What is Sustainability? Graciela Chichilnisky Columbia University, New York Cass School of Business, London October 15th 2010
The goal of this presentation is to provide a formal concept of sustainability and to suggest how to make it operational while discussing and illustrating the new results with examples of (i) renewable resources, (ii) business strategies and (iii) public policies.
Support and Collaborating Institutions Air Force O�ce of Scienti�c Research, Arlington VA Columbia Consortium for Risk Management (CCRM) Columbia University, New York Alliance of Small Island States (AOSIS) Intergovernmental Renewable Energy Organization (IREO) Groupement de Recherche en Economie Quantitative d'Aix Marseille (GREQAM) Institut D'Economie Publique (IDEP), Universite De Montpellier, France Institute for Advanced International Studies, Geneva, Switzerland East Carolina University (ECU), North Carolina
To simplify presentation, summary de�nitions and results are provided. Recent publications were circulated containing de�nitions and proofs.
Sustainable Development Pentagon's recent report on Climate Change A recent Pentagon report �nds that climate change over the next 20 years could result in a global catastro- phe costing millions of lives in wars and natural dis- asters. Potentially most important national security risk. Sustainable Development comes to the fore. http://www.guardian.co.uk/environment/2004/feb/22/usnews.theobserve most-commented http://www.nytimes.com/2009/08/09/science/earth/09climate.html? r=2 http://wwfblogs.org/climate/content/climate-change-climbs-ranks- pentagon-and-cia-0 Our research provides new foundations for decision making over time, for risk management and econo- metrics, probability and statistics that de�ne sustain- abilty and illustrate how to implement it, improving
the measurement, management and mitigation of time dependent decisions and catastrophic risks. The research updates Mathematical and Economic tools for optimal statistical decisions, and decisions over time.
Examples of the new criteria Finance: Maximize expected returns while minimizing the drop in a portfolio's value in case of a market downturn Network optimization: Electric grids: Maximize expected electricity through- put in the grid, while minimizing the probability of a "black out" Stochastic Systems: Jump - Di�ussion Processes (Merton, 1985) These are not consistent with current decision making over time or under uncertainty, leading to perceived "irrationality". The issue is not lack of rationality - but a di�erent type of rationality that gives more weight to the future - as we normally do.
In the midst of a turbulent global economy G-20 leaders voiced a challenge last year: We need a Sustainable form of Economic Development We must achieve sustainable business practices & public policy The G-20 Meeting took place in Pittsburgh, USA, September 24{25, 2009. The G-20 Leaders' Statement can be found in http://www.pittsburghsummit.gov/mediacenter/129639.htm. Here are relevant quotes from the G-20 Leaders' Statement: \As we commit to implement a new, sustainable growth model, we should encourage work on measurement methods so as to bet- ter take into account the social and environmental dimensions of economic development." and \Modernizing the international �nancial institutions and global development architecture is es- sential to our e�orts to promote global �nancial stability, foster sustainable development, and lift the lives of the poorest." These statements substantiate the extent to which sustainable devel- opment has become a mainstream international priority.
What is Sustainability?
� Sustainability means addressing the needs of the present without undermining the the needs of the future Going beyond good intentions � Is there a way to make this operational? � If so, exactly how? � And how will this change economics & public pol- icy?
The Present and the Future Sustainability is about time It is not just what we do today but the e�ect it will have tomorrow In economics, it means how we rank economic opportunities over time
Examples Public policy examples: Sustainable Debt and Sustainable De�cit Spending Example 1 : Sustainable debt: The criterion used here is to only accept \debt provisions made today that can be met by future surpluses". Example 2: De�cit spending: The criterion for sus- tainable de�cit spending is \not to use new money to pay the interest for the old". Business Examples: Sustainable Business Plans Example 3 Sustainable business plans: The sustain- able criterion used here is to seek to maximize pro�ts while ensuring the long-run feasibility or survival of the enterprise.
Renewable resources examples Sustainable Fisheries, Forests, and Land Products Example 4: Sustainable exploitation or sustainable use of resources over time: The criterion used here is to maximize the value of production today while ensuring long-run survival of the stock. Sustainable Portfolio Management Private decisions about Investment Example 5 Sustainable portfolio management: A sustainable criterion suggested is to maximize the present discounted value of investment while limiting total losses to the portfolio at any point in time. Networks: Energy Supplies
Example 6 A sustainable electrical network: A sus- tainable criterion suggested is to maximize average electricity throughput, while minimizing the e�ects of a `black out'. None of the criteria listed above is consistent with neo- classic cost-bene�t analysis. To evaluate an economic project over time in a sustainable fashion { indeed, to evaluate any business plan or any public policy that requires sustainability { we need new economic foun- dations that update classical economic thinking and are clear, simple, general, and analytically tractable. Providing these is the purpose of the article.
Sustainable Business & Public Policy Debt, De�cit Spending and Business Plans Sustainable debt means `debt provisions that can be met by future surpluses' De�cit spending: sustainable de�cits means that `we do not use new money to pay the interest for the old' Business plans: to maximize pro�ts while ensuring long-run feasibility or survival of the enterprise.
Sustainable use of Renewable Natural Resources Renewable resources such as �sheries, forests, land products: sustainable use means to maximize the value of production today while ensuring long-run survival of the stock
Sustainable Portolio Management Portofolio Management: maximize present discounted value of investment while limiting total losses to the portfolio at any point in time Networks (Electricity) Maximize average electricity throughput, while minimizing the e�ects of a `black out' These are all "constraints" on economic decisions over time None of these criteria are consistent with classic cost-bene�t analysis None are consistent with classic or neo-classic economics
Neoclassical economics o�ers no de�nition of sustainable decisions Economic decisions over time use cost-bene�t analysis - with no "constraint" on sustainability To evaluate any economic project over time, any business plan or any public that require sustainability { we need new economic foundations that are clear, simple, general and analytically tractable. This is the purpose of the presentation
Theory & Policy Economic actions over time - business, portfolio man- agement, public policy - are based on cost bene�t analysis and present discounted value and based on T. Koopman's axioms for economics over time: Impatience is Koopman's fundamental axiom � Impatience leads to present discounted value with a `�xed discount factor' This is not just theory � By law, it must be used by the US Congress before funding large projects � It determines Public Policy, US De�cits and Debt
� It permeates all Business Plans � Determines the valuation of business projects, �rms' valuations and thus the value of portfolios
� I will show that Koopman's impatience axiom is a dictatorship of the present and clashes with sus- tainability. � This was not a problem in his time � It became a problem now - because we are us- ing world resources to the limit, facing massive extinction 1,000x of fossil records, and causing global warming. � It is a problem now because of "Ponzi schemes" (e.g. Mado�) � It became a problem now because our short term values and economic strategies paved the way to global economic crisis � Public policy is in crisis too.
� We need to change economic in a way that is sus- tainable, consistent with economic development and with pro�t maximization. � How to achieve that? � The following provides an alternative.
What is the problem? Discount factors underestimate the importance of the future Discounting the Future makes it irrelevant | A Ponzi scheme pushes to permanently the future the moment of reckoning | "Consumption loan" models used everywhere in macroeconomics allow ballooning de�cits and debt - forever. | Experimental work with bonds pricing (short and long term) shows that traders do not discount the future using �xed discount factors | Many care about massive biodiversity extinction that will a�ect our grandchildren
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