“In a very rapidly changing scenario, with a burgeoning population, fast-changing demographic profile, and growth aspirations of people around the world putting pressure on natural resources, our economic thoughts and practices have to change.”
In the beginning there was nothing, no human beings, no animals, no trees, no oceans, no earth, no sun, no stars, not even space or time. A quantum fluctuation leading to the Big Bang almost 14 billion years ago sowed the seeds of the Universe and space and time, as we know it. In the initial phase, stars, black holes, and galaxies were formed. The Earth, our home planet, was born almost 10 billion years later, about 4 billion years ago. It was then a fiery ball and took almost 1 billion years to cool down. Seeds of life sprouted about 3 billion years ago, some say spontaneously, while others hold a view through panspermia, no one knows for sure.
While the earth was cooling, life forms were evolving and the planet was undergoing cataclysmic changes. Continents were shifting and breaking apart, ocean floors were rising and sinking, volcanoes were erupting. Forests, animals, fishes, amphibians came and disappeared, so much so that according to some, 99.9% of the species in existence since beginning of life on Earth have ceased to exist. These changes, over a period of hundreds of millions of years, left us the legacy of natural resources—coal, crude oil, natural gas— and minerals so necessary for industrial processes and evolution of a technological civilisation.
Life forms continued to evolve. Humans came on the scene. No one is sure, but it is said that human sub-species evolved about half a million years ago in the African Savannah. With human civilisations, human aspiration too continued to develop and grow, perhaps slowly, if we were to compare it with the developments in the last 100 years.
The advent of the Industrial Revolution, which started in Europe around 1760, brought in its wake a transformation. Progress brought about by technology encouraged a shift from primarily an agricultural world to an industrial one. Rapid shifts took place in many parts of the world, mainly Europe and North America, and in the earlier part of the last century, in Japan. Such shifts are now taking place in parts of Asia, mainly India and China, Latin America, and Africa. These changes, by themselves great achievements for mankind, have led to a burgeoning population and major demographic changes. An off-shoot of this technological progress has been that more intensive and concentrated methods of food production are required for supporting technological societies and longer human life spans, stemming from better healthcare.
About the time of the birth of Jesus Christ, the planet supported a population of about 200 million human beings, which, by the early 19th century i.e. in a period of about 1,830 years touched a billion people. In another 185 years, we have expanded 7-fold to over 7.2 billion people and we are still continuing to expand. The advent of technological changes and exploitation of natural resources has improved the living conditions of human beings, and on an average a human being lives better, is better fed, and better educated than any other time in the history of mankind.
All this has been brought about by scientific advances in different fields such as Quantum Physics, Relativity, Material Sciences, Chemistry, Agricultural Sciences, and so on and so forth.
The list is endless.
However, a large population and better living standards have created their own challenges in fields as diverse as economics, social sciences, ecology, and environment. At the heart of these is the rapid exploitation of natural resources, be it in the form of energy-generating resources like coal or crude oil, mineral resources like ores, or environmental resources, which are being degraded in the pursuit of economic growth.
These issues are well known, and have been discussed in various fora for decades now. The first Club of Rome report, Limits to Growth, which was published in 1972, raises many issues pertinent to these changes. That landmark report and subsequent Club of Rome reports, which generated extensive debates in the 1970s, now lie peacefully buried in the archives of libraries around the world. While these issues are still relevant, it is not the intent of this book to reiterate them.
Along with technological progress, economic theories evolved as well. A key aspect of economic theories was better and more efficient utilisation of resources, be it capital, land or labour. These concepts and theories optimized utilisation of resources and went a long way in improving the living standards of mankind across the world.
These economic theories, which have served us well for many decades now, need a relook, particularly from the point of view of sustainability. If we lived in a world where resources were infinite or virtually limitless in relation to our consumption, we would have had no issues. But that is indeed not the case, more so, as our population and resource consumption have been expanding exponentially. Using current methods of economic analysis, capital allocation really promotes gross long-term inefficiencies in our resource utilisation. If we continue with these approaches, our societies would become unsustainable.
The authors have long held the view that not only do our economic theories lead to unsustainable development, but really amount to stealing from our future generations. We compare our society to a rich man who sells his family silver to sustain his lifestyle and in the end leaves practically nothing for his children. What is worse in our case is that we would leave our children a huge debt, which they would have to pay. This book will provide enough evidence that our economic and capital allocation models do the same thing: promote current consumption at the cost of future generations. The problem is further compounded by the short-sightedness of the political class in most nations of the world where the focus seems to be the next year, the next election, or in non-democratic societies, growth in personal wealth or stature. Similarly, the corporate world around us generally thinks of the next quarter, the next shareholders’ meet, and the bonuses, which the top managers can persuade the Boards and shareholders to pay them. Few think of the long-term strategies for the company, and fewer still about long-term sustainability issues.
Most businesses use capital allocation models to optimise their working. Similar concepts are, at least theoretically, used by countries (where their leaders are not driven by political considerations, which is not often) to utilise national resources. Few realise the pitfalls of such models. So wide is the use of these models that working of all banks would come to a standstill if somehow these formulae were to be erased from their computers.
Capital allocation models are generally skewed in favour of current consumption. They place a premium on current consumption and earlier use of the resources vis-à-vis saving them for the future generations. For example, if we can pump a barrel of oil now and its price is US$100, our benefit (less the pumping out cost, which we for the sake of simplicity assume to be zero) is US$100. But if we leave the same barrel of oil underground so that someone else can use it 50 years later at a 10% cost of capital, the value of the same barrel of oil today is 85 cents. If we were more farsighted and do not use it for 100 years, the present value falls to 0.7 cents. So our incentive is in using the resource as fast as possible. Of course, in doing this analysis we conveniently forget that nature took several hundred million years to generate the same barrel of oil.
Another way of looking at the same situation is, if, for the sake of argument, through some technological breakthrough it is possible to extract 100 barrels of oil after 50 years, but if the field were to be exploited now, only 1 barrel could be extracted and the remaining 99 barrels are lost forever. Managers would still find it desirable to extract that one barrel of oil now, notwithstanding the fact that future generations would lose 99 barrels of oil. This example may sound extreme, but analogous decisions are routinely taken globally. As a result, the rate of consumption of natural resources is so high that the world reserves of many key resources would be exhausted in a couple of generations. As these resources get exhausted, their availability would decline, although this fall would be generally gradual. But a fall in resource availability would impact industrial production as well as all the consequences that would inevitably result from it.
Everybody would be impacted. No one would be spared. But youngsters in their twenties and thirties, with 30 to 40 years of working life remaining, would be most affected. Their hopes, aspiration and dreams of a comfortable and peaceful retirement after years and years of hard work would stand shattered as money, not backed by availability of goods and services, would lose value as its purchasing power falls.
The aim of this book is to bring out the deep lacunae in our economic thought and practices. The existing economic practices were developed when natural resources were plentiful, the global population small, and natural resource consumption minuscule in relation to the reserves. But in a very rapidly changing scenario, with a burgeoning population, fast-changing demographic profile, and growth aspirations of people around the world putting pressure on natural resources, our economic thoughts and practices have to change.
No change is without associated pain. We are all comfortable with the present thought processes, which predict steady and sustained growth based on the implicit assumption that resources are unlimited. But the reality is that we live in a finite world with limited resources, and after that reality is factored in, none of these projections hold true. And the sooner we realise this, the better it is and perhaps less painful too.
This book is divided into two sections. The first section, The Context, highlights the world we live in and how fast we are consuming our resources and impacting the environment. Some readers may find The Context grim and depressing, but we have painted the picture as we see it based on the best available information. We would request such readers bear with us or simply move on to the next part, The New Economic Paradigm, and then come back to The Context. In the second part, The New Economic Paradigm, we have suggested a new approach to our economic theories, which would lead to a more sustainable world.
“Humans are extremely intelligent and yet extremely foolish. They have failed to perceive the inter-linkages in the Web of Life; remove a few links and the Web could collapse, threatening their own existence.”
Stealing From Our Children. The real dilemma of growth and the need for New Economics – Kamal K. Kothari and Chitra Chandrasekhar.
get it from Amazon.com