Protestors target Bank of America as part of Occupy Wall Street in March 2012. Photo / Michael Fleshman via Flickr, used under Creative Commons
Protestors target Bank of America as part of Occupy Wall Street in March 2012. Photo / Michael Fleshman via Flickr, used under Creative Commons
Human living is in the early stages of huge change that will take us well beyond historical experience. In this, the fourth of a five-part series, business professor and sustainability expert Dr Wayne Cartwright explains what this will mean for energy use, the weather, food, finance - and life in general as we know it.
Dr Wayne Cartwright. Photo / Supplied
OPINION:
I am now able to pull together information from the articles about energy, climate and food to provide a cohesive view of the global economy. The message is bleak.
Our current form of economy (known technically as 'neo-classical') is beginning to collapse because several changes not encountered previously are weakening the foundations that have evolved over the past couple of hundred years. We need to look closely at each one of these foundations and why they are now shaky.
The economy is robust only when it is growing, and growth of economic output requires increasing rates of energy inputs. The core foundation has been access to expanding supplies of relatively cheap energy. In the very early years, this came from burning coal to produce steam for locomotives and factories. Later, the huge opportunity for economic growth came from burning oil in engines and (with gas and coal as well) in electricity generators. Of course, even more recent economic developments around information technology use less energy but they also deliver much less growth, so aggregate economic growth still requires expanding energy-intensive industries.
Until recently, the economy has usually been able to rely on energy being available at prices that would not inhibit growth. As the economy has recovered from each of its periodic slow-downs and contractions, energy supplies have been there at affordable prices to fuel resumption of growth.
As we discussed in the first article, within a few years oil and gas prices will be at levels that will inhibit growth. There will be no recovery from recessions because energy prices will be too high to permit it. Recessionary conditions that have been cyclical in the past will become permanent. If the current form of economy is allowed to follow this path, unemployment and a plethora of forms of economic and social hardship are inevitable.
It is obvious that it is strongly in our own best interests to begin now to build forms of economy that rely much less on energy yet also allow people to live in wellbeing and happiness. Energy prices alone are enough to require this shift but, to reinforce the need for radical reform, there is another foundation of the current economy that will also cause its collapse unless it is fixed.
The foundation of the global economy - a robust and trustworthy banking and financial sector - is under threat. Photo / Getty Images
Unsustainable debt - and its impact
This essential foundation of the current global economy is a robust and trustworthy banking and financial sector that facilitates monetary transactions, provides repayable credit, encourages and rewards savings, and arranges capital and debt finance for development of enterprises.
Until about 30 years ago, these were actually the characteristics of most of the banking and financial sector. It required government regulations to stay this way. During the 1980s, some of the key regulations were relaxed or withdrawn, especially in the United States, resulting in radical shifts in the actions taken by the sector.
Since then, increasing volumes of credit have been issued on the assumption - actually enshrined in complicated computer models - that economic growth would continue strongly, thereby assuring the lenders that borrowers would be able to repay the loans.
As we all saw to our cost in the period following 2008, this assumption was false and the computer risk assessment models were inadequate. There was no effective oversight of the relationship between the total amount of debt issued and the overall size of economic output from which repayments would be expected.
The result is that the total debt now owed is several multiples of what could ever be repaid, even if the economy remained robust. In the future inevitably recessionary economy, debt repayment is literally hopeless.
There are two chastening implications of this situation. First, the economy has frequently relied on debt creation to fuel recovery from recessionary conditions. This strategy is no longer available because sensible debt levels have been exceeded - to put it mildly! Increasing debt is no longer a 'solution' to insufficient economic growth.
Second, when the outstanding debt is called in there will be massive and catastrophic financial and business failures. This is the reality behind the current EU debt crisis, but only a small part of the problem has been exposed so far.
Again, it is obvious that it is strongly in everyone's best interests to reform the financial sector of the economy to avoid this catastrophe and return the sector to a specified supportive role.
Yet another critical foundation of neo-classical economics is shaky. This is the assumption that suitable land would always be available for expansion of the economy and that climatic conditions would be stable within predictable ranges. Both assumptions are now false due to the combined effects of population pressure, climate change and increasing frequency of severe weather events.
The new forms of economy must recognise explicitly the reality of the future effects of global warming. It must also include approaches to population policies that maximise the wellbeing of the human race.
There is another dimension to consideration of the major reforms suggested here. The processes of the neo-classical economy are associated strongly with the particular ideology for human living that we call capitalism. Many people have strong emotional beliefs about the rightness of this ideology and political parties have formed around it.
Movements towards active work on the reforms proposed here are likely to be seen as an attack on capitalism, which will strengthen opposition to change. So be it! If it is any comfort to devotees of capitalism, none of the other 'isms' (socialism, communism, fascism) seem to meet the needs of the future. A quite fresh approach to human living systems seems to be required, as will be explored in the last article of this series.
Whatever, the approach taken to future living, the matter of hugely unsustainable current debt must be addressed before progress can be made. It must be accepted that current debt would be unrepayable even in buoyant economic conditions, so is totally out of the question with permanent contraction now inevitable. Several proposals have been made for solutions. All are extremely unattractive to lenders, but they are hopelessly exposed whatever action is taken. The approach that seems to be the least damaging to the wider economy is the 'haircut' concept, in which all outstanding debt is reduced by a proportion that will remove the intractable debt overhang from the global economy.
What are the implications of this discussion for New Zealand? Obviously, all of it is relevant because this country is strongly connected to the global economy. We can't enact global reforms but our views on the matter can certainly be heard, if we take the trouble to develop useful views.
Some of the reforms in economic systems and banking that make sense will be applied within countries, at the level of cities, districts, and local communities, and there is nothing to stop New Zealand getting on with them. If it did so, these developments would serve as models for developments in other countries.
Dr Wayne Cartwright has postgraduate degrees in agricultural science and economics and has served 34 years in tertiary education - including 30 as a professor in the business schools at the Massey and Auckland Universities.
He has consulted widely in business management, international business and governance, and strategic responses to future insight. He has served on several corporate boards of directors.
