The Three Economic Principles of Sustainability

Submitted by John Ikerd

The recent global financial crisis has raised widespread concern for the sustainability of the global economy and much has been written concerning the negative impacts of economic development on natural ecosystems and civil societies. Unfortunately, few viable alternatives to the prevailing economic paradigms have been suggested for consideration. Those that have been are typically little more than suggestions for fine tuning capitalist or socialist economies.

In his new book The Essentials of Economic Sustainability, John Ikerd addresses the basic principles and concepts essential to economic sustainability. Some of these concepts are capitalist, some are socialistic, and others are general principles validated by philosophy or common sense. What results is a synthesis: something that is neither capitalist nor socialist but fundamentally different. In part five, he outlines the basic principles driving economies and what they mean for sustainability.

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Many people find the discipline of economics to be confusing, boring, or even depressing as a subject or field of study. Economic theory seems too abstract to be relevant to their day-to-day lives. Even if they understand it, the concepts don’t seem to match their everyday reality.

These criticisms are often valid, but they relate far more to the way economics is taught than to economic reality. In spite of the complexity of economies and abstractness of economic theories, the basic principles of economics are quite simple and straightforward.

The fundamental purpose of an economy is to meet the instrumental, impersonal needs of people as individuals as explained in The Essentials of Economic Sustainability.

The essence of economics can be reduced to three basic principles: scarcity, efficiency, and sovereignty. These principles were not created by economists. They are basic principles of human behavior. These principles exist regardless of whether individuals live in market economies or planned economies. They define the functions people need to carry out to meet their impersonal, instrumental, individual needs, including the need to work or earn an economic livelihood. Few things are more real or relevant to the day-to-day lives of people.

Scarcity

Scarcity is an essential principle of economic sustainability. Things have economic value only if they are scarce – meaning there is not enough for everyone to have all they want. The economic or exchange value of something is different from its intrinsic or use value. Intrinsic value is determined by necessity; economic value is determined by scarcity.

For example, air most certainly is valuable to human life but it has no economic value. Air only becomes economically valuable when it becomes sufficiently restricted, polluted, or degraded to make good, clean air scarce. People then are forced to pay the costs of keeping clean air available. Air then has economic value. This may sound simple, but many people don’t seem to understand that the economy doesn’t necessarily value things that are important to society and humanity.

As something becomes less scarce, it has less economic value: the “law of diminishing returns.” The economic laws of supply and demand are derived directly from this basic economic principle.

Supply, Demand And Market Price

The first serving of food at a given meal may taste very good, if a person is hungry. The second serving might taste okay, but by the third or fourth serving most people would have had more than enough. As a result, the quantities or amounts of something consumers are willing to buy vary inversely with its price: The law of demand.

As people expend more time and energy producing things, they require more pay to offset the increasing scarcity of their time and energy left for other uses. So the amount of labor they are willing to supply varies directly with their wages or salaries. As a result, producers who hire workers are willing to produce larger amounts of things only if they can get higher prices to cover their increasing costs of production. Quantities supplied by producers or sellers vary directly in relation to prices: the law of supply. The laws of supply and demand are reflections of our humanness.

In market economies, prices are determined by the laws of supply and demand. As more of something is sold, the costs of producing it goes up but its value to buyers goes down, until buyers are willing to pay just enough to cover the added costs of production. At this point, buyers would buy more only if prices were lower but sellers would sell more only if prices were higher.

They have arrived at a market price.

The most powerful economic concepts are these simple ideas of supply, demand, and market price. Certainly, the real world in which buyers and sellers operate is far more complex than this simple explanation, but the underlying principles are the same. The global economy has been brought to the verge of collapse by people who failed to understand or respect both the power and the limitation of the economic principle of scarcity.

Efficiency

The principle of efficiency is also essential to economic sustainability. Economic efficiency refers to economic value relative to economic cost. The greater the value relative to costs, the greater the efficiency.

The natural and human resources used to produce things of economic value often have a variety of alternative uses. Wood, coal, oil, and natural gas, for example, can be used by a variety of means in manufacturing, generation of electricity, transportation, and home heating. Many laborers and managers have a wide variety of employable skills and talents and thus a variety of employment opportunities. Economic efficiency is achieved by putting natural and human resources to their highest or best economic use – meaning their greatest economic value relative to their economic costs.

Sovereignty: First Principle Of Economic Sustainability

Sovereignty or “freedom to choose” is the first principle of economic sustainability. If people are not free to make economic choices the concepts of scarcity and efficiency are of little consequence, at least not to them individually. People must be free to determine or discover their needs and wants for themselves, without persuasion or coercion from others. They must have accurate information so they can know the ultimate value of things before they choose to buy them, to avoid regret for the choices they have made.

Most economists assume that people are sovereign without questioning whether they actually are free to choose. After all, no one is forcing people to buy things. Perhaps people aren’t forced to buy anything, but billions of dollars are spent each year on advertising designed to persuade, coerce, and create social pressures to convince people to buy things they don’t need or even want.

In addition, many people have sacrificed their economic sovereignty through excessive borrowing which limits their economic opportunities for the future. Economic sovereignty is essential for economic sustainability.

To live and make a living in a sustainable society, people must respect the economic principles scarcity, efficiency, and sovereignty.

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Part 4: From Utilitarianism To Ethics: The Social Principles of Economic Sustainability

Part 3: The Three Ecological Principles of Economic Sustainability

Part 2: The Hierarchy of Economic Sustainability: Getting The Principles Right

Part 1: Ethics & The Challenge of Economic Sustainability