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Other Areas Being Explored: Eco-Economics |
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Modern Economies and Earth Process As stated in Article 1 and illustrated by the Ecological Footprint Exercise, there are two dysfunctional trends occurring in today’s increasingly globalized economy:
While economic expansion has a direct and obvious effect on ecosystems and resources, so does impoverishment and excessive wealth. Both contribute to violent conflicts, which in turn devastate ecosystems. If one considers cause and effect, concerns for peace, social justice, protection of the earth, and an economics of earth stewardship and right sharing are all intertwined. Elements of an Economic System To consider these trends in more detail, it is important to identify several distinct elements of any modern economy. A simple definition of a market is the process of exchange of money for a particular kind of good or service between many buyers and sellers. If there are many buyers and sellers, prices are apt to be only as high as necessary to provide a fair return to the sellers. Because most people don’t make most things for themselves, but instead buy what they need and work at making things for markets, it is important for markets to function - for exchanges to keep taking place - if the society is to prosper. In a modern industrial economy there are a huge number of markets. In addition to markets for goods and services, there are markets for land, savings and a great many different kinds of financial securities. A simple definition of capital is wealth used to increase the ability to produce. What economists mean by physical capital, or real capital, is the tools, machinery, factories, trucks, roads, and stores that make it possible for goods and services to be provided through markets to people who want them. Economists distinguish physical capital from financial capital. Some economists also identify natural and social capital as elements of the economic system that need to be given more consideration. A simple definition of what economists mean by an investment is spending for new physical capital: a new tool, machine, factory, truck, road, or store. If the investment is successful, there will be an increase in the goods or services provided by markets to people who want them, and a profit for the investor. To an economist, financial capital is savings invested in real capital. A simple definition of interest is money a borrower pays a lender in exchange for being able to use the borrowed money. When someone puts savings in a bank to earn interest, they are actually lending it to the bank. The business of the bank is to lend the money to someone else who is willing to pay a higher rate of interest, some of which goes to the depositor and the rest of which goes to the bank. Why Do Modern Economies Tend to Expand? There are many explanations for the expansion of industrial economies, and for the sense that prosperity is at risk if they don’t expand. There is controversy among economists about the usefulness of various explanations. But there are two reasons for expansion that are basic to the system itself. One is that both producers and governments tend to promote new investment to maintain market activity. The other is that borrowers need to expand their earnings to pay interest on their loans. These reasons are most easily explained in the context of a Circular Flow Diagram that is included in every introductory economics textbook (below).
When people decide to save part of their income instead of spending it for goods and services, the savings are withheld from markets, at least temporarily. This is illustrated by the Circular Flow Diagram. Unless the savings are returned to the circular flow, the level of demand for goods and services will decline by the amount that is saved. If the savings are borrowed for consumption or for new investment, money is returned to the circular flow. If no one borrows the savings, and less demand reduces the level of economic activity, companies may reduce employment and a downward cycle may begin. This is one reason there is often so much impetus, by governments and producers alike to encourage consumers to borrow for spending, and by governments to encourage businesses to borrow for investment. When savings are used in a way that earns interest, they are returned to the system by the borrowers. If a borrower uses a loan for consumption, the level of demand will be sustained, but the borrower will have to do something in the future to earn enough money to pay back the loan with interest. What ever it is, more earnings are apt to involve the use of more resources. If a borrower is a producer and the savings are used for investment in new capital, this will also sustain the overall level of demand. Production from the new investment provides the means for earning income to pay back the loan plus interest. Most new production also is apt to expand the economy’s use of natural resources. Either way, the need to pay back loans plus interest creates pressures for economic activity to expand. In addition, because borrowers pay interest to lenders, wealth shifts from borrowers to lenders, unless borrowers are able to use the loans to earn at least twice as much more money than the interest they have to pay. Do All Economies Have to Expand? It would certainly be possible to devise economic policies so that savings can be used for investment and other purposes without driving economic expansion. Every modern economy uses a variety of ways to make four basic types of decisions. Many people think of the free enterprise system as a monolithic entity. In reality, every modern economy is distinctive in the ways it makes these decisions, which are also constantly changing. They could be changed to reduce the systemic pressures toward expansion. The four types of decisions are: 1. How much labor, capital, and resources from land are used to produce how much of what kinds of goods and service? Three interacting ways can be readily distinguished:
2. Who owns and profits from the society’s physical capital, its “means of production?” Three general forms can be readily distinguished:
3. How is money created and managed? Three ways, among others, can be distinguished:
4. How are decisions made about the economy’s legal framework and management? These can be made at different levels, by different processes, and for different purposes, as in:
By identifying theses separate types of decisions, and the variety of ways they are made in modern economies, a bunch of considerations that often come wrapped in a single package can be unbundled. How each affects the economy as a whole can then be considered separately Using a single label like capitalist or socialist to characterize a society or a viewpoint does little to promote understanding of the way a system actually works, or how markets might be changed to function differently. The Role of Government Every government has policies that affect the distribution of income and wealth. Some policies accentuate the tendency for wealth to accumulate; others moderate this tendency or may even counterbalance it. However, no government is trying to redesign its economic system to function within ecological limits. People in industrial societies expect to earn a high return on their savings, and this simply isn’t possible unless the economy expands. Furthermore, in the globalized economy, no government would be apt to succeed in redesigning its economy unless all governments do it together. Perhaps one reason so many people expect to earn high returns on their savings, and don’t consider the effect this will have on the earth, is that we tend to think about the economy as illustrated by the Circular Flow Diagram, and the earth is simply missing from this model. All the diagram shows are the markets, as though the resources from land come from, to use Boulding’s phrase, an illimitable earth. The Need for a Different Understanding of the Economy An emerging field of ecological economics uses a different model, presented in Article #3, that places the economy in a larger context of the society and the earth. This model incorporates many other kinds of capital that provide resources for producing goods and services. Corporations are now concerned about having international agreements to protect their property rights in intellectual capital: the new knowledge they have paid to develop. Ecological economists also identify other kinds of capital, including natural capital (natural resources and eco-system services), human capital (knowledge and skills of individuals), and social capital (social order provided by families, communities, and civil society). These are shown in the diagram of the Ecological and Social Context of Markets. They each provide flows of material and/or energy into the market economy, and receive flows of material and/or energy back from the market economy in different forms. Some of these flows are recognized by the market system and are included to some degree in prices. Others are not. Some of these flows help maintain the productivity of the capital stock that provides them. Increasingly, many do not. It is fairly easy to understand that if an economic system is to prosper, its stock of physical capital - its tools, machines, factories, trucks, roads and stores - must be maintained or replaced. A company that begins selling its machinery without replacing it, that begins to “liquidate” its capital stock, will produce fewer goods and services. Its ability to receive income from its capital stock will surely decline. Ecological economists observe that this is also true of natural and social capital. If the ability of the natural and social capital stock to provide resources to the economy is not maintained, the economy will decline. At present, economic theory views natural and social capital as “externalities,” which means they are external to the market system and not a part of the models on which most economic theory is based. Policies can be devised to “account” for these stocks as part of the whole economy, and to be sure they are maintained and protected by the economic system.
Modern economics is based on the assumption that the environment is part of the economy. We are now realizing this assumption is an error. The human economy is actually a part of the environment—a wholly owned subsidiary of earth's biosphere. This recognition creates a profound upheaval in our understanding of the human-earth relationship, and in our relationship with the Creator. Our relationship with the Creator is closer than we previously imagined. We are not dealing with "an ancient of days" that once long ago set the life of earth in motion, but rather with the continuous emergence, manifestation, and unfolding of the Creator in the midst of earth's communities of life. This understanding of relationship goes to the core of human identity within Creation. Adapting our economics to the requirements of respecting and protecting all life is a matter of deep spiritual significance and religious responsibility. Human economic and social life is inseparable from the integrity of Creation, and brings the ethic of earth stewardship into clear focus. Illustrative activity Preparing for the Exercise and Discussion Materials needed
Put chessboard on a table where people can gather to see it, fill the medicine cup with popcorn, and put some kernels in the lid. Put the medicine cup and pint container in the middle of the chessboard, and the lid to the side. To understand the square numbers on the chessboard, consider the upper left square to be square one and then count across to the right, down a row and back to the left down a row and back across to the right and so forth. Recruit a narrator, wise person and servant. You be the king. Narrator A simple example of exponential growth, and how it can surprise us even when we understand its possibilities, is a story told of the ancient wise man who invented chess. The king was so pleased with the game that he wanted to reward the wise man handsomely, and asked him to choose anything in the kingdom he wanted. The wise man knew the king’s people were hungry and that the king was selfish, so he decided to trick the king to help the people. All he wanted, he said, was a grain of rice on the first square to be doubled on the second, doubled again on the third, and so on for each square on the board. The king couldn’t believe the wise man would ask for so little, so tried to get him to ask for something more. But the wise man said he was offered whatever he wanted, this was all he wanted, and he knew the king was a man of his word. So the king ordered a servant to bring a basket of rice and to begin counting out the reward. King This is a wonderful game. How can it be that this is all you want as a reward? You can have gold—or a palace of your own—anything! ( Wise Person ad libs, __________) OK, you silly Wise Person. Have it your way. Servant! Bring rice and give him/her his/her reward. Put one kernel on Square one, 2 kernels on Square 2, 4 kernels on Square 3, 8 kernels on Square 4. (ad lib as led, and on Square 4 say) "Come on! Hurry up! We don’t have all day"! Stop the servant in the middle of the 5th square, and ask people to guess which squares the medicine cup (9) and pint container (13) go on. Refer to the numbers at the end of the chapter, and let them sink in.
Questions
Note: If people seem to be overwhelmed by these issues, you may want to read together the section on “Ways Forward” in Article #3, followed by a time for reflection and discussion or worship-sharing.
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Many economists have yet to embrace the idea that natural and social capital need to be fully integrated into economic models. Many political leaders, and the public at large, are concerned about dealing with social and environmental problems. But few people think about the need to invest in the economy’s natural and social capital as an alternative way of understanding the causes of social and environmental problems. One thing is certain. If an economic system continues to expand, and doesn’t concern itself with maintaining and protecting the stocks of natural and social capital as well as the man-made capital on which it depends, sooner or later it will go out of business.