Reference: Daly, Herman and Joshua Farley. 2005. Ecological Economics. Island Press.

What is ecological economics?

Ecological economics is a transdisciplinary field that addresses the relationship between economic systems and ecological systems. The focus is on building a sustainable future by considering current problems that are not addressed well by current disciplines.

Ecological economics is not the same as environmental economics.

Environmental economics focuses on how economics affects the use and management of natural resources. Topics include how to efficiently manage a forest for wood, a fishery, or a mineral deposit.

It also considers externalities - how to handle effects from the economic system that have positive or detrimental impacts on the environment which are not borne by parties to the transaction.

But it uses the tools of mainstream economics and accepts the preanalytic vision of the world assumed by mainstream economics.

Ecological economics differs from environmental economics fundamentally in that it does not accept the preanalytic version of the world assumed by mainstream economics. It is concerned more broadly with environment/economy interaction and has a longer view.

There are a few key elements of Ecological Economics that distinguish this field:

1. Economy is seen as a subsystem of ecosystem, not the other way round.
2. Focus on throughput and, therefore, attention to the laws of thermodynamics.
3. Attention to Scale.
4. Concern with ends and means.
5. Position that world must evolve towards a "Steady-state" economy.
6. Focus on future generations and just distribution.

 

1) Economy is seen as a subsystem of ecosystem, not the other way round.

Economy is an open system - takes in resources, puts out waste.

The earth is a closed system. Resources circulate but only energy flows in and out.

There is a circular flow between the two main part of the economy - producing units and consuming units.

Households provide labor and get paid. They use their income to buy goods.

Say's Law: Production creates demand. income from the production for goods allows people to purchase the products so that the market clears (and can grow forever).

You could add to this resource inputs and waste outputs but they don't impact the overall model.

Economy is a giant GE model with thousands of equations and thousands of unknowns, and market provides the solution.

This is the basic microeconomic model. Managerial economics is concerned with how firms produce and prices for inputs and outputs. Supply and demand - how they react to different market structures, etc.

After the Great Depression, economists started to reconsider Say's Law. They found that there are leakages that affect the ability of markets to clear and employment rates:

Savings and investment.

Taxes and public finance.

Imports and exports.

These are the realm of macroeconomics.

Injections into the circular flow can be used to affect interest rates (thereby affecting savings and investments), employment, etc.

Circular flow diagram very useful but it suggests that there is nothing outside of the diagram.

Also, circular flow is in exchange value. It ignores that matter and energy are going around. They have been largely left out of the model. Standard economics has abstracted from the fact that matter and energy are going in and coming out of this model as waste. This movement of matter and energy are not abstract but must follow physical laws.

There is no production and consumption - there is only transformation.

 

2) Focus on throughput. Concern with laws of thermodynamics.

What is throughput?

1^st law - conservation of matter and energy.

Throughput is subject to a balance equation.

Mineral resources are stock limited but flow abundant.

Solar energy is stock abundant but flow limited.

We have become more and more dependent on fossil energy - allowed for industrial revolution. But this energy is running out.

2^nd law - Entropy - energy and matter move towards less ordered state. Entropy increases in an isolated system. We can recycle materials but never completely. Recycling energy is possible but is an overall loser. Hydrogen example.

Do we have an isolated system? Sun energy enters.

Increasing the rate or flow of throughput also increases entropy and reduces opportunity.

Important to evaluate flows in terms of ecosystems capacity to assimilate waste and provide resources. Ex. waste water, forests. Sustainability.

If our growth is greater than our regeneration capacity, this is occurring through drawing down natural capital.

Difference between stock-flow and fund-service resources.

• Stock-flow - transforms into what it produces. Can be used up, not worn out.
• Fund-service - is suffers wear and tear but does not become part of the thing it produces.- Can not be stockpiled for future use.

Also to consider: throughput connects depletion and pollution. The faster the throughput, the faster we have pollution and depletion.

3) Scale. Both Marxist and traditional economics are focused on growth. When the pie is bigger, there is more to go around. Growth solves many of our problems - physical and social.

Full world empty world. Empty world has lots of room for movement. Full world does not.

If you see the ecosystem as a subset of the economy, "full world" is not a relevant concept. If ecosystem is an input, growth can occur forever because technology can make up for lost ecosystem services.

Optimal scale in micro - activity should grow until marginal costs are greater than marginal benefits. e.g. Firms: how much to produce, how much labor to hire; Consumers: how much of a product to buy; Economy: How much of good X should be produced.

This rule can apply to ecological economics as well assuming the economy is relatively small compared to ecosystem.

But as world gets more full, costs associated with production start being greater than benefits. Welfare from economic services increase but welfare from ecological services decrease.

Examples of costs? Pollution, labor, stress, loss resources (opportunity costs), health. Also, foundation of economy itself! Climate change. Ecological collapse.

Welfare is made up of both man-made capital and natural capital. With growth, stocks of man-made capital increase but natural capital decreases. Why do we care? Can't man-made capital make up for natural capital?

Is this possible?

Probably not. Why?

Some reasons:

1) Limitations to scientific understanding: The inability of science to provide all of the information about the environment and environmental problems needed to address these problems;

2) Thermodynamic limitations: The principle of the conservation of mass as well as the second law of thermodynamics which suggest that, while remediation technologies may solve environmental problems in one place and time, they will shift environmental impacts to other places or into the future; and

3) Entropy and Energy: It is impossible to design any type of production process that does not have some undesired environmental impacts due to the entropy law as well as the negative environmental consequences of energy generation.

Arguably, biological organisms are able to break these laws. Can we develop technologies that mimic natural systems?

In many cases, environmental science and technology appear to be successful only because attention is focused narrowly (in space and time) on specific objectives while wider, long-term impacts are ignored.

Technological change can have hidden consequences. There are many examples of wealthier nations adopting technologies that allow for more efficient resource use, substitution of resources, and better containment of wastes. However, some of these new technologies lead to secondary environmental impacts, such as the use of nuclear power. This reduces CO₂ emissions but increased other problems.

 

Bottom line is that increased growth can have positive as well as negative consequences - at some point the costs of growth become greater than the benefits.

Law of diminishing marginal utility.

Law of increasing marginal costs.

Optimal scale is used in mainstream economics to think about production. Remember production functions, cost functions - how much labor, how much capital, how much to produce?

LRAC curve slopes upward for firms as well as for economy as a whole.

Natural capital becomes the limiting factor in production.

Therefore, it become increasingly important to know if ecosystem services and other aspects of natural capital are being depleted faster than they can regenerate.

4. Concern with ends and means.

Most economics text start with the THREE ECONOMIC QUESTIONS:

1. What should be produced
2. How should it be produced
3. For whom

Add to this environmental aspects :(see GNAW)

1. What should be produced and what should be maintained
2. How should production and maintenance be accomplished
3. For whom should economic activity be undertaken

Daly and Farley go quite a big step further:

1. What ends do we desire
2. What limited or scarce resources do we need to attain these ends
3. What ends get priority and to what extent should we allocate resources to them.

This is what economics should be about. With the traditional question, there is already the assumption that production of goods and services is the end we desire.

They ask what is development? Does it require growth? Can we have development without growth - i.e. improvement?

This is the starting point of their inquiry.

Ultimate means - low-entropy matter-energy (matter and energy are convertible - see Einstein)

Ultimate ends?

5) Steady-state economy.

What is the steady-state? Idea is to maintain constant stocks of wealth and people at level sufficient for a long, good life. Throughput for maintaining stocks has to be low and within the re-obsorptive and regenerative capacity of the environment.

Nicholas Georgescu-Roegen argues that, as we rely less and less on current solar energy and more and more on fossil hydrocarbon and other mined resources, economic activity needs to be understood as moving toward a closed system and subject to the second law of thermodynamics.

i.e. economic activity as an entropic process - takes high quality energy and materials and reducing them to waste heat and dispersed minerals.

Looking at new technology from this perspective, we see that it allows economic activity to accelerate, for entropy to increase faster, leaving less for the future, not more.

Thus, to the extent that we rely on stock resources, especially of energy, progress is not possible, indeed even sustainability is not possible. The alternative, of course, is to return to relying on current solar energy, in part by working with natural systems. This, however, raises further issues.

Humans are co-opting approximately 40% of the primary energy captured by terrestrial ecosystems. Ecological economists use this study as an indication of how human activity has transformed the environment and as an indicator of the limits to further transformation. For Herman Daly and other ecological economists, the analysis of Vitousek et al stresses the urgency of moving to a steady-state while there is still some margin left.

Mathis Wackernagel and William Rees (1996) have used biophysical analysis to calculate the "ecological footprint" of a population, the area of productive land and water ecosystems needed to produce the resources it consumes and assimilate the wastes it produces.

6) Focus on future generations and just distribution.

What is link between sustainable scale and just distribution? Economist posit that increased growth will take care of distributional problems - there will be more pie for all. But if continued growth is not possible and we are actually at a point of uneconomic growth, consumption by wealthy is decreasing ability of poor to subsist.

Also, as we use up resources, we decrease what is available for future generations.

If we are to care about future generations, we need to also care about present generations.

EE is concerned with scale and distribution FIRST and efficient resource allocation later because efficient allocation can not be determined until scale and distribution are determined (think of island metaphor). If you scale up you can not keep the same distribution. Distribution determines allocation.

 

Importance of distribution of income, according to D&T.

1. poor people can't care about sustainability (really? not always)

2. excessively rich consume too much resources

3. intergenarational distribution. Our consumption of luxuries hurts future generations.

4. limit growth to ensure future well-being of plant. But, if pie must cease to grow, we need to redistribute.

5. Arguably, efficiency. Marginal benefits to a poor person is greater than marginal loss of a rich person

Tension between Pareto optimality and declining marginal utility.

If we admit to interpersonal comparisons of utility, then distribution isn't just about fairness but also about efficiency.

Policy solutions

 

Policies for redistribution:

• Caps on income and wealth Conspicuous consumption is a negative externality. Status seeking is a zero sum game, reducing resources for future generations. Also, people should not be able to capture values created by nature, society, other people (labor theory of value).

• Minimum income
• Distributing returns to capital

Four sources of income:

1. wages - return to labor
2. profits - returns to entrepreneurship
3. interest - returns to capital
4. rent - return to land or other natural resources

Most efforts to redistribute wealth focuses on returns to labor (e.g. minimum wage laws). Biggest disparities lie elsewhere. CAPITAL

Why distribute returns to capital? Accounts for large amounts of money flowing to few individuals.

Make more people capitalists and not just serfs.

Ownership creates better stewardship

Employee Shareholder Ownership Programs (ESOPs).

People more involved - production better, profits distributed more fairly.

Local ownership reduces local externalities.

Redistribute returns to natural capital (rent)

What is difference between rent and profit or interest?

Explain Ricardian Rent - agricultural land and land near urban areas.

(akin to producers surplus)

Are individuals entitled to wealth created by society or nature rather than through individual effort, or should this wealth belong to society?

For externalities, there are hidden subsidies - firms not paying for right to pollute. Free rent.

Policy: Sky trust - Peter Barnes. Polluters pay in, everyone gets money out.

Land tax. Henry George. Tax on land not buildings.

1. Higher the land tax, the lower the cost of land.
2. Makes speculation less profitable - helps stabilize the economy
3. Homeownership more accessible
4. Land rent lower since supply perfectly inelastic so tax can not be shifted to renters.
5. Reduces sprawl

This concept could be spread to other free goods from nature.

Using market to promote sustainability: What are some problems with economic imperialism?

• Doesn't address scale.
• How to calculate the correct prices so that market can be used for allocation?
• You can't figure out social values by aggregating individual values.
• Macro-Allocation: allocating resources between provision of market and non-market goods. Problem: Not equal information regarding these types of goods.
• Commodification of society - makes private goods paramount.
• Spatial aspects of non-market goods - national and international costs and benefits associated with resources use and preservation. Makes it harder to regulate. ex. challenge of climate change.

 

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Bottom line:

We need a paradigm shift to be able to move our society to a place of sustainability. How do we achieve this?

Most of the most essential and scarcest resources are public goods which can not be protected adequately in the existing market system which gives preference to market goods. But natural capital and man-made capital are not perfectly interchangeable.

 

Ecological Economics focuses on three important goals:

• Sustainable scale
• Just distribution
• Allocative efficiency.

These goals need to be addressed in this order. Why?

You can't know how to allocate resources until you know distribution. Distribution depends on scale because if the economy can no longer grow, you can't depend on growth to alleviate poverty. Also, you can't scale up without affecting distribution.

Analogous to cap and trade:

• set size of allowances
• set ownership right
• allow for trades.

We want to maximize services, not production. Ex. we don't want energy per se, but the services energy provides.