would automatically drive us towards those which will also bring in social equity. If resources are used to create services required by the majority, the allocation of resources does not depend on market price but on equitable distribution of purchasing power leading to another step in creating better equity. We have already reached a level of irreversible exploitation of natural resources and “more” is more and more unsustainable. Look at energy use. Today 5% of world population uses 35% of energy – if indeed it was made equitable, the remaining 30% available energy would have been used at some other place and some other people obviate the need for more pressure on natural capital.

What do we therefore need to do, if we are to address progress for all? The answer is not too complex, if we make sure that we define progress as “well-being for all” rather than this getting entangled in the “growth is progress” paradigm, and “progress” as it is defined here as a driver for policies, we will certainly have policies which align very well with the core principle “well-being for all”. Conceptually, we already have all the management tools and techniques to solve the challenges of “how”; however current realities of capitalism rarely allow us to use these tools.

Economic dimensions

Therefore if we want to promote this economics of sustainability for progress and peace – we must address all the three dimensions. These dimensions are 1. Sustainable Scale of economy as whole, 2. Appropriate allocation of resources and 3. Equitable distribution of wealth. The scale should tell you about sustainable level of production & consumption, pricing should talk about proper valuation of natural resources & services and the resultant allocation will then address the aspect of equitable distribution of wealth, which will bring in the most desired and yet elusive part of progress, that is peace! When resources remain adequate through measures of restoration and sustainable consumption; and public spending is targeted to creating what masses require, we could possibly attain that peace – at least within the nation.

Connecting products to resource use

Let us now delve a bit into the way business is done today. Most businesses produce products directly or indirectly. Every product produced and service delivered needs natural resources and energy. Let us take a case of a modern gadget like a mobile phone as a product and calling from such a phone as a service. In the process of making a mobile phone instrument, we need silicon (derived from sand) for processors, plastic derived from crude oil; Batteries require other minerals and rare earth elements among other resources. Each of these components also requires substantial energy in the process of production. In case of a service to be delivered like a phone call from a mobile phone reaching the desired destination, we need the towers for wireless communication, made of steel, which comes from the iron ore that we mine. It also required energy, every time the phone connection is established and you spend time talking or listening. This energy comes from the rechargeable batteries. Every person, as a part of this economic process, needs ecological services – some of these are clean air to breathe, clean water to drink and productive soil. Water that is potable and air that is “breathable” is a direct product of sound ecology delivering eco-services, which we have always assumed to be free. These indeed could be “free” if we respect the limits that nature has imposed on resource use for production and consumption. If our current “production” process is to sustain, we must therefore so limit using more and more natural resources such that it is within the bounds of regenerative and absorptive capacity of nature. Only then we can achieve sustainability. If we design our “business” to basically provide services rather than products, thereby aligning the interest of the producer and the masses, the resultant allocation of natural resources will lead to social welfare. Take the example of “Mobility” as a service rather than car as a product. The end objective of a car is moving a person or a group of persons from starting point to destination in a comfortable manner. Now if we design our system of moving people around the end objective, we will use fewer resources and achieve all of what we may want to achieve. This clearly says that businesses of the now and future must be focused on “why are they producing” what they are producing. Developing “right” technology which will help people and the planet live well is crucial. Technology and programs should be so designed which can create alternate livelihoods and also regenerate natural capital in the process.

Conclusion:

Let us summarize by looking at the inputs, processes and outputs. We have to make sure that inputs are available, meaning natural resources are available. This leads to a policy of conservation and restoration of nature. Some other salient points would include move from “more inputs” to “fewer inputs” for the same outcome, use resources sustainably. This means we must always think of our ability to replenish resources, if we were to use these resources at all. We must understand the fragility of ecosystems and collapse of such ecosystems means depleted eco-services delivered. We need focus on “what” we would like to achieve and “why” – before getting entangled into “how”, for framing solutions. We will have to build an economy which delivers services but is not interested in expanding range of products in response to artificially created wants. Another important aspect is aspect of spending public money for creating public services. One important observation is “public services” are those, which can indeed be used by the very large percentage of population in a meaningful way. A good example, of miss-directed public spending especially in developing economies is building “more” road infrastructure which is used by the 2% car owners, instead of focusing on inexpensive public transport, which can be sued by a large percentage of population. Thus, all the money collected by governments must go into building services for the masses – whom they represent. One of the most important points – often missed - is the need to re-direct attention and investment in creating natural capital by restoring nature.

All this is good in theory – some will say. Our current economy believes that it delivers what consumer demands. This is far from truth. The ways in which businesses influence the consumer though continuous bombardment of commercials and advertisements are better not discussed! For that matter the influence of the corporate sector on governments is far too much to ignore. If we do promote the right definition of “progress” through our media, we will certainly be able change the mindset of people from quantitative growth to qualitative development and bring the spiritual aspects of peace and respect for nature within the reach of all before we irreversibly destroy nature through the economics of “more”.

The discussion clearly points to certain policy directions. I would like to provide these concrete action oriented policies for progress and peace.

  1. Maintain availability of inputs required for survival and wellbeing. Ensure conservation and restoration of natural capital. This will includes specific restoration programs for rebuilding climate and geography specific ecosystems.
  2. Aggressively pursue demand side management principals in planning. As an example, policies must get vehicles off the road rather than building larger roads, bridges and highways.
  3. Look at end requirement and promote methods and policies which will require fewer inputs to deliver similar outcomes.
  4. Promote local businesses delivering services for the common man with sustainable use of resources.
  5. Public money must be spent for public good and therefore should go into creating services for masses. Government must understand the need to use money in public services that can and will be used equitably. A good counter example is policy of building more roads in cities of developing countries, where very small percentages (less than 5%) of car owners occupy more than 80% of the road space. This is a clear example of how we create inequity through incorrect priorities.
  6. Let us put value on the natural resources and treat that as an asset class and policies to foster investment in this asset class. If the value of this asset class is reflected in accounting with a strong positive bias, we will have more and more businesses investing in restoration – at least for the resources they would continue to need as a business.

Author: Ajay Phatak works as a VP of Symphony Teleca Corporation, a technology development company and is professionally trained in Chemical Engineering, Computer Science and Natural Resource management & restoration. He believes that paradigm shift in economic thinking and policy is the best way to shift the behavior of a common man towards making the world more sustainable. Ajay lives and works in the City of Pune in India. He can be reached at ajayphatak@iitbombay.org

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Ajay Phatak, Trustee

Ajay Phatak

Trustee