Economy and Society I

Market and Stability

The current industrial system design:
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This is a linear system in terms of energy and material flow.

  • Primary industry extracts raw material from nature
  • Secondary industry produces commodities using these raw materials
  • Tertiary industry (retailing sector) distributes commodities

At every stage waste is produced, which ends up in the sink (the Earth).

Instability of the Industrial System

These linear industrial designs are adopted because linear systems are the simplest to design and the market favours these simple linear system designs.

This linear industrial system is however unstable because:

  • Finite resources (energy and material depletion)
  • Finite sink (pollution).
  • Internal driving forces within the market
    • Maximising profit (Profit = $out - $in = (kEout + K'Mout) - (kEin + k'Min))
    • Property ownership (striving for a monopoly on the market or resources)
    • Economy of scale (one a business is set on the track of economy of scale it exhibits positive feedback dynamics)
  • Question of size: communication, management & coordination (possible relations in an organisation: 0.5 N (N-1) )
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Uneconomic growth

Microeconomics

This is the study of individual consumers, groups of consumers or firms. In microeconomics there are two accounts for transactions: debits and credits. The credit entries record the sources of finance. The debit entries record the use to which that finance is put.

Macroeconomics

This is the study of the whole economic system aggregation over the functioning of individual economic units. In macroeconomics there is one "account; GDP (gross domestic production) that conflates cost and benefits into the single category of 'economic activity'.

The concept of 'uneconomic' growth

It is commonly accepted that economic growth is a good thing. However, if we compare the two ways economic activities are calculated in the two disciplines of economics, the problem becomes quite clear. Microeconomics facilitates the idea of 'resources' and 'debt', while macroeconomics counts both as growth. That is, expense and assets are added together as economic activity and counted as economic growth.
The leading ecological economist Herman E. Daly was the first one to formalise this problem. He recognised there is a point where any more growth will cost more than the benefit we are getting from the growth.

The "paradigm shift"

  • The economy is a subsystem of the ecosystem (whose carrying capacity it must respect)
  • The economy grows by transforming natural-capital into man-made capital
  • The optimal extent of this transformation occurs when the marginal cost of natural-capital reduction is equal to the marginal benefit of man-made capital increase
  • This transformation process takes place within a total environment that is finite and materially closed.
  • There is a throughput of solar energy which powers biogeochemical cycles, but that energy throughput is finite and non-growing
  • Its growth is ultimately limited by the size of the total system of which it is a part

Socioeconomic cycles

Poverty cycle

There are a number of circumstances that can trigger a poverty cycle.

  • Non-fertile land
  • No transport network
  • Little / no social security system
  • Little / no education available
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Solutions to the poverty cycle

  • External help : natural resources, borrow external funds, attract foreign capital (changing economic laws / tax policy)
  • Changes in social system design: social security, social justice (no need for large family for security), political equality, improve distribution and reward systems (incentive for innovation / change)
  • Internal changes: establish or adopt new values, provide education, improve infrastructure

Example (Chinese economy)
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  • Contract out state owned land to peasants
  • Introduce free market
  • Increased productivities
  • Better supply of food
  • More available labour for small business
  • More capital invested in small business

Wealth cycle

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A wealthy country typically has:

  • A social security system (pension, medical care, subsidy for education, etc → no incentive to have a large family).
  • More capital available for R&D → higher productivity / better products & services
  • Education as security policy → smaller, better educated population with hi-tech agriculture
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