Responding to the financial and economic crisis.

1. Responding to the financial and economic crisis. John Abell Professor of Economics Randolph College

2. Definitions • Oikonomia: 1. The wisdom of household management. 2. The art of efficiently producing and maintaining concrete use values for the household and community over the long run. • Chrematistics: The art of maximizing the accumulation by individuals of abstract exchange values in the form of money in the short run. Aristotle

3. First Bank of Berne, Indiana Ranked best performing bank in Indiana in 2009 by Financial Mgt. Consulting Group Founded: 1891 Assets: $415 million Employees: 115 Shareholders: 322 2009 earnings: $8.9 million, a bank record

5. Washington Mutual Bank September 2008: Collapsed. $180 billion in failed mortgage-related loans. Seized by federal regulators. Sold to JPMorgan for $1.9 billion, 5% of its peak value a year earlier. Company policy? Issue loans to anyone or anything real-estate related, especially sub-prime loans.

6. State of the economy

24. “Fundamental challenges to the fixation on growth”Bill Mckibben (Deep Economy) • Growth produces more inequality than prosperity. • Growth has not led to a reduction in poverty.* • Growth is not making us happy. • Growth is contributing to an environmental crisis.

25. Reminder of what it is we wish to grow • GDP (Gross Domestic Product): • A Dollar measure of all currently produced final goods and services.

26. Inequality

30. Poverty

32. Happiness

34. Robert F. Kennedy GDP… measures everything… except that which makes life worthwhile. 3/18/68 University of Kansas

35. Environmental stress

36. Econ 101: Circular flow model

37. Economic growth

38. Throughput • Definition #1: The flow beginning with raw material inputs, followed by their conversion into commodities, and finally into waste outputs. • Definition #2: Entropic physical flow from nature's sources through the economy and back to nature's sinks. Herman Daly

39. Econ 101: Circular flow model

40. The three questions all economic systems need to answer: • What to produce? • How to produce? • For whom to produce? But… Two additional questions that are rarely asked in Neo-Classical economics: 4. How much (is optimal) to produce? 5. What is the ecologically sustainable way to produce?

41. Scale I

42. Scale II

43. Report on Global Ecosystems Calls for Radical Changes. Earth's Sustainability Is Not Guaranteed Unless Action Is Taken to Protect Resources, Experts Say By Shankar Vedantam Washington Post Staff WriterWednesday, March 30, 2005; Page A02 More than 1,300 authors from 95 countries participated in the Millennium Ecosystem Assessment, whose results are being made public today by the United Nations and by several private and public organizations.

44. Global warming? +.9 C (+1.6 F) since 1880; +.5 C (+.9 F) since 1980 alone. Source: James Hansen, NASA Goddard Institute for Space Studies (Nov 2007) http://www.giss.nasa.gov/research/features/200711_temptracker/

49. The Arithmetic of Growth • Ehrlich equation: • I = P x A x T • I = Impact of human activities (for example, CO2 emissions) • P = Population • A = Affluence or scale (Income per capita) • T = Technological intensity of human activities (CO2 emissions per $ of economic activity)

50. Basic concepts… • I = P x A x T • I needs to go down. For this to happen: • Ideally we would like for P to go down as well. • Ideally, we’d like for A to go up, especially for the poorest of countries. For A to increase, though, then scale must increase as well! • If we can’t get P to go down, and if A is going to continue to go up, then T must come down!