However, since 1971 when Nicholas Georgescu-Roegen published The Entropy Law and the Economic Process, it has become generally accessible knowledge that any economic activity is subject to the Second Law of Thermodynamics. In terms of the non-linear thermodynamics developed by Ilya Prigogine in the 40s and 50s, an economy appears as a system which organizes itself by importing low entropy or syntropy and exporting entropy into its environment. Meadows (1992) has depicted this view of a physical economy in a schematic which could be regarded as an icon of ecological economics.
The message of this schematic is
It is not surprising to note, therefore, that ever since the neolithic revolution, when man began to step up his milking of the entropic flow with the aid of fire, tools and social organisation, this competitive situation resulted in problems of ecological degradation which, however, were on a limited local and regional scale and did not exceed the regulating capacity of the wider biospheric system. The industrial system, however, is tapping the huge low-entropy reservoirs which accumulated over the billions of years of the earth's history, with far-reaching consequences:
In the industrial system, this network is replaced by a flow-through mechanism which uses the sources of syntropy or low entropy provided by the sun and the life support systems of the planet and which has only one sink for its waste products: the biosphere (see Fig. 2). Viewed solely from the point of view of the Second Law of Thermodynamics, the economic process thus appears as a process which uses low entropy energy and resources of the physical world and thereby increases the entropy in its environment.
Obviously, viewing the economic process solely as a thermodynamic process would be just as one-sided as the mainstream description in terms of value streams. The metabolism of human societies is governed by a very complex network of cultural components (i.e. values, rules, habits, beliefs and institutions like money, the banking system and the market). Thus the entropic economic process described above is driven and controlled by the money replicating machine of the capitalist market economy.
1.3 The term "money replicating machine" must not be misconstrued as a poetic metaphor. As a matter of fact, it refers to a property of the money of the capitalist market economy which is as banal as it is absent from public consciousness - or, for that matter, from the the theories of mainstream economics.
In economics textbooks, money is described as a means of exchange, a store of value and an accounting medium. The fact that money can be augmented by lending it and getting it back with interest, or by investing it and seeing it grow year by year through the accumulation of returns, is not recognized as a property of money, but, if at all, as the property of capital (into which money transmutates, however, without further ado the moment it is invested). But even with respect to capital, there is no clear and explicit recognition that it has the ability to create value. Ever since Adam Smith, it has been assumed that value is created by work, and Marx' value theory is based on the same axiomatic assumption.
This strange inability for economic thinking to adjust itself to fundamental historical changes in the human metabolism with nature seems to one of the great obstacles for making sense of the expansionist and destructive dynamism of industrial capitalism.
It can be argued that in a subsistence or household economy which is geared to fulfil basic human needs, money - if it is needed at all - is nothing more than an elegant technology for facilitating the exchange of any surpluses. There will be no need for the volume of money to expand, since the suplusses are limited by the human ability to do
work which only in rare happy circumstances will be more than enough to generate more of the material goods like food, shelter and clothing than are necessary for human survival. In consequence, should the money supply expand under those circumstances, it regulates itself by losing its value if it turns out that there are not enough goods to satisfy the additional demand.
1.4 Industrial capitalism prizes the market economy out of this static situation. In an industrial economy relying on fossil fuels, money/capital that can be changed into real resources at any point is the symbolic equivalent of natural assets or, more generally, low entropy or syntropy. This is comparable to a currency that is linked to the Dollar or Euro by a fixed exchange rate - in Euroland, the Lira or Escudo or Zloty (some time soon) is as good as the Euro. A thing conceived as a mere carrier of information has become a medium that is identified with the thing it represents (e.g. real resources, energy, work) through a cause-and-effect loop so massively stable that it can be defined as a real-symbolic identity. Quite logically, the self-replicating property of syntropy (syntropy put to work extracts more syntropy) is reflected in the invested capital which, in its turn, will be increased by the incoming return. This cycle is nicely exemplified by the exploitation of a coal deposit: it is mined, then burnt to fire a steam engine which in its turn helps to mine more coal, which helps to produce steel, from which more steam engines are built, more coal is mined etc. Translated into the terms of non-linear thermodynamics, the real-symbolic identity of capital and syntropy creates a "pumped" system.
The capital/resources feedback loop turns into a hypercycle through being linked to human needs. The (human!) agents of the system who, from their own experience, know intimately the psychological profile of its customers have the capacity to invent a never-ending stream of new needs and wants. Moreover, in a mature capitalist society there is a positive feedback loop connecting, on the one side, the gratification of essential human needs (for love, support and identity) with material satisfiers (impressive homes, cars, TV, clothes) and, on the other side, the deficits and needs that are created and sustained in the process. The cycle thus established displays classic features of addiction, maintaining and feeding on itself.
The modern market economy based on industrial capitalism thus creates a perfect environment for expanding real and financial capital at the expense of the biosphere at an exponential rate.
Let me recapitulate the necessary conditions for this process:
The last two points - the "capital connection" (1.5) and human needs as the final inexhaustible resource of value creation (1.6) - call for some further comments.
1.5 The process of value creation through the interaction of the Verwertung (expoitation) of syntropy and the simultaneous augmentation of its monetary equivalent money/capital depends, of course, on the functioning of a higly sophisticated system of money creation. Without it, the process of continuous and accelerating expansion would be unthinkable. An enterprise investing a billion to expand its production has to wait for months or even years before it can recoup the invested money by selling its products. But next year’s cars have not yet been built and the income from their sale is not yet available. So the money necessary for financing these cars does not exist. What needs to happen here is called credit creation. The billion taken out in the form of a credit has to be paid back with interest within a few years. "Let’s pretend we had the money to build a factory, then we can make cars, which we can then sell, and then we will have the money that we need now to build a factory..." - it is this kind of illusionist’s trick that has set the cycle in motion. In a stationary economy based on a pure means of exchange, this process could never get underway.
Hermann Daly who has devoted a significant supplement to Our Common Good to the subject of money creation quotes Josef Schumpeter as saying that "as late as the 1920s, ninety-nine out of one hundred economists believed that banks could not create money any more than cloakrooms could create cloaks" (Daly 1994: 415). If, amazingly enough, economists are divided about this claim to this day this is most probably due to the absence of a clear agreement about what money is. It really depends on whether you stick to a narrow defintion of money as the coins and bills emitted by a sovereign or its central bank, or whether you include what represents the bulk of modern monetary systems, i.e. the book money created by the commercial banks. Indeed, "banks do not create legal tender, only governments can do that. But banks do create customary means of payment" (loc.cit.: 415).
The incremental money supply which is the prerequisite for the expansion of the physical economy is created in a modern economy by "the granting of credits by commercial banks to their customers (largely companies) and by re-financing of commercial banks by the Central Banks which can, basically, increase the volume of money at will" (Binswanger 1994: 94-95).
In a modern, well-managed enconomy, this "licence to print money" (which, as we have seen, it is precisely not in a literal sense) is of course qualified and restricted by a sophisticated network of conditions and controls. Central bank reserve requirements, discount and lombard rates and open-market policies are just the most visible constraints which hold monetary expansion in check. The elaborate network of further constraints which are embodied in the structure of the banking industry (such as the supervisory function of the central bank, the vetting procedures of commercial banks and other financial institutions, the information network of the rating agencies and, last but not least, the information generating potential of stock and financial markets) are most clearly demonstrated by their absence, as in the case of the crash of the South East Asian economies in 1998/1999. In a well-organised and well-managed economy, these checks are designed to and most of the time successful in keeping monetary expansion at such a level that the public has no reason to doubt that the money in their pockets or their accounts is backed by real values, in other words, that it can be exchanged at any time for the goods and services produced by the economy.
1.6 In a well-managed modern economy money grows inexorably in real terms and not just on paper as in badly managed economies. The money value of the German GDP has increased from DM 100 billion in 1950 to DM 3000 billion which means its nominal value has grown thirty times. Even if the value of the DM has shrunk significantly during these fifty years the real GDP, or real income, has grown five times bigger during that period. What is the source of this amazing creation of wealth? Has it been created by our hard work, as we like to believe, or has it been stolen from the countries of the underdevelopped South?
Since the end of the Eighteenth century the rapid development of the forces of production and the development of sources of fossil energy brought with them an unprecedented rise in real income. The capital which had been built up in the age of merchant capitalism was available for the new entrepreneurs who seized the opportunity to deploy and multiply their money.
By activating a whole new set of imaginary needs the rising real incomes in the productive sector can be absorbed and redistributed and transformed into a constantly growing demand. Without the suction effect that is caused by demand, production would soon come to a standstill. At the same time, value creation in the imaginary sector develops a momentum of its own. It is neither encumbered with practical problems like labour, scarce resources and material nor is it, like the satisfaction of physical needs, limited by inevitable saturation. In the realm of imaginary needs, value creation without limits is a possibility, at least as long as the purchasing power so generated encounters enough goods and services so that inflation cannot strip it of ist value. This is made possible by the rapidly accelerated growth of industrial production and productivity in the developed industrial societies where purchasing power and production are pushing each other along.
The key to this dynamic is human needs and wants. Anything that exceeds the basic human needs becomes an inexhaustible resource the system can explore, use, exploit and turn into monetary value. Whenever some need or want or any little part of it is gratified, value is created through the payment made for this gratification. Now any value that is created by gratifying imaginary needs has the astonishing power of buying real resources – without any limitation. The magic wand which does this conjuring trick is the money of the market economy which is unable to distinguish between the creation of real vs. imaginary value. Value creation in any currency (cf. BOX) goes into the books as a monetary value representing an abstract means of exchange that can buy anything the heart desires.
This brings us straight to the core of madness inherent in the capitalist system.
Our essential, organic, absolute or physiological needs are limited. They are subject to the principle of marginal utility: when you are hungry, one loaf of bread represents great utility, the second loaf less, and by the tenth loaf, utility moves towards zero. The same applies to jumpers or woollen blankets when you are cold, and to a roof over your head for protection from rain and snow.
This limitation does not apply to the imaginary (non-essential, psychological, relative) needs. People will always crave status symbols such as big cars, beautiful houses, classy dogs and horses or famous works of art, because an individual’s underlying psychological ("imaginary") needs like a craving for security, recognition, love or identification can be fulfilled – or rather unfulfilled – in a million ways. Another way of distinguishing between these two basic groups of needs is therefore to look at them as "satisfiable/non-satisfiable" (Zinn 1995).
What this means is that the stuff from which the greater part of value creation in modern industrial societies is made can be reproduced at will. Provided the growth of the volume of money is carefully managed, the purchasing power resulting from this act of value creation has the potential to grow beyond all limitations, all the time claiming its share of Nature’s limited resources.
And here we have it - the fatal flaw in the design of the modern market economy. Things are bound to go badly wrong when money - whether it derives from fulfilling real, physically limited needs or imaginary, endlessly expandable wants - is allowed to claim real and imaginary goods. By mixing up the real and the imaginary sphere, our monetary system has turned itself into a money laundering machine on a gigantic scale.
The only conclusion that can be inferred from all this is that a solid line needs to be drawn between the world of real, essential goods and that of imaginary, superfluous ones. Money is not able to distinguish between the real and the imaginary. It is sheer madness to give it equal access to both.
An economic system that allows this is bound to make such inroads on the real resources and on the life support systems of the biosphere - both naturally limited on a limited planet - that they will inevitably run out.
To stop this growth threatening the basis of life, first we must be rid of this self-accelerating motor firmly locked to its own fuel pump. One way of achieving this is to set an upper limit to the means of exchange for the acquisition of real resources by creating a strictly limited budget (which will in the first place be directed towards the supply of basics). The money of the capitalist market economy with its capacity of value creation and self-replication would then be confined to the sphere of endlessly reproducible luxury needs. There is no convertibility between the two sectors.
So, on the one hand the amount of syntropy consumed by human needs would remain limited to a sustainable level, and on the other hand, there would be a strong incentive to make a more intelligent and efficient use of a given budget without increasing demands made on the real resources - something that is inevitable in a capitalist monetary system.
3.0 One possibility of creating such a 'resource' budget would be assign to every citizen a limited budget of CO2 credits. By tying our consumption of natural resources and ecological services to a limited budget of CO2 emissions an operational and verifiable concept of sustainability is built into the economy. Our use of resources and life support systems is then determined not by what we can set in motion by human labour, cleverness and capital, but by what is maximally available in the sense of a budget (sustainable "income" from natural assets).
Human economic activities depend very strongly on the deployment of energy for transforming existing matter into useful products. We could, therefore, in a rough approximation, take human energy use as a basis for outlining a "legitimate" ecological space. H.P. Dürr's 1.5 kW strategy of is likewise based on this idea. For reasons of clarity and material immediacy, I prefer to use carbon dioxide emissions. As it is generated in all combustion processes, the greenhouse gas CO2 is highly representative for energy consumption and, therefore, of industrial output. Logically, it therefore also roughly reflects the material flows, and the foreign substances and pollutants released during these processes, all of which put pressure on the natural systems. These kinds of pollution can be significantly reduced by a policy of limiting CO2 emissions 11.
The principal argument for using CO2 emissions as a standard for a sustainable economy is the fact that there is a high degree of consensus among scientists about the permissible global levels of CO2 emissions that will not harm the planet’s life support systems. These levels can be determined with some precision, and the IPCC (Intergovernmental Panel for Climate Control, a UN body), as well as the Enquiry Commission of the German Bundestag, have calculated that if global warming is to be prevented they must not exceed about 11 billion tons per year.
If we accept that long term sustainable development is possible only on a basis of fair distribution of wealth then, with a global population of six billion, our quota would allow two tons of CO2 per person per year.
The current per capita "consumption" (or rather, emissions ) of carbon dioxide in industrial countries stands at 11 to 13 tons. In the USA this rises to 23 tons, while in most of the Southern countries it is much below two tons per year.
If we seriously want to make the sustainable use of natural resources and life support systems effective for the day-to-day and minute-minute-to-minute behaviour of humans the obvious way of doing so is to use this quota in the way of an annual income, as a basis of consumer spending, making it effectively into a second means of payment that is tied to a real resource. Just as the consumer nowadays is automatically paying VAT with any purchase, he would in the future be charged for the CO2 content, i. e. all carbon dioxide emissions caused in the manufacturing of goods or during the rendering of services, at the point of sale.
Carbon dioxide pollution that results from goods and services will be assigned to the product in the way of a value added tax and handed down to the consumer along the stages of production and along the chain of value creation. Let’s use the fridge as an example. The manufacturer undertakes to pay for the carbon dioxide pollution he is charged by the sheet steel supplier, who is thus passing on the charges for CO2 pollution arising from the rolling mill, the steelworks, the mining and the transport of the iron-ore that he in his turn has been charged for. Other items on this bill would be the CO2 costs of the insulating material, of the compressor, of glass and plastic parts. By the time the fridge appears on sale in the retailer’s shop, its CO2 cost will also contain a surcharge for transport from the factory to the point of sale, as well as for the retailer’s overhead costs such as heating and lighting.
Now that the consumers pay the aggregated pollution cost out of their CO2 budget, the entitlements are passed all the way back up the value chain to those places that have used CO2 rights for manufacturing in the first place.
It goes without saying that, similar to the accounting of Value Added Tax, most of these transactions take place in the accounts of the companies involved, and that the process, like the VAT system, is closely monitored by a public authority.
All the technical conditions for the practical implementation of a CO2 budget are in place. Naturally, the individual budget would not be reduced overnight to 2 tons, from its present 12 tons per year. It would happen gradually, over thirty or forty years. Each individual budget is stored on the magnetic strip of a charge card or on the chip of a smart card. Laser scanners in the supermarket or at the petrol stations then read one bar code for the price and one for CO2 content from the price label, and the card terminal charges the card accordingly.
It is a matter of course that nuclear energy has to be taken into account with an equivalent charge expressed in CO2, in the same way as energy or eco-taxes are planning to do. Let us not forget that the CO2 budget is above all about limiting material flows and transformation brought about by deployment of energy.
The obvious objection that a CO2 quota would throw us back to the post-war period with its ration cards misses the point. A CO2 quota is not an allocation of individual articles, but it constitutes a completely freely disposable budget, albeit limited. Vouchers and ration cards as we know them from the war and post-war periods represent a quantity of a particular article. They may represent half a pound of butter, or a pair of shoes, or two gallons of petrol. This puts them into the vicinity of a centralist command economy with all its clumsy bureaucratic workings, its built-in unfairness and absurd consequence of never giving people what they really need, and which can function only in tandem with a black market that will balance out the deficiencies in the system of allocation, by matching supply and production to demand.
There is only one thing a budget based on CO2 and resources has in common with ration coupons: both limit the amount of resources available. In every other way it can be used in the same way as money, and like money it will have an impact on supply and demand in the market and influence the allocation of resources. It will quite naturally push them in the direction of conserving energy and raw materials in favour of recycling, re-use, zero-emission cycles and renewable energies – because these are the areas where people will concentrate their spending because they are soft on their CO2 budgets. This will reward those companies who are offering goods and services which embody these principles of a new, ecological economy. A resource-based budget will ensure that after one or two decades after its introduction there will be an abundant supply of goods and services which are produced with a minimum of resources and which consume a minimum in their use.
A CO2 budget cannot be introduced over night. It will shrink from twelve to two tons per head over a time span of 40 years, i.e by a quarter ton or 2.5 per cent per year. Consequently, as from the word Go, it will be clear that in the year 2020, it will have shrunk to seven tons. This clear and undisputable perspective will create the basis for long-term structural changes, without which it is very difficult and often impossible for an individual to change one's personal life-style, energy consumption, car use, eating habits, leasure time pursuits and holiday patterns.
The transition to a CO2 economy is an emergency brake to stop the rapid course into self-destruction. It creates the material conditions which support and promote sustainable use of the life support systems – rather than penalizing it as an unbounded capitalist market economy does.
A CO2 budget which would gradually shrink in the industrial countries from twelve to two tons per head would also set us on the road to greater distributive equity worldwide. The concept of a CO2 economy determines the upper limits of individual consumption out of a fund of essential resources defined as a commons. By the same token, it makes available the "environmental space" which the countries of the South need to achieve the level of economic development which is necessary to satisfy their basic needs. In this perspective, the resource bounded economy appears as the global land reform. The point is to limit the claims of one half of humanity in order to preserve a living space for the other half. It calls an end to human beings appropriating resources they don’t need and by doing so, excluding others and depriving them of their livelihood.
Contact F. David Peat
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