Truth and Consequences in Economics
Economics is the core of our current global culture. And the core of that economics is a lie. At the heart of our accepted economics is "future discounting" or "present value analysis" (PNV) an analytical technique that devalues future and externalized impacts of our actions in favor of immediate benefits. It also turns out to substantially diminish true economic productivity and value.
Future discounting belies its stated goal of economic productivity in a variety of ways:
* It eliminates, and therefore forecloses re-consideration of long-term thinking based options whose total and average economic and financial productivity are greater than short-term ones.
* It excludes choice and attainment of goals and values, other than immediate financial benefit, from our decision-making process - invariably with negative economic effects. Such goals are almost always non-quantifiable, of continuing rather than short-term benefit, and are belittled or ignored by PNV.
* It normally focuses solely on benefits to a single beneficiary, excluding costs and benefits externalized to others and to the larger systems within which the beneficiary is embedded.
* It damages and reduces value available in the "future" we all have to live in.
* Its operational productivity, in comparison to demonstrated alternatives such as Factor -10 economics, is frequently an order-of-magnitude less.
Future discounting is a curious economic tool that has been elevated to near-deity status because its use mandates and gives theoretical justification to what certain elements of our society wish immediate consumption of our resources, while ignoring future consequences of such actions. The slavish adherence to PNV by corporate economists is curious, until we consider the situation that many CEOs find themselves in. They, or their predecessors, have liquidated assets (such as harvesting forests) to make themselves look good on short-term balance sheets, find themselves in a situation where management practices that maximize ongoing revenues will produce little income in the short term, and are looking desperately for justification for practices such as short forestry rotations that will bring in revenue that shows up on their short-term balance sheets.
Adherence to this principle has resulted in ignoring any consideration of long-term thinking and seeking of short-term benefits, even where long-term alternatives produce far greater per-year productivity. In forestry, for example, comparing short timber harvest rotations mandated by discount rates and PNV to longer rotations:
Wigg (1989) showed double timber output and a nine-fold increase in net profit going from 60 to 180 year rotations.1
Carey, Lippke and Sessions (1999) concluded that "on a landscape, 300-year basis, management for biodiversity including riparian and mass-wasting zone management, produced only 7.5% less wood than maximizing net present value with little riparian, and no mass-wasting protection. In spite of the output reduction, decadal revenues were 54-68% higher than maximizing PNV, reflecting higher quality wood products. " 2
Willer and Hall (1999) found that increasing rotations from 45 to 140 years would increase the volume of timber logged 38% and more than double annual financial return. 3
Curtis (1994) found "substantial lengthening of rotations . . . could mean a long-term increase in timber volume production [47% to 285% in his study] and probably would increase value production." 4
Bender (1994) showed that combining Wigg's improvement in timber productivity and value from long rotations with improvement in other forest-related values such as fisheries impacts, recreation, and other forest products could result in 20 to 30-fold combined improvement in net forest value. 5
Maximizing immediate financial benefits is virtually always achieved at the expense of lower long-term sustained revenues. In virtually every field, there is a considerable literature on the aggregate economic effects, ecological costs, and impacts on future generations, which shows that for every win from discounting the future and using short-term thinking, there are losses which far outweigh those wins.6
Long-term thinking is often met with the delightful observation, "But in the long run, we're all dead." This is true, but hardly relevant. We do live in the "now". But that "now" is part of chains of consequences extending from our past and into our future that we, as well as our descendents, must live with. Many of those bills come due well before we are "long-term dead". Our "now" is also inheritor of consequences of yesterday's and last year's and last generation's actions. We ARE simultaneously in the short-run and the long-run, and living the future of many yesterdays. Long-term costs are real, do have to be paid, and are an essential part of any realistic economic accounting.
Our "now" does have to deal with many negative costs of short-term thinking. Sweden, and other countries, are now facing huge costs of decommissioning, dismantling and multi-thousand year isolation of radioactive wastes from terminated nuclear power programs whose benefits have already expired. The citizens of Argentina are now facing devastating economic and political effects of international "economic development" loans whose long-term consequences were ignored. Cigarette smokers are now enduring painful deaths from lung cancer long-term effects of the short-term effects of "being cool". U.S. forests have been so thoroughly liquidated that their near-term productivity is now decimated. Subsidizing rapid depletion of domestic petroleum reserves has brought the U.S. in less than a century to where we now have massive and expensive dependence on imports of resources of other countries.
Future discounting is fashionable, as was Enron, and lauded, obviously, by those who benefit from it. They claim that we all, always, ignore and discount the future in our actions. This is sometimes true, blinded by advertising-blitzed cultural beliefs encouraging us to make short-term choices that are highly profitable to others, while externalizing massive future costs. But the opposite is equally true. We do make long-term decisions private and public savings for retirement (negative future discounting); building and buying houses that last our lifetimes or longer; investment in education, city infrastructure, having families, planting trees. And we could probably say that we often get into relationships based on very long-term hopes and dreams.
In addition to its conceptual failures, future discounting and net present value have been dealt a severe blow by Factor-10 economics and more wholistic economic analyses comparing immediate vs. on-going value of alternatives.7 Such alternative approaches to economics that delivers order-of-magnitude better benefits on an ongoing basis renders PNV obsolete simply because of its operational ineffectiveness.
Economic theories such as future discounting are just that theories. They can become conventional wisdom, and be surrounded by intellectual constructs that make them appear inevitable and infallible. That was true of the "flat earth" theory, also. Not only intellectual constructs, but our sensory experience as well, supported that perception. Greater understanding does not deny past "truths". It broadens our understanding to the point where we see the past perception as a special case of a new and broader comprehension.
The value of an economic concept lies in what its use achieves. If employment of a concept brings in more money, and that was our goal, and if it accomplished that goal within our values, it may be a useful concept. If the concept was "rob a bank", that may bring in money, but possibly not within our society's values, and may not be a great idea. What a concept can achieve is not something that exists in isolation. We have to also keep before us our personal and societal goals and values, and examine all in concert.
Current economics asserts that our relationships can be quantified, that non-quantifiable values should be disregarded, and that application of quantified tools such as PNV that maximize immediate profits over continuing ones should be universally acceded to. There is, however, no justification as to why we should consider it reasonable or wise to quantify our relationships. As we've indicated elsewhere, our most important goals in life are inherently unquantifiable.8 Economics is not the core of a healthy culture any healthy culture has deeper passions, more directly tied to achievement of loftier and more rewarding goals. Everywhere in economics we find concepts, principles, and practices whose economic falseness is known, but whose use continues in hopes of convincing the gullible to act in ways that unjustly favor the proponents. Future discounting, short-term thinking? Listen again to silviculturalists:
"Efficient use is often assumed to be short-rotation management an assumption that is not true from the standpoints of (1) maximizing total wood production; (2) substituting harvest of wood products through thinning for suppression mortality; (3) producing high-quality and high-valued wood products; (4) maintaining long-term forest productivity; and (5) conserving bio-diversity, the capacity of forest ecosystems to meet the needs and desires of future generations."9 [It is also not true in terms of total financial profit.]
Short-term economics sees that an action maximizing immediate profit brings in more money in the short term. It appears that repeatedly taking actions that each maximize short-term profit must also maximize long-term profit. But this is not true.
What they don't acknowledge is that each of those short-term actions alters and contracts the framework that subsequent actions must be taken in, eliminating the long-term options and leaving only options that are far less productive.
Acting solely on short-term thinking forecloses our future. Cutting down an entire forest looks great on the books the first year. But it means no revenue or timber for the next 40 years, plus reduction in both ongoing timber productivity and financial value generated. Because more productive alternatives associated with long-term thinking are no longer available to us when we're making subsequent decisions, we tend to forget their existence. Going into debt to buy a car is a similar example. Having to make loan payments during subsequent years, makes it significantly harder for us to consider the alternative of saving money in advance to purchase the next car. This is true even though over a 50 year period the difference between buying all our cars on credit and buying them from accumulated savings is quite significant.
A PNV forestry plan that harvests trees at 40 years of age leaves only subsequent courses of action based on bare land and no merchantable timber production for twenty years, as opposed to a productive forest in place actively growing more and higher value timber while avoiding harvesting/replanting costs. At that point, any maximizing of those "bare land" options results in far less immediate or ongoing economic and financial productivity than if the initial action was based on long-term productivity. People with long experience, such as German foresters, refuse to use PNV, because it results in actions based on short-term, transient conditions, which incur long-term costs. They point to at least two periods, in the last century alone, where the German currency went through immense inflation, which following PNV would have resulted in cutting all the forests, leaving none for even the next year's needs.
PNV is also a mechanism that is distorted even further in practice to justify shorter and shorter rotations to move [smaller amounts of] money more quickly into company coffers. Interestingly, even some of the most adamant "free-marketeers" acknowledge that PNV is an unworkable liability in our present economy:
1. PNV is much less useful when unfamiliarities and uncertainties are large.
2. PNV does not take into account the intangible assets [which may be the most vital and valuable assets] or new strategic options created as a by-product of an investment.
3. PNV assumes that capital is the scarce resource [when] what is now scarce is the talent to mobilize a company's intangibles to capture best opportunities.
4. [With PNV], as the cost of financial capital falls, it becomes ever easier to justify low-return investments in familiar, relatively low-return businesses. This is the trap for many integrators.
Companies . . . should supplement PNV with . . .estimated return on invested tangible capital, estimated capitalized value of intangibles, estimated value of options created, and opportunity costs of the talent deployed in capturing the opportunity. The world needs new metrics for evaluating strategy and capital budgeting decisions. The PNV approach is no longer sufficient for today's dynamic global economy."10
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WHAT IS ECONOMICS FOR?
It might be useful at this point to widen our perspective, look at where economic thinking of which PNV is a central part is taking us, and whether that is a good place to go. The proposals put forth in a recent book, Race for the World,11 may help us see more clearly how we pick and choose what we include and exclude in order to construct theories, philosophies, or rules of economics to make them appear inevitable, true, and justifiable. Our choice of economic tools and the central value we place on economics are important agents in how well or poorly we achieve our personal and social values and goals.
RFTW approaches economics from a semi-systems approach, looking globally at how different structures and processes can create distinct economic alternatives. It shows us a world in rapid transition to dominance by global economic firms in virtually every sector of our lives, outlines how an individual firm can position itself to be one of the winners in that race, and projects vast economic benefits from this transition. But what is the state of the world at the end of this race? And if it isn't a desirable state, what are the alternatives to achieve a better one?
Curiously, RFTW states in its preface that "the process of globalization, not the end state, is the focus of our inquiry." That is valid, to focus a perspective, but it seems that where we are going is pretty important also. Three years have passed, and the authors have not visibly acted to address what the implications are of the process they so heartily endorse. Some clues they drop suggests it may not be a desirable future. They give John D. Rockefeller's development of Standard Oil into the (then) world's biggest company as a success story (emphasis mine):
" . . . He then set about weakening the power of the railroads. His first refinery was built in 1863 at the conjunction of a waterway and a railroad line in Cleveland, giving him the leverage to negotiate favorable transportation rates from the oil fields and to the major terminals on the East Coast. He obtained concessions from railroads by promising constant, high-volume shipments and the necessary capacity by acquiring distressed competitors. In 1872, a scheme to establish a double cartel of refiners and railroads collapsed, but not before Rockefeller used the threat of denying others access to rail transport to buy up twenty-two of the twenty-six other Cleveland refineries. As the Standard Oil empire grew, it expanded its arsenal of competitive weapons: monopolizing the supply of tank cars to increase its stranglehold on rail transport, taking over East Coast oil terminals to control the flow of exports to Europe, and becoming the predominant builder and operator of the pipelines that served new wells in Pennsylvania. From drillhead to refinery to terminal, Rockefeller controlled access to the growing web of oil flows. Competitors had no choice but to sell out, and by 1877 he controlled 90 percent of U.S. refining capacity.
They later say:
" . . .Rockefeller, in retrospect, played the integrator midgame in this industry by rolling up competitors over a hundred years ago. What is unique about the transition economy is that this can be done in every industry, and it is happening fast."
In the endnotes, the authors mention, as an aside, that
"Rockefeller's empire was broken up by the U.S. government in 1911 because of its stranglehold on all parts of the oil business . . ."
It would appear that a planet whose economic life was held in such a stranglehold by a few global economic powers might not be a good place to live. Yet the authors assert that "Governments everywhere now understand they have no alternative to opening their national economies to world-class suppliers of intangible capital." "All players have the opportunity to generate vast new economic wealth." "Companies have no choice but to respond to the dictates of the capital markets." "The global capital markets are the servant of the strong, and the undertaker of the weak."
So the current process of economic globalization may not produce a good world to live in. It does produce opportunities for vast concentration of wealth, as they so ably demonstrate. But they don't talk about the swath of destruction and loss left in the wake of this centralization, or about the "losers." They don't show how much of this "wealth" is actually improved economic productivity vs. merely centralization of profits, or "squeeze" forced from the welfare and well-being of others in the market by over-concentration of power. It is a heady game, but one that appears to disempower every soul on the planet except a tiny minority. This is a game that through the World Bank, IMF, and WTO has already rendered virtually powerless every national government on the planet. Increase in power is a relative term its converse effect is almost always decrease in the power of others.
They haven't addressed it, so we have to ask the question, "Does this process support values we believe in? Is its end state one that makes life better for us, or for the majority of people on this planet? September 11 and its aftermath make it clear that many in the world do not believe it does.
How much does any of this add to our real wealth: experiencing love and being loved, feeling of value to others, knowing we have something to contribute? Friendship, peace, security, health, well-being, adventure, joy, passion, spirit? Meaningfulness and purpose of our life, growth, fullness, experience, successful meeting of challenges, knowledge and expansion of our own capabilities? Helping others, being able to create and give, the excitement of exploring worlds and wisdom beyond just that of human life, joining with others into richer untouched possibilities?
All of these are hard to quantify or to buy. All have to come from within. We achieve them more directly by focusing our personal actions, governmental policy, and economic indicators to eliminate discord and to align our lives to those goals. In none of the above are greed, materialism, and quantitative thinking acceptable or productive.
Unstated, but visible reading between and along the lines of RFTW, the goals of economic globalization are simple and clear: maximizing the concentration of corporate wealth and power, and that of their officers and stockholders. Nothing else is even on the radar screen. I cannot see that economic globalization and its attendant individual and national disempowerment either intentionally or secondarily improves well-being or attainment of personal and social goals compared to alternatives.
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So how do we change what is happening so that it no longer impedes our goals and values, and so we can implement things that can assist their attainment?
First, we need to gain clarity that our dominant institutions and economic processes are not attaining and, indeed are preventing attaining our goals and values. The fallout from September 11, the Enron/government corruption, and books such as RFTW that lay out clearly for everyone to see what present processes are leading to, are bringing that consensus.
Second, we need to ask how to control what is out of control (and which arrogantly self-proclaims itself to be uncontrollable). There ARE answers - likely a multitude of pieces of effective answers - to that. I'll mention a few to at least suggest the possibility:
1. Democratic global political control. Global corporations can only be controlled by people, through global political institutions. Ones with power, funding, and independence. When our government, corruptly dominated by corporate interests, has veto and purse string power over the UN, there is no way it can control corporations far larger than it is.
2. Positive, public, and democratic trade agreements. GATT and NAFTA need to be turned upside down. Trade agreements need to be public and democratic, not secret; determined by sovereign governments, not private corporations; adjudicated by impartial public bodies, not the corporations themselves; and supportive of fair wages, environmental health, local autonomy, and improving quality of life everywhere.
3. Reform or dismantle the World Bank, WTO, and the International Monetary Fund. They have been instrumental in destroying the autonomous economy of country after country. Replace them with institutions enabling each country to develop their own way of life.
4. Constrain corporate actions. When corporations were established as "legal citizens", no restraint or limitations were established for their operation. Time has shown that unwise - entities with duration and potential wealth magnitudes above an individual person have unfair advantages and power. If necessary, and nothing else works, corporations can be eliminated. Or they could be required to be non-profit above a certain size, or become quasi-public, or otherwise appropriate restrained in the public interest.
5. Revise our patent, copyright and trademark laws, so that corporations over a certain size, market share, or other criteria cannot own or have power over intangible and intellectual property. Intangible capital (such as intellectual property, talent, networks, and brands) is something which can be shared and given to others at virtually no cost. Intangible capital is what is most powerfully running current globalization trends. It is something that can be given the rest of the world to repay our debts and empower them, while reducing the imbalance of global corporate power. By the time an invention reaches a certain $ or percent of market application, it inevitably has more than profited its inventors, and should be given to the public.
6. Restrict and control advertising and the international use of brands that are powerful incentives for economic centralization.
7. Establish public information networks to make "best-practices" available freely to all on the planet, and cooperatives to share the fixed expenses and knowledge of good practices.
8. Tax wealth to reduce inequity. It's time to share.
9. Give free access to public media for political candidates, and severely limit political contributions and expenditures above that. The airwaves are publicly owned. Why should a candidate have to depend on crippling fundraising and expenditures affordable only for corporate business interests, to use a public media? Why should we even consider "public financing" of access to public media instead of making that access a prerequisite to licensing such media?
10. Review and restore business regulation - requiring separation of financial, media, and other businesses; centralized multiple ownership of media outlets; user financing of TV rather than advertising, etc. Aligning incentives with new goals, such as evaluation of CEO's based on achieving long-term benefits rather than immediate resource liquidation can align business practices with public good.
11. Replace economics with eco-nomics. Disengage the seeking of our personal and societal goals from the tyranny of quantitative economic theory that was developed to support goals we now see contrary to our well-being.
12. Take action on the "Ten Easy Pieces"12 to end terrorism and begin movement towards a more just world.
Third, we need to develop a vision of the kind of world we wish to have, and fine-tune the educational, regulatory, and cultural incentives to align our actions with those goals.
If we want a positive future, we need to understand what comprises and generates that future, and take the steps to achieve it. Equity, security, sustainability, responsibility, giving, and sacredness are the elements that constitute a durable and rewarding culture.13 A central element of our economics has been discounting the future analytically and in real life. We already live in that future, and have already received significant "discounting" and reduction of our well-being. We now are faced with a future of strife, terrorism, reduction in civil liberties, global warming and pain. An economics of wholeness, which shows true costs and doesn't discount the future, can produce ten-fold improvement in our entire economy. As farmers say, "Don't eat your seed corn."
1. Wigg, Mark, "The Economics of Sustainable Forestry", SOCIETY OF AMERICAN FORESTERS, 1989.
2. Carey, Andrew; Lippke, Bruce; and Sessions, John, "Intentional Systems Management: Managing Forests for Biodiversity," JOURNAL OF SUSTAINABLE FORESTRY, Vol. 9(3/4), 1999.
3. Willer, Chuck and Hall, Daniel, "Long Rotation Forestry: Making the Most of Our Commercial Forests," 1999.
4. Curtis, Robert O. "Some Simulation Estimates of Mean Annual Increment of Douglas-Fir" USFS Research Paper PNW-RP-471, 1994.
5. Bender, Tom, "Improving The Economic Value Of Coastal Public Forest Lands," 1994.
6. For example, Richard B. Norgaard and Richard B. Howarth, "Sustainability and Discounting the Future," in ECOLOGICAL ECONOMICS, 1991; Colin Price, TIME DISCOUNTING AND THE FUTURE, 1993.
7. See Ernst Von Weizsacker and Amory and L. Hunter Lovins, FACTOR FOUR, Earthscan, 1997; Paul Hawken, Amory and L. Hunter Lovins, NATURAL CAPITALISM, 1999; Tom Bender, LEARNING TO COUNT WHAT REALLY COUNTS, 2002.
8. Tom Bender, 2002, above.
9. Andrew B. Carey, Bruce R. Lippke and John Sessions, "Intentional Systems Management: Managing Forests for Biodiversity," JOURNAL OF SUSTAINABLE FORESTRY, Vol 9(3/4) 1999.
10. Lowell Bryan, Jane Fraser, Jeremy Oppenheim and Wilhelm Rall, RACE FOR THE WORLD, Harvard Business School Press, 1999.
12. See "Ten Easy Pieces - of a Better World," Tom Bender, DAILY ASTORIAN, 31 October '01.
13. See "The Izu Principles," Tom Bender, Oct. '94.
©12 April 2002
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