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Towards a mathematical model of the economy that moves away from extractive business approaches

If business as a discipline is to develop away from extractive practices we need to develop a mathematical language to help economists and policy makers model alternative approaches. Modelling – using both standard business calculations and simulation tools like those developed by Steve Keen – can help decision making at the level of the individual firm and policy level. We propose that adaptations of the Cobb-Douglas Equation can be used to help those doing macro-economic modelling of the sustainable economy. We hope this article contributes to knowledge. Read More…

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EXPLAINER: capital, sustainable development and peace

As world population expands, and the demand for a better standard of living drives the world economy, it is becoming clearer to many that using up the world’s resources will actually put us at risk of ending up with a lower standard of living. It could even drive conflicts. Insecurity and lack of the capability to produce the basics are likely to fan the flames of conflict and undermine peace in the world. We urgently need a new mindset – one that focusses on bringing security of the basics to everyone whilst preserving and indeed increasing the capability of society to provide.

Part of this new mindset requires us to rethink capital. This article breaks down the importance of capital to society, and how the economy should manage capital if we are to transition to a sustainable and peaceful future. Read More…

EXPLAINER: The funnel concept of reduced available resources

The funnel concept, introduced by Karl-Henrik Robert  Founder of the Swedish Natural Step, explains how increasing pressure on resources reduces the options of future generations to maintain a standard of living. Stress like that on populations  radically increases conflict and undermines peaceful societies. In the diagram below,  the width of the funnel represents the opportunities to continue society’s per capita resource usage. The depth of the funnel represents time. Read More…

Opinion: rethink “technology” to save the planet

Photo: Maj-Lis Koivisto

What we call “technology” is actually a narrow  description of a practice including mechanics, electronics and computer science. This confusion is hampering human development, especially when the expectation is on not developing financial and social technology but demanding mechanical solutions when simple agreements could suffice. Modern technology is failing, we are not addressing the challenges in front of us. Our very use of language in this case is holding us back and preventing us from thinking clearly.

What is sustainable technology? Can technology development drive sustainability? I argue that more clarity around what we mean by technology and sustainability would be helpful  – let me attempt to break it down.

What we actually mean by technology – test yourself

To illustrate what I mean, let us first conduct a thought experiment. We go to the University round the corner, the leading institute of technology, and ask the brightest students to produce the most sustainable way of keeping people out of property they can think of.

Now many would imagine, and I am sure they would be right, that these students would diligently pursue their task. Perhaps they would look into the definition of sustainable and maybe come across the work of the Natural Step, talking about the system conditions, and their connection with cradle to cradle. Sustainable would mean that minerals, technical nutrients, once extracted would cycle continuously around in society. Once part of a finished product, then reclaimed and put into raw material to wait for the next manufacture. Never would these minerals return into the biosphere. Nor would they return to the Earth as that would mean a waste of the energy required to extract them in the first place. Following system conditions and cradle to cradle they would maybe design the lock of materials that could be recycled easily to more locks or other products. They would design it so it meant the minimum of emergy or embedded energy (from fossil fuels) in it; this would reduce its footprint.

And it would be designed to need the minimum of energy over its lifetime. Of course, it would be interesting to consider the economic potential of this the new technology although this was not given in the assignment. It could be that this new technology has some advantages over existing locks – for example they have minimum materials in them and do not need a key – or they are cheaper or they are stronger. If the new design has an economical advantages maybe the students could set up a start-up to market and sell their new invention.

Let us, then, imagine the description of their invention. Perhaps you have one of your own.

This device is mounted on doors. It is highly sustainable as it is made of recyclable materials has a low footprint from manufacture, low maintenance costs, and does not emit toxins to the environment. It prevents people passing the door, and only lets through people who the owner of the building wants to enter.

But I digress: the purpose of this exercise is to explore sustainable technology. I hope you have written down YOUR idea. Let’s try a new tack. What do we want a lock for – is it to keep some people out and let others in? Maybe a sort of compromise between having the strength of a wall but the convenience of having a door to open. Privacy, as well, and a feeling of security. If someone wants to get into a locked door they can always break it down. But that creates a sound. There is something about the lock that is hard enough to stop people but easy enough to let people in that should come in. And then a lock can always be picked as we see in police shows on TV.
I was thinking that the lock is a recent invention. Aboriginal tribes do not have them, so how do they achieve security and privacy etc? I suppose a lot of it is about trust. Maybe they put up a symbol for who can enter and who cannot – or they just agree among themselves? So why not consider, instead of a mechanical device, replacing it with a whole load of trust, social signals, communication and agreements?

This device consists of only a few atoms, uses no energy in manufacture or use, its purpose is to ensure that only people who the owner wants enters a certain designated, defined space. It is highly flexible and can be applied to large spaces and small one.

You might want to look back at your own description of your invention at this point.

Now, is this that we are replacing the physical locks with technology? This depends how you define technology. If you define it as inventions to solve a problem, then social inventions like agreements are technology too.

Agreements are technology

But don’t you find this line of inquiry uncomfortable? Is there is something inherently wrong with calling innovations that do not require physical things technology?

Not really – many definitions of technology encompass applying what you have and what you know to what you want to do. You want to keep people out of a certain area? You go and talk to them and create an agreement.
So the first point I would like to bring out is that when discussing sustainable technology

the sensible approach is to regard technology as a capability and body of knowledge that can be applied practically.

This means all kinds of application in engineering, but also social and financial innovations should be termed “technology”.

Somewhere along the line we bought into the mindset that the best approach to solving a need was to create a mechanical-based solution.   This is so ingrained that at our University of technology you will probably find that they are studying engineering – and mathematics and computer science. The social side – designing agreements – is almost completely left out.

The second point is that we cannot expect “technology” to solve a problem if we apply conditions that are too narrow. This is not an easy point to get. By conditions that are too narrow we can mean things like requiring the invention of technology to drive sustainable development when we at the same time require that it function within a certain financial system, be a mechanical device and make money. You are rather widening the requirements and narrowing the opportunities.

One conclusion you can draw from this is that when someone says “technology will drive sustainable development” they are probably, without considering it, thinking that it is possible to solve the problem and keep most of the causes of the problem in the requirement.

I believe that we confuse thinking about sustainability by coming from the point of view where we have a high financial capital – that is to say we take for granted there is money to purchase mechanical solutions. On the other hand, we assume there is a low social or trust capital. If we had a high trust capital we would need fewer mechanical solutions. Yet – and I do it too – we reach for a high finance low trust solution to start with.

Reflection on  the lock exercise highlights that a high trust – low mechanical physical solution removes the need for work. If work is reduced, economic activity is reduced and the basis of our prosperity is removed given we keep the financial system that requires monetarism.

The third point touches on the second. If you want the economy to drive the introduction of sustainability, then if perfectly good ideas have to be thrown away because they are not viable in the economic context, then it is the economic technology that is at fault, not the technology itself.
Technology is not restricted to mechanical devices. Technology is not restricted to computer software. If you want to restrict the concept of technology to machines then you need to develop a new term for the application of knowledge.

Fourthly, this example uncovers another concept that is confused. – that of work. Work in purely physics terms – put simply – is to move something. For a book resting on a table no work is done, but if the table rises then work is done to change the position of the book.

You could say that WORK is to bring a change in an object.

This can even be applied to the work of changing the state of information. Some experts have said that information is a change in uncertainty. If you have more information after a change of data then you are less uncertain.

This has a neat parallel with the idea of doing work from an economic sense: if you done something that has created a change in an economic relationship (for example written something) then economic work is a change in what is owed to you. After the work is done you are owed more than when you started.

This brings us to another way to look at technology. If technology is an invention to solve a problem then work is the application of an invention to solve a problem. But not only inventions are used to solve a problem, but real resources this could be energy like muscle power and fossil fuel but biological resource like wood and mineral resources like iron.

We even have a term for these resources: capital. Human capital, financial capital, natural capital. Technology is part of social and human capital. An increase in inventions is an increase in capital.

This is where sustainability comes in: Sustainable implies the capability to continue. Applying technology to solve a problem in a sustainable way implies that capital is not depleted.

So sustainable technology is the invention of how to apply resources to solve problems in a way that retains capital. Work is the application of that technology to solve the challenge. If a solution depletes natural capital but increases financial capital then it can hardly be seen as being sustainable.

The trouble is, no accounting technology has been developed to measure the capital depletion of natural systems and minerals whilst comparing with financial capital. This is a serious flaw in modern-day accounting, and addressed in other articles on this site.

One attempt to remedy this has been proposed by the economist Anders Höglund, with his proposal for floating emission charges connected to phase out goals with the revenue diverted back into the economy via a citizens’ refund. Basically, the principle is that all depletion of natural capital is not allowed. A certain period of time is given to market actors to cease depletion. If the rate of reduction is in line with targets, nothing happens, but if it is less, the emission charge is raised. And it is raised until the rate of change is reached. This is a kind of price discovery mechanism: the price of pollution – natural capital depletion- is the cost of not polluting.

I suggest that the lock exercise shows us something more: that when we discuss technology we omit to define the problem technology shall solve on a broader basis. If the technology we have today should be judged in broader terms we could argue that it is doing a poor job: one sixth of the world are undernourished, access to clean water is limited to more than a billion people, poverty is widespread and so is war.

We have to leave mechanical thinking

If we are to progress with creating the sustainable society all forms of technology, especially financial but even social, need to be developed rapidly. Maybe it is as simple as applying the ancient technology of kindness. Maybe we need more technology of equality. This is not the time to stand still in old thinking hung up on mechanical devices. We need to move forward. We need more trust and more zero-atom technology!

Read More…

OPINION: Accounting needs to adapt to the circular economy

Photo: Maj-Lis Koivisto

We often hear about how hard it is to change the course of large ships, and as an analogy our current economic system seems to be hard to turn away from its course of counter-sustainability. However, large tankers DO make it into port. I would like to offer the idea that our economy can change course too. As with large ships, we need to understand and master the controls. Very few talk about accounting and sustainability. That is a shame, as several built-in features (and some easy to build in) could offer a way to turn the economy around. It’s not rocket science and it would be a big leap forward!
Read More…

Putting sustainability into financial reporting

We can envisage a balance sheet from which it is possible to glean the current state of the firm’s investment in circularity. A worked example is given below. Note that by  circular infrastructure we mean infrastructure that:

  • runs (or can run) on renewable energy
  • uses recycled materials and recycles materials
THE TRANSITIONAL COMPANY
PERIOD ENDED 31/12/2016
CURRENT ASSETS CURRENT LIABILITIES
Cash 200 000 € Accounts payable 0 €
Accounts receivable 0 € Accrued Expenses 0 €
Inventory 0 € Taxes owed 0 €
TOTAL CURRENT ASSETS 200 000 € Long term debt 0 €
TOTAL CURRENT ASSETS 0 €
PROPERTY AND EQUIPMENT
*Circular Infrastructure 100 000 € LONG TERM DEBT
*Non-circular Infrastructure 50 000 € *Loans for Circular investment 100 000 €
Less depreciation -4 000 € *Loans for other infrastructure investment 30 000 €
NET FIXED ASSETS 146 000 € Other loans
TOTAL LIABILITIES 130 000 €
OTHER ASSETS STOCKHOLDERS EQUITY
Licence 0 € Paid in Capital 0 €
Goodwill 0 € Retained Earnings 0 €
TOTAL OTHER ASSETS 0 € TOTAL NET WORTH 0 €
TOTAL ASSETS 346 000 € TOTAL LIABILITIES AND NET WORTH
*Percentage circular infrastructure value 67% *Percentage investment loans for circular infrastructure 77%

As the example above shows, the infrastructure is 67% circular. In terms of loans the 77% invested in circularity gives a degree of transparency for investors. For example, if investors think that regulations will become stricter in future, then the investment is sound.

Extended Profit and Loss Statement

An extended profit and loss statement can also be created as shown below.

From this you can derive measures like % of sales of circular products, cost of circular technology, circular vs non-circular expenses and trends over time. This again creates transparency for the capability of the firm to operate in an environmental way.

INCOME STATEMENT
PERIOD ENDED 31/12/2016
CURRENT
OPERATING INCOME
*Circular product sales 50 000 €
*Non-circular sales 100 000 €
Net sales 150 000 €
*Renewable energy 2 000 €
*Non-renewable energy 2 000 €
*Non-circular materials purchase 2 500 €
*Circular materials purchase 2 500 €
Other costs of good sold 100 €
GROSS INCOME 140 900 €
OPERATING EXPENSES
*Renewable energy 2 000 €
*Non-renewable energy 4 000 €
*Non-circular materials purchase 3 000 €
*Circular materials purchase 10 000 €
*Repairs and maintenance on linear infrastructure 20 000 €
*Repairs and maintenance on circular infrastructure 30 000 €
*Costs for waste elimination, non-recycled 2 000 €
Other expenses
TOTAL OPERATING EXPENSES 71 000 €
Other income 0 €
Other expenses 0 €
NET INCOME BEFORE TAXES 69 900 €
TAXES 25 000 €
NET INCOME 44 900 €
Circular products 50/150    75%

Renewable energy 2/6        50%

Circular materials 10/13     77%

Circularity lost to waste    15%

Circular infrastructure

costs 30/50                           60%

The Baltic: a dying sea on the doorstep of industrial giants

At a Stockholm seminar on the 18th January held by the Baltic Works Commission,  scientists, government officials and NGOs came together to discuss the dying briny depths on their doorstep: the Baltic Sea. The general consensus is one of emergency where technology provides an as yet unproven ray of hope. This is only if the countries surrounding the Baltic are ready for bold investments, policy changes  and some bold pilot studies. If nothing is done, the nutrients contained in the dead sea floor could flow into the water body and – worst case – cause the whole sea to turn in to a dead algal soup. Read More…

The economics of pollution and non-renewable material surcharges

Market based instruments

If renewable solutions were cheaper for firms to use, they would. This is how price signals function to steer the behaviour of firms. For the circular economy to function,  price signals should favour circular products and production methods. In other words, it needs to make better business sense to install circular and renewable energy infrastructure, and to install and use infrastructure that uses recycled materials. Without that, the linear economy –  one that inputs extracted materials and outputs materials as waste  will continue to be the modus operandi of the profitable firm.

This article explores how to use price signals to steer firms’ buying behaviour in a way that keeps the economy stable. Market-based instruments are financial mechanisms that steer price signals to guide the behaviour of firms and markets in general. Read More…

A circular economy needs a framework of rules and financial incentives to work

The idea seems logical: when a product or material enters the economy it should stay there – if it comes from below the ground. If it comes from nature it can return at a rate the eco-system can absorb it. The problem is, we are living in a society that has been weaving a complicated web of laws, rules and, taxes and fees since money was created. At the moment it just doesn’t pay. Ushering in the circular economy means making sure it pays by dismantling a few parts of this framework and replacing others. But where to start? Are there existing points of control that can be adapted to stimulate circularity? This article identifies a few essentials. Read More…

The economics of the circular economy

Economic Fiscal Reform calls for the economic system to align with the twin purposes of preserving and  indeed restoring the environment whilst providing a standard of living for citizens. Up to now, these purposes have not been central to the way economics has been practiced. We are, however, facing a pressing situation: soil degradation, atmospheric warming and mineral depletion are forcing us to rethink. The idea of the circular economy – where biological and mineral material circulate in the economy without being deposited – is gaining ground. Read More…