Increasing Global Synergyau_g

by Re-designing the Economic System


Richard Douthwaite

“The blunt truth about the politics of climate change is that no country will want to sacrifice its economy in order to meet this challenge"
Tony Blair, 1st November, 2005

"The blunt truth about the politics of climate change is that countries are not doing enough to adapt their economies so that they reduce their greenhouse gas emissions."
Lord May, President of the Royal Society, 9th November 2005

This paper offers 9 design proposals:

Introduction

Unless we first replace the present economic system with a less damaging version, every effort to build a better world is likely to be swept away by the effects of climate change, oil and gas depletion, or an economic collapse.

This is not to say that we should stop building better buildings, communities, energy supply networks, money systems, etc. until the world is sustainable. Indeed, working examples of all these things are essential if we are to build a widely-shared vision of what a sustainable future might be like. We need this process to build popular support for the economic changes that have to be made. Arguably, hardly anyone is attracted by the world they see emerging today. Few people think that the future will be a better than the past. At a workshop earlier this year for over thirty senior decision makers from several sectors of Irish life, I asked the participants to write newspaper headlines from the year 2015. Not one headline reflected a positive change. Instead, they were about increased congestion, crime and stress. If their views were in anyway representative, a realistic vision of another, more attractive future, is likely to get a lot of support. But that future will remain a vision until the economic system has been changed to allow it to be implemented on a worldwide scale.

A massive roll-out is impossible at present because, in a globalised competitive world, the need for economies to compete internationally places tight limits on their freedom of action. In addition, as we will see later, the priority of every country’s economy is to grow rather than to benefit its people or to safeguard their future. This is why Mr. Blair cannot respond to the climate crisis. Although he recognises how serious the problem is, he can only deal with it if the growth rate does not suffer. This makes achieving the cuts required in fossil fuel emissions completely impossible as, over the past thirty years, the upward curves that describe energy use and economic growth have remained virtually identical.

Another reason for making fundamental changes to the economic system’s design is that co-sustainable utopias would require a range of diversities. This means that diversity cannot just be applied in the production methods it employs but also in the range of economic activities carried out a particular area. As each part of the world has a unique combination of the factors of production, it requires a unique set of relative prices for a full range of activities to survive. In a global economy, however, only one set of relative prices exists. This destroys diversity and means that only a limited range of productive activities can be carried on in any particular place. Co-sustainable utopias would also be diverse. We need to create a world in which each area is free to adapt its lifestyle and range of production to its local environmental circumstances, rather than to the imperatives imposed by the need to compete in world markets.

This paper is based on work by Feasta, the Dublin-based Foundation for the Economics of Sustainability. Feasta is the Irish word for ‘in the future’ or ‘from now on’. Essentially, Feasta’s job is to carry out a complete redesign of the economic system. We are tackling this by trying to establish from first principles the characteristics that a system would have to possess if it was to be truly sustainable – by which we mean capable of continuing for hundreds of years without having to be changed because it is not continuously damaging or consuming anything on which its continuation depends. This is not to say that a co-sustainable society would not change. It almost certainly would, however, it would not be forced to do so as a result of its own behaviour. Once these characteristics are established, we would be able to see what needs to change in order to make them conform to the ideal. At this moment it would not be helpful to ask whether the changes we identify in this way are politically feasible. Our job is simply to set out what must be done.

Our work has shown that the economic design changes required are really quite minor in comparison with those carried out in the past. as For example, after World War II the UK Labour government entered into a wholesale nationalisation of British industry . Our recommendations are, in essence, technical. As a result, they could be introduced very quickly indeed., If we were to alter the way that money is put into circulation we would see other, more structural changes emerge. We have paid particular attention to economic growth because infinite physical growth is impossible in a finite world. Our re-designed economy must not self-destruct when economic growth stops. This paper explains why growth has been essential to the present system and how the necessity for it can be removed.

The present economic system – capitalism – was designed in the late 1700s to meet the circumstances of the time. In those days, because labour productivity was low, it was very hard to produce a surplus - that is, to produce more goods than were needed to ensure survival. At the time, this surplus was very important because, with it, factories could be built, canals dug and mines sunk. Labour productivity could be enormously enhanced if a surplus – that is, capital - was available.

In other words, at that time, capital equipment (including infrastructure) was the scarce factor of production. As natural resources and labour were in abundant supply, it made sense to set up a system which ensured that capital equipment was used where it could be most effective in raising output and hence incomes.

That is the system we still use today. This is surprising, as capital – i.e. our ability to set aside resources and turn them into potentially productive assets - is no longer scarce. Nevertheless, we still seek to maximise the return on capital as our paramount goal. This is wasteful (i.e. expensive) for all of us. If investors cannot get a sufficiently high return from, say, a factory, they may close it down, regardless of how many other people are earning their livings from it.

In short, the capitalism that once made sense once is now badly out of date. Today, the scarcest factor of production is not capital or labour but natural resources - or natural capital. Converting our economic system to it has to be our highest priority. In particular, we need to support the ability of the planet to accommodate our actions, such as absorb our emissions and render them harmless. What we therefore need today is a metadesign process that synergises our living styles, informed by the limited amount of natural capital we can allow ourselves, but without jeopardising environmental co-sustainment. The American writers Amory & Hunter Lovins and Paul Hawken call this Natural Capitalism in their book of that name. No economy or society can be co-sustainable in a constantly changing world unless it can recognise when it needs to adapt quickly enough and appropriately enough to avert disaster. This paper argues that capitalism makes such rapid, appropriate adaptation almost impossible. A redesigned system is therefore required if a combined economic, environmental and social collapse is to be averted and, eventually, a growing proliferation of utopias attained.

1. The two time frames

Co-sustainment needs to be achieved in two time frames. One is short-term and largely economic. We need to eat tonight. Employees have to be paid at the end of the week. Interest has to be paid at the end of the half-year. The second time frame seems less urgent but is no less important. The natural environment has to be preserved. Capital equipment, buildings and infrastructure have to be kept up. Health has to be maintained. Knowledge and skills have to be preserved and passed on. And social structures such as families, friendships and neighbourhoods have to stay strong.

Unfortunately, the achievement of immediate, short-term sustainability is often at the expense of the longer-term type. One reason for this is that the components of long-term sustainability are far too forgiving for their own good and, eventually, for ours. They allow themselves to be damaged quite a lot before they force us to pay them some attention by endangering our short-term economic sustainability. Until then, we ignore them whenever we can. Indeed, we have organised our personal lives, our economies, our companies and our politics in a way that makes it hard for us to do otherwise.

In our ‘short-termist’ society, only when a crisis occurs do we consider changing our habits. By that time, it may already be too late, as many societies in history have found to their cost. In Mesopotamia, in the Indus Valley and in the jungles of Mesoamerica, civilisations collapsed because they had undermined their environment. So did the Soviet and Roman empires. The people of Easter Island turned to cannibalism to replace fish protein to their diets after cutting down all the trees suitable for building fishing canoes. In New Zealand, the Maori also became cannibals after they had killed and eaten to extinction all twelve species of the flightless moa birds.

However, if the maintenance of short-term sustainability was built into the system as part of our new design and thus made automatic, it would free resources and enthusiasm for progress towards attaining the longer-term kind. At present, governments seek to maintain their economic sustainability by following four short-term indicators:

1) the rate of economic growth
2) the balance of payments,
3) the health of the public finances
4) the rate of inflation.

Let us see why these indicators are so important, and whether we can design ways of making them less so in order to allow higher priority to be given to attaining environmental and social co-sustainment.

Conventional Economic Sustainability Indicator 1: The rate of growth of national income

National income growth is currently the world’s most widely considered economic sustainability indicator. It is the percentage by which the amount of trading in the monetarised part of a national economy has risen, usually in the course of a year. Put another way, it is the percentage increase in the total of all the money incomes generated in the economy. Its significance is much wider than that, however. Because it measures the additional incomes the growth rate is an excellent guide to the extra profits that arose in an economy and hence its attractiveness to investors.

If there is no growth in any given year, the investments made the previous year have produced no return. This can be expected to hit company profits because money will have been borrowed to finance the investments on which interest will have to be paid. So if no growth happens, the increased debt, falling profits and unused capacity resulting from last year’s investments will discourage companies from making further investments in the current year.

This has serious results. In normal years in industrialised economies, somewhere between 18% (US and Sweden) and 28% (Poland and Portugal) of GNP is invested in projects that, it is hoped, will enable the economy to grow the following year. A similar proportion of the labour force is employed on these projects. Consequently, if the expected growth fails to materialise and all further investments are cancelled, a fifth or more of a country’s workers will find themselves without paid work. These newly-unemployed people will be forced to cut their spending sharply, which in turn will cost other workers their jobs. The economy will enter a downward spiral, with each round of job losses leading to more.

The prospect of this happening terrifies governments so much that they work very closely with the business sector to ensure that the economy continues to grow regardless of any social or environmental damage that the growth process may be causing. In other words, the need for growth to maintain short-term sustainability gets in the way of achieving the longer-term kind. Governments have therefore to become much less concerned about whether growth occurs or not before they can feel free to tackle long-term unsustainability in a wholehearted way.

So how can this be achieved? The simplest solution would be for governments to neutralise a decline in private-sector investment by increasing their own spending by the same amount. They could even target this extra spending on projects that improved longer-term sustainability. In the current system, however, the extra spending would generally involve running a budget deficit that would be financed by borrowing. If growth did not resume fairly quickly by enough to create shortages of capacity which forced companies to start investing again, the resulting debt could build up to such an unmanageable level that the banks would refuse to lend the government any more except on unfavourable terms.

This is exactly what happened in Japan during the 1990s – government spending on building unnecessary roads, airports and bridges kept unemployment low for almost a decade but failed to re-ignite the growth process. Eventually, when the debt burden reached 130% of national income, the government realised that it would have to stop borrowing. It allowed unemployment to rise but the debt was already too high in the eyes of the three US credit rating agencies and in December 2001, they lowered their rating on government bonds. This led Heizo Takenaka, the economics minister, to warn the country on television that a further downgrading of the debt would be catastrophic as it would lead to higher interest rates thus making a recovery even more difficult to bring about.

The only viable long-term solution would be for the government to fill the gap left by the decline in private investment by spending into circulation money it had created itself rather than borrowed. It could continue to pick up the slack in this way and invest in projects that increased co-sustainment until it had developed an economy that was completely (co-)sustainable. When it reached the point at which there were no further projects into which new money could be poured which produced a worthwhile return in terms of either sustainability, or its citizens’ quality of life, its investments should stop and the money no longer required for capital investment be distributed among the least-well-off segment of the population so that they could spend it instead. When this happened, everything being produced by the economy apart from that required to maintain the capital stock would be going to meet people’s needs rather than to generate growth or enhance sustainability. There would be no net investment or net savings in such an economy.

Design conclusion 1:

‘‘In order for governments to be able to be largely unconcerned whether economic growth takes place or not, they need to be able to create money and spend it into circulation. More generally, sustainability requires that the money supply should cease to be dependent on people going into debt. Money creation should be taken out of the hands of the commercial banks entirely. Instead, all money should be spent into use by national or local governments. This approach is suggested in a recent book, Creating New Money, by James Robertson and Professor Joseph Huber.''

Conventional Economic Sustainability Indicator No. 2: The Balance of Payments

Britain has run a balance of payments deficit on its current account for many years and borrows overseas to make up the shortfall. Interest rates and corporate profit need to be kept sufficiently high for the country to continue to attract and retain this foreign money. The circumstances could therefore arise in which the rates required to keep overseas investors happy became so high that so little money was being borrowed from the banks by people living in Britain that it was insufficient to compensate for the money being repaid to the banks as interest and principal on previous years’ borrowings. As a result, the amount of money in circulation would fall and people would not be able to do as much buying and selling as they would like. In these circumstances, needs would go unmet while factories and people who could have met those needs would remain unemployed.

Of course, relative interest rates are only a factor in Britain’s attractiveness to overseas investors and Mr. Blair has paid great attention to maintaining some of the other factors. He has kept the tax-take down with the result that health, education and social welfare spending has been a smaller proportion of GNP than in most EU-15 countries. He has also refrained from acting to improve social and environmental sustainability in ways that increase business costs and governments of whatever party are likely to continue to do so until the deteriorating social and environmental situation begins to destroy Britain’s attractiveness as an investment location and something just has to be done.

So what could Britain do to ensure that its balance of payments ceases to be an impediment to achieving longer-term sustainability? According to the textbooks, money has three functions.

1) it is the means of exchange – it enables people to buy and sell.
2) it is a store of value, that enables a surplus to saved, perhaps many years later
3) it is a unit of account that, if it works properly, should enable one year’s financial data to be meaningfully compared with that of another year.

Quite frequently, however, these functions become incompatible with each other. For example, if enough money is put into circulation to enable people to be able to do as much exchanging as they would like, an inflation might result, undermining the value of people’s savings and the use of money as a unit of account. So running a currency with three conflicting objectives is unlikely to fulfil any of the objectives well. It would be far better to have two or even three currencies, one for each task.

In the British case, this would mean the introduction of a new currency – let’s call it the 'Crown' - to act as the means of exchange - while the pound sterling would be reserved for savings. Under this system, everyone would be paid the whole of their wages or pensions in crowns and would pay their rent, interest and tax and purchase their day-to-day needs using them. Ordinary current accounts at the bank would be kept in them too. But when anyone wanted to save, they would use their crowns to buy sterling at an exchange rate that could vary from day to day. Savings accounts would be denominated in sterling (although the interest on them would be paid in crowns) and people would use sterling if they wanted to buy a capital item, like shares, a pension or a house.

Britain’s exports of goods and services, plus the income from its citizens’ overseas investments, would be sold through this exchange for crowns provided by people who wanted to buy goods and services outside the country or who had interest and profits to send abroad. On the other hand, if anyone wanted to invest abroad or had a foreign loan to repay, they would first have to buy sterling (or raid their sterling savings account) to buy dollars or some other foreign currency being sold by people wanting to move capital into Britain. If very few people wanted to invest in the country at a particular time and a lot wanted to take their capital out, the sterling/dollar exchange rate would swing to balance the two flows. It would be the same for current account transactions – the value of exports would always equal the value of imports because the crown/dollar exchange rate would adjust to ensure that it did. And, of course, the exchange rates of sterling and the crown against the dollar would determine the exchange rate that the twin currencies had against each other.

The important feature of this system is that payments would always balance and they would therefore cease to concern the government. If, one year, exports were inadequate to earn enough foreign currency to pay for imports, the exchange rate would vary and exporters would earn more crowns for every unit they sold overseas. This would encourage them to increase foreign sales. At the same time, imports would become more costly, encouraging purchasers to switch their orders to home producers. Investment inflows and outflows would also always balance and speculative runs against the twin currencies would be impossible. Moreover, a temporary inflow or outflow of capital would no longer play havoc with exporters’ earnings or the price which importers had to pay.

Britain did, in fact, have twin exchange rates from the late 1940s until 1979 – those wishing to take capital out of the Sterling Area had to pay ‘the dollar premium’ to get the necessary foreign exchange. Similarly, those bring capital into the Area got a better exchange rate than they would have done for the proceeds of an export sale. South Africa operated a similar system to protect itself during the apartheid period and only abandoned it in 1995. Its capital currency was known as the financial rand. “The financial rand system has served South Africa well during the years of the country's economic isolation” the South Africa minister of finance, C.F. Liebenburg, said when he announced its abolition

Design conclusion 2:

‘‘Countries should operate two currencies, one for savings, one for trade. Capital and current money flows should be kept apart. Both should have independent floating exchange rates so that governments need never be concerned about current account deficits or the need to attract foreign investment.''

Conventional Economic Sustainability Indicator No. 3: Inflation

The construction of a more sustainable economy requires some sectors to expand while others contract and a mild inflation can be a very good thing in such circumstances as it makes the transition much easier. The good thing about inflation is that it creates a forgiving business environment because it erodes the consequences of bad investment decisions. It also allows firms to make creeping adjustments to wage differentials. The real wages of workers with skills in short supply can be raised while those in declining areas of business, people who would never agree to take less money in cash terms, can be given pay increases of less than the inflation rate. These adjustments signal to existing and potential workers that perhaps they should look for better-paid jobs in the expanding sectors and thus enable the declining sector to shrink gracefully. If these adjustments could not be made, firms in the declining sector would have less room for manoeuvre and could face into liquidation rather than a controlled contraction.

Inflation is also important for balancing the interests of borrowers and lenders. If the rate of inflation (say 4 per cent) plus the rate of GNP growth in real terms (say 3 per cent) is equal to the rate of interest (say 7 per cent), the division of national income between borrowers and lenders stays constant. This is because when the money rate of growth equals the rate of interest the income of both groups rises in proportion to the way it was distributed the previous year.

The balancing mechanism between borrower and lender works as follows. If almost all companies in an industry find their profit margins dropping they will try to raise their prices, and, in the absence of foreign competition, they will succeed. The inflation caused by their action increases their profit margins by cutting the real cost of the money the firms are borrowing (or, to put it another way, the lenders’ share), the real wages of their employees and the real prices they pay to their suppliers.

On the other hand, if the firms’ profits rise above the customary level, they will increase their investment, which will tend to increase the demand for labour. This in turn tends to push wages up and thus, potentially, increases the share of national income going to employees. The higher demand for capital may also push up interest rates, increasing the lenders’ national income share. And when the factories created with the additional investment come into production, the increased supply will tend to push prices down, also increasing the relative national income shares of the non-firm sectors.

In other words, we have a co-sustainment-inducing balancing mechanism that generates inflation whenever it acts. At present, when corporate profits are down, firms push their prices up to compensate. When corporate profits are up, increased investment pushes up the price of labour and possibly those of land and capital as well. For this new mechanism to work, governments must have a sufficiently relaxed attitude to inflation to allow it to take place.

If, as we suggested in our discussion of the balance of payments indicator, two currencies are in use in an economy, one for saving, the other for exchanging, it does not matter if a mild inflation takes place in the prices paid in the exchange currency because the value of people’s savings is protected by the savings currency. An inflation rate of, say, 5% in exchange currency prices would encourage people to convert any money they didn’t need immediately into the savings currency. This increased flow of funds into the savings currency would improve the exchange rate for people moving their money the other way, thus compensating them for the inflation and making the savings currency an effective store of value.

In fact, from the government’s point of view, there is a positive advantage to having a modest inflation. It is that, as prices rise, more money is needed in circulation and, if the government spends the exchange currency into circulation, the fact that more is needed means that it can either collect less in tax or it can offer improved public services at the same tax rate. There is no risk at all that a modest inflation can develop into a runaway one unless the government behaves recklessly and puts too much money into circulation. Indeed, the amount of money in circulation and thus inflation would be far more controllable if the government managed it directly than under the present system in which the central bank has to try to reduce the amount of money creation authorised by the commercial banks by changing the rate of interest and/or selling government bonds.

Falling prices are, in fact, always a more serious threat than rising ones. This is because they increase the burden of debt. In a deflation, the amount people owe stays the same while the number of goods or services they have to sell to repay the debt rises. These increased sales are difficult to achieve because the fact that prices are falling encourages potential purchasers to put off buying for as long as they can - they know they’ll get a better bargain later on. The risks presented by deflation are so great that it is probably best never to aim for a zero rate of inflation even in a static, sustainable economy but always to have a low positive one.

EconomicSynergyConclusions 3:

‘‘The amount of money in circulation and hence the rate of inflation would be totally under a government’s control if it spent the exchange currency into circulation and taxed it back again. It could allow an inflation rate of between 3% and 8% per annum while the economy was changing during its move to sustainability. This rate would be controlled by having the government create all the exchange currency and spend it into circulation. Near zero inflation would be acceptable once sustainability had been attained and the economic system had ceased to change.''

Conventional Economic Sustainability Indicator No. 4: The state of the public finances

We have already discussed the desirability of governments creating their own money and spending it into use rather than borrowing it from investors and financial institutions. Once a government is able to create money to spend into use, it would be able to re-purchase all its bonds and redeem its other debts. Provided that such a government did not spend so much money into circulation that the rate of inflation exceeded 8%, the public finances would never be a problem again.

These monetary and protectionist changes would therefore give governments the freedom to offer social protection or to respond to environmental crises with far less regard for the economic consequences than they have now. Under the present system, countries cannot take decisive action because any major intervention would alter key price relationships and so destroy the competitiveness of the products they were exporting. As a result, the only way the necessary changes can be made without causing a crisis would be as part of a co-ordinated programme involving, at the very least, the country’s most important trading partners. Negotiating a co-ordinated international programme would take time as the problems in arranging a world response to the threat of climate change show.

Even within the EU, gaining the freedom to act could be a problem. Apart from carbon taxes, the Dutch and the Germans have been prevented from acting as decisively as they would have wished in several environmental areas. For example, the Dutch wanted to pass a law so that all new cars were fitted with catalytic converters at the same time as the US made them compulsory in 1983. However, it was prevented from doing so. Then, when the Dutch government had started giving tax relief on cars with catalytic converters so that they cost no more than dirtier vehicles, it was taken to the European Court (eventually, the case was dropped).

On another occasion the Dutch wanted to restrict the use of cadmium in the plastics industry because the toxic metal was building up at between 1 and 2 per cent a year in the soil and marine mud. This time the EC discouraged national action on the basis that it would interfere with trade and offered to make a regulation itself, eventually producing a toothless directive as a result of opposition by Britain and Italy.

Similarly, when Germany had wanted to ban pentachlorophenol, the directive the EC produced to do the job actually legalized existing uses. According to Lucas Reijnders, professor of environmental science at Amsterdam University and the part-time co-ordinator of the Nature and Environment Foundation, a leading Dutch environmental organization, ‘What we are able to do legally within the EC is far short of what is required to stop environmental deterioration in the Netherlands. Still, what we can do is to legislate in defiance of the EC in the knowledge that it takes at least two years for a case to come to court.’

Since the unsustainability of one place could destroy that of the others, no part of the world can be considered to be sustainable unless all are co-sustainable. Co-sustainment is best achieved as a result of thousands of local areas looking at their resources, their needs and their problems and taking decisions accordingly in their own time. The Canadian economist, Jane Jacobs, thinks that every city region should have its own currency and this is probably the right scale for action to occur. Certainly, if a city region had its own money, it would be much better placed to become sustainable by developing systems that enabled it to live sustainably within its own environmental limits.

The scale for the design we adopt should be determined by where our priorities lie. If we maximise some theoretical economic efficiency we might, at best, enable the wealthy to consume more goods. Is this more important than enabling adequate social and environmental protection and the construction of a co-sustainable world? If we decide that the latter is more important, then the design must permit countries (or city regions within them) to make the required adjustments as soon as they are ready to do so since, if they had to wait until a majority of the nations of the world could agree to act in concert, the decision might not come in time.

The most urgent design change we need to implement is to install a system which does not collapse if economic growth fails to occur. This would not only make governments much freer to act to promote social and environmental sustainability but it would also release resources for use in poorer parts of the world.

2. Designing changes to the international economy

One of the most urgent crises facing the world at present is the depletion of oil and gas reserves to the point at which it will not be possible to continue increasing the total amount of energy supplied from them within the very near future. This means that, a short time later, total deliveries will begin to decline at, initially, 2-3% a year. Unless other sources can be found to compensate – and this would involve not just their compensating for the decline but making up for the missed production growth as well – economic growth will become impossible at anything close to its present rate. Indeed, an economic contraction is almost certain. This would threaten the world’s financial system unless the design changes suggested in the previous section had been made.

The increasing energy scarcity will push up the price of every fuel in terms of the length of time people have to work to earn enough to pay for it. This will have serious consequences for the poor, who spend a greater proportion of their income on energy than do the better off. They will also be hit by rises in the cost of their food due to the increased cost of farm inputs like fertilizer and tractor fuel. Fortunately, there is already a well-tried design solution for situations in which vital commodities get so scarce that their distribution cannot be left to an unregulated market. It may sound politically distasteful, but it works. It is called ‘rationing’ and has been used by governments in times of crisis with great success. Introduced on either a national or an international level, it could prevent malnutrition and fuel poverty increasing wherever it was used. It could also provide a basis for slowing climate change.

Feasta’s design idea for rationing is that it should be greenhouse emissions rather than quantities of fuel that are rationed, since no-one has a human right to, say, a tonne of coal, but everyone can claim a right to a share of the planet’s capacity to absorb greenhouse emissions. An individual country could introduce this form of rationing by starting to issue emissions ration coupons regularly to its population. Everyone would get the same allocation and the total ration for the first year would be just less than the country’s expected CO2 emissions for that year. In each subsequent year, the total emissions ration could be cut by, say, 2%, in line with the fall-off in energy supplies. Recipients would sell their coupons to the banks, which would sell them on to businesses which needed to buy fossil fuels. The competition among businesses for the limited number of coupons would give them an increasing value. This approach would bring three benefits:

  • It would force the country’s industry and the public to be more energy efficient. This would stand the country in good stead as the world price of fossil fuels rose over the years. Moreover, the techniques industry developed might find a market overseas, in the way that the encouragement given by the Danish government to its wind power industry has paid off many times in export sales.
  • The cost of buying the coupons needed to purchase fossil energy would rise year by year as the size of the total national ration fell. The income from selling coupons would, in effect, provide everyone with a citizen’s income which would be of most benefit to the poorest people.
  • As the price of fossil energy rose because of the rising cost of buying the coupons to purchase it, it would become increasingly financially attractive to develop renewable sources of energy. As many of these could only be developed at a local level, the benefits would be shared out across the country.

But the full benefits of energy rationing can only be captured if it is adopted internationally. In this case a new international organisation would calculate the annual percentage rate at which global fossil fuel consumption needed to be reduced from its present level to give the world a good chance of avoiding a catastrophic climate change. That rate would determine the size of the emissions ration the organisation issued every year, the total ration being shared amongst the world’s human population on an equal per capita basis.

The international organisation would then agree with the world’s oil, gas, and coal producers the price they would receive for the total amount of fossil fuel that it was possible to burn within the greenhouse emissions ration. In return for this guaranteed price, the producers would undertake not to supply fuel without collecting enough coupons to cover the emissions from it. Inspectors would check to ensure this was the case.

Accordingly, every quarter or every year, each person in the world would get an individual ration coupon entitling him or her to burn the amount of fossil fuel that would release their share of the world greenhouse gas emissions allocated for that year. They would not, of course, be entitled to the fuel itself – they would have to pay for that - but they would be able to sell their ration coupons through banks and post offices which would in turn sell them on to companies needing to buy fossil fuels from the producers.

The advantage of having an international rationing system is not just that it goes a long way to solving the climate crisis. It also means that, instead of fossil fuel producers making huge windfall profits because of the scarcity of oil and gas after their production peaks, most of the extra money that energy purchasers have to pay to secure their fuel will go to the poorest people in the world.

Design conclusion 4:

‘‘The distribution of scarce, vital commodities cannot be left to an unregulated world market. The growing scarcity of oil and gas means that rationing is required for all fossil fuels. The rationing system should be based on everyone’s right to a share in the planet’s capacity to absorb carbon emissions.''

A new world currency

The dollar, the pound sterling, the euro, the Swiss franc and the yen are all 'reserve currencies' - in other words, they are the currencies which the world's central banks keep in reserve against the day they might have to intervene in the markets to support the exchange rates of the national currencies for which they are responsible. When gold was the world currency, wealth was created wherever the gold was found. Today, wealth is created in the reserve currency countries when their banks approve loans. The amount of this wealth is considerable. According to IMF figures, the dollar holdings of the world’s non-US central banks increased by approximately $145 billion in 1999. This means that the US either lent or spent these extra dollars in the rest of the world during that year, gaining either goods and services or interest payments for them, but that during the year it did not supply anything in return. By accepting the dollars without getting anything back, the rest of the world was giving the US a massive subsidy. In the eight years between 1992 and 2000, the world’s central banks increased their dollar holdings by around $800 billion, effectively giving America a cost-free loan of the same amount.

I use the term ‘cost-free’ rather than ‘interest-free’ because most of this money was, in fact, deposited by the central banks with financial institutions in the United States and interest was paid on it. However, that interest was paid in dollars created by a book-keeping operation and added to the total amount of dollars held by the rest of the world. A cost to the US would only have arisen if the dollars paid in interest had actually been used to buy American goods or services but, in fact, no such cost has been paid since the country went into a mild recession in 1991, the only year in the past 20 in which the US supplied more goods and services to the rest of the world than it took in. In the other 19 years, the US has run a deficit on its import-export account and become increasingly indebted internationally. These debts will remain cost-free for as long as the US is able to continue to pay interest in dollars and increase the amount it owes.

A good idea of how big a subsidy this $800bn.is can be gained by recalling that in 1998, the UNDP estimated that half that sum, the expenditure of only $40bn a year for ten years, would enable everyone in the world to be given access to an adequate diet, safe water, basic health care, adequate sanitation and pre- and post- natal attention. But, huge though it is, the sum is just a small fraction of the advantage the US gains by having a reserve currency. In addition to central banks, dollars are also held by companies, institutions and millions of people around the world, either in notes in a wall safe, as deposits in a US bank account, or as some form of security – perhaps as a bond such as a Treasury bill or in shares traded on Wall Street.

The total gain from having a reserve currency (the technical term is seignorage) is the cumulative balance of payments deficit on the import-export account that the issuing country is able to run up. At present, the $3,000 bn. net debt owed by the US to the rest of the world would take the total income from its export sales for three years to pay off assuming America imported nothing at all. Looked at another way, seignorage currently enables America to import half as much again as it exports.

A handful of other countries benefit from seignorage too but to a much more limited extent. Britain does best amongst these runners-up. It gained goods and services worth £31 billion from the rest of the world between 1992 and 2000 thanks to the increase in central banks’ holdings of sterling. This was just 5.7% of the US gain from the same source over the same period. Britain has also been able to run up a debt with the rest of the world - the UK balance of trade has been negative in every year since 1985 with the result that the country’s net financial liabilities stood at £69.8 billion at the end of the third quarter of 2001. The government statistics office described this as ‘a relatively large figure historically speaking’ although it was only 4% of what the US owed. Britain’s present current account deficit is around 2.5% of its GDP.

The other beneficiaries from seignorage did not run up current account deficits and so failed to take advantage of their position. Japan, for example, which got 4.5% of the US gain between 1992 and 2000, has run a trade surplus for many years. The same applies to Switzerland (0.6% of the US gain) and the countries which now make up the eurozone (a miniscule 0.25%).

At present, countries without reserve currencies lack the freedom to refuse to earn increasing amounts of dollars, pounds, yen or euro only to lend them back to the countries which issue them. This is because while the volume of world trade is growing, they need to increase their reserve currency deposits with banks overseas for the same reasons that private individuals want more money in their personal bank accounts – to make investments and to pay for their increasing purchases. Accordingly, these countries’ only choice is whether or not to reduce their holdings of one reserve currency - perhaps because they think that it’s about to fall in value compared with the others – and to increase their balances of the others to compensate.

For as long as world trade continues to grow, the indebtedness (and thus the seignorage gains) of the reserve-currency issuing countries is likely to increase. But if world trade declines or a world currency is introduced, surplus reserve currencies would begin to return to their countries of issue in exchange for goods and services. On the basis of the figures above, only the US would be seriously affected by this. The value of the dollar would fall and American living standards would decline as a higher proportion of everything being produced in the US would have to go abroad in exchange for the returning dollars. The cost of everything produced and consumed locally that could be exported would rise by the extent of the devaluation.

EconomicSynergyConclusions: 5

A genuine world currency should be established

‘‘Rather than allowing a select group of countries to provide the world with its money, it would be fairer to have an international institution do so in order to share the seignorage gains among the currency’s users. Remarkably, such a currency already exists. The press called it ‘paper gold’ when it was first issued by the IMF in 1969 since its official name, Special Drawing Rights (SDRs), was somewhat boring.’‘ (See longer version)
‘‘There are three ways in which the new currency could be put into circulation. It could be lent, spent, or given away. The disadvantages of lending the money into use are that:''

i) The new money would only go to ‘sound’ borrowers. In other words, it would go to the financially strong.
ii) As the loans were repaid, the amount of money in circulation would shrink, reducing the size of the world economy unless new loans were taken out. But new loans would not be taken out unless the world economy was buoyant. As a result, issuing the new money this way would reinforce the present system’s growth imperative, the prime cause of its unsustainability.
‘‘iii) The interest charged on the loans would reduce the amount of money in global circulation. If the world economy was not to contract, additional loans would have to be taken out. This would cause the ratio of debt to gross world product to increase, eventually to unsustainable levels, unless the world economy grew, in real terms, at the same percentage rate as the rate of interest charged. This would heighten the growth imperative. ''

‘‘The new currency could certainly be spent into use over the years at a rate which would not cause a global inflation by being used to pay for, say, greatly expanded activities by the United Nations and to relieve Highly Indebted Poor Countries of their debt. However, this approach would make it unlikely that the new currency would displace the present reserve currencies entirely. All it could hope for would be to capture the seignorage gains resulting from rising levels of world trade which would otherwise go to the reserve-currency-issuing countries. Very little of the new money would trickle down to the poor.''

EconomicSynergyConclusions: 6

‘‘The new world currency should be issued by being given into circulation on a scale that would immediately make it the main world currency and allow the reserve currencies to be returned to their countries of origin to clear international debt. ''

‘‘SDRs were given into circulation but, as we noted, they were allocated on the basis of a country’s IMF quota which is related to its importance in world trade. This was scarcely equitable as the strong got the lion’s share of the new money. For reasons of equity, any new international currency issue should be distributed to countries on the basis of their populations on some agreed date.''

EconomicSynergyConclusions: 7

‘‘The distribution of the new currency should be on the basis of population rather than economic power.''

‘‘To deliver the maximum level of human welfare, every economic system should try to work out which scarce resource places the tightest constraint on its development and expansion. It should then adjust its systems and technologies so that they work within the limits imposed by that constraint. In line with this, an international currency should be linked to the availability of the scarcest global resource so that, since people always try to minimise their use of money, they automatically minimise their use of that scarce resource. ''

‘‘What global resource do we most need to much use less of at present? Labour and capital can be immediately ruled out. There is unemployment in most countries and, in comparison with a century ago, the physical capital stock is huge and under-utilised. By contrast, the natural environment is grossly overused especially as a sink for human pollutants. For example, the Intergovernmental Panel on Climate Change (IPCC) believes that 60-80% cuts in emissions of one category of pollutants - greenhouse gases, which come largely from the burning of fossil fuels - are urgently needed to lessen the risk of humanity being exposed to the catastrophic consequences of a runaway global warming. If this is the most serious resource threat facing humankind at present, it should become the basis of the new world currency.''

EconomicSynergyConclusions: 8

‘‘The supply of the new world currency should be limited in a way which ensures that the overall volume of world trade is compatible with the most crucial area of global sustainability.''

‘‘If the overloaded sinks were to be taken as the basis for a new world currency, an international Issuing Authority would supply governments with the new money, emissions-backed currency units (ebcus), in amounts in proportion to the size of their populations. It would maintain the value of the currency in relation to the emissions permits issued to everyone in the world on the basis described above by supplying additional permits to whoever presented it with a specific amount of ebcus. This would fix the value of the ebcu in relation to a certain amount of greenhouse emissions and through that to the use of fossil energy.''

‘‘The issue of the ebcu money would be a once-off, to get the system started. If a buyer actually used ebcus to buy additional emissions permits from the Issuing Authority in order to be able to burn more fossil energy, the number of ebcus in circulation internationally would not be increased to make up for the loss - the ebcus paid over to the Issuing Authority would simply be cancelled and the world would have to manage with less of them in circulation. This would cut the amount of international trading it was possible to carry on and, as a result, world fossil energy consumption would fall. In other words, the level of international trading at any time would always be compatible with achieving the CO2 concentration target. If renewable energy output grew or the efficiency with which fossil energy was used was improved sufficiently rapidly, it would be possible for world trade to increase. ''

‘‘Essentially, the system is a version of the Bretton Woods arrangement which President Nixon destroyed except that the right to burn fossil energy has replaced gold and ebcus play the role of the US dollar.''

3. ---_Co-sustainment and globalisation

One of the most serious defects of capitalism is that, as it is designed to maximise the surplus going to the owners of capital, it gives them more capital to invest. In other words, capitalism has a built-in positive feedback mechanism which allows the capitalists’ activities to expand by hiring more labour and using more natural resources. This expansion will continue until it is counterbalanced by the development of a negative feedback which reduces the return on further expansion to zero. Several negative feedbacks could bring this about but the most likely – and damaging – one would be the exhaustion of natural resources such as fisheries, forests, oil and gas, coupled with the cost of damage done when the inability of the Earth to absorb the volume of human-produced emissions and other waste begins to impact on human activities. A plethora of statistics indicates that we are getting perilously close to this point and, for the sake of future generations, it is most important that the expansion be stopped before we do.

The feedback-produced expansion has spread a single economic system around the world with the result that a high proportion of the world's population now eats the same foods, is housed in buildings constructed of the same materials, drives the same cars and lives and works in much the same way. This uniformity means that much of humankind competes on world markets for the same raw materials – cotton, steel, cement, oil - and thus puts their sources under a high - and in many cases unsustainable - degree of pressure.

The global expansion has enabled capitalism’s positive feedback to reward those countries and companies that consume the Earth's resources most rapidly with incomes that enable them to purchase and destroy even more. It has also destroyed the local negative feedback mechanisms that once warned communities to mend their ways when they started behaving unsustainably. Now that goods can be transported from anywhere for those with the money to pay, the better-off know that once the fertility of a district's soil declines, its forests are felled, its mines exhausted, its seas fished out. They can always import their requirements or, if necessary, move somewhere else.

There is therefore a close link between restoring local economic self-reliance and achieving sustainability. Theoretically it might be possible to develop a worldwide industrial culture that enabled all humanity to live sustainably within the limits of the world, but the scale and the complexity of the task are immense. An easier, more feasible alternative is to design a system that would encourage a greater diversity of diet, clothing, building materials and life-styles. This would take the pressure off over-used resources just as it does in the natural world where each species has its own ecological niche and avoids competing directly with the others.

Diversity is desirable for other reasons too. If everyone who grows up in an area is to find an occupation there in which they can feel fulfilled, a wide variety of jobs and other activities is necessary because people differ widely in their interests and aptitudes. A wide range of jobs creates a richness of life, It is important economically too because if a community or a country imports a lot of its requirements and relies on exporting a limited range of goods and services to pay for them, it risks getting caught out if something goes wrong or the market changes. For example, Ireland is the world’s second-largest producer of computer software. It also earns a lot from exporting milk products and beef and from selling itself as a tourist destination. Suppose that there is an airline strike, so the tourists can’t come. Or that the software companies find they can get equally good programmes written much more cheaply in Bangalore. Or that an outbreak of foot-and-mouth disease spreads to hundreds of farms and makes Irish beef, cheese and butter unexportable. The economic and social costs of any of these would be immense.

Diversity is therefore essential to achieving sustainability. Unfortunately, though, a highly competitive world trading system which deliberately sets out to remove every possible barrier - including those of distance and, as with genetically-modified foods, consumer preference - to the free movement of goods and services leaves very few niches in which diversity can hide. Part of the problem is that a diverse economy almost inevitably produces at higher cost than one which specialises in a very few products. This is because many products exhibit what economists call ‘increasing returns to scale’. In other words, the more of them you produce, the cheaper they become. The first model of a new car to come off the production line will have cost many millions to create. In comparison, the one immediately behind it will be very cheap and the ones that follow that will become cheaper still as the company, its suppliers and its workers move along learning curves. Consequently, anyone producing relatively small numbers of cars will be at a price disadvantage because they will have to spread the development costs of their first car over a more limited production run and be unable to move as far as their bigger rivals along the learning curve.

Exactly the same can be said of almost every product. Take something basic like, say, shoes. To produce them using modern methods needs an extensive infrastructure including specialist suppliers (or, better still, producers) of leather, soling materials, adhesives, clicking presses, press knives, sewing machines, thread and much more. It also needs people who know how to design shoes, others who can use the specialist equipment required to make them, and still others with the skills to keep delicate machines in working order. It therefore takes a considerable investment in people, equipment and facilities to produce the first shoe. This is the reason why every industrial economy in the world developed behind tariff barriers.

The problem with increasing returns to scale is that, other things being equal, the biggest producers (like Microsoft, for example) will to be the cheapest and most profitable and will drive almost all their rivals out of business. This leads to activities that could in theory be carried out equally well in many places in the world being concentrated in very few.

EconomicSynergyConclusions: 9

‘‘Tariff barriers, high transport costs or some other sort of protection such as the twin currencies described earlier, are necessary if a region or a country is to develop or maintain a diverse, and thus more sustainable economy.''

4. Conclusion

Both the unsustainability of the humanity's present mode of existence and our inability to correct it are primarily due to flaws in the economic system's design. As every designer knows, if you adopt the wrong concept, it can be very hard to make a project work. More and more features have to be added to fulfil the design brief. On the other hand, if you are able to find a way of correcting a flawed design, a lot of savings can be made as systems or structures become simpler. In other words, a synergy develops.

This will be the case when correcting the current economic design. Readers will have noticed how many of the suggested changes produce desirable effects that were not part of the original intention, like the way having a government spend money into circulation not only makes the economy more stable but makes it more controllable too. Or how energy rationing, something which is essential if the gap between rich and poor is not going to widen to the extent that the rich run their cars on biofuels grown at the cost of the poor's starvation, dovetails with action to limit climate change.

But these gains are only the tip of the iceberg. Our re-design will change a system which prides itself on its efficiency but which manages to keep a large proportion of the world's population in involuntary idleness. One which uses great deal of energy to increase labour productivity by a small margin in some parts of the world, while denying others whose productivity could be increased many times over if they had access to a little electricity the use of any energy at all. If our re-design can release the energies of the hundreds of millions of people that the current systems excludes, the gains in countries like Britain will seem as nothing at all.

Richard Douthwaite
November, 2005

Return to / go to SynergyToolsDrafts Papers
Return to / go to details of ds21 Members
Return to / go to Design Synergy HOME PAGE

Print

Search Au (powered by Google)