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All the notions we thought solid, all the values of civilized life,all that made for stability in international relations,all that made for regularity in the economy...in a word, all that tended happily to limit the uncertainty of the morrow,all that gave nations and individuals some confidence in the morrow...all this seems badly compromised.
1
 All human activity is a cry for forgiveness.
2
 Who shall absolve us from the guilt of the holocaust? Colonialism?...A nuclear catastrophe?
3
The extinction of even one species?Practical men, who believe themselves to be quite exempt from any intellectual influences ,are usually slaves of some defunct economist.
4
SUSTAINABILITY
: Presently, there are many ideas of what constitutessustainability.
5
Our definition is simple and straightforward:
sustainability is creatingreal economic wealth in the world for the communities we live in
.
Economic wealth
is alwaysfounded on a binary bio-physical reality. Either the bio-physical systems that aresupportive of life (and economy!) on the planet are evolving toward sustainability. Orthey are moving towards collapse.
6
 
COMPLEX SYSTEMS & MARKETS:
Most bio-physical support systems on earththat are supportive of humankind’s economic activities are complex systems.
7
Theyare rarely in stasis.
8
These systems are dynamical and exhibit
emergence
. The impor-tant function of markets is to allocate capital towards activities that are sustainable.That is, markets, ideally, are to ensure that the allocation of capital, overall, producesthe growth of real economic wealthin the world for the communities we live in.
WHY MARKETS FAIL:
Markets ultimately determine whether allocating capital forparticular investments to grow the economy are sustainable.
9
Non-sustainability istypically signaled by sharp discontinuities of asset prices “largely unanticipated bymarket participants. For, were it otherwise, financial arbitrage would have divertedit.”
10
Markets regularly fail when they fail to manage risk.
11
RISK
: The primary task of markets is to allocate capital to timely projects that pro-vide the technological innovation an economy requires for sustainable growth.
12
An-other primary task of markets is to protect the bio-physical services of the earth sothat sustainable growth can continueover the long term. When an economy success-fully accomplishes these tasks of innovation, reallocation andprotection, it is accu-rately assessing risks: maturity, liquidity, market, credit, currency, technological obso-lescence, and wider economic, ecologic, and political risks.Market risk consists of the danger of mispricing assets; credit risk covers the po-tential of financial promises not being honored; currency risk describes a mis-match between the value of liabilities’ and assets’ respective currencies; techno-
MACROECOLOGICS: fumbling toward sustainability
LYLE A. BRECHT DRAFT 1.8 410.963.8680 - CAPITAL MARKETS RESEARCH - Sunday, November 1, 2009 Page 1 of 8
 
logical obsolescence describes the technological progress in achieving more out-put with less input of labor, capital, and time; larger economic, ecologic, and po-litical risks refer to
black swans
 , those highly improbable events such as globalcrisis,war, political upheaval, and ecological collapse that produce massive im-pacts on markets.The collective characterization of these risks, taken as a whole, is called
systemic risk
.What characterizes systemic risk is that it is
emergent
(the final outcome cannot befully predicted by antecedent causes) and a
consequent
of the mispricing of inputs toand outputs from market transactions.
13
Systemic risk must be accounted for andmanaged in order to produce a positive
economic return on invested capital
(EROIC).
14
ALL MARKETS REQUIRE RULES FOR SUSTAINABILITY:
Markets require struc-ture (rules of the game) to function efficiently.
15
Regulations help to define this struc-ture as fair and equitable for all parties who wish to transact business in a market.
16
 Unregulated markets tend to develop unfair practices that are driven by avarice.
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 Thisleads to the inefficient allocation of capital. Over time, if capital is not efficientlyallocated to activities that are productive and that produce a real economic return oninvested capital, the market tends towards collapse.
18
Thus, the primary purpose of regulations is to prevent the collapse of markets due to the inefficient allocation of capital within those markets.
19
By definition,
collapsing markets
have not been prop-erly regulated. Markets thatare not prone to collapse are sustainable.
MARKETS & SYSTEMIC RISK:
Presently, markets are not efficient in pricing sys-temic risk.
20
The quality of governmental regulatoryinstitutions maybe the singlemost important
 forcing function
for markets to accurately assess and price systemicrisk.
21
However, present regulatory institutions are overly tactically focused, piece-meal, stove-piped and limited in their purview, and generally ineffective. Fundamen-tal and structural inefficiencies in the government regulatory apparatus enable do-mestic (and global) markets to misprice inputsto and outputs of the economy by ei-ther deferring known economic costs to the future (externalities) or failing to accountfor known economic costs and pushing these costs to public taxpayers (contingent liabilities).If markets were efficient in pricing systemic risk and/or government regulationswere effective, by definition, there would be no threats from abrupt climate change,freshwater resources would not be depleted, the global destruction of ecosystems,and the extinction of species due to anthropogenic causes, etc. would not beoccurring.
22
For all these consequents of not managing the systemic risks of markettransactions are dis-economic. That is, the economic costs for not managing theserisks are greater than the profits derived by pushing the costs of these risks to thefuture.
MACROECOLOGICS: fumbling toward sustainability
LYLE A. BRECHT DRAFT 1.8 410.963.8680 - CAPITAL MARKETS RESEARCH - Sunday, November 1, 2009 Page 2 of 8
 
MARKETS FOR ECOSYSTEM SERVICES:
 
Ecosystem Services
refers to those bio-physical support services that constitute the foundation for every economy on earth.
 Markets
for ecosystem services are the mechanisms for costing systemic risk and pric-ing this systemic risk in all the market transactions of the economy. For without accu-rate pricing of inputs to and outputs from the economy, capital will not be allocatedto the most productive uses in the economy for producing sustainable economicgrowth.
23
Without sustainable economic growth, real economic wealth is not createdfor the communities we live in, but destroyed. The mechanisms for costing systemicrisk and pricing this systemic risk in all the market transactions of the economy musttypically derive from market regulatory innovations, as markets, on their own, willrarely adequately price systemic risk.
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Without adequate pricing of systemic risk inmarket transactions, instead of global GDP going from $60 trillion to an estimated$240 trillion by 2050, it may instead
collapse deeply
to $6 trillion.
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ENDNOTES
MACROECOLOGICS: fumbling toward sustainability
LYLE A. BRECHT DRAFT 1.8 410.963.8680 - CAPITAL MARKETS RESEARCH - Sunday, November 1, 2009 Page 3 of 8
1
 
Paul Valery,
“Historical Fact”
(1932) reflecting upon the large effects of the Great Depression.
2
Karl Barth,
The Epistle to the Romans
 , trans. Edwyn C. Hoskyns (London: Oxford UniversityPress, 1933), 97-8.
3
Rowan Williams,
A Ray of Darkness: Sermons and Reflections
(Cambridge, MA: Cowley Publica-tions, 1995), 4.
4
John Maynard Keynes, quoted in Justin Fox,
The Myth of the Rational Market: A History of Risk,Reward, and Delusion on Wall Street
(New York: HarperCollinsPublishers, 2009), xvi on defectsin neoclassical economic theory based on St. Thomas Aquinas’ original notion that just pricesare “set by the market “( Fox, xiii).
5
 
Sustainability results from the timely process of transforming these economic systems un-dergoing change to systems that are
resilient
(less susceptible to collapse) when shifting tolower thermodynamic states. Economic systems are sustainable whenthermodynamic stateshifts do not cause rapid disruptive nonlinearities - abrupt changes of the system to an unan-ticipated, less-complex state.One way to think about the thermodynamic states of economic systems is in terms of energyreturn on energy invested (EROEI). For example, in this context sustainability might be moretechnically described as the re-engineering of economic systems to transition from high energyreturn on energy invested sources to systems capable of operating at lower thermodynamicstates: in1930, EROEI of oil, natural gas and coal was 100:1; today EROEI of oil, gas, wind is15:1; large hydropower 11:1; conventional coal 10:1 (when one adds the cost of CO2 emis-sions); newly found oil, photovoltaic solar 8:1;
clean
coal 5:1 (better carbon emissions control but coal ash and heavy metals pollution); fuel cell, geothermal, nuclear 4:1 (one one includesthe entire nuclear fuel cycle, nuclear is about as carbon intensive as clean coal); oil shale andAlberta tar sands 3:1 (very carbon emissions intensive); LNG 2:1; ethanol (from corn) 1.3:1;hydrogen 0.8:1; nuclear fusion (unknown). See, Charlie Hall, “Balloon Graph;” The Oil Drum(www.theoildrum.com); Thomas Homer-Dixon,
The Upside of Down: Catastrophe, Creativity, andthe Renewal of Civilization
(Washington, DC, Island Press, 2006).
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