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.