Economic Literacy and Sustainability

Introduction

There is a growing understanding that sustainability is not an action to be taken within the prevailing market-based economic system but rather a paradigm shift to another that aligns the holistic value of the environment, including its inhabitants, to qualitative well-being. However, the challenge to this shift is not based on social norms alone but instead includes modification of disciplinary perspectives.

Over the past few decades, the economics discipline, which given the strength of market activities has shaped our culture and perception of value, has excluded altogether its own moral foundations; the discipline is founded in moral philosophy. This separation has normalized the view that morality and economics need not be consistent and that self-interest can be the catalyst for broader social gains (Friedman, 1970). The latter has become a social norm.

In excluding human dependency on the environment and with one another, societies have fostered exploitation as a norm and legitimized this through the constraint of regulation, which has often lagged its own usefulness. This, in turn, has enabled self-gratification, either at the individual or at the firm level at the cost of unprotected parties. Essentially, our economic framework in its interpretation of Adam Smith and the founders of the discipline has made the benefit of taking by the strong at the cost of the vulnerable a legitimized action. This has been exacerbated by quantitative proxies (e.g., income, gross domestic product (GDP)) for qualitative perceptions of well-being (e.g., happiness, trust).

To achieve sustainability, there is arguably a need to augment the goals of the economy from accumulation and material gratification to new indicators that address qualitative well-being and promote morally driven decision-making. A value-driven approach not dependent on prices but intrinsic or holistic value is a much more significant constraint, and it naturally embodies an intergenerational and equity perspective.

This Perspective addresses the role of economics in the present period and how the teaching of economics can be a catalyst for sustainability. The examples and discussion focus on the United States as the United States is the country responsible for the global adoption of an economic growth metric and has promoted the adoption of market-based economic drivers. The discussion provides a summary of a course application of economic literacy as an example of the significance of economics education in promoting sustainability.

Economic Growth, Drivers, and Impacts

Consumption is a driver of trade and is also related to the perception of human needs and wants relative to the environment. The present period cultural orientation toward consumption implicitly surfaces the perception of the human relationship with the environment as either one of symbiosis or dominion. In the case of the former, stewardship would prevail. To a large extent, the perceived relationship between human systems and environmental systems has affected the level of resource use and environmental augmentation. Culture in the form of religion and spiritual beliefs can be asserted to have contributed to the perception of stewardship relative to human needs and wants, as well as the modification of the perspective over time.

U.S. norms are an outcome of the perceptions and systems established at settlement, and it is evident that the attribution of the environment as a resource dominates economic thought (Domínguez & Luoma, 2020; Speth, 1977). It is embedded in extant documents from the Massachusetts colony, within the discussion of the production possibilities frontier (PPF), as well as present period policy interest in ensuring that we seek to maximize production subject to resource constraints at any given point in time. In the case of production, this conforms to policy—monetary and fiscal—that seeks to maintain or establish the economy at its peak in business cycle terms or at its potential relative to the measure of economic growth, GDP.

The underlying and guiding assumption of production and consumption decisions is premised on the belief that individuals in an economy have insatiable appetites to consume. This assumption is reflected in the PPF when efficiency is defined as any production combination found on the PPF line. On this line, the economy is maximizing production relative to resource constraints. Combinations of output along along this line, reflect full use of available resources (Espinosa et al., 2021). To the extent that the allocation of resources at a given point in time considers intergenerational equity and threshold extraction rates consistent with the prevention of resource depletion, production can incorporate sustainable resource utilization. However, economic agents have to value the future, and resources, by essentially providing an intrinsic value to these factors. This value would then translate into present period utilization that seeks to conserve, includes risk management as a constraint, and effectively modifies the assumption and legitimacy of insatiable self-gratification as the norm of human behavior.

The inclusion of intrinsic value could be achieved by addressing growth rates relative to regeneration of resources rather than allowing market valuation to form the basis on pricing. In the latter case, prices can be reflective of marketing and/or asymmetry of information; however, in the former, growth rates would need to be assessed. Inclusion of growth rates means that the present value is reflective of regeneration rates, as present value = future value/(1+growth rate) n , where n is the number of periods The higher the growth rate, the faster the regeneration, and the lower the present period price. Similarly, increased uncertainty related to growth, perhaps as related to the speed of climate change, could justify a negative or zero growth rate relative to present utilization rates, thereby justifying higher prices in the present period. This is akin to internalizing the costs of consumption as price captures the uncertainty of potential overuse.

Though growth rates could have variation based on assumptions, the inclusion of risk related to the attainment of growth expectations could provide an additional means to conservatively evaluate present period pricing and use. Of significance, to the extent that a society is taught or maintains the social norm of satiation of needs relative to that of wants, the efficient allocation of resources would not be found in maximization of use but more likely minimization of waste and maximum use life of production outputs.

Economic Growth and the Present Significance of Consumption

The focus on consumption-led growth is in large part due to the quantitative measure for growth and the social norms in society that have normalized personal gratification. GDP is a measure of production capacity within a nation’s domestic borders, and what it essentially captures is the total value of goods and services sold at a specific point in time. GDP can be calculated by assessing total income generated in an economy or total expenditures made within an economy at a specific point in time. The components of the expenditure calculation of GDP include consumption (C), investment (I), government (G), and net exports (X − M), the formula for which is exports minus imports: GDP& = C + I + G + ( X − M ) Consumption spending, C, is spending by households on goods and services, with the exception of new housing. Included in household expenditures are durable and nondurable goods as well as medical care and education. Investment spending, I, consists of the purchase of goods and services that will be used in the production of future goods and services. The expenditures include production facilities, inventory, and new housing. Government spending, G, includes spending on goods and services by local and state and the national government, but it does not include transfer payments. Transfer payments do not reflect a direct purchase of a good or service; rather, they reflect a reallocation of tax dollars. The expenditures of transfer recipients are already included in consumption spending, justifying their omission from G in the calculation of GDP. Net exports reflect the net amount of purchases by foreigners of domestically produced goods (X) relative to the amount of foreign goods purchased in the domestic market (M). Net exports provide the status of the balance of trade between countries and are influenced by and also, as a result of relative demand between trading parties, influence foreign exchange rates. Foreign exchange rates reflect the demand of one currency relative to another.

In the United States, consumption expenditures account for more than 70 percent of GDP. Because prices change routinely, the value of GDP is determined by its growth rate period to period and, in comparison, at a point in time to another country’s GDP values. Since the 1940s, GDP has become a global indicator, and, in this capacity, cross-country comparative evaluation has become a proxy for the economic strength of a country.

It is interesting to note that the potential GDP is equivalent to the PPF, in that to reach the potential at any given time, the economy is fully utilizing the resources available. The limitation of the calculation rests on the dependence on market values. Though GDP captures growth, growth in competitive markets is dependent on increasing quantity related to consumption, which means that, wherever possible, costs of production are externalized either to the environment or to vulnerable populations in the form of downward wage pressure. In effect, firm profit maximization and consumer insatiability, two endogenized tenets of neoclassical economics, have resulted in externalities to the environment and societies. Externalities are observable in environmental degradation and depletion of environmental resources as well as in exploitation of labor markets. Thus, a perversion exits with a GDP measure, as provided in an analogy by Anielski (2002):

Given the strength of the consumer expenditures in developed countries’ GDP, sustainability transformation to sustainable development may be catalyzed through education—economic literacy—that promotes a shift in consumption value orientation to include a responsibility for the holistic impact of a given consumption choice—a moral framework. The result would potentially lead to internalization of externalized costs of production to ensure sustainable use of environmental resources as well as labor. However, education is not sufficient as there remains considerable variation among consumers related to their individual and collective responsibility. Some voice that government regulation is the needed catalyst, while another related perspective is that of corporate accountability.

Economic Literacy and Sustainability

Though not perhaps sufficient, addressing economic literacy is necessary and an opportunity. Arguably, increased economic literacy could serve as a catalyst for both regulatory and corporate sustainability adoption.

In daily transaction behavior, the moral values embedded and communicated within demand and supply determine the manner in which a need or want is attained. To the extent that there is no discussion of the values and behavioral factors assumed and reflected in demand and supply—arguably, implicit values—the values and the subsequent behaviors become endogenous to the economic system. Explicit awareness of present behavioral assumptions inclusive of the unlimited wants of consumers, the profit maximization motivations of producers to meet investor returns, and the understated resource depletion resulting from externalized or understated costs offer the potential to modify active and embedded behavior.

Consumption choices are based on demand and supply of a good and are identified with satisfying a need or a want. The impact of consumption decisions can be significant when there is asymmetry of information; fundamentally, there is a relationship between economic and environmental outcomes and consumption choices. Purchases affect labor and environmental resource use. However, most purchase decisions are made through a market mechanism, where the consumer is not aware of the entire production process and waste is not a factor in the consumption decision. This limitation in information transparency often creates a disconnect between the social and environmental justice sensitivities of a consumer and the realities of their consumption choice in enabling and maintaining the values that they espouse.

In teaching economics, equilibrium, the point at which demand and supply are equal, is assumed to yield a market outcome where resources are efficiently allocated; neither demand nor supply agent can be made better without making the other worse off. The price at which the quantity demanded equals the quantity supplied is therefore expected to embody the cost associated with production, including return to the supplier and the benefit of consumption of the good or service. However, production and consumption are not limited to the transactional nature of exchange of the final good at the determined market price; they are promoted due to the externalization of costs.

In essence, externalities arise when an individual or firm engages in activities that influence the well-being of others and where no compensation is provided in exchange for the imposition. The lack of inclusion of externalities in the cost assessment or consumption expense of a particular good leads to the undervaluing of that good and potential for both overconsumption and heightened waste. Along a product life cycle, each step of the life cycle may have costs that are not captured in price because firms have no incentive to include costs that they do not need to address. Their focus is profit maximization (investor returns), and individuals presently are assumed to be incentivized to maximize consumption subject to an income constraint—the lower the prices, the more of their insatiable desire to consume can be fulfilled.

Incorporating Economic Literacy

Addressing the life cycle of a product can be an engaging and enlightening exercise for students. The process promotes economic literacy as it includes theory—the theory of the firm and theory of the consumer—and practice, externalities, and the significance of value-oriented purchasing and investing with respect to the utility function (Venkatesan, 2016). The following provides a summary perspective and student outcomes.

Concluding Comments

In the discussion of externalities, it is often assumed that market participants perceive the externalities generated by their actions as acceptable due to their focus on the immediate gratification of their needs. For the producer, this equates to externalizing the cost of the disposal of waste products into waterways and the air where no cost is directly borne to adversely impact profits, but arguably, intertemporal costs can be assessed that may impact the enjoyment and longevity of multiple life forms and generations of human life. For the consumer, the externality can be evaluated in the indifference to waste creation at the point of the consumption decision or even the externalities associated with the production of the good or service being purchased. In the case of the former, the cost of the disposal of packaging material is typically marginal to zero, relatively negligible, but disposal creates a negative externality in the landfill, incinerator, or recycling plant that could have been avoided with a thoughtful exercise of demand.

At present, the type of internalizing of externalities that has occurred has been limited to quantifying the externality to an overt cost. However, to the extent that the costs may remain understated, and the market mechanism is not cognizant and focused on the elimination of the externality-based cost but rather the minimization of overall costs, this process has yielded suboptimal outcomes. For example, assume that a firm produces ambient pollution as a result of the incineration of waste. If a governmental regulatory body institutes a fee or cost for pollution, effectively charging the firm for the ability to pollute the air, the producer is able to delegate responsibility for environmental stewardship to the price of pollution. Additionally, depending on the demand for the service offered, the producer may be able to not only transfer the costs now associated with polluting activity to the consumer but also maintain the pollution level. Assuming that the good is a necessity, the consumer is inelastic to the change in price and maintains the needs quantity of the good. In this example, the negative externality related to internalizing the cost has not changed. Instead, only the responsibility of pollution has been transferred to a cost, revenue to the regulating body has been generated, and the consumer has suffered erosion in her overall disposable income and purchasing power. The impact of the latter outcome may be an unexpected contractionary phenomenon to GDP. Fundamentally, the consumer has continued to maintain demand arguably because the complete impact of the externality being created by their consumption is not understood.

Externalities are characterized as a type of market failure based on the premise that optimal social outcomes result from individual economic agents acting in self-interest. However, if instead of being a market failure, externalities could be evaluated to assess and develop an optimizing strategy between individual interests and enhanced social outcomes, externalities could be internalized within the market model as a preference. Perhaps externalities only indicate a lack of holistic awareness on the part of the consumer and producer or a cultural bias toward immediate gratification. A necessary element for modification is education for economic literacy. Though understanding may not be sufficient, it does provide greater understanding of the interconnections between government, corporations, and consumers and the need to align their incentives.

In this manner, success of this internalization strategy relies on the development of the educated economic agent and in the application of life cycle assessment to available choices. Presumably, if economic agents are aware of the responsibility inherent in their consumption and are aware of the environmental and social impact of production processes, consumer demand can create the coalescing framework to augment preference to exhibit demand for sustainably produced products and related corporations from the investor perspective. The augmentation in demand does not allow for the opportunity of delegation of responsibility of pollution capacity to a cost or, alternatively, the incorporation within a cost minimization framework. As a result, the change in preference and subsequent modification in demand promotes the development of market outcomes that are environmentally and socially optimal from the position of what is supplied. In this manner economic literacy can catalyze government, consumer, and firm sustainability objectives and actions through the common aspect of the economic agent. The actions of economic agents can then influence the economic framework to align what we measure to what we value.