INVESTMENT PLANNING TOWARDS AN INNOVATIVEAND SUSTAINABLE ENVIRONMENT

Jerry Courvisanos

Department of Economics,University of Tasmania,

P.O. Box 1214, Launceston,Tasmania, 7250 Australia

Facsimile 61-3-6324 3711e-mail: Jerry.Courvisanos@utas.edu.au

presented at the6th International Conference of the Greening of Industry Network

“Developing Sustainability: New Dialogue, New Approaches”16-19 November 1997

University of California, Santa BarbaraCalifornia, USA

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Abstract

The role of business fixed investment in a nation’s economy is to provide the capital goods (ormeans of production) which enable development of productive processes resulting in required goods andservices. This form of private investment exhibits instability, veering from boom to bust over a period ofaround ten years called investment cycles. The "economics" problem arises with the need for investment athigh and stable levels to produce long term secure employment (even at reduced hours of work and betterincome distribution), for it is such investment which engenders economic growth with correspondingthreats to the sustainability of the ecosystem.

Technological innovation is seen by firms as the agent to initiate strong investment. The“technology” problem arises with the need for firms to find ways to harness such innovation that providesstable growth and employment. Whether the technology creates ecosystem sustainability in the privatemarket place depends on how effective the market system is in incorporating ecological concerns intoprivate property rights (i.e. Is it profitable to introduce technology which is ecologically sensitive?).

This paper argues that resolution of the two problems above results in market failure. Markets ontheir own fail to understand and appreciate that a sustainable society must be defined in terms ofmaintaining the biodiversity of the planet so that life as we understand it is perpetuated (although it isinevitable for, and we must let, nature adapt and change over time). There is need to develop subtle publicpolicy tools that will allow for the economic and technology imperatives to flourish within the constraintof a sustainable society.

The paper goes on to develop a behavioral framework of analysis to help resolve the “economics”and “technology” problems in a manner that leads to a "sustainable society". This framework is based onthe work of two economists, Michal Kalecki and Adolph Lowe. Kalecki argued for social control ofinvestment (due to market instability failure) and that this involves a democratic investment planningapproach to ensuring stability in investment cycles. This approach is extended here by the behavioralsatisficing objective to apply to market ecosystem failure with the type of technological innovation thatensures sustainability of the ecosystem.

Lowe argued for an “instrumental analysis” to public policy, linking human agency to investmentbehavior in order to overcome uncertainty and severe instability of investment which prevents long termprivate investment programs. This analysis is extended here to develop subtle public policy tools that willallow for the economic and technology imperatives to flourish within the constraint of a sustainablesociety. The conclusion of this paper contends that only with such a framework of analysis as developedhere can societies start to evolve consistent and workable public policy tools for thriving and growingeconomies that at the same time are ecologically sensitive. There is also the associated recognition thatimportant economists in the past have contributed analyses that are essential for the economic viability ofan ecologically sustainable society.

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“You've hit the (post-)Keynesians at a weak point; they and the supplysiders seem like the last unreconstructed growth hounds around. Didn't Joan

Robinson say something like, for all their talk of investment, theKeynesians have never asked investment in what?”

Doug Henwood (email com., pkt net, 30 August 1997)

1. Investment and Market Failure

A growing economy requires investment in the future. Economics defines fixed capital

investment as planned expenditure on plant and equipment (or means of production, MOP)

that furnishes the productive processes for future goods and services. In a capitalist

economy this role is centrally located in the private market sector. Unless specified

otherwise, the term “investment” in this paper refers to private business fixed capital

investment.

Investment needs to be greater than the rate of depreciation of “old” MOP in order for a

capitalist economy to grow. The standard "economics" problem arises with the need for

investment at high and stable levels to produce economic growth. This will deliver both

private profit growth (microeconomic objective) and long term secure employment

(macroeconomic objective). Economics research has identified technological innovation as

the agent initiating strong investment. The “technology” problem arises with the need for

firms to find ways to harness such innovation that provides stable growth in profits and

employment.1

Two forms of market failure have been identified in the attempted resolution of both the

economics and technology problems. The first is instability of investment, exemplified by

1 The important role of technological innovation from two different theoretical perspectives isgiven by Kalecki (1954) and Solow (1957). Denison (1962) provided the first detailed empirical

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the increasingly volatile investment cycles exhibited in capitalist economies as the process

of market deregulation has been extended over the last 15 years. The increasing degree of

market uncertainty has generated these investment cycles that result in cumulative bubbles

of boom-expansion followed by serious troughs of debt-deflation (see Courvisanos, 1996,

pp 190-214).

The second is ecologically unsustainable investment which produces MOP that are

inappropriate in terms of scale, location and time, clearly identified most persuasively by

Schumacher (1974). The aggregate impact of investment and the embodied technological

solutions have been in the direction of decreasing ecological sustainability (Meadows et al.,

1992). This has been despite growing support for market-based environmental solutions in

the 1980s and early 1990s (Kinrade, 1995). The scale of investment (large sized with

strong technological input), its location (with emphasis in industrial clusters) and its

cumulative impact through time all point to market failure of private investment decision-

making in delivering an innovative capital goods structure that leads to a more sustainable

ecological environment. From an ecological standpoint, the need for significant structural

adjustments to the current operation of the private investment climate is required.

An investment strategy that addresses both failures needs to be developed. In the next

section, this paper sets out briefly the private-public mix of investment strategies implied in

two optimal economic approaches. They come from the two perspectives on sustainable

development that have predominated discussions in this area. One is “environmental

economics”, which is the neoclassical economics perspective that resolves environmental

support. More recent studies by Sahal (1981), Nelson (1990) and Verspagen (1992) provideaccounts of how this technology problem has been addressed in capitalist economies.

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concerns on the basis of reducing conflicts to optimal cost-benefit algorithms. The other is

“ecological economics”, which is based on the economy being a subset of the global

ecosystem and the need to ensure an optimal ecological scale of resource use. Optimality

is the “only game in town”.

A critique of both optimal approaches is also in this section. The argument is that optimal

investment strategies fail to adequately address the two market failures, reducing private

and public policy actions to sub-optimal solutions. A contradiction in theory as well as

practice.

An alternative public-private mix investment strategy is outlined in the rest of the paper.

The perspective is based on satisficing behavior given endogenous private firm constraints

created by the two market failures. These failures force private agents (i.e. managers) to

operate within bounded rationality rather than optimal rationality. This alternative is based

on contributions on investment strategies developed by two significant non-neoclassical

economists of the second half of the 20th Century. Adolph Lowe and his “Instrumental

Analysis” provides a completely different approach of public policy in overcoming market

failure while linking agents with their investment decisions. Michal Kalecki and his

“Perspective Planning” provides a concrete way of nesting instrumental analysis into a

democratic investment planning approach.

After setting out each of these author’s contributions in terms of investment strategy in the

third and fourth sections of the paper. The fifth section is devoted to incorporating their

contributions to form a framework for an ecologically sustainable investment strategy that

better addresses the two market failures outlined above. This is a step towards a new

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investment paradigm that is both innovative and ecologically sustainable, such that the

dilemma of sustainable economic growth and sustainable ecological diversity dissolve into

a positive program of cumulative causation. The concluding section poses the question as

to whether this can become the new economic rationalist position.

2. Orthodox ‘Optimal’ Approaches to Investment

Attempting to achieve an optimal solution while confronting market failure has led

economists to specific investment strategies. The orthodox position in neoclassical

economics on this optimal solution has altered over the post-war period. In the early post-

war till the mid-1970s, Keynesian economics predominated with macroeconomic demand

management providing the indirect public policy towards stabilising the investment cycle

(Courvisanos, 1996, p 225). Through the use of a combination of fiscal, monetary and

incomes policies, central governments attempt to provide counter-cyclical actions which

mitigate macroeconomic uncertainty. This then allows private investment decision-making

to be based on less contradictory market signals with correspondingly lower amplitudes of

peaks and troughs. Offsetting fluctuations in private investment activity by public

investment is a specific strategic countercyclical policy by governments (Kalecki, 1945, pp

89-90).

In tandem with Keynesian macrostabilisation is the orthodox cost-benefit approach to

environmental market failure at the microeconomic level. Governments use taxes and

charges to internalise the social costs of production, so that private investment decisions

are based the full marginal costs when calculating rates of return benefits on specific

investment projects (Helm and Pearce, 1991). Recent emphasis from this orthodox

position has been to recognise the efficiency gains from market-based instruments (e.g.

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tradeable resource and pollution permits) over direct legal regulation. This allows the

private decision-maker to incorporate social costs as a marginal adjustment to the scale

and form of the investment project, rather than just as a fixed regulated cost. Most of the

market-based instruments applied to date “...have been grafted onto existing regulatory

regimes rather than introduced as an alternative to such regimes.” (Eckersley, 1995, p 15)

The rise of “free market” economics of Lucas and Sargent in the 1980s has altered the

orthodox neoclassical position towards greater market control with governments only

setting broad parameters within which the private sector operates. Governments in

advanced capitalist economies have generally accepted this position. At the

macroeconomic level it involves the setting of medium term targets on fiscal (e.g. balanced

budgets) and monetary (e.g. minimum inflation) public policies, so that market forces can

respond flexibly towards some stable market signals. With this comes a deregulatory

approach in fostering private investment strategy that restructures away from protected

mature industries to higher value-added growth industries. This approach concentrates on

providing the investment decision-makers with more efficient flow of market information

and removing interventionist public policies that distort this market information, increasing

uncertainty and instability.

Within this broad investment perspective is “free market environmentalism [where]...

environmental externalities are attributed to the absence of markets and property rights”

(Eckersley, 1995, p 15, original emphasis). Investment strategy in this context is left to the

private decision-makers once government has clearly converted “the commons” into

private property rights. Entrepreneurial initiative will respond to rising environmental

demand by investing in new technologies that will internalise external costs (see Anderson

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and Leal, 1991). Public investment should only be contemplated when transaction costs

are extreme, and then only with the alliance of the private sector (e.g. outsourcing, joint

ventures, leasing).

The neoclassical orthodox position, in both versions, is based on a static endogenous

system within which private investment decisions are made. The stability of private

investment derives from the state’s attention in establishing the “benchmark” conditions

that lead to a stable market-based economy. These benchmark conditions set the basic

price signals upon which private entrepreneurs respond. The dynamic aspect of this broad

orthodox position is the exogenous element of technological innovation. For it is such

technology that is assumed will come forward under correct market signals. This

innovation is seen as being appropriated via investment, but with no specific theory on

how it happens. Empirical evidence on technical change comes forth as only a “residual” to

all the basic internal static economic factors that are explicitly price responsive (see

Denison, 1962).

This benchmarking begins from the premise that human agency responds to flexible market

signals by tending towards a known (or at least knowable) equilibrium stable condition.

The underlying critical response to this is that technology itself, within the context of

volatile market signals creates conditions for uncertainty in expectations about the future

that lead to cumulative instability. The work by Minsky (1982) on financial instability and

by Crotty (1992) on growth-safety trade off in capital goods investment, show the

cumulative volatility arising from market signals to investment (both financial and

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physical). Recent work of technology embodied in investment has shown the rise of severe

cyclical activity whenever new technological systems predominate.2

From this critique, optimal allocation is not an option in a world of uncertainty. The

instability of investment and technological innovation leads to serious questioning of the

internalisation approach to environmental social costs, whether in the welfare (cost-

benefit) or free market versions. The concerns are both practical and conceptual (see

Stanfield, pp 26-7). At the practical level, there are intractable problems in identifying and

measuring (or even guestimating) the social costs that need to be incorporated into rates of

return calculations for investment projects extending into the unknowable future. Market

signals are not able provide the necessary data, and public investment strategies from the

optimal perspective are not able to resolve these measuring problems. That is unless public

investment dominates as in the “military-industrial complex”, but then this drives us

towards the “socialisation of investment” advocated by Keynes and Kalecki. A position

anathema to neoclassical economics.

At the conceptual level, ecological market failures are all-pervasive and interdependent in a

world of uncertainty in which agents have to operate. Technological change embodied in

new investment alters “the extant institutional configuration” (Stanfield, 1995, p 27),

which is taken as given in neoclassical economics. Technological investment has an

evolutionary focus that is endogenous to the entrepreneurial process of investment

decision-making. This denies any static equilibrium solution to the ecological market

2 Courvisanos (1996) has combined these two analyses to develop a “susceptibility cycle” ofinvestment at the agency behavioral level involving technological innovation. Case studypatterns provide support to this concept of cumulative instability. See also Freeman and Perez(1988).

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failures and involves technical change at the center of the endogenous process of

instability. Technology can not be some deuxs exs machina that generates the market

solution to ecological disasters that accompany economic growth.

The alternative optimal approach comes from “ecological economics”, based on the

seminal work by Daly (1977). Daly argues for an optimal ecological scale of resource use

that is derived from the “biophysical equilibrium”. This equilibrium determines that the

optimal scale of production is where there is a balance of material-energy throughputs into

the economy that maintains the flows from the ecosystem at a constant sustainable level.

This is the optimal steady-state economy. Daly (1977, p 17) considers innovation as

essential in this type of economy to improve the quality of society without adding to the

stock of human artifacts that would distort the biophysical equilibrium. Market-based

instruments of the type supported by neoclassical economists are the public policy tools

used to achieve steady-state. This incorporates private incentives in optimal allocation to

achieve collective control at the optimal scale of production.

In this “constrained market environmentalism”, the investment process operates in the

same way as with neoclassical economics but with the crucial preanalytic setting of an

optimal scale of production. Size of the investment projects is predetermined, yet there

exists market-based encouragement to develop ecologically sustainable technology. Such a

steady-state economy reduces the influence of exogenous factors on investment cycle

susceptibility, making these cycles even more strongly endogenous based. Aggregate

demand, profitability, debt levels and excess capacity must still vary endogenously in a

market-based steady-state economy, only the trend growth rate over the business cycle is

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zero. The instability of investment then depends on the same endogenous uncertainty

problems that were raised above with neoclassical economics.

In this steady-state economy there is market-based investment instability and technical

change. These are processes of cumulative change through time, and not some stable

equilibrium set by the market. Free market environmentalism does not have the analytics to

deal with cumulative change in the ecological domain. As Stanfield (1995, p 19) points

out, discontinuities of threshold levels exist in the environment so that “...there is no

smooth curve of residuals disposal and environmental deterioration”. In a dialectical

manner, ecology mutates as it grows out of qualitative change. Optimal scale is undefined

within the context of an unstable investment cycle and cumulative ecological change.

Private corporate investment strategy which is best suited to innovation needs a stable

business environment (see Kay, 1993). An adaptive, evolutionary and incremental

approach to investment is necessary for innovation that is ecologically supportive. Static

optimal based corporate and public policies can not include fundamental uncertainty in

their analytics. The result is investment strategies that maintain existing technological

competence with “end-of-pipe” add-on environmental solutions. Market uncertainty needs

to be ameliorated through public investment strategies that create a predictable but

strategic focus that induces innovation that is cumulatively changing towards a

ecologically sustainable investment program.

The next two sections introduce a set of economic analytics that are aimed to operate in a

world of uncertainty and cumulative change. They have at their base satisficing rather than

optimising objectives in terms of policy actions. In Section 5, these two analyses will be

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combined to provide a framework of analysis for an innovative and sustainable

environment.

3. Alternative Stage I: Instrumental Analysis

Lowe (1976) established an analytical framework designed to enable rules of formal logic

to be applied to economic cause and effect sequences over real historical time. This

framework is particularly aimed at using such cause-effect principles to set up state

structural adjustment policies that can deliver a sustainable, equitable and ecologically

supportive economic environment. Lowe calls this “...the search for the economic means

suitable for the attainment of any stipulated end. To this procedure I have assigned the

label of instrumental analysis.” (Lowe, 1976, pp 11-12)3

Investment is the central element of any path to economic growth. There has been much

analysis and evidence to show that uncertainty by the “mistake-ridden private sector”

causes investment instability and undermines any smooth effective path to economic

growth (Courvisanos, 1996, p 231). Private investment in a market-based economy, as has

been argued above, lacks sufficient order and coherence for it to be effective via the

private sector in producing a strong ecologically sustainable program in economic regions

or nations that currently lack the relevant supportive infrastructure.

A Lowe-style instrumental analysis (IA) in relation to an investment strategy for

sustainable environment is set out below:

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Assumption: Investment instability is inherent in advanced capitalist economies, such that

instability leads to problematic growth paths. Instability in investment prevents flexible

investment strategies based on new technological systems.

Aim: Order and coherence in investment by maintaining an appropriate rate of capital

stock growth to ensure that innovation in an ecologically sustainable environment is less

problematic.

Method: i. Through regressive inference, derive necessary links back to the motivational

patterns of firms vis-à-vis investment

ii. Develop “secondary controls” which alter behavior to enable economies

(regional or national) to reach generally accepted ecologically-based goal-adequate paths.

Strategy: i. Establish the human agency elements to private investment decision-making.

ii. Secure the co-operation (“voluntary conformity”) of entrepreneurs and all

other agents involved in the investment strategy process (e.g. university technology center,

state bureaucracy, union/employee delegates, training schools) to alter investment

behavior towards a more stable, but strong innovative investment path.

iii. Introduce into this path, dynamic diffusion of new technology systems to

reach specified and accepted investment goals. This can be done by implementing

investment perspective planning as set out in the following section of this paper.

3 Allen Oakley was “instrumental” in guiding me through Lowe’s work during my Ph.D.studies. His own exposition of Lowe’s work in Oakley (1987) is an excellent introduction to thisform of analysis, and this section borrows heavily from it.

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Secondary Controls: These are the specific public policies introduced to achieve the

strategy.4 These controls have the following conditions -

• dynamic (specified over a nominated period of time) and operating directly on

motivations and their impact on market behavior.

• sufficiently large economies of scale exist to generate benefits from modern

technology and management skills.5

• expectations are constrained by the generally accepted choice of macroeconomic

goals (employment growth, unemployment rate, inflation rate, external balance).

• microeconomic action directives related to investment planning that are consistent

with the agreed macroeconomic goals.6

All secondary controls must have two elements. The first are technical engineering rules

that govern the path of investment given the current technological limits. The second are

motivational substructures based on agreed microeconomic goals.

This framework will form the basis for devising and evaluating investment strategies for

innovative and ecologically sustainable economies. Note that this is an economic analysis

and there is no evaluation of the political issues which inevitably surround such strategies

and their implementation. Such political evaluations are left to political scientists to

4 Lowe applies the term primary controls to orthodox macroeconomic demand managementpolicies (Oakley, 1987, pp 17-18). Such public policies will not on their own deliver theappropriate goal-adequate paths due to microeconomic market failures inherent in investmentinstability.5 These controls specifically eschew structural change through deregulation and privatisationwhich destroy scale economies and only address market structure without appreciating thenature of firm (and worker) conduct in deregulated markets that lead to discordance. A classicexample of this is the major “discordance” arising from financial deregulation in the 1980s. Thisoccurred in all economies that undertook major financial deregulation, e.g. Australia (seeMartin, 1991), USA (see Mayer, 1990; Wray, 1992).

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conduct. Whenever political factors affect the economic analysis, they are noted but not

analysed.

4. Alternative Stage II: Perspective Planning

Kalecki (1986) is a series of articles on how to implement investment strategies from the

perspective of public control. The approach in these papers can be incorporated into a

specified ecologically acceptable innovative investment strategy, once such a strategic plan

has been identified in the Lowe process of democratic control.

A path of dynamic diffusion of new technology systems needs to be established that is

conducive to innovation in investment for a sustainable physical environment. This requires

long-term investment strategies to have an incrementally adjusting perspective planning

approach. To achieve this it is necessary to establish specific practical short-term goals to

induce innovation in investment that eventually adds up to the long-term goals specified.

The plan must be continually assessed at every short-term end-point to see whether it is

necessary to revise the goals and the strategy for reaching the broad-based long-term

scenario.

Consistent with Lowe’s instrumental analysis, the Kalecki-style investment planning model

rejects the Soviet command approach which Kalecki always regarded as unworkable as it

continually would hit up against human and ecological constraints. It was the misguided

attempts by the Soviet planners to “crash through” these constraints that led to severe

deterioration of both the human and ecological environments in Soviet and Eastern

6 Richardson (1960) details how investment co-ordination by information agreements andindustrial concentration would assist such micro-goals in policy-oriented strategies.

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European economies. Collapse of such a system was inevitable, as Kalecki makes clear in

many of his papers written in the 1950s and 1960s, included in the Kalecki (1986)

collection.

The perspective planning model also rejects market-based reliance on price signals to lead

the economy. Prices are always distorted by imperfect competition and public sector

attempts to adjust these prices to account for social costs. All such distortions raise prices

and reduce output to the detriment of employment opportunities.

Three over-riding criteria in any perspective planning7 are:

i. ensuring the stability of investment through centralised control mechanisms,

ii. re-structuring towards ex-ante planning (rather than ex-post planning by monopoly

capitalists that enshrines the current technological paradigm),

iii. democratisation of the process through information input by all levels in the production

process, with emphasis on the input of workers’ groups who understand the processes and

can best identify limitations of the current production process.

Perspective investment planning in Kalecki (1986) can be summarised into the following

crucial implementation elements:

• resource allocation needs to take place according to agreed macroeconomic effective

demand criteria, applied ex-ante.

7 These three criteria are adapted from elements described in McFarlane (1984, pp 3-5) from aKaleckian perspective.

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• prices are fixed with mark-up “satisficing” rules (not by monopoly capital as now, but

by public control) based on the macro-settings such that the mark-up reflects both

actual and shadow (social) costs related to the requirements of investment finance.

• market signals are used by firms for quantity adjustments in the use and expansion of

capacity.8

• firms’ performances assessed by net value indicators within wage guidelines and

employment targets (rather than profits).

• investment is kept in check (to prevent overaccumulation) by interest payments

deducted from the performance indicators.

• central vertical integrated input-output planning feeding into firms’ investment

planning ensuring appropriate supply linkages from raw materials to final products.

• planning at both the central broad level and at the firm investment level are based on

constraints set by labour force growth, technical progress and available raw materials

and growth determined by agreed macro-criteria (and in particular, the trade-off level

at which consumption should be maintained relative to investment growth).

• countervailing power of workers’ councils as strategic input to counterbalance role of

central planners.

The broad engineering and motivational structures that have secured “voluntary

conformity” determine the long-term (say,15 year) Lowe-style growth path. This sets the

broad long-term objectives of any perspective plan. The Kalecki-style implementation

elements above specify how these objectives are to be attained in the short-term (say, five

year). Continual reappraising of the implementation program provides information that

enables a resetting or adjustment of the short-term objectives, which then fits into the re-

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evaluation of the long-term plan as it is continually revised and extended out always to the

15 year projection.

5. Investment Framework for an Innovative and Sustainable Environment

Neither Lowe nor Kalecki raise ecological concerns in their analyses. Both are concerned

with developing political democratic control of an unstable market environment. The basis

of such control is the operation of investment planning and implementation. Given the

inadequacies of the market-based optimal ecological approaches to investment described in

Section 2, an alternative framework for an innovative and sustainable ecological

environment is required. By incorporating the Lowe-Kalecki investment strategy around

crucial satisficing objectives (that are continually re-evaluated and adjusted), a new

ecological framework of analysis is available. The approach is to extend the behavioral

satisficing objectives and implementation strategies of the Lowe-Kalecki framework to

apply to market ecosystem failure, while encouraging the application of technological

innovation that ensures sustainability of the ecosystem.

At the broad sociological-political level, “instrumental analysis” needs to be applied to an

economy with market ecosystem failure. Secondary public controls on investment strategy

are needed that establish motivation and voluntary conformity towards ecologically

appropriate goals. Then a perspective plan with these goals is set up using the above eight

dot points to form a specific investment program in consort with agreed ecological “rules”

that deliver the type of ecological sustainability determined by the “instrumental analysis”.

8 Kalecki (1954, pp 62-3) shows how market clearing quantity adjustments are more flexibleunder perspective planning than price adjustments are under current monopoly power in

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Establishing satisficing ecological “rules” always goes on, only currently a few powerful

private and public monopoly interests determine them, generally not from an “ecologically

sustainable” perspective. Barbier (1989) has developed some ecologically sustainable rules

which could form the basis of any Lowe-Kalecki plan. These rules deal with rates of both

exploitation of natural resources and generation of wastes that specific ecosystems can

assimilate to for long-term “carrying capacity” sustainability. The perspective planning

approach allows continual re-evaluation of these rules over time so that they are not static

and reflect innovative technological change.

Economists currently writing on the physical environment recognise that all attempts to

incorporate ecological concerns depend on judgements, whether via the market or through

the democratic processes suggested by the Lowe-Kalecki framework. Hodge (1995, p 56)

explains that to have confidence in the effectiveness of these rules “...any prescriptions will

have to embrace a wide range of capital assets and precautionary rather than optimising

approaches have to be adopted.” It is the planning system behind these rules that provide a

level of confidence that induces innovation in investment that leads to revisions both in

carrying capacities and economic growth for future iterative reevaluations of the

perspective plan.

Since it is impossible to define with any certainty what sustainability requires, a risk averse

investment strategy needs to be initially introduced, and not based on a static optimising

(and optimistic) cost-benefit comparison. Over time what sustainability requires is a

“shifting target” that depends on the new information and technology that becomes

capitalist economies.

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available and on the changing attitudes and expectations adopted by the generation that

has democratic public control (Hodge, 1995, p 56).

Borrowing from the “cumulative causation” literature (see Ricoy, 1987), the Lowe-

Kalecki ecological framework provides a growth of effective demand based on certain

sustainability rules that establishes certainty within which innovative investment can

flourish. The continual iterative re-evaluation of the investment plan encourages further

innovation that leads to more acceptable and internationally competitive sustainability

rules. This creates “self-reinforcing internal dynamics” that induce strong international

competitiveness and greater economic growth and employment.

This is not a figment of the author’s imagination. The policy framework has been

appropriated from two distinguished economists and their long-standing analyses of the

problems with investment and growth in uncertain capitalist markets. The framework has

been applied to the ecological sustainability question on the basis of recent work on

sustainability rules by environment economists. Two recent publications provide empirical

support for the type of framework proposed here. One is from a strategic business

management perspective. The other is from a public environmental policy perspective.9

Neither has an investment policy strategy, but they both support the general approach

advocated within the investment strategy. It is an approach based on dynamic satisficing

objectives rather than static optimising, and it aims to encourage cumulative causation so

that ecologically supportive innovation is enhanced over time.

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Porter and van der Linde (1995) explore the central role of innovation by private firms in

ending the stalemate between stricter environmental regulations (or rules) and attempts by

business to role back these rules seen as costly and anti-competitive. The authors argue

that this “static view of environmental regulation” is incorrect. Firms operate in a dynamic

competitive situation, constantly finding solutions to problems that makes these firms more

competitive. “Properly designed environmental standards can trigger innovations that

lower the total cost of a product or improve its value.” (ibid., p 120) With incomplete

information and limited time and attention by managers to assess the complex new world

of environmental issues, rules set up by public policy makers offers a bounded rationality

construct. From this construct firms can make satisficing environmentally supportive

innovative decisions in the current transitional phase of the economy, as it moves into the

post-industrial digital economy. In this new world, “...[s]tatic thinking causes companies to

fight environmental standards that actually could enhance their competitiveness.” (ibid., p

128)

Case study examples of many companies are set out by Porter and van der Linde to show

that good regulation can enhance risk taking and experimentation within a predictable

business and ecology setting. Where this has been successful it has been due to good

regulation. Such good regulation is clear and stable in its direction, while creating

maximum opportunity for firms to solve innovatively the problems that rules create. Good

rules do not lock firms into particular technology and are gradually improved in line with

private sector technological developments.

9 Dallas Hanson, an environmentalist colleague at the Department of Management in theUniversity of Tasmania, introduced me to these studies. His expertise on the environment has

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Wallace (1995) develops the same theme as Porter and van der Linde, this time from the

perspective of an environmental public policy maker. Wallace, in his book, details many

examples of countries that have implemented “good regulation”. It is possible for policy

makers to create opportunities and incentives for firms to innovative for a sustainable

ecological environment. To do this well, public policy makers “...need to understand the

nature of decision-making in industry; how it is conditioned by perceptions of markets and

risk, existing technological capacities and constraints and the capacity for change.”

(Wallace, p 22) Six national studies and two industry case studies by Wallace show that

this can be done.

In all the Wallace studies it is shown that successful innovation requires a stable corporate

environment, and with the nature of corporate instability described in Section 2 above,

only public control can provide it. Further, the studies show that clear public policy

ecological directions and rules that allow for adaptation and incremental change bring forth

the required corporate innovation that supports creatively the ecosystem, rather than

prescriptive static regulations that result in “head-in-the-sand” responses that favor costly

“end-of-pipe” technological solutions (ibid., p 17). Nations need to set a coherent,

comprehensive agenda for the environment which encourages flexible and innovative

responses from the private sector. Wallace identifies The Netherlands as having taken this

process the furthest, but there are fears from other nations of the costs of competitive

disadvantage measured in current static neoclassical economic terms.10

been greatly appreciated.10 My own country, the present Australian Government, has been the most “recalcitrant” inrejecting strongly the imposition of environment guidelines because it wants to protect the

23

6. The New Eco-Rationalist Approach

The Lowe-Kalecki framework is a non-orthodox post-Keynesian behavioral economic

analysis. It provides a comprehensive alternative approach to how an investment strategy

can be introduced into an economy in order to derive the benefits of a innovative,

competitive and ecologically sustainable environment. Currently only The Netherlands has

been prepared to go down this path significantly. It has many of the elements of the Lowe-

Kalecki framework in its public program: national strategic environment plan, short-term

targets and target groups, private sector co-operation, voluntary conformity, citizens’

group input (see Wallace, 1995, pp 43-61). The ability to successfully operate this

approach over the globe requires a broad economic framework and a specific investment

strategy that governments and the private sector see as a viable alternative to the

dominance of a the current static neoclassical “optimal” economic framework which

stymies any efforts to generalise The Netherlands experience.

The dominance in economics of the neoclassical “optimal” rationalist approach needs to be

replaced by a eco-rationalist “satisficing” approach. This can only succeed if the specifics

of an eco-rationalist position can be clearly enunciated and its vision seen to be practically

achievable. The aim of this paper has been to spell out in some detail an eco-rationalist

investment strategy for the private sector working within an overall public perspective

investment plan. The practical implications of such a strategy and some examples of such

innovative investment behavior have been noted to indicate the possibilities of this

approach.

declining export coal industry and the perceived increased costs of regulation on other exportindustries.

24

The need for this change in economic thinking is apparent from Tisdell (1994) where he

considers whether the concept of sustainability is a help or hindrance to economics.11

Tisdell notes that despite the fact that “...a wide range of modern economic analysis has

been influenced by such [ecological] developments, neoclassical growth theories and their

stemming new growth theories show no influence.” (Tisdell, 1994, p 133) Neoclassical

economics at its core growth theories can not accommodate for ecological sustainable

development. Market failures as outlined in the early part of this paper have been

accommodated in applied microeconomic neoclassical economics as social cost

amendments (however unsatisfactory this may be). Ecological sustainability remains

incompatible to the heart of neoclassical economics, that is, capital accumulation and

growth theories (as Tisdell makes clear).

This paper contends that only with an investment strategy framework of analysis divorced

of neoclassical analysis can societies start to evolve consistent and workable public policy

tools for a thriving, competitive and growing private sector that at the same time is

ecologically sensitive. A start on developing this alternative framework has been presented

here. There is also the associated recognition in this paper that important non-orthodox

economists in the past have contributed analyses that are essential for the economic

viability of an ecologically sustainable society.

11 Notice, the question is phrased in terms of help/hinder “economics” as a discipline and notthe “economy” as the place we all live in. Only by help/hinder the economy does economicsmatter.

25

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