The Sustainability Transition

to a New Green Economy

The New Economic Sector

Posted by Maggie Winslow on November 1, 2008

The financial crisis has made abundantly clear what many economists have been arguing for decades: The free market can not be depended on to maximize social welfare. Free markets can be very efficient for allocating resources in certain types of markets. The promise of free-markets hold when certain conditions are met. However, free markets have proven to be poorly adapted to protecting the natural world, the basis of our collective wealth. Obviously now, they are also unable to successfully work in the financial economy, where most of the ‘goods’ have no actually value, rather a perceived value. One of the problems the government experienced with the bail-out plan was at what price to value credit default swaps. Their value is derived from other values and also depends on perception and expectations. Adam Smith differentiated between real value and perceived value. Goods with real value can be more easily prices through the forces of supply and demand. Goods with perceived value are likely to experience bubbles and crashes and wreak havoc on markets. This is one reason why the head of the central bank of Mexico called the marketing of ‘derivatives” – those financial instruments that derive their value from other goods – unethical. The financial economy is supposed to lubricate the real economy, allowing for savings to be efficiently transformed into investments and to provide for insurance to mitigate swings of fortune in the real economy. Allowing the financial economy to become a market in its own right and lightly regulated at that was an invitation to disaster.

So why a New Economy? The financial crisis has highlighted the need for a reconsideration of how our economy works and part of this rethinking must entail consideration of how the natural world links to our economy. It is not simply a source of resources and a dumping ground. It is the foundation of wealth. The financial crisis is relatively easily solvable because it just related to money. An environmental crisis will be much more intractable and profound. It is harder to solve sea levels rising, massive species die-offs and changing weather patterns which make large areas of agricultural land more tenuous.

Rather than relying on disposable consumer goods to prop up our economy and maintain employment, we need a new economic sector – natural capital maintenance. This sector would include economic activity related to increasing energy efficiency and renewable energy development, preserving water resources, and preventing further environmental degradation such as soil run-off. This sector could create millions of jobs, make our society richer and stronger in the future.

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