“...a highly readable and authoritative account of the problems we face from global warming to shrinking water resources, fisheries, forests, etc. The picture is very frightening. But the book also provides a way forward.” –Clare Short, British Member of Parliament
Chapter 12. Building a New Economy: Introduction
In Chapter 1 we concluded that the western economic model—the fossil-fuel-based, automobile-centered, throwaway economy—was not viable for the world. Instead, the new economy will be powered by renewable sources of energy, will have a more diverse transport system—relying more on rail, buses, and bicycles and less on cars—and will recycle materials comprehensively.
We can describe this new economy in some detail. The question is how to get from here to there quickly enough to avoid economic decline and collapse. In our favor, we do have some assets that earlier civilizations did not, including archeological records, more advanced scientific knowledge, and, most important, a sense of how to use economic policy to achieve social goals.
The key to building a global economy that can sustain economic progress is the creation of an honest market, one that tells the ecological truth. The market is an incredible institution, allocating resources with an efficiency that no central planning body can match. It easily balances supply and demand, and it sets prices that readily reflect both scarcity and abundance.
The market does, however, have some fundamental weaknesses. It does not incorporate into prices the indirect costs of providing goods or services into prices, it does not value nature’s services properly, and it does not respect the sustainable-yield thresholds of natural systems. It also favors the near term over the long term, showing little concern for future generations.
Throughout most of recorded history, the indirect costs of economic activity were so small that they were rarely an issue and, even then, only at the local level. But with the sevenfold global economic expansion since 1950, the failure to address these market shortcomings and the irrational economic distortions they create could be fatal. 1
As noted in Chapter 1, accounting systems that do not tell the truth can be costly. Faulty corporate accounting systems that leave costs off the books have driven some of the world’s largest corporations into bankruptcy. Unfortunately, our faulty global economic accounting system has potentially far more serious consequences. Our modern economic prosperity is achieved in part by running up ecological deficits, costs that do not show up on the books, but costs that someone will eventually pay.
Once we calculate the indirect costs of a product or service, we can incorporate them into market prices in the form of a tax, offsetting them with income tax reductions. If we can get the market to tell the truth, then we can avoid being blindsided by faulty accounting systems that lead to bankruptcy. As Øystein Dahle, former Vice President of Exxon for Norway and the North Sea, has pointed out: “Socialism collapsed because it did not allow the market to tell the economic truth. Capitalism may collapse because it does not allow the market to tell the ecological truth.” 2
1. Expansion in world economy from International Monetary Fund (IMF), World Economic Outlook Database, at www.imf.org/external/pubs/ft/weo, updated April 2005; Angus Maddison, The World Economy: A Millennial Perspective (Paris: Organisation for Economic Co-operation and Development (OECD), 2001).
2. Øystein Dahle from discussion with author at State of the World Conference, Aspen, CO, 22 July 2001.
Copyright © 2006 Earth Policy Institute