Introduction

This book covers both environmental and general economic issues. Unsurprisingly, the main emphasis of this book on the environmental side concerns climate change. The consequences are well-documented. By the end of summer 2011 the arctic sea ice was melting twice as fast than in 1972, when satellite observations made it possible to take measurements. Climate change is already affecting human health, of children in the developing world in particular, and puts the future of coming generations into jeopardy. However, the authors stress that humanity's onslaught on the earth is wider. Biodiversity is at serious risk from profit-oriented production methods and current patterns of consumption.

In our view, sustainability ought to be an integral part of economics. While we tend to think of sustainability in terms of the environment, it is more than that. A world without economic, financial and above all, social stability, is a dangerous place. One might argue that the concept 'financial sustainability,' in the sense of 'enduring financial stability' could form a useful contribution to the definition of income and so take its rightful place as an economics subject.

However, the term 'sustainability' tends to be regarded as being solely associated with the environment. In fact, environmental economics as usually taught is seen as an offshoot of mainstream economics, developed around the technique of cost benefit analysis. This arrangement overlooks the fact that the degradation of critical capabilities of the earth is not counted as a cost, and therefore not subject to the normal incentives of cost effective use of scarce resources. Clearly, an economic system based on limitless consumption in combination with an ever increasing world population spells disaster to the integrity of the natural world.

There is an urgent need to rectify the damage that is still being inflicted on the ecosystem, to find a human lifestyle that does not attack its own physical and biological basis. This has led to calls for a society without any economic growth. Even though this might help to restore environmental sustainability, it is unrealistic, as it runs counter to the other criteria for a sustainable society. Instead, we argue that maintaining a stable social structure on a crowded earth demands not only a commitment to full employment, but also a measure of continued growth in material affluence.

Employment is best served by a large scale program of public investment in green technology, such as structures to produce renewable forms of energy. At the same time, humanity and especially the less advantaged, need to be defended from already unavoidable adverse results of climate change. That is much preferable to attempting to restart the faltering market economy in its previous wasteful mode of operation -which may not even be successful-. Green investment projects would be commercially attractive, if it were not for the omission of environmental degradation as a cost of production under the prevailing false price structure. Accordingly, they provide taxpayers a better chance of eventually recovering their money than open-ended bank bailouts. An accelerated green investment programme will give humanity the time to address the underlying flaws in the present exclusively market-orientated mode of economic management. In comparing the results of our analysis with economics as conventionally taught, we flag three main points:

A false price structure
The prevailing price structure does not reflect the basic purpose of cost price calculation of generating incentives towards the cost-effective use of scarce resources. It rewards the cost-effective use of a relatively abundant resource, human labour, while not adequately counting the overstressing of vital capabilities of the earth as a cost.
A flawed technique

Cost benefit analysis compares current cost with a discounted value of future benefits. Application of this technique to selecting the most economical spending program to protect critical resources of the finite earth, treats the distant future as of little importance. This is immoral, quite apart from the flaws in the 'proof' of the supposedly unique rate of discount.
A potential surplus of savings

Without further growth in consumption, at a rate which violates the basic limits of the finite earth, there is, under conditions of relative affluence and a positive e rate of interest, a potential surplus of savings over commercially attractive outlets which do not harm the environment. A stable long term balance in the capital market therefore requires either an environmentally unsustainable rate of growth in material affluence, or alternatively, collective provisions reducing the financial burden of post-retirement life and care for the elderly.

The main topics covered

We highlight two core themes within the remit of market economics. The first concerns the way the understated cost of transport enhances the concentration of affluence in already prosperous areas. Also, globalization has given rise to other, more insidious costs in addition to emissions from freight traffic. The second covers the reasons why investment in renewable energy systems is a suitable prescription to stabilize the market economy. We stress that a Keynesian analysis is not universally valid. Its relevance rests on the specific social and economic conditions which make people save more. However, the resulting volume of savings surpasses the existing capacity of investment outlets which are both commercially attractive and sustainable. It has only gradually become clear that the steady erosion of comprehensive social security in many industrially developed countries has led to a serious imbalance, reminiscent of the 1930s situation. For several decades, this gap has been bridged by illusion rather than by publicly funded investment in objectively useful projects. Now that the bubble has broken, stabilization of the market economy calls for the replacement of make-believe benefits by genuine assets. At the same time the climate crisis is in urgent need of rapid investment in renewable energy systems.

Whilst the book exposes how a flawed theory framework has been instrumental in leading the world to the brink, the book also indicates ways out of mankind's present predicament.

Environmental economics is hampered by several areas of confusion, all of which are also pertinent to the discipline of economics in general. Traditional economics has been developed around the postulate that demand and supply for all important resources and products, are held in balance by their price. The close relationship between scarcity and market value distorts the truth, and should never be the only consideration. The development of western industrial and commercial affluence has invariably affected the established lifestyles of those less fortunate, from the Highland clearances to the colonization of terra nullius or 'empty' wastes, seemingly not belonging to anyone. Now it is the planet itself, the health of the atmosphere and the oceans, the very basics of life that are under threat. Nevertheless, if a consistent balance between demand and supply at the prevailing price were the reality, with regard to all important resources, income would form the financial equivalent of the sustainable level and composition of consumption spending.

Although the term 'sustainability' does not as yet form part of the vocabulary of economics, the accounting convention of calculating net income by subtracting a sum for the replacement of equipment derives its logic from the assumption that it would otherwise not be sustainable. If critical resources of the finite earth, such as the integrity of the atmosphere and the biological diversity of life, were properly represented as a financial cost, there would be incentives towards their conservation, with incomes and prices the financial counterpart of a sustainable level and composition of consumption. Unfortunately, the opposite is the case. 'Efficient' production provides incentives towards the wanton over-exploitation of vital, but unpriced or inadequately costed resources. The consequences of the false price structure are further hidden and exacerbated by the unrealistic assumption that economic activities can be performed on any scale, with the same ratio between inputs and the resulting outputs. The reality is that in important industries 'large' appears to be efficient, giving rise to the geographical concentration of commerce and industry, with the raw materials and products shipped around the globe by carbon dioxide emitting transport.

The urgency of the climate change crisis demands a rapid transition from carbon-intensive to sustainable methods of production and employment, whilst avoiding large scale transitional unemployment. If the world had the political will to face the national and global income distribution aspect of a drastic change in the price structure with a fair division of the rental value of natural resources, there could be plenty of employment in environmentally desirable and commercially attractive construction projects. That is, however, plainly not the case, which suggests non-market methods of economic management should be explored in order to achieve a degree of social as well as environmental sustainability.

Organisation of the material

Drawing on historical and current data the book summarises the pathways resulting in the present predicament and maps out strategies to develop financial and economic systems leading to a sustainable world. The material is arranged in 12 chapters, grouped in three distinct parts. These are entitled 'Stylised market equilibrium', 'The real market economy', and 'Present affluence versus the future'. Further summary information is provided at the start of each of the three parts and in the Introduction and Summary sections of the 12 individual chapters.