Ecological-Induced Inflation on the Rise
The world isn’t just teetering on the brink of another recession. It is in the midst of a profound economic and financial shift.
Top economist Mohamed El-Erian says we’re not just headed for another recession, but a ‘profound economic and financial shift’
The profound economic and financial shift is the result of the ubiquitous and subtle reduction on the capacity of the Earth’s natural capital to generate output. The Earth’s Factory Floor — its natural capital — has never been adequately accounted for in our economic system. The logical result of something not being valued is that you end up with less of it. Economics 101.
EcoCommerce 101 describes the economic model that accounts for natural capital so it does get valued and we end up with a more productive Factory Floor.
A Farm’s Natural Capital
As a farmer, it is quite easy to recognize the full suite of natural capital of our farm as the basis for our economic success. For production purposes, I account for the natural capital somewhat as a natural capital sandwich containing biotic layers in between two abiotic supporting layers. I have no control over the renewable and non-renewable abiotic components, but I do have significant control over the biotic components, and hence, that is why they are referred to as conditionally renewable.
The degree of our farm’s productivity is determined by the natural capital parameters established by the abiotic components and the actions I take relative to the conditions I apply to the biotic components. This same concept applies to the entire Earth.
The Current Agriculture Economy
The agriculture economy in the early part of the 21st century is based on the outputs identified as the Biotic — Conditionally Renewable Bio-Physical Resources. In laypersons’ terms, that is the grain, livestock, timber, etc. that represents the physical goods we consume. They are also referred to a provisional ecosystem services. That is what I and every land manager on earth generally gets paid for.
More subtle, but as important for the agriculture economy is the Biotic — Conditionally Renewable Bio-Processes layer of the natural capital sandwich. This living layer could be considered the Earth’s Factory Floor. It determines how efficiently the provisional ecosystem services get produced. If the soil is degraded and the Bio-Processes are not optimum, then it will take more external resources (fertilizer, water, pesticides, etc.) to replace those natural capital processes.
Agflation
If I degrade our farms’ Biotic — Conditionally Renewable Bio-Processes layer, I will need to buy inputs to maintain the production levels. So, instead of investing $4 to grow a bushel of corn, it will cost me $5. That is a 25% increase in cost for producing the same output. Relative to a bushel of corn, your money is worth less. That is Agflation.
Ecoflation
The Agflation that is occurring on farm land can be applied to the entire Earths’ Factory Floor. Ecoflation is the gradual or rapid reduction in natural capital productivity leading to higher costs associated with producing the same amount of outputs.
Profound Economic Shift
Economists are scrambling again. Economists are not ecologists, nor are they eco-commercists and so they see the solution embedded in Father Economy rather than Mother Nature.
The scramble sounds like this,
“If you raise interest rates, you can also have a crash of equity markets, bond markets, credit markets, and asset prices in general that causes further financial and economic damage,” Roubini told Fortune. Still, he explained that raising rates does help fight inflation, even though it risks the possibility of a hard landing, all of which are triggered by “negative shocks” to the supply chain.”
Granted, it is difficult to put your finger on the colossal economic problem before us, but if we were experiencing Ecoflation, it would be the same symptoms. Things cost more than when natural capital was more productive. Our economic strategy is to chase our economic tail in trying to spend more money to generate the same output, and in the process we continually degrade more natural capital.
Natural Capital Accounting
None of this will change or can change until we institute a natural capital accounting system that works for the land manager and the global economist. The EcoCommerce model is based on a natural capital unit or NCU. The NCU has the capacity to account for the four layers of natural capital and the ecosystem services they generate.
The NCU becomes the irreducible unit of value to account for the entirety of global natural capital to the tune of trillions according to leading global institutions on the subject.
The Taskforce on Nature-related Financial Disclosures (TNFD) stated, “Globally, natural assets produce an estimated $125 trillion annually in ecosystem services, such as carbon sequestration, biodiversity, and clean water.
The World Economic Forum stated, “$44 trillion of economic value generation — more than half of the world’s total GDP — is moderately or highly dependent on nature and its services.”
The White House’s System of Natural Capital Accounting and Associated Environmental-Economic Statistics states, “The business sector increasingly understands that tens of trillions of dollars of economic output depend on natural capital.”
All added up, but no where to account
Despite natural capital’s extreme value and importance, Leach, et al. noted that “we lack a unified classification encompassing all aspects of the natural environment.”
Profound Economic Shift Doesn’t Need to be Dire
I do agree with the economists that we are headed for a ‘profound economic and financial shift’, but hopefully the economists will recognize that there is not only no free lunch in economics, there is also no free factories.
Tim Gieseke manages natural capital and is the author of three books that outline the environmental, socio-economics, and governance of instituting a natural capital accounting system and employing EcoCommerce.
Collaborative Environmental Governance Frameworks: A Practical Guide (2019)
Shared Governance for Sustainable Working Landscapes (2016)
EcoCommerce 101: Adding an ecological dimension to the economy (2011)
