Not crony capitalism, not raw capitalism, not capitalism in the hands of wrong people but capitalism itself is the cause of the environmental degradation and social misery we see around us. Capitalism offers the rules if you like, the players play by those rules, and the results are what we see. If I am going to say something this bold, I need to be really specific and present good arguments. Let me attempt that, but you will have to bear with me through some details. This is not rocket science, but the whole subject area has many branching ideas so you will need to look hard to see the path through the subject matter.
Kate Raworth’s Doughnut model of the way an economy should perform is excellent. But it needs an idea of how to control that economy so it performs to requirements. Enter the bath tub.
Kate Raworth has a wonderfully clear and simple concept – that we should arrange the way we run society on the principle that we do not exceed planetary boundaries – in our relation to nature – on one hand, and that we set things up to avoid people suffering and that everyone’s basic needs get fulfilled – the human dimension – on the other. She draws it like a doughnut.
In her excellent book, Doughnut Economics, Kate shows how this task is essentially one for the economy and a question for economics. Doughnut economics gives us a very clear set of requirements for how an economy should work. That immediately brings one to think of money, investments, taxes, banks businesses etc. And that is where the model needs a little help .
Some results from alpha testing of the Universal Basic Income simulation game
Together with the Swedish Sustainable Economy Foundation I am developing a Universal basic Income “Business Game“. The idea is to take a simplified, fictive country and play around with various aspects of UBI to learn by doing.
We are into the first alpha testing phase and have produced an overview dashboard to look into what sort of figure we are interested in following as the game progresses
The above run was a force run to see how raising taxes and lowering numbers in work looks in the system. As you see the state gets less to spend on services as income declines. Maybe not so interesting. The next run looks at raising UBI from under minimum standard and just raising VAT.
The second run added spending power of UBI takers to the dashboard. If you raise VAT you lower spending power. Interestingly – in the simplified model at least – you get MORE state income and the UBI takers do not get lowered VAT. This gives us a hint that it might be possible to raise UBI and Universal Basic Services, although the UBI eats away at the money available for social costs.
Modelling like this raises many detailed questions and it is a difficult task to make the game engine simple enough to handle in a game situation ( so that you learn basic principles) and complex enough to give a feeling of “real life” (so it feels authentic enough).
Let me know in the comments if there is any logic I am missing or any metric you want to see on the dashboard.
Our analysis of signals of change in the world tell us that there are major changes being called for.
Eliminate poverty – we already decided
The Sustainable Development goals set a new precedent for human development and it is still sinking in that the majority of countries in the world have signed up to eliminating poverty (SDG1) and hunger (SDG2) and eliminating threats to the environment.
A new Green Deal proposes massive investment in a new USA
From the Democratic party, the New Green Deal is the boldest proposal to come from the US for a long time – it will aim to eliminate poverty, create green jobs and transform the technical infrastructure of the US to a circular economy
The Circular Economy is central to achieving the SDGs and the New Green Deal
The idea has been with us for a while, and it is slowly becoming more and more apparent that nature works in a circular way and society needs to fit in. The possibilities are huge, from green, dignified jobs for all to eradication of pollution to a better life for future generations.
Heavy fees on things that pollute like fossil fuel can be a blessing
We are noticing how more and more economists are realizing that a heavy, increasing fee on fossil carbon could stimulate the economy rather than slow it if the fees are paid back to taxpayers. Some estimates point to 70% of citizens being better off under the scheme as those who use fossil fuels are ofter the wealthiest.
Have you ever pondered over the role played by the neighbourhood- cobbler, electrician and tailor in recovering resources and reducing waste? Most of us have never even noticed them. If I say that they like wastepickers and recyclers are going to be the pillars of ‘Circular Economy’ envisioned by economically advanced countries, will you believe me?
I am assured that your first question will be ‘What is circular economy?’
According to the authors- Peter Lacy & Jakob Rutqvist of the book ‘Waste to Wealth- The Circular Economy Advantage’, ‘
Shifting to a circular model means changing our linear economy’s supply logic. We will need more renewable energy, more biomaterials and biochemical that can degrade safely, and more technical materials like metals that are designed to use recovered secondary material and for low cost end of life recycling, effectively closing the manufacturing loop. We need components designed for reuse and products…
This presentation comes from the “Future day” seminar arranged by waste handler Ragnsells.
It covers why phosphorus requires to be treated as a special case in the circular economy, indeed in a circular economy culture. And gives a few ideas how to do that – mentioning the acute need to do something about the Baltic Sea.
Extractive economy is business-as-usual and the mental model taught in business schools. It is not called that of course, but examining any business textbook will reveal that the mental model – or paradigm – of extraction is underlying most teaching. This article aims to explain in clear terms what extractive models are, point out some of the shortcomings and hopefully opens up to the possibility of other, more functional, models.
Seldom do business textbooks describe the paradigm of modern business as extractive – that is to say based on extracting resources from the earth without replenishing or recycling them. This is possibly because the practice is so ingrained in our way of life that it is taken as the only way. Extractive business practices deplete resources and downgrade capital. It is rather surprising that the dominant business paradigm is capitalism and yet it runs on degrading capital. On a finite planet, this is surely not good business let alone good for the planet. A dialogue around extractive approaches can be helped by naming what is going on and describing the paradigm. Several patterns associated with extractive approaches are described including the bell-curve of oil field extraction and the accumulated capital investment curves precluding break-even. Extractive approaches have many social downsides including externalization of negative effects like pollution and noise, but the main challenge is that they are actually not even good business, especially as investments for fiduciary investors.
The basic idea of extractive business
The basic idea of extractive business is that there is a resource to exploit to produce goods and services which are sold at a profit.
By exploiting the resource:
it gets used up (resources) or degraded (capital asset)
money gets made by the people putting up money in the beginning
money is made by the extractor
it creates livelihoods for employees along the whole supply chain
the extractor typically moves on, using knowledge and technology gained to the next pool of resource
Both resources and capital can be extracted
We should explore the distinctions between resources and capital – both essential components of business approaches. Extractive approaches use up resources, but even risk depleting capital. One of the definitions of capital is that which is used in production of services for payment but not used up. Obviously natural capital is one of the things that firms can use, but capital also includes built capital; buildings, machines, human capital, workers and so on, and social capital; organisations.
Capital can be drawn down, or reduced. For example, natural capital can be eroded if it is treated in such a way that more is extracted than can be regenerated. In this way capital can be treated by firms as a resource. Another example might be railroads. A firm can own railroads and rent them to railroad companies. The firm can maximize profits by reducing investment in maintenance. After a while, the capital asset – the railroad system – is worth less as the functionality of the system is degraded.
In this other example above, tractors may be effective, but they do not reproduce themselves (or self-repair). In terms of investment, are tractors really a better long-term?
Typical examples of resources firms use up to earn money include:
Indeed, extractive business like energy companies and food distributers are among the largest corporations on Earth, so it is understandable that the extractive mindset is still dominant in the way business is taught.
TABLE: Largest corporations globally by revenues and their extractive approach Source: Wikipedia
Typical examples of resources being used up include:
Soil farmed and not regenerated
Forests clear felled and their ability to regenerate compromised.
Workers losing their working ability through accidents or industrial illnesses.
Patterns of extractive business approaches
Extraction of resources typically follows a bell-shaped curve, illustrated below.
Initially, infrastructure needs to be set up to start extracting the resource, and as this is added production ramps up to about half of the resources are extracted. Typically, the other half of the resource is harder to get at, and production tails off from its peak.
This pattern is seen in oil field exploitation as shown below.
Another way to see this pattern is the “S” curve of accumulated extraction. This pattern is the corollary of the bell curve. Starting fairly slowly, the total amount of extracted resources accelerates and then tapers off towards the end.
The next pattern to consider is how business can be set up around this resource.
Typically, an investment needs to be made before anything can be extracted. This investment – money put up before any earnings can come in – typically comes from the owners of the business who are shareholders/stockholders or from outside investors who offer loans.
This investment follows the pattern below which shows money accumulated as investment.
As you see, the need for money invested rises rapidly in the beginning until a desired rate of extraction is reached. The slight rise after that represents the investment in replacing worn-out equipment.
The diagram below illustrates some key points in the business cycle.
Time to production – from the first dollar invested to when production starts
Time to break even – where the money earned from the operation is equal to the total amount invested.
The final result – in this case the accrued profit is about 30% higher than the investment over the total lifetime of the business.
The costs – these are not shown on the pattern. Costs include maintenance, inputs like fuel and labour.
Throughout the lifetime of the business it generates jobs and livelihoods for both direct employees and employees in suppliers. It also generates livelihoods for customers using the products.
So what are the downsides with extractive business approaches?
Frontier mentality is unsustainable – cannot go on forever
The amount of extractable resources is finite, so with each completed extraction there is less to find. The model only works when there is a relatively large amount of potential resources to be had. The model drives itself as the investment in one extraction in terms of knowledge and technology can be transferred to the next, so there is a incentive to continue to the next resource. This mentality is something that may have developed in conjunction with the discovery of the North American Continent, as the frontier to the Wild West pushed forwards, successful businesses sought to repeat themselves further across the frontier.
It externalizes a lot of its true costs
Some of the costs of this type of business are actually moved across to society as a whole to to bear, and are not born by the producer or customer. For the oil and coal business these include:
injured and disabled workers
the consequences of climate change
dealing with workers laid off after the industry declines
changing infrastructure to use alternative sources of product (includes closing down townships near the facility, investment in new railways, etc)
It creates dependency on the extracted resource
The availability of an extracted, finite resource creates dependencies that require whole system changes after the resource depletes. One example we are dealing with today is the need for investment in renewable energy as oil and gas reserves are drawn down.
One way dependency is dealt with is through globalisation. When oil reserves deplete in one country the corporations move to another. So dependency drives globalisation and the risks of exploitation that follow it.
Unavailable for future generations
The whole problem with extracting finite resources in ways that do not let them be re-used is selfish in a way. Firstly, they are made unavailable for future generations, and they are used just by those who happen to find them. There is no thought of just distribution in the extractive approach.
Together with the need to make money to pay investors back, the model pressures wages into a negative spiral towards austerity
It follows from the discourse above that one way to get more money out of an investment is to reduce costs. Labour costs are one obvious target. Once an investment in infrastructure is made, with owners and borrowed money, the race is on to not only cover costs but to find a way to repay the investment with a profit. So there will always be a downward pressure on wages. That in turn creates an affordability problem for the workers’ essentials like fibre, fuel and food. If workers have less money, they have less to spend on goods produced. In order to sell goods produced from extractive practices at prices affordable to workers, there is more pressure to extract, even more cheaply, from land and from the earth. This creates a downward spiral leading to austerity, and ultimately conflicts.
The extractive economy and its relationship to property rights
Extractive business approaches tend to, where property is involved, draw down the ecological functionality of the property if it is land, and if it is machinery, emit pollution and exert other externalized pressures onto society around it.
Mining – which affects the water quality of the surrounding area
Industrial agriculture which imposes a nutrient burden on the eco-system around it.
Vehicle ownership – which emits noise to surroundings
Extractive practices are actually supported in many cases by lax laws that do not protect the rights of surrounding eco-systems or society. For an extractive approach to be acceptable in the modern society, strict environmental, waste and pollution laws should apply.
A doubtful target for fiduciary investing
Through any project’s business cycle, institutional investors, like pension funds, will be looking to place their money to get dividends so they can pay their members’ pensions. These investors are expected to invest with prudence – to provide pensions whilst not degrading living standards for their pension-takers. Extractive businesses, whilst offering shorter-term possibilities of returns, always – by definition – reach an end-point. These businesses are only able to offer the kind of constant returns pension fund seek by having an ongoing portfolio of young, mature and ending extractive projects. As we saw earlier, this means that ordinary workers are being required to invest in extractive business approaches with externalized costs being placed onto society and bearing the risk that the available resources get depleted.
We cannot run all businesses with an extractive approach
We have to find ways to prosper in our present reality where we understand there is no Planet B. In that reality, an extractive economy is quickly seen as truly unsustainable when you start to analyze it. We can’t keep taking more from a place where there is only so much. There ARE alternative non-extractive but harvestable resources. Examples include well-managed soils that continue to be fertile for generations, well-managed forests that can provide fibre and fuel indefinitely, and the sun and wind and tides that can provide energy. There are, too, ways of recycling extracted minerals like copper indefinitely.
If extractive is the dominant business paradigm, the alternative is regenerative. This approach harvests resources whilst ensuring that the underlying capital – soil, forest, energy installation, minerals, etc remain functional and preferably function even better. This is the subject of future explainers.
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.Continue reading “Towards a mathematical model of the economy that moves away from extractive business approaches”