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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 constitutes sustainability.5 Our definition is simple and straightforward: sustainability is creating real economic wealth in the world for the communities we live in. Economic wealth is always founded on a binary bio-physical reality. Either the bio-physical systems that are supportive of life (and economy!) on the planet are evolving toward sustainability. Or they are moving towards collapse. 6 COMPLEX SYSTEMS & MARKETS: Most bio-physical support systems on earth that are supportive of humankind’s economic activities are complex systems.7 They are rarely in stasis. 8 These systems are dynamical and exhibit emergence. The important 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, produces the growth of real economic wealth in the world for the communities we live in. WHY MARKETS FAIL: Markets ultimately determine whether allocating capital for particular investments to grow the economy are sustainable. 9 Non-sustainability is typically signaled by sharp discontinuities of asset prices “largely unanticipated by market participants. For, were it otherwise, financial arbitrage would have diverted it.” 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 provide the technological innovation an economy requires for sustainable growth.12 Another primary task of markets is to protect the bio-physical services of the earth so that sustainable growth can continue over the long term. When an economy successfully accomplishes these tasks of innovation, reallocation and protection, it is accurately assessing risks: maturity, liquidity, market, credit, currency, technological obsolescence, and wider economic, ecologic, and political risks. Market risk consists of the danger of mispricing assets; credit risk covers the potential of financial promises not being honored; currency risk describes a mismatch between the value of liabilities’ and assets’ respective currencies; techno-

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logical obsolescence describes the technological progress in achieving more output with less input of labor, capital, and time; larger economic, ecologic, and political risks refer to black swans, those highly improbable events such as global crisis, war, political upheaval, and ecological collapse that produce massive impacts 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 be fully predicted by antecedent causes) and a consequent of the mispricing of inputs to and outputs from market transactions.13 Systemic risk must be accounted for and managed in order to produce a positive economic return on invested capital (EROIC).14 ALL MARKETS REQUIRE RULES FOR SUSTAINABILITY: Markets require structure (rules of the game) to function efficiently.15 Regulations help to define this structure 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.17 This leads to the inefficient allocation of capital. Over time, if capital is not efficiently allocated to activities that are productive and that produce a real economic return on invested 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 properly regulated. Markets that are not prone to collapse are sustainable. MARKETS & SYSTEMIC RISK: Presently, markets are not efficient in pricing systemic risk.20 The quality of governmental regulatory institutions maybe the single most important forcing function for markets to accurately assess and price systemic risk. 21 However, present regulatory institutions are overly tactically focused, piecemeal, stove-piped and limited in their purview, and generally ineffective. Fundamental and structural inefficiencies in the government regulatory apparatus enable domestic (and global) markets to misprice inputs to and outputs of the economy by either deferring known economic costs to the future (externalities) or failing to account for known economic costs and pushing these costs to public taxpayers (contingent liabilities). If markets were efficient in pricing systemic risk and/or government regulations were 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 be occurring. 22 For all these consequents of not managing the systemic risks of market transactions are dis-economic. That is, the economic costs for not managing these risks are greater than the profits derived by pushing the costs of these risks to the future.

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MARKETS FOR ECOSYSTEM SERVICES: Ecosystem Services refers to those biophysical support services that constitute the foundation for every economy on earth. Markets for ecosystem services are the mechanisms for costing systemic risk and pricing this systemic risk in all the market transactions of the economy. For without accurate pricing of inputs to and outputs from the economy, capital will not be allocated to the most productive uses in the economy for producing sustainable economic growth.23 Without sustainable economic growth, real economic wealth is not created for the communities we live in, but destroyed. The mechanisms for costing systemic risk and pricing this systemic risk in all the market transactions of the economy must typically derive from market regulatory innovations, as markets, on their own, will rarely adequately price systemic risk. 24 Without adequate pricing of systemic risk in market transactions, instead of global GDP going from $60 trillion to an estimated $240 trillion by 2050, it may instead collapse deeply to $6 trillion. 25 ENDNOTES
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Paul Valery, “Historical Fact” (1932) reflecting upon the large effects of the Great Depression.

Karl Barth, The Epistle to the Romans, trans. Edwyn C. Hoskyns (London: Oxford University Press, 1933), 97-8. Rowan Williams, A Ray of Darkness: Sermons and Reflections (Cambridge, MA: Cowley Publications, 1995), 4.
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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 defects in neoclassical economic theory based on St. Thomas Aquinas’ original notion that just prices are “set by the market “( Fox, xiii).
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Sustainability results from the timely process of transforming these economic systems undergoing change to systems that are resilient (less susceptible to collapse) when shifting to lower thermodynamic states. Economic systems are sustainable when thermodynamic state shifts do not cause rapid disruptive nonlinearities - abrupt changes of the system to an unanticipated, less-complex state. One way to think about the thermodynamic states of economic systems is in terms of energy return on energy invested (EROEI). For example, in this context sustainability might be more technically described as the re-engineering of economic systems to transition from high energy return on energy invested sources to systems capable of operating at lower thermodynamic states: in 1930, EROEI of oil, natural gas and coal was 100:1; today EROEI of oil, gas, wind is 15:1; large hydropower 11:1; conventional coal 10:1 (when one adds the cost of CO2 emissions); 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 includes the entire nuclear fuel cycle, nuclear is about as carbon intensive as clean coal); oil shale and Alberta 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, and the Renewal of Civilization (Washington, DC, Island Press, 2006).

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“Perhaps the fundamental question – is how can the operating institutions for the modern world be changed so that economic activity both protects and restores the natural world.” See James Gustave Speth, The Bridge at the Edge of the World: Capitalism, the Environment, and Crossing from Crisis to Sustainability (New Haven & London: Yale University Press, 2008), 7.
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Complex systems are comprised of networks of linked activity nodes. Energy, materials, and information are exchanged via these links among the nodes. Networks come in two main forms: (1) Random networks resemble the interstate highway system: nodes are cities and towns and links are the highways between these nodes. No node has a large number of links to other nodes; (2) Scale-free networks resemble the air-traffic control network with most nodes having few connections with other nodes and a few hubs with connectivity to many nodes. Scale-free networks include most ecosystems, the Internet, the U.S. electric power grid, the global oil refining and distribution system, the global banking system, most water distribution systems, and modern food-processing and supply networks. Almost all complex systems are interconnected with other systems. Generally, the systems that support modern life are complex systems that exhibit emergent properties that are unpredictable from their component parts. The links between nodes and the interconnections between systems become brittle if accumulating stresses have eroded a system’s resilience over time. Systems are resilient if, under stress, they can reorganize themselves and continue to function. Complex systems that can do this are said to be adaptive. Adaptive complex systems tend to go through adaptive cycles of growth, collapse, regeneration, and then growth again, but with differing thermodynamic flows and interconnection novelty. All systems have a tipping point, a set of stresses (an overload beyond a threshold rate of change of inputs) beyond which they breakdown (loose complexity and cease to function within normal ranges) and sometimes collapse (recovery is uncertain) or suffer deep collapse (multiple systems experience synchronous failure [the concurrent collapse of multiple support systems] when systems are tightly coupled [operate with dependencies that deplete resilience]). As failure proceeds, moments of contingency arise (there is an absolute timeliness for rescuing the system from collapse e.g. if rescue measures are applied in time x, the cost is y; if rescue measures are applied in time x+1, the cost is 100y. Think New Orleans pre-Hurricane Katrina: the cost to strengthen the levees to Lake Pontrain before Katrina hit was a fraction of the cost to clean-up the devastation in New Orleans post-Katrina.) The apparent equilibrium states of complex systems may be due to misperception. We often miss "large scale, long duration problems. We are not wired to see large systems, as being in motion. The larger the phenomenon, the more stationary it is likely to appear to us." See http://gregor.us/coal/jevons-and-the-six-day-car-crash/.
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Sustainability results from the timely process of transforming these economic systems undergoing change to systems that are resilient (less susceptible to collapse) when shifting to lower thermodynamic states. Economic systems are sustainable when thermodynamic state shifts do not cause rapid disruptive nonlinearities - abrupt changes of the system to an unanticipated, less-complex state. See http://www.scribd.com/doc/9714755/Sustainable-Economy.
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“Bubbles seem to require prolonged periods of prosperity, damped inflation and low longterm interest rates.... History also demonstrates that underpriced risk – the hallmark of bubbles – can persist for years.” See Alan Greenspan, “We need a better cushion against risk,” Financial Times (26 Mar 2009).
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Derivatives help to diversify risks among a multitude of counter-party relationships. These counter-party relationships produce a more robust economic system that is able to self-correct against small shocks. Yet, due to interconnections among parties, the economic system becomes more vulnerable to black swans that produce massive, tumultuous effects in markets. See Daron Acemoglu, “The Crisis of 2008: Structural; Lessons for and from Economics’ (January 6, 2009), 3. “The transition to a clean-energy economy should be modeled not on pollution control efforts, like the one on acid rain, but rather on past investments in infrastructure, such as railroads and highways, as well as on research and development…. This innovation-centered framework makes sense not only for the long-term expansion of individual freedom, possibility, and choice” but offers the best probability of achieving real, economic wealth creation of benefit to the nation. See Ted Nordhaus and Michael Shellenberger, Breakthrough: From the Death of Environmentalism to the Politics of Possibility (Boston & New York: Houghton Mifflin Company, 2007), 15
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Market mispricing of inputs to and outputs from the economy discourages timely technological innovation, slows down technology adoption cycles, and inhibits the reallocation of labor and capital to those more productive sectors of the economy, thus putting the entire national economy at a competitive disadvantage. In particularly egregious situations and over time, this mispricing creates unsustainable economic conditions resulting in collapse of asset values, markets, and/or economies that careen from one financial crisis to another.
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Ever since St. Thomas Aquinas proposed that market-set prices resulted in true economic value, this has served as an article of faith in the Christian West. Most recently, this faith-based belief has been bolstered by mathematical formulations and economic theory (validated with Nobel prizes for economics). However, despite the math and theory, the underlying predicates are the tenets of the rational choice theory: human beings act rationally as if to maximize their utility. That is, market transactions must be efficient (the Efficient Market Theory) as no person would pay more in the transaction than their derived utility for the good or service in question. Gene Fama summarizes the Efficient Market Theory: “The primary role of the capital markets is allocation of ownership of the economy’s capital stock. In general terms, the ideal is a market in which prices provide accurate signals for resource allocation.... A market in which prices always ‘fully reflect’ available information is called ‘efficient’” (“Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance (May 1970); 383 quoted in Fox, 104)
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If one subscribes to the wisdom of markets, then the following corollary is that any government regulation of markets is bad for as Fredrich Hayek intimated in a 1945 article, “The Use of Knowledge in Society,” “Any attempt to regulate prices or business activity was doomed to thwart the movement of knowledge needed to make the economy run smoothly” (Fox, 91-2). This mentality was most vigorously marketed by Milton Friedman, a professor of economics at the University of Chicago in his Capitalism and Freedom that expresses the idea that “whatever the government does is bad” (Fox 93-4). This Chicago School understanding of economics devolved into what some refer to as Disaster Capitalism: making a huge fortune specifically from natural and planned disasters exacerbated by poverty, social tensions, environmental degradation, ineffectual leadership, and weak political institutions. Disaster capitalism’s raison d'être may be the promotion and generation of market inefficiencies – pricing signals that distort real prices for goods and services and their real cost to the environment, public health, and social justice. The checkered history and deleterious results of disaster capitalism is well documented in Naomi Klein’s, The Shock Doctrine: The Rise of Disaster Capitalism (New York: Henry Holt and Company, 2007). The most recent result of this economic theory is the 2008 financial crisis.

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The business community often has an aversion to government regulations. Even the word, regulations, is a non-starter. This is because the government has often relied on two forms of regulations that are anathema to business: Thou Shalt Not and If....Then regulatory forms. Adding to industry’s woes, these regulations are often promulgated in a piecemeal, disjunctive fashion and collectively are dis-economic, producing results that are as or more harmful to the economy than the good the regulation was intended to achieve. Often these forms of regulations lend credence to Fredrich Hayek and Milton Friedman’s mantra that “whatever the government does is bad” (Fox 93-4). However, at least in theory, a well-regulated market should be more efficient and more profitable for participants (overall) than an unregulated market. The quality of importance is well-regulated. That is, regulations assist in managing market transactions to reduce overall risk (systemic risk) that if not managed could potentially destroy any profits from market activities over long periods of time. This is, of course, what occurred in 2008 with the collapse of the CDO (collateralized debt obligation) derivates U.S. financial markets.
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An important innovation that other capitalistic, industrialized, democratic countries of the world are investigating are regulatory mechanisms based on behavioral economics. Behavioral economics advances the discussion concerning rational choice theory by discussing the theory’s limitations when psychological principles of individual behavior are taken into account. For example, behavioral economic theory looks at decision-making in light of: prospect theory (generalized expected utility of decision making under uncertainty), bounded rationality (satisfaction vs. maximized utility), overconfidence, projection bias, effects of limited attention, time-inconsistent choice (behavior not based on expected utility, but on previous historical reinforcement experiences), hyperbolic discounting (changing discount rates based on length of forecasting period), fairness, reciprocal altruism, etc. This is entirely keeping with Adam Smith’s vision of capitalism that relies on free markets to function. For Adam Smith, as for most modern economists, free markets must be ‘regulated’ for the common good. Otherwise, unscrupulous individuals operating from the premise of avarice and utility (as defined by them personally as opposed to the common good), will destroy the value of market transactions to efficiently allocate capital to the most productive uses in the society. Either the intrinsic values of market participants provide the regulation of these markets, or extrinsic means are employed, usually requiring government intervention in markets. This is universally true. There are few legitimate, lawful, free markets operating anywhere in the world today that are not regulated. [Whether the regulations imposed on markets are useful to improve the efficiency of markets or they harm market transactions is a another matter.] See http://www.scribd.com/doc/19538880/Capitalism-Socialism-Corporatism.
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Max Weber and others have argued persuasively that greed and the unrestrained pursuit of profit are not foundational to the tenets of capitalism and never were so. For without the restraint of rational calculation and support of government to make legal the economic activity in question, economic progress would grind quickly to a halt. In fact, the progress attributed to capitalism and its use of free markets might be better attributed to this-worldly asceticism that emphasized hard work, education, and deferred gratification as the noblest of virtues for the amassing of capital and investing this capital to good effect. See Zygmunt Bauman, “Building a Capitalist Society in a Postmodern World,” in Peter Beilharz, ed., The Bauman Reader (Malden, MA & Oxford: Blackwell, 2001), 65.
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For example, if achieving a 350 PPM atmospheric concentration of CO2 is necessary to avoid an atmospheric tipping point, the economic reallocation of capital necessary for achieving this level of CO2 in the atmosphere may be $20,000 billion. This is not a cost. This means that either we are allocating capital for a sustainable economy by addressing the systemic risk of anthropogenic abrupt climate change or we are spending our way towards economic collapse.

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Technological innovation and the reallocation of capital to more productive purposes are the two pillars for fostering economic growth. But, only when properly regulated do these factors foster economic growth by enabling risk sharing and diversification. What government regulations provide is the trust to make long-term investment commitments necessary to increase the wealth of the society. See Acemoglu, 8 and Martin Wolf, Fixing Global Finance (Baltimore: The Johns Hopkins University Press, 2008), 20.
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The most glaring recent instantiation of markets not pricing systemic risk and the impact on the global economy appeared in costing of the price of insurance premiums for CDOs (collateralized debt obligations derivatives based on the underlying asset values of mortgages on real property) on Wall Street. Premiums for individual tranches of CDO’s were priced at a riskadjusted price that assumed no systemic risk. As the CDO market collapsed, U.S. taxpayers were required to put up approximately $17,489 billion in reserves (potential future taxes to make good on underpriced CDO insurance).

What government regulations theoretically provide, at their best, is the enduring trust to make long-term investment commitments necessary to increase the wealth of the society (Wolf, 20). For example, when regulations or lack thereof result the mispricing of inputs to and outputs from the economy, this creates instability in markets that results in an economy that lurches from crisis to crisis with ever-spiraling costs to taxpayers and that shatters lives of its victims. This situation may not only be a source for waves of financial crises, but also of an increasing propensity for local resource wars and terrorism as preferred methods for sorting out temporary winners and losers in a Ponzi-like scheme where real, economic costs are borne by the losers (often present-day taxpayers, citizens of other countries when industrial pollution is exported overseas, or to future generations of citizens when payment of debt from contingent liabilities is put off to the future).
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Two structural problems of free markets exist today: (a) capital is oftentimes not allocated efficiently to its most productive uses; and (b) profits from business activities are used to guide investment decisions where, because of faulty accounting for the economic costs of systemic risk (such as the discounting of ecosystem services value), little or no actual profits may actually have been produced (even as they are reported in the firm’s financial statements). According to the logic of the efficient market theory (a pillar of neoclassical economics), if the markets actually priced goods and services at their true (intrinsic) value, there would be no global warming today (at least from anthropogenic sources), the Chesapeake Bay estuary would not be threatened with destruction, the nation’s freshwater resources would not be imperiled, cybersecurity for the nation’s cyberspace would not be at risk, etc. What all these problems indicate is that markets are sometimes highly inefficient in arriving at the true economic prices of inputs to and outputs from the economy.
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Fixing present fundamental and structural regulatory inadequacies may require, in tandem, legislation, policies, and administrative practices that:
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Restores industry’s and the people’s trust in government through more thorough oversight of markets and the imposition of economic incentive regulations that encourage trust in market institutions. Restructures tax policy to add market cost adjustment surcharges on some inputs to and outputs from the domestic economy as a means to correct market mispricing and to reduce taxes on income and adds corrective tariffs to imported goods so as to not disadvantage domestic manufacturers; Provides economic stimulus that encourages technological innovation and the reallocation of skilled labor and capital towards strategic projects that creates new jobs.

Nassim Nicholas Taleb (b. 1960) describes why it is so hard for markets, on their own, to price systemic risk in his Fooled By Randomness (2001) and The Black Swan (2007). He outlines Benoit Mandelbrot (b.1924) proofs of the incomputability of the probability for consequential rare events from empirical observations ("black swans"). From empirical studies of risk in a time series, it appears that in the process of achieving generalizations from this data and/or deriving general rules from particular observations, hidden properties in the data are routinely missed. Decision-makers end-up overestimating the value of rational explanations of past data, and underestimate the prevalence of unexplainable randomness in the data. The result is managing systems as if a black swan will never occur, even though they almost always do.
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Taleb believes decision-makers ignore black swans because humans are more comfortable seeing reality as something structured, ordinary, and comprehensible (i.e. rationally explainable). Taleb calls this blindness to the Real the Platonic fallacy and argues that it leads to three explanatory distortions when developing models of reality in time: (a) narrative fallacy: using retrospective historicity to ‘explain’ the past. That is, the past occurred this way because of x, y, and z; (b) ludic fallacy: modern probability theory, utility theory, rational choice theory, and game theory that assumes a normal Gaussian distribution probability curve mistakes simple models of reality with the Real; (c) statistical regress fallacy: believing that the structure of the probability of x occurring that actually exists in reality can be fully developed and described from a set of data. Taleb also believes that people are subject to the triplet of opacity, through which historical descriptions of reality is distilled even as current events are incomprehensible. The triplet of opacity consists of (a) an hubristic illusion of understanding of current events; (b) a retrospective distortion of historical events to ‘fit’ current socially acceptable ways of describing reality; (c) an overestimation of what constitutes ‘factual information,’ combined with an overvaluing of the value of ‘expert knowledge’ (typically rendered by ‘experts’ possessing certain credentials, experience, or notoriety)) concerning the subject being discussed. Global GDP estimate is from CIA http//www.cia.gov/cia/publications/factbook/. For example, the economic game theory behind nuclear deterrence that provides the foundation of national defense illustrates how economic misunderstandings of and mispricing of systemic risk (e.g. value/cost of nuclear weapons) distort capital allocation decisions. In the case of national defense, over the past 64-years, $60,000 billion has been spent worldwide on defense. Can the world’s economies today afford a trajectory of expenditures where another $60,000 billion will be spent over the next 64-years for national defense? If we spend available capital in this fashion, what other investment decisions must be forsworn, delayed, or forgotten? See http://www.scribd.com/doc/20228926/Economic-Games-Behind-Nuclear-Deterrence.
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