Friday, November 28, 2008

21st Century Economics -- Part 1

This post is an introduction to a series of essays on economics. These essays outline what we can do to transition from our unethical, and ecologically destructive economic system to an economy that works in the 21st century.

From Spendthrift to Thrifty:
An Introduction to Ecological Economics

A couple of weeks ago, I listened to an interview that introduced me to the field of ecological economics. The man being interviewed was Nate Hagen, a doctoral student at the Gund Institute for Ecological Economics at the University of Vermont. I found his insights fascinating and after hearing his brilliant synopsis of the topic, I decided to learn more about it. By the way, you can find several good interviews with Nate and his colleagues by following this link:

Ecological economics represents a fresh new approach to understanding our market system. Central to this approach is the notion that economic activity does not occur in a vacuum; it happens within a rich context of human culture and social behaviour. And like every other human system, it is built upon ecological foundations.

We rarely pause to consider how completely we depend on the ecosystems of our planet. It’s a little like contemplating the miracle of DNA replication – we have a tendency to just take it for granted. This is understandable, particularly when the natural world is so vast and abundant that exhausting its bounty seems impossible.

It must have been difficult for people in past societies to imagine a world in which natural resources are becoming scarce and population is spiralling out of control. But we no longer have the luxury of naiveté. The most grievous oversight of contemporary mainstream economics is the failure to acknowledge the fact that every economic transaction depends on ecological stability.

As the current financial crisis has illustrated so dramatically, our global economic system is in dire need of a major overhaul:

  • In our economy, prices lie. The market fails to include the tremendous environmental costs of production in the final price of the goods and services it provides. Prices are determined solely on the basis of cost of production plus profit margin. This dysfunctional pricing mechanism is a dangerous oversimplification of the true costs associated with production and it is misleading consumers.

  • We have a broken monetary system of debt-based fiat currency which requires ever expanding amounts of public and private debt to maintain. Watch the video below to learn more about our fractional reserve banking system which essentially loans money into existence.

  • We have a regulatory structure that, instead of being updated and expanded to deal with the challenges of globalization, has been systematically dismantled under the misguided tutelage of market fundamentalists like Milton Friedman.

  • We have a lop-sided global economy that is driven by the consumption of wealthy nations and the production of poor nations (both of which are ethically and ecologically problematic). This is international trade run riot, and it leads to the notoriously long, wasteful supply chains that we euphemistically call globalization.

  • The American economy is particularly vulnerable because so much of our economic activity is based on discretionary consumer spending to buy things that are imported from overseas. And the size of our productive economy has shrunk dramatically relative to the size of the service economy. Basically, we no longer produce our own necessities, we rely on imports for most of them, and what’s left of our economy is largely propped up by the unsustainable spending habits of the addicted American consumer.

So, what happens to our global economy when America realizes it has maxed out its credit card and the international spending spree grinds to a halt?

I think it’s called a CREDIT CRUNCH-cum-ECONOMIC CRISIS-cum-SYSTEMIC FINANCIAL MELTDOWN. At least that’s what they call it in the news.

Maybe this will get our attention.

Maybe we will finally muster the ethical courage to grab the reigns of our economy and guide the markets to deliver what humanity truly needs and wants: a global economy that is both humane and ecologically sustainable.

Maybe we’re ready for....drum roll, please....ECOLOGICAL ECONOMICS!!

**Part 2 of this series will be posted soon. It is a critique of classical economics in light of current ecological challenges.

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