A Systems Perspective 3: Nature and Econ

26 Mar

Post! Executive Outline:

Economics as a guide to policy|discipline|business|development typically undervalues Marginal Cost.
1. Resources *Natural capital to make manufactured stuff*
2. Oil is artificially low
3. Other environmental inputs= services
4. The commons

An increase in Marginal Cost would universally better off society.
1. Reduce | Reuse | Conserve –> Lessen material dependence
2. Reduce Energy/person –> Secure our country from Middle East
3. Focus on efficiency –> Reduce waste which hurts services
4. Produce less corn.

Finally, a policy solution without silly cap-and-trade or clean energy, which generates revenues by being harsher on unsustainable businesses.Increase the marginal cost of resources, to decrease their use. Read on, dear reader. But be prepared to comment if you finish it all.

To cap off this meta-series on the environment and our current situation as America today, I hope to explore an argument that the government raise marginal costs to resource-intensive production. The effects of such a counter-intuitive proposal are, among others, the disempowerment of traditional business as usual, increasing financial incentives to research into sustainable technologies, international pressure to conserve scarce resources, and a commitment to the continuation of America. Online MBA programs can guide you to information on how you can learn more about business and economics. Business and the economy are intrinsically related, and if you want to learn more about one of those topics, it is useful to learn about both. The economy is dynamic and ever-changing, and we need people who are well-versed in 21st Century knowledge to help guide the world in the right direction.

First, let’s examine some of the assumptions of Economics as it was constructed in 1887. This world was largely unknown at the time. Mapped but not explored. Tapped but not tapped out. The Flows had started, expanded by figuring out how other people worked. How trade worked. Mainly in the favor of those who understood it. If everyone well understood the drivers of this new change, they could make money. Get a leg up and make change on the others. The drivers of private investment, return on investment, exploration and eliminating all barriers increased production– the advantage we have over the other animals. The Industrial revolution happened, substituting coal and steam for fire and horsepower. Who would have thought it would lead to our domination of the world? The Economists looking at factor models could have.

Now we get to a point where we have everything to satisfy basic needs, especially the well-off and increasingly the poor as well. To Economists it is not the distribution of income that matters, only the total amount. So, in total amount, we have an average GDP/person that is higher than ever before. But the machine must be slowed down, before production falls. Economics is a magical system, one that’s pushed marginal costs to an all-time low. We’re speeding up the use of resources with incredible efficiency. But when the fuel runs out, the water runs out, the energy or other resources, watch out! It doesn’t need to run out before it becomes a problem.

Especially America, as a consumption-oriented economy, is at the top of a pyramid of needs. Material dependence on other countries to provide the fuel, food, and imports to feed us is very wasteful, especially from the Middle East which directly finances corrupt regimes. It creates some social assumptions, that cheap imports will BE available, even as everyone overproduces. The growth of other countries is not a challenge in a traditional sense– it increases total production and demand for our services– but it IS a problem on a finite resource base. The greased wheels keep turning and turning, and a lot of financial, social, and environmental inequalities build up.

So what does this situation have to do with Marginal Cost? The problem is that at the margin, a few things aren’t considered. For example:
water — especially in dry areas
environmental services — the value of the world
the commons — a valued piece of land for future generations
intertemporal growth — such that future generations will also experience growth
culture —
security —
impact —
CO2 –…
The cost of business requires heavy inputs and assumptions, all of which are artificially low.

Marginal costs are what determine most business decisions, in deciding where to increase spending to sell more units at a certain price. It’s not a concern where your service is coming from, or even what you’re doing (digging holes boosts Productivity, war boosts GDP) because you’re adding value. As long as there’s a market, the company stays in business, growth drives more investments, stocks add value, trade adds new markets… the company prospers. BUT if that final MC is high, it’s not as effective to keep producing more. What was profitable, no longer is. The business of the Economy must think of new ways to do thing so that it works again. Consumers took offense to the higher prices when most Government spending and country resources were dedicated to War in the ____, so they did what they could to make ends meet. Not go out to the movies as much, reduce and reuse, trade things among local communities, compost and grow food, etc.. Higher prices= lower cost living. Higher Marginal Costs for businesses, like a tax = Higher prices. A recession is the result: lowering consumption has pile-up effects to the economy.

But what if true costs are higher than the dollar costs?

Then, it’s not a recession, it’s called a bubble. An Economy based on assumptions can’t last; growth by it’s own metrics will come to terms with a wall of reality in due time. When the subsidies (of cheap oil, of cheap corn, of government, or otherwise..) run out it’s an uncomfortable position for that business, because suddenly a business plan based on business-as-usual assumptions doesn’t make money any more. The terms by which it priced goods are no longer valid (because it’s below MC) and they’re facing a weaker demand. It’s easy to keep going, but real financial indicators don’t lie. The stickiness at low cost- low price- high consumption crumbles once one of the backing elements runs out. It won’t be climate change, but it could be loans or oil that will increase the rate or the costs!

A bill in good foresight from the Government would change business realities to match truer costs. For those that use steel, tax the Iron and Carbon inputs before they get here. For those that use Wood or Water in high qualities, give usage rights to these areas. For those that use gasoline or ship long distances (everyone), tax Petroleum upstream. The extra revenues, of course, would go to the government.

Increase the marginal cost of resources, to decrease their use.

Such a novel idea, but it took me four years of puzzling over to get to it. I’m sure no one at the government has thought about it this way, but it makes sense. History has shown that people respond to financial incentives. Politics would be thankfully easy for Obama abroad : Solving Climate Change is as easy as saying “We’ll agree to a gas tax” @Opec et. al, and those who are just living, well, we’ll get by and be better for it. If we take the opportunity now to restruture food, production, building, energy, the economy, trade and development, the future for all our kids will be better off.

A cost revaluation of supply-side Economics.

See post 1: Resources in Country Growth
Post 2: Oil, Energy, and the Economy


4 Responses to “A Systems Perspective 3: Nature and Econ”

  1. Edward D. Miller March 28, 2010 at 5:04 pm #

    Wise people like you are farsighted, and are brave enough to suggest changes which increase pain in the short run. I agree, a carbon tax would make the most sense. The political reality won’t allow that for awhile though. A world government of some sort would sure make it easier to create a level playing field for all. Brave politicians who consider ‘the 7th generation’ would also be nice.

  2. eddiemill March 30, 2010 at 9:38 pm #

    “” In Germany, for
    example, labor productivity rose 3.5-fold between 1960 and 2000, while materials productivity
    only doubled. This is curious, as raw materials account for about 40 percent of the production
    costs of German industry, surpassing labor costs which weigh in at less than 25 percent.18 German
    industry could save about 20 percent of its current raw materials use by 2016 through higher
    materials efficiency—avoiding annual inputs worth about $37 billion (€27 billion).19 In a joint
    statement in August 2006, the environment ministry and the IG Metall trade union reaffirmed the
    government’s goal of doubling energy and raw materials productivity by 2020.20
    UNEP Green Jobs Report. http://www.unep.org/labour_environment/PDFs/Greenjobs/UNEP-Green-Jobs-Report.pdf


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    […] Green « A Systems Perspective 3: Nature and Econ […]

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    […] My works on the Economy and Environment: Part 1: Economic History link Part 2: Oil Energy Recessions link Part 3: Nature and Econ link […]

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