Ferguson and Natural Capitalism

Niall Ferguson's first 2012 Reith Lecture (broadcast on Radio 4 this morning, but to be aired again) was primarily about the role of institutions in economic life. He argues that Britain's erstwhile economic success was down to the quality and constitution of our institutions. In the Q&A session after his talk, he admits, though, though not in these words, that capitalism as we have it breaks its own rules as it liquidates [natural] capital and calls it income.


http://www.bbc.co.uk/radio/player/b01jmx0p

Growth error

Jolyon Connell, founder and editorial director of The Week magazine writes in the 8 October 2011 edition that Matt Ridley, wrote in The Times that "the West has been running a vast financial pyramid scheme, but the world itself is not in debt." Correct. We haven't tried borrowing money from other planets yet and the world is of course a closed system: This applies as much to finances as anything else and importantly physical resources. But Ridley continues: "the world economy actually grew by 5% last year according to the IMF." This is factually correct, I assume, but we are talking about growth in GDP/GNP (which are identical at world level). We can't have a pyramid scheme with real resources, because they are finite. If we "liquidate our natural capital and call it income" as the authors of Natural Capitalism term what we are doing, no restructuring, bailing out, quantative easing or any other financial tinkering will save us.

Monetary reform

The monetary reform movements and groups I have encountered all call for an end to the ability of commercial banks to create money out of thin air with no realistic limits on how much they create and no constraint on the purpose they create it for, other than their own profit.

The reform groups call for the money supply to be regulated by a government appointed or constituted body rather like the Monetary Policy Committe that sets the base interest rate.

A change to this system may remove some of the worst mechanisms for boom and bust, but still seems to me to leave the problem of the basis on which money supply will be increased or decreased. In some reformed models, banks will still be in offering loans and interest on deposits. How will the banking system as a whole ensure that it meets human need and does not ignore the oversall constraint of our finite ecosystem.

Will the banking system look to create jobs that the system will require people to have n order to access the resources they need? If so, it will have failed to address that key element of a resource based economy.

'Bank to the Future' seeks to combine social networking and peer-to-peer lending. Nice, but if a project is making money by liquidating natural capital, it doesn't make it better becuse the £ raised to start up the project was raised by crowd funding rather than fractional reserve lending. The CEO of BttF speaks engagingly about projects that interest or excite potential investors, but if these are not sustainable projects that benefit human need then they should not be done, however eciting they are.

Apart from ensuring that the reformed baming system meets the sustainability and human neeed focussed criteria, would it not be better to step over this development and use the technology and ingenuity we have available to solve problems directly and account for the resourcces we actually have available at a planetary level. No committee can decide how much of a natural resource the eco system should have, but scientists can measure how much it actaully does have, and work out ways of using resources efficiently so as not to deplete them, and find alternatives to resources in short supply. In a monetary system, resources in short supply have a high price, and the money will follow such resources. The monetary system likes shortages, even needs them, which is why we see  set aside in agriculture and food being thrown away while people go hungry for lack of money.

Communism

I suppose TVP/TZM advocates might find themselves saying that we shouldn't squander our natural resources in pursuit of [financial] profit. (In Natural Capitalism terms, liquidate our natural capital and call it income). Thinking about it, I'm quite happy with "we shouldn't squander our natural resources".  That's it, full stop. Profit? Maybe, maybe not, competition? Maybe maybe not. But if competition and financial profit are not being harnessed to the end of environmental sustainabilty, or at least not against it, then they have to be sacrificed. This is nothing to do with social justice - even that is contingent on sustainability.

Return on Investment / Simple pay back

These two terms get at the same concept. The former is more sophisticated and necessary in the accounting / financial world. The latter is simpler, more rule of thumb, but easier to calculate.

The idea of RoI, put simply, is to ask, when considering a non financial investment, whether you can make more money over the same period by putting the same capital into a financial investment.

For instance, if you were to spent (say) £2K double glazing your home, you would have to (by this principle) check whether the money you didn't get investing the £2K in a financial product is more or less than you will save in energy bills.


That all makes financial sense, but it ignores the carrying capacity of the earth, or natural capital to put it another way. If we fail to conserve finite natural resources, we as a planet will run out of them sooner, and all the money in the world can't buy us more. Like everything else, the usefulness of money is contingent on us having a planet to live on that can sustain our lives. That always has to come first.

Natural Capital - saving nature saves money too

One of the key points in the book Natural Capitalism is that we are "liquidating our natural capital and calling it income". This is a way of stating that we are using up the earth's resources too fast in the language of economics. It is part of the book's argument that capitalism is not following its own rules.


The Telegraph recently reported on a UN report that tries to cost the services nature provides (also a theme in Natural Capitalism)  - the current system seems to treat these services as free and unlimited a lot of the time. The estimate was £40 trillion - equal (interestingly) to the combined income of all the world's nations.