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Physical Dimension of Economic Processes

First and Second Laws of Thermodynamic

Entropy – a measure of disorder in a system.

First Law of Thermodynamics states that in a closed system the

total quantity of energy and matter remains constant.

Second Law of Thermodynamics states that in any

thermodynamic process, the entropy of a system plus its

environment must either increase or remain unchanged.

This law has been used to explain the reasons for the lack of recycling,

since the process of recycling must itself be costly in terms of

increased entropy. Thus, entropy presents an obstacle to the design of

a sustainable system.

The lower is the entropy in a system, the more order there is and the

more energy is available.

For instance, compare a piece of wood, the ashes and escaped gases

and dispersed heat, which remain after it is burned. From the First

Law of Thermodynamics, the matter and energy in existence after the

burning are exactly the same as they were before. However, the

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entropy has increased; the order and the amount of available energy

have both decreased.

In environmental economics the concept of entropy is relevant via the

Second Law of Thermodynamics, which states that the entropy of a

system must either increase or remain unchanged. This has been used

by the environmental economists to argue that materials should be

conserved as far as possible since their complete recycling is

impossible.

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The biosphere

The biosphere is that part of the Earth where all life exists.

It is the thin layer of soil, rock, air and water around the Earth’s

surface that is only about 20 km thick. Within this layer, there are both

organic components – such as plants, animals, insects, micro-

organisms and their dead remains and body wastes plus inorganic

components.

The biosphere represents a huge reserve of energy. There are three

main sources of energy for the biosphere –

gravity,

solar radiation,

internal Earth forces.

Of these, the most important is solar radiation. Plants use solar energy

to make energy through the process of photosynthesis, and this energy

is then available for use by animals and people. Plants are the first

stage in the food chain (they are known as primary producers).

Without solar energy, there could be no life as we know it on the

Earth.

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The ecosystem

An ecosystem is an independent community of plants and animals

together with the habitat to which they have adapted. All the elements

of an ecosystem are interrelated, being either directly or indirectly

dependent on every other element of the ecosystem.

A single ecosystem could be small – coastal estuary,

or big – global ecosystem.

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Natural resources as production factor

Natural resources – assets and flows of goods which are produced by

nature (or anything people can use what comes from nature).

People gather natural resources from the Earth. Examples of natural

resources are air, water, wood, crude oil, solar energy, wind energy,

hydro-electric energy, and coal. Refined oil is not a natural resource,

for example, because people make it.

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Classification of Natural Resources

There are two sorts of natural resource: renewable resources and non-

renewable resources.

A renewable resource grows again or comes back again after we use

it. For example, sunlight, sun energy, wave power, geothermal power,

water. Their availability is unaffected by the amount exploited at any

given moment.

Renewable resources also include those with a biological growth

potential such as forests and fish stocks. These resources can be

exploited up to a certain point without reducing the stock available in

the following period. However, if exploitation is greater than the

regenerative capacity of the resource, then the stock will decrease.

Thus, these resources, as well as being renewable, can also be called

depletable.

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A non-renewable resource is a resource that does not grow or come

back, or a resource that would take a very long time to come back.

Non-renewable resource stocks are reduced by any extraction. For

example, fossil fuels (coal, oil, natural gas), minerals (metallic and

non-metallic) and nuclear fuel (such as uranium).

Many non-renewable resources can be recycled, which means they

can be used repeatedly. For example, metals (aluminum, zinc, lead),

some non-metallic minerals (diamonds, materials manufactured from

fossil fuels such as plastics).

Biological resources include genetic resources, organisms or parts

thereof, populations, or any other biotic component of ecosystems

with actual or potential use or value for humanity. (Convention on

Biological Diversity - Rio de Janeiro, 1992)

Natural capital consists of a nation’s environmental and natural

resource reserves. Natural capital thus includes the stock of life-

supporting system, biodiversity, and renewable and non-renewable

resources, but excludes both human and human-made capital.

This concept is useful for two major reasons. Firstly it highlights the

extent to which environmental resources contribute to economic

productivity and welfare. For instance, the environment provides

waste-disposal services for the productive process, absorbing and as

far as its capacity allows, recycling waste products and pollutants.

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Stocks of environmental resources, including energy, raw materials,

and agricultural outputs, provide inputs to the productive process.

Secondly, the concept of natural capital highlights the implications for

the future of the depletion of environmental resources and damage to

the environment’s capacity to provide valuable services.

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Will Resource Run Out?

The distinction between renewable and non-renewable resources

partly rests on the assumption that non-renewable resources are finite

and therefore exhaustible.

Malthus Paradigm v. Ricardo Paradigm

Thomas Malthus – English demographer (1766 – 1834) argued (An

Essay on the Principle of Population1798) that the Earth could only

support a finite population size because food supplies are limited. He

said that while the human population increases in geometric

progression (1-2-4-8-16 etc), food production only increases in an

arithmetic progression (1-2-3-4-5-6 etc). Malthus believed this was

the case because the amount of land is finite, and so food production

could not continue increasing to keep pace with population growth.

David Ricardo - English political economist (1772-1823) is

responsible for developing theories of rent, wages, and profits. He

defined rent as "the difference between the produce obtained by the

employment of two equal quantities of capital and labor." The model

for this theory basically said that while only one grade of land is being

used for cultivation, rent will not exist, but when multiple grades of

land are being utilized, rent will be charged on the higher grades and

will increase with the ascension of the grade. As such, Ricardo

believed that the process of economic development, which increased

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land utilization and eventually led to the cultivation of poorer land,

benefited first and foremost the landowners because they would

receive the rent payments either in money or in product.

In 1972 a group known as the Club of Rome headed by Denis

Meadows wrote The Limits to Growth, in which the authors argued

that the combination of population growth and finite natural resources

would create mass misery. The group then run several computer

simulations on the future of humanity under various scenarios, all of

which seemed to end in disaster. Their arguments paralleled those of

Thomas Malthus two centuries earlier. In the 1960s, Julian Simon

supported these arguments, but later argued that the evidence didn’t

support these gloomy views. He changed his views, and published

several books, the most complete one being The Ultimate Resource 2

(1996).

He argued that the true measure of scarcity is price. If something is

becoming scarcer, its price will increase. Similarly, if something is

becoming more abundant, its price will fall. Although it seems

contrary to common sense, the evidence seems to be that over time,

the price of almost every natural resource (adjusted for inflation) is

decreasing, indicating that resource are becoming less scarce or more

abundant.

In 1931 Harold Hotelling, one of the most respected resource

economists at that time, predicted that the real price of oil and of other

fixed resources would rise as the amount left on Earth decreased.

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However, the evidence shows that apart from politically-motivated

price increases in the 1970s and early 1980s, the price of petrol has

declined steadily. Furthermore, if the price of petrol is related to the

real cost of purchasing it, which is the number of hours needed by an

average person to earn the money to buy a litre of petrol, then the

decline in price is even more marked.

However, the high prices prompt entrepreneurs and innovators to find

new resources, or new ways of getting existing resources more

cheaply. Julian Simon quoted the example of billiard balls that used to

be made from ivory of elephants’ tusks. As the demand for billiard

balls increased, elephants become a scarce resource, because their

breeding time was slower than the increase in demand for ivory. As a

result, researchers looked for substitutes and developed celluloid,

which was prototype of plastic. Plastic is a much cheaper alternative.

Our supplies of natural resources are not finite in any economics

sense. Nor does past experience give reason to expect natural

resources to become more scarce. Rather, if history is any guide,

natural resources will progressively become less costly, hence less

scarce, and will constitute a smaller proportion of our expenses in

futures years. (J. Simon).

Barnett and Morse developed a method to estimate the per-unit

extraction cost of resource. Cost are based on actual expenditures on

labour, capital and other inputs. It can be used to estimate the

changing scarcity of a resource over time – increasing unit costs

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reflect increasing scarcity. Barnett and Morse used this method to

conclude that mineral resources became less scarce over the period

1870 – 1970 due to the discovery of new deposits and the substitution

of less scarce resources.

When we use coal, there is less coal afterward. One day, there will be

no more of it to make goods. The non-renewable resource can be used

directly (for example, burning oil to cook), or we can find a renewable

resource to use (for example, using wind energy to make electricity to

cook). It is important to conserve (save) non-renewable resources,

because if we use them too quickly there will not be enough.

All places have their own natural resources. When people do not have

a certain resource they need, they can either replace it with another

resource, or trade with another country to get the resource. Some

resources are difficult to find, so people sometimes fight to have them

(for example, oil resources).

When people do not have some natural resources, their quality of life

can get lower. For example, when they cannot get clean water, people

may become ill; if there is not enough wood, trees will be cut and the

forest will disappear over time (deforestation); if there are not enough

fish in sea, people can die of starvation. Some examples of renewable

resources are wood, solar energy, trees, wind, hydroelectric power,

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fish and sunlight. Non renewable resources cannot be recycled. For

example, oil, minerals, and other non renewable resources cannot be

recycled. Natural resources are very important to a human lifestyle.