We humans are a clever lot. We are curious about the world, and we are natural problem solvers within it. When we are free from ideologies and other delusions, we have a strong affinity for the natural world, and a genuine wish to live within its means and to protect it from harm.
But we humans are now chained to an economic system that is currently a planet destroying machine. So if we want to break free, and gain the power to save the planet and the human societies it nurtures, we need to understand the nature of the problems that make the economic system so destructive, and then decide on the best solutions to correct those underlying causes of dysfunction, and set some transition plans and put them into action.
As we start to look at what makes the economic system so destructive, we immediately come to realise that finance is at the heart of the problem. The system that creates the money on which the economy operates is driving the perpetual expansion of the volume of economic activities that deplete the planet’s finite resources and natural systems.
Already, armed just with the concept that finance is the problem, we gain enormous power. The way that finance works is subject to our political institutions, which are in turn subject to our collective political will. So finance is not some independent force of nature, it is something that we can control, should we be willing and able to gather the necessary political will to do so.
In this article we will come to see that fixing finance actually comes with enormous social and ecological benefits, along with dramatic improvements to the efficiency and stability of the economic system.
This article presents an overview of a powerful and elegantly simple solution to address climate change. If adopted at the global level, it would allow climate change to be controlled at its very cause, which of course is the dangerous concentrations of greenhouse gases in the atmosphere.
A self funding control system
This proposal is one particular application of the self funding fee-rebate model, which uses pricing signals to control market outcomes. Briefly, the model has a specific goal for each market outcome, which is something that can be measured in the real world, and a desired trajectory for that goal to follow over time. There is a cost price applied to economic activities that drive the market outcome away from the desired trajectory, and a reward price that is paid out to economic activities that drive the market outcome towards the goal trajectory. The revenues collected from destructive activities are fully distributed to constructive activities.
The pricing signals are dynamic, and will rise and fall according to the measured performance of the market outcome compared to the desired trajectory. If the market has outperformed the target, the pricing signal will be reduced, and if the market has under-performed the target, the pricing signal will rise to increase the power of the incentives and disincentives.
Control market outcomes, not businesses
The pricing signals will control aggregate market behaviour with respect to the particular goal, without dictating to market participants how to go about their business. They will of course try to maximise their profitability, by changing their business activities to better exploit the new incentives and better avoid the disincentives created by the pricing signals, but the way they find those efficiencies and innovations is completely up to them.
Grow the good, and shrink the bad
The overall effect of the pricing signals is to cultivate and maximise the volume of economic activities that serve the goals, and to minimise or even eliminate economic activities that harm the goals. The ratio between the volumes of constructive and destructive activities is controlled by the dynamic pricing in an increasingly precise method of forcing the overall goal outcome to follow the specific trajectory laid out for it.
The ultimate model of climate action
This model of control, armed with just the singular goal of controlling greenhouse gas concentrations, would be an absolute game changer. The actual costs of emissions and the actual value of carbon sinking would be embodied in the prices of all inputs to economic activities, so every economic decision would automatically take into account the impacts on greenhouse gas concentrations.
We are approaching many limits to growth over the next decades: Economic contraction, peak energy and geopolitical stress. Nicole Foss explains how the deflationary dynamics that always follow finance and property bubbles will rapidly impact individuals and communities, while the longer acting forces of peak oil and climate change will determine and limit the nature of any economic recovery. So how can we adapt?
This talk offers a profound understanding from the systems perspective of the current realities of finance and economics, and the serious predicament we are in. Here is the full audio recording of the talk, originally posted here, and it might be all that some readers need in order to absorb the excellent analysis in full:
For others, including me, the Foss talk has simply too many good arguments in such a rapid-fire stream of great points, with each requiring some considered reflection, that it is impossible to keep up with.
Each of the following sections of this article contains a far more digestible snippet of the audio, and a transcript to go with it. Together these should make it much easier to navigate, contemplate and absorb this great argument, piece by piece.