Money and Sustainability

From P2P Foundation
Jump to navigation Jump to search

* Book: "Money and Sustainability: The Missing Link" by Bernard Lietaer, Christian Arnsperger, Sally Goerner and Stefan Brunnhuber. Triarchy Press, 2012


A report from the Club of Rome to Finance Watch and the World Business Academy


"Our money system systematically undermines sustainability initiatives and objectives. It is also the structural cause common to all financial and monetary instability. These systemic problems are first explained – and then elegantly resolved by the practical innovations proposed in this book.

Our money system IS the "Missing Link."

We tend to assume that we must have a single, monopolistic currency, funded through bank debt, enforced by a central bank. But we don't need any such thing!

In fact, the present system is outdated, brittle and unfit for purpose (witness the eurozone crisis). Like any other monoculture, it's profitable at first but ultimately a recipe for economic and environmental disaster. The alternative is a monetary "ecosystem," with complementary currencies alongside the conventional one. This is more flexible, resilient, fair and sustainable. Societies worked like this in the past. So can we.

In 1972, the famous first Report for the Club of Rome – The Limits to Growth – showed how an economic system that demands infinite growth in a finite world is fundamentally unsustainable. This new Report explains our present monopolistic money system and the flawed thinking that underpins it. It spells out the catastrophic problems – environmental, socio-economic and financial – that we will continue to experience unless we make radical changes. Finally, it sets out nine practical proposals, which can be implemented now, to run alongside the current money system. This book is essential reading for policy makers, business leaders and economists, anyone concerned about sustainability, those working in the field of monetary systems and anyone with an informed interested in the future of the planet."


Chapter I: Why This Report, Now? video

Chapter II: Making Economic Paradigms Explicit

Chapter III: Monetary and Banking Instability

Chapter IV: Instabilities Explained – The Physics of Complex Flow Networks

Chapter V: The Effects of Today’s Money System on Sustainability

Chapter VI: The Institutional Framework of Power

Chapter VII: Examples of Private Initiative Solutions

Chapter VIII: Examples of Governmental Initiatives

Chapter IX: Beyond the Limits to Growth?

  • Appendices (available online only):
  1. Appendix A: A Primer about Money
  2. Appendix B: Climate Change
  3. Appendix C: Mapping Paradigms
  4. Appendix D: Complex Flow Networks
  5. Appendix E: A Chinese Insight
  6. Appendix F: Wealth Concentration
  7. Appendix G: Kondratieff and the "Long Wave"


How the Current Financial System Demands Unsustainability

Christian Arnsperger:

"one of the main reasons why this growth-oriented system of production and consumption is unsustainable -- that is, generates actions that systematically ignore that the economy is a sub-system of a finite, non-growing biosphere -- lies in the financial and monetary architecture that supposedly "finances" this system. Far-sighted (that's Newspeak for "prophetic") analysts like (a.o.) Bernard Lietaer, Margrit Kennedy or Richard Douthwaite have been hammering this message for two decades -- and have been joined more recently by a new generation of younger and no-longer-so-young people such as (a.o.) Richard Heinberg, John Michael Greer, Charles Eisenstein, Stephen Belgin, Marek Hudon or myself. Not that we all agree on all the specifics of how a new monetary and financial architecture could emerge and what it would look like. We don't. However, we agree on the basic premise that the hubris -- the denial of physical limits, the built-in refusal of human finiteness -- characterizing the current money system is largely responsible for the consistent overshooting of natural resource utilization and the equally consistent damage inflicted on so-called human resources. In other words, we agree on the fact that the way money is being created, circulated, and spent in today's globalized economy violates the basic tenets of the paradigm of Ecological Economics due to Nicholas Georgescu-Roegen, Kenneth Boulding, and Herman Daly.

Ecological Economics doesn't deny the need for money -- meaning, simply, the existence of one or several means of exchange that are accepted for payments by all members of a community, including the government -- nor does it reject the necessity of financing economic activity. It doesn't question the usefulness of markets as devices that support a healthy division of labor. What Ecological Economics simply and straightforwardly rejects is the unholy cocktail of bank-debt-money and competitively oriented "innovation" that makes globalized financial capitalism into a forced-growth system. The unavoidable finiteness of the biosphere -- which various mainstream growth models tend to minimize through the tricky idea of "decoupling" -- implies that "prosperity as growth" needs to be replaced by "prosperity as development without growth," to borrow Daly's terminology. More precisely, it's all about creating possibilities for qualitative flourishing that don't depend on quantitative accumulation. By now, this idea has almost become a commonplace platitude. The question is, Why does it motivate so few of us?

A by and large stationary economy such as the one Daly calls for is incompatible with massive leverage (i.e., debt financing predicated on future value growth), since the latter relies on the tacit assumption that asset values measured in dollars or euros can keep growing essentially into infinity. Moreover, this value growth can't possibly be purely inflationary, since this would mean that no additional purchasing power is generated and all value growth is due only to rising prices. Speculators of all walks of life rely on asset-price bubbles in order to quickly siphon off sufficiently high numbers to their own bank accounts -- but once that money has landed on their accounts, by God they want to be able to count on it in order to buy more stuff! Huge amounts of money that aren't backed by material stuff to purchase (at least potentially) become totally useless. So the basic message of the financial and monetary system to the rest of the economy is: Now that we've generated this huge overhang of pending means of payment, now that all our banks have created this flood of scriptural cash based on speculators' bets -- and therefore debts -- we expect the real economy to make the goods and services available for all this cash to be spent. Remember that this was the reason why Fed Chairman Alan Greenspan encouraged, or at least totally condoned, the subprime lending spree: It was supposed to help already over-indebted households spur on the real economy through new home-building projects. In a sense, this was "financial Keynesianism": the Fed allowed vast quantities of cash to flood the economy, hoping this would (just like Keynes had hoped public expenditure would) generate spending, employment, and growth.

The housing asset-price bubble was used as a strategic tool. It was encouraged and consciously sustained. It was, in a sense, the ultimate bet: Let a localized inflationary craze generate sufficient bank-account wealth for a sufficient number of people, so that when they start to spend this as yet unbacked monetary wealth, the material wealth that was needed to back it would start getting produced. Greenspan's bet, rooted in his deep faith in self-regulating markets and in the "prosperity as growth" paradigm, was that this would jump-start a virtuous process through which the real economy would rally to quickly close the gaping chasm created by the financial and monetary logic of money creation. It didn't work. It eventually forced most States to create even more debt in order to bail out the perilously exposed banks and financial institutions that had speculated on the continuation of growth. And now that the sovereign-debt crisis is threatening the whole architecture, the immediate reflex is to try to spur on growth through yet another "trick": no longer through a new asset-price bubble, but through a massive "austerity" plan based on the idea that since private-sector economic agents are better able than the public sector to generate real wealth quickly, so that public spending has to be reduced drastically in order to free up resources for investors, private employers, and privately employed households to spur on growth. Austerity measures are thought to be a growth-creating measure by which the reduction of public deficits will supposedly increase private opportunities, so that supposedly efficient competitive markets will generate the needed economic growth.

Does that sound like the remedy is awfully similar to what caused the disease? Only because it is. And it couldn't be any different as long as the basic architecture of the financial and monetary system remains what it has been. Prosperity as forced growth is simply how this system defines the possible horizon. As I was watching the documentary "Inside Job" yesterday night (you can stream it on, I clearly felt the extent to which the main actors of the financial crisis in fact staunchly believe that there is simply no other possibility than to keep pursuing the same old macroeconomic project -- what can vary is the kind of tool (whether a new asset price bubble or a wave of austerity measures) that is best used in order to pursue it. Is it any wonder that, in parallel with this scramble for yet another jump start, we are witnessing such ecological regressions as Barack Obama stopping the process of improving air quality in the air traffic sector, or Canada announcing that it is leaving the Kyoto Protocol? It simply seems impossible to fully accept that prosperity cannot -- can no longer -- be bought at the cost of denying the biosphere's finiteness and the fragility of human beings.

Ecological Economics offers an alternative avenue. It argues that the whole architecture of our system, and in particular its monetary and financial aspects, needs to be recast. The bulk of the past posts of this blog are an attempt to suggest directions in which this recasting process might conceivably move. Why are these directions so very, very difficult to accept? I think that this question, more than the content of the measures to be implemented (about which a broadening consensus is actually emerging), needs to be addressed. Ecological Economics clearly questions what it means to be "rational" nowadays. It therefore needs to face squarely the existential issue of why its basic macro- and microeconomic assumptions -- all resting, basically, on the all-pervading fact of finiteness -- generate such deep distress. Why do they trigger such fears and anxieties? Why do so many of us perceive that the new assumptions fly in the face of the very meaning we've learned to give to our lives? Why is ecological rationality so quickly brushed under the carpet as soon as economic growth stalls? These are crucial questions. And this is why Ecological Economics needs to be supplemented by what I call Existential Economics -- the analysis of how deep-seated fears, as well as non-investigated worldviews about what existence means, condition what we consider to be economically rational, feasible, and realistic." (


Hazel Henderson:

"Enter Bernard Lietaer and his co-authors and their deeper analysis in "Money and Sustainability: the Missing Link." As mentioned, most economic textbooks and financial models take money as a given with its three familiar functions: a unit of account, a medium of exchange and a store of value. Only recently -- as we witness on TV money being printed and monetary policies spotlighted -- have the secretive processes of money-creation and credit-allocation become visible. The financial crises of 2008 and bank bailouts led to the rise of the Tea Party and its early slogan: "where's my bailout?" but was soon captured by big donors and lobbyists for anti-government laissez faire. The global Occupy Movements of the 99% were fueled by similar anger at Wall Street banks, the bailouts and unfairness. Money-creation and banking became a target of closer examination. Even Mervyn King, Governor of the Bank of England opined, "of all the ways of organizing banking, the worst is the one we have today. Change is, I believe, inevitable" (speech in New York, October 25, 2010).

From the time of Aristotle who asserted that money exists "not by nature, but by law," money-creation and credit-allocation have been the essence of politics and power in societies. Kings and rulers controlled money-issuance most often to finance wars, conquest on foreign ventures and to maintain control over their populations. Lietaer and his co-authors delve into this history of money-creation and point to the blindness of all schools of economics from the Austrians to Marxists of the extent to which money-creation influences human behavior, societies and cultures. They examine how fractional reserve banking, and its creation of money as debt overtook direct minting of money by governments and how compound interest and discount rates create un-repayable debts and many of the risk-taking and short-termism which leads to financial collapses.

The authors point out that while private debt has more than 5,000 years of recorded history, the emergence of public debt was in 12th century Venice, secured through a state monopoly on salt. The modern government debt market took off only after the English Consolidating Act of 1751, creating "consuls" and later "gilts" and other government bonds. Central banks began with Sweden's Riksbank in 1668. The Bank of England, founded in 1688, was granted a monopoly over issuing paper money. In the USA, after many conflicts over the role of its earlier national banks, the Federal Reserve Act was passed in 1913, as a private corporation owned by its twelve regional banking groups, with its Federal Reserve Board as its governing façade with members appointed by the President and approved by the Senate. Only in 2011 did a majority in Congress join with media in demanding the first ever audit of the Fed and the over $13 trillion it supplied to the large banks following the 2008 crises (

Fast forward to 2012 and the authors cite all the well-known evidence of how finance and markets have changed: globalization, computerized high frequency trading on 50 or more electronic exchanges, 24/7 markets, systemic risk, contagion, herd behavior, securitization, derivatives including credit default swaps, some $4 trillion of daily foreign exchange - with greater leverage and speculation.

Not surprisingly, the authors cite the increasing numbers of crises in financial systems documented by Reinhart and Rogoff in "This Time It's Different" (2010) and the IMF's tally of crises that hit 180 IMF countries between 1970 and 2010 (1971-75, 1976-80, 1981-85, 1986-90, 1996-2000, 2001-2005 and 2006-2010), with 145 banking crises, 208 monetary crashes and 72 sovereign debt crises (IMF, Washington, DC, The authors ask if a car, a plane or an organization had such a track record, would there not be a universal outcry to send the designers back to the drawing board? They expose an underlying issue: all schools of economic thinking view the monopolistic creation and circulation of a single (national) currency as a given, so they do not see the need to question the current established modus operandi. Even ecological economists are frequently unaware of how central is the assumption of monopolistic bank-debt driven currency in driving unsustainable GDP-growth. Dennis Meadows, co-author of the famous Club of Rome report, Limits to Growth (1972), admits in his foreword to "Sustainability and Money" to the same blind spot.

I began to examine the role of money creation in my "Creating Alternative Futures: The End of Economics" (1978), and I agree with the authors that the design of money, how it is issued and credit is created are indeed hidden variables. Any examination of these is fiercely resisted by those who operate these monetary and credit systems and others with vested interests in maintaining them - including politicians and legislators. Regulators also have been captured in these arbitrary systems and suffer from "theory-induced blindness" to use Daniel Kahneman's term in his "Thinking Fast and Slow" (2011). Mass media and the financial press accept all these conventional models and metrics as given and transmit acceptance to the public of dubious statistics that conceal structural problems, such as unemployment levels and GDP-measured "growth."

The authors explain in detail why none of the current reforms will work and why the next crisis is imminent: most are still rooted in delusional statistics (Beyond GDP) and the unstable structure of global finance. As I have also pointed out for decades, this structure still rests on traditional economic models that misclassify economies as closed systems in general equilibrium (Arrow and Debreu, 1959), assuming a progressive "market completion." In reality, of course, economies are dissipative structures requiring constant input of energy, materials and human effort, resulting in higher levels of entropy in the environment (Henderson, 1981, 1988). Similar errors are the mathematical assumptions of debt-based currencies and compound interest, which force more energy and materials exploitation and eventually lead to un-repayable debt levels and the ubiquitous defaults previously described by Reinhart and Rogoff.

In reality, the economics models must be transcended and incorporated into systems analysis and modeled as complex flow networks using thermodynamics and balancing between the three resources of human development: energy, materials and information, the latter being the dominant factor. When we see financial systems in this light (similar to electrical grids), we see, as the authors show, that they are too interconnected and maximized for too narrow a model of efficiency, which respectively maximize flows of electricity and money. The authors present a model demonstrating the trade-offs between such narrow efficiency and the equally important need for resilience - which generally requires restoring diversity (as in micro-grids for local electricity rather than the vulnerability and transmission losses of national-scale grids)." (

2. by Graham Barnes:

"The authors first ‘make explicit’ the prevailing economic paradigm and contrast this with an ecological economics approach (which they claim is rooted in the response to Limits to Growth [the 1972 report from the global thinktank the Club of Rome]) by Herman Daly and others.

The underlying narrative here, of how a fantasy world (or model of economic reality) has come to be taken as read and treated as gospel by a whole generation of economists, academics and politicians, is short and to the point. It deals brutally with two of the main faults in this paradigm: the treatment of non-monetised entities (notably the environment, non-paid activities and cultural and spiritual traditions) as irrelevant externalities; and the erroneous assumption that money is a passive neutral element : an ‘innocuous facilitator’. The first of these has received a fair amount of air-time lately though the summary here is concise and helpful. The second is described via consideration of a monetary ‘blind spot’ comprising three layers.

Although dual or multi-currency societies have existed, appreciation of how they have operated is not widespread and mainstream economics generally ignores them, assuming a single, monopolistic hierarchically-issued currency. The communism versus capitalism ideology war has layered on top of this assumption (embodied in both ideologies) a blanket of comparative debates and analyses, further obscuring the single currency hegemony. And on top of this, a layer of institutions, central banks, and academics have pickled and preserved this monetary orthodoxy. The book reminds us that no matter how entrenched, repeated and defended, this structure is still just a paradigm – a particular view of reality – and alternative paradigms exist.

Chapter 3 is a taxonomy of financial crises, split into monetary, banking and sovereign crises. Prefaced with a disturbing description of the casino economy (only 2% of the $4 trillion daily forex transactions are real trade – 98% are speculation), the chapter describes each type of crisis and the connections between them. The analysis fully supports Mervyn King’s observation (used at the head of the chapter) that “of all the ways of organising banking, the worst is the one we have today.”

In Chapter 4 banking and monetary instabilities are addressed by reference to the physics of complex flow systems. Hopefully my colleague at Feasta David Korowicz might review and comment on this section of the book separately. Unfortunately this sort of ‘crossover’ analysis puts me in mind of the mathematic modelling and analysis that has been incorporated into mainstream economics as the aspirational trappings of a wannabe science. For that reason it leaves a sense of unease. However the chapter is notable for its exploration of the trade off between efficiency and resilience and the offered definition of sustainability as the optimal balance between the two. The argument is that nature selects for this optimal balance but that the current economic system favours efficiency at the cost of resilience. Further, a multiplicity of diverse currency systems with various channels of linkage and exchange between them is needed for monetary sustainability.

Chapter 5 returns to the money – sustainability gap by looking at the impact of existing systemic biases on human behaviour – mostly negative impacts. These biases include pro- cyclical money creation fuelling boom-and-bust cycles; an analysis of short-termism and finally our favourite – debt and the effect of compound interest. This latter topic explores ‘the ideology of the cancer cell’ – the search for growth as an end in itself – and explains Herman Daly’s concept of uneconomic growth. But the overall prescription is not for a replacement of debt-based money but for a proliferation of currencies – as suggested by Hayek but with a broader range of non-banking issuers. Finally the concentration of wealth and destruction of social capital are described. The whole chapter is a compelling critique of the devastating impact of what is traditionally and erroneously seen as a neutral medium of exchange. It should be required reading for anyone who is still attached to mainstream economics, especially the teachers of the subject.

Chapter 6 attempts to address a weakness of most modern analyses of monetary dysfunction – scenarios for change. It is only partly successful but given the intransigence, inertia and vested interests of the status quo this is understandable. The approach taken is to analyse the institutional framework of power – the unholy alliance between government, banks, the finance industry and the ‘professional tax bureacracy’ which acts to perpetuate the dysfunction. The central role of ‘warfarism’ is also referenced.

There is a section on the New Chicago Plan whereby governments would take back the power of money creation from the banks. As would be expected from the above commentary the authors do not believe that replacing a private monopoly with a public monopoly would address the structural fragility problem. Interestingly they also believe that such a proposal (as with the original Chicago Plan) would be fought to the death by the banking system and therefore that the multiple diverse currency approach might be less threatening to them.

This is the disappointing part – the fact that experts that understand monetary dysfunction better than anyone cannot foresee any roadmap for change that doesn’t need the permission of the interests that personify the problem.

The remaining sections of the book are largely case studies. They are well written and draw out the key comparative aspects of various new currencies and they are split into private initiatives and government initiatives. These sections are perhaps more a reference guide than a read-through.

Omissions? Well, apart from coverage of STRO’s C3 model in the case studies there is no mention of P2P ideas and ‘self-certified’ money issuance, which some activists believe is the gold standard for currency backing."

More Information