An Incoherent Financial and Banking System by Dr Robert Howell

An Incoherent Financial and Banking System

Dr Robert Howell

 

How serious is the threat that current banking and financial systems pose to a stable, safe and secure future?  Are there aspects that can be easily fixed, or is drastic reform needed?  Is the state of the financial and banking sector such that it is a major global driver, and something that needs careful factoring into strategic considerations?  This article describes the likely risk of another 2008 financial crash, considers the effectiveness and efficiency of the current system, and evaluates whether the current system enables a solution to the threat of ecological collapse.

 

Summary

 

The current international banking and financial system is currently operating with a culture of selfishness and greed, ignoring or minimalising social and ecological impacts, and with an emphasis on short-term behaviour and rewards.  There are inadequate penalties to punish wrongdoing so that there are limited financial and criminal measures for reform.  These characteristics, however, if altered will not be sufficient to avoid future financial crashes, most probably worse than 2008.  The 2008 crash was not predicted by mainstream economists because the behaviour of the financial sector was not included in their models.  This exclusion is due to neoclassical economists’ inadequate understanding of how money is created, and their treating the financial sector as having a neutral impact on economic stability. (Ingham calls the orthodox concept of money for practical monetary policy, “incoherent”).  If the neoclassical economists included the impact of the financial sector in their models, they would have to recognise that the market alone is not able to deliver efficient goods and services.  If they continue to believe that the market is the best mechanism for the allocation of resources, then their ability to predict instability, economic collapses and depressions is severely compromised.   The obsessive reliance on the market in money creation is ideological: the theorists refuse to acknowledge the roles of the government monetary authority, the banking system, and the agencies of production.  The cost of money creation is excessive (roughly one third of everything we buy goes to pay interest) and the system is unstable. The profits by the sector are privatised, the losses are borne by everyone, and government budgets suffer.

 

The privatisation of the bulk of money creation needs to be changed:  money creation at the minimum should be brought under control, but should be primarily the responsibility of government.  We should move away from fractional banking, and government creation of money should enable public funding at zero or minimal interest.  The current system is predicated on a growth economy and this cannot continue without major ecological collapse.  Major reform is unlikely without considerable public understanding of how inadequate the system is, and this will be difficult to achieve. 

                                                                                       

Risks of the Financial and Banking Sector

 

The risks of the financial and banking sector include a culture of selfishness and greed, and ignore social and environmental threats.  The emphasis on short-termism, and inadequate penalties to punish wrongdoing, incentivise rather than discourage, the continuance of “business-as-usual”.  In 2011 the head of Aviva Investors in London, Paul Abberley, attacked the City for failing to rise to the challenge of climate change and other key sustainability issues. “He said the financial system needed reforming because the City was ‘amoral’ and that investors were not willing to walk away from profitable investment opportunities, even when it was clear they caused damage to the environment or the social fabric of society. Abberley said financial institutions are riddled with climate change sceptics and investment professionals who are dismissive of important social issues such as labour rights” (Confino, 2011).

 

In March 2012, Greg Smith, Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa announced that he was leaving the firm. “I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it. To put the problem in the simplest terms, the interests of the client continue to be side lined in the way the firm operates and thinks about making money. …Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them” (Smith, 2012)

 

In the UK the 2012 Kay Review concluded that UK equity markets were not as effective as they should be in achieving their core purpose of enhancing the long term performance of companies and enabling savers to implement their financial plans.  The problem is short-termism through misalignment of incentives within the investment chain. The Review identified the need to encourage a change of philosophy and culture that restores relationships of trust and confidence (Kay Review).

 

Penalties paid for illegal behaviour are substantial but despite record amounts in fines there are inadequate penalties and enforcement.  Between 2009 and 2013 payments of £166bn in fines have been paid for misdeeds dealing with foreign exchange price manipulation, consumer insurance, money laundering, and selling faulty mortgages (Kollewe, J, Teanor, J, and Hickey, S).  Yet very few people are penalised, and bank share prices and earnings still perform generally well. 

 

There is has been no significant financial system reform and thereby no reassurance, that another 2008 financial collapse will be avoided.  Ben Bernanke, former Chairman, Federal Reserve Board and Mark Carney, Chairman, Financial Stability Board and Governor of the Bank of England have stated that there have been a number of attempts at reform but the ‘too-big-to-fail’ issue has not been dealt with, and the expectation that these institutions can privatise gains and socialise losses remains. This encourages excessive private sector risk-taking and can be ruinous for public finances. The IMF has estimated that the world’s largest banks benefitted from implicit government subsidies of $630 billion in the year 2011-12 (IMF Report).

 

A More Basic Reform Needed: the Creation of Money Issue

 

Changing the ethical culture, introducing a longer term perspective (including changing short-term reward systems), removing subsidies, increasing and enforcing adequate penalties, are necessary but not sufficient.  Currently around 5% of managed and sovereign wealth funds can be said to be socially and environmentally responsible (Howell, 2012). But in addition to the inability of the current system to efficiently and effectively shift funds towards activities that will enable humankind to live within the carrying capacity of earth’s supporting ecosystems, the current financial system is inconsistent and incoherent. One significant critic is Martin Wolf (Wolf).

 

Wolf is the associate editor and chief economics commentator at the Financial Times.  He is widely considered to be one of the world’s most influential writers on economics, and regarded as “staggeringly well connected” within elite financial elite circles.  As a young man he supported Keynesian economics, but gradually became disillusioned and moved to become an influential advocate of globalisation and the free market.   This changed after reflecting on the 2008 meltdown.  He states that he is guilty of working with a mental model of the economy that did not allow for the possibility of another great depression.  He concludes that economic, financial, intellectual and political elites have misunderstood the consequences of headlong financial liberalisation.   Policy-making elites failed to appreciate risks of systemic breakdown; intellectual elites failed to anticipate crisis and agree on what to do; and political elites discredited themselves by their willingness to finance the rescue.

 

Wolf describes the role of private banking in money creation (97% in UK) and fractional banking as very destabilising.  At the very minimum there should be a tightening of regulations and increases in the reserve ratio.  At the maximum governments should be given responsibility for money creation.  (Wolf reviews at some length Fisher’s work in the 1930’s, the IMF 2012 study, and Kotlikoff of Boston University and Dyson in Modernising Money).  Wolf states that banks could loan money invested by customers (ie, act as intermediaries).  The central bank should create new money for non-inflationary growth (via a Committee independent of government).  New money should go to finance government spending, direct payments to citizens, redeem debt, and make loans to banks.  Wolf does not agree that the economy would die for lack of credit because about 10% of UK banks have financed business investment in sectors other than property.

 

Wolf states that benefits of the Chicago Plan (Fisher), where Government has the responsibility of a monopoly monetary policy, include the elimination of the biggest source of instability.  With 100% reserves the bank runs would cease.  If Government issued money for public goods and services at 0%, debt interest would fall.  Overall debt would fall.  Wolf cannot see the current system continuing because it is too unstable.  He foresees, broadly two outcomes: less globalised finance or more globalised regulation.

 

Current Monetary Policy

 

A very common public assumption is that the government creates money.   Banks are like piggy banks that store money for when we want to pay for goods and services.  This store can be lent out to support economic activity and get interest.  This is wrong – normally less than 5% of money is usually created this way (coins and paper notes).

 

Paper money in Europe came about when people kept gold or silver with goldsmiths,

who gave them a note or receipt of their deposit.   Rather than going to the goldsmiths to collect the gold or silver each time a payment was made, the note became the means of exchange between people providing and receiving goods and services. Not all the gold and silver that was deposited in a bank will be called on, so banks used that money to make loans.  This marked a transition from just guarding bullion (and earning a fee for safe storage) to an interest bearing operation.  Because the reserve of gold and silver was less than 100% of the notes issued, this is called a fractional banking system. Hence, the majority of money is created by banks when a loan is generated.  Banks create money by recording that in their accounts.  When the loan is repaid, the money supply decreases accordingly.  The Bank of England carried on the procedures of the goldsmith bankers (Positive Money).

 

The Bank of England was created in 1694.  It was a way of reducing the sovereignty of the King by an elite group of Whig financiers, who only supported William on the following conditions:  a charter to establish the Bank of England that would create and issue banknotes as the national paper currency, the bank would create money to loan to the government, and a payment of interest at 8% would be paid for from taxes.  The Bank was the only joint stock company: other banks were limited to having no more than six partners, and had to observe usury laws.  The English financial system at that time was designed to maximise government access to war finance, to increase the power of the Government and the Bank of England’s elite owners.  The industrial revolution was financed by traders and manufacturers, not through bank lending.  Over time the Bank of England changed from a retail bank to a bank of last resort (a bank to assist other banks when they are in danger of collapse).   But a model of the primary money creation through privately owned banks, at times under control through government regulation, was established (Bank of England).

 

Functions of Money

 

It is generally accepted by historians and commentators that there are three functions of money [1]:

 

1)    Medium of Exchange and payment.  Money is something that facilitates payment for goods and services.

2)    Store of Value.  Money enables the value of surpluses or excess goods and services being able to be saved for future use.

3)    Money of Account or Measure of Value.  Money is an abstract notion like a metre which is a unit of measurement that enables a value to be quantified.

 

Mainstream economics sees the function of money primarily as 1), ie, real economic analysis operates on the assumption that the economic process can be understood in the barter exchange of real goods and services, and this is carried out in the market, and money is primarily created by the market.  Orthodox economics sees money as neutral, as not contributing to economic activity, except in assisting in the exchange of payments.   This is different from monetary analysis that includes the cost of acquiring financial resources (the rate of interest) as an integral part of the economic process, and that the function in 3) is critical, ie, a Money of Account or Measure of Value is needed.  (It is like a metre, which is a unit of measurement that enables a value to be quantified.)

 

An Incoherent Model

 

Critics of the orthodox theory include Randell Wray (Wray).  He states that the historical account of the creation of money by orthodox economists as primarily being created by the market is inaccurate.   It ignores the role of Governments in establishing a measure of value and its application, historically and currently.  (Wray calls the expectation that the state has no role to play, and that money can be created by market means, “Peter Pan Never-Never Land”).

 

Ingham states that the relationship between the orthodox conception of money in economic analysis and practical monetary policy is now tenuous to the point of incoherence (Ingham).    All monetary systems, if they are to produce market prices and produce and store abstract value, are necessarily precarious and unstable.  They require constant intervention to both regulate and legitimize monetary practice and policy, to control economic agents’ disruptive and destabilising pursuit of self-interest.   At the centre of this process is a complex triangular power struggle between the monetary authority, the banking system, and the agencies of production.

 

Stiglitz states that flawed monetary and regulatory policies were guided by inadequate modeling of credit markets (banks and shadow banks).  The perspective that low and stable inflation leads to a stable real economy was never supported by either economic theory or evidence.  Models did not include agency problems or the risk taking of banks (Blanchard, O, et al).

 

The two diagrams below picture the growth of the finance industry over recent decades, showing the significant increase in the % of the industry of the total corporate profits in the US (Economist), and the share of the financial sector in GDP for selected countries (Brown, 2013). 

 

 

 

 

If the financial sector activity is not included in any analysis of the economy then it is not a surprise that mainstream economics is unable to adequately describe modern economies and why neoclassical economists are unable to foresee banking and financial collapses.  If, however, the sector is included in any analysis, it needs to be recognised that the market alone is inadequate to control money supply.   This comes back to writers like Ingham who state that at the centre of this process is a complex triangular power struggle between the monetary authority, the banking system, and the agencies of production.  These grounds alone provide more than enough substance for rejecting the current neo-classical economic model as incoherent.

 

Some Reformers

 

James Robertson has written extensively over many years, and has been involved with the formation of New Economics Foundation, and Positive Money (the international movement for monetary reform).  In his most recent book, Future Money he argues for the transfer of national money supply away from commercial banks (as a source of private profit) to a central bank as a source of public revenue to be spent into circulation by the Government for public purposes.  Banks should operate with a full reserve, with money issued debt and interest free.  He argues for the creation of  an international money supply based on a new international currency to operate parallel with national currencies.  There should be independent community currencies.  Tax reform is also required (Robertson).

 

Ellen Brown in The Web of Debt and The Public Bank Solution argues for the issuance of interest-free credit from a government-controlled and fully owned central bank (Brown 2010, Brown, 2013). These interest free but repayable loans would be used for public infrastructure and productive private investment. Historical examples of government created money:  North Dakota, New Zealand, Australia, Canada, USA, and BRICs (Brazil, Russia, India, China and South Africa).  She states that roughly one third of everything we buy goes to interest (using research from economist Helmut Creutz (Germany) and Michael Hudson (USA)).

 

In her book Healthy Money Healthy Planet Deidre Kent provides a brief history of money creation in New Zealand (Kent).  The first Labour Government nationalised the Reserve Bank and used bank credit at 1.25% for state housing and public works. The Social Credit League was an advocate of money reform (and that party changed to call itself Democrats). In the 1980’s Roger Douglas deregulated and eliminated many government functions. The Reserve Bank has ‘prudential supervision’ and capital adequacy requirements, but 98% of money is created by private banks.

Kent argues for the introduction of an interest free debt money system, a land valuation tax to avoid land speculation, and complementary currencies.

 

Bernard Lietaer has had wide experience in money systems and has written extensively.  His most recent work (with others) is Money and Sustainability, published on behalf of the Club of Rome.  He does not support the Chicago Plan because while it deals with the 145 banking and 76 sovereign debt crises (since 1970) it does not deal with the 208 monetary crashes (when a currency drops significantly).  He states that reformers need to be politically realistic – in 2010 for every elected official in Washington there were 3 high level lobbyists working for the banking system.  There is a need to have diversity in a system, with complementary incentive systems (Lietaer, B et al).

 

Ecological Economics

 

Ecological economics is a branch of economics premised on the thermodynamic laws of science, and the need to live within the capacity of the Earth to support life (Howell, 2015 a & b).  An example of an ecological economist is Herman Daly who has put forward three rules for doing this (Daly):

 

  • Output rule - wastes should be kept within the assimilative capacity of the local environment;
  • Input Rule - harvest rates of renewable inputs shall not exceed the regenerative capacity of the natural system that generates them; 

§  Non-renewable Rule - depletion rate shall equal the rate at which renewable substitutes are developed by human invention and investment

 

Meeting these rules entails recognition that uncontrolled debt is not consistent with living within a sustainable ecological footprint.  What kind of money system is able to operate within these principles?   Imagine a world where there is abundant work and proper care of the needy (young, old, ill and disabled people, and people unable to earn a living wage).  Work would include not just the basic activities of providing such things as food, shelter, and transport, but also the planning and implementation of more efficient and effective operations (research and development) and support services (such as health, education, legal regulation and enforcement, disaster relief and renewal).   This world is not static, but is dynamic because it is renewing and improving itself.  It is developing while keeping within the Earth’s capacity to support life.  

 

Money facilitates the many and varied components of the planning and production of these goods and services and can do so for a fee for services (Money Function 1: Medium of Exchange).   The creation of money is a public good and best left to government because the cost is cheaper.  Banks and financial institutions will hold 100% of reserves and act as intermediaries between savers and producers of goods and services.   A surplus in operations that is desirable for future safety nets, for holidays or for future material benefits, can be built into the pricing, savings and economy without the need for interest growing funds (Money Function 2: Store of Value).     If the money supply is insufficient to facilitate these activities, the Government can print more money debt free but not so much that the value drops and leads to inflation.

 

Can an interest bearing banking system be consistent with the principles?   If banks are required to provide interest to a depositor, they have to obtain the money by providing credit to a borrower.  For the borrower to be able to pay the interest to the bank, he/she needs to carry out some productive and profitable activity that is in addition to what they normally do to remain steady, ie, they have to grow.  To do this they will need to employ extra staff, and purchase the tools, facilities and raw materials they will use, including energy.    Is this ‘extra’ going beyond the Earth’s limits? In a world that has a very ‘light’ human footprint in terms of population numbers and settlement through the world, it is not necessarily inconsistent with a sustainable and resilient model.  It may use some of the Earth’s dirty resources, such as coal, as long as the waste is kept within the assimilative local environment (Daly Rule 1), and that renewable substitutes are developed by human invention and investment equal to the rate of using the non-renewable resource rate (Daly Rule 3).

 

Interest bearing debt will encourage growth and, all other factors being constant, will lead to a depletion of stored energy and greater use of continual energy through sunlight.  This can be possible in the short term without the application of the Daly Rules, but at some stage limits will be reached.  Prior to the 1960’s, the human footprint was less than 100% of the world’s resources.  But today it is estimated to be 150%.  Unlimited growth in these circumstances is not consistent with a sustainable and resilient world.   Daly has a place for interest, as does Wolf, but within a 100% reserve, and hence it can be seen as a fee for an intermediary service.

 

Reform Options for New Zealand

 

Some of the options, briefly, include providing a way for the wider public to know about the inadequacies of the neoclassical economic model, with particular reference to money creation, and the privatisation of banking:

ü  Start an investigation into the cost of money creation, and in particular the cost of government debt for public goods and services.

ü  Require an economic framework for public policy options that takes into account banking and financial activity. 

ü  Make Government responsible for money creation, rather than the banks. 

ü  Stop fractional banking (move to 100% reserves). 

ü  Develop a modern version of State Advances Corporation to provide money at no/minimal interest rates for key activities, such as housing and transport. 

 

It is unlikely that these reforms will be made easily, but as further financial and banking collapses occur, opportunities will arise that seem unlikely at the present.

 

Conclusion

 

The current international neo-classical model is based on outdated science, and unacceptable ethics.  It is also incoherent, in that it excludes the financial sector from its models, on the grounds that money supply is neutral in its effect.  As a result it is unable to accurately describe and predict economic activity.  If it did include the financial sector in its model, it would have to acknowledge that the market is unable to control the creation of money without government regulation and intervention.  The obsessive reliance on the market in money creation is ideological: the neoclassical economists refuse to acknowledge the roles of the government monetary authority, the banking system, and the agencies of production.   The debt that is created through the privatised money supply is primarily used for property purchase and development. When property prices rise they fuel another financial crash, and it is likely that the next one will be worse than 2008. 

 

The privatisation of the bulk of money creation needs to be changed:  money creation should be primarily the responsibility of government.   We should move away from fractional banking, and government creation of money should enable public funding at zero or minimal interest.  The current system is predicated on a growth economy and this cannot continue without major ecological collapse.  Major reform is unlikely without considerable public understanding of how inadequate the current system is.  Reform will then be difficult to achieve, perhaps without a major financial collapse and depression.

 

References

 

Bank of England.  Retrieved from https://en.wikipedia.org/wiki/Bank_of_England

 

Blanchard, O, Romer, D, Spence, M and Stiglitz, J eds.  In the Wake of the Crisis.  MIT Press.

 

Brown, E. 2013. The Public Bank Solution.  Baton Rouge, Lousiana:  Third Millennium Press

 

Brown, E, 2010.  Web of Debt. Baton Rouge, Lousiana:  Third Millennium Press

 

Daly, H. 1996. Beyond Growth. Boston MA: Beacon Press.

 

Confino, J. 2011. Aviva seeks to change City's unsustainable habits. Retrieved from http://www.guardian.co.uk/sustainable-business/aviva-chief-city-failure-sustainability

Economist. The Financial System.  What went wrong. Economist March 22, 2008.

 

Howell, R. 2012. Why We Need to Change the Way we Invest.  Retrieved from

https://d3n8a8pro7vhmx.cloudfront.net/accr/pages/36/attachments/original/1361872481/Why_We_Need_To_Change_The_Way_We_Invest.pdf?1361872481

 

Howell, R. 2015a.  How are we to live. Retrieved from

https://dl.dropboxusercontent.com/u/11111592/RH%20How%20are%20we%20to%20live%200315.pdf

 

Howell, R. 2015b. Wiring Diagram. Retrieved from https://dl.dropboxusercontent.com/u/11111592/RH%20Wiring%20Diagram%202015.pdf

 

IMF Report.  April 2014. Moving from Liquidity- to Growth-Driven Markets. Retrieved from http://www.imf.org/External/Pubs/FT/GFSR/2014/01/pdf/text.pdf

 

Ingham, G. 2004.  The Nature of Money. Polity Books.

 

The Kay Review of UK Equity Markets and Long-term Decision Making. 2012.  Retrieved from https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253454/bis-12-917-kay-review-of-equity-markets-final-report.pdf

 

Kent, D. 2005. Healthy Money Healthy Planet. Craig Potton.

 

Kollewe, J, Teanor, J, and Hickey, S. 12 Nov 2014.  The Guardian. Retrieved from

http://www.theguardian.com/business/2014/nov/12/banks-fined-200bn-six-years-history-banking-penalties-libor-forex

 

Lietaer, B et al. 2012. Money and Sustainability The Missing link. Triarchy Press UK

 

Positive Money. Retrieved from http://positivemoney.org/videos/

 

Robertson, J. 2012.  Future Money.  Green Books.

 

Smith, G. 2012. Why I Am Leaving Goldman Sachs March 14, 2012 NY Times Retrieved from http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldmansachs.html?pagewanted=all

 

Wolf, M. 2014. The Shifts and Shocks – what we have learned and have still to learn from the financial crisis. Penguin.

 

Wray, R. 2012.  Modern Money Theory. Palgrave Macmillan.

 

[1] Some include a fourth, namely, a standard of deferred payment, but this is really a subset of Money of Account.

How are we to live? - Dr Robert Howell

How are we to Live?

Dr Robert Howell

 

How are we to live to get what we want from life, to enjoy the love of family and friends, the comforts of the Earth, and the pleasures of the good life?  A normal pattern is to seek an education to get a good job, to enable us to buy a house and the various goods and services to feed ourselves, travel, and keep in good health.  We expect the collective arrangements by the people who live with us - locally, nationally, internationally – to provide security for our safety, and protection of the rewards of our work and effort.   During the last 50 or so years, large numbers of New Zealanders have realised many of these expectations.

 

Yet there are numerous signs that these expectations cannot be met in the immediate future.  These indicators include climate warming, water pollution, energy pricing, food shortages, banking failures, government incompetence and paralysis, and the destructive behaviour of many business operations[1].  In each of these indicators, let alone their combined impact, there is significant evidence to show that we cannot continue Business-As-Usual.  The New Zealand No 8 fencing wire approach of pragmatic and innovative DIY problem solving will not solve these issues.  Instead we need to think outside the box in a different way.  We need to rethink the basic assumptions that underlie what we have understood by the good life: the beliefs that we have about how to relate to our fellow humans and the Earth we live on.  Many of these intellectual frameworks are based in innovative approaches for their time over one or two or more centuries ago.  These have shaped the way we have built our institutions that make up the governmental, commercial and civil society sectors that are commonplace today, and that we take for granted.  Our purpose here is to discuss the various strands or traditions or schools of thought in ethics, science and economics and how they fit together.  Until we release ourselves from these historical straitjackets of how to think about how we are to live, the future will be captured by the limitations of outmoded principles that underpin current thought and practice.

 

Ethics traditionally has dealt with human-human relations and ignored human-Earth matters.  The dominant international economic model is based on out-dated scientific principles.  Yet there are many writers and thinkers who have recognised these weaknesses and have extended the traditional ethical and religious traditions to include a human-Earth perspective, and an economics that is based on modern scientific principles.  These are described here.  (Figure 1 summarises this in a diagram.)

 

Ethics

Everyday discourse includes words such as “right”, “ought”, “duty”, “obligations”, and “responsibilities”.  We talk about obligations parents have towards their children for their care and nurture.  Organisations have responsibilities towards their employees.  Entitlements can be rights, or what people are owed.  This is moral language. 

 

When these descriptions of intention or behaviour are gathered together in a set they can take the form of professional rules; organisational charters; national constitutions; policies; codes of conduct; creeds and doctrines; and cultural customs through myths, stories, and traditions. Example: organisational employment rules describe the expected behaviour between an employee and their employer about matters such as racial or sexual discrimination, a safe workplace, drinking alcohol or taking certain drugs while at work. Schemas describe standards or sets of rules or customs or policies and are attempts to give system, clarity, and intellectual power to everyday moral activity and discourse. In these codes are certain primary moral concepts or principles.  When we talk about these principles, we are using a meta-language: we are talking about the moral language or schema.

 

Philosophers have developed theories about these primary moral principles, and argued that a certain notion or notions could be used to derive explanations about what was ethical. Theories can also aim to advocate for different understandings about how to behave where there are contradictions between different discourse and behaviour, and between different schemas.   Kant relied on the notion of duty[2], the Utilitarians on the concept of happiness or utility[3], and Rawls on the idea of equity[4].  Aristotelians use a set of virtues coordinated by eudemonia[5].  Hobbes and Locke[6] were early advocates for the idea of a social contract that described the responsibilities between a ruler and their subjects.  That approach has been very influential in French, American and international thought (example: United Nations Declaration of Human Rights[7] ), that include individual property rights.  These traditional ethical theorists or theories primarily focus on human-human relations, although Utilitarians were reformers in regard to such attitudes and behaviour towards animals.

 

In the 1970’s Rawls gave a new impetus to the social contract tradition by describing persuasive arguments for the importance of the notion of fairness in deciding the responsibilities of leaders and the range of social institutions to be included in governmental obligations to its citizens.  Differing from Rawls is Nozick[8] who argued for a libertarian ethic (maximising individualism and freedom of choice) and a minimalist state with very wide disparities in access to the resources necessary for living. But a minimalist state will have very few of the functions that are critical for a safe and sustainable world.  Nozick tries and fails to show how a police force can be established through voluntary association[9].  His theory has fatal weaknesses.  Both Rawls and Nozick ignore human-Earth relationships.

 

While traditional ethics has primarily dealt with human-human relationships, there have always been people throughout history who have included human-Earth relations in their ethic.  These include people from many indigenous cultures, Francis of Assisi, Blake, Wordsworth, John Muir (Sierra Club), Gandhi, Rousseau and Schweitzer.  German foresters influenced in part by Rousseau, and the movement promoting wilderness, included a human-Earth perspective into their thinking[10].  But it was twentieth century scientists such as Rachel Carson[11] and Aldo Leopold[12] who led the modern development in environmental ethics. Their focus on a human-Earth relationship was picked from some of the animal rights writers (Singer, Regan), and then environmental philosophers such as Naess (deep ecology)[13], Callicott (the leading contemporary exponent of Leopold’s land ethic)[14], Westra (ecological integrity)[15], Sylvan (the intrinsic value of the non-human, natural world)[16], Taylor (respect for nature)[17], and Roulson (value in nature)[18], amongst many others.

 

Ethical issues were also recognised by scientists working with climate change. The Intergovernmental Panel on Climate Change (IPCC) was set up to advise the United Nations Framework Convention on Climate Change (UNFCCC) on the issues of climate change. The First IPCC assessment Report dealt mainly with the science.   But subsequent Reports and the literature debate around these Reports picked up the issues related to the Articles and Principles of the UNFCCC, namely, equity, cost effectiveness and economic analysis, sustainable development, and (to a lesser extent) governance.  One of the writers on the IPCC Working Party Group III in the early 1990’s, Grubb, recognised a number of the ethical issues[19].  He identified the issues of fairness (equity) between countries and generations.  He picked up a third issue put forward by Shue, namely, the process of representation and effective participation.  Grubb reported on the economic calculations by such economists as Nordhaus which rests on a utilitarian philosophy, and obscures the important differences in climate change effect between countries and generations, and the valuing of life. He noted that countries will have different impacts, with the developing countries worse off; countries differ in their capabilities to deal with climate change; and the method of evaluating impacts is difficult. Grubb referred to the attempts by economists such as Nordhaus to assess the impacts of climate change on the basis of GNP and agricultural intensities.   Nordhaus and others argued that it would be cheaper to adapt to climate change rather than abate it.  The calculations do not feature poor countries significantly in their calculations.   Kamal Nath, the Indian Environment minister publicly rejected these because of the discrimination between rich and poor people[20].  

 

We have seen that scientists and environmentalists have picked up ethical issues involved in the human-Earth perspective. But a number of modern philosophers have now recognised that the traditional approach needs to be extended to include a human-Earth relationship. Hursthouse is an example of someone who has used the Aristotelian approach[21]. She has developed the virtue of respect for nature as a new virtue.

 

Peter Singer is a modern utilitarian or consequentialist.  He devotes two chapters of the third edition of Practical Ethics to climate change, and the environment, respectively[22].  He describes an environmental ethic arguing from a human-centred ethics.   He argues that we have a responsibility to avoid harming people.  Individually and collectively through our emissions we are causing harm.  We have an obligation to act individually and to change the policy of governments to slow climate change.

 

Shue uses the social contract tradition to advocate for a rights approach based on fairness[23].  He states that the purpose of a right is to provide protection for human beings against a threat to which they are vulnerable and against which they may be powerless without such protective action. To be effective they must be international and intergenerational.   Rapid climate change places current and future generations in the kind of circumstances that call for the construction of rights-protecting institutions.  Climate change threatens in particular the right to life, the right to health, and the right to subsistence. He argues that rights-protecting institutions are required now. He argues on the principle of fairness for the right of all current and future generations to life, and for immediate action to reduce this environmental destruction.

 

Within Christian thought the interpretation that the Genesis stories supported human dominion over nature for human benefit has been argued by White in a 1967 article, Historic Roots of our Ecologic Crisis [24].  Many Christian churches have countered this view.  For example, for Methodists, the theology of creation proclaims the consistent message of Christian stewardship, of humanity’s obligation to care for the whole of the earth and its creatures. While historically some groups may have emphasised human dominion over creation, modern Church teaching explicitly denies this interpretation[25].  Other religions have affirmed a human-Earth ethic that recognise interdependence between humans and nature[26].  Eric Schumacher’s book Small is Beautiful: A Study of Economics As If People Mattered[27] was a very popular book in the 1970’s that brought a Buddhist approach to economics and ethics.  The Forum on Religion and Ecology at Yale is the largest international multireligious project of its kind[28].  With its conferences, publications, and website it is engaged in exploring religious worldviews, texts, ethics, and practices in order to broaden understanding of the complex nature of current environmental concerns. It is a valuable source to identify many religious views that take a human-Earth relationship other than one of explotation of the Earth.

 

These are just a few examples of philosophers, ethicists and theologians from many traditions who have included a human-Earth relationship into their ethical framework.  Respect for nature, care; integrity; oneness; intrinsic value; resilence; stewardship; wholeness; and reverence for life - there are many concepts to choose from for our core ethical principle or principles.  (The Earth Charter uses a number of concepts including respect, ecological integrity, care, equity, just[29].)  If we choose one, it needs to be rich enough to generate the secondary concepts, schema and sets of obligations to be able to define a relationship that guides behaviour.  If more than one concept is chosen, then they need to be integrated together to avoid conflicts and contradictions.  Do we give priority or equal weight to righting the injustices that led to developing countries being much poorer, against a need to drastically reduce carbon emissions by all countries including poor countries that might have large deposits of fossil fuels?  Does the United Nations Declaration of Human Rights (including property rights) take precedence over the World Charter for Nature (“Nature shall be respected and its essential processes shall not be impaired”)[30]?

 

Whatever core concept or set of concepts is chosen it should not include ideas that see the world as solely or mainly for human utility.  There is a more pragmatic argument for this.  If we start with the notion that nature is mainly to be seen for instrumental utility for humankind, but subject to certain limits, it is much harder to develop a relationship with nature that enables a fit that works for humans, and where nature is able to provide a sustainable place for human life.   It is the same as having a competitive ethic for business, but within some limits.  If the basic value of business is maximisation of self-interest, it is very difficult for a business executive to leave the office for home and change into a loving, caring spouse or parent.  And to develop a society as a whole that is a loving and caring place to live in, while a significant portion of it works to contrary standards, is very difficult.   People do not find it easy to be schizophrenic.   Aristotle talked about phronesis or practical wisdom that is a complex, learned and nuanced ability to be virtuous.   It is like an apprenticeship.  It is not something that can be switched on and off.   If humans value and respect nature, but recognise that it is also of utility for food, shelter, and warmth, it will be much easier to design an economy and society that has the right relationship with nature, than if we start with the belief that the world is primarily for our use, but within certain limits.  Rather than start at one end (the world is for us to exploit) but then impose some limits, start at the other end (we should ensure nature’s health and resilience are paramount) and then see what resources are needed for humans and how they can be used.

 

Mainstream Economics

The current dominant economic model, classical or neo-classical, is based on Adam Smith’s work, and has been developed by economists such as Ricardo[31], Jevons[32], Menger[33] and Walras[34], amongst others. It is founded on the premises that if individuals pursue their self-interest in a competitive free-market system, an optimal and stable equilibrium will be reached that will benefit everyone[35].  Competition will bring about the most efficient price for goods and services through a balance of supply and demand.  The price mechanism will also deal with scarcity, encouraging substitution of diminishing resources.  The model assumes a Utilitarian ethic. 

 

 

The neo-classical tradition recognises that the market is not always perfect.  There are externalities (costs that are not included in prices).  Pollution created in the production of certain goods is an example and the cost usually falls on the government or non-polluters to pay (hence the polluter pays principle).  Coase is a more recent economist who suggested that market pricing be used to deal with the environmental hazards of CFCs.  But Nicholas Stern argued that the greatest market failure was the lack of factoring in of the cost of climate warming[36].  Environmental Economics is a sub-set of the neo-classical position where attempts are made to identify externalities in internalise them in prices.

 

When the economists were developing their classical economic principles they believed in the existence of natural laws of economics that were analogous to the laws of physics. They substituted economic variables for physical variables.

The physics they used was soon to be outmoded. By copying the equations of mid-19th century physics, economists fell victim to the assumptions of the time.   As a result their abilities to accurately describe and predict economic activity is seriously flawed[37].

 

Reed, CEO at Citicorp became disillusioned with the predictions of economists. He funded a 10-day cross-disciplinary workshop in 1987 where he brought major scientists and economists together.  The scientists were amazed at economic assumptions that were out of step with modern science: they said that it was like visiting Cuba – completely shut off from the Western world and vintage cars of 50s[38].

 

A more recent example is the inability of mainstream economists to predict the 2008 financial collapse.  The 2008 crash was not predicted by mainstream economists because the behaviour of the financial sector was not included in their models.  This exclusion is due to neoclassical economists’ inadequate understanding of how money is created by privately owned banks. Ingham calls the orthodox concept of money for practical monetary policy, incoherent[39]. The expectation that the state has no role to play, and that money can be created by market means, Wray calls Peter Pan Never-Never Land[40].  The obsessive reliance on the market in money creation is ideological: the theory refuses to acknowledge the roles of the government monetary authority, the banking system, and the agencies of production. The cost of money creation is excessive and the system is unstable. 

 

Other authors who have described this problem include Stiglitz[41], Robertson[42], Kent[43], Brown[44], Greco[45], Lietaer[46] and Wolf.   (I have located this group in Figure 1 at the bottom, associated with the Ecological Economics stream, because on balance the majority but not all fit within that stream.  The money discussion has a long historic pedigree and Brown gives good coverage of that in her book, Web of Deceit.)   Of recent authors, the most surprising is Martin Wolf, associate editor and chief economics commentator at the Financial Times.  He is widely considered to be one of the world’s most influential writers on economics and regarded as “staggeringly well connected” within elite financial elite circles.  As a young man Wolf supported Keynesian economics, but gradually became disillusioned and moved to become an influential advocate of globalisation and the free market.  This changed after reflecting on the 2008 meltdown.  He writes that he is guilty of working with a mental model of the economy that did not allow for the possibility of another great depression.  He states that the economic, financial, intellectual and political elites have misunderstood the consequences of headlong financial liberalisation.  The policy-making elites failed to appreciate the risks of systemic breakdown; the intellectual elites failed to anticipate the crisis and agree on what to do; and the political elites were discredited by their willingness to finance the rescue.  He argues that the current international economic model is too unstable and needs to be changed.  In particular he recommends changing the privatisation of the creation of money carried out by banks, and making that function the responsibility of government[47]

 

The current mainstream economic system is based on a utilitarian ethic that sees the Earth a resource for human utility. It is based on a version of the libertarian social contract that sees a minimal role for government, yet its most sophisticated advocate, Nozick, fails in being unable to justify the establishment of a police function within his scheme.  It ignores the instability of the financial sector through the privatisation of money creation: it is linked to a monetary policy that is incoherent.

 

Science

Carnot[48], Clausius[49] and Thompson[50] (Lord Kelvin) were among the prominent scientists who developed the thermodynamic laws.  The First Law of Thermodynamics states that all matter and energy in the universe is constant, that it cannot be created or destroyed.  The Second Law (entropy law) states that matter and energy can only be changed in one direction, from usable to unusable, from ordered to disordered. The earth is a closed system except for the entry of energy in the form of sunlight.  In earth’s system what goes into a part of the system must come out, and it does with its productive potential irrevocably diminished[51].

 

The thermodynamic laws are in direct contradiction with the equilibrium law that is one of the foundational principles of the current dominant neo-classical economic model.  The thermodynamic laws mean that the beliefs that there is no limit to growth, and that there is always a substitute for scarce resources, are in conflict with modern science.

 

The Club of Rome produced a book, Limits to Growth, in 1972, which was based on computer simulations of exponential economic and population growth with finite resource supplies[52]. (The book picked up issues like population that had been earlier identified by Malthus [53].)  Scenarios based on Business-As-Usual could not be sustained. Recently Turner has shown that their predictions about limits to growth were justified[54].

 

Vitousek and others in 1986 calculated that 40% of the solar energy converted by photosynthesis available to counter the entropic effect of the Second Law, is already captured by humans[55].   The ecological footprint was conceived by Rees[56] and developed in conjunction with Wackernagel and others[57].  Recent use of the footprint shows that 1.5 Earths would be required to meet the demands humanity makes on nature each year [58].

 

If there is any doubt about how scientists’ think about the perilous state of the Earth go to the World Scientists' Warning to Humanity (1992), signed by some 1,700 of the world's leading scientists, including the majority of Nobel laureates in the sciences [59] Their statement (which I encourage you to read in its entirety) contains the following:

The earth is finite. Its ability to absorb wastes and destructive effluent is finite. Its ability to provide food and energy is finite. Its ability to provide for growing numbers of people is finite. And we are fast approaching many of the earth's limits. Current economic practices which damage the environment, in both developed and underdeveloped nations, cannot be continued without the risk that vital global systems will be damaged beyond repair.

 

Ecological Economics

Ecological economics is an economic system that accepts the thermodynamic laws as given. Soddy was one of the early founders of ecological economics.  He received the Nobel Prize for Chemistry in 1921.  From 1921 – 34 he carried on a quixotic campaign for a radical restructuring of global monetary relationships, offering a perspective rooted in physics (particularly the laws of thermodynamics) and was roundly dismissed as a crank.  Most of his proposals (abandoning the gold standard; letting international exchange rates float; using government surpluses and deficits as macroeconomic policy tools; and establishing economic statistics) are now conventional practice.  One remaining recommendation, eliminating fractional-reserve banking, is still outside conventional wisdom[60].

 

Boulding, in an influential article, The Economics of the Coming Spaceship Earth[61], contrasted an open ended economy and a closed economy. The open economy he called the "cowboy economy," the cowboy being symbolic of the illimitable plains

and also associated with reckless, exploitative, romantic, and violent behaviour, which is characteristic of open societies. The closed economy of the future might similarly be called the "spaceman" economy. Here the earth has become a single spaceship, without unlimited reservoirs of anything, either for extraction or for pollution. 

 

Herman Daly[62] (a student of Georgescu Roegen) proposes three rules for an economics based on modern science. The Output rule states that wastes should be kept within the assimilative capacity of the local environment.  The Input Rule states that the harvesting rates of renewable inputs shall not exceed the regenerative capacity of the natural system that generates them.  The third rule says that the Non-renewable depletion rate shall equal the rate at which renewable substitutes are developed by human invention and investment.

 

Other economists amongst many who have contributed to economic analysis based on the foundations of ecological economics include Korten[63], Costanza[64], Victor[65], Jackson[66], Raworth[67], Dietz and O’Neill[68].

 

Conclusion

The traditional ethical philosophers and schools, such as Aristotle, Kant, the Social Contract, Utilitarianism, dealt with human-human relations.  Ecologists such as Carsen and Leopold followed by environmental ethicists, included in their writings human-Earth relations.  More recently philosophers such as Hursthouse, Singer and Shue, have extended the traditional streams to include human-Earth relations.

 

Science, through the work of people such as Carnot, Clausuis and Kelvin, developed the laws of thermodynamics.  Unfortunately, the dominant international economic model through work by Jevons, Menger and Walras, based their thinking on science before these developments.  The neo-classical economic model uses a form of utilitarianism based only on human-human relations, and sees the Earth simply as there for human utility and exploitation.  It is hence based on out-dated science and ethics.  It also identifies with a version of the social contract that minimises the role of government and maximises the place of the market that leads to an incoherent monetary policy causing major instability. Ecological economics that does recognise the laws of thermodynamics is not mainstream enough to influence political leaders.

 

There are a number of ethical concepts and principles on which to base a human-human and human-Earth based ethic.  Until we adopt and use such concepts as equity and respect for nature enabling us to live within the capacity of the Earth to support human life, we will be denying any desirable kind of life to future generations.

The recent report of the IPCC[69] states very clearly the serious dangers that the world faces through a warming world.  Why does the world not take heed?  I believe it is because of the mental and organisational straightjackets that we are in because of an unscientific and unethical economic system.  Until we change those, we will not significantly tackle climate warming. Wolf , in his criticism of the move to an unregulated market based economic system cannot see it continuing because it is too unstable. Very broadly he sees two outcomes: less globalised finance or more globalised regulation.  He does not see reform coming very soon and is therefore anticipating further major financial and banking crises.  Unfortunately, even if those changes occurred in time the dangers of ecological deterioration would only be slowed and not halted. 

 

In the immediate future, the chances of enjoying the love of family and friends, the comforts of the Earth, and the pleasures of the good life will be very limited.  Until we release ourselves from these historical straitjackets of how to think about how we are to live, the future will be captured by the limitations of outmoded principles that underpin current thought and practice. Rousseau's most important treatise begins with the dramatic opening lines, "Man is born free, and everywhere he is in chains” [70].   It is now time to throw off the economic chains of thought that bind us to a future of slavery and destruction.

 

 

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Creating Tomorrow: Community and Energy

Human living is in the early stages of huge change that will take us well beyond historical experience. In the last of a five-part series, business professor and sustainability expert Dr Wayne Cartwright explains what this means for life as we know it.

A dramatic shift in society's attitude to the environment is needed. Photo / Getty Images

Dr Wayne Cartwright. Photo / Supplied

OPINION: Present ways of human living cannot continue for more than a few years because they depend on the strong performance of an economy that is failing and cannot continue. New ways of living are required - there is no choice about this - but we do have alternatives.

Our new ways of living will be shaped by two realities: what we think life is about (our deep beliefs that influence how we think and act); and harsh and restrictive economic conditions.

Wealth and self-interest

Right now, the dominant view of life for the relatively affluent is determined by the global economy and their role within it. The economy requires that wellbeing is closely associated with material possessions and spending ability (on recreation, travel, sport and so forth).

This belief is tuned up through advertising, shopping malls, online stores and easy credit. Continual developments in technology and design enhance products and services so that what we own soon needs replacement.

People are encouraged to believe purchasing replacements will make them happier, which maintains economic growth and keeps this way of life rolling along. 

The economy also encourages people to be self-interested. Most workplaces encourage people to 'look out for themselves' and be competitive. Most leadership is top-down and transactional, focused on 'getting the job done'. Although team-work is sometimes expected, this is usually to make the organisation perform better, not because it is intrinsic to society's way of life.

The economy also depends on rights of ownership because markets work through buying and selling things that are owned. This works well as far as it goes but resources in the 'commons' - the atmosphere, oceans, most waterways and the fundamental ecological systems on which human life is utterly dependent - are separated from immediate consideration. 

These dominant personal ethics and values apparently feel right and comfortable to most people. Put simply, 'this is the way things are'. People feel they can't do anything to change it even if they want to. They take this way of living for granted and do the best they can within it.

Two paths ahead

The critical question is whether these ethics and values will continue to serve us well in a future of permanent economic contraction.

If we hold on to them, we will be motivated to retain current ways of living as much as possible. Most attention will go to coping as well as possible with oil prices, climate change and problem debt. We will continue to seek wellbeing and happiness from material possessions and consumption but with lower incomes, higher costs of most products, more expensive transportation, substantial unemployment and widespread failures of companies and financial institutions.

The tax base will be lower so social services and welfare safety nets will be cut back. Environmental degradation will continue, although more slowly due to less economic activity. 

Does this future way of living look rather dismal? Do people have to 'take to the bunkers' in this way? Does this way of living provide the best prospects for wellbeing and happiness? 

There is an alternative that is worth urgent and deep consideration. Many people may find it strange and even radical, but that should not be a reason to put it aside - after all, we are heading for radical changes anyway. 

The case for a more communal way of life

Community self-sufficiency can be used to buffer economic swings. Photo / Getty Images

The core of this alternative would be much stronger local communities. There is a good practical economic reason for this. An economy faced with much higher energy costs will increase its 'local-for-local' production of foods, some types of light manufacturing and local services, leading to vigorous local markets and community exchanges. Thus, a much greater proportion of total economic activity will take place within communities. 

The same cost influences will reduce flows of goods between districts and reduce dependency on imported goods. (Though, of course, many categories of commodities, manufactured products and services will continue to be provided from national sources and by importing. Conventional food supply chains will also continue to supply essential foods that cannot be produced locally and non-seasonal fruits and vegetables when they are affordable.)

Thus, the whole economy will have greater self-sufficiency at each level - local and community, city and district, and nation. This will help buffer parts of the economy from external economic disruptions. Local communities would be buffered most and nations to a lesser extent. 

Further buffering could be provided by creative approaches to local trading - such as barter exchanges, locally-redeemable vouchers and local currencies - to further insulate the 'local-for-local' part of the economy in each community from national and international swings.

Reassessing deep beliefs

Our present values do not align with the formation of strong local communities. Self-interest and individualism would need to be replaced with the realisation that personal and family wellbeing are more secure in a community that works together, shares successes, and jointly tackles setbacks and difficulties. People would need to realise that each of us is interdependent with all other human beings.

The stupidity of deliberately disadvantaging other people would become very clear. Harmful competition would be reduced. People would have an intrinsic deep respect for others - whatever their nature or foibles - and this would replace wariness, quick judgement and doubt. 

If people made these changes in their deep beliefs then, at the very least, they would understand that if they harm the natural environment, they also harm themselves. More powerfully, their respect for life would make such action very distressing, so they would avoid it. 

People would recognise that, beyond essentials, the accumulation of material and financial wealth is not required for wellbeing and happiness. This would be replaced by the deep satisfaction of sharing many kinds of experiences and a life more in harmony with nature. (A weaker economy would not be able to provide as much happiness through material goods anyway.)

In this way of life, community enterprises would spring up with volunteer labour, resources provided in kind and value-determined voluntary payments. The structures of these non-commercial enterprises would be practical and consistent with the community's values.

Human activity needs to be planned, adjusted and monitored to fit within environmental limits. Photo / Getty Images

Is it time to take fringe ways of living mainstream? 

Small groups have been experimenting with these ways of living but very much on the fringes of society, which has viewed them with suspicion. The time has perhaps come to learn from them, expand their ideas and bring them into the mainstream.

In this scenario, new ways of living would begin in local communities with agreed common principles but with acceptance of local variations. In this way, core ethics would be explored and tested in practical living conditions where people are in close and regular contact.

The ways of living developed in these founding communities would then extend - as they strengthen - to whole countries and, eventually, most of global mankind. This would happen in contrast to the neo-classical economic model, which pushed global processes and influences down to countries and communities. 

In this alternative way of life, market mechanisms would work to maximise community wellbeing and the happiness of individuals within the overarching requirement for ecological integrity. Business enterprises would have a different role in society, consistent with the society's new core values and ethics.

Changes to finance and employment

The banking and finance sector would provide just two main services - the facilitation of financial transactions through clearing cheques and debit card accounts, and the issuing of loans from deposits to assist with the development of enterprises and purchase of assets.

The right to create and supply money would be vested in governments rather than banks. Central government would control the whole-of-country money supply and local governments would control local-for-local market currencies. Credit would not be available to finance consumption but community exchanges would provide food banks and vouchers for people and families with short-term difficulties. 

The concept of employment would be very different. Communities would function as integrated units to maximise the wellbeing of their citizens. Some people would be employed by commercial enterprises but the level of market demand would be insufficient to employ everyone in this way. 

However, there would be no unemployment, because non-commercial community enterprises and institutions would provide opportunities for everyone able to contribute skills and time to enhance the wellbeing of the community. Given the values that guide living, it would be easy for the community to establish systems for sharing resources among its citizens, so that everyone is able to participate in the requirements for life.

Governments at all levels would ensure that the integrity of ecological systems is sustained and, if already at risk, recovered. All human activity would be planned, monitored, and adjusted to ensure this happened. Most planning and adjusting would be undertaken autonomously by citizens who live by their ethics and principles - and so simply know what is right. Governments would monitor and intervene as necessary. Monitoring methods would be developed from concepts already well-established, such as carbon footprinting and energy budgeting.

'Challenging but achievable'

Major and radical changes in ways of human living are inevitable and are already underway. Major shifts will probably be necessary within a decade and certainly within twenty years.

We can either let these changes roll over us with great consequential hardship or we can begin to prepare right now for our big transition to quite different ways of living - truly 'creating tomorrow'.

This will be challenging but it is achievable. To do it, we need to open ourselves to change by understanding what is really happening, ridding ourselves of stupid beliefs that our present ways of living can continue much longer, and commit as a whole community to making the changes work well for us and the planet.

Check out the full series as featured in Element magazine from the NZ Herald:

• Creating Tomorrow: Energy
• Creating Tomorrow: Weather
• Creating Tomorrow: Food
• Creating Tomorrow: Finance
• Creating Tomorrow: Community and Energy

Like what you see? For weekly Element news sign up to our newsletter. We're also on Facebook and Twitter.

Creating Tomorrow: Finance

Human living is in the early stages of huge change that will take us well beyond historical experience. In this, the fourth of a five-part series, business professor and sustainability expert Dr Wayne Cartwright explains what this will mean for energy use, the weather, food, finance - and life in general as we know it.

Protestors target Bank of America as part of Occupy Wall Street in March 2012. Photo / Michael Fleshman via Flickr, used under Creative Commons

Dr Wayne Cartwright. Photo / Supplied

OPINION: I am now able to pull together information from the articles about energy, climate and food to provide a cohesive view of the global economy. The message is bleak.

Our current form of economy (known technically as 'neo-classical') is beginning to collapse because several changes not encountered previously are weakening the foundations that have evolved over the past couple of hundred years. We need to look closely at each one of these foundations and why they are now shaky.

Growth is no longer certain

The economy is robust only when it is growing, and growth of economic output requires increasing rates of energy inputs. The core foundation has been access to expanding supplies of relatively cheap energy. In the very early years, this came from burning coal to produce steam for locomotives and factories. Later, the huge opportunity for economic growth came from burning oil in engines and (with gas and coal as well) in electricity generators.

Of course, even more recent economic developments around information technology use less energy but they also deliver much less growth, so aggregate economic growth still requires expanding energy-intensive industries.

Until recently, the economy has usually been able to rely on energy being available at prices that would not inhibit growth. As the economy has recovered from each of its periodic slow-downs and contractions, energy supplies have been there at affordable prices to fuel resumption of growth.

As we discussed in the first article, within a few years oil and gas prices will be at levels that will inhibit growth. There will be no recovery from recessions because energy prices will be too high to permit it. Recessionary conditions that have been cyclical in the past will become permanent. If the current form of economy is allowed to follow this path, unemployment and a plethora of forms of economic and social hardship are inevitable.

It is obvious that it is strongly in our own best interests to begin now to build forms of economy that rely much less on energy yet also allow people to live in wellbeing and happiness. Energy prices alone are enough to require this shift but, to reinforce the need for radical reform, there is another foundation of the current economy that will also cause its collapse unless it is fixed.

The foundation of the global economy - a robust and trustworthy banking and financial sector - is under threat. Photo / Getty Images

Unsustainable debt - and its impact

This essential foundation of the current global economy is a robust and trustworthy banking and financial sector that facilitates monetary transactions, provides repayable credit, encourages and rewards savings, and arranges capital and debt finance for development of enterprises.

Until about 30 years ago, these were actually the characteristics of most of the banking and financial sector. It required government regulations to stay this way. During the 1980s, some of the key regulations were relaxed or withdrawn, especially in the United States, resulting in radical shifts in the actions taken by the sector.

Since then, increasing volumes of credit have been issued on the assumption - actually enshrined in complicated computer models - that economic growth would continue strongly, thereby assuring the lenders that borrowers would be able to repay the loans.

As we all saw to our cost in the period following 2008, this assumption was false and the computer risk assessment models were inadequate. There was no effective oversight of the relationship between the total amount of debt issued and the overall size of economic output from which repayments would be expected.

The result is that the total debt now owed is several multiples of what could ever be repaid, even if the economy remained robust. In the future inevitably recessionary economy, debt repayment is literally hopeless.

There are two chastening implications of this situation. First, the economy has frequently relied on debt creation to fuel recovery from recessionary conditions. This strategy is no longer available because sensible debt levels have been exceeded - to put it mildly! Increasing debt is no longer a 'solution' to insufficient economic growth.

Second, when the outstanding debt is called in there will be massive and catastrophic financial and business failures. This is the reality behind the current EU debt crisis, but only a small part of the problem has been exposed so far.

Again, it is obvious that it is strongly in everyone's best interests to reform the financial sector of the economy to avoid this catastrophe and return the sector to a specified supportive role.

Yet another critical foundation of neo-classical economics is shaky. This is the assumption that suitable land would always be available for expansion of the economy and that climatic conditions would be stable within predictable ranges. Both assumptions are now false due to the combined effects of population pressure, climate change and increasing frequency of severe weather events.

Time for new economic models

The new forms of economy must recognise explicitly the reality of the future effects of global warming. It must also include approaches to population policies that maximise the wellbeing of the human race.

There is another dimension to consideration of the major reforms suggested here. The processes of the neo-classical economy are associated strongly with the particular ideology for human living that we call capitalism. Many people have strong emotional beliefs about the rightness of this ideology and political parties have formed around it.

Movements towards active work on the reforms proposed here are likely to be seen as an attack on capitalism, which will strengthen opposition to change. So be it! If it is any comfort to devotees of capitalism, none of the other 'isms' (socialism, communism, fascism) seem to meet the needs of the future. A quite fresh approach to human living systems seems to be required, as will be explored in the last article of this series.

Whatever, the approach taken to future living, the matter of hugely unsustainable current debt must be addressed before progress can be made. It must be accepted that current debt would be unrepayable even in buoyant economic conditions, so is totally out of the question with permanent contraction now inevitable. Several proposals have been made for solutions. All are extremely unattractive to lenders, but they are hopelessly exposed whatever action is taken. The approach that seems to be the least damaging to the wider economy is the 'haircut' concept, in which all outstanding debt is reduced by a proportion that will remove the intractable debt overhang from the global economy.

What are the implications of this discussion for New Zealand? Obviously, all of it is relevant because this country is strongly connected to the global economy. We can't enact global reforms but our views on the matter can certainly be heard, if we take the trouble to develop useful views.

Some of the reforms in economic systems and banking that make sense will be applied within countries, at the level of cities, districts, and local communities, and there is nothing to stop New Zealand getting on with them. If it did so, these developments would serve as models for developments in other countries.

Check out the full series as featured in Element magazine from the NZ Herald:

• Creating Tomorrow: Energy
• Creating Tomorrow: Weather
• Creating Tomorrow: Food
• Creating Tomorrow: Finance
• Creating Tomorrow: Community and Economy

Dr Wayne Cartwright has postgraduate degrees in agricultural science and economics and has served 34 years in tertiary education - including 30 as a professor in the business schools at the Massey and Auckland Universities.

He has consulted widely in business management, international business and governance, and strategic responses to future insight. He has served on several corporate boards of directors.

He is a past chair of Sustainable Aotearoa New Zealand (SANZ) and has been on the Council for Socially Responsible Investment. He co-wrote and edited the 2009 SANZ publication Strong Sustainability for New Zealand: Principles and Scenarios.

Like what you see? For weekly Element news sign up to our newsletter. We're also on Facebook and Twitter.

Creating Tomorrow: Food

Human living is in the early stages of huge change that will take us well beyond historical experience. In this, the third of a five-part series, business professor and sustainability expert Dr Wayne Cartwright explains what this will mean for energy use, the weather, food, finance - and life in general as we know it.

Most cities are not set up to support large amounts of homegrown food. Photo / Getty Images

Dr Wayne Cartwright. Photo / Supplied

OPINION: The pressure on the global capacity for food production from oil costs and climate change would be a huge issue for mankind even if the world population were stable. However, it is increasing, so the challenge to feed people is coming at us both ways - more people, and forces of change that make food production more difficult.

This article explores what is happening globally and then looks at New Zealand.

Changing conditions

Global food production is becoming more difficult and unreliable for four reasons. First, variations in rainfall and temperatures outside seasonal norms are already causing traditional crops to fail in many regions. These variations and their effects will intensify as the effects of climate change strengthen.

For example, the recent extreme drought in the Great Plains in the US, which greatly reduced corn and wheat yields, will soon result in increased food prices.

The previous year, drought in Russia and Ukraine had a similar effect on the same foods. As another example, subsistence crops in sub-Saharan Africa, which have grown reliably for hundreds of years have been failing, because expected rains have not arrived.

Alternative crops may eventually be found that thrive in the changing conditions, but there is little time available to experiment and adjust farming practices. Although some aspects of climate change are resulting in other regions experiencing more favourable conditions, the overall effect will be to make global food production more challenging.

Drought in the Great Plains in the US can raise food prices around the world. Photo / Getty Images

Water depletion

Second, several regions that depend on water from aquifers are experiencing drops in the levels of these essential sources of water, mostly due to over-use. This is happening to major commercial farming regions where pumping allocations have been too liberal, such as the Great Plains, and also to subsistence agriculture in countries such as India, due to increases in local community population.

Rising fuel costs

Third, rising fuel oil prices will substantially increase on-farm costs and hence the prices that farmers must receive to stay in business.

This will affect especially the arable cropping types of farming that are highly mechanised. It will have less direct effects on pastoral agriculture that is less energy-intensive and on the production of vegetables and grain cropping, which use more manual labour.

It is ironic that the major shifts in agriculture in the poorer countries over the last several decades - replacing subsistence food production with more mechanised corporate farming - will make food production in these regions far more vulnerable than it would have been. Certainly, these shifts increased crop yields greatly, but it is these yields that are now at risk from oil prices.

Fuel oil prices will also increase the costs of food transportation. People and communities that depend on imported food will become more vulnerable. The costs of food processing, packing and storage will also rise, but this will depend more on electricity prices (which indirectly reflect oil prices as well).

Rising fertiliser costs

The fourth reason is that nitrogenous fertilisers will also increase in cost, by about the same proportion as oil. These fertilisers are essential to the commercial arable farming systems that produce most of the world's food. Access to the relatively cheap Haber-Bosch process - using oil as energy and natural gas feedstock - that converted nitrogen from the atmosphere to fertilisers such as urea was one of the key foundations of the 'Green Revolution' of the 1960-70 period, which dramatically averted widespread starvation.

The forthcoming sharp and permanent increase in oil and gas prices will make this source of nitrogen much more expensive. Relatively cheap chemical sources of nitrogen for crops are about to disappear. This change also directly affects much of pastoral agriculture where current pasture management systems depend on nitrogen fertiliser.

New markets, new methods

These four changes will result in global food supply deficits that are likely to approach starvation conditions in many regions. There will also be major changes in the patterns of international trade in food as production capacities decline in some regions more than others, new producing regions open up, and demand in regional markets shifts.

The relatively affluent regional markets that are most exposed to embedded dependency on energy from fossil fuels - North America, parts of Western Europe, Japan, Australia and China - will suffer significant drops in disposable incomes.

Regional markets that are highly exposed to severe weather events will be further disrupted. Generally, food prices will rise continually relative to incomes, because oil prices will increase supply chain costs while depressing consumer incomes.

Food will account for increasing proportions of household spending, resulting in more prominent public concerns about food prices.

All of these changes will reduce overall demand for luxury and convenience foods, and increasing proportions of consumers will shift towards foods that deliver primarily nutritional benefits at reduced cost.

These consumers will also develop stronger preferences for foods that have safe and secure sources as well as sustainable supply chains that have relatively low footprints for energy, water, and carbon emissions. Measures of these conditions are likely to become prominent as both retailer requirements and import market entry criteria.

Responding to escalating costs of commercial food production and transportation, food production in home gardens and local communities will expand, leading to much more localised distribution and retailing similar to traditional 'farmers' markets'.

However, the scope for these developments will be constrained in densely populated city areas. Traditional city planning has made little provision for growing food locally.

Supermarket food retailing, which is based on economies of scale and low energy costs, will be challenged strongly by these developments.

These trends towards localisation will also result in food importers facing greater challenges in establishing and maintaining consumer trust in products that have distant origins.

Nutrition will be the top priority

In regions that have low incomes, food markets will be dominated by the need for nutritional sufficiency. Groups who are already at or below safe nutritional levels will become more at risk, and these groups will expand as economic contraction reduces incomes.

The focus in these markets will be on security of supply of nutritionally sufficient foods. The first priority for consumers will be availability and affordability.

Food deficits will become the subject of considerable national and international political attention. Open market operations will be considered insufficient or inappropriate, so will be complemented by government intervention at all levels - international, national, and local.

Although the volume of food required for markets that are focussed on achieving nutritional sufficiency will grow rapidly, there will be little or no opportunity for commercial profits. Instead, these markets will be served through channels that have large inputs of aid funding and government subsidies.

Shipping will replace air freight as the latter becomes more expensive. Photo / Getty Images

Shipping and security

The cost of international transportation of foods will rise sharply as oil prices increase, providing large incentives for innovations that reduce exposure to energy costs.

Air transportation of food will become uneconomic but large container ships will be well suited to accept the innovative technologies that will minimise shipping costs. When geopolitical conflicts arise over access to water and oil, it is likely that some shipping routes will be disrupted and become unsafe for extended periods.

Food processing and manufacturing will be dominated by efforts to reduce energy costs and to meet increasingly stringent requirements for the efficient use of water. It will also operate within allowed rates of gaseous emissions, discharges to waterways and disposal of solid waste. These rates will be determined by the inputs that can be accommodated sustainably by the affected ecosystems, and so will differ between locations.

Food processing and manufacturing will become highly adaptive and resilient, to meet rapid shifts in market requirements and conditions.

What does this mean for New Zealand?

Food is the largest sector of New Zealand's economy. This country exports a very high proportion of protein-rich foods, with most of these products sold in affluent markets.

The major change drivers of oil prices and climate change will greatly affect the New Zealand food sector, but less severely than most other countries. Most production in this country is pastoral rather than arable, which is more energy-intensive.

The increasing cost of nitrogen fertilisers will force a radical change in dairy farming systems. In any case, pollution of waterways is already obliging farmers to reduce nitrogen application. Innovative farmers have already found alternative systems.

New Zealand's relative distance from international markets will lead to major efforts to reduce the weight and volume of food products as fuel prices increase, and for adopting preservation technologies that avoid refrigeration.

Negative perceptions of the energy and carbon footprints of shipping New Zealand food will strengthen in parallel with public concern.

New Zealand's position as a high-protein food producer will bring opportunities - and serious challenges. Photo / Getty Images

However, by far the largest effect on the New Zealand food sector will be the severe economic shock and permanent contraction of demand in relatively affluent export markets. Simply put, these markets will buy substantially lower volumes of animal protein products.

It is predicted that the direct affect of global warming on New Zealand food production will be very substantial. A higher frequency of severe storms will disrupt road, rail and electricity infrastructure. Programmes to mitigate these risks should begin immediately.

Farms will be increasingly at risk from severe droughts, especially in the east. It is essential to begin upgrading water conservation and management to levels well beyond current plans.

A greater frequency of unseasonal frosts will challenge orchardists and vineyards. There will be increased risks of pest and disease incursions associated with increasing temperatures.

On the positive side, it is likely that New Zealand will be affected less severely than most other producing regions that are competitors in affluent international markets. This will provide food exporters with major opportunites to secure competitive advantages and increase shares of these markets - which will nevertheless be smaller.

Feeding the world

In a future that includes the certainty of global food deficits, several other international perspectives will arise for the New Zealand food sector.

One will be political pressure from international food relief agencies for New Zealand to produce greater volumes of more affordable foods, especially grains, instead of dairy products and meat.

The government should strenuously resist these proposals because they are based on erroneous understandings that New Zealand has substantial land areas with high natural fertility, suitable for arable farming. Actually, most of our soils are light and relatively infertile, so are best suited to pastoral agriculture.

It is also likely that calls will be made for New Zealand to accept large numbers of immigrants who would be fed - along with the rest of us - on the same lower-cost staple foods. Such proposals should also be rejected because they are based on misunderstandings about New Zealand's food production capacity.

People offshore believe the country to be sparsely populated, without realising the high proportion of land that is steep and mountainous so cannot be settled or farmed.

That said, New Zealand will be politically obliged to assist materially with the global food deficit. Supply to affluent markets will not cut it so a policy that supplies to international food relief programmes will be necessary.

Check out the full series as featured in Element magazine from the NZ Herald:

• Creating Tomorrow: Energy
• Creating Tomorrow: Weather
• Creating Tomorrow: Food
• Creating Tomorrow: Finance
• Creating Tomorrow: Community and Economy

Dr Wayne Cartwright has postgraduate degrees in agricultural science and economics and has served 34 years in tertiary education - including 30 as a professor in the business schools at the Massey and Auckland Universities.

He has consulted widely in business management, international business and governance, and strategic responses to future insight. He has served on several corporate boards of directors.

He is a past chair of Sustainable Aotearoa New Zealand (SANZ) and has been on the Council for Socially Responsible Investment. He co-wrote and edited the 2009 SANZ publication Strong Sustainability for New Zealand: Principles and Scenarios.

Like what you see? For weekly Element news sign up to our newsletter. We're also on Facebook and Twitter.

Creating Tomorrow: Weather

Human living is in the early stages of huge change that will take us well beyond historical experience. In this, the second of a five-part series, business professor and sustainability expert Dr Wayne Cartwright explains what this will mean for energy use, the weather, food, finance - and life in general as we know it.


The spinners of misinformation about climate change will find that history treats them harshly, argues SANZ board member Dr Wayne Cartwright. Photo / Getty Images

Dr Wayne Cartwright. Photo / Supplied

OPINION: Published information about global climate change has been confused by deliberate manipulation and spin, similar to the cynical misinformation about the outlook for oil and gas. Indeed, it seems that the funders and authors of the two sets of propaganda have much in common.

The core aim of these efforts has been to deny that global warming is being caused by the emissions from burning oil and coal, thereby deflecting any serious attempt to reduce usage of these resources. It has to be acknowledged that this campaign has been masterful and has succeeded in sowing doubt in the minds of the public and politicians despite overwhelming contrary evidence from the IPCC and other reputable sources.

The misinformation has had the even broader effect of creating doubt that global warming is even occurring. This will have tragic consequences because it has allowed people, corporate directors, and politicians to maintain their comfortable position that there is nothing to worry about, that 'living as usual' and 'business as usual' can continue indefinitely, and that there is no need to contemplate action.

The spinners of misinformation will find that history treats them harshly. It will observe that protection of the interests of oil and coal producers is quite a different matter to encouraging the public, and their leaders, to ignore the risks of climate change - and weather events that have the potential to create chaos and great loss of life.

I have a simple suggestion: ignore the skulduggery and get on with preparing for a world in which climate change and more frequent severe weather events are real.

Change now versus change later

It is crucial to recognise that we face two quite different buckets of issues. These buckets are usually confused and mixed up.

The first bucket is about actions that can be taken to mitigate or reduce the future rate of global warming and its effects.

These actions are quite distinct from the second bucket. These issues are about the urgent need to adapt and adjust human living, business, and public infrastructure to cope with the climate changes and severe weather events that have already begun and will continue with increasing severity.

No amount of carbon emission reduction in the future will affect these changes and events that are already locked in due to the emissions of past and present.

More frequent extreme weather events will increase the risks of land erosion and inundation. Photo / Getty Images

Time to fix the ETS

Most of the press coverage and political debate has focused on the first bucket. Despite the attention, all initiatives to date have either failed or are dysfunctional.

The international emissions trading scheme (ETS) into which New Zealand has plugged its own ETS legislation has the fatal flaw that efforts are focused on the trading processes and rules and not on the need to actually reduce carbon emissions. In addition, the scheme is impossibly complicated and inherently favours some groups of emitters.

Worse, it has allowed entry of vast volumes of dodgy carbon credits that have originated from defunct Eastern European industries. These have depressed the carbon price to the point that emissions are essentially free.

In a nutshell, the task of reducing atmospheric carbon, which is critical to the survival of human civilization, has been awarded to traders of securities.

These are organisations and people who have very short time horizons, who have no real interest in what is being traded, and who seek profit from the trading process and from speculating about movements in the prices of the traded securities.

They have similar perspectives and methods to the traders of financial derivatives who had a prominent role in the 2008 recession. This is bizarre.

The aim of reform must be to ensure that emitters of carbon from fossil fuels pay the full cost of the resulting environmental degradation in a simple manner that is fiscally neutral.

A changing climate would change the ways in which land can be used to produce food. Photo / Getty Images

Change is happening now - ready or not

The 'living as usual' and 'business as usual 'people have easily taken comfort from the discourse about reducing climate change because it seems to be referring to the quite distant future.

The second bucket of issues offers no such opportunity to take comfort. These are the climate changes and weather patterns that are already 'locked in' and will occur whether humans are ready for them or not.

We must shake ourselves free of this foolishness and apathy. As we prepare, it will help to see that there are two categories of effects.

One is the risk to human habitats, public infrastructure and land from floods, tidal surges, and severe wind. These are risks of damage to the built environment and public infrastructure: houses, schools, hospitals, factories, offices, roads, railways, electricity grids, and the like. They are also risks to land, including erosion and inundation.

The second category of effects is change in the ways in which land can be used to produce food. These will alter forever the capacity of countries and whole regions to produce food. (This is such be discussed separately in next Friday's article.)

Managing risk to the built environment is, in principle, straightforward. For each group of assets, risks must be assessed, decisions made about the extent to which they should be mitigated, and required actions determined and completed.

Most countries already do this for risk from flooding and wind, by assessing the risks on the basis of historical records.

The only rub is that historical records are irrelevant to the risks incurred by global warming because some of its effects will exceed previous recorded experiences.

Most countries seem to be reluctant to accept the reality of this upward shift in risk profiles. This results in assets being unprepared and exposed to damaging events. Witness the major damage to private and public assets along the United States' upper eastern seaboard by storm-driven tidal surges, as well as flooded waterways and wind.

It seems that the authorities responsible for the security of the built environment and public infrastructure in New Zealand are in the same camp.

It looks like ducking the task of managing risk by simply denying its existence until it bites, which is more than a little late.

When risk assessments are eventually done properly, some of the issues that are revealed will be large. It is likely to include decisions to relocate whole communities away from likely inundation, roads and railways that need to be shifted, and electricity power grids that are too vulnerable to extreme weather events.

More frequent extreme weather events will greatly increase the risks of land erosion and inundation. It is likely that it will be necessary to retire whole tracts of land hitherto used for pastoral farming.

The most evident examples are steep hill country that will best be planted in trees, and previously drained river margins and lowlands that should revert to wetlands. Land owners will no doubt seek compensation for such enforced retirement of land.

These issues must be considered and action taken as part of creating tomorrow.

Check out the full series as featured in Element magazine from the NZ Herald:

• Creating Tomorrow: Energy
• Creating Tomorrow: Weather
• Creating Tomorrow: Food
• Creating Tomorrow: Finance
• Creating Tomorrow: Community and Economy

Dr Wayne Cartwright has postgraduate degrees in agricultural science and economics and has served 34 years in tertiary education - including 30 as a professor in the business schools at the Massey and Auckland Universities.

He has consulted widely in business management, international business and governance, and strategic responses to future insight. He has served on several corporate boards of directors.

He is a past chair of Sustainable Aotearoa New Zealand (SANZ) and has been on the Council for Socially Responsible Investment. He co-wrote and edited the 2009 SANZ publication Strong Sustainability for New Zealand: Principles and Scenarios.

Like what you see? For weekly Element news sign up to our newsletter. We're also on Facebook and Twitter.

Creating Tomorrow: Energy

Human living is in the early stages of huge change that will take us well beyond historical experience. In this, the first of a five-part series, business professor and sustainability expert Dr Wayne Cartwright explains what this will mean for energy use, the weather, food, finance - and life in general as we know it.

The future of energy - in New Zealand and the world - needs to go beyond business-as-usual. Photo / Getty Images

OPINION: The rising cost of energy will transform the global economy, probably within the next seven to ten years. What's happening, why and what does it mean for the world and for New Zealand?

In its current form, the industrialised global economy is utterly dependent on cheap energy. Without it, virtually nothing can happen. The great bulk of this energy comes from non-renewable fossil fuels. Transportation and manufacturing depend on oil and gas, and a high proportion of electricity generation processes burn coal, oil or gas.

So, in creating tomorrow, it is obvious that we need to be very well informed about the future for energy, and especially fossil fuels.

Unfortunately, published information about the global outlook for energy is riddled with contradictions and confusion.

Most of this is due to deliberate manipulation and spin, as producers of oil, natural gas, and coal work continually to maintain investor confidence and to reinforce their very strong political networks. Politicians, economic advisers, investment houses, and banks all welcome continual reassurance that the outlook is for reliable supplies at affordable prices.

This position is actually false, irresponsible and dangerous. Some of the confusion also arises from interpreting short-term variations in energy prices as medium and long-term trends. We have a current example - oil and gas prices dropped during the 'financial crisis' recession - but the medium-term trend is still sharply upwards.

Another current example of misleading interpretation has arisen from the recognition of large shale gas reserves that can be accessed by fracking. In the United States, the rush to exploit these resources - stimulated by pre-recession high prices - resulted in a short-term oversupply of gas into a recessionary market. Prices plunged, leading to public and political perceptions that large supplies of gas could be supplied for many years at moderate prices.

These beliefs are false because shale gas can be extracted profitably only at much higher prices. Despite huge reserves of gas being potentially available through fracking, all are accessible only at relatively high cost. Hence, these reserves are not sources of low-cost future energy.

A harsh reality

Just three straightforward truths emerge when the confusions and cynical misinformation are cleared away. First, the low cost oil and gas fields that have been an essential foundation to economic growth over many decades are already exhausted or are nearing depletion. There are still large reserves of both oil and gas, and more are being discovered, but these are all sources such as deep ocean wells, tar sands, and tight deposits that require fracking.

Compared to the sources that are nearing depletion, these sources all require greater investment in development, extraction costs are much higher, and the amount of energy inputs required to extract energy is also higher.

Hence, the prices necessary for profitable extraction from these sources are considerably higher than our 'living-as-usual' and 'business-as-usual' expectations.

Prices equivalent to at least US$100 per barrel for crude oil are required. Some of the large shale gas fields accessible by fracking are profitable at a lower price but they require entirely new and costly infrastructure for the necessary water supply and for transporting the gas and, in any case, cannot substitute for a major proportion of oil supplies.

Second, it is well established that the global economy moves towards recession whenever oil and gas prices are above the equivalent of around US$100 per barrel for crude oil.

The shock and slow-down intensify if the price rises further. The most recent example was in 2008 when the recession was triggered by oil prices that peaked at US$147. This situation became worse when the US property bubble burst and revealed a great amount of poorly secured debt.

Third, considering the first two truths together, it is clear that the prices necessary to make it financially viable to extract oil and gas from most of the sources that will be available in the near future, are also the prices which trigger recessionary moves in the global economy - both are around US$100!

The harsh reality is that when oil and gas production reaches the point where a high proportion comes from high-cost sources, global supplies will be available only at prices that cause contraction in the global economy.

Energy1.jpg

Fossil fuel prices have a heavy impact on the global economy. Photo / Getty Images

Spikes and drops

This situation will start a roller-coaster. A somewhat simplified scenario begins with high oil and gas prices triggering a recession. Due to this recession, demand for oil and gas will drop, causing prices to fall temporarily. These lower energy prices will stimulate the economy but oil and gas extraction cannot continue for long at these reduced prices.

Hence, energy supply is unable to respond to the rising demand. The resulting shortages will soon cause prices to rise again, probably to levels higher than before. This price lift will reinforce the original recession, and the roller-coaster will head downwards again.

These cycles will continue, resulting in a succession of abrupt spikes and drops in prices. The shocks of this will extend throughout the economy, broadening the recessionary conditions. Even before the roller-coaster eventually slows down, it will become clear that energy prices have risen permanently to levels that prevent the global economy from returning to the types and levels of activity allowed previously by cheap oil and gas.

Those will be the primary effects. Alongside them, rising oil and gas prices will make it increasingly attractive to invest in alternative forms of energy, especially the capture of solar, wind and tidal sources, and some types of biofuels. Nuclear electricity generation could also grow significantly despite its inherent risks. These innovative non-fossil sources will undoubtedly account for increasing proportions of total energy usage, although scaling-up non-fossil fuel production will itself absorb large amounts of fossil fuels.

The time and investment needed to scale non-fossil fuel production to significant commercial levels means that in practice they will substitute for only a small proportion of oil and gas supplies. In any case, on the basis of known technologies, their costs of production will lie well above historical oil and gas levels.

Thus, even spectacular advances in supply of energy from non-fossil sources will not support continuation of life-as-usual.

The conclusion is very clear and stark: a future global economy based on high energy costs and reduced energy usage per capita is inevitable even assuming a highly optimistic outlook for non-fossil energy production.

Time to show leadership

It is astonishing that the certainty of this outlook for severely rising costs of energy has not been recognized widely. To the contrary, apparently prestigious institutions continue to ignore it. For example, recent publications by the National Intelligence Council and The Economist newspaper - both looking out to 2050 - make no provision for the recessionary effects of energy costs. Presumably, both have been captured by the same false assurances that are providing spurious comfort to political leaders.

The global economy will necessarily adjust to permanently high average prices and use of much less energy. When this happens, LAU and BAU will no longer be feasible. It will be essential for countries and communities to adapt and innovate human ways of living creatively so that they have much lower energy requirements, while also striving to provide greater wellbeing, satisfaction and happiness for citizens.

It is obvious that the sensible time to get on with this challenge is now so that the worst aspects of disruption can be avoided. This requires a calibre of leadership that we are not currently seeing. Such leadership will include encouragement of alternative energy systems, which will flourish after countries and communities have accepted the logic of transitioning to low-energy ways of living.

Climate change is not the only motivation

These conclusions are valid without any reference to either climate change or the further effects of oil and gas on environmental degradation. Although increasing numbers of people are very sensibly calling for far more active approaches to curbing greenhouse gas emissions, the conclusion that our present ways of life will become insupportable within a few years does not rest on environmental concerns or policies - the straight economics of energy costs alone will do it.

The compounding effects of more extreme climate change and wider ecological degradation come after that. Of course, if governments do summon up the courage to ensure that the full environmental and social costs of emissions are paid by emitters, this will further increase the costs of fossil fuels, and accelerate our passage towards a low-energy future.

My best guess is that this will happen as soon as a sequence of major weather events makes climate change undeniable. The forthcoming low-energy economy will emit less carbon, but this change will be too late and too little to avert very severe climate change.

Urgent action to reduce carbon emissions further remains as crucial as ever.

The Waikato River - shown here at the Huka Falls in Taupo - plays a vital role in the country's energy mix. Photo / Getty Images

What does this mean for New Zealand?

Global recessions and disruptions driven by energy costs will have direct effects on New Zealand's export markets, its sources of imported goods and services, and the international financial markets that New Zealand relies upon.

The risks to New Zealand's international economy should be analysed thoroughly and managed with great care. There will also be new opportunities, especially for specialised exports, and these should also be thoroughly understood and acted upon with creative vigour.

The whole globalised corporate scene will change dramatically as the sectors and companies most exposed to oil and gas prices decline, while others that are less affected step forward.

It would be foolish for New Zealanders to assume that oil and gas produced from the future deep ocean wells and fracking sources that have been proposed will supply a buoyant global market. This will not be the case because when prices are high enough to justify this production, global market demand will be severely depressed by the same prices.

It is clear that current government policy has not recognised this fundamental point. New Zealand has a very distinctive energy endowment because such a high proportion of its total energy, including nearly all of its electricity, comes from renewable sources. This is primarily hydro electricity generation but also includes significant geothermal and wind generation.

In view of the global energy scenario presented here, this endowment has the huge benefit of already providing the high proportion of renewable energy sources that most other countries will struggle to achieve.

It is true that almost all of New Zealand's transportation system is dependent on imported petroleum but this level of dependency could be reduced by vigorous introduction of electric vehicles charged from renewable sources. In this connection, the freeing of Manapouri hydro generation from contractual obligations would provide the needed capacity.

New Zealand cannot escape the global shift to a higher energy cost economy, but it is less dependent on oil and gas than most other developed countries due to the hydro and geothermal resources that already power a high proportion of our electricity generation.

Unless these resources are sold in the meantime - as the government has started doing - New Zealand will have an extremely valuable buffer during the times of change.

It is clear that New Zealand's hydro and geothermal endowments are truly strategic assets that should be regarded as sovereign investments. It would seem that this has not been understood by either the generating companies or by the government and its advisers. This is because mainstream traditional commercial valuation techniques do not consider the strategic holding opportunities for assets and so greatly underestimate the value of these particular assets.

Established renewable energy sources are globally very rare. To sell some of these assets at values based on projections from short-term energy prices is to sell them at values that are ludicrously low relative to future values.

Such a decision is extraordinarily naïve and irresponsible and demonstrates both an alarming absence of strategic common sense and a lack of understanding of future economic realities.

Time for a change

It is inevitable that our global tomorrow will be changed hugely by rising energy costs. Countries and communities that accept this now have the opportunity to make necessary adjustments to maximize their wellbeing. If it is looked at in the right way, this process will be stimulating and rewarding over a lengthy period.

The current energy policy of the New Zealand government ignores the future global energy situation discussed here.

While it is already too late for some decisions, all further implementations of this policy should be stopped pending proper analysis and review of the implications for the wellbeing of future New Zealanders.

Check out the full series as featured in Element magazine from the NZ Herald:

• Creating Tomorrow: Energy
• Creating Tomorrow: Weather
• Creating Tomorrow: Food
• Creating Tomorrow: Finance
• Creating Tomorrow: Community and Economy

Dr Wayne Cartwright has postgraduate degrees in agricultural science and economics and has served 34 years in tertiary education - including 30 as a professor in the business schools at the Massey and Auckland Universities.

He has consulted widely in business management, international business and governance, and strategic responses to future insight. He has served on several corporate boards of directors.

He is a past chair of Sustainable Aotearoa New Zealand (SANZ) and has been on the Council for Socially Responsible Investment. He co-wrote and edited the 2009 SANZ publication Strong Sustainability for New Zealand: Principles and Scenarios.

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Blueprint for next phase of global sustainability released by NZ think tank

Wellington - The way forward for sustainable living beyond current international best practices such as reduce, reuse and recycle, and minimising the human “footprint” has been released today by think tank Sustainable Aotearoa New Zealand (SANZ) at an event hosted by the Chair of the New Zealand National Commission for UNESCO, Bryan Gould.  

The publication, entitled “Strong Sustainability for New Zealand: principles and scenarios”, is a proposal for sustainable ways of living that give priority to the ecological values needed to sustain the natural systems and resources that societies and economies rely on. 

SANZ coordinated a group of well-respected experts in many different fields to come together in a think tank to come up with a solution for how human civilization can survive by becoming truly sustainable as a functioning part of earth’s ecosystems. 

The Chair of SANZ and editor of the publication, Dr Wayne Cartwright says, “Without this emphasis on sustaining ecological systems, there can be nolong-term viable social or economic structure for human beings. Therefore it makes complete sense economically and socially to ensure that this is the most important value for sustainability”. 

“These findings, which have been reported in the publication released today, are based on science, ethics, values and world views,” he says. “In our research we connected the strands of climate change, economic recession, environmental degradation, human inequality and social breakdown and found that current sustainability practices, while commendable, all add up to being no better than ‘less damaging’ than previous practices.” 

Rather than settling for being “less damaging”, the goal, if human civilisation is to continue, needs to be the rejuvenation of the earth’s failing ecosystems, according to Dr Cartwright. 

“Just as important is the need for a realisation that the world’s approach to economics is the main culprit for the degradation of our planet,” Dr Cartwright says. “The assumption that economic growth can continue is false,” he says. 

“This whole body of belief and practice is putting humanity and nature on a collision course, and that is why so many governmental policies on issues such as climate change, energy, waterways and soils are completely failing to address the real issues. 

“The globally unsustainable practices of the past and present have already started complex global changes that will take human civilisation outside the range of prior experience in terms of magnitude, speed of arrival and simultaneity”. 

“Debate about short-term issues will become increasingly irrelevant as civil society begins to accept the challenges of the future.” 

“Here in New Zealand, if the responses to these changes are sensible, they will mark the early steps on the path to a sustainable New Zealand – and SANZ believes that we have contributed to starting the journey with this publication.”

Ends

 

For more information please contact: 

Wendy Reid 
Executive Director 
Sustainable Aotearoa New Zealand Inc. 
027 493-7310

Tertiary Sector Needs Major Overhaul Say Sustainability Educators

Auckland – New Zealand’s leading sustainability education advisers, including Professor Klaus Bosselmann of the University of Auckland and Pam Williams of Victoria University, have agreed that the tertiary education sector is in urgent need of a major overhaul if it is to usefully contribute to the vital task of transforming New Zealand into a sustainable society. 

On Wednesday 7 November, the day after the Government announced its new school curriculum, 65 education for sustainable development (ESD) stakeholders met in Auckland for a national strategy forum to identify New Zealand’s deliverables for the United Nations Decade of Education for Sustainable Development (UNDESD), which runs from 2005 to 2014. 

Convened by the New Zealand National Commission for UNESCO and its UNDESD partner, Sustainable Aotearoa New Zealand Inc. (SANZ), this year’s forum was addressed by Ministry for the Environment Chief Executive, Hugh Logan, and was attended by key representatives from national government*, local government**, business, and a cross-section of sustainability, cultural, and youth organisations. 

The group also included eminent scientists such as NIWA’s Dr Jim Salinger (of the Nobel Peace Prize winning Intergovernmental Panel on Climate Change) and ZESPRI International’s Dr Jane Adams (MNZM), who is an expert in the field of food science and technology, agriculture, and ESD. 

In a powerful illustration of the universality and growing coherence of sustainability issues, the stakeholders unanimously agreed that the tertiary sector must lead by example in a wave of ESD that needs to cascade through to the secondary and primary education sectors, and also through to all areas of community education, vocational training and professional development. 

The stakeholders specifically want to see sustainability concepts integrated into all aspects of university learning, as is beginning to happen in the primary and secondary sectors. There was wide support for core ESD material being taught to all New Zealand tertiary students. Further, the stakeholders see it as essential that all tertiary institutions “walk the talk” by operating their campuses sustainably. For students to learn by example, they say, institutions must do more than just achieve isolated goals such carbon neutrality. Instead, they need to show how sustainability affects every aspect of life including non-physical factors such as social justice and ethical investment. 

Dr Wayne Cartwright, Chairperson of SANZ and Adjunct Professor of Strategic Management in the Department of International Business at the University of Auckland, says, “We still need to teach all the core competencies, but there’s not much point educating people for a way of life and an economic system that simply won’t exist by the time students are in positions of responsibility. The changes ahead of us – that have already begun – are of a radical nature that requires a radical and urgent response. Our education should equip us with a resilience and adaptability for the crises ahead, not simply plod along as if it is business as usual.” 

The stakeholders discussed a sea change in the culture of the tertiary sector, away from an individualistic, competitive framework and toward a much more interdependent framework – a paradigm shift they say is needed in society as well. 

Dr Adams, former Dean of the Faculty of Health and Environmental Sciences at UNITEC, addressed the forum with a salient reminder of the ongoing lack of science and technology graduates. “Escalating energy costs will force us to produce more and more of our own food and we simply don’t have enough expertise to meet that need. A crisis is looming,” she said. 

Dr Adams, formerly Dean of the Faculty of Health and Environmental Sciences at UNITEC, suggested that significant value may be added to New Zealand goods and services by demonstrating they are generated using sustainable systems. However, she cautioned that “the greatest threat to our realisation of sustainable production systems is the lack of graduates, particularly with science and technology qualifications, to implement the changes that will be required.” 

This lack of preparedness, along with a lack of future visioning and the persistent dearth of meaningful sustainability measurements and progress indicators, were other key concerns for the delegates. 

Ends.


* Ministry of Education, Ministry for the Environment, Department of Conservation, Department of Labour, Tertiary Education Commission, Education Review Office. 
** Auckland Regional Council, Bay of Plenty Regional Council, North Shore City Council, Rodney District Council, Far North District Council. 

For more information please contact: 

Wendy Reid 
Executive Director 
Sustainable Aotearoa New Zealand Inc. 
027 493-7310 
wendy.reid@phase2.org