Expectations and sustainability

Greg Reid

The GFC and its aftermath have shown how vulnerable the market economy is to the effect of expectations. Few would dispute that consumer demand is currently suppressed by uncertain expectations of the future and expectations are tearing sustainability in two opposing directions.

Australians expect electricity prices will continue to rise. This is a strong incentive to buy sustainable alternatives like solar power. At the same time, investment and share prices in renewable energy are low despite the new carbon tax. Political uncertainty and repeated share dilutions play a role but I also argue that investment is limited due to depressed future expectations.

The consumer who buys solar panels can rationally expect his power bill to reduce but expectations of future investment performance are based more on confidence than calculation. Unfortunately there is little to inspire confidence in management of the global economy or in the capacity of our political systems to resolve the big issues of our time.

Climate change is one of the big issues and it is clear that global mitigation efforts will fail. Extreme conditions will grow in intensity and frequency. Costs and damages are already accumulating faster than they can be redressed. As realisation of the situation spreads it will become a pall over expectations.

Conventional economic analysis predicts merely that growth will switch to areas less prone to climatic impacts and counts incomplete damage repair as GDP growth. Trends in confidence, savings, insurance premiums and property values are all ignored.

Current economic models are spectacularly inaccurate and frequently mislead policy decisions. Among the many false assumptions is the mathematical conclusion that people aspire only to “more of the same” without any basic need for hope in a better future.

A new theory of economics is required that realistically models human needs and behaviour. The challenge for an economics of sustainability is to convince the wider public that it is not just offering “less of the same”. The challenge for political leaders of all sides is to inspire some optimism in the future and that will take more than GDP figures and “smoke screen” policies.

Greg Reid, MSc, is an ERA member living in NSW