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Notes

G Davies, 2018. Published by Create magazine (Engineers Australia’s official publication) ……. Can our society in its current form last 100 years, let alone 1000 or 10,000 years? When asked this question, most people answer no to even 100 years. Intuitively, people feel that our current lifestyles are not sustainable – but what does this mean and is this not concerning. In its simplest form, sustainability means being able to continue indefinitely or at least a lengthy period. There are many existential threats to humanity, and probably the greatest is the degradation of the environment on which we 100% depend, because this can lead to a collapse of society and conflict. This is not a political left/right debate. In 1989, Margaret Thatcher provided gravitas to the issues of deforestation, climate change and fossil fuels in her 4000 word address to the United Nations with “Of all the challenges faced by the world community …. one has grown clearer than any other in both urgency and importance—… the threat to our global environment”. Her speech is significant because of her scientific and conservative background. Most importantly, it is consistent with CSIRO, BOM, NASA, UN, IMF, but not the Flat Earth Society! So with the evidence suggesting greater urgency than ever is required, why has progress been so slow over the last 30 years? First, it is necessary to explore the overarching principles around sustainability. It is not possible to have infinite growth (population, materials and waste), and endless extraction and on a finite planet. We need to live within system limits (also known thermodynamically as steady state or dynamic equilibrium). Everything (elements, medicine, CO2, body mass) exists in a finely tuned balance – not too hot, nor too cold. (courtesy of Goldilocks). It is natural for all species to want to improve their situation by making a better and safer burrow, nest or home. Humans became the masters of inventing tools, which led to mechanisation, industrialisation and automation and in turn our high standard of living. However tools in themselves would be ineffective without an energy source other than human labour. Abundant energy has allowed food and material production rates to far exceed that which was previously possible. This has led to the exploitation of earth’s natural resources, consumption and waste generation that threatens the longevity (sustainability) of our civilisation. Engineers can be proud of achievements such as aeroplanes, buildings, refrigeration, communications and appliance, which have led to our modern lifestyle, however these artefacts have inadvertently led to depletion and contamination of the ecosystem. As a result, it behoves engineers to have to carefully consider the Code of Ethics: “to use our knowledge for the benefit of the community and for a sustainable future ahead of sectional interests”. It is said, that if you cannot measure it, you cannot manage it. In the natural and social world, this can have limitations, nevertheless, its worth considering a few approximate metrics1 against what existed 300 years ago: 20% of natural forests remain; Large fish stocks are down to 20%; 25% of fish have ingested plastic Global warming has increased by around 10 C Extinctions are over 100 times greater than would occur naturally. This should be alarming to all – imagine if this were your bank balance. ‘Free’ abundant energy has driven this state of affairs and so requires a greater understanding. 35% of Australia’s energy is used in transport, 45% in industry and 10% in homes. Electricity makes up 40% of energy consumption, of which 15% is from renewable sources. ‘Embodied energy’ (the total energy required to make products) accounts for the bulk of our energy usage. As an example, a computer uses 5x as much energy to make as it uses in its life of operations. Thus, when you throw away products, you throw away energy. The increased trend towards shorter product life is increasing company revenues, but also energy and waste. “Multinationals have to take the long view. There will be no profit or satisfaction for anyone if pollution continues to destroy our planet”2. Company directors and CEOs are legally bound to maximise financial returns for shareholders. However, their financial statements do not necessarily attribute a fair cost for stock (ie shared natural resources), emissions, waste and social disruption; externalised costs which will ultimately be borne by society. The global effort to ensure sustainability is often referred to as a wicked problem and/or the ‘tragedy of the commons’ which requires everyone to pull their weight. Unfortunately, Australia lacks the leadership to address the fact that we produce 1.5% of the world emissions yet have only 0.3% of the world’s population. So what can be done? I’d suggest that we recognise the problem and risks, engage all stakeholders, ensure a transparent and fair system, replace GDP (which only measures economic activity) with value metrics, ensure all externalities are paid by the proponent in a whole of life cycle analysis and work towards greater prosperity for all. There are a number of encouraging signs…. The community are overwhelmingly in favour of positive action. A mix of distributed renewable energy, demand management, storage and energy efficiency will produce the most affordable, reliable and quality electricity. Engineers are at the forefront of waste management, recycling and climate adaptation. It is possible to have a sustainable society and also improve our well-being. – G.J. Davies (FIEAust, GAICD) – Implementing Sustainability: Principles and Practice by Engineers Australia, 2017. https://www.engineersaustralia.org.au/News/creating-sustainable-solutions-benefit-community Margaret Thatcher, 1989 UN address.

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Money DOES grow on Trees

By G Davies, 2014. Published in SENG magazine …… An engineer, and economist and an orang-utan are walking near a forest on a hot day and decide to stop for a rest. The engineer looks at the trees, does some enthalpy calculations and announces he has a plan, whereupon he chops down a tree to make a fire. The heat from the fire is used to make steam, to turn a turbine and make electricity, which is then used to drive an air-conditioner and ‘voila’ he has nice cold air. “That’s cool!” says the economist who then chops down some trees, turns them into pulp and paper, prints money and proclaims to the world he is rich. With his riches, he buys cool air from the engineer and sells it to passers-by. He then says to the orang-utan “you’re lazy. If you were prepared to work, you too could have cool air”. Whereupon, the orang-utan scratches his head in puzzlement, walks across the road, climbs a tree, sits back and relaxes, while enjoying the evaporative cooling and shade provided by the forest. He then shouts back to the others, “I might be lazy, but you’re foolish; if you carry on like that, you’ll run out of wood and will overheat. (Written by an engineer!) The above story obviously simplifies the situation, but captures the essence of how neo-liberal economics comes into conflict with ‘common sense’, and ultimately the laws of nature. Economic growth is akin to a pyramid scheme that relies on continual expansion, without due consideration of the finite nature of the resources. The laws of thermodynamics will not treat us well if we continue down this path. We need to learn to work with nature and appreciate its value and offerings if we are to achieve well-being and sustainability now and into the future. ‘Moneytree’ Policy (pardon the pun) needs to drive innovation and engineering to provide long term value using a full Life Cycle Assessment, whereas the current economy is run on the basis of products with an ever decreasing life, being thrown away and thereby ensuring (short term) repeat business. The well-heeled idiom “money doesn’t grow on trees” is one of the most unfortunate and misleading phrases that one hears. Let me explain. Firstly, what is money? Yes, it is a unit of currency that is often printed on paper, which itself comes from trees, but more importantly in this day and age, money is a more abstract concept of value or wealth – often represented by a number of digits appearing on a computer screen. These digits can evoke great distress if they have a negative sign in front! Conversely if there are say 7 or more digits appearing, you should be feeling very chuffed as you are in the top few per cent of wealthy people. In essence, money represents (or should represent) value and allows us to compare very disparate objects such as an overseas holiday, a shed, a guitar, a painting or even the headband of some famous celebrity. Let us now turn our attention to trees and what they provide: evaporative air conditioners, (as per above);purification systems (turn CO2 into O2);oils (teatree, eucalypt, ethanol);fruit, nuts, food;sap (used for rubber, glues);firewood, bio-fuel, even coal (until it becomes a stranded asset!);structural members;inspiration for biomimicry design – eg. pumping system, photosynthesis, structural design (pointy trees in snow laden climates, low in windy country);pollination, shade, aesthetics, aromas, habitats, sporting equipment, furniture, wind breaks. Surely that is evidence enough that trees have value and thus ‘Money DOES grow on trees’!. In fact our economy is a human construct entirely dependent on the environment. This dependence is depicted in the ‘pyramid’ below, where each item is entirely dependent on the items below it. So, no environment; no economy! This is not to say we shouldn’t partake of nature, it’s just that neo-classical economics, if left unchecked, would drive us to a state of collapse because it has forgotten that the source of all wealth is from nature. Furthermore, current economic models do not consider the limits to growth. This is a case of the ‘tail is wagging the dog’, and it is simply not sustainable. To be sustainable the rate of resource extraction should not exceed the rate of replenishment (thermodynamics 101). Similarly, the rate of waste disposal should not exceed the rate at which the waste can be absorbed. Energy is probably the defining characteristic of Western society in that it has allowed massive growth and expansion way beyond what could be achieved manually. Let it not be written into history that it was also the cause of our collapse. Its importance is such that it has been included as the base of the pyramid, and also because through the ‘big bang’, the planets were formed. So if our economy is entirely dependent on us, the environment and energy, why is it given this cult like status – “that which must not be questioned or threatened”? This addiction to growth – measured by an increase in GDP – has caused grave injustices to society and seriously threatens the social fabric. Using GDP as a measure standard of living is like measuring the mass of food eaten as a measure of health. There are many measures such as Genuine Progress Indicator (GPI) that would serve us better, but the G8/20 leaders have yet to realise this. The leaders in industry continually say that strong companies attain financial success through investing in their people and systems. Surely then then a strong economy results from a nurturing its people and ecosystems. Unfortunately, big business has focussed on short term financial gain at the expense of the environment and society which has lead not only to grave injustices and environmental damage, but also financial crises. Big business has taken profits, yet left the burden of costs such as pollution, health, water contamination and emissions (in economic terms known as externalities) to society. ‘They have the meal and leave the […]

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GDP and Groupthink.

By G Davies 2015, Published in Company Directors Magazine ……. If your doctor judges your health solely on the basis of the mass of food you eat, or if a board judges company health solely on its turnover, you would be concerned. Yet, in an analogous fashion, we judge the health of a nation and its economy predominantly by using Gross Domestic Product (GDP)as the predominant metric. This is not to say that GDP should not be measured, but it’s a question of how relevant is the correlation between GDP, wealth and standard of living. How valid is GDP as a KPI? Christchurch was severely damaged by earthquakes, which required much effort and cost to re-build yet this tragedy increased GDP. Volunteer workers from many of the thousands of organisations do great things for our society, but the GDP does not measure not monetary transactions. It also places no inherent value on our natural resources which are handed to us on a plate ‘pro bono’. Land purchases may reflect some of this value, but in general, accounting practice only valuates ‘improvements’. Disastrous projects (eg. Union Carbide, Deep Water Horizon and Montara off the Australian coast) that result in serious illness, capital write-offs and toxic run-off, require additional expense in the form of doctors, emergency workers, demolition, rebuilding and clean-up. All this extra work increases GDP. Similarly, consumer products (eg. phones, appliances, fashion) with a short life and designed-in obsolescence increase GDP because of the continual need to repurchase said items after ‘throwing them away’, yet does this add real value? Criminal activity, disasters, disposable products all add to much to GDP compared to the SES, CFS, neighbourhood watch, protection agencies and natural processes. GDP does not predict the future, though it is fair to say that prices go up based on demand and scarcity, so that trends may indicate growing scarcity, and the high prices would cause behaviour to adjust accordingly. However, economic forecasts do not easily consider delayed consequences and thus can mask reality. This in turn leads to cycles (in the same way as steering a houseboat down the Murray without anticipating the time lag) and ultimately can lead to crashes. GDP did not measure the ‘free stock’ provided to coal powered generation in the UK in 1952, nor did it measure the negative effects of pollution until a week-long smog resulted in the deaths of thousands. The pollution and other negative side effects were costs borne by all, (negative externalities) yet individual companies benefited. This resulted in the introduction of laws and compliance requirements to better ensure the polluter pays, but do we have to learn the hard way again? So why is there this unquestioned reliance on GDP? The G20 Summit at great (at great expense and thus increased GDP) concluded with a commitment to economic growth (ie an increase in GDP) of 3%. Is this groupthink in action? Historically, when there was scarcity, GDP had some correlation with standard of living, possibly in the same way our ancestor’s health probably correlated with amount of food eaten, or companies with large turnover were economically strong. So perhaps this was the basis of GDP getting such credence, but given the list of companies with large turnover that no longer exist and the obesity epidemic, is it not time to question GDP as the only reported measure of the economy? Robert F. Kennedy in 1968 referred to GNP as ‘we seem to have surrendered values to material things … GNP measures everything except that which makes life worthwhile’. In the context of this article, Gross National Product (GNP) and Gross Value Add (GVA), GNI and GSP are considered to be of the same ilk as GDP. In short GDP does not measure value or even accumulated material wealth; it only measures economic activity – good and bad, and in fact, the developer of GDP Simon Kuznets warned against its use as a measure of wellbeing or standard of living. Now if we consider that Labour Productivity is effectively GDP per person, we then bring into question the Productivity measure as well, and many other KPIs that are all based on GDP. So what alternative measures or KPIs are there for an economy? There is no easy answer, but it may be better to have no KPI than a misleading KPI. What about Net Assets, Net Tangible Assets, or Gross Equity? A measure worthy of consideration is the total net tangible assets less the total value of land, which aims to value ‘human improvements’. Further to this, what about subtracting the cost to rehabilitate damaged environments and displaced communities along the lines of the Genuine Progress Indicator (GPI)? There are numerous indices proposed that look at net wealth, wellbeing and standard of living. According to some of these measures, the ‘Western World’ has not really progressed in the last 20 years, which appears consistent with anecdotal evidence and public surveys. So if there is a problem with the measures of GDP and Productivity, what should directors do about it? Firstly, consider the fundamentals on which the modern economy is based. Then review your KPI fundamentals, understand how your organisation is affected by the greater environment in which it operates and strategise how this may change in the future. Then do a risk assessment on various scenarios and where high risks may eventuate. Consider what the business opportunities are in the future, as we approach the limits to growth on a finite planet. Consider what happens to profitability and assets if/when growth (change in GDP) stops and how will this affect market capitalisation. Given our finite resources, a measure of efficiency worth consideration may be wellbeing divided by footprint. Using a measure similar to this, viz the Happy Planet Index, Costa Rica comes out on top! They even did pretty well in the FIFA world cup. Black Swan events are often cited, whereas in reality they were foreseeable and occur as a result of ostrich behaviour and/or groupthink. I […]

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