subject: Climate Change: Why the Economy Matters [print this page] Bill Clinton's 1992 campaign had a slogan as a reminder to campaigners; "It's the economy, stupid". The phrase has passed into history but it still rings as true today as it did then and green campaigners need to recognise that.
Economic activity is the bed rock of our civilisation and the basis of much human preoccupation. There is not a sovereign state that does not rely on economic activity, even if the basis of it is outside what some would consider legal. All Governments depend on business to employ people (whose income they can tax) and generate profits (that they re-invest to build the business or share with stockholders, which can then be taxed). For their part, businesses rely on government to keep the peace and provide a fair set of rules that everyone abides by. An individual that is not "economically active" or family that does not have at least one "economically active" person in it is likely to be severely disadvantaged. Most places in the world follow this model and most have combined it with a form of democracy where the population get a regular chance to approve or change the people who are responsible for making up the rules. Although democracy is not necessary for economic development, it has become ingrained in the Western psyche so much that world countries where the central government is so weak or ineffective that it has little practical control over much of its territory, or where there is little or no provision of public services, or where widespread corruption and criminality exists, or where there are refugees and involuntary movement of populations and sharp economic decline it is said to be a failed state.
Although you might be able to argue over how fairly the benefits have been spread, there is no denying that the world is much better off than it was 60 years ago. People in the very successful economies like the US and most of Europe have seen standards of living soar and even the traditionally poor countries now have a burgeoning middle class. There have been crisis like that of Long Term Capital Asset Management in 1998, the dot com collapse of 2001 and, most recently, the global banking crisis of 2008. They have all been scare moments when the world economy seemed on the brink of collapse but somehow it has survived, pretty much intact.
Or has it?
Wealth and money are human concepts. No other animal or plant or fish gives a fig about it. But we use it as a way to communicate. Get enough wealth and you get a lot of power, influence and "friends".
Wealth is not entirely intangible, of course. It originated from using energy to extract minerals and other material from the Earth, use more energy to shape it into something desirable, some more energy to ship it somewhere for someone to buy it, use it for a while then throw it away. Over the past few years, we have started to consider knowledge and ideas as wealth as well but the physical economy is still the key.
We know we have wealth because our accountants tell us that we do, in the form of assets or cash (money). Accountants are generally good people and when they are compiling the accounts we expect them to gather information and report it objectively so that third-parties who must rely on it can be sure there is no bias or inconsistency, whether deliberate or not. So that everyone is clear about what this means, each country has its own Generally Accepted Accounting Principles (GAAP), which lays down the standards and guidelines for how the information should be gathered and assembled. (There is also an International GAAP, which as you imagine is pretty complicated and one guide to it runs to 3,800 pages.)
Accounting is based on a series of principles and there are two, in particular, that are worth thinking about. The first is the Principle of prudence. This principle aims at showing the financial reality "as is": one should not try to make things look prettier than they are. This means that a revenue item should be recorded only when it is certain and a provision should be entered for an expense which is probable. But is accounting really giving us the true picture of the world "as is"?
Let's consider for a moment just what our economic activity really entails. How about the millions of tons of toxic material that it pumps into the air, water and soil every year? How about the gigantic amount of waste we produce and, mainly, dump into a hole where the materials fester and produce more dangerous gases? How about the thousands of regulations that are required if not to keep people safe, at least doesn't poison them too quickly? How about the idea that productivity is boosted by employing fewer people, so cutting more and more out from a share of the riches? How about the tendency to globalisation that erodes cultural diversity? How about the death and destruction of thousands of species of animals, insects and plants? Is accountancy really telling us the reality "as is"? When the BP well in the Gulf was spewing oil that it could sell of around US$80 per barrel, it was facing fines of between US$1,100 and US$4,300 to compensate for the damage that each spilt barrel caused! What is the true price of oil?
Like a lot of human problems, we didn't set out to do it the wrong way. Modern accountancy was invented about 500 years ago in Italy where double-entry book-keeping was first used. Double-entry book-keeping changed the way that people were able to think about business and virtually all the decision making tools we use today like pay-back times and returns on investment could not exist without it. It was and is an amazing system and at its intellectual core is the concept of "balance". Even today when a financier wants to know the financial strength of a company, she looks at the "balance sheet". Consider, for a moment how very different the world in 15th century Italy was compared to today. In human terms, there were many fewer of us for start, about a twentieth of our number today. We had also not had our industrial revolution. Little wonder that the guys who thought that "balance" was so important didn't notice that there was a cost associated with using the Earth's resources and services.
Once the industrial revolution got into full swing, it became apparent pretty quickly just how damaging the activity was to the environment. Rich people built their houses upwind of the smoke-stakes and changes the cuffs and collars of their shirts before evening. Around this time in our history the "science" of economics was newly emerging. Economists noted the filth but felt secure enough that the damage would only be localised and as the Earth was a big place, they could consider it as an "externality" i.e. it still didn't have to be accounted for. Remember, though, that they were working at a time when there was still only about a quarter of the number of us now. The result has been that today we have a global system that is focused on making a product and getting it to a customer as quickly and cheaply as possible, without considering much else. A global system that has brought us, for a while, better life expectancy, better health, more comfort and more convenience than the species has ever known. But the underlying flaw has now been exposed. Although the theories are over 100 years old, we now know that nature is not an abundant "mother" always fertile and able to replenish with fault. In the past 50 years we have come to know the delicacy, complexity and interconnectedness of the natural systems and just how vulnerable to damage they are. For the first time we can see that future generations will be poorer and worse off than we are now.
How we choose to deal with this is, I believe, a defining issue for humans. The reaction from some quarters has been to say, we need to stop economic activity. We need to go back to a simpler life. Needless to say, this has been a minority view. But we do need to find another way.
In the same way as there is a principle of prudence, there is also a Principle of Full Disclosure whereall information and values about the financial position of a business must be disclosed in the records. There are already a number of campaigns to extend this principle to include disclosure on the environmental impacts of a business. That would certainly help; the resources and services of the planet aren't really free. But the full solution needs a fundamental rethink on how we account for our activity so that we are rewarded for replenishing the environment rather than destroying it. As soon as people can make money from nourishing natural systems, business and the economy will deliver. Because if you really want to know how to solve the problems of pollution and develop solutions to climate change; it's the economy, stupid.
Climate Change: Why the Economy Matters
By: Harold Forbes
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