Tuesday, May 11, 2010

the trophic theory of money

Video - Fun facts about money.

steadystate.org | I introduced the trophic theory in chapter 3 of Shoveling Fuel for a Runaway Train. The theory, in a nutshell, is that the volume of real money (adjusted for inflation) in an economy is a pretty good indicator of the ecological impact of that economy. I believe that the trophic theory of money should become the principle monetary framework in ecological economics, and am grateful that it will be presented in the second edition of the Daly and Farley textbook.

Let’s review the basics here. In ecology, or the economy of nature, “trophic” refers to the flow of energy and nutrients. The lowest trophic level is the producers, or plants that produce their own food in the process of photosynthesis. Herbivorous animals eat plants, and carnivorous animals eat herbivores. That’s the economy of nature in a nutshell. No plants, no animals. In other words, plants are the foundation in the economy of nature, and they must be productive enough to produce more food than needed only for their own reproduction. There has to be surplus plant production in order for herbivores to exist and, in turn, enough herbivores to support the carnivores.

In the human economy, the producers are farmers. Only with an agricultural surplus can there be a division of labor into manufacturing and service sectors. There are, of course, complex nuances to trophic theory, whether applied to the economy of nature or the human economy. I have addressed some of these nuances in the journal Conservation Biology and in our CASSE fact sheet on the Trophic Structure of the Economy. If, for example, you’re wondering where the service providers fit in these trophic levels, I recommend the article in Conservation Biology.

Here, we’ll stick with the basics and tie this trophic theory right back to the origin of money. By “origin,” I’m not referring to the development in the human mind of abstract exchange value, nor to the evolution of monetary instruments from wampum to legal tender. Rather, I am referring to the agricultural and extractive surplus that frees the hands for the division of labor and makes money a meaningful concept and a useful tool of exchange. More real money means more agricultural surplus and therefore more environmental impact.

“Real” money, as we know, means adjusted for inflation. In the simplest of terms, inflation means rising prices, which makes your money worth less. The problem with this simple definition is that it puts the focus on money, so monetary policy miracles are sought to fix the problem. What gets overlooked is that the prices are of real things, real goods and services. That’s why inflation is measured using baskets of goods and services ranging from milk to shirts to haircuts. Even funeral expenses go into the calculation of inflation.

All of these real goods and services occupy some portion of the economic trophic structure. Because this trophic structure as a whole can only increase with increasing agricultural and extractive surplus, an expanding real money supply represents an increasing environmental impact. To think otherwise is to fall into the fallacious trap that “there is no conflict between growing the economy and protecting the environment.” So the trophic theory of money helps to explain why there is a fundamental conflict between economic growth and environmental protection, and why that conflict cannot be solved by throwing evermore money at it.

The trophic theory of money also helps to explain financial and monetary crises. The monetary authorities and banks can extend credit and expand the money supply all they want, but if the capacity of the planet to generate more real money has been exceeded, credit leads to default, and the expanded money supply becomes “unreal” or inflated.

The main thing to remember, though, is that money – real money – represents a unit of pressure on the environment. Benjamin Franklin said, “A penny saved is a penny earned.” Accounting for inflation, we might say, “A dollar spent is a dollar burned.” But what does that mean, “burned?” Let me explain by example.