Analyzing sustainability

by Dr. Dennis R. Murphy

 

A new catchword has gained in popularity lately and that is “sustainability.” Even corporations have caught on, and four years ago Dow Jones began to produce a “sustainability index” related to a complex of indicators, including economic, environmental, and social criteria for some 300 companies in 23 countries that are leaders in terms of “sustainability.” It is meant to provide information to investors about the likelihood of the rated companies maintaining their records of achievement.

There is another notion of sustainability, and all you have to do is type the term into your Google search engine to find a host of references. Largely, the sustainability movement is focused on environmental issues. One such group, The Alliance for Sustainability, forthrightly states as its mission “to bring about personal, organizational and planetary sustainability through support of projects that are ecologically sound, economically viable, socially just and humane” as if these are a set of trade-offs. They are generally in favor of limited growth, population control, the Kyoto Protocol, and so on. They are not in favor of humility!

In short, many of these groups insist that the “ecological balance” of the planet is threatened. One of these leaders, the Economic Sustainability Index, a joint project of Yale University, Columbia University, and the World Economic Forum, recently reported that the United States was ranked 51st, behind such countries as Iceland (8th), Botswana (13th), and France (33rd). When some criticism was leveled at the rankings, a revised list was published that put the United States at 45th.

The index is constructed in five categories:

• environmental systems,

• environmental stresses,

• human vulnerability to environmental risks,

• a society’s institutional capacity to respond to environmental threats,

• and a nation’s stewardship of the shared resources of the global commons.

These are obviously highly subjective measures, and the United States was particularly criticized for its alleged failure to control green house gases and other perceived threats to the “shared resources of the global commons,” a rather interesting, if fanciful term. Of course, the US position regarding the Kyoto Protocols is cited as prima facia evidence of our malfeasance.

Now, it is all well and good to be sensitive to these issues, but some parts of the agenda of these “green” organizations seem very familiar. Years ago we became accustomed to the language of “spaceship earth” and the drumbeat of warnings that resources were being exhausted by growing populations and intensified industrial use. An early proponent of this notion was the Club of Rome, a think tank that in 1972 published a seminal report, The Limits to Growth that presented an apocalyptic view of the future. The thinking that lead to that report has been resurrected lately, most recently at the UN-sponsored World Conference on Sustainable Development in Johannesburg, South Africa, this summer.

But the Limits to Growth theories and predictions have been proved wrong time and again. What they missed, and continue to miss, is the role of technological progress, and the inapplicability of so-called fixed coefficient production functions. It was a matter of ideology – and article of faith – that the world had reached its limits. This has lead to a number of devastating results.

One of the clearest has been the third world debt crisis. Although recently pushed off of the financial pages because of other concerns, it is still very real and was born of the “ideology of scarcity” that grew out of the limits to growth mentality. The world was imagined to be running out of resources, and therefore raw materials prices would rise without limit. If the price of commodities went up forever, it followed that the best place to invest your money was in commodities. The primary producers of commodities were Third World countries that lacked industrial capability but controlled natural resources needed by the industrial world. So investors, including the World Bank, began pouring billions of dollars into ventures from Mexico to the Philippines to Nigeria, all designed to produce raw materials. Since oil was going to cost 40, 50 or even 100 dollars a barrel on spaceship earth, the cost of production was not critical. The price was going up and it was important to get in while the getting was good.

Of course, the inevitable happened. When Third World mega-projects started production, the price of commodities collapsed. When prices fell below the cost of production, projects went bankrupt. The Third World debt crisis originated in an ideology of commodity scarcity that precipitated unwise investment decisions.

This is best summed up in the famous wager between economist Julian Simon and leading Club of Rome scare monger Paul Ehrlich, a man frequently in error but never in doubt. In brief, Ehrlich, who had earlier confidently predicted that England would no longer exist by the year 2000, picked a bundle of five basic metals in 1980 that he was certain would increase in price over the coming decade. If the inflation adjusted price of the metals increased, Simon was to mail Ehrlich a check for the difference. If they fell, Ehrlich would pay Simon. Ehrlich said at the time, “Simon is wrong about the economics of mineral resources … I and my colleagues … jointly accept Simon’s astonishing offer before other greedy people jump in.”

Simon won the bet handily, and would have won even if the prices had not been adjusted for inflation. The table shows what happened:

The reason why Ehrlich was wrong, and why today some of those who tout so-called “sustainable growth” are wrong, is that as New York Times Magazine writer John Tierney summed up changes in the use of metals in the 1980s:

Prices fell for the same Cornucopian reasons they had fallen in previous decades — entrepreneurship and continuing technological improvements. Prospectors found new lodes such as the nickel mines around the world that ended a Canadian company’s near monopoly of the market. Thanks to computers, new machines and new chemical processes, there were more efficient ways to extract and refine the ores for chrome and the other metals. For many uses, the metals were replaced by cheaper materials, notably plastics, which became less expensive …, Telephone calls went through satellites and fiber-optic lines instead of copper wires. Ceramics replaced tungsten in cutting tools. Cans were made of aluminum instead of tin…

The available evidence is that economic progress leads to environmental progress. One of the hopeful outcomes of the World Summit on Sustainable Development referred to above was some recognition of that fact in the final report, over the objections of the basically anti-capitalist radicals.