Growth and sustainability

[Kim Warren Kim strategydynamics.]

Posted by ""Kim Warren"" <Kim@strategydynamics.com>
Some great talks on this issue at last week's conference reminded me of
something I have long wanted to understand, and wonder if anyone can
help with.

There is clearly a link between economic growth and consumption of
resources, but is this link modified by what is consumed? Three examples
come to mind

- if someone spends $100 on music downloads, this presumably contributes
to economic activity without consuming physical resources

- if someone spends $100 on designer shoes rather than $30 on unbranded
alternative, does the price difference contribute to economic growth?

- if someone spends $100 on a haircut, say [not in my case, being
follically challenged!] rather than on a physical product, does that
also contribute to economic growth without consuming scarce resources?

.. not that I'm disputing for a second the need to cut
resource-consumption.

Sorry if this is a naive question, but other non-economists may be
wondering about the same question.

Kim
Posted by ""Kim Warren"" <Kim@strategydynamics.com>
posting date Thu, 28 Jul 2005 11:50:47 +0100

[vze4gqr9 verizon.net]

Posted by <vze4gqr9@verizon.net>
Re: Kim's haircut issues.

I could be mistaken, but don't economists consider time a resource? If so, the barber's
time is consumed, and the opportunity cost is whatever the barber could be doing instead.

I have no clue how to think about the shoes. Seems to me that any time someone pays
a premium for fashion -- some brain cells were consumed somewhere along the way.
But I still have a Nehru jacket in my closet, so what do I know?

Steve
Posted by <vze4gqr9@verizon.net>
posting date Thu, 28 Jul 2005 09:44:00 -0400

[Christian Erik Kampmann cek.mark]

Posted by ""Christian Erik Kampmann"" <cek.marktg@cbs.dk>
Kim, as I remember my econ theory, all of your three examples contribute to
economic value creation and hence to economic growth, both conceptually and
as part of the national accounts. The music download is an example of a
production with very small variable costs, but the fixed costs of the
infrastructure supporting the internet does consume resources (hardware,
energy, etc.). Both that and the haircut are examples of service industries
which, contrary to what you may think, are typically quite capital and
resource intensive (due to the use of transportation equipment -- think of
the airline industry for example, office buildings, etc.). The hairdresser
needs to heat and light up the salon, for instance. The designer premium
brand is an interesting example: here you may talk of relatively pure
value creation that does not directly consume resources. As you indicate,
the consumption of natural resources very much depends on what product
you're talking about.

Christian
Posted by ""Christian Erik Kampmann"" <cek.marktg@cbs.dk>
posting date Thu, 28 Jul 2005 16:03:03 +0200

[Finn Jackson finn.jackson tangle]

Posted by ""Finn Jackson"" <finn.jackson@tangley.com>
Great and important questions, which I think boil down to: ""Is the link
between economic growth and consumption of
resources modified by what is consumed?""


- if someone spends $100 on music downloads, this presumably contributes
to economic activity without consuming physical resources

Well, yes it probably consumes minimal electricity and infrastructure
resources during the download. But we have no idea what resources it took to
create the music track in the first place.
Ecologists (if we are talking about growth and sustainability) like to look
at ""whole life costs"" when comparing alternatives. There is no [ecological]
point buying a long life lightbulb that saves me '1 tonne' in resources to
use but costs an extra '2 tonnes' to manufacture.


- if someone spends $100 on designer shoes rather than $30 on unbranded
alternative, does the price difference contribute to economic growth?

If we assume that similar resources used to make both pairs of shoes then
yes. (Assuming that I measure 'economic growth' as sales revenue.)
This shows that economic growth can also by modified *how* resources are
consumed, as well as *what* is consumed:
- A bag of sand can sell for $10 for use in a child's sand pit.
- Or it might sell for $100 if converted into glass.
- Or it might sell for $10,000 if converted into silicon chips.

Returning to the shoes example, we can also see that costs affect
sustainable growth.
If the designer shoes cost $99 to sell for $100, and the unbranded shoes
cost $1 to sell for $30, then the organisation selling one pair of unbranded
shoes is clearly more *sustainable* than the organisation selling one pair
of designer shoes.
So the relative rates of sales tax and taxes on profits will also be
important. Which means that the answer to the question also ""depends what
you mean by 'economic growth'"".


- if someone spends $100 on a haircut, say [not in my case, being
follically challenged!] rather than on a physical product, does that
also contribute to economic growth without consuming scarce resources?

Yes.
The service sector now accounts for more than 50% of the global economy, and
substantially more in 'developed' countries. And in the service sector we
are generally paying for people's time and expertise (which is accumulated
time) rather than for physical materials.
More generally there is a line of thought which says that the only costs
that exist are people's time and taxes. For this service example it is
relatively clear. For a 'product' we can think that its cost is a
combination of people's time, plus the machinery/equipment they used. And
that equipment ultimately came from raw materials 'extracted' from the
ground. And their costs of extraction: more people, equipment, and the taxes
that were levied by the state. So the only costs, ultimately, are people's
time and taxes.


Some points around an issue. I wonder what Kim's underlying question/purpose
was.


Finn Jackson
finn.jackson@tangley.com
www.finnjackson.com
Posted by ""Finn Jackson"" <finn.jackson@tangley.com>
posting date Thu, 28 Jul 2005 15:44:11 +0100

[rgd6 cornell.edu]

Posted by <rgd6@cornell.edu>
Another issue here is that the money generated as profit is used by others
to buy additional goods. Designer shoes create excess profits that are then
used by the owners/stockholders to buy a BMW or two.

In his interesting book ""Shoveling Fuel for a Runaway Train: Errant
Economists, Shameful Spenders, and a Plan to Stop them All"" Brian Czech
refers to high income spenders as ""liquidators"" who are using more than
their needed share of resources. He argues (I recall) that service
industries are only slightly better at conserving resources than other forms
of consumption.

His book parallels, in a popular style, some of what is said in Herman Daly
and John Cobb's much more detailed ""For the common good"".

Those interested in sustainability issues should read these.

_____________________
Richard G. Dudley
Bogor, Indonesia
please reply to rgd6@cornell.edu
http://www.people.cornell.edu/pages/rgd6
Posted by <rgd6@cornell.edu>
posting date Fri, 29 Jul 2005 19:10:37 +0700

[Klaus-Ole Vogstad klausv stud.nt]

Posted by Klaus-Ole Vogstad <klausv@stud.ntnu.no>
Each economic activity requires goods and services from virtually all
other economic activities as well.
This interdependency of economic activity was described by W. Leontief
in the 30ies by his input-output model of the economy :
x = Ax + d
where
d is final demand vector
A is a matrix representing dollars of purchase from sectors i needed to
produce one dollar from sector j. Thus Ax represents intermediate
requirements and x is the total requirement vector to produce d.

Later on, the economic input-output model was extended to include the
emissions and resource consumption associated with each sector. LCA
practitioners are now using Input-output tables with different levels
of aggregation to figure out the types of questions that you
specifically asked.

Service sectors do typically not consume physical resources directly,
but do indeed induce intermediate requirements (Ax) that in turn
consume physical resources besides causing pollution.

Concerning your example, spending $100 on a haircut, generates 185$ of
economic purchases, consumes 46 kWh of electricity, release 70 kg CO2
equivalents, 1.5 kg Hazardous waste and consume 2.6 kg of ores.

Purchases of beauty & barber shops from other sectors include Real
estate agents, advertising, utilities, communication services,
manufacturing industries, refineries, paper & pulp etc.

Have a look at http://www.eiolca.net where you can perform these
calculations online using the 1992 US IO table linked to emission
databases.

Posted by Klaus-Ole Vogstad <klausv@stud.ntnu.no>
posting date Sun, 31 Jul 2005 16:18:31 +0200

[Kim Warren Kim strategydynamics.]

Posted by ""Kim Warren"" <Kim@strategydynamics.com>
Thanks - this is very helpful indeed to a novice on these issues like
me.

Presumably, there would also be a difference between a Gucci handbag for
$1,000 and an unbranded one for $30 .. to do with the
resource-consumption of all the marketing efforts etc. ?

I guess my 'supplementary' question, then, is does each service *have*
to consume so much resource, or could we feasibly design an
'economy-lite' that still generates economic value, but eats up and
throws out less stuff?

Kim
Posted by ""Kim Warren"" <Kim@strategydynamics.com>
posting date Mon, 1 Aug 2005 22:18:24 +0100

[Erling Moxnes Erling.Moxnes ifi.]

Posted by Erling Moxnes <Erling.Moxnes@ifi.uib.no>
Kim,

This is a good question that we all should think about. Here is one answer.

My favourite example is fiddle playing versus driving you own jet plane.
Both options challenge you, give you exiting experiences and give much
meaning to life. The resources consumed differ vastly - fiddles made of wood
typically last very long (e.g. Stradivarius and Guarnerius still are still
ranked as the best in spite of being hundreds of years old), air planes last
much shorter and require metals and fuel. Hence what you consume matters for
the use of natural resources.

However, (ignoring that downloading music requires both energy and much
equipment) in order to pay for the music and to pay the extra for the
designer shoes, you have to produce the jet planes that the artists and the
owners of the brands desire. (Well, in a money economy, the artists and the
owners of brands pay someone else with your money to produce the air planes,
and you will have to produce what the plane makers need for their living,
and then you give the money you earn to the shoe maker or to the artist.) If
of course the artist is a true artist and the shoe maker is as well, they
will buy good fiddles for the extra money they earn and not air planes.
Since you probably do not know what these people will do with your money,
you really cannot control what your expenses are used for, with the
important exception that fiddles and air planes clearly require different
inputs of natural resources.

GNP is ideally a measure of how much we produce, and when this measure
increases we have economic growth. Thus if your hairdresser cuts twice as
fast as she used to, economic activity doubles. If this happens without
costs to the hairdresser, the effect on resource depletion depends on what
the hairdresser consumes with her dobled income. If efficiency increases due
to more use of energy (high speed electric scissors), more natural resources
are used.

So to keep resource extraction as low as possible, you should start playing
the fiddle, visit a cheap, slow and nice hairdresser, and quit work at 12
o'clock so that you have no money to spend on products that lead to resource
use - directly in jet planes or indirectly through brand owners.

Good luck,

Erling Moxnes

--
Posted by Erling Moxnes <Erling.Moxnes@ifi.uib.no>
posting date Mon, 01 Aug 2005 15:47:29 +0200

[Colm Toolan subscriptions toolan]

Posted by ""Colm Toolan"" <subscriptions@toolan.de>

>I guess my 'supplementary' question, then, is does each service *have*
>to consume so much resource, or could we feasibly design an
>'economy-lite' that still generates economic value, but eats up and throws
>out less stuff?

Kim,

Neil Crofts has done a lot of thinking and writing relating to the idea of
""Authentic Business"" which addresses just this question. In addition to his
own experience he has also documented several examples of successful and
very successful companies, which have thrived on these very principles. See
http://www.authenticbusiness.co.uk

Regards, Colm

Colm Toolan, Business Architect
Isarweg 35, 24146 Kiel, Germany
W: www.toolan.de
Posted by ""Colm Toolan"" <subscriptions@toolan.de>
posting date Tue, 2 Aug 2005 14:36:46 +0200

[Matzaball50 aol.com]

Posted by Matzaball50@aol.com

>"" guess my 'supplementary' question, then, is does each service *have*
>to consume so much resource, or could we feasibly design an
>'economy-lite' that still generates economic value, but eats up and
>throws out less stuff?""

The answer is yes, IF people are willing to 'buy' a product resource
friendly and NO if they are not. I do not believe you can plan an entire economy.

It is not a matter of 'marketing' in my opinion. It is a matter of what a
consumer views as 'value'. If a consumer cares only about the monetary cost and
not about anything else, then that will be reflected in their purchasing
decisions.

Marketing can only convey a message, it can't convince someone it is a
message worth valuing. That lies only within each of us.

regards,

Marc
Posted by Matzaball50@aol.com
posting date Tue, 2 Aug 2005 18:52:20 EDT

[Tom Fiddaman tom vensim.com]

Posted by Tom Fiddaman This is not at all a naive question - there are so many dimensions to the answer I hardly know where to begin or end. Nevertheless I'm always game for a good ramble, so here goes. First comes the question of "growth of what?" Usually this means GDP, but that just conceals the sort of problem you describe. One of the basic points of World Dynamics/LTG was that material growth needs to stop at some point, but growth of intangibles doesn't. Whether a stable resource trajectory implies rising GDP or not really depends on whether GDP is a good measure of welfare. There are lots of fallacies about GDP growth. For example, the widespread idea that consumption drives growth is rather nutty. Consumption just makes stuff disappear, hopefully creating some welfare along the way. Growth comes from accumulation of something - e.g. physical capital or knowledge. Solow showed long ago that capital accumulation played a limited role and that technology (in a broad sense) had to play a major role. So, consumption only drives growth through transient effects (e.g. increasing utilization of existing capital) or expectations (driving up goods prices, signaling to producers to invest in capital or R&D to produce something). I suspect that has a lot to do with why the huge consumption stimulus we've had in the US hasn't done much. Another common GDP growth fallacy is seen in sectoral cost-benefit analyses, which often employ multipliers to capture the benefits of spillovers in activity to other sectors. The usual argument runs that if we spend in the lolipop sector, it will also benefit the diabetes pharmaceuticals, cardboard stick, and artificial color sectors, resulting in some % of additional activity. Of course, if you add up all the sectoral multipliers, the total will exceed the full economy, so something must be wrong. The big issue of course is ignoring the budget constraint, i.e. that rubles spent in one sector have to come from somewhere else. It's often argued that growth reduces resource consumption and pollution (i.e. the Kuznets Curve - you have to get rich to protect the environment). Personally, I don't put much faith in that argument. It's a bit of a sleight of hand (the rich consume/pollute less per $ of GDP, but the intensity reduction is slower than growth, so they consumer more in absolute terms) and analyses typically neglect the resources embedded in imported goods, and thus the shift of resource-intensive polluting industries to developing countries. In a technical sense, it's hard to determine the real resource intensity of goods and services. For example, the music download requires a big network, server and player infrastructure; one estimate I've seen is that the per-user electric burden of the internet is approximately equal to a refrigerator - which is quite a bit of power consumption, not to mention all the associated capital. What you need is an input-output table that lets you see how $ spent in a sector propagate to input requirements from other sectors. Or, price the resources correctly and the market will propagate those prices to end use products so no one has to think (good luck). The most interesting recent attempt at the growth/resource problem I'm aware of is an article by Ken Arrow, Paul Ehrlich, and a bunch of other economists and ecologists; a popular account is at http://iis-db.stanford.edu/pubs/20898/A ... o_Much.pdf . I think it's a valuable approach, but suffers from serious shortcomings.It uses market prices to value resources, and neglects resource flows embodied in imports. Natural and built capital are presumed to be fully substitutable. The authors are well aware of these limitations, but others seem to be ignoring the caveats and drawing alarming conclusions, e.g. The broad implication is that richer countries are on a sustainable path while poorer ones are not,(from the article above). It's hard to imagine how the developed countries can consume 2/3 of the world's resource flow sustainably, while the poor's use of the other 1/3 is unsustainable. Even so, the article concludes that some regions - e.g. oil-rich Middle East nations - resource depletion is occurring faster than offsetting investment in human and physical capital. To come back to the core question, what is consumed certainly matters, but perhaps more for its direct resource implications than its growth implications. It's a long way between raw materials and human welfare, so there should be plenty of latitude to improve on our current state. Tom **************************************************** Tom Fiddaman Ventana Systems, Inc. =ttp://www.vensim.com PO Box=53 = Tel (406) 582=911 Wilsall MT=9086 &nbs=; Fax (202) 315 3570 Tom@Vensim.com &n=sp; http://www.sd3.info **************************************************** Posted by Tom Fiddaman posting date Tue, 02 Aug 2005 20:41:21 -0600

[Wehrenberg Stephen Dr. SWehrenbe]

Posted by ""Wehrenberg, Stephen Dr."" <SWehrenberg@comdt.uscg.mil>


Marc asserts that ""Marketing can only convey a message, it can't convince
someone it is a message worth valuing. That lies only within each of us.""

I'm a psychologist. Though marketing courses start with this premise--that
the role of marketing advertising is to inform consumers about their
choices--that premise denies where all the research in marketing and product
acceptance tends to go. My psychologist-colleagues working in the field of
marketing advertising are quite candid that their goal is to get the
advertiser's message into the consumer's head UNEDITED so that they may
convince the consumer to buy. The purpose of marketing advertising is to
persuade, plain and simple. And if done well, it can most certainly
convince someone that it is a message worth valuing.

Steve Wehrenberg
Stephen B. Wehrenberg, Ph.D.
HR Strategy and Capability Development Staff (CG-1B),
Director, Future Force
US Coast Guard
202-267-0624 swehrenberg@comdt.uscg.mil
Posted by ""Wehrenberg, Stephen Dr."" <SWehrenberg@comdt.uscg.mil>
posting date Wed, 3 Aug 2005 08:11:32 -0400

[George A Simpson gsimpso4 csc.co]

Posted by George A Simpson <gsimpso4@csc.com>


I just have some sketchy thoughts which might be of interest for this
thread; musings from a couple of weeks walking in the mountains of north
Wales.

The underlying question here is ""what is value?"".

Value is what the economy creates and moves around, and sometimes, but by
no means always, this involves substances.

Value is whatever people are willing to pay for.

Thus something may be of value today and worthless tomorrow.

Which is encouraging for SD investigators, as our time-based approach
allows us in principle to model the drivers of value change.

..george...

Dr. George Simpson, Principal Consultant, CSC Alliance: Performance
Engineer
CSC House, Fleet Hampshire, UK. GU51 2UY tel +44 1252 813930 mobile 07814
623518
Meetme UK 0207 9783400 9243039# email: gsimpso4@csc.com
Posted by George A Simpson <gsimpso4@csc.com>
posting date Mon, 8 Aug 2005 13:43:21 +0100

[Ken Coghill ken.coghill buseco.m]

Posted by Ken Coghill <ken.coghill@buseco.monash.edu.au>
For argument which challenges the remarkable, limiting assertion that
""Value is whatever people are willing to pay for"" (posted by George A
Simpson), read David Throsby's ""Economics and Culture"" Cambridge
University Press, 2001.

Ken Coghill PhD
Monash Governance Research Unit
Department of Management
Monash University
P.O. Box 197
Caulfield East 3145
Australia
Posted by Ken Coghill <ken.coghill@buseco.monash.edu.au>
posting date Tue, 09 Aug 2005 22:49:46 +1000