Analysis of Subproblem D - How to Achieve Economic Proper Coupling
If you reached this page before reading the Summary of Analysis, read it first. This will give you a bigger picture.
This subproblem is what most people see as the problem to solve. The economy is improperly coupled to the environment, which causes unsustainable environmental impact. The problem began in earnest at the beginning of the Industrial Revolution around 1800. Ever since then the human system has been stuck in the Industrial Growth Mode.
A system mode occurs when a system becomes locked into an overall pattern of behavior for awhile. Small impacts on the system will not knock it out of that mode, due to the presence of strong balancing feedback loops. Only large impacts like invention of the radical new technology of agriculture can do that. Mode lock-in is usually good because it provides stability to a system.
However, once a system slips into an undesirable mode it can be surprisingly difficult to snap the system into a desirable mode, due to the phenomena of systemic change resistance. That's why the economic proper coupling is not the problem to solve. That honor goes to the How to overcome change resistance subproblem.
What the graph doesn't show is the exponential growth in environmental impact due to the Industrial Growth Mode. That impact will cause catastrophic collapse unless the world changes modes very soon to the Sustainable Mode. That needs to happen so soon and on such a large scale that it will require the Sustainability Revolution. Our challenge is how to precipitate that revolution.
Proper coupling occurs when the behavior of one system affects the behavior of other systems in a desirable manner, using the appropriate feedback loops, so the systems work together in harmony in accordance with design objectives. Economic improper coupling occurs when an economic system is improperly coupled to another system. In the environmental sustainability problem the world’s economic system is improperly coupled to the greater system it lives within: the environment. This is a powerful abstraction because it tells us that to solve an improper coupling problem, we must strengthen and/or introduce the correct feedback loops. Let's see how that can be done.
Substep A - Find the immediate cause of the problem symptoms in terms of the system's dominant feedback loops
The symptoms of economic improper coupling are the economic system is causing unsustainable environmental impact. The two improperly coupled systems are the economic and environment systems. They're improperly coupled because they don't have the right feedback loops connecting them. It's like your house is missing its thermostat, so when you turn on your heater it overheats until you shut it off manually. A thermostat provides a balancing feedback loop. It's goal is the temperature you set it at.
This was an exceptionally difficult subproblem to find the root cause of. After years of false starts and weak root causes, the analysis has settled an analysis model that captures the macro economic behavior of the subproblem. This is The World's Property Management System, shown below. Instead of a simulation model it's a causal loop diagram. That's all that's needed to execute the System Improvement Process on this subproblem. Click on the diagram to see the full size diagram.
The model contains four subsystems. In the center is the world's Shared Infrastructure System. This forms the bulk of how the world presently manages the Private Property Rights System on the left. That system has been in place ever since Homo sapiens first appeared, though it started out very simple. As the need for society to manage private property better grew, the response was to build out the rest of the left and center systems. The end result, achieved several generations after the Industrial Revolution began in 1800, was the modern market system, shown at the bottom of the center system.
The exact reason the entire system grew is the Growth of Industrial Technology Loop. The loop increases technology. That increases use of private property and the size and capability of government. Those two nodes then cause the left and center system to grow all the more. This strengthens the Private Property Rights System, which in turn increases technology, and the Growth of Industrial Technology loop starts all over again.
This growth causes two things, one good, one bad. Note the two arrows coming out of the bottom of the left system. One arrow causes a massive increase in human population and quality of life. That's the benefit of the Industrial Revolution. But there so such thing as a free lunch forever, so the other arrow increases environmental impact in the Shared Natural Resources system. That increases production costs, which lowers production rates. That's how the Limits to Growth loop places a limit on growth of the world's Private Property Rights System.
The immediate cause dominant loops of subproblem symptoms are the Growth of Industrial Technology and Limits to Growth loops. These loops summarize what the left system is doing to the rest of the system.
This is a rich model, full of stimulating insights. Soon we will explain how the system on the right side is needed to balance the destructive forces of the system on the left. Think of the current system as a butterfly with only one wing. It can't fly well. It's about to crash unless we can create a strong second wing.
The hardest part of our work is behind us. We've build a model of the problem that includes profound immediate cause dominant loops. That's the Growth of Industrial Technology and Limits to Growth loops. These cause the subproblem symptoms of unsustainable environmental impact.
The sages of the world have come up with one naive hypotheses after another for the intermediate causes of these symptoms. They're now on their fifth generation of intermediate causes. Take a peek at the Five Generations of Solutions That All Failed. Each generation of solutions was based on a perceived cause that was thought to be (without saying so) the root cause. It was not. In all cases they were intermediate causes.
1. Conservation parks - This solution assumed the cause of disappearance of wildlife was disappearance of wilderness areas. Naturally the solution was to create wildlife parks. Problem solvers never asked "What is the cause of disappearance of wilderness areas."
2. End-of-pipe regulation - This solution assumed the cause of so much pollution and natural resource overharvesting was lack of laws saying you can't do that. Naturally the solution was to pass such laws. It didn't work because the cause was not lack of regulation. That was an intermediate cause. Problem solvers didn't ask "Why are people doing these unsustainable things?" Lack of constraints is never the full story about why a social agent behaves the way he does. One must also consider system cues, agent incentives, etc.
3. Beginning-of-pipe-regulations - End-of-pipe-regulation failed, so why not try to prevent destruction before it occurs instead of after? That logic was so obviously correct that beginning-of-pipe-regulations were tried. This solution assumed that proactive regulations like mandated use of best technology would work, because the cause was too much destruction occurring. That should be greatly reduced by proactive regulations to the point of sustainability. This generation of solutions failed as badly as the rest, because problem solvers never asked the same question as above: "Why are people doing these unsustainable things?"
4. International treaties - Global sustainability problems started appearing. One, the stratospheric ozone layer depletion problem, was actually solved by an international treaty. That success led problem solvers to assume that more similar treaties would solve similar problems, like climate change and deforestation. The cause was assumed to be lack of multiparty agreement. These treaties have nearly all mysteriously failed. Why? Because once again, problem solvers didn't ask "Why are entire nations doing these unsustainable things? Why are we having such tremendous difficulty solving the problem? Why is the system pushing back so hard?"
5. Economic instruments - Finally we arrive at the world's current solution favorite. Economic instruments are solutions like carbon taxes and emission permit trading. They put an economic value on what economists call externalized costs. These are costs borne by parties external to a transaction. For example, later generations will bear the costs of today's greenhouse gas emissions, due to climate change. Country A bears the costs of country B's river pollution or river water overuse, it it's downstream. Fisherman A bears the cost of fisherman B's over harvesting of a limited supply of fish.
Today's problem solvers assume the cause of environmental unsustainability is externalized costs of environmental impact. But that's an intermediate cause, not a root cause. This generation of solutions will fail like all the rest. In fact, it already is failing. Once again, problem solvers have not been asking the right questions, like "Why do social agents so badly want others to bear these externalized costs? Why is it so hard to internalize costs? What costs are we really speaking of here?"
The low leverage point is internalize costs. It fails because it's a symptomatic solution. Carbon taxes and emission trading permits are prescriptive regulation and market-based classes of solutions. They are symptomatic because they treat intermediate rather than root causes.
Why are the Growth of Industrial Technology and Limits to Growth loops so dominant, for over two hundred years now?
That question has been asked by many. The Limits to Growth project and book asked that question back in 1972. The best they could say was on page 10:
It is the predicament of mankind that man can perceive the problematique, yet, despite his considerable knowledge and skills, he does not understand the origins, significance, and interrelationships of its many many components and thus is unable to devise effective responses. This failure occurs in large part because we continue to examine single items in the problematique without understanding that the whole is more than the sum of its parts, that change in one element means change in the others.
In other words, they have no idea how to solve the problem.
That was forty years ago. Little has changed.
But it could change if problem solvers used the right tools. The System Improvement Process forced us to keep asking WHY questions, because our answers were not solid enough to fill in the blanks of the process. So when we asked the same question others have long been asking, we arrived at a different answer.
Why are the Growth of Industrial Technology and Limits to Growth loops so dominant, for over two hundred years now? The insight is that dominance is relative. Building the model shows that the real question is not why are the Growth of Industrial Technology and Limits to Growth loops so dominant, but why are the Growth of Sustainable Technology and Impact Reduction loops so weak?
That's the right question. It blows away the fog. It's a new way of thinking.
So why are the two loops on the right of the model so weak?
The answer to that question has been sitting in plain sight for over seventy years. In 1937 Ronald Coase published The Nature of the Firm. (This link has a great article.) In it Coase posed a question no one had seriously asked before: Why do firms appear? In theory the price mechanism should work equally well for organizations or individuals. But Coase asked:
…why is such organization necessary? Why are there these “islands of power”? Outside the firm, price movements direct production, which is coordinated through a series of exchange transactions on the market. Within a firm these market transactions are eliminated, and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-coordinator, who directs production.
Coase showed that firms appear because “Within a firm these market transactions are eliminated.” This increases economic efficiency, which allows a firm to sell its output at a lower price and still be profitable. This opportunity attracts entrepreneurs and investors. From this arises the principle that firms appear when there is a profitable opportunity to lower transaction costs.
But firms have not appeared to manage unsustainably managed common-pool resources. Why? Because transaction cost are so sky high they cannot enter the market. We have therefore found the economic root cause. It’s high transaction costs for managing common property sustainably, like the air we breathe and the water we drink. This means that presently there is no way to manage common property efficiently enough to do it sustainably. (This is a radical conclusion. But it explains so much and seems to hold up under analytical scrutiny.)
The main root cause of improper coupling between the economic and environmental systems is high transaction costs for managing common property sustainably.
According to Coase transaction costs are “the cost of using the price mechanism” or “the cost of carrying out a transaction by means of an exchange on the open market.” There are two types of costs in a firm: transformation costs and transaction costs. Transformation costs are the costs of converting inputs into outputs. This is the actual cost of making a product or service. Transaction costs are the costs of using market transactions to sell your output or buy someone else’s. Examples of transaction costs are the cost of finding out where to get it, the cost of determining the quality of the product, the cost of bargaining, the cost of contracting, and the cost of payment. Added up, these can be substantial.
Let’s define technology as any practice that will reduce the PAT factors in the IPAT equation. “New technology” means more sustainable technology. For the sustainability problem transactions costs occur in areas like these:
1. Searching for the most cost effective existing technology.
2. Contracting and managing creation of needed new technology.
3. Education on the implementation of new technology.
4. Cost/share programs for new technology introduction.
5. Transfer programs to developing countries for use of new technology.
6. Monitoring a source’s amount of environmental impact.
7. Enforcement of contracts, regulations, permits, etc.
8. Design, lobbying, drafting, negotiation, etc. of related new legislation.
9. Research to identify and organize common property problems.
10. Research to set sustainability targets for common property problems.
Presently these costs are high because they can’t be conducted inside a firm. Instead, to solve an environmental problem the above transactions have to be conducted by the many individual parties involved: politicians, government agencies, local authorities, the sources causing environmental impact, NGOs, individuals interested in solving the problem, and so on. It’s a transactional mess.
Another way to see why transaction costs for managing common property are high is to study the Common Property Rights System in The World's Property Management System model. In the CPR box there are seven nodes. The top one, use of common property, is what needs managing within a firm. But due to lack of legal Common Property Rights firms can’t appear to perform the other six nodes. Instead, these are awkwardly and expensively performed in the manner described above by many different social agents.
We have our root cause. How can we resolve it?
Because we are using model based analysis, this substep is easy. We just look at the model to answer the question. The root cause is high transaction costs for managing common property sustainably. Those costs can be lowered dramatically if the two loops coming out of the Common Property Rights System can go dominant. These are the Growth of Sustainable Technology and Impact Reduction loops.
Because we are using model based analysis, this substep is also easy. How did the two loops on the left go so dominant? By allowing firms to appear to lower transaction costs for managing private property. It wasn't obvious that's what was happening back at the dawn of the Industrial Revolution. But it is now. For-profit corporations have used their private property rights to give the world a massive increase in human population and quality of life.
By symmetrical analogy, the model tells us we can do the same for the system on the right. All we need to make the two loops on the right go dominant is to allow firms to appear to lower transaction costs for the management of common property. That's the high leverage point.
This will require a new type of firm, one oriented toward the sustainable management of common property rather than the exploitative management of private property. The two types of firms will be as similar but as different as the two wings on a butterfly. From far away they will both look like corporations. But up close they will look vastly different because they have totally different goals.
For the complete analysis see this chapter on Analysis of the Economic Proper Coupling Subproblem. PDF It's from the Common Property Rights book. This includes a much more detailed discussion of The World's Property Management System model.