MMT to Address Global Warming: J.D. Alt's Macroeconomic System for Climate Change

Macroeconomic System for Climate Change. J.D. Alt, New Economic Perspectives. Jan. 7, 2019.

A U.S. Patent Application

Inventor:  J.D. ALT (acknowledging all advocates of modern fiat money)

Assignment:  To all citizens of democratic free societies

Abstract:

A macroeconomic system including the issuing of a fiat currency by a sovereign government; the establishment of a tax regime on the government’s citizens wherein the taxes levied can only be paid with the sovereign government’s fiat currency; the sovereign government’s debiting of its tax collection account to purchase goods and services from its citizens and their commerce; the sovereign government’s issuing of future fiat currency certificates—to be redefined as “treasury bonds”—which it trades, at a discount, for existing fiat currency held in private financial markets; the sovereign government then spending the traded-for existing fiat currency to purchase goods and services from its citizens and their commerce over and above what it is able to purchase by debiting its tax collection account; the management of the value of the said fiat currency relative to goods and services by the general means of draining the currency from circulation through the sovereign tax regime—and by the specific means of controlling the discount and time-to-maturity of the issued future fiat currency certificates (treasury bonds); and wherein the sovereign government’s spending is thereby enabled to be orders-of-magnitude greater than what the government collects in taxes—without encumbering the government with debt, and without devaluing the fiat currency with respect to the citizens’ commerce; said macroeconomic system thus enabling a sovereign government to spend whatever fiat currency is necessary to enable and assist its collective society to mitigate and adapt to climate-change.

Background of the Invention:

The present invention relates to the problem of a sovereign government paying for goods and services which are necessary for a collective society, represented by the sovereign government, to mitigate and adapt to climate-change; specifically, to the following general aspects of that problem:

1. Tasks which mitigate and adapt to climate-change are usually not tasks which generate financial profits, or are tasks which, if they ultimately have the potential to generate financial profits, are tasks with very high risk and/or very long lead-times for profitability and, for these reasons, are tasks which private, profit-making enterprise, has little or no incentive to undertake and accomplish. Therefore, if these necessary tasks are to be undertaken and accomplished, they must be paid for by the sovereign government representing the interests of the collective society.
2. The cost of the goods and services necessary to mitigate and adapt to climate-change—which must be paid for by the sovereign government—are projected to be several orders-of-magnitude greater than any expenditures historically made, for any purpose, by a sovereign government; if the mitigation and adaptation tasks are to proceed, then, spending by the sovereign government will have to increase by several orders-of-magnitude beyond current, or historical, spending.
3. Increasing sovereign government spending by several orders-of-magnitude is prevented by an existing macroeconomic system which holds that a sovereign government may only spend currency which it has either collected in taxes from its citizens, or borrowed from private financial markets, thus limiting the government spending to some percentage of the currency held by private citizens, private enterprise, and the private financial markets—while each of these groups, pursuing their own natural interests, strives to limit the government’s taxing or borrowing from their currency, thus establishing and locking in a self-regulating mechanism which makes it impossible for the sovereign government to increase its spending by the orders-of-magnitude necessary to address the challenges of climate-change.

If a collective society is to successfully mitigate and adapt to climate-change, therefore, it is advantageous for its sovereign government to be capable of spending currency several orders-of-magnitude greater than what the government can acquire by means of tax collections or borrowing from private financial markets. More specifically, it will be advantageous if the sovereign government has the means—without collecting additional taxes or borrowing—for issuing and spending whatever currency is found necessary to purchase the goods and services necessitated by collective society’s efforts to mitigate and adapt to climate change. Within the definitions, assumptions, and operations of the existing normative macroeconomic system, however, it is unobvious how to provide a sovereign government with this capability. Specifically, the needed capability is thwarted by the existing macroeconomic system as follows:

1. If required government spending is greater than currency which has been collected in taxes, the existing macroeconomic system requires the government to issue treasury bond promissory notes which are traded to the private financial markets in exchange for currency held therein which the government shall then use for its spending; it is further understood that the government will pay interest to the promissory note (bond) holder until the bond matures, at which time the government will repay to the bond-holder the principal face-value of the bond.
2. To pay the interest and principal on the treasury bond promissory notes, however, the sovereign government is required by the existing macroeconomic system to collect additional taxes which puts it, therefore, in the illogical position of having to collect greater future taxes to make up for an initial tax-collection shortfall—or, alternatively, issue another round of treasury bond promissory notes to acquire the currency necessary to pay the interest and repay the principal on the initial promissory note issue, thus creating a Ponzi scheme which necessitates a continuous expansion of the tax base.
3. Because of the necessitated and continuous expansion of the tax base, the sovereign government can only justify the issuing of additional treasury bond promissory notes with arguments that, because of the additional government spending made possible by the new promissory notes, the aggregate currency held by private citizens, businesses, and financial markets will grow—thereby enabling the government to collect the greater future taxes that will be needed to meet the obligations of the new promissory notes.
4. The need to justify new government borrowing and spending with the forecast of greater future tax revenues makes it logically difficult, if not impossible, to curtail existing private sector enterprises which generate the tax revenues—most specifically and crucially (from the perspective of the present invention) those enterprises which substantially contribute to the carbon emissions responsible for the climate-change the government is seeking to mitigate.

For all these reasons, the norms of the existing macroeconomic system make it virtually impossible for a sovereign government to spend the currency that will be necessary to assist and enable its collective society to successfully mitigate and adapt to climate-change; compounding this difficulty, the existing macroeconomic system furthermore makes it virtually impossible to curtail profit-making enterprises responsible for the carbon emissions driving the climate-change itself.

It is therefore advantageous to envision a macroeconomic system which will remove these disadvantages.

Description of the Prior Art:

It is known for a sovereign government to establish a Central Bank which issues fiat currency as necessary to enable its citizens to engage in the profit-seeking commerce they choose, the currency being provided through a central bank system which extends credit to the citizens and their profit-seeking enterprises, and which, in turn, earns financial profits itself through the accrual of interest on the debt, while the Central Bank issues the fiat currency, as necessary, to keep the system liquid. It is also known, in such a macroeconomic system, for the sovereign government to claim a share of the profits in the citizens’ commerce, for its own spending purposes, by levying taxes on those profits, and requiring that the taxes be paid with the fiat currency issued by the Central Bank—a requirement which renders the fiat currency itself the de facto unit of account for all financial transactions, public and private, within the sovereign’s realm.

It is further known, in such a macroeconomic system, where the sovereign government’s spending purposes are not met by its share of the profits of the citizens’ commerce, for the sovereign government to issue interest bearing treasury bond promissory notes, which are traded for fiat currency held by the private financial markets, the traded-for currency then being used for the government’s spending purposes. The treasury bond, in such a case, is understood to be a promissory note which commits the government to paying the interest the bond bears as well as the principal on the date of the bond’s maturity. This prior art, however, makes no provision for how the sovereign government is to obtain the future fiat currency that will be needed to meet the obligations of the promissory note—other than through the collection of future taxes, or the issuing of future treasury bond promissory notes—thus creating a Ponzi scheme which can only be maintained by continually expanding the aggregate size of the citizen’s profit-making commerce and, thus, the government’s future tax-claim on those profits (as well as the ability of the citizens’ commerce to purchase the future treasury bonds).

This prior art poses grave disadvantages to the sovereign government, to the citizens’ commerce, and to the well-being of the collective society the government represents, when a condition arises that imposes new, and very large, spending requirements on the sovereign government—as is specifically the case with the challenge of climate-change that now confronts modern human society. The prior art makes no provision for the government to spend additional fiat currency without dramatically growing the citizen’s profit-making commerce, while it is the most profitable components of that commerce itself—fossil energy—which most contribute to the onset of the climate-change being mitigated. Thus, the prior art sets in motion the operations of a macroeconomic system which is in direct conflict with what the system must undertake to accomplish.

Summary of the Invention:

It is the object of the present invention to overcome the above disadvantages of the prior art by describing a strategic modification to the known macroeconomic system which will enable it to accommodate the orders-of-magnitude increase in sovereign government spending necessitated to meet the challenges of climate-change—and to do so without committing the government to the repayment of an unsustainable debt requiring it to envision and justify a Ponzi scheme of profit-generated financial growth which, perversely, encourages the continued use of the fossil energies driving the climate-change collective society is seeking to mitigate and adapt to.

Specifically, it is the object of the present invention to describe a macroeconomic system which utilizes the principal features, components, and operations of the known system, but which strategically alters the normative understanding of just one of those components: namely, the treasury bond: Specifically, that a treasury bond shall not be understood, or operationally treated, as a promissory note committing the government to the payments of interest and future principal, but instead shall be understood and operationally treated as a direct issuing of future fiat currency which is traded, at a discount, for existing fiat currency in the private markets; said existing fiat currency received in trade for the treasury bond then being spent by the government to enable and assist the collective society in mitigating and adapting to climate-change. Thus, the private financial markets, because they can obtain the future fiat currency at a discount, are able to fully pursue their profit-oriented commerce, while the sovereign government is able to spend the appropriated existing fiat dollars in pursuit of climate change mitigation and adaptation without encumbering itself with a Ponzi scheme debt obligation.

Detailed Description of the Invention:

It will be noted that the present invention, in the interest of minimizing the difficulty of affecting change to social norms, makes the smallest modification possible to the existing macroeconomic system in order to achieve the stated goal of enabling a sovereign government to increase its spending by the orders-of-magnitude necessary to enable and assist the collective society it represents to mitigate and adapt to climate-change. Accordingly, it can be understood that the present invention assumes that the following normative operations of the existing macroeconomic system remain unchanged:

1. The sovereign Central Bank issues fiat currency as necessary to maintain the liquidity of the private banking system, the operation of which enables the profit-making efforts of private commerce to proceed.
2. The sovereign government levies taxes on the profits of the private commerce, which taxes can only be paid to the sovereign treasury with the fiat currency issued by the sovereign Central Bank, thereby rendering that fiat currency the unit of account for all financial transactions, public and private.
3. The legal representatives of the sovereign government direct the sovereign treasury to purchase goods and services from the citizens and their private commerce for the purpose of providing public and/or collective benefits which cannot suitably be provided by the profit-making business models of private commerce.
4. The said purchases of goods and services by the sovereign treasury are paid for by debiting the treasury’s tax-collection account of fiat currency.
5. Where the said treasury purchases, directed by the legal representatives of the sovereign government, exceed the amount of fiat currency available for debit from the treasury’s tax-collection account, the treasury makes up the short-fall by issuing treasury bonds:

At this point the present invention is inserted in the macroeconomic system, by establishing a modified normative understanding of what the said treasury bond represents; namely that the treasury bond is a certificate of future fiat currency, issued by the sovereign treasury, with a pre-established and specified date upon which the fiat currency, thus certified, shall become acceptable as payment for all debts public and private.

The existing normative operations of the macroeconomic system, then, continue unchanged:

1. The private financial markets trade existing fiat currency for the treasury bonds issued by the sovereign treasury; the treasury bonds are traded at a discount, the said discount representing a calculated interest rate-of-return, thus enabling the private financial markets to realize a profit when the specified date of maturity of the bond arrives, and thus providing an incentive for the private financial markets to trade—as well as providing the sovereign treasury the means to control that incentive by adjusting the discount.
2. The sovereign treasury (as directed by the representatives of the sovereign government) spends the existing fiat currency received in trade for the treasury bonds to purchase goods and services from the citizens and citizens’ commerce to undertake and accomplish desired benefits for the collective society—specifically (but not limited to) the mitigation of and adaptation to climate-change.
3. The future-currency treasury bonds, acquired by the private financial markets, are then traded within those markets as collateral for the issuance of and payment of leveraged debts within the private banking system for the purpose of profit-making commerce, with the sovereign Central Bank issuing fiat currency, as necessary, to maintain the liquidity of the system as profits are realized and debts retired.
4. When the specified date of maturity of the treasury bond arrives, the future fiat currency certified by the bond becomes acceptable payment for all debts public and private—i.e. becomes existing currency.

It can now be understood that the modified macroeconomic system described above has the following advantageous and beneficial results:

1. The representatives of a sovereign government, without encumbering that government with the debt of treasury bond promissory notes, can elect to direct the sovereign treasury to spend fiat currency at a rate orders-of-magnitude greater than what is collected by the government in taxes.
2. Because the sovereign government incurs no future payment obligations requiring its profit-making tax-base to expand, a policy of curtailing the existing commerce responsible for the carbon emissions driving climate-change becomes both rational and feasible.
3. The sovereign government’s appropriation and spending of existing fiat currency does not reduce the amount of capital available for the purposes of private commerce: not only is the appropriated fiat currency spent back into private commerce, but the tapped reserve positions of the financial markets are immediately replaced with future fiat currency; thus the government’s spending is not mathematically limited to some percentage of the existing currency in the private financial markets, but can expand as necessary to meet collective society’s needs to mitigate and adapt to climate-change.
4. Because the existing fiat currency appropriated by the representatives of the sovereign government is exchanged for future fiat currency, which does not become “spendable” for a specified number of years, the government’s increased spending does not immediately expand the quantity of currency circulating in private commerce—except in-so-far-as private commerce, itself, decides to increase its profit-seeking debt; thus, the value of the currency in relation to the goods and services available in private commerce remains relatively stable; further, the stability of the currency’s value can be controlled by the sovereign treasury by means of manipulating the time to maturity of the future currency certified in the treasury bonds; and further, the sovereign Central Bank, in collaboration with the sovereign treasury, can establish and maintain the desired base interest rates in the private banking system by means of manipulating the discount at which the treasury bonds are initially traded.

Claims

1. A method of modifying the existing macroeconomic system by revising the normative understanding of what is represented by a “treasury bond.”
2. The method of claim 1 in which a “treasury bond” is understood to be the issuance, by the treasury of a sovereign government, of fiat currency which shall become acceptable as payment for all debts public and private at a specified future date.
3. The method of claim 2 in which the “treasury bond” shall be traded at a discount for existing fiat currency.
4. The method of claim 3 in which the sovereign government shall spend the existing fiat currency, received in trade for the “treasury bond,” to buy goods and services which assist and enable collective society to mitigate and adapt to climate change.

see also:

MMT: Report from the Front. L. Randall Wray. NEP. Oct. 7, 2019.

... The way forward. The global challenges we face will push MMT forward. While climate change is the most obvious challenge, it is linked to rising inequality, marginalization of displaced workers, ruthless austerity policy, growing waves of refugees, and the take-over of national governments by neoliberals and even fascists. Our “progressive” friends will push for market-friendly solutions: taxes on financial transactions, taxes on pollution, taxes on rich folks to pay for goodies. None of those helps. We have to return to the WWII mobilization to see how to tackle the current challenges—so MMT will eventually win out. It is all about resource mobilization, not finance. And we must include all the necessary social programs in the Green New Deal: jobs for all, healthcare for all, food for all, shelter for all, education for all, decent retirement for all. Bernie, AOC, and Naomi Klein recognize the scope of the challenges. The climate crisis cannot be resolved without taking on the social crisis—the financialization of the economy, the financialization of housing, food, healthcare, education, the electoral process; the entire society.

We probably are not the first intelligent life form to go through this. Any advanced alien species on other planets that survived 10,000 years of civilization have already successfully navigated a crisis similar to the one we face. They discovered fossil fuels and smoked their planet. Their financial sector took over the economy and produced intolerable inequality. But they greened the economy, overthrew their Wall Street, and took back their societies and economies and put them to work for the benefit of their species. Otherwise, they would not have survived.

We can take comfort and inspiration from that. We might just survive, too.

Feature Reference Article #14

We Cannot Fight Climate Change With Capitalism, Says Report. Laura Paddison, Huff Po. Aug. 31, 2018.

The world's economies are totally unprepared for rapid climate change, rising social inequality and the end of cheap energy.

As access to cheap, plentiful energy dries up and the effects of climate change take hold, we are entering a new era of profound challenge ― and free market capitalism cannot dig us out. This is the conclusion of a report produced for the United Nations by Bios, an independent research institute based in Finland.

Signs of a world in turmoil are not hard to find. People are increasingly feeling the effects of rapid climate change. Cities boil in more than 120-degree heat, California burns and the Arctic thaws. Meanwhile, biodiversity loss is reaching terrifying levels, with animals going extinct at about 1,000 times the natural rate. In addition, as societies, we’re facing increased inequality, unemployment and soaring personal debt levels.

Faced with these interconnected crises, says the report, our economies are woefully underprepared: “It can be safely said that no widely applicable economic models have been developed specifically for the upcoming era.”

The paper, commissioned by the U.N. to feed into its 2019 Global Sustainable Development Report, looks specifically at the next 20 to 30 years as a key transition period during which the world must radically cut emissions and consumption to have a hope of stopping climate change.

Traditional ways of economic thinking have been based on the assumption we will continue to have access to cheap and plentiful sources of energy and materials, says the report, but the “era of cheap energy is coming to an end.”

The thrust of the authors’ argument is that, for the first time, economies are moving to sources of energy that are much less efficient ― meaning more and more effort is needed to get smaller amounts of energy. There are plenty of fossil fuels that can still be pulled from the ground but doing so would shoot through climate commitments and accelerate global warming. In addition, we have used up the planet’s capacity to handle the waste generated through all our material and energy use.

In other words, we are at an ecological crunch point and we don’t have the economic tools to deal with it.

“Trusting that the free market capitalist dynamics will get us there, that of course is not going to happen,” report co-author Paavo Järvensivu, an academic who specializes in economics and culture at Bios, says in a phone call with HuffPost. Economies that rely on the power of markets, notes the report, don’t even recognize the problem as they’re too focused on short-term profits to take account of longer-term issues like climate change and environmental destruction.

But Järvensivu is also keen not to fuel an argument about whether capitalism is dead.

“I think it’s harmful to think of capitalism as this one big lump, or capitalism as this kind of ‘either, or’ question: that we either have capitalism or something totally different,” Järvensivu says.

“The social and material need for this transformation [away from cheap energy and mass consumption] is so acute and societies have to go through a very dramatic shift over 20 to 30 years to get their emissions dramatically lower,” he adds, “so we are past this discussion of should we have capitalism or should we have something else.”

Instead, he says, we need to find new ways of thinking about the economy to meet these challenges. It’s asking the question, he says, “Do we aim for more consumption or do we aim for liveable environments in the future?”

Around 80 percent of global energy comes from fossil fuels ― oil, coal and gas, which powered industrialization but have a heavy toll through their climate change impact. While we need to wean ourselves off these, renewables are not efficient enough yet compared to conventional energy and the infrastructure is not in place for it, the report says. “Meeting current or growing levels of energy need in the next few decades with low-carbon solutions will be extremely difficult, if not impossible,” it notes.

What’s needed, says the report, is to combine developing clean energy sources with lowering energy use. And it has some suggestions about how to achieve this without compromising people’s opportunity for a decent life.

The report calls for an overhaul of transportation away from a focus on car ownership. In cities, this would mean changes in city planning to focus on biking and walking, combined with an electric public transit system. This “could be beneficial for people in a larger sense,” says Järvensivu, as it “means less transport, less owning private cars, but not necessarily a less good quality life.”

International freight transportation and aviation would need to be slashed, says the report, as they “cannot continue to grow at current rates” because of the need to cut emissions as well as the lack of low carbon alternatives.

Food systems also need to be rethought. Both rich and poor countries should focus on self-sufficiency, advises the report, to produce a diverse selection of food for their own populations. As for diets, it advocates that dairy and meat, which have a big climate impact, be replaced by largely plant-based diets.

Housing is the third area slated for transformation. Construction using steel and concrete is hugely carbon intensive. The report authors suggest moving to wooden structures, which could provide carbon storage.

All these changes require concerted political action. “There must be a comprehensive vision and closely coordinated plans. Otherwise a rapid system level transformation towards global sustainability goals is inconceivable,” says the report.

Which is all well and good, but doesn’t exactly jibe with what’s been happening on the political scene. President Donald Trump is hellbent on cutting environmental regulation and has withdrawn from the Paris climate agreement. Even the countries that remain in the agreement are failing on their commitments to curb climate change.

There has been interest in introducing a carbon price, which means charging polluters for the carbon they emit ― a key pledge Canada Prime Minister Justin Trudeau made in his campaign. But the report argues this measure is nowhere near good enough: “As a policy tool, carbon pricing lacks the crucial element of coordinating a diverse set of economic actors toward a common goal.”

Järvensivu believes the push for action will come from the fact that people are starting to genuinely worry about their future security and looking for collective action. “These kind of things might actually start to matter quite a bit more than caring about a new iPhone or a yearly trip to Thailand,” he says. “We are actually looking for a sense of security and not in a way that we would just aim for more consuming power in terms of money and so on.”

He cites Sen. Bernie Sanders (I-Vt.) as an example of someone seeking transformational economic change, along with professor Stephanie Kelton, whose work argues sovereign governments cannot run out of money, thus debunking the argument that economies cannot afford to make the transformations needed to address climate change.

Järvensivu insists the report isn’t advocating for an economy that would be unrecognizable from what we have now, at least not in the short term. Rather, he says, it seeks to identify the material and energy crises approaching us and the kinds of economic tools and policies we need to meet them.

“After 20 to 30 years, we don’t know what this [economy] would look like, if we actually managed to achieve radically lower emissions and still secure possibilities for a good life ... are we then even concerned whether this was capitalism or not, or are we looking for other things,” he says. “Probably we are.”

Global Sustainable Development Report 2019 drafted by the Group of independent scientists. Paavo Järvensivu (1*,2*), Tero Toivanen (1,3*), Tere Vadén (1), Ville Lähde (1), Antti Majava (1), Jussi T. Eronen (1,4*). Aug. 14, 2018.

*1 BIOS Research Unit, Helsinki, Finland
*2 Aalto University, Sustainability in Business Research, Helsinki, Finland
*3 Department of Political and Economic Studies, University of Helsinki, Finland
*4 Ecosystems and Environment Research Programme & Helsinki Institute of Sustainability Science (HELSUS), Faculty of Biological and Environmental Sciences, University of Helsinki, Finland

Governance of Economic Transition

We live in an era of turmoil and profound change in the energetic and material underpinnings of economies. The era of cheap energy is coming to an end (Murphy 2014, Lambert et al. 2014, Hall et al. 2014, Hall et al. 2009, Hirsch et al. 2005). Because economies are for the first time in human history shifting to energy sources that are less energy efficient, production of usable energy (exergy) will require more, not less, effort on the part of societies to power both basic and non-basic human activities. Sink costs are also rising; economies have used up the capacity of planetary ecosystems to handle the waste generated by energy and material use. Climate change is the most pronounced sink cost.

What will happen during the oncoming years and decades when we enter the era of energy transition, combined with emission cuts, and start to witness more severe effects of climate change? That is the big question. What kind of economic understanding and governance models do we need, now that economies are undergoing dramatic rather than incremental change? While economists typically emphasize carbon pricing as a policy tool for tackling climate change, natural scientists and multidisciplinary environmental research groups argue for more profound political engagement and proactive governance of economic transition (Chapin et al. 2011, Steffen et al. 2018) – something akin to a global Marshall Plan (Aronoff 2017, Gore 1992). This difference in perspective is in part due to relatively recent advancements in environmental research, which have revealed a faster-than-expected decline in natural ecosystems and take into account the whole range of human-induced pressures, and not merely climate emissions (Barnosky et al. 2014).

New economic thinking for the turbulent years ahead

Decades of academic work in ecological economics have gone into integrating energetic and material stocks, flows, and boundaries into economic thinking (van den Bergh 2001, Røpke 2005). Although some progress can be seen on the economic-theoretical level, the economic models which inform political decision-making in rich countries almost completely disregard the energetic and material dimensions of the economy (Hall and Klitgaard 2011).

As Hall and Klitgaard (2011) have shown, today’s dominant economic theories, approaches, and models were developed during the era of energetic and material abundance. These theories were challenged only temporarily by the oil crises of the 1970s and the 1990s; no significant theoretical or political changes were made. Thus, dominant economic theories as well as policy-related economic modeling rely on the presupposition of continued energetic and material growth. The theories and models anticipate only incremental changes in the existing economic order. Hence, they are inadequate for explaining the current turmoil.

In addition to rapid climate change, biodiversity loss, and other environmental hazards, societies are witnessing rising inequality, rising unemployment, slow economic growth, rising debt levels, and governments without workable tools for managing their economies. Central banks in the US and the Eurozone have resorted to unconventional measures such as negative interest rates and buying up significant amounts of public debt. This has relieved some economic pressure, but many commentators are worried about what can be done after these extraordinary measures are exhausted and the next economic crisis hits (Stein 2018).

It can be safely said that no widely applicable economic models have been developed specifically for the upcoming era. Here we highlight under-utilized tenets of existing economic-theoretical thinking that can assist governments in channeling economies toward activity that causes a radically lighter burden on natural ecosystems and simultaneously ensures more equal opportunities for good human life. Our focus is on the transition period, the next few decades.

What needs to be done – in social and material terms?

Let us first take a glance at what economies need to accomplish, in concrete terms. They need to transform the ways in which energy, transport, food, and housing are produced and consumed (O’Neill et al. 2018). The result should be production and consumption that provides decent opportunities for a good life while dramatically reducing the burden on natural ecosystems. In terms of greenhouse gases, global net emissions should be zero around 2050 – in Europe and the US by around 2040. (Rockström et al. 2017)

• Energy. Currently, approximately 80% of the global net primary energy supply comes from fossil fuels – oil, natural gas, and coal (IEA 2017). Good quality, easily available fossil fuels have powered the industrialization of nations world-wide. Now, the entire energy infrastructure needs to be transformed. The energy return on investment (EROI) decreases across the spectrum – unconventional oils, nuclear and renewables return less energy in generation than conventional oils, whose production has peaked – and societies need to abandon fossil fuels because of their impact on the climate. Because renewables have a lower EROI and different technical requirements, such as the need to build energy storage facilities, meeting current or growing levels of energy need in the next few decades with low-carbon solutions will be extremely difficult, if not impossible. Thus, there is considerable pressure to lower total energy use. The development of energy production will also need to be closely linked with the development of the systems and practices of energy consumption, for example, the electrification and sharing of transport vehicles. (Murphy 2014, Lambert et al. 2014, Hall et al. 2014, Hall et al. 2009)
• Transport. In cities, walking and biking should be emphasized and the remaining public or semi-public transport in and between cities should be largely electrified. This will require changes in city planning (for example, how homes and workplaces are connected to each other and how convenient biking is), in vehicle production, in transport infrastructure such as railways, roads and charging stations, and in energy production and storage. Due to the decreased need and capacity for rapid transit, the overall result will most likely be less transport rather than more. (Banister 2011, Geels 2012) In addition, international freight transport and aviation cannot continue to grow at current rates, because of the need to cut emissions and the lack of low-carbon alternatives to current technologies.
• Food. In developing countries, the regime of exporting a narrow selection of commodities and raw materials and importing cheap basic food items has not worked for local communities. A wide array of research shows that developing countries ought to focus on providing diverse nutrition for their own people and thereby increase local livelihood opportunities and improve socio-material conditions in general. Simultaneously, most countries, affluent and developing alike, face great environmental challenges in food production. It will be too risky to rely on the functioning of only a few main food production areas in the future. (FAO et al. 2015, FAO et al. 2017) This will have repercussions for international food trade, also in Europe and the US. Countries currently relying on significant amounts of food imports will have to attain a high degree of food self-sufficiency, with international food trade regaining its position as a crucial component of food security rather than serving as a commodity market. With regard to both production and consumption practices, dairy and meat should make way for largely plant-based diets (Poore & Nemecek 2018).
• Housing. The construction industry is currently dominated by concrete and steel, whose manufacturing and other life-cycle processes are very energy-intensive and cause significant climate emissions and other types of waste (ECORYS 2014). Long-lasting wood buildings, on the contrary, can provide carbon storage (Pingoud et al. 2003, Soimakallio et al. 2016, Gustavsson et al. 2017). A significant shift toward using wood in construction would require changes in the entire production network, starting from forestry, in which construction uses compete for example with paper and energy uses. In addition to manufacturing, cooling and heating are the most significant drivers of lifetime emissions from housing. As for transport and food, the level of emissions caused by cooling and heating is closely tied with the mode of energy production on the one hand and with housing practices – e.g., the level and means of convenience – on the other hand (Shove 2003).

Rapid economic transition requires proactive governance – markets cannot accomplish the task

It is clear from these examples that strong political governance is required to accomplish the key transitions. Market-based action will not suffice – even with a high carbon price. There must be a comprehensive vision and closely coordinated plans. Otherwise, a rapid system-level transformation toward global sustainability goals is inconceivable. Mazzucato (2013, 2018) has examined this topic from the perspective of innovation policy and argues that historically, major system-level innovations such as the US Apollo program have required the state to set the mission and coordinate and finance much of the related research and development. According to her research, achieving system-level transition has required and will require proactive mission-oriented innovation – it will not be enough for the state to fix “market failures” reactively. Of course, innovation alone is not enough, and we will return to the question of limiting resource use and organizing jobs below.

The typical opposition to the need for rapid coordinated transition in most Western countries begins with the influential idea that only under a regime of limited government “intervention” can the market sustain its efficiency. Thus, if the state prioritizes one technology over the other, it will most likely prioritize the wrong one. If the state employs people to build new infrastructure, it will crowd out private enterprise. From this standpoint, many economists have settled for carbon pricing as the least interventionist, economically most efficient “first-best” policy for cutting greenhouse gas emissions (Jenkins 2014). Carbon pricing can be accomplished via carbon taxes or emissions caps and permit trading (“cap-and-trade”). A carbon price is a “Pigouvian fee” (Pigou 2017 [1932]) designed to correct undesired, unpriced market externalities.

A key problem with carbon pricing has been that states, federations, or unions have not implemented it on a sufficiently high level, fearing industrial leakage to less environmentally-regulated countries. For this reason, many economists and politicians hope for global carbon pricing. But if we return to the four examples above, energy, transport, food, and housing, we can see that it would be highly unlikely that even global carbon pricing would guide economic activity in the right direction – at least with sufficient speed and breadth. As a policy tool, carbon pricing lacks the crucial element of coordinating a diverse set of economic actors toward a common goal. Individual actors would have an incentive to decrease carbon emissions, but they would still compete through their own business logics; there would be nothing to ensure that any one business logic would support the transition to sustainability on a systemic level. Moreover, it has been extremely difficult in recent years to settle almost anything with such a wide impact on an international level.

Another influential idea opposing state-guided transition to sustainability is the goal of a balanced state budget, which is considered essential even in the relatively short run. This means, on the one hand, that states should avoid spending to avoid running budget deficits, and on the other hand, that they should avoid regulation that negatively affects existing private enterprise and consequently tax revenues. Thus, states have not been keen to invest in sustainability transformation or limit resource-intensive economic activity.

Both a priori arguments against strong state governance presented above depend on a particular kind of economic theory, namely the neoclassical school. If we switch to another theoretical lens, looking at the economy from another perspective, these arguments lose their effect. The theoretical move is analogous to a shift from a focus on individual cognition to social or structural dimensions of human behavior, where we begin to see that individual wants, for example, are not merely individual but are produced or conditioned by a set of extra-individual dimensions. This kind of theoretical shift is a normal procedure for any student of the social or human sciences.

Economic theory to support transition governance

Whereas the neoclassical school of economic theory starts from a set of theoretical axioms depicting reality in terms of simplified mathematical functions leading to equilibrium and presupposed to hold in any historical situation, the Post-Keynesian school (Hein and Stockhammer 2011, Lavoie 2009) builds its theories on existing economic institutions. Post-Keynesian analysis is historical in nature; markets would not and do not exist without political regulation. Consequently, the Post-Keynesian approach is not a priori wary of the state’s role in the market. It does not assume that markets always seek equilibrium, but maintains instead that capitalist economies tend to generate market bubbles and other crises. Markets do not lead to socially and ecologically desirable outcomes on their own, but require active political guidance.

Many Post-Keynesians, working through the framework of modern monetary theory, emphasize the economic role of states or unions of states with their own currencies and central banks (Wray 2015, Mitchell 2015, Lavoie 2013). A central claim of these scholars is that states can never run out of their own currency. Unlike natural, social, and technological resources, sovereign currencies are not a limiting factor in collective action such as the transition to sustainability. This has been the case since the gold standard was abandoned and fiat money adopted in the 1970s. The state can always spend and invest in its own currency. Moreover, it does not have to hold on to particular jobs or industries for the sake of tax revenues. In other words, from this perspective, collective action, organized at least partly through the state, should be guided not by the need to secure public funds, but on the basis of social goals and material boundary conditions.

As a practical policy tool, Post-Keynesians have suggested a so-called job guarantee (Cook et al. 2008, Murray and Forstater 2017, Tcherneva 2018), which would ensure that all people capable and willing to work would be able to get a permanent, state-funded, and locally administered job. The most suitable jobs for the program would be those that almost anyone can do with limited training. The jobs could be modeled to serve the transition to sustainability and to build capacities to adapt to climate change: for example, installing decentralized energy solutions and preparing for floods. In addition to triggering the transition, the job guarantee would ensure full employment. It would lessen insecurity and the need to compete for environmentally destructive jobs on the individual and the collective level.

The Post-Keynesian approach challenges economic orthodoxy and supports sustainability transitions in the current economic and political context of Western and other similarly ordered countries. Developments in China serve as a reminder that economic theories other than neoclassical ones are already effective in the world. In China, economic transitions have not been held back by the ideas of minimum state intervention or a balanced budget. Past transitions have, however, been ecologically unsustainable in many ways. Beyond Post-Keynesian theory, there can be a variety of economic theories that support rapid materially and ecologically beneficial transitions. The key theoretical requirement is that they must enable politics to acknowledge transformational social goals and the material boundaries of economic activity.

The new geopolitical order during and after transition governance

Taken together, what would these policy measures mean for the world economy and geopolitics? Of course, as is always the case in large-scale societal transformations, it is difficult to predict the overall outcome when there are multiple variables, but generally the direction would be toward “a Keynesian world with planetary boundaries”: unique, autonomous economies and societies engaging in regulated international trade for specific reasons, such as food security, rather than for the sake of free trade as a principle. Individuals, organizations, and nations would approach the economy as a tool to enable a good life rather than as an end in itself. Economic activity will gain meaning not by achieving economic growth but by rebuilding infrastructure and practices toward a post-fossil fuel world with a radically smaller burden on natural ecosystems. In rich countries, citizens would have less purchasing power than now, but it would be distributed more equally. Citizens in all countries would have access to meaningful jobs and they could trust that a desirable future is being constructed on the collective level.

The focus on life-improving and emissions-reducing goals rather than abstract economic goals would also characterize the relations between developing and developed countries; economic activity between them would consist of bi-directional learning in order to build new, locally suitable infrastructure and practices at both ends. This kind of proactive state-led economic governance oriented toward self-sustained, low-emission production and consumption runs contrary to the currently dominant world political order, which has been organized around international free trade. Key international institutions, such as the International Monetary Fund, which has been known for its policies of privatization and export-led industrialization, will need to be reconfigured accordingly.

Climate change and other environmental changes threaten livelihoods across the planet and thus give cause for mass migration. It is in the interest of all countries to maintain local opportunities for a good life. Because different countries and areas have different path-dependencies and goals, there is no socio-technical solution that fits all. One especially important constraint for rich countries is that dramatic reductions in emissions at current high levels of consumption are very challenging, if not impossible. Some developing countries, in contrast, can make significant improvements in their people’s wellbeing with new investments in low-carbon solutions. These developing countries do not need to begin by dismantling the fossil-fuelled infrastructure that has provided a range of low-cost production and consumption opportunities in rich countries for decades. Shifting climate zones towards the Earth’s North and South Poles ads another imperative for learning: for example, food producers in northern Europe have a lot to learn from their southern colleagues.

In view of the challenges encountered today in implementing meaningful international agreements, the most likely option for initiating transitions to sustainability would be for a group of progressive states to take the lead. 

This would require economic thinking that enables large public investment programs on the one hand and strong regulation and environmental caps on the other. In the modern global economy, states are the only actors that have the legitimacy and capacity to fund and organize large-scale transitions.