Tuesday, December 30, 2008
How do you define value?
How does our culture define value?
What are the most valuable possessions in your life?
What are the most valuable experiences in your life?
I answered these questions for myself recently, and my responses had me thinking about how value is quantified in the marketplace by pricing goods and services. This of course led to more questions, most of which I won’t bore you with. But there is one question I want to discuss:
Are prices an accurate reflection of value?
The anatomy of price isn’t too complicated. A given commodity is produced at a cost to the capitalist who owns the means of production, and the capitalist sells the commodity at cost plus whatever profit he can get away with in a competitive market. When you add sales tax to the picture, you have a rough equation of price: production costs + profit + taxes = price. It’s pretty simple, maybe too simple.
Price is the most universal and influential market signal in the economy. At the most fundamental level, price is simply value quantified. And participants in a money-based system of trade depend on price to assess relative value in the market. As such, prices must accurately reflect the true costs of production in order to properly inform the decisions of consumers.
To illustrate what I’m describing, here is a concrete example (it’s a bit unrealistic, but bear with me):
Let’s say you go to a market to buy shoelaces, but when you find some, you notice that they are more expensive than a new pair of shoes in the next stall. You immediately conclude that either the shoelaces are overpriced, or the shoes are underpriced, because the shoes are clearly more valuable than the shoelaces, and prices should reflect that. At the risk of pushing this example too far, let’s assume that you do a little more comparison shopping to gain more information about average prices of shoes and shoelaces.
You go to another market and find that with a few exceptions, the shoes at the second market are more expensive than the pair you saw at the first market. But when you look at the shoelaces, you realize that all of them are less than half the price of the ones at the first market.
Now you have a picture that makes sense -- you have found prices that reflect relative value more accurately, and you buy the cheap shoelaces at the second market. I know this example was a bit tedious, but it shows the kind of rational self-interest that lies at the heart of the free market system, and it demonstrates the importance of price as a market signal that informs the decisions of both consumers and producers.
Understanding the Power of Price
Understanding the pricing mechanism (i.e. how prices are assigned) has always been an essential principle of economic theory.
The early political economists of the 18th century observed that price performed a vital function within the capitalist system. They saw that flexible prices maintain a fairly stable balance between supply and demand in the market – high prices ration scarce goods and low prices prevent excess supply. This was a perfectly logical and accurate conclusion. And like any good idea, it was refined by those that followed.
In the early 20th century, for instance, the trust-busting of the Gilded Age was aimed at encouraging competition in the market to prevent price gouging by monopolies. This is an important example of necessary government intervention in the marketplace. Child labor laws, occupational safety, minimum wages, etc. were also necessary interventions. So clearly, government has a crucial supervisory and regulatory role to play in the market. We don’t want a completely laissez-faire economic policy. But that is essentially what we got during the Reagan/Thatcher consensus of the 80s.
For the market fundamentalists informing their policies, price was seen as the ultimate regulator of the market. Little else was needed to regulate the market: so, if the price of oil rises, so too does the incentive to produce more or compete by offering alternatives. In this way the market was always checking itself through competition among businesses and a capitalist economy was seen as a self-regulating system. This thinking became very influential in the 70s and 80s after Milton Friedman won the Nobel Prize for Economics in 1976.
From then on, he and other Chicago School monetarists guided U.S. economic policy toward less regulation, monetary management of business cycles by the Federal Reserve (rather than fiscal management as Keynes suggested), and lower business taxes. At the same time, largely unfair international trade was rapidly expanded through the Structural Adjustment Programs of the World Bank and IMF which opened much of the world up to foreign investment and foreign imports.
It's been called neocolonialism, neoliberalism, and (a little less accurately) globalization; it's even been sugar-coated as free trade! To call the institutionalized exploitation of people and the destruction of the planet 'free trade' is truly to enter the realm of Orwellian doublespeak. We can sugar coat it all day long in the rich world to make ourselves sleep better at night, but globalization has been a jagged little pill to swallow for the poorest in the world. And that's putting it mildly.
I found my rose colored glasses.....finally!
If there is a silver lining in the current economic carnage, it’s that these neoliberal economic policies, introduced to America and the world during the Reagan administration, have at last been exposed for the fraud they truly are. Any pretense that we live and work in a free market has been smashed by a nauseating series of “too big to fail” bailouts. This is corporate welfare on an unprecedented scale.
For the past few decades, the government has privatized corporate profits, while socializing corporate risk. And the whole time our leaders (Republican and Democrat alike) chanted the tired mantra of Milton Friedman and his Chicago School cronies: 'de-regulation and free trade will lift the world out of poverty'--as if these policies were designed to help sub-Saharan Africans or the American taxpayer!
Recent history is our best teacher. Undermining our trust in the guidance of capitalism's venerated 'invisible hand' was the economic reality that average real wages for the American taxpayer were stagnant while the tax codes became increasingly regressive. A glance at the world's news headlines brought home the tragedies of an entire continent crippled by the AIDS pandemic and the predatory lending practices of the World Bank and the IMF. We watched in utter powerlessness, as free trade put millions of small farmers out of business throughout the so-called 'developing world' by exporting the cheap, subsidized cash crops of Europe and North America, thus undercutting the price of local produce in places like Mexico.
This is the ugly side of unregulated economic globalization--speculative bubbles on Wall Street and Main Street, a widening gap between rich and poor, and the transformation of rural, semi-autonomous peasants into urban proletarians beholden to the mercy of unfettered capitalism. In the urban context, these farmers suddenly find themselves without any marketable skills and they are forced to join the ever growing population of unskilled workers.
As the ranks of the urban working class swell around the world, there is a race to the bottom in poor countries in terms of working conditions and wages. The labor market is over stocked and competition is fierce. At the other end of the supply chain, the average Wal-Mart shopper is comfortably oblivious and well insulated from these realities.
So, Wal-Mart shoppers, why the comfortable oblivion?
Why do we continue to delude ourselves about the impact of our consumer choices?
Could it really just be down to those rock bottom prices?
In a word....YES
Pickin' on Wal-Mart....again....cuz they deserve it!
In their single-minded pursuit of their corporate responsibility to keep their shareholders happy, Wal-Mart has found the perfect business model for our time: great quarterly profits with no accountability. Wal-Mart understands that for the average consumer, price is the bottom line when making a purchasing decision. All things being equal, we choose the lowest price. That’s why people still shop at Wal-Mart. Everybody knows that their standards ethically and ecologically inferior to those of most local businesses. But the products are roughly equivalent and MUCH cheaper.
Most importantly, when you walk into Wal-Mart, the heavy problems of the world are conveniently out of sight and out of mind. You aren’t stumbling over an under-fed child laborer busy sewing the seam into your new blue jeans on your way to the check out line. And you don’t have to breathe the air in downtown Shanghai as you push your giant cart around either. That’s the genius of Wal-Mart’s business model!! They have zero accountability! They can exploit people and the environment without paying for it!!
This is the glitch in the system: corporations are allowed to externalize environmental and social costs and therefore prices lie.
What if consumers were aware of the full costs associated with producing the goods they buy?
And what if producers had to purchase the right to use our ecosystem services?
What if they also had to pay living wages to their employees, even in China?
Imagine an economy that fully accounted for the value of our planet and its people -- do you think buying a happy meal would cost more or less in that economy?
There is clearly much of great value that is simply not priced into the market. Think of all the things we depend on our ecosystem for:
-- natural resources including fossil fuels, soil, metals and minerals
-- climate stability via natural carbon sinks such as the algae in the sea and the trees in the forest
-- biological diversity
-- the food we eat, the water we drink and the air we breathe.
These are some of the essential services our ecosystem provides for free. Taken together, the ecosystem services support our very livelihood as a species. Without a functioning ecosystem there is no economy.
So if economists love numbers so much, why haven’t they slapped a price tag on these vital ecosystem services? The easy cop-out answer is that they’re priceless. But the truth is that they’re not priced because you can’t make money buying and selling them. They belong to every living being on the planet, so private property laws simply don’t apply. And as a result, these vital services are invisible to the market.
You can’t own climate stability, but unfortunately you can own a dirty coal-burning power plant that robs it from future generations. This is what is broken. This is why price is not a good enough regulator. Until we figure out a way to price the damage we’re causing to our own life support system, we cannot depend on price to guide markets effectively.
Wednesday, December 24, 2008
This site is intended to empower individuals and communities to take bold action in response to our worsening ecological predicament. Human population and consumption are rapidly outstripping the carrying capacity of the planet. The signs are all around us – every ecological indicator shows that human activity is putting enormous stress on the biosphere.
And we all know the folly of destroying our only life support system....yet we carry on, hypnotized by a million diversions, paralyzed by fear or simply ignorant to the reality that we are all complicit servants of a profligate culture, a culture that has set us on a collision course with mass die off. The time for a mainstream, popular critique of this culture is long overdue.
I firmly believe that such a critique can liberate us from the destructive patterns of habitual consumption that define modern civilization. I want to contribute to that critique. And my goal is for this blog to become a thriving grassroots forum facilitating discussion about local, community action that can make a difference. We have no time to waste!!
Disavowing consumer culture will require that we restructure and rescale our global economy as well. An economy that is driven by feckless consumption, dirty production and supply chains that criss-cross the globe is an economy that’s categorically unsustainable.
Simply put, the global economy is far too large. We need to shift our focus away from the blind pursuit of economic growth, toward the goals of economic downsizing, re-localization, and restructuring. Only then can we collectively engage in an orderly retreat from this peak of population and consumption.
Right now Americans borrow, borrow, borrow, spend, spend, spend – thus lining the pockets of the modern day oligarchs whom we call CEOs. Instead we need to save, invest and produce in America, for America.
It’s time to rebuild a productive domestic economy that can deliver necessities to the masses without reliance upon imports. It’s time for us to voice dissent to power; time to question our most fundamental assumptions about wealth and value; time to push hard for the change we need. The true power in every society lies with the people.
Humanity is currently undergoing a great cultural shift precipitated by a host of ecological constraints. We are living in a time of unprecedented change, and our collective response is critical – it’s evolve or die time.
Will we choose to build stronger communities to share scarce resources? or will we allow civilization to unravel through a series of bloody resource wars?
Will we proactively make the sacrifices required to create a more ethical economy? or will we stand by while famine and disease continue to ravage the poor and while the cancer of economic growth continues to eat away at the scant remaining natural resources of the planet?
How long will we go on stealing from future generations?
These are the most pressing ethical questions of our time, and the only answers that matter are actions. We are the ones we’ve been waiting for.... what will we do now?
Monday, December 22, 2008
Saturday, December 20, 2008
Basically, it’s a glorified cap and trade system resulting in a currency that represents an allowance to emit carbon. To launch the currency, every nation in the world is issued a pre-determined number of credits based on their population. Once the currency is issued, countries can trade their carbon credits freely—the idea being that energy hungry countries would buy credits from poor countries, thus distributing wealth more evenly around the world.
If this was implemented in combination with an Oil Depletion Protocol to prevent wild fluctuations in the price of oil and food, perhaps Africans could keep eating past 2020.
Friday, December 19, 2008
Our economy is so fucked!! I gotta get this out:
Our monetary system is the biggest pyramid scheme in human history. We have inherited and fully embellished a fractional reserve banking system that depends on ever expanding levels of debt in order to stay afloat. Private banks, with the assistance of the Federal Reserve have virtually unchecked power to control the money supply; they create new money every time they make a loan. And since the 70s, a growing proportion of big industrial and corporate loans are made with absolutely NO reserve requirements!!
These loans are being funded with bank CDs and money market deposits, not hard currency held in reserve at a central bank. This has allowed overall loan to reserve ratios (i.e. leverage) in our financial system to skyrocket. Even checking account deposits are overwhelmingly comprised of debt money. Banks are only required to hold 10% of their total checking deposit liability in reserve at the central bank. Further complicating this picture is the market for securitized debt. This enables financial institutions to essentially pass the buck, by selling their liability to a third party, thus getting it off their own balance sheet.
At the same time fractional reserve requirements for FDIC-insured banks were falling to next to nothing, the Federal Reserve was pursuing the most profligate monetary policy in U.S. history under the auspices of the highly revered Alan Greenspan. After the tech bubble burst in 2000, he ramped up the stimulus by slashing the fed funds rate to 1% and kept it there for a year!! The financial services industry had a field day with the easy money and we know the result all too well – a massive credit bubble that inflated housing prices and a wide range of other assets.
But at the time we didn’t recognize this monetary policy as inflationary – we thought it was fuelling real growth because the economy was effectively being subsidized by cheaply imported consumer goods from China. So the Consumer Price Index was stable, and core inflation was within a healthy range. But if you look at the expansion of the money supply over this period, it’s absolutely shocking – we’re talking exponential growth in debt money. And where was the commensurate growth in economic productivity? Was it in the magical financial engineering that created the now infamous slew of structured debt instruments? Was it in the flip-a-house get rich quick scheme out in Calee-fornia? Seriously, what do we have to show for this rapid expansion of the money supply?
Well, we got a massively over-leveraged financial system + a massively indebted federal government + record levels of household debt, which = Peak credit!!
A conversation between me and my evil twin about the implications of peak credit: Enjoy!
ME: Right, so this is peak credit – maybe that’s OK. After all, a little debt deflation is just what the doctor ordered for this bloated economy, right? Loan defaults will rise for a while, but at least it will encourage people to stop borrowing, start saving and pay off their debts if they can. And most importantly, it would allow financial institutions to de-leverage – restoring loan to reserve ratios to more normal levels. What’s wrong with allowing all of that?
MY EVIL TWIN: Did you say you want to encourage Americans to save? We can’t allow that. 70% of our economy depends on them buying shit they don’t need – that’s why they’re called CONSUMERS. Save? Ha, that fell out of fashion back in the 80s. If we saved as much today as we did in the 70s, our economy would hemorrhage jobs, and Starbucks would become an endangered species. And I, for one, like my gingerbread lattes this time of year. So please, get off your “We need to encourage savings” soap box.
ME: Alright I’m off it already – agree to disagree. Let’s talk about how to best stimulate the economy. Obama’s fiscal stimulus sounds promising, but the Fed seems determined to re-inflate the money supply at all costs. This is wrong-headed and reckless to say the least. Any effort to stimulate the economy during the now-unavoidable deflationary recession should come in the form of fiscal investment in projects of real long-term value to the American people. Can anybody say renewable energy infrastructure?!? Why can’t we stick with that? Why do we have to keep pumping money into the financial system? Aren’t they the ones who got us into this mess?
EVIL TWIN: We need both a fiscal and a monetary stimulus because deflation is the Fed’s worst nightmare. Honestly, given the size of the current money supply, unchecked deflation should be everyone’s worst nightmare. We owe it to ourselves to at least try to make an orderly retreat from this debt peak. The value of the dollar will suffer as the Fed prints hard currency to buy government debt (i.e. monetizing debt instead of selling bonds on a market that’s soon to be saturated with too many govt. bonds). Budget deficits will soar. And there will be more layoffs across all sectors of the economy as banks deleverage and credit markets stay tight. There may even be mild deflation. But perhaps we can avoid the worst case scenario of repeating the Great Depression. We’ve already committed to sinking $5 trillion into this money pit, and we still have a threat of deflation – this recession could be far worse than anyone is predicting. That’s why the Fed has to print right now. There’s not another choice.
ME: I hate your evil logic. Damn, our economy is so fucked.
Saturday, December 13, 2008
"We need to end all of these bailouts and allow deflation to happen. The bailouts aren't working anyway, so what's the point? Assuming deflation is a bad thing is a fallacy. It's precisely what the economy needs to purge the bad debts from the system."
O.K. so those were the main points; it's an argument I hear quite a bit these days, and understandably so. The TARP plan keeps morphing into something new every week, and nothing seems to be slowing the collapse of the retail and housing sectors. However, given the levels of debt in our economy, deflation is a dangerous threat and without monetary and fiscal stimulus, it will cripple our economy for years to come.
The Bubble's Deflating...
Assuming that deflation is a bad thing for the economy is not a fallacious premise. An environment of falling wages and prices at a time when we have record levels of private debt will surely lead to a massive spike in defaults, further destabilizing our already fragile financial system.
If nothing is done to prevent this we really won’t have the capital we need to invest in alternative energy infrastructure. That is why I support the coming Fed rate cut, which will likely be 50 basis points, as well as further monetary easing by other methods. The fed funds rate is quickly approaching 0%, so cutting rates will not be an option much longer.
Nouriel Roubini has called for more monetary easing by unorthodox means to avoid a liquidity trap when we reach 0% interest. In a recent op-ed for the Financial Times, he recommends that the Fed begin purchasing commercial paper, mortgages, mortgage-backed securities (MBS) and other asset-backed securities in order to add even more liquidity to the financial system. You can read the full article here:
Believe me, I have my doubts that this will work. I am more of a Keynesian than a monetarist, but given the severity of the contraction in the money supply (which i’m sure you know is just loaned into existence), it seems worth a shot.
More than monetary easing, we need a massive fiscal stimulus in the form of investments in alternative energy infrastructure and electrified rail transport. Check out Van Jones website http://www.vanjones.net/ or his book about a new “green collar” economy for more info. His plan is solid – not saying it’s destined to succeed, but it’s sensible. At the moment, government is the only entity capable of borrowing and investing on the scale we need. This is basically our only choice because the American economy needs to be massively restructured, and fast. Our current role in the global economy is that of the reckless spendthrift of the world, and we just maxed out our credit card. The only line of credit left for us is to issue government bonds.
Unlike some, I don’t think foreign bondholders will dump Treasuries anytime soon. Where else will they park their cash? Gold? Oil? Stocks? Those have all proven to be far more volatile than U.S. bonds.
It's also important to remember that what is good for the U.S. dollar is good for China (currently the largest foreign bondholder in the world). It’s a dysfunctional, utterly destructive relationship from an ecological standpoint. But the fact is that we are co-dependent right now -- we need their exports and they need our custom, which depends on the strength of the dollar. So China can’t afford to dump its dollar reserves; and China just surpassed Japan as the largest foreign holder of U.S. govt. paper. The trend is moving in the opposite direction to that which you suggest: U.S. govt. issued paper is the safest investment out there, you don’t get a return on your money, but at least you’re not going to lose your ass tomorrow. I’m not arguing that the future solvency U.S. govt. is a foregone conclusion. It is not, particularly if we fail to restructure our economy. I’m just saying it’s a better short term bet than anything else out there.
Here’s some brief background info on the inherent, structural vulnerabilities of the U.S. economy (I’m sure you’ve heard it all before :)
The neoliberal economic policies of the Reagan administration ushered in a new era of de-regulation for the financial sector, which over the past three decades has ballooned in size to comprise roughly 20% of GDP.
This boom in finance, what Kevin Phillips calls the “financialization” of the U.S. economy, has occurred as part of the larger trend of globalization opening the world to so-called free trade.
Concurrent to the rise of finance has been another trend of globalization: the decline of America's manufacturing base. In the 70s, manufacturing was twice as large as finance; now it's just the opposite, with manufacturing only accounting for around 12% of the economy. For thirty years these trends have gained momentum, creating an economy that is utterly dependent on convoluted financial transactions, debt, and most of all, consumer spending.
Currently 70% of America’s economic activity is driven by consumption, and everything from energy to fresh produce to shoelaces is imported. Seriously, everything is imported.
Now, having made those points earlier about the dangers of deflation and how to prevent its worst consequences, I want to stress that I understand that we are past ‘peak credit’, if you will. De-leveraging needs to happen right now; the collective private debt burden in our economy needs to be dramatically lower. So some debt deflation is inevitable. That is why the banks have hoarded the bailout money rather than lending it. After watching the value of their assets plummet, they are restoring solvency to their operations, and in the process lowering their risk by making fewer, more careful loans.
All of this adds up to much less debt money circulating in the economy, or as Kunstler puts it – we are hemorrhaging pixel money. I recognize that no amount of monetary or fiscal stimulus will stop the bleeding. But it may slow the bleeding, and that’s important right now. The credit bubble has popped, and there is no re-inflating it. However, properly guided investments aimed at restructuring our economy can slow the rate that the bubble deflates. We can’t reverse it. It had to happen eventually because our total debt (public and private) to GDP ratio had reached an unsustainable level.
The total debt to GDP ratio for the U.S. economy before the subprime crisis was an incredible 3.5 to 1, far higher than it was in the late 20s before the Great Depression. In 2007 the total amount of debt in the U.S. (household, business, financial and govt. sectors) was a staggering $53 trillion. Only about $10 trillion of that is the national debt, so the vast majority was private debt, and a little local and state govt. debt.
I mention these numbers to point out that the credit bubble was largest in the private sector. The government can de-leverage later, right now we need an emergency blood transfusion from the public to the private sector.
Thursday, December 11, 2008
Sunday, December 7, 2008
I do hate to disappoint my loyal fans, but unfortunately I'll have to keep y'all waitin' fur the time bein'. I don't want to just post a bunch of steamy dog crap, so I'm gonna employ the use of the few brain cells in my head that managed to survive my youthful debauchery, and I'm gonna create something truly special. Stay tuned, you won't want to miss it...trust me.
In the meantime this quote from Teddy Roosevelt will have to keep you entertained and inspired. It's a good little nugget of wisdom from a guy who wasn't all bad. He's kinda the Ernest Hemingway of dead presidents -- if nothing else, you gotta love his style.
"It is not the critic who counts, not the man who points out how the strong man
stumbled, or where the doer of deeds could have done better. The credit belongs
to the man who is actually in the arena; whose face is marred by the dust and
sweat and blood; who strives valiantly; who errs and comes short again and
again; who knows the great enthusiasms, the great devotions and spends himself
in a worthy cause; who at the best, knows in the end the triumph of high
achievement, and who, at worst, if he fails, at least fails while daring
greatly; so that his place shall never be with those cold and timid souls who
know neither victory or defeat." --Teddy Roosevelt
I thought this might encourage the couch potato in all of us to cower shamefully into a dark corner so it can curl up and die forever. Peace out.....
Wednesday, December 3, 2008
Off to an ugly start....
Classical economic theory has its roots in European colonialism. As Europeans expanded throughout the world exploiting the resources of newly discovered lands and peoples, massive new wealth began flowing from the colonies into Europe, and the money supply grew rapidly. These were the early days of capitalism. Some powers, such as Spain, extracted raw money, in the form of gold and silver bullion, from their colonies. Others extracted raw materials and then added value through manufacturing (i.e. British furniture makers using American lumber). And of course the most brutal and inhumane colonial enterprise was the institution of chattel slavery in order to maximize profits through the cultivation of cash crops. Regardless of the specific strategy, the goal was simple: to bring wealth back home to Europe.
For the European societies at the receiving end of this epic transfer of wealth, the discovery of the New World must have felt like finding a hidden treasure of inexhaustible abundance. The proverbial ‘land of milk and honey’ had at last been found, and the European powers began hoarding copious amounts of gold and silver to signal their newfound wealth. Resources were there for the taking, and the only factor limiting production was labor.
Not surprisingly, the greedy ambitions of these early entrepreneurs afflicted them with an insatiable appetite for cheap labor. This blinding self-interest is the original sin of the free market and it set capitalism on an unethical and inhumane course which led to the enslavement and subjugation of countless individuals all across the globe. For these unfortunate souls, European expansion and the imposition of merchant capitalism were twin curses that forever changed them. Timeless traditions were banned, languages lost, and entire cultures muddled as the Portuguese, Spanish, English, French and Dutch marched across a world they felt they owned.
A Few Enlightened Souls?
Far from the front lines of colonial exploitation and oppression, the first thinkers to attempt to explain the inner workings of capitalism emerged out of the European Enlightenment. Among them the political economists of the Scottish Enlightenment took the lead. During the late 18th century, as the industrial revolution was just beginning to ramp up in Britain, the world was introduced to the first fully articulated theory of self interest, division of labor and free trade. Appropriately enough, Adam Smith published Wealth of Nations in 1776, the year a bunch of rebellious British transplants in America decided to throw off the yoke of merchant capitalism and make their own money.
Wealth of Nations is widely regarded as the founding treatise of capitalism. In it Adam Smith criticized the restrictive tariffs of merchant capitalism, or mercantilism, and touted the free market as the most efficient mechanism for allocating the resources of society. In the most often quoted and paraphrased excerpt from his magnum opus, Smith employed his now famous metaphor to describe the miraculous efficacy of free markets:
“the invisible hand” of the market ensures that the pursuit of individual self interest in the marketplace will naturally benefit the whole of society. This was clearly written before the age of derivatives markets and credit default swaps and securitized debt. It seems more than a bit naive to assume that the selfish whiz kids on Wall Street who devised these investments were naturally benefitting society.
Among the most incisive observations presented in Wealth of Nations is Adam Smith’s labor theory of value. Smith recognized that in an industrial system, labor was the essential medium of exchange in the economy. In the previous agriculture based system of feudalism, one’s wealth was equal to the amount of productive land one controlled.
But in societies characterized by a high degree of specialization within the work force, where workers depend on the markets to provide for their needs and wants, one’s wealth is measured by the amount of labor one can purchase in the form of goods and services. So for Smith, the value of a given commodity was roughly equivalent to the trouble and toil that went into producing it.
This was a brilliant insight, and in the 18th century, Smith had no way of foreseeing any limits on production other than labor. In his world, it made perfect sense to think of labor as the only significant factor limiting production. But in the modern world, when efficiency improvements are replacing human labor and natural resources are being extracted at unprecedented rates, labor is no longer the key to understanding value in the economy.
In our time, resource scarcity, pollution and population growth comprise a set of unprecedented ecological limits to growth. These are new limits for us, and we need new thinking about how to adapt an economy that fits within them.
Beyond Wealth of Nations
With the publication of Wealth of Nations, the field of economics was born, and later contributors elaborated upon the ideas of Adam Smith. One of the most significant early developments was David Ricardo’s theory of comparative advantage, which presaged globalization.
Ricardo made the observation that if country A was blessed with a tropical climate and a year-round growing season but no fossil fuel, and country B had a massive endowment of coal but harsh winters; then country A should exchange its fresh produce for the coal of country B.
This insight eventually led to a rapid expansion of international trade. International trade of this kind can be understood as simply another type of division of labor; it is specialization between nations rather than workers.
During the nineteenth century, John Stuart Mill was the first economist to write about the value of preserving nature. Like a true Romantic, Mill waxed poetic when lamenting the prospect of watching the whole earth divided and conquered by the capitalists. In Principles of Political Economy, Mill issued a prophetic warning to the future generations of industrial society regarding the environment:
There is little satisfaction in contemplating the world with nothing left to the
spontaneous activity of nature; with every rood of land brought into
cultivation, which is capable of growing food for human beings; every flowery
waste or natural pasture ploughed up, all quadrupeds or birds which are not
domesticated for man's use exterminated as his rivals for food, every hedgerow
or superfluous tree rooted out, and scarcely a place left where a wild shrub or
flower could grow without being eradicated as a weed in the name of improved
agriculture. If the earth must lose that great portion of its pleasantness which
it owes to things that the unlimited increase of wealth and population would
extirpate from it, for the mere purpose of enabling it to support a larger, but
not a better or a happier population, I sincerely hope, for the sake of
posterity, that they will be content to be stationary, long before necessity
compel them to it.
Unfortunately he never fully explained how nature is valuable to the economy, or how a system which depends on processing natural resources might temper its destructive proclivities.
Taken together the ideas of Smith, Ricardo and Mill represent the nucleus of mainstream economic thought to this day. Criticisms and contributions have fallen in and out of favor (i.e. Marxism, Keynesian economics, supply-side monetarism). But the core set of conclusions that emerged from classical economics remain fundamental and unchallenged.
So, we have essentially inherited an eighteenth century economic paradigm. We believe in the efficiency of the so-called free market. We regard division of labor, including international trade, as a net positive for society. And we depend wholeheartedly on prices to balance the supply and demand in the market. Unfortunately, these assumptions don’t make sense in our time.
For example, classical economics fails to acknowledge that growth on a finite planet has limits. In fact a central premise implicit in conventional economic theory is that such limits are illusory. A classical economist would argue that as the natural limits of a given resource are approached the price of the limited resource increases, which creates an incentive for the market to invest in alternatives and/or more efficient productivity. Thus economic growth, albeit in a new direction, can continue in spite of the limit.
However, when the scarce resources in question include everything from fresh water and top soil to crude oil and natural gas, it seems ludicrous to assume that the market can truly deliver enough in the way of alternatives and increased productivity to allow for this hypothetical, perpetual economic growth.
My next essay will focus on how the field of ecological economics proposes to redress the glaring ineptitude of the markets to deal with limits.