Prosperity, Poverty or Extinction?: Humanity's Choices

Copyright © 2012 by Allen Cookson.

Library of Congress Control Number:   2012920598

ISBN:      Hardcover      978-1-4797-4255-4

                Softcover        978-1-4797-4254-7

                eBook            978-1-4797-4256-1

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Rev. date: 02/27/2016

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Contents

Preface

Acknowledgments

Chapter 1 Economic Principles

Chapter 2 Food

Chapter 3 Materials

Chapter 4 Energy

Chapter 5 Climate

Chapter 6 Pollution

Chapter 7 Land

Chapter 8 Population

Chapter 9 Quality of Life

Chapter 10 Defense

Chapter 11 Money

Chapter 12 International Economics

Chapter 13 Inequality

Chapter 14 Sustainability

Chapter 15 Attitudes

Chapter 16 The Primitive Option

Chapter 17 Biodiversity

Chapter 18 Information

Chapter 19 The Human Species

Chapter 20 Futures

Epilogue

Appendix 1 Mathematical Prefixes

Appendix 2 Units

Appendix 3 Quotation Sources

Glossary

References

Two World Views

Are you a view-one person or a view-two?

Copyright 2005 Edward Fullbrook who grants permission to reproduce freely without amendment.

I came where the river ran over stones.

My ears knew an early joy.

And all the waters of all the streams sang in my veins that summer day.

(Theodore Roethke)

PREFACE

Better to light a candle than to curse the darkness.

(Chinese proverb)

Some years ago, my wife, teenaged son, and I in a family discussion were bemoaning the state of the world and the disastrous course humanity seemed set upon. My son said, It’s all very well for you two. You’ll probably get through life OK. What about me? What are you going to do about it?

Impelled by this challenge, I joined a small political party but found that they had no influence, though they were a valuable source of ideas and international contacts. In the 1960s, as a young man I had been active in a large party and persuaded members and the national lay leadership to present a reform proposal to the prime minister. (Our party was in power.) Despite a strong support from party membership, nothing was done by the government. Twenty years later, an opposing party in government enacted the reform, which I now think was naive and simplistic in its foundation and execution.

Thinking about my son’s challenge, I did not believe the earth could wait another 20 years on the same disastrous course. I considered how various paradigm shifts had taken place. Darwin, Keynes, Rachel Carson, the Odum brothers, Hayek, and Milton Friedman had all researched and written seminal material that had influenced people with power to change policy or that at least changed culture among intelligentsia. Collectively scientists have brought about an effective international action on stratospheric ozone depletion. To a very limited extent, the same has happened over global warming. Sir David King, UK’s former chief scientific advisor, convinced Prime Minister Tony Blair of the need for action on this.

I do not have the capacity to produce research of the caliber of influential figures mentioned above. What I have done is gather together in an organized way the work of respected specialists in their fields. References will enable readers to check things they have doubts about. These references include primary sources (with some of mainly historical interest), topic reviews by specialists, and material aimed at the non-specialist reader, which are indicated as such in the list of references. Sometimes differing views will be evident. The sheer volume of literature available demanded a limited selection.

What is assumed is that the earth can support only a limited, though debatable, number of people in a healthy, prosperous state. Infrequently I cite discredited or unpopular views and where appropriate provide a rebuttal. I build upon disparate disciplines in proposing new solutions to seemingly intractable problems.

The intellectual and emotional impasse that I am concerned about here is the obsession with economic growth and the failure to recognize the finiteness of the physical components of the biosphere that humans inhabit. Few scientists are unaware of this limitation. However, among the business, economics, farming, and political communities, it can be difficult to find people who believe that growth must stop, or if they do, who act as if they do. I found this even in my youth when I sometimes had arguments with businessmen about their ideas of progress. For this reason, I latterly embarked upon a formal study of economics whose community seemed to be the barrier to real progress.

I now feel adequately qualified to integrate science and economics in an analysis of the human ecological dilemma. (I spent most of my life teaching sciences at secondary school level.) The book is aimed at the educated layman and the student, though I think its eclecticism will ensure even academics will find ideas that are new to them. I have included some technical detail that will be of interest to readers with strengths relevant to it. Mathematical or technical bits can be skipped over without losing the thread. As development of arguments is dependent upon definitions and evidence in the earlier chapters, it is important not to skip chapters even if you think you know everything about a particular topic.

I have tried to avoid questions of administration and politics except where these areas impinge upon ecological or economic principles. This is not to deny the impact of corruption, crime, education, health, and administration practices upon the prosperity of a nation’s people.

A successful textbook often has more longevity and influence than a best-selling popular work. I am trying to have it both ways. Hopefully the book will be read by many concerned lay people and also find a place as an introductory text or supplementary reading for economics, engineering, geography, politics, and other subjects’ courses. To date, any such courses have had an inadequate influence on sustainability policy.

Possible avenues for increasing knowledge of the important and neglected discipline, ecological economics, could include secondary school courses, university papers, postgraduate diploma for liberal arts students, university extension, Workers’ Educational Association courses, and policy makers’ in-service courses.

Knowledge and understanding are power. It is my hope that this book will be a starting point for readers to directly or indirectly influence policy makers.

ACKNOWLEDGMENTS

First I thank my son Matiu for the challenge, which led to my economics studies and this project. He helped me access primary sources and drew biogeochemical cycles with the help of his wife Katie, who also directed me to sources of which I would not otherwise have become aware. She also drew a cartoon. My son Christopher has been my mentor on computer matters. Without advice from the following people, there might have been undesirable deficiencies or errors: dairy farmer Rod Thomson, aid worker Martin Winder, Dr V. Jagannathan of Bhabha Atomic Research Centre, (India), electrical engineer David King (not the same man as Sir David King), Victoria University climate scientist Dr Andy Reisinger, astronomer Frank Andrews, NIWA (National Institute of Water and Atmospheric Research (New Zealand)), science leader, climate variability and change, Dr James Renwick, and University of Canterbury psychologist Dr Verena Pritchard. The Reserve Bank of New Zealand (RBNZ) has provided prompt responses to my queries.

My thanks are due to economists Kim Martin and Raf Manji, James Renwick, Verena Pritchard, Matiu, Katie, theologian Dr Chris Gousmett, and engineer Dr John Peet for critical reading of sections of the draft script. I did not always follow advice. It would be wisest to blame me for any defects.

Also I thank xlibris staff for their patience and endeavours to meet my wishes.

As well as countless researchers whose work I have mined, I thank the following people for permission to use their work: Organization for Economic Cooperation and Development (OECD) for Fig. 9.1, Carbon Dioxide Information Analysis Center, Oak Ridge, Tennessee, for T. J. Blasing’s data and explanations on GHGs, Scripps Institution of Oceanography for Fig.5.2, Met Office UK for Fig.5.1, United States Census Bureau for Figures 8.2 a,b,c,d, Census of India for Fig.8.10 and Economic Commission for Latin America and the Caribbean for Fig.13.3.

Also I acknowledge as sources Vattenfall (Fig.5.3) and Mountain of Love Productions (Fig.19.1)

CHAPTER 1

Economic Principles

The only relevant test of the validity of a hypothesis is comparison of prediction with experience.

(Milton Friedman)

Introduction

Since the title of this book is Prosperity, Poverty or Extinction? I need to state what I mean by these words for the purposes of the book as explained in the preface. Prosperity is well-being, with physical and mental health and an enjoyment of life as good as the genetic and physical limitations of individuals allow it. Enjoyment of life implies sufficient leisure time and income to engage in family life, arts, crafts, sporting and other physical recreations, and academic studies as fits individual talents and reasonable inclinations and responsibilities. Poverty is a deficiency of prosperity due to lack of necessary physical, environmental, economic, and/or social conditions. Extinction is the death of whole human communities, maybe the whole human race. These three states—prosperity, poverty, and extinction—will be considered at the individual, community, national, and global level, with much emphasis on the latter. We are exploring what humanity needs to do to achieve global prosperity for the foreseeable future.

Markets

Prosperity depends upon the adequate supply of goods, services, and environmental factors so that demand can be met. There is evidence that markets generally, but not always, have worked better at achieving this than socialist or command economies, where governments either subsidize or tax production and consumption to achieve a desired supply and demand or directly control the supply. In the Soviet bloc, output was decreed by central government, resulting in terrible inefficiencies and a needlessly low standard of living. British economist Ronald Coase (later a Nobel laureate) showed that a firm has characteristics of a command economy such as that of the Union of Soviet Socialist Republics. A large firm may have these features while being as big as a small or medium-sized state (Coase 1937). However, if, unlike the Union of Soviet Socialist Republics, an inefficient firm is faced with effective competition and has a workforce that is not terrorized, it will not last long.

In The Wealth of Nations, Scottish classical economist Adam Smith (1776) averred that markets are automatically adjusted to a balanced state by an invisible hand. However, one must question whether market economies could have been as efficient as advanced economies with a high level of public ownership, had private economic activity been required to pay for negative externalities.¹ Furthermore, the balanced state delivered by the market for a good is often grossly inequitable. Supplementary measures to achieve a fair share of the good are usually necessary. Adam Smith saw self-interest and sympathy for one’s fellow men as not incompatible but complementary. His unjustly neglected book The Theory of Moral Sentiments (Smith 1759) deals with this more fully than The Wealth of Nations.

We can see by graphical presentation derived from the work of the English neoclassical economist Alfred Marshall (1925) how markets balance supply and demand. Many people find a graph easier to understand than verbiage.

Fig. 1.1 Market

Consider the market for wheat. The supply curve in Fig. 1.1 shows the minimum price suppliers will accept for a given quantity of wheat, and the maximum quantity they will supply for a given price. The demand line shows the maximum price consumers will pay for a given quantity supplied, and the maximum quantity they will buy at a given price. The shapes of the supply and demand curves are my choices, which may bear little resemblance to real wheat curves. A real demand curve depends upon the disposable incomes and individual preferences of the buyers, and competing products. There is a limit to how much wheat people can consume, so even at zero price, consumption will not exceed the limit seen at the bottom of the demand line. In fact disposal of a glut may involve cost (a negative price). This is not shown in Fig. 1.1. I drew the supply curve the way it is, to show that as production increases, cost drops for a bit, because of economies of scale. That is, after farmers have spent a lot of money on tractors, etc., the increase in income that accompanies increase in output allows them to accept a lower price. Ultimately, increasing wheat production becomes more and more costly as the limits of available land and water for irrigation are reached, so the gradient of the curve increases toward the vertical.

At the point E, supply equals demand, so at this equilibrium point, there is neither shortage nor surplus of wheat. At point A, farmers will think they could earn more by producing more at a higher price, but consumers would not pay more than at E, nor would they consume more at an acceptable price to farmers. On the other hand at point B, farmers cannot sell all the wheat, so they are left with a surplus. At point C, consumers quickly realize that such gluttony will not be supplied by farmers at that low price. The minimum price acceptable to farmers is on the supply curve—too expensive for would-be gluttons, so their consumption adjusts to that at the equilibrium point E. Likewise D is not a stable production consumption state. To summarize, only at E are both suppliers and consumers satisfied. There is a sort of auction going on where buyers and sellers tacitly negotiate an acceptable price, even though they may not be in direct contact (Walras 1874). E represents an efficient market. It is called a Pareto equilibrium after Italian economist Vilfredo Pareto (1897). There can be no change from a Pareto equilibrium without at least one party suffering, even if the other benefits.

Suppose now that a higher producing variety of wheat is developed. This reduces the cost to farmers. The situation is represented by curve S’ in Fig. 1.2. The shift of the supply curve to the right indicates a drop in price and an increase in quantity demanded and supplied. The new equilibrium point is E’ where the demand curve and the new supply curve S’ cross.

If, on the other hand, the supply of irrigation water is reduced owing to the competing demands of a growing city, wheat supply is reduced and price increases as indicated in curve S. The new equilibrium point is E where the demand curve and S" cross.

Fig.1.2 supply change

Having looked at shifts in the supply curve, let’s do the same for the demand curve. Suppose that population increases. The resulting demand increase, associated with a price increase, is indicated by curve D’ in Fig. 1.3. The new equilibrium after the shift in the demand curve is E’.

Now imagine that the original population size has not changed but the people are poorer, so they cannot now afford to buy as much wheat. This is shown by curve D. The new equilibrium is at E where the supply curve crosses D".

Fig. 1.3 Demand Change

Of course both supply and demand curves can shift at the same time.

Any economist who ignores the relationships between supply, demand, price, and quantity is asking for trouble. Meadows et al. (1972), in their famous Limits to Growth, attempted to forecast population and the supplies of materials and energy into the future, using an ambitious computer model. Their report incurred the scorn of almost all economists partly because it took inadequate account of rising prices’ effects on supply (e.g. Beckerman 1972).

. . . a brazen, impudent piece of nonsense that no-one could possibly take seriously.

In contrast, the revised book Beyond the Limits (Meadows et al. 1992) was accorded considerable respect. The comment of American economist William Nordhaus (1992) (a Nobel laureate) on the latter book was appropriate.

Economists have often belied their tradition as the dismal science² by downplaying both earlier concerns about the limitations from exhaustible resources and the current alarm about potential environmental catastrophe. However, to dismiss today’s ecological concerns out of hand would be reckless. Because boys have mistakenly cried wolf in the past does not mean the woods are safe.

Marshall’s, like all models, must not be accepted uncritically. Here are some assumptions made and examples of situations where they are invalid:

Assumption 1. Buyers and sellers (economists call them agents or actors) have complete information. You will understand that if an insurance company does not know that it is being cheated by clients, the operation is not very efficient. If investors do not know the financial states of companies, the share market is inefficient. Agents cannot act appropriately without information. There is a danger of asymmetric information if a company has director(s) in a competitor’s board. Alternatively the two companies may be cooperating in a possibly illegal cartel, whose members share information. A study of interlocking directorships concluded that in some areas of the New Zealand, economy firms are sufficiently interlocked for there to be serious doubts about the levels of competition within these fields of activity (Laurent 1971).

Assumption 2. Buyers and sellers are rational in seeking to optimize their financial position. If they act out of sentiment, or if greed drives them into irrational behavior, the market will be inefficient.

However, the reality is that marketers have found that packing cosmetics in fancy packs at a higher price increases sales compared with the identical product with budget presentation and low price. Lehrer (2006) reports the results of neuroeconomics experiments involving real-time brain scans, which showed that people unknowingly put more value on the label on a can than what was in it, in determining preferences for cola drinks.

One day in the early spring of 1637, a Dutch merchant named François Koster paid the enormous sum of 6650 guilders for a few dozen tulip bulbs.

At a time when a whole family might live for a year on perhaps 300 guilders, this was a remarkable purchase. Even more surprisingly, Koster had absolutely no intention of growing his tulips. He planned to take the bulbs and sell them on, and fully expected to make a profit from the deal… Tulip prices had risen swiftly and consistently for more than two years. Why shouldn’t they go higher still?

Less than a week after the merchant had bought the bulbs, tulip prices dropped, suddenly and without warning. Within a matter of days flowers had plummeted to only one-tenth of their old values, and often considerably less… . François Koster himself, having made a down payment of 820 guilders for his bulbs, found himself unable to pay the balance of the price…

Those who lived outside the borders of the country (which was then known as the United Provinces of the Netherlands) looked on with even greater incredulity as a people famous throughout Europe for being dour, drab, sternly moralistic and above all extraordinarily canny in matters of finance abandoned themselves to an inexplicable passion for tulips (Dash 1999).

Recurring speculative bubbles such as this one have afflicted economies over the centuries. In our own time (early twenty-first century), unsustainable rises in house prices in some countries were followed by collapse in late 2007. Rational behavior was in short supply.

Buchanan (2008) reports on new thinking and research coming out of the contemporary financial crisis. In fact market behavior is not rational and does not respond to information as classical economics predicts. Herd behavior is normal. Most humans, including many of the world’s most eminent economists, are unable to learn from history. And moral hazard of an executive acting in his own, not his employer’s interest, confounds the meaning of a rational agent in a hypothetical classical market.

I have acquaintances, including savvy business people, who stick with an Internet service provider, phone company, insurance company, or bank that gives them poor service at a high price compared with their competitors. The problem is consumer inertia. It is too much hassle to change. That this is not just a minor problem with the idealized market model is illustrated by New Zealand’s Consumers’ Institute (now Consumer NZ), whose regular surveys of consumer satisfaction with Internet service providers have revealed that the overwhelmingly dominant company (xtra) is rated at the bottom for consumer satisfaction.

Value put on status can run counter to simple market theory. Some people will buy a prestige car, knowing full well that a cheaper model made by the same company is basically the same except for minor fittings such as badge and grill, though in some cases quality control differs. The tactic of selling fundamentally identical products with different presentation at different prices is called price discrimination. Each presentation is targeted at a different market sector from the other(s). This achieves a larger profit than only one presentation and price.

Assumption 3. There are large numbers of competitive buyers and sellers. That is, there are no dominant players, such as a monopolistic company or trade union. Consider a situation where a paper mill is the only customer (a monopsony) for forestry companies. This does not allow an efficient market to exist.

Assumption 4. Equilibrium is reached fairly quickly. This is not true of Siberian forestry where trees take centuries to reach marketable size. That is a long time lag for supply to adjust to demand. What if car assembly workers are laid off, but there is a desperate shortage of surgeons? For one thing, it is unlikely many such workers have what it takes to become a surgeon. Anyway it takes about 10 years from the commencement of tertiary education before a new surgeon is let loose on a live human with his scalpels. The analytical method I have presented is known as comparative statics. It implies instantaneous adjustment to Pareto Equilibrium. There is no consideration of the dynamic mechanism of adjustment.

Assumption 5. All agents are identical. That is, they all have the same incomes and preferences. This is clearly an unwarranted assumption, but some economists have developed substantial theoretical models based on it, and some politicians have followed policy advice received from them.

Assumption 6. Price determines demand. However, sales and marketing literature recognizes that a number of other factors, including quality, backup service, liking the seller, and brand recognition, often take priority over price in a buyer’s mind (e.g., Wren 1984). This extends the idea of a rational agent into other preferences (such as snobbish showing off) than price. As income increases, demand for some higher-priced goods increases, while cheaper substitutes suffer decreased demand. Microeconomists³ call the latter inferior goods.

Also consider a poor taxi driver who makes do with a used Ford that has poor fuel economy. It might be a more economical choice to buy an expensive new Toyota Prius (an internal combustion-electric hybrid), even allowing for the possibility of borrowing at high interest, which his credit risk status would entail. If he won a lottery, the driver would probably change to the higher-priced car, but if not, he would probably stick with the Ford, even if it were of economic benefit for him to borrow to buy the Toyota.

Labor price is often unrelated to supply and demand. This has been glaringly obvious from 1980 to 2000, when top executive remuneration (excluding capital gains) in the United States increased from an average 40 times the average wage to 400 times the average wage of workers (Irvin 2007, pp 2-3). Company performances did not match this increase. Witness recent failures of companies run by CEOs paid millions of dollars per year. A large supply of suitable people for senior executive positions is commonplace. In contrast, there have been episodes in various countries where persistent desperate shortages of workers in occupations such as speech therapists and aged care workers with special skills brought about little or no increase in income. It is clear that other factors are more important in some cases than supply and demand in determining labor price. Probably being an insider with personal networks is the crucial factor (ILO 2008). Occupations dominated by women often suffer by comparison with male-dominated occupations.

Stigler (1957) demonstrated mathematically that standard microeconomic theory about demand was incorrect. The demand curves of competitive firms differed from total demand. This forgotten study was rediscovered and developed by Keen and Standish (2010) who refuted long-believed doctrines of neoclassical microeconomics about optimal price setting. Blinder et al. (1998) interviewed hundreds of nonagricultural firms about their price-setting behavior. It was quite variable and overwhelmingly, clearly divergent from neoclassical microeconomic theory as taught in almost all universities. Since macroeconomics is largely, though not entirely, derived from the aggregation of microeconomies of individuals, households, firms, nations, etc., it follows that flawed microeconomic theory means any macroeconomic theory derived from that is itself flawed (e.g., neoclassical macroeconomics).

Here is an example of a particular condition that requires consideration by any sound microeconomic or macroeconomic model. No matter how high the price of a good, people will pay all the money they can raise if the good is essential for survival and has no substitute.

For such a good, the demand curve would look like Fig. 1.4

Fig. 1.4 Demand for an essential good

As you have probably guessed correctly, in the real world, there are no perfectly efficient markets. For this reason, governments commonly have laws controlling economic behavior. Laws against cartels and requirements for honest financial disclosure are examples of measures designed to make markets more efficient. Nearly all countries have mixed economies, with investor-owned companies, cooperatives (including publicly owned ones) owned by customers or employees, state-owned monopolies, and various protective measures impeding trade.

Contrary to widespread belief today, there are and have been many cooperatives and state-owned enterprises (SOEs) with histories of success, for example, London Symphony Orchestra, Carl Zeiss, United Airlines, Gore-tex, Mondragon, and New Zealand Post. Failure in joint stock companies is not uncommon, for example, Enron, Lehman Brothers, PanAm, and General Motors. For cooperatives, it appears close engagement of owners with management is important. For SOEs, government’s undue milking of their earnings is prejudicial to their success (Wilkinson and Pickett 2009, Ch. 16). SOEs’ earnings should be used for maintenance, research, and development, not as a cash cow for government, nor should they be subsidized, as these things distort the economy. However, it is right that their purchase, establishment, and opportunity costs⁴ are eventually paid for out of earnings.

Despite weaknesses in Marshall’s theory, it helps us understand how various market forces affect human welfare. Core macroeconomic courses teach DSGE (Dynamic Stochastic General Equilibrium) Theory modeling almost exclusively. Keen (2011 p.259) considers DSGE useless nonsense. He illustrates one of his criticisms with an analogy. I tell you that I eat nothing but cabbage. You ask me why, and I reply portentously: I am a vegetarian. It is interesting that Arrow (1951) and Debreu (1954 and 1959) in their examination of the assumptions of Walrasian market theory assumed that innovation is absent from a hypothetical perfect market (Stiglitz 2010). What an irony considering that market fans claim (probably justifiably) that markets deliver innovation best!

Feedback Loops

The supply-demand model presented above provides examples of negative feedback loops. These lead to equilibrium, though overshooting of the equilibrium value will lead to a diminishing oscillation about it. (There are situations where oscillation continues undiminished, perhaps with increasing amplitude or upward secular trend, as in recent global mean temperature rise. That is not indicative of negative feedback.) The essence of negative feedback is that an increase or decrease in variable A leads to a change in variable B, which reverses the direction of change in variable A. The chain of causation may be longer than this. Here is a specific example of negative feedback: Increasing price of wheat increases the incentive to farmers’ growing more wheat, which reduces the price.

Positive feedback has an increase or decrease in variable A, leading to a change in variable B, which causes a change in the same direction of variable A as the original stimulus provided to A. The change proceeds at an increasing rate unless some other factor intervenes, creating a loop to halt and reverse the change, which will otherwise be catastrophic. An example would be increasing global temperature (variable A), melting circumpolar ice, which leads to a decreased area of ice, which diminishes the highly reflective area of the earth and an increase in area of open water (variable B) which in turn raises the temperature and so on. This is unsustainable. Following this positive feedback, the warmer climate increases sequestration of the greenhouse gas (GHG) carbon dioxide by photosynthesis. This cools the climate, so ice cover increases again. Without the photosynthesis intervening, temperature would continue to rise to catastrophic levels.

The following mathematical scenarios create negative and positive feedback respectively.

Negative feedback: B =f1(A)

1591.png and 1584.png have opposite signs.

Note that 1577.png is not the reciprocal of 1571.png .

Positive feedback: B =f2(A)

1564.png and 1556.png have the same signs.

Also, for negative feedback d²A/dB² and d² B/dA² have opposite signs.

A and B move to asymptotes.

For positive feedback d²A/dB² and d² B/dA² have the same sign.

Positive feedback will lead to an accelerated increase as in Fig. 1.5b or an accelerated decrease to zero or increasingly negative values if negativity has physical meaning.

Fig. 1.5a Negative feedback Fig. 1.5b Positive feedback

To have the positive feedback conform to this generalized mathematical treatment, it may be necessary for the axis for one variable to be inverted. For example, in the case cited above, the area of ice would have to have its scale inverted but the area of open water would not.

Often variables overshoot, creating oscillations within a secular trend. Real overshooting is not as tidy as in Fig. 1.6. Unpredictable effects of rumors and political and natural events generate spikes and troughs with often unforeseeable overcorrections. Also there is usually a lag in the effect of a perturbation.

Fig. 1.6 Negative Feedback with overshoot

Externalities

An externality of an economic activity is a side effect of the activity. If a hydro dam prevents flooding, that beneficial side effect is called a positive externality. If the dam’s construction results in the loss of a superb white water, kayaking river, that cost is called a negative externality. Ignoring externalities in the benefit-cost analysis of a proposed project may result in a project with a net cost proceeding. British economist A. C. Pigou (1920), whose name is sullied by his refusal to accept the failure of the contemporary monetary model during the Great Depression, was ahead of his time in developing economic models for pollution externalities. Nowadays, developed countries require a benefit-cost analysis of any project that is outside standard impact parameters.

Hell’s Canyon in the Snake River, which is the border there of Idaho and Oregon, is the deepest canyon in North America, scenically outstanding, an outstanding wildlife habitat and recreational resource. A high dam considered in the 1970s would have generated wealth in the form of electrical energy at the cost of loss of those values. Although the cost at the time was estimated to be less than the benefits, forecast increase in demand for the natural values associated in part with the lack of substitutes led to the environmental cost of the dam being projected in a few years to exceed the benefits. Consequently Congress voted to prevent the development of this part of the river. Had the externalities not been included in the analysis, the dam would have been constructed (Fisher et al. 1972).

Substitutes

Fig. 1.7

When the price of a good increases to an uncomfortable level, there is an incentive to develop cheaper substitutes. Fig. 1.7 is a schematic graph (not based on actual price figures) showing how backstop technologies succeed each other as substitutes. This example is for the raw materials from which petrol (gasoline) can be produced.

You will notice that there are times when two raw materials lead to the same or close prices. Differences in exchange rates, distance of sources from markets, and trade barriers can enable several sources of petrol to be exploited contemporaneously. Sometimes technology can provide a cheaper substitute for anything preceding it.

To encourage the development of substitutes, tax regimes should discourage unproductive speculation but encourage venture capital into research on substitutes and conservation. By allowing windfall profits for successful inventions, government provides a risk premium for brave investors, including visionary inventors, who spend money and labor for long unrewarded years. Hall and Jones (1999) have studied the relationship between investment and social development. Griliches (1991) reviewed research on spillovers from research and found social rates of return of the order of 40-60%, far exceeding private rates of return. Here we have an indication that positive externalities of research have been inadequately rewarded, even with a robust patent system. This prompts governments to support both basic and applied research⁵ in universities and other institutions, including the private sector.

Poverty Traps

There are people living in poverty, who cannot afford education to become qualified to get a well-paid job. There are others who need tools to grow food, but they cannot afford to buy them. These poverty traps are replicated on the macroeconomic scale when a nation cannot afford to increase its productivity by educating its people and building essential transport infrastructure. Escape from a poverty trap may be possible if credit is available, but if the would-be recipient is considered an unreliable debtor, this is unlikely. Again, aid and debt forgiveness are unlikely if a potential recipient is expected to misuse this assistance.

Consider three hypothetical nations that had a low standard of living (Fig. 1.8a): using dung and animal power for energy until a new technology (oil) enabled them to exploit this nonrenewable resource with great benefit to their peoples (Fig. 1.8b).

The leaders of nation A (Fig. 1.8c) foresaw early the exhaustion of the oil resource and either set aside tax revenue for research and development of an alternative or provided financial incentives for private enterprises to do so. This lowered the per capita income, but when rising prices due to increasing shortage of the oil resource began to depress real incomes, the new backstop technology prevented return to poverty.

Nation B (Fig. 1.8d) did the same but left it until later to make up their minds. Nation C left it until so late that they had insufficient income to invest any in the new technology. They were caught in a poverty trap (Fig. 1.8b). It is possible the whole human population will be caught in a poverty trap if it leaves investing in developing substitutes for resources being exhausted until too late.

Figs.1.8 Poverty Traps

N. B. Real income is the purchasing power taking into account inflation.

You may well ask how the first poor nation escaped dependency upon dung for fuel. When England discovered that coal was a good source of energy, the nation became rich even if most of the people were poor. The discovery in America that oil was an even better energy source increased real incomes even further. This allowed America and Britain to invest in poor countries, often colonies. India, which had a large number of poor rural people dependent upon dung for energy, with independence from Britain, built on the education and infrastructure that Britain had provided as an imperial ruler, so it was able to afford to substitute oil and coal for dung for most of the people.

Encouraging Investment in Real Wealth

It is clear that it is in a country’s interest to encourage investment in the development of substitutes for resources that are being depleted. In recent times, it has been more profitable, though risky, to put money into speculative bubbles. There is a huge amount of effort tied up in the money, stock, and derivatives markets, which has little benefit, if any, to a nation. This is consistent with the view of the Nobel laureate American economist James Tobin (1995), who proposed a global tax that would include speculative transactions, generally exempt from tax. Tobin (1984) thought it inefficient to have so many of our brightest graduates going into the finance industry. That includes science graduates, who figure out that finance offers a more secure and better-paid job. English economist J. M. Keynes took the view that many people earning their income from the finance industry are so domineering or even psychopathic that they are better thus occupied as they might otherwise gravitate to crime (Ormerod 1994, p. 7). Recent (2009) events might lead one to think that the finance industry and crime are synonymous.

Most money and credit is spent on transactions in financial securities, not on real goods and services. Each day the equivalent of almost an entire year’s national income passes through the New York Clearing House to buy stocks, bonds, mortgages and other bank loans. (Hudson 2010)

Such excessive trading could be controlled to some extent by a financial transactions tax. This will be discussed in more detail in Chapter 11.

Real Wealth

This chapter has focused on prices. This is because price is the simplest way of putting a value on something. It has been said that money is one of the greatest inventions of humanity. Barter is hopelessly clumsy because it depends upon a buyer and a seller having compatible needs. Money allows trade between people/organizations/countries with needs that are incompatible for barter. It is a medium of exchange, which at the same time acts as a measure and store of value through market prices. Sadly, the advantages of money have been diminished by its having become a commodity that is traded on markets. When currency values become volatile by inflation or financial instability, people often buy precious metals, land, or mundane agricultural commodities as safer stores of value. Making the medium of exchange a commodity is as absurd as building a bridge of elastic rubber girders or using elastic rulers. People or vehicles attempting to cross such a hypothetical bridge would have great difficulty keeping their balance and would probably fall over as the world economy does.

There are other measures of value.

Almost all economists are intellectually committed to the idea that the things that people want can be valued in dollars and cents. If this is true, and things such as clean air, stable sea levels, tropical forests and species diversity can be valued in that way, then environmental values submit—or so it is argued—quite readily to the disciplines of economic analysis… most environmentalists not only disagree with this idea, they find it morally deplorable. (The Economist 31 January 2002)

Biophysical and ecological economists argue that net energy analysis has several advantages over standard economic analysis. First, net energy analysis assesses the change in the physical scarcity of energy resources, and therefore is immune to the effects of market imperfections that distort monetary data. Second, because goods and services are produced from the conversion of energy into useful work, net energy is a measure of the potential to do useful work in economic systems. Third, EROI [Energy Return on Investment] can be used to rank alternative energy supply technologies according to their potential abilities to do useful work in the economy. Most neoclassical economists reject methods of economic analysis that are not based on human preferences, arguing that net energy analysis does not generate useful information beyond that produced in a thorough economic analysis. (Cleveland 2010)

The labor input into a good or a service was thought by classical economists to determine price, but the evidence is clear that it is often a minor factor. Supply and demand are the usual arbiters of price.

The primacy of money and prices in economics has led many economists to neglect or even totally ignore the elements of real wealth. The British Nobel laureate chemist Frederick Soddy (1926) criticized the focus on monetary flows in economics, arguing that real wealth was derived from the use of energy to transform materials into physical goods and services. Soddy’s economic writings were largely ignored in his time, or regarded as the work of a crank, but they would be applied to the development of ecological economics in the late twentieth century. Rumanian-American economist Nicholas Georgescu-Roegen made advances on Soddy’s ideas by mathematically developing thermodynamic bases for economics (Georgescu-Roegen 1971).

The most important element of real wealth is food, without which we could not live. It is time to consider this.

CHAPTER 2

Food

There should be no more people in a country than could enjoy a glass of wine and a piece of beef with their dinner.

(Thomas Malthus)

Introduction

After a 140-year downward trend in the prices of the main food groups, since 2000, prices have been racing upward. In 2010 according to FAO, 925 million people were underfed. http://www.worldwatch.org/sow11

In this chapter, we start by considering what mix of food constituents we need for health. An introduction to food chains and energy pyramids is followed by consideration of the ecological economics of farming and other methods of food supply such as hunting and gathering. Major problems such as desertification and the unsustainable high productivity and low-cost farming, which is necessary to feed the earth’s population of 7 billion, are examined.

There is a fairly detailed examination of fishing and aquaculture, including the tragedy of the commons and methods of avoiding it.

We look at issues associated with genetically modified (GM) foods and the new science of nutrigenomics.

Food waste is considered. How should we deal with the underfed of the world?

Nutritional Requirements

Humans, like other animals, must absorb, process, and assimilate complex organic substances, which are essential for them to survive and reproduce. Plants manufacture them or their precursors in the presence of light from the raw materials carbon dioxide, water, and various mineral ions. The crucial process is called photosynthesis. Humans must eat plant and/or animal material to obtain essential nutrients.

Carbohydrates obtained from plants such as grains and tuberous species provide energy and also fiber, which is needed for a healthy alimentary canal.

Fats and oils can be obtained from plants such as olives and soybeans and from meat and dairy products. They are a concentrated energy source, and certain fatty acids are essential nutrients.

Proteins provide energy and are essential for growth and body maintenance. Proteins are polymers of amino acids. When a person digests protein, it is broken down into its component amino acids. After absorption, they are synthesized in the body into human proteins. There are about twenty amino acids that are essential for human protein synthesis. Complete proteins contain all of them. Almost all animal proteins are complete. Gelatin is an exception. A few plant protein sources are complete. Soybeans are an example.

Vitamins may be defined as organic substances, which humans cannot manufacture in their bodies, but which are needed in small amounts for various metabolic processes to take place and for the immune system to function effectively. For instance, L-ascorbic