As a consultant on monetary policy, I spent much of my career questioning bankers about the authenticity of their balance sheets. Tell me, how do you justify the value of this asset? Why do you say these reserves are worth what you claim because — look, here’s evidence to the contrary!
The thing that alarmed me most in these eyeball-to-eyeball discussions was this: the social demand for commodities is regularly claimed by banks as having a direct link with the ecological supply of resources which are extracted, produced and sold as commodities. It bothers me that the ecological debt of civilization continues to mount, yet no one is actually keeping track of it — certainly not through the reserve assets itemized by banks in their portfolios.
Consider how strange this is: the demand for goods measured by price is being used as a proxy for the relative accessibility of non-renewable resources — yet the increasing scarcity of things like fossil fuels isn’t showing up at the gas pump. Same for water and rare minerals, which are not being valued according to their declining accessibility. Nor is it showing up in the balance sheets of banks, stock trading companies and insurance companies.
Why is supply and demand, which is widely celebrated as a natural principle of economic balance, unable to manage the thresholds of resources which an environment can sustain?
I began to see this as a gigantic problem of misallocation within our economic system, which is far deeper than sustainable accounting or reporting. The greater challenge is to reconceive and readjust the modern system of economic valuation, in particular, the economists’ idea that it’s based on a kind of universal equilibrium. So, let’s start by asking, why is supply and demand, which is widely celebrated as a natural principle of economic balance, unable to manage the thresholds of resources which an environment can sustain, or to ensure that they are allocated to meet the needs of the population living in that environment?
In both classical and Keynesian economics, the balance between the supply of a quantity of a good or service and the demand for it is determined by the price of this quantity. What is counted, on the supply side of the equation, are the production costs, which include labor, capital, energy and materials, the expectations of future prices and suppliers, and the technology and technological advances that are used in production. Production costs are determined by the relative availability or scarcity of the amount of material and energy resources which comprises these products. Yet there is no consideration of an ecological dimension. Even the rate at which people and their organizations may harvest or use a particular resource within its regenerative capacity is viewed as the production of an economic yield, not an ecological yield.
Conversely, the demand-side measures consumer income, tastes and preferences, prices of related goods and services, expectations about future prices and incomes, and the number of potential consumers. Rather than reflecting actual human need, demand is a measure of individual consumption at the point of sale. Only the price at which a person is willing to pay for something is reflected in demand, reflecting how much cash or credit a person has. What’s not measured is the individual’s accessibility to air, water, food, health, safety, shelter, security, love, belonging or inclusion — no subjective expression of need, and no social or ecological dimension.
What’s not measured is the individual’s accessibility to air, water, food, health, safety, shelter, security, love, belonging or inclusion.
This framework for market equilibrium is also applied on a broader scale. Just as the supply-demand formula is based on a functional connection between producers and consumers in microeconomics, the supply-demand ledger is used in macroeconomics to express the transactional relationship between lenders and borrowers. A familiar example is the application of the supply-and-demand system to aggregate supply and aggregate demand in finance and banking. Here, the equilibrium between the money supply and the demand for money are expressed through an interest rate, which represents the price that is charged for money.
Once again, this is a measure of a certain kind of balance within the marketplace, but not in the broader relationship between ecology and the population. So, banks routinely have ecologically unsustainable values in their reserves, yet this is never called into question in a system which establishes equilibrium through supply and demand. When all that is accounted in the standard supply-demand equation is the price of a particular resource or good, or an interest rate which represents the price of money, neither the resource preservation and replenishment rates or the human need for the resource are measured at all.
Adding to the problem: this misalignment of value has encouraged supply-and-demand to become deeply politicized. On the one hand, classical and neo-classical economists say that ‘supply creates its own demand’. This encourages policies of greater investment and production through individual initiative and less government intervention in the economy, while rationalizing endless resource extraction, production and growth.
On the other hand, Keynesian economists say that boosting wages and purchasing power generates effective demand. This encourages policies of shared investment and production through a government’s intervention in the economy, but entirely ignores the destructive competition which this creates between available resources and the needs of a population for those resources. Here, Keynesian economics is no different from classical economics: both assume that meeting human needs is dependent on extractive production, expanding population, continuous demand, personal income, rising consumption and the infinite bounty of the environment.
Neither of these approaches to supply and demand reflect the constraints to the productive capacity of Earth’s resource base.
Neither choice is correct because the market equation misrepresents reality. Neither of these approaches to supply and demand —in which the quantity demanded by consumers or borrowers is directly balanced by the quantity that firms or banks wish to supply — reflect the constraints to the productive capacity of Earth’s resource base and the maximum size of a population which can be maintained indefinitely within an area.
As a result, planetary civilization has reached the point where these economic proxies for ecological balance have created an enormous misalignment. Human population is using resources food, water, energy and rare minerals faster than Nature can replenish them to meet human needs.
Our epistemology, our ideology and our accounting systems are to blame for this massive market failure. First, we must stop conceiving of the connection between resources and human needs as a ‘supply chain’. Instead, let’s reconsider the relationship of ecology with population.
The threshold of available resources and the allocations of those resources to meet the needs of a population are actually opposing forces which continuously counteract one another. This same dynamic principle exists between every species and its environment: natural organisms react to changes in their ecosystem and make adjustments to survive. Instead of supply creating its own demand, or demand being dependent on a personal income, the demonstration of need creates its own supply and is automatically met. This is how it works in nature and and in the biology of the human body; this is also how it must work in human society.
The needs of a population for its resource support systems must be given a new empirical basis in policy. This begins with a little reorientation. What is presently on the supply-side as the extraction and production of resources is redefined as the self-organization of resources within the limits of the planet to sustainably regenerate those resources. And what is now on the demand side as a measure of income or purchasing capacity is redefined as the self-sufficiency of people in meeting their needs through their use of these resources.
When supply becomes an ecological value and demand becomes a value of human need, the new dynamics of society as a living system begins.
When supply becomes an ecological value and demand becomes a value of human need, ’build it and they will come’ is transformed into ‘demonstrate the need, and it will be met’ and the new dynamics of society as a living system begins.
Now, instead of a crude approximation for economic equilibrium, we have an actual measure of the cooperative activities of people using resources to meet their needs — the balance which an ecology can optimally ‘carry’ or sustain to meet the needs of its people.
This is biophysical economics — measuring the replenishment of both renewable and non-renewable resources and enabling society to manage them to sustain their yield for the human population. With this integrated accounting, we’ll generate an entirely new expression of sustainability, living and working together within the metabolism of society.
James B. Quilligan is a political economist and the Managing Director of Economic Democracy Advocates. He is a member of Systems Change Alliance’s advisory board and has been an economic advisor to countless heads of state, including Chancellor of Germany, Willy Brandt, and Swedish Prime Minister, Olof Palme.
Photo by Thomas Sola