the visible hand

it is the theory which decides what can be observed – einstein

constanza: the other forms of capital…

Posted by ecoshift on October 14, 2008

The Oil Drum | The Long Term Solution to Our Financial Crisis: The Other Forms of Capital
Posted by Nate Hagens on October 14, 2008 – 10:09am
Topic: Economics/Finance

As the world slowly awakens to the concept that all wealth perhaps can’t be measured by digits in the bank, the global economic and political elite have been meeting to potentially form a “new Bretton Woods,” kick started by global guarantees of banking deposits, direct government investment in banks, and global rate cuts. Though the markets have so far reacted with glee (or short covering), pumping fiat money into the system with no biophysical linkage to the real economy has (at least) two major problems. First, it accelerates the growing gap between financial capital and real capital, and second, it tacitly acknowledges our current “ends” as acceptable, and that all forms of capital can and should continue to be directed towards the positional consumption of “stuff” that our culture currently advocates (perhaps via momentum alone). In crisis times such as these, our leaders would do well to recognize that the human economy is a subset of a larger, finite system, and is subject to the natural laws forthwith. Furthermore, a plethora of new economic, psycholgic, and neuroscience research also suggests that “more” does not equate with “better”…

Below the fold is a guest commentary explaining these themes written by my thesis co-advisor, Robert Costanza, director of the Gund Institute for Ecological Economics at the University of Vermont.

We now live in a world relatively full of humans and their built capital infrastructure. In this new context, we have to reconceptualize what the economy is and what it is for. We have to first remember that the goal of the economy is to sustainably improve human well-being and quality of life. We have to remember that material consumption and GDP are merely means to that end, not ends in themselves. We have to recognize, as both ancient wisdom and new psychological research tell us, that material consumption beyond real need can actually reduce our well-being. We have to better understand what really does contribute to sustainable human well-being, and recognize the substantial contributions of natural and social capital, which are now the limiting factors in many countries. We have to be able to distinguish between real poverty in terms of low quality of life, and merely low monetary income. Ultimately we have to create a new model of the economy and development that acknowledges this new full world context and vision.

This new model of development would be based clearly on the goal of sustainable human well-being. It would use measures of progress that clearly acknowledge this goal. It would acknowledge the importance of ecological sustainability, social fairness, and real economic efficiency. Ecological sustainability implies recognizing that natural and social capital are not infinitely substitutable for built and human capital, and that real biophysical limits exist to the expansion of the market economy.

Social fairness implies recognizing that the distribution of wealth is an important determinant of social capital and quality of life. The conventional model has bought into the assumption that the best way to improve welfare is through growth in marketed consumption as measured by GDP. This focus on growth has not improved overall societal welfare and explicit attention to distribution issues is sorely needed. As Robert Frank has argued in his latest book: Falling Behind: How Rising Inequality Harms the Middle Class, economic growth beyond a certain point sets up a “positional arms race” that changes the consumption context and forces everyone to consume too much of positional goods (like houses and cars) at the expense of non-marketed, non-positional goods and services from natural and social capital. Fore example, this drive to consume more positional goods leads people to reach beyond their means to purchase ever larger and more expensive houses, fueling the housing bubble. It also fuels increasing inequality of income which actually reduces overall societal well-being, not just for the poor, but across the income spectrum.

Real economic efficiency implies including all resources that affect sustainable human well-being in the allocation system, not just marketed goods and services. Our current market allocation system excludes most non-marketed natural and social capital assets and services that are huge contributors to human well-being. The current economic model ignores this and therefore does not achieve real economic efficiency. A new, sustainable ecological economic model would measure and include the contributions of natural and social capital and could better approximate real economic efficiency.

The new model would also acknowledge that a complex range of property rights regimes are necessary to adequately manage the full range of resources that contribute to human well-being. For example, most natural and social capital assets are public goods. Making them private property does not work well. On the other hand, leaving them as open access resources (with no property rights) does not work well either. What is needed is a third way to propertize these resources without privatizing them. Several new (and old) common property rights systems have been proposed to achieve this goal, including various forms of common property trusts.


2 Responses to “constanza: the other forms of capital…”

  1. outoftownerDSR said

    Wow, that puts into words the thoughts I’ve been having on why economics has been failing people for the past few years. I really do think that we can reframe people’s life goals to be more sustainable. Maybe the american dream doesn’t need to include a single-family residence with a yard and a picket fence in the suburbs (and 2-3 or more cars to get anywhere else). I’d love to see more people thinking about what will replace the current american dream.

  2. ecoshift said

    I do not think we are at a point where these kinds of concepts can be put into policy and passed through the legislature.

    But we’ve passed an important hurdle: even John McCain is running on a platform of re-regulating the financial industry.

    It is clear, as of this date, that unregulated markets seriously and inefficiently misallocate economic resources.

    Those paying attention have known for some time that we are far from a free market. But now it’s clear to all. Markets need guidance if they are to serve as a tool for the development and well-being of the majority of citizens.

    The only question that remains is what kind of guidance they will receive. Discussion of these types of concepts can only benefit that policy debate. It is time to prepare these market based alternative frameworks to move from the theoretical realm of ivory towers, to the policy realm.

    Hope you like sausage.

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