How do you value the future?

 This is a current subject of much debate, not between politicians, not between engineers, not between individual citizens, but between environmental economists. Valuing the future has created texts devoted directly to deciding what is right or wrong, but who knows best? Before we can begin discussing the facts behind how, why, and when we should be valuing the future different from the present, we must first define some key terms that are imperative towards understanding exactly what “valuing the future” means.

Pareto Optimality: An efficient allocation is one that best satisfies individual wants weighted by the individual’s ability to pay -- that is, by their income and wealth.

Intertemporal Allocation: The apportionment of resources across different stages in the lifetimes of basically the same set of people (same generation).

Intertemporal Distribution: The apportionment of resources across different generations (different people).

Lorenz Curve: A curve plotting the cumulative percentage of the population against the cumulative percentage of total income held by that percentage of the population, which illustrates the degree of equality or inequality in the distribution of income.

Gini Coefficient: A measure of the inequality of the distribution of wealth or income across a population. A Gini coefficient of one implies perfect inequality (one person owns everything), and a coefficient of zero indicates a perfectly equal distribution.

Intertemporal Discounting: The process of systematically weighting future costs and benefits as less valuable than present ones.

 Now that we have defined some key terms that are imperative towards understanding how, why, and when we should be valuing the future as more or less than present day, we can now begin to figure out just what exactly environmental economists are debating about.

 The topic of renewable and non-renewable resources brings up debate when discussing intertemporal distribution, because each is treated differently when being considered for reasonable distribution across generations. Renewable resources are considered finite, so when considered for distribution across generations the renewable resources are given a higher future value based on intertemporal discounting, because the supply is finite even as demand increases exponentially. On the other end non-renewable resources are considered (income specifically) more important, and when being considered for distribution across generations non-renewables are valued less in future values as the intertemporal discounting interest rate increases to make it seem as though non-renewable resources are more cost effective to exploit presently for economic gain, then to preserve them for any future exploitation.

 This difference in renewable and non-renewable resources in relation to intertemporal distribution provides a stark contrast that is expressed best in intertemporal discounting, and the value of natural capital. Personally when considering this economic valuation of present and future values I find that I value the present and future as not more or less, but as the same. What I mean is that living in the present is VERY important, making decisions in the present that affect the future deserve the utmost logic, but those same decisions that affect the present and future should be taken into account for any future valuation, which is why I value the present and future as the same. This concept is reflected in economics much differently than I reflect it. In economics most economists use intertemporal discounting to create values for future amounts, the problem is that it is all based on our current money-market economy that creates a necessity for economic gain in the shortest span of time, which is present value. So when this happens economists use high interest rates (upwards of 3, 4, or 5 per cent) to include in intertemporal discounting creating a future value that is only a percentage of the present value amounts. A great example of this market failure is the idea of valuing a human life. Currently a human life is estimated to be worth around $10 million, but if we apply a three (3) percent discount rate to this it means that a human life five hundred years from now is only worth $3.81 in today’s valuation.

 So which human life would you like to occupy? The life you currently live, worth $10 million, or that of future humans five hundred years from now worth a TOTAL of $3.81. No wonder we currently exploit resources like there is no tomorrow, because according to intertemporal distribution and discounting from the world’s leading economists, the value of tomorrow will be so little it will nor be worth to live that long. Luckily for humanity, present and future, environmental economists are attempting to change the intertemporal discounting rate from the usual 3, 4, or 5 per cent interest, to a more reasonable rate of 0.5, 1, or 1.5 per cent interest that would value the future and its resources almost as valuable as present values.

 Let’s just hope the day comes soon enough to slow down our suicidal growth rates before all is lost.

P.S.
 Thank you for your interest, please comment and subscribe.

Onward,

Hayden van Andel

Is Small Beautiful?

The original publication date of the collection of essays Small is Beautiful by E. F. Schumacher was in 1973, and yet MOST of his text continues to ring true today in 2012. A little history regarding the author would be beneficial before we discuss the relevance of this work in accordance with today’s society. Schumacher was a respected economist who worked with John Maynard Keynes and John Kenneth Galbraith, and for twenty years as the Chief Economic Advisor to the National Coal Board in the United Kingdom. He was opposed to the tenets of neo-classical economics, declaring that single-minded concentration on output and technology was dehumanizing. He held that one's workplace should be dignified and meaningful first, efficient second, and that nature (like its natural resources) is priceless.

Now that we have an understanding of the author and the publication date, we can now begin to discuss the relevance of the text with its relation to modern day society. What was very interesting in the reading was the references Schumacher made towards the value of natural capital and the imperative realization of this concept among economists. This concept of 'natural capital' has most likely been around in different forms and terms since the greeks and romans developed the first economies of scale. What is interesting is in 1973 we had a very influential economist stating the effects of not valuing natural capital and the environmental destruction that follows, and now in 2012 we still have many more influential economists stating the same information and authoring similar texts in regard to 'natural capital’. These authors include Paul Hawken, Amory B. Lovins, and many more, and unfortunately we are seemingly in the same position as we were in 1973.

But this is somewhat wrong for a couple of reasons. First, Schumacher states in his text that, “[S]tatistics never prove anything.” This statement made by Schumacher is relatively mis-educated, because currently in our global society statistics provide key data that helps organizations prove that, for example the value of 'natural capital’ through the collection of data regarding the depletion rate of resources in comparison to there demand from society. So this statement made by Schumacher expresses the generation from which he was educated in and developed his theories in (a time when computers had VERY limited computing power).

Since the publication of Schumacher’s collection of essays a lot has changed in society for the better. One example of an area that is experiencing a change in thinking is technology and its relation to the efficiency of innovation in energy. In 1973 Schumacher predicted that by 2028 we would be experiencing an energy crisis the world has never witnessed before. The optimistic outlook in this bleak prediction is, that technology and its creators are beginning to realize their importance in innovating the energy sector to create less supply while providing for the increase in demand. Technology has now helped society exponentially update the energy sector with new and more efficient energy solutions each year while creating less demand for the non-renewable resources (oil, coal, natural gas) that we have been dependent on since the beginning of the industrial revolution.

With this understanding of the relation of Schumacher’s Small is Beautiful to today’s society we can now understand and realize that even though the concept of ‘natural capital’ has been around for tens of thousands of years the realization of the concept takes a lot more effort than predicted. So why not educate yourself on an emerging paradigm that holds its creation in the oldest civilizations known to current societies.

Thank you for your interest, please comment and subscribe.

Onward,

Hayden van Andel

Adopting and Innovating Agroforestry

In agriculture what is more important, diversity or abundance?

Unfortunately this is a loaded question and the answer is mixed, but most often then not the answer is more diversity leads to better agricultural operations. So how does agroforestry play into this diversity concept? To begin we have to define some key terms that help us understand how agroforestry and diversity then create successful agriculture operations.

Innovation/Technology transfer: Is the process of integrating new and innovative technology into operations in a way that creates a more efficient and productive environment.

Diffusion of Innovation Paradigm: The act of innovative designs being incorporated into society as a whole.

Agroforestry: Is a collective name for land use systems and technologies in which woody perennial are deliberately combined on the same land management unit with hervaeous crops and/or animals, either in some form of spatial arrangement or temporal sequence.

Indigenous Knowledge Systems: is human experiences, organised and ordered into accumulated knowledge with the objective to utilise it to achieve quality of life and to create a livable environment for both human and other forms of life.

Endogenous Technology: Is an economic theory which argues that economic growth is generated from within a system as a direct result of internal processes and will lead to economic growth by means of the development of new forms of technology.

Now that we have defined the key terms listed above we may begin to discuss how agroforestry plays such a large role in the diversity level of agriculture. The dissertation from Professor Bradley Tyndall titled The Anatomy of Innovation Adoption: The Case of Successful Agroforestry in East Africa (1996) is a very interesting text regarding the successful integration of agroforestry into farming in East Africa to increase maximum sustainable yield and create diversity. The most interesting aspect of this dissertation is the effectiveness of the Grevillea tree in producing fuelwood for the farmers in a sustainable manner. The Grevillea tree is a Silver Oak tree that grows in Australia and has recently been introduced to Africa. The amazing aspect of the Grevillea tree is its rapid growth and cultivation rate, this makes it extremely cost effective to divert a portion of land to the cultivation of these Silver Oaks for use as fuelwood.

In East Africa the poverty rate is rampant with a majority of the population unable to sustainably heat and cook in their own homes. With farmers producing an abundance of certain crops the soil has begun to deteriorate in quality of nutrient. So farmers have begun to grow and cultivate the Grevillea tree as a percentage of their irrigated land, in so producing different nutrients for the soil and later harvesting the wood as fuelwood for heating and cooking. All this culminates in the practice of agroforestry and the creation of diversity from abundance, which creates a win-win for the farmers of East Africa that do not rely on the energy and fuel from the corrupt governments, and it creates a healthier soil that is more diversified in cultivation.

With the Grevillea tree being used solely for private utility this makes it a non-market good, as it is not commercially sold in the area. But being a non-market good still creates a high demand product. Currently 94 percent of farmers in East Africa grow and harvest the Silver Oaks for private use, seeing that they are cost effective, have rapid maturity phases, and consume at a very efficient rate, the percent of farmers may have grown to close to 100 percent in East Africa alone and even more around the world. The Grevillea tree should remain a non-market good, because it is extremely efficient towards farming techniques creating diversity in crops as well as creating sustainable operations for numerous families in rural East Africa.

This is just one example of a resource that may create diversity out of abundance, and in doing so increasing the efficiency and cost effectiveness of an agricultural operation.

Thank you for your interest, please comment and subscribe.

Onward,

Hayden van Andel