Thursday, 30 October 2008

Environment and its analogy to money

I mentioned a while back that environmental economic analysis should be as sophisticated and innovative as the Keynesian or monetarist revolutions had been. I am dissatisfied with approaches that work out the costs of future environmental damage and calculate its discounted value, because they seem inadequate to analyse or respond to the problem of global warming in particular, which could threaten life and civilisations.

Reading the sales pitch for the WWF Living Planet Report yesterday (here - downloading the full report into browsers instead of saving seems to lock them up, so beware), I came across the phrase

"[the possibility of a] financial recession pales in comparison to the looming ecological credit crunch"

which is true, to such an extent that the effects of recession are scarcely of the same expected order of magnitude. But the economic implications of the phrase - which seems rhetorical, rather than analytical - made me sit up.

Money is not a good like other goods, because it is present in almost all markets for goods. When a supply and demand diagram is drawn for, say, peanuts, the missing variable which is implicitly used but not explicitly included is money. No modern macroeconomic model could exclude money determination alongside and separate from aggregate good determination. Its properties are different, and critical for market operation.

So it is with the environment, most clearly through global warming. The effects of global warming will pervade almost every future market in goods, and it should be analysed on a multiple simultaneous approach to macroeconomics alongside aggregate goods and money. I do not know what its properties are, but its economic characterisation is certainly distinct from the other two. The recognition of its permeation is a first step towards finding the characterisation.

I think that the abstract representation is that goods like environmental use lie at the base of the economic pyramid on which everything else is built, and they move upwards to support production and consumption in other goods. The manner in which they do so is idiosyncratic to the good, so carbon dioxide release is generated and affects other production differently from other base goods like money, water, or oil. Oh, to be able to carry this analysis through!

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