Economics and Ecology –

basic ideas

Toni Menninger

The Story of Stuff (20 min documentary)

From its extraction through sale, use and disposal, all the

stuff in our lives affects communities at home and abroad,

yet most of this is hidden from view. The Story of Stuff is a

20-minute, fast-paced, fact-filled look at the underside of

our production and consumption patterns. The Story of

Stuff exposes the connections between a huge number of

environmental and social issues, and calls us together to

create a more sustainable and just world. It'll teach you

something, it'll make you laugh, and it just may change

the way you look at all the stuff in your life forever.

http://www.storyofstuff.org/movies-all/story-of-stuff/

The three pillars of sustainability

Environment

Economy

Society

Why need to consider the economy?

Much of what humans do - the good and the bad -

are economic activities. Resource depletion and

pollution result from economic activities.

Ecosystem services have a genuine economic value.

Businesses and consumers are motivated by

economic incentives. These incentives (usually short

term) need to be aligned with the long term goal of

sustainability.

• Ethical insight (knowing what is right or wrong) is

often trumped by the profit motive.

Basic insights of Ecological Economics

Externalities - hidden environmental / social

costs

Natural Capital and Ecosystem Services

valuation

Shortcomings of GDP, alternative indicators

of progress (GPI...)

The human economy (the anthroposphere)

as part of the ecosphere

Basic insights of Ecological Economics

Economic Externalities: unintended

consequences of economic activity

Can be negative or positive

Standard example of negative externality:

Pollution

The polluter imposes a burden on other

people and/or on society at large

The polluter has no economic incentive to

reduce pollution or increase efficiency unless full

cost pricing is introduced

Economic measures to promote

sustainability

• Green taxes - "tax bads not goods"

Full cost pricing - "internalize

externalities“ (Pigouvian taxes)

Marketable pollution permits - "cap and trade"

Remove subsidies (e. g. fossil fuel industry,

transportation industry)

Alternative measures of success instead of

GDP

Economic incentives are effective!

Prices change behavior

Oil

price

“Tax bads not goods”:

fuel taxes promote conservation

Economic externalities: External costs of Energy

Who pays for these hidden costs?

Hidden Costs of Energy: Unpriced Consequences of Energy Production

and Use Freely available at http://www.nap.edu/catalog.php?record_id=12794

Energy Efficiency through taxes?

● Energy taxes are not a “drain” on the economy – they move

resources from less to more energy efficient sectors.

● Revenues from energy taxes flow back into the domestic

economy – money spent importing fuel is lost from the domestic

economy.

● Revenues from energy taxes can be redistributed to soften the

impact on low-income groups, or used to create jobs, or

invested in energy efficient infrastructure.

● Energy generation and use causes massive negative

externalities (carbon emissions etc.). Taxes designed to

compensate for a negative economic externality are known as

Pigouvian taxes. Standard economic theory predicts that

Pigouvian taxes increase economic efficiency.

● Difficulty: quantifying the externality

● Difficulty: energy intensive industries will go where energy

taxes and regulations are least strict

The Argument for Environmental Taxes

“Environmental taxes can play a central role in

reducing the fiscal gap in the years to come.

These are efficient taxes because they tax “bads”

rather than “goods.” Environmental taxes have the

unique feature of raising revenues, increasing

economic efficiency, and improving the public

health. (…) It is striking how the political dialogue

in the US has ignored a policy that has so many

desirable features. (…) Simply put, externality

taxes are the best fiscal instrument to employ at

this time, in this country, and given the fiscal

constraints faced by the US.”

Economist William D. Nordhaus

What's wrong with GDP?

The gross national product does not allow for the health of our children, the quality of

their education, or the joy of their play. It does not include the beauty of our poetry or

the strength of our marriages; the intelligence of our public debate or the integrity of our

public officials. It measures neither our wit nor our courage; neither our wisdom nor our

learning; neither our compassion nor our devotion to our country; it measures

everything, in short, except that which makes life worthwhile.

Robert F. Kennedy, 1968

Some would blame our current problems on an organized conspiracy. I wish it were so

simple. Members of a conspiracy can be rooted out and brought to justice. This system,

however, is fueled by something far more dangerous than conspiracy. It is driven not by a

small band of men but by a concept that has become accepted as gospel: the idea that all

economic growth benefits humankind and that the greater the growth, the more widespread

the benefits.

John Perkins, Confessions of an Economic Hit Man, 2004

Our phony economy

Jonathan Rowe, Harper’s Magazine 2008

http://harpers.org/archive/2008/06/0082042

Index of Sustainable Economic Welfare = Genuine Progress Indicator (GPI)

GPI peaked in the 1970s while GDP continued growing. How could that be???

What's wrong with GDP?

• GDP does not distinguish cost from benefit –

in fact costs are counted as a positive.

• GDP does not account for the liquidation of

Natural Capital (deforestation, soil erosion,

depletion of non-renewable resources, etc.) or

the depreciation of man-made capital.

• GDP does not account for non-market

activities (unpaid domestic work, unpaid care

for children, sick or elderly)

• GDP does not account for inequality

What's wrong with GDP?

GDP includes economic activities that few

regard as desirable:

• Transaction costs: administration, government,

financial system, legal system, litigation

Cleaning up oil spills, toxic dumps

Damage repair after disaster

Cost of crime, law enforcement

War, military expenses

... (name your own example)

What's wrong with GDP? Example: prisons

US prison population increased from 500,000 in

1980 (1 out of 450) to 2.3 million in 2008 (1 out of 132)

Prisons cost 3% of the California state budget in

1979, 10% now (higher education: reduction from 15%

to 12%)

What's wrong with GDP? Example: Health care

National Health Expenditures (NHE, all private

and public spending on health care) was 5.2% of

US economy in 1960, 17.9% in 2010.

Average annual growth rate 5.5% (adjusted for

inflation), compared to 3.1% GDP growth

Doubling time 13 years!

Over the 2000-2010 period, 42% of economic

growth in the US was due to growth in health

care expenses.

What's wrong with GDP? Example: Health care

Over the 2000-2010 period, 42% of

economic growth in the US was due to

growth in health care expenses

How to calculate:

2000: NHE 13.8% of 88.9 GDP quantity index

2010: NHE 17.9% of 103.5 GDP quantity index

-> NHE increased 6.2 index points (from 12.3 to

18.5), GDP 14.6 index points

The Real GDP Quantity Index (NIPA Table 1.1.3) is calculated by the U.S. Bureau of

Economic Analysis; it is adjusted for inflation and indexed to the year 2005=100.

What's wrong with GDP? Example: Arms sales

What's wrong with GDP? Income Distribution and Inequality

Share of pre-tax

income of top 1%

of households

increased from

8% in 1970s to

20% in late 2000s

-> top 1% earners

captured about

28% of the

economic growth

of last 30 years

What's wrong with GDP? Why Inequality Matters

• Statistically misleading: When Bill Gates

enters a bar, the average income of patrons

soars.

• Economic inefficiency: scarce economic

resources should be directed where they do

the most good.

• Diminishing returns and declining marginal

utility: a dollar has more value for a homeless

beggar than for a billionaire.

• Social Justice: Do the super-rich “deserve”

their wealth? Do the poor “deserve” poverty?

The economy as part of the ecosphere

The ecosphere - a finite, materially closed

system: nutrient cycles, nonrenewable

resources

Laws of Energy

Steady but finite flow of solar energy

drives almost all life processes on earth,

ecosystem services

Solar energy provides renewable hydro,

wind, and biomass energy. Fossil fuels are

condensed solar energy.

The economy as a subsystem

of the ecosphere

G r o w i n g E c o n o m i c S u b s y s t e m

R e c y c l e d M a t t e r

E n e r g y

R e s o u r c e s

E n e r g y

R e s o u r c e s

S o l a r E n e r g y

W a s t e H e a t

Sink Functions

Source Functions

FInite Global Ecosystem

Entropic flow of

matter-energy from

nature's sources,

through the human

economy, and back

to nature's sinks:

resources (low

entropy) are

converted to wastes

and pollution (high

entropy).

The Anthroposphere as a Subsystem of the

Ecosphere

G r o w i n g E c o n o m i c

S u b s y s t e m

Recycled Matter

R e s o u r c e s

S o l a r E n e r g y

W a s t e H e a t

E n e r g y E n e r g y

R e s o u r c e s

FInite Global Ecosystem

Sink Functions

Source Functions

Dramatic economic

and population

growth in recent

centuries – what

are the limits?

The Debate about Economic Growth

• Is economic growth always desirable?

• Is economic growth necessary?

• Is economic growth sustainable?

→ What do you think?

Toward Sustainable Ethics

Frontier Ethics American frontier people hat little notion of

limits. Frontier ethics influences countless

decisions every day.

Sustainable Ethics

The Earth’ resources are finite and should be

managed carefully.

Aldo Leopold’s land ethic (1933) held that

humans were part of a larger community that

included the soil, water, plants, and animals.

Take Home Message • Economic incentives matter

• Economic Externalities: unintended consequences of

economic activity

• Genuine Progress Indicator (GPI)

•versus Gross Domestic Product (GDP)

• Examine the big picture

The Debate about

Economic Growth:

Thought-provoking

readings