• Economics and Sustainability

    by Gabriel Cross

    Economics is simple. The greater the supply, the lower the price, the lower the supply, the higher the price. The greater the demand, the higher the price, the lower the demand, the lower the price. Free markets will naturally set the price where the supply and demand curves meet. The market will always find the right price for everything. That is all you need to know about economics. Except, there are a number of assumptions in traditional economics that are being challenged on an almost constant basis by contemporary realities.

    First, traditional economics tends to assume that supply will be relatively steady and controllable, so that it can always be set to maximize profit from the current demand. Though resources are seen as limited, it is assumed that a relatively steady supply of that limited resource will exist over time. In a world in which raw material supplies are more and more obviously threatened, from oil to lumber, from land to water, the ability of the market to efficiently set prices is called into question. Because prices are always set based on supply right now, as supplies approach zero, costs will increase exponentially. Is this an efficient way to distribute resources over time?

    Another assumption of the traditional economic models is that demand is always a good thing, and more demand is always more good. Endless efforts have been made to create more demand, advertising being the most obvious example. It is rarely questioned whether there might be an optimal or an ideal demand: everyone just wants more. Experiments in curbing demand, therefore, have been limited for the most part to wartime and crisis situations. Otherwise, consumers are encouraged to consume as much as possible. In a world in which limits are being realized in supply chains, is an ever expanding market demand really something to be desired?

    Finally, as implied by both points above, traditional economics assumes that time is not a factor. To put this a little differently, it is assumed that any changes over time will be automatically corrected by the free market, and therefore are insignificant to the market right now. However, if a resource were ever to become exhausted and no adequate replacement or alternative were available, then a very different reality would emerge. As we approached zero availability of the resource (zero supply)- especially if demand had done nothing but grow up to that point- the “right price” set by the market would skyrocket.

    In the end, no price could be set for the remaining supply: its value would be incalculable. This may sound like a remote abstraction, but if any of the predictions about peak oil are accurate, we may soon see a real world test case.

    The above does not even begin to address another criticism of traditional economics; the use of “externalities” to keep costs down. An externality is something which has a cost, but is not paid for in the current paradigm. The standard example is carbon emissions, which will eventually cost everyone dearly due to climate change, and yet currently no one is required to “pay” for this cost.

    In the end, what the free market is truly good at is setting the price of goods given the status quo. But only those factors that are affecting the cost of production, availability of supply, and driving demand right now can be accounted for. The future, particularly the long-term future, plays absolutely no role in the free market economy. In other words, traditional economics, pioneered at a time when nature’s bounty seemed unlimited, assumes sustainability. Now that sustainability is called into question, so is the ability of traditional economic models to efficiently and effectively manage resource distribution on its own.

    I do not mean to imply that free market economics and sustainability are mutually exclusive, or even necessarily in conflict with one another. Only that the assumptions about the sustainability of traditional economics must be teased out, examined individually, and corrected if necessary. In the coming weeks, I will explore the relationship between economics and sustainability, and in the process hopefully edify myself and my readers about how the free market economy can be sustainable in the present as well as the future.

    • Love this history lesson, Gabriel. It is so much easier to understand. Thanks.

    • Gabriel, you are an optomist and see the free market as a “half full glass” but there is another view that is “Half empty.” Much of the world suffers inhuman living conditions in a manipulated market that stacks the odds against the poor.

      A quote from Dr. C. Evertt Koop, former Surgeon General of the United States.
      “Years from now, I’m afraid that our nation will look back on this application of free trade policy and find it scandalous, as the rest of the world does now…At a time when we are pleading with foreign governments to stop the export of cocaine, it is the heigth of hypocrisy for the United States to export tobacco.”
      Koop ended his statement with devastating statistics. Last year, in the United States, 2000 people died from cocaine use. In the same year, cigaretts killed 390,000 people.
      Under the slogan “Free Trade” the British fought the Opium Wars to compel China to allow the British to bring Opium into China.
      The chief motive of “Free Trade” is profit. The drive for profit is ruthless. i.e. garment factory sweat houses.

      • Sue

      • March 10, 2011 at 9:49 pm
      • Reply

      This article is brilliant in its simplicity, and I would say more realistic than optimistic, particularly since the people motivated by profit tend to rule the world, as little as the rest of us like it.

      • Of course, you are right. There is a dark side to just about everything. Economics is not my forte but I’m really, really good at bitching about politics and powerfull people-Like George W, and his goons like Dick Chenney and the Halliburton bunch!

    • Donald,

      It cannot be denied that unchecked free market capitalism has wreaked havoc in a number of instances around the globe and throughout history. I don’t think of myself as an optimist, however, I think of myself as a pragmatist. As Sue points out, the PIC’s speak only the language of free market capitalism, and in order to have an audience with the king you must speak the language of the court.

      I firmly believe that the health of humanity and the eco-systems that we coexist with is very good for business in the long term, and if you can find a capitalist economic expression of this principle, you can affect positive change in people’s (and companies’) behavior over night. I encourage you to read my efforts in this endeavor in this light.

      • I will try Gabriel but most of what you write is over my head. I did grasp the ideas in this one because you laid it out so a layman could understand. I ask you to forgive my pessimissism, it would seem that I have spent most of my life on the darker side of life and it comes out at different times in different ways. Sometimes I can’t believe some of the crap I put out there. Of course, you’re right. If you want to get ahead in the kingdom you must bow to the king and do the kings will. It upsets me at times that those in power are never held accountable. When I see the word finance, all I see is BCCI.

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