The Schumacher Center is fortunate to be surrounded by talented and motivated young staff and interns who bring fresh perspectives and new skills to our common work. When former intern Sue Holmberg called to tell us of a Herman Daly lecture that she was organizing in Amherst, we filled a car and drove over to listen. We wished to meet and honor an economist who has done so much to integrate ecological and social issues into current economic discussions. Jing Cao is a 2005/2006 intern for the Schumacher Center and student at Simon’s Rock College studying economics. Her excellent summary of Daly’s talk is included for your information.
The Twenty-Fifth Annual E. F. Schumacher Lectures will be held October 22nd in Stockbridge, Massachusetts. Three outstanding thinker/activists are scheduled to speak: Nancy Jack Todd, Thomas Linzey, and Christopher H. Budd. Full details about our speakers and registration materials are available at our website.
We hope you are able to join us.
Herman Daly, one of the founding fathers of ecological economics, spoke at the University of Massachusetts Amherst’s Political Economy Research Institute (PERI) on September 29, 2005 as part of PERI’s Forum on Social Wealth. Daly is a professor at the University of Maryland’s School of Public Affairs and co-founder and board member of the journal Ecological Economics. Following is a summary of his lecture, prepared by Jing Cao.
“Sustaining Our Commonwealth of Nature and Knowledge”
Summary of talk by Herman Daly
A commonwealth is a resource created either by nature, or by aggregate human effort. Natural resources would fall into the first category; knowledge belongs to the second. There is also a third area of commonwealths: man-made institutions such as money.
Sustaining our commonwealths means using with maintenance. We must realize what the maximum amount of a resource we can consume while still maintaining our commonwealths. Any income from these commonwealths may be freely consumed, but we must preserve the capital itself, the commonwealths.
The problem in the current economy is that nature is treated as a non-scarce resource when it is in fact scarce. Knowledge has the opposite problem, it is treated as scarce when it is in fact non-scarce.
In economics, goods are either rival or non-rival, and excludable or non-excludable. A rival good is one where if I consume it, that prevents you from consuming it. Clothing, for example, is rival. Sunlight is non-rival since my consumption of it doesn’t prevent you from enjoying it. Rivalness is a physical property.
Excludability is a legal concept. Excludable goods can be made private property, such as a private residence. Non-excludable goods are those not privatized, such as the right to pollute.
Rival, excludable goods are the ones the market was made for—market goods. Non-rival, non-excludable goods are public goods. Rival, non-excludable goods give way to the tragedy of the commons. These goods, fishing rights or clean air, are rival, yet because there is no way of making these excludable, each party will try to consume them before another party exhausts the resource, leading to competitive depletion instead of cooperative conservation, which would be in the best interest of all parties. Non-rival, excludable goods, such as knowledge, result n the tragedy of artificial scarcity.
Sustainability is not a problem with the commonwealth of knowledge because knowledge is a non-rival resource. For existing knowledge, since there is zero opportunity cost for its use (my use of a piece of knowledge does not prevent you from using it) its price should be zero.
However, there is an expenditure of rival resources for the pursuit of new knowledge. Some pieces of knowledge, such as the discovery of subatomic particles, may come at a high cost. Others, such as Descartes’ fathoming of analytical geometry while staring at his ceiling from his bed, may come at no cost. The acquisition of a new piece of knowledge may also be for the delight of discovery.
However conventional wisdom says that without a profit motive, no new knowledge will be created. The production of new knowledge requires extrinsic stimulation and to this end it is made artificially rival through patents and intellectual property rights. However, since new knowledge is created from old knowledge, if old knowledge is made artificially expensive, then the production of new knowledge is hindered.
New knowledge is the driving force behind profits, since without new knowledge and technology, profits will approach zero at a market equilibrium. Even without intellectual property rights, those parties who discover new knowledge will hold a temporary monopoly on their innovations by virtue of its novelty. At its onset, no other parties would have the resources to utilize this new knowledge. This temporary monopoly could be a profit incentive for businesses to pursue new technology.
One area where intellectual property may be justifiably retained is in potentially dangerous information, such as the technology to develop nuclear weapons. However it may be better to control access to the rival goods necessary for such production than to control the knowledge of the technology, which is non-rival.
Not all knowledge is equally beneficial to mankind, and the interests of private profit isn’t always the best filter. The profit incentive has given us liposuction and Viagra, but no cure to AIDS or malaria.
We should drastically cut back on intellectual property rights and rely on public funds and the human drive to learn for the continued production of new knowledge.
Nature, on the other hand, is rival, but treated as non-rival. Rival goods sometimes become non-rival if demand is low, and my consumption does not hinder your consumption. Water used to be such a resource.
Some resources, such as timber, are rival generationally, since within a generation there is only a limited supply, but can be non-rival in the long-term if exploited at levels of sustainable yield, that is if only income and not capital is consumed.
It is necessary to protect these fundamentally rival goods by making them excludable. The commonwealth of nature needs to be protected by individual or social property rights, not open access.
The market solution to this is the cap-and-trade system. Rival resources such as fishing rights or polluting rights would be capped at an ecologically sustainable level, and then traded on a market.
The cap-and-trade system brings up the questions of scale, distribution, and allocation. The decision of where to place the cap on the scale of the use of a resource must be a social and ecological decision. The market assumes a preexisting scale and has no mechanism for setting one.
The market also deals very little with distribution, since the market takes ownership as a given. Once these new assets are created, who would initially own them? Should they begin as a social resource which the state could auction off to the highest bidder as a means of raising government funds? Or should they begin in private hands through a process of grand-fathering?
The market deals mostly with allocation. Once scale and distribution are given, prices are used as a tool to optimize the allocation of these ecological assets by meeting supply with demand. However, price can’t also be used to optimize scale and distribution. For every independent policy goal, we need an independent policy instrument. Allocation may be set by price, but scale should be set by ecological sustainability, and distribution should be set by the ethical criteria of fairness.
An alternative the cap-and-trade is ecological tax reform. The government could shift away from taxing value-added, and towards taxing that from which value is added. In this way pollution and resource consumption, not income, would be taxed. However ecological tax reform, unlike cap-and-trade, does not directly set a limit on scale.
Finally, money seems to be a rival good, but its value depends of the willingness of others to hold it. Thus it’s non-rival; money cannot be used up.
Is money wealth? Commodity money such as gold was private wealth which served the public function of facilitating the economy. However fiat money, our current form which is backed by trust alone, gains value only from people’s willingness to hold it instead of real wealth in the form of commodities. Thus money is a commonwealth of a community.
Since fiat money is valued much higher than its commodity value and has a relatively low production cost, the creator of a fiat currency profits from this creation. This profit, called senorage, used to go to governments. However, this profit is increasingly going to commercial banks.
Because of the fractional reserve money system in the US, where banks are only required to hold a fraction of the money they lend or collect in reserves, banks practice money creation, lending out money they don’t physically have. 95% of the US money supply was created by the banking sector, shifting senorage from the public to the private sector.
By requiring banks to hold 100% of their reserves, money would return to a public commodity instead of a private source of wealth. In the fractional reserve system, because banks demand interest on loans, persistent economic growth is required just t keep the money supply from shrinking. If money creation was returned to the government, zero interest loans could be issued. Banks would no longer create money, they would simply be intermediaries between lenders and borrowers.
Local supplementary currencies could be a tool in regional economic development. With the introduction of a local currency, local transactions can be conducted without first exporting goods outside that community to obtain currency with which to trade within a community.
A final question is how fast do we move? What is the timetable for moving towards sustainability?