"Talented and motivated"
October 5th, 2005
Dear Friends,
The E. F. Schumacher Society is fortunate to be surrounded
by talented and motivated young staff and interns who bring
fresh perspectives and new skills to our common work. When
former intern Sue Holmberg called to tell us of a Herman
Daly lecture that she was organizing in Amherst, we filled
a car and drove over to listen. We wished to meet
and honor an economist who has done so much to integrate
ecological and social issues into current economic discussions. Jing
Cao is a 2005/2006 intern for the Schumacher Society and
student at Simon's Rock College studying economics. Her
excellent summary of Daly's talk is included for your information.
The Twenty-Fifth Annual E. F. Schumacher Lectures will
be held October 22nd in Stockbridge, Massachusetts. Three
outstanding thinker/activists are scheduled to speak: Nancy
Jack Todd, Thomas Linzey, and Christopher H. Budd. Full
details about our speakers and registration materials are
available at our web site: www.smallisbeautiful.org. If
you would like a registration packet sent by mail, simply
make the request by return email. Or you may call the office
(413-528-1737) and ask for Julie Macé, lecture coordinator.
We hope you are able to join us.
Sincerely,
Susan Witt
Christopher Lindstrom
Julie Macé
Jing Cao
E. F. Schumacher Society
140 Jug End Road
Great Barrington, MA 01230 USA
www.smallisbeautiful.org
* * * * * * *
Herman Daly, one of the founding fathers of ecological
economics, spoke at the University of Massachusetts Amherst's
Political Economy Research Institute (PERI) on September
29, 2005 as part of PERI's Forum on Social Wealth. Daly
is a professor at the University of Maryland's School of
Public Affairs and co-founder and board member of the journal
Ecological Economics. Following is a summary of his lecture,
prepared by Jing Cao.
"Sustaining Our Commonwealth of Nature and Knowledge."
Summary of talk by Herman Daly
A commonwealth is a resource created either by nature,
or by aggregate human effort. Natural resources would fall
into the first category; knowledge belongs to the second.
There is also a third area of commonwealths: man-made institutions
such as money.
Sustaining our commonwealths means using with maintenance.
We must realize what the maximum amount of a resource we
can consume while still maintaining our commonwealths.
Any income from these commonwealths may be freely consumed,
but we must preserve the capital itself, the commonwealths.
The problem in the current economy is that nature is treated
as a non-scarce resource when it is in fact scarce. Knowledge
has the opposite problem, it is treated as scarce when
it is in fact non-scarce.
In economics, goods are either rival or non-rival, and
excludable or non-excludable. A rival good is one where
if I consume it, that prevents you from consuming it. Clothing,
for example, is rival. Sunlight is non-rival since my consumption
of it doesn't prevent you from enjoying it. Rivalness is
a physical property.
Excludability is a legal concept. Excludable goods can
be made private property, such as a private residence.
Non-excludable goods are those not privatized, such as
the right to pollute.
Rival, excludable goods are the ones the market was made
for—market goods. Non-rival, non-excludable goods
are public goods. Rival, non-excludable goods give way
to the tragedy of the commons. These goods, fishing rights
or clean air, are rival, yet because there is no way of
making these excludable, each party will try to consume
them before another party exhausts the resource, leading
to competitive depletion instead of cooperative conservation,
which would be in the best interest of all parties. Non-rival,
excludable goods, such as knowledge, result n the tragedy
of artificial scarcity.
Sustainability is not a problem with the commonwealth
of knowledge because knowledge is a non-rival resource.
For existing knowledge, since there is zero opportunity
cost for its use (my use of a piece of knowledge does not
prevent you from using it) its price should be zero.
However, there is an expenditure of rival resources for
the pursuit of new knowledge. Some pieces of knowledge,
such as the discovery of subatomic particles, may come
at a high cost. Others, such as Descartes' fathoming of
analytical geometry while staring at his ceiling from his
bed, may come at no cost. The acquisition of a new piece
of knowledge may also be for the delight of discovery.
However conventional wisdom says that without a profit
motive, no new knowledge will be created. The production
of new knowledge requires extrinsic stimulation and to
this end it is made artificially rival through patents
and intellectual property rights. However, since new knowledge
is created from old knowledge, if old knowledge is made
artificially expensive, then the production of new knowledge
is hindered.
New knowledge is the driving force behind profits, since
without new knowledge and technology, profits will approach
zero at a market equilibrium. Even without intellectual
property rights, those parties who discover new knowledge
will hold a temporary monopoly on their innovations by
virtue of its novelty. At its onset, no other parties would
have the resources to utilize this new knowledge. This
temporary monopoly could be a profit incentive for businesses
to pursue new technology.
One area where intellectual property may be justifiably
retained is in potentially dangerous information, such
as the technology to develop nuclear weapons. However it
may be better to control access to the rival goods necessary
for such production than to control the knowledge of the
technology, which is non-rival.
Not all knowledge is equally beneficial to mankind, and
the interests of private profit isn't always the best filter.
The profit incentive has given us liposuction and Viagra,
but no cure to AIDS or malaria.
We should drastically cut back on intellectual property
rights and rely on public funds and the human drive to
learn for the continued production of new knowledge.
Nature, on the other hand, is rival, but treated as non-rival.
Rival goods sometimes become non-rival if demand is low,
and my consumption does not hinder your consumption. Water
used to be such a resource.
Some resources, such as timber, are rival generationally,
since within a generation there is only a limited supply,
but can be non-rival in the long-term if exploited at levels
of sustainable yield, that is if only income and not capital
is consumed.
It is necessary to protect these fundamentally rival goods
by making them excludable. The commonwealth of nature needs
to be protected by individual or social property rights,
not open access.
The market solution to this is the cap-and-trade system.
Rival resources such as fishing rights or polluting rights
would be capped at an ecologically sustainable level, and
then traded on a market.
The cap-and-trade system brings up the questions of scale,
distribution, and allocation. The decision of where to
place the cap on the scale of the use of a resource must
be a social and ecological decision. The market assumes
a preexisting scale and has no mechanism for setting one.
The market also deals very little with distribution, since
the market takes ownership as a given. Once these new assets
are created, who would initially own them? Should they
begin as a social resource which the state could auction
off to the highest bidder as a means of raising government
funds? Or should they begin in private hands through a
process of grand-fathering?
The market deals mostly with allocation. Once scale and
distribution are given, prices are used as a tool to optimize
the allocation of these ecological assets by meeting supply
with demand. However, price can't also be used to optimize
scale and distribution. For every independent policy
goal, we need an independent policy instrument. Allocation
may be set by price, but scale should be set by ecological
sustainability, and distribution should be set by the ethical
criteria of fairness.
An alternative the cap-and-trade is ecological tax reform.
The government could shift away from taxing value-added,
and towards taxing that from which value is added. In this
way pollution and resource consumption, not income, would
be taxed. However ecological tax reform, unlike cap-and-trade,
does not directly set a limit on scale.
Finally, money seems to be a rival good, but its value
depends of the willingness of others to hold it. Thus it's
non-rival; money cannot be used up.
Is money wealth? Commodity money such as gold was private
wealth which served the public function of facilitating
the economy. However fiat money, our current form which
is backed by trust alone, gains value only from people's
willingness to hold it instead of real wealth in the form
of commodities. Thus money is a commonwealth of a community.
Since fiat money is valued much higher than its commodity
value and has a relatively low production cost, the creator
of a fiat currency profits from this creation. This profit,
called senorage, used to go to governments. However, this
profit is increasingly going to commercial banks.
Because of the fractional reserve money system in the
US, where banks are only required to hold a fraction of
the money they lend or collect in reserves, banks practice
money creation, lending out money they don't physically
have. 95% of the US money supply was created by the banking
sector, shifting senorage from the public to the private
sector.
By requiring banks to hold 100% of their reserves, money
would return to a public commodity instead of a private
source of wealth. In the fractional reserve system, because
banks demand interest on loans, persistent economic growth
is required just t keep the money supply from shrinking.
If money creation was returned to the government, zero
interest loans could be issued. Banks would no longer create
money, they would simply be intermediaries between lenders
and borrowers.
Local supplementary currencies could be a tool in regional
economic development. With the introduction of a local
currency, local transactions can be conducted without first
exporting goods outside that community to obtain currency
with which to trade within a community.
A final question is how fast do we move? What is the timetable
for moving towards sustainability?
