Imagine. You buy an orange from the store and trigger a whole chain of positive reactions. Staff get paid, public infrastructure gets repaired, rebuilt and improved, the land the oranges grow on gets fertilised and new orange trees get planted. It is not such a stretch of the imagination as you might think, because that is the way nature operates. By feeding, creatures actually steward and improve the eco-system. You could say their feeding, moving through and manuring nature regenerates the capability of the eco-system.
Examples are everywhere:
- They introduced wolves into Yellowstone park and the rivers started flowing again.
- Birds and other predators help keep insect populations down.
- By grazing on grass, hoofed animals help grass grow and sequester carbon.
- Squirrels hiding nuts actually help trees reproduce. The squirrels forget where they hide them and they germinate.
Ecological maturity is the goal and measure
Ecological maturity is the pinnacle of development of eco-systems. When they are mature they reach the maximum trapping of sunlight and conversion into matter. They absorb maximum amounts of water coming into them. And support the maximum weight of living things in them. That means that they have maximum capability to support humans, too. One simple measure of maturity is the infra-red absorption of the area, which satellites or drones can see.
But our own society is not functioning like that
Our human economy should function the same way; in some ways it does already, as the purchase of oranges fills the tax coffers, creates work and pays farmers for their labour so they can continue.
Unfortunately, there are many ways that our economy does not mimic nature and actually degrades the natural environment and in some cases human health as well.
An infra-red camera over a city reveals it is a heat island. Very little absorption of light energy.
Economics as a discipline should offer some good ideas about how to set up a regenerative economy. The economy regenerates all that is used to produce the services we need, indeed makes them better, helping all eco-systems towards maturity.
A regenerative approach to capital
In economics there is a definition that defines capital as something which is used in the process of producing and delivering services and/or products, but is not used up. This is also termed Real Capital. A good example is the house you own. You live in it, it provides accommodation but it is not used up or consumed, rather it is a platform for consumables like water, heat and food coming into it. Of course, maintenance and repairs are needed.
In any firm there are four types of real capital employed, shown below.
| – Productive Forests|
– Healthy soils
– Eco-systems with functioning hydrology
– Minerals, Metals readily available
The living layer we all rely on, as well as the layer beneath our feet with the minerals and other substances from the lithosphere, natural systems like the climate and water cycle.
|Infrastructure for safe, energy efficient comfortable: |
• Energy production and distribution
All man-made things that are used to provide our basic needs: houses, roads, factories, equipment, tools etc. This includes systems like telecoms, payments, etc.
|Organisations offering gainful, productive employment||Social Capital:|
Our organisations and institutions including the knowledge and capability that is in these organisations.
|Healthy, productive, skilled, strong, happy, generous, peace-loving, balanced, people||Human Capital:|
What we as humans command in terms of strength, knowledge, insights, attitude, capabilities etc.
Where real capital is employed in the firm
You will remember the representation of the firm we gave in the earlier article – one with the four major components: inputs, employees, equipment (infrastructure) and products.
We need to map the concept of real capital onto this map. Human capital is the employees and others working in the firm. Built capital is the equipment and buildings used by the firm. Social capital is the firm and organisation and the learning embodied in the firm, like technical drawings, processes etc. Natural capital is resources harvested if they are biological, extracted if they are mineral either owned or used by the firm.
Organisations delivering goods and services to people are – as I understand it -either firms in the sense of privately or publicly owned companies or government /municipal bodies organised as firms according to the diagram above. This means that in order to address the economy that performs to requirements, we need to address the firm and its relationship with real capital.
A functional economy has the real capital it needs, performs to requirements and regenerates capital rather than depletes it.Stephen Hinton
Depleting Real Capital in the Regenerative Economy is not allowed – or at least it costs more.
The diagram below shows the negative consequences of the set-up of the firm that requires firms to compete, for the annual balance sheet to balance and for costs for the money borrowed to install infrastructure and other real capital before operations can begin. These negatives result in the economic system not performing to requirements, the very definition of market failure.
Real capital depletion is a market failure
We can explore these market failures in turn:
Production costs: The requirement to keep production costs down results in the process depleting natural capital by externalising production costs through pollution, and by offering cheaper but poorer service.
Cost of waste: Production can be cheaper if waste handling is reduced to a minimum. Again, the risks are that the environment is harmed – natural capital is degraded – or social capital is degraded in that organisations meet huge losses of resources.
Getting more from each customer: On the customer side, the drive to keep profits up by increasing consumption and keeping product costs high can deplete human capital by encouraging over-use which can reduce customer’s health status. Keeping costs high can hurt customer’s economy.
Paying employees less: Keeping employee costs down can result in worker poverty, or indeed endanger their health by reducing working conditions – both drawing down human capital.
Pushing infrastructure costs into the future: costs for maintenance, repair, refurbishment and restoration can be deferred into the future. These costs do not appear on the current year’s balance sheet and therefore costs are lower and profits higher. This behaviour increases risks of poor service due to failures and even risks to life with a major failure. It also risks creating higher future infrastructure costs if equipment is worn out quickly.
Cheap sourcing: Finally, by reducing costs for inputs there is a risk firms will use the cheapest sources which in turn risk natural and human capital in the form of drawing down natural capital in a way that depletes it, or puts economic and health pressures on human capital.
Clearly, there is a lot that needs to be done within economics not least to develop approaches that focus on the role of real capital in society and to ensure that the forces that drive the firm do not result in depletion, poor service or lack of capability to serve all.
How do you “rig” the economy to function in a regenerative way?
Let us explore first some of the approaches to Real Capital that are regenerative and that make up the heart of the economic system we are looking for:
Natural Biological Capital – regenerative harvesting and return
Bio material needed to provide services to society should be removed in such a way that eco-systems can regenerate them and even increase their ability to regenerate them. In other words, material should be harvested in a way that does not significantly reduce its ecological maturity. In the same way, all biological material returned to eco-systems should be returned in a way that the eco system can cope with and indeed thrive on.
- Selectively cutting and removing mature trees from the forest in a way that leaves the forest intact.
- Composting: returning biological waste back in a way that regenerates the soil
- Water management to cut nutrient emissions to water to a level where the water body remains nutrient-poor.
Natural Mineral Capital – recycling to create re useable stocks
Metals and minerals extracted from the Earth should be, after no longer being part of useful products, stored and made available for new products. Examples include:
- Scrap metal recycling
- Reusing building materials
Built Capital – Repair, Refurbishment, maintenance and design to last
Built Capital should be designed to last and be repaired, upgraded, repurposed as needed. There needs to be enough built capital to provide for people’s needs.
- Transport systems with sufficient capacity to fulfil needs
- Food provision systems enough to feed everyone
- Water systems sufficient for people’s needs
- Enough houses to accommodate everyone
Social Capital – Design, set up and run organisations that support the regenerative economy
- Health care organisations with the funding and capability to expand to a level where they can provide health care to all.
- Organisations all the way along the food provisioning chain (field to fork to field) with the capability to provide food for all in a regenerative way.
Human Capital – Design of work, production and products that promote heath, well-being and capability.
- Education for people that maximises their capabilities to be part of the regenerative economy
- Focus on the promotion of health in all products available
Where do economics and real capital coincide?
Every transaction the firm makes is surrounded by economic rules, fees, taxes etc. Every purchase of inputs includes VAT, licences, fees etc. Every wage paid out triggers costs for employer’s taxes etc. Every sale includes VAT and other taxes, licences, fees. Decisions around each transaction are steered by this eco-system of economic incentives and restraints. If businesses deem a transaction too expensive and will harm profits, they seek alternatives.
A functional regenerative economy presents an economic framework to firms that:
- encourages firms to build up real capital to a level where it affords the aggregated capacity to fulfil the needs of everyone in society.
- discourages (makes expensive) the drawing-down of real capital.
Economic Instruments that stabilise the economy and incentivise regenerative transition
Proposed by the Swedish Sustainable Economy Foundation, flexible surcharges on existing fees and taxes are instruments that governments can employ to stabilise economies whist ensuring a relatively smooth transition to sustainability and a regenerative state.
The principle of flexible surcharges is to increase a surcharge affecting degenerative practices at regular intervals in large enough proportions that, for any given economic activity, degenerates real capital:
- Identify the point in the supply chain where a demand arises for the extraction of a pollutant or draw-down of finite resources.
- Identify a suitable surcharge to levy.
- Raise the surcharge until (non-extractive) alternatives become competitive.
In this way, the price of pollution/degradation of Real Capital is not discovered, rather the price of not degrading is discovered.
These instruments, then, work to encourage societies to function in a way that conforms to regenerative requirements. Let us take an example to illustrate it:
For a society that is using fossil fuel at a rate that will:
- Draw down reserves to effectively zero in one generation.
- Damage climate systems in the same generation by emitting more than nature can absorb.
A surcharge on import or extraction of raw oil within national boundaries is introduced. This is raised until the market adopts other, non-degenerative, solutions.
To ensure the rate of adoption does not bankrupt many firms and cause a recession, the levy is raised at intervals and the market is monitored closely. At the same time, the money collected from levies is redistributed to tax-payers to ensure they have enough in their pockets to pay for the alternatives. Firms should be able to invest in alternatives while running down polluting practices.
These kinds of instruments halt draw-down of Real Capital as non-regenerative behaviour gets more expensive, and at the same time ensures investment in alternatives as people have money to spend on cheaper, regenerative-based products and firms get a window to transition.
This window-based approach is better than introducing regulations overnight as firms will take the easiest investment first and the hardest and or most expensive will be taken last.
Fees on non-regenerative functioning like waste and emission-handling fees
In the same way, if the level and quantity of waste being generated cannot be recycled effectively by society, fees are raised, again with a repayment to taxpayers. In this way, it gets more expensive to emit or throw away and cheaper to ensure recycling or return in a regenerative way.
The Regenerative Economy needs economic incentives for people and organisations to operate in a regenerative way. The table below gives some examples of the kind of market-based economic instruments that could be put in place.
|Natural, Biological||Fees on land with low maturity|
|Natural, Mineral and Metal||Extraction fees that are raised until market behaviour responds to required allowed extraction rates|
|Built, infrastructure||Loans to build infrastructure required for basic need fulfilment|
Fees on waste emissions from the infrastructure
|Social||Subsidies/Mass purchase to organisations providing basic needs in regenerative ways|
Remove barriers to organisations providing meaningful work
|Human||Minimum Wage requirements|
Universal Basic Services
Measurements that matter
The regenerative economy hardly needs profit as the main measurement to show it is is performing to requirements, nor GDP for that matter.
What is salient is the measure of the amount of Real Capital in place and its condition and in its employment is performing to requirements.
A national measure could be the status of Real Capital. A convenient measurement would be “enough to fulfil basic needs”. A simple “yes” or “no” would signal the need for investment, and a drilling down into the issue of how much, where, and why.
The table below shows how a simplified Regenerative Economy scoreboard can look with some examples
|Requirement||Real Capital needed|
|Status real capital|
% of needed
|Performance to requirement|
|a) Food and clean water for all||Agricultural land, machines, organisations, people||100%||80%|
|b) Full employment||Organisations||80%||90%|
|c) Energy to provide for all||Energy production and distribution||70%||70%|
|d) Housing for everyone||Accommodation||110%||90%|
|e) Health care for all||Hospitals, health centres, dentists, doctors, nurses||85%||95%|
|f) Functioning eco-systems||Regenerative water, farming and forest management||100%||100%|
The scoreboard informs the state of the economy and suitable measures.
In (a) the real capital is sufficient but the operations are not performing well enough so investment in performance improvement is needed.
In (b) there is insufficient Real Capital but the organisation is achieving a high level of performance. This is probably not sustainable and investment in Real Capital is needed as a priority.
In (c) investment is needed in Real Capital and possibly performance improvement.
in (d) there is more than enough housing but people are still homeless. A performance improvement in the form of distribution is needed.
In (e) the health care service needs investment in Real Capital. It is performing over what might be expected of it and investment is needed to support operation.
In (f) we see the ideal 100-100 result where investment has paid off in full function.
The Regenerative Economy with a Real Capital approach offers many benefits
The focus on performance to requirements means that investment decisions become clearer by side stepping a complete reliance on market mechanisms.
The Real Capital definition gives a clear accounting measure of the ability of an organisation to perform to requirements and be part of the total solution.
The requirement for accounts to state each organisations Real Capital in terms of percentage of requirements give national accounting bodies a clearer picture of the potential overall performance of the economy and investment needs.
Real Capital status over time will help long term planning as each measure taken to either increase Real Capital or its use will yield learning about the relation of Real Capital to performance.
This is a work in progress, you are welcome to leave a comment below. (Have had a lot of spam so I will approve it first.)