Winslow ecological econonomics

SUS6200 Macroeconomics and Ecological Economics

Ecological Economics

Ecological Economics Differs from Environmental Economics

• It does not accept the preanalytic version of the world assumed by mainstream economics.

• It is concerned more broadly with ecosystem/economy interactions.

• It is concerned more broadly with social system/economy interactions.

• It has a longer view with explicit concern for future generations.

• It is concerned with the size of the economy.

Ecological Economics is a Diverse and Evolving Field

• Different practitioners have different foci.

Key Elements of Daly & Farley’s Ecological Economics

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 of economy relative to ecosystem.

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.

Other Aspects of EE Not Emphasized in D&F (from Norgaard)

• Environmental sustainability depends on viable social systems. Coevolution.

• Progress toward the mutual well-being of nature and people is being thwarted by:– excessive material consumption – excessive material inequality

Norgaard Identifies the Following Which Distinguish Ecological Economics

• Focuses on whole rather than parts.• Focuses on systems, social and natural, rather

than components.• Includes future generations in analysis.• Uses physical laws in models.• Focuses on materialism, inequality and

growth.

1) Economy is Seen as a Subsystem of the Ecosystem

• 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.

Classic diagram from NCE book

Firm Household

$

G&S

Labor

$Environment

wasteresources

Diagram from Ecological Economics

Ecosystem

Economymatter

energy

matter

energy

recycling

solar energy heat

Welfare

economic services

ecosystem services

Human Social Activity

2) Focus on Throughput

What is throughput? • Natural resources are transformed into

market goods and end up as waste.• Resources move through the economy -

production, consumption, disposal.• This movement must follow the laws of

thermodynamics.

Thermodynamics - It’s the Law

1st LawIn any closed system matter and

energy can be neither created

nor destroyed.

Matter and energy can be

interchanged.

You can’t make something You can’t make something

from nothing.from nothing.

2nd LawEnergy and matter move towards Energy and matter move towards a less ordered state.a less ordered state.Transformations lead to increased Transformations lead to increased entropy.entropy.

Entropy increases in an Entropy increases in an isolated system.isolated system.

Thermodynamics - It’s the LawHow is this related to

economics? Since we can’t make something from

nothing, “production” is an illusion. We can recycle materials but it uses energy.

Resource Resource Degradation/Degradation/

PollutionPollution

ThroughputThroughput

The faster the throughput, the faster the depletion and degradation and the more “lost

opportunity.”

Resource DepletionResource Depletion

Thermodynamics - It’s the LawHow is this related to economics? It is important to evaluate flows in terms of ecosystems capacity to assimilate waste and provide resources and technological capacity to substitute.

Resource DepletionResource DepletionResource Resource

Degradation/Degradation/PollutionPollution

ThroughputThroughput

If our rate of throughput (growth) is greater than our regeneration capacity, this is occurring

through drawing down natural capital.

Can't man-made capital make up for natural capital?

The value delivered by the biosphere is estimated to be in the range of US$33 trillion per year (1997 dollars).

Global economy delivers US$18 trillion per year.

-The value of the world’s ecosystem services and natural capitalNATURE, VOL 387, 15 MAY 1997

Can Technology Save Us?

Until man duplicates a blade of grass, nature can laugh at his so-called scientific knowledge....

-Thomas Edison

3) Scale of the Economy Relative to the Ecosystem

Full world, empty world. • 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.

• If economy is embedded in ecosystem, there are limits to growth.

Why is Scale Important?

• When economy was small relative to ecosystem, impacts of growth were not as significant.– Rate of resource consumption more sustainable.– Waste absorption capacity not over taxed.

• As world gets more full, costs associated with production start being more profound. – Pollution– Lost ecosystem services– Climate change– Depletion of resources– Stress

Relatively Empty World

Ecosystem

Economymatter

energy

matter

energy

recyclingsolar energy

heat

Welfare

economic services

ecosystem services

Economy grows relative to ecosystem: Full World

Ecosystem

Economy

matter

energy

matter

energy

recycling

solar energy

heat

Welfare

economic services

ecosystem services

Are technological solutions enough to achieve sustainability?

Is There an Optimal Scale?

• Increased growth can have positive as well as negative consequences.

• At some point the costs of growth become

greater than the benefits.

Diminishing Marginal Utility and Increasing Marginal Costs (or marginal dis-utility)

MU

MDU

Uneconomic GrowthEconomic Growth

MDU

MUa

b

c

More common drawing of this concept: diminishing marginal benefits and increasing

marginal costs.

Benefits and costs

Increasing growth in the economy ->

Marginal benefits Marginal costs

Where are we on this graph?

Benefits and costs

Increasing growth in the economy ->

Marginal benefits Marginal costs

Optimal Scale in Microeconomics

• Activity should increase until marginal costs are equal to and not greater than marginal benefits. – Firms:

• how much to produce (set MC = MR)• how much labor to hire (set W = VMPL)

– Consumers: • how much of a product to buy (set MUx/Px = MUy/Py)

– Economy: • how much of good X should be produced (Set MWTP = MC)

• When MC = MB, optimal scale is reached.• There is no “optimal scale” in macroeconomics.

Marginal Costs• Marginal costs of production must be going up

for economy as a whole because resources are getting scarcer.

• If MC is increasing, AC must be increasing as well at some point.

AC

MC$

Q

Average Costs

LRAC$

Q

Short run and long run average costs are both assumed to eventually increase in microeconomics.

SRAC1

LRAC Curve Also Slopes Upward for Economy as a Whole

• Optimal scale is used in mainstream economics to think about production.

• In ecological economics, natural capital becomes the

limiting factor in production.

• It is important to know if ecosystem services and other aspects of natural capital are being depleted faster than they can regenerate.

• Hence the importance of thermodynamics.

Scale of Economy Also Relevant to Social Systems

Church

Nature

FamilyFriends

Market - buying and selling

"Getting and spending, we lay

waste our powers."

4) Concern with Ends and Means

• Most economics text start with these questions:– What should be produced?– How should it be produced?– For whom?

• Add to this environmental sustainability aspects:– What should be produced and what should be

maintained?– How should production and maintenance be

accomplished?– For whom should economic activity be undertaken?

Daly and Farley Go Further

• What ends do we desire?

• What limited or scarce resources do we need to attain these ends?

• What ends get priority and to what extent should we allocate resources to them?

Physics

Technics

Economics, Politics

Ethics

Religion, Philosophy

Ultimate means (low-entropy matter-energy)

Intermediate means (artifacts)

Intermediate ends (health, safety, comfort)

Ultimate ends (final cause)

Realm of consumer

Realm of producer

Realm of philosophy, democracy, public discourse

Economists Pondering Ultimate Ends and Consumerism is Nothing New

• Simonde de Sismondi

• John Ruskin

• John Hobson

• Thornstein Veblen

• John Kenneth Galbraith

Simonde de Sismondi (1773–1842)

• Questioned whether economic growth is an end in of itself and is synonymous with increases in the public good.

• In the early 1800s he was already concerned about the excess of consumer goods and how this excess led to human suffering for production.

John Ruskin (1819 – 1900)

• Commodities have value only in as much as they satisfy human needs.

• Things we need are part of wealth, things we don't are illth.

• Economic theory assumes away the social aspects of life and treats avarice as a central human characteristic.

• The accumulation of wealth is not the final goal.

John Hobson (1858 - 1940)• Mainstream economics focuses too much on the isolated human

desires.

• "How far can economic conduct, with its accompanying desires and gratifications, be taken as a safe index of the desirable or organic welfare in its true sense?"

• i.e. WTP not the way to allocate resources.

• Industrial economies designed to over-emphasize production and consumption.

John Hobson Cont.

Thought industrialization should be used to increase leisure but recognized that the demands of profiteering would use machines for turning out as many goodsas possible to be marketed.

Noted that the economic system has an internal logic but what is it intended for? To meet our material needs or to meet all our needs?

(He also argued that capitalism was leading to imperialism and that, therefore, the market was dangerous and needed to be curtailed.)

Thorstein Veblen (1857 – 1929) • Disagreed with the neoclassical

view of the utilitarian consumer, as a simple calculator of pleasure and pain who behaved in the market place simply to maximize pleasure.

• "Rational Economic Man" was seen as insatiably acquisitive. Veblen disagreed with this characterization.

• Wrote the Theory of the Leisure Class.

• Famous for idea of conspicuous consumption.

• Began field of institutional economics.

John Kenneth Galbraith (1908-2006)

• The Affluent Society (1958)

• Argues that advertising has created false desires that are leading society away from true benefits and over production is having dire consequences.

John Kenneth Galbraith Cont.

• Focus on private consumption takes president over public goods provision, which tend to be less material.

• First economist to really focus on environmental consequences of consumption: "How much should a country consume".

Other Thoughts on Ultimate Ends?

5) Steady-State Economy

What is the steady-state economy? • 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-absorptive and regenerative capacity of the environment.

Human Capital EconomicProductionProcess

GoodsandServices

EvolvingCulturalNorms andPolicy

Well Being(Individual andCommunity)

Consumption(based on changing,adapting preferences)

Education, training,research.

Building

Investment(decisions about, taxescommunity spending,education, science andtechnology policy, etc., basedon complex propertyrights regimes)

Individual Public

GDP

Wastes

Common

Ecologicalservices/amenities

having, being

- having,- being

negative impacts on all forms of capital

being, doing, relating

Restoration,

ConservationNatural Capital

ManufacturedCapital

having

positive impacts on human capital capacity

doing, relatingComplex propertyrights regimes

SolarEnergy

Social Capital

Lim

ited

Su

bst

ituta

bili

tyB

etw

ee

n C

ap

ital F

orm

s

Model of the Ecological Economic System

Waste heat

Institutionalrules, norms, etc.

Materially closed earth system

From: Costanza, R., J. C. Cumberland, H. E. Daly, R. Goodland, and R. Norgaard. 1997. An Introduction to Ecological Economics. St. Lucie Press, Boca Raton, 275 pp.

Energy and the Steady State

• Fossil fuel is a stock-flow. Flow not limited but it will run out.

• Solar energy is a fund-service. It won’t run out but flow is limited.

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

Energy and the Steady State

• The alternative, of course, is to return to relying on current solar energy, in part by working with natural systems.

• This raises further issues:– Humans are co-opting approximately 40% of the

primary energy captured by terrestrial ecosystems.

• This indicates the extent to which human activity has already transformed the environment and the limits to further transformation.

6) Focus on Future Generations and Just Distribution

• Some economists 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 exist.

• 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.

Importance of distribution of income according to D&F

• Poor people can't care about sustainability.• Excessively rich consume too many resources.• Intergenerational distribution needs to be

considered. • Need to limit growth to ensure future well-being

of planet. But, if pie must cease to grow, we need to redistribute.

• Arguably, efficiency. Marginal benefits to a poor person is greater than marginal loss to 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.

How does the distribution of wealth affect sustainability?

Redistribution• Caps on income and wealth

– Conspicuous consumption is a negative externality. – Status seeking is a zero sum game, reducing

resources for future generations. – People should not be able to capture values created

by nature, society, other people (labor theory of value).

• Four sources of income: – wages - return to labor– profits - returns to entrepreneurship– interest - returns to capital– rent - return to land or other natural resources

Policies for Redistribution:

• Minimum income

• Distributing returns to capital – Why?– Accounts for large amounts of money flowing

to few individuals.– Make more people capitalists and not just

serfs.– Ownership creates better stewardship

(ESOPs)

Redistribute Returns to Natural Capital (Rent)

• Eliminate hidden subsidies: free rent on public goods. Ex. firms not paying for right to pollute.

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

Henry George (1839 - 1897)

Tax on unimproved land

• Stimulate land improvement

• Reduce speculation

• Share value of rent with society

Order of Goals

• Ecological Economics focuses on three important goals:

Sustainable scaleJust distribution

Allocative efficiency• These goals need to be addressed in

this order. Why?

Achieving a Steady State

Macro-Level Solutions

• Incorporate sustainability criteria in quantitative indices of national income, wealth, and welfare.

• Develop better regulatory and incentive-based instruments to assure sustainability (limits, taxes, and trading).

• True cost pricing (limits investment in non-sustainable enterprises).

• Invest in public goods (education, healthcare, technology).

Macro-Level Solutions Cont.

• Support policies that reduce population growth.

• Reduce the work week, especially to accommodate productivity increases.(More equal distribution of income required.)

• Limit trade.

• Actively assess new technologies for their beneficial aspects.

• Equalize income.

Using Markets to Promote Sustainability

(Economic Imperialism)

What is economic imperialism?

What are some problems with economic imperialism?

• Doesn’t address scale• Hard to calculate the correct prices• You can't figure out social values by aggregating

individual values• Macro-Allocation: Not good information for

allocating resources between provision of market and non-market goods

• Commodification of society• Spatial aspects of non-market goods

What are some positive aspects of economic imperialism?

• Market system is already in place to implement

• Lots of people believe in market more than direct regulation

• Other?

Micro-Level Solutions

EthicalProfits

Reduce throughput

Reorient products/services

Encourage fair regulation

Develop disruptive

technologies

• Regulations can lead to cost savings and clear benefits.

• Regulations can promote job growth.

Encourage fair regulation

Pre- 1960s, Pollution denial

1970s and ‘80sEnd-of-pipe regulation

Late ‘80s and ‘90sPollution prevention

and stewardship

Clean Tech, Eco-effectiveness,

Cost savings,Opportunity

Reduce throughput

MMK services gained

NK services sacrificed

MMK services gained

MMK stock= MMK stock

throughputthroughputNK stock

NK stockNK services

sacrificed

X X X

Comprehensive Efficiency Identity

Service EfficiencyHow well are man made resources meeting what they are designed for? How well are we allocating resources?

MMK = Man-made capital stock (e.g. equipment, goods)NK = Natural capital stock (e.g. soil, minerals, living organisms)

MMK services gained



NK stockNK services

sacrificed

X X X


Maintenance Efficiency

or DurabilityHow much man-made

stock are we getting for

a given level of throughput?

Are things well-made and

durable?

MMK services gained


Reduce throughput

MMK services gained



NK stockNK services

sacrificed

X X X


Production EfficiencyAre we getting a high

level of throughput

for the amount of NK

stock available?

MMK services gained


Reduce throughput

MMK services gained



NK stockNK services

sacrificed

X X X


Ecosystem EfficiencyAmount of NK stock

we can get for NK

services sacrificed.

MMK services gained


Reduce throughput

Reorient products/services

Sustainable Value

Pollution PreventionPros: Cost and risk reduction

Product StewardshipPros: Reputation and legitimacy, future cost savings

Clean TechnologyPro: Innovation and repositioning

Base of the PyramidPros: Growth and future value

Different strategies for different markets(from Capitalism at the Crossroads, S. Hart)

Developed Markets: reducing corporate footprint

Emerging Markets: avoiding collision between economic growth and resource depletion and degradation

Traditional/Survival Markets: understanding needs, developing native capacities

Creative DestructionThere are limitations with marginal improvements.

Disruptive technologies

Breaking away from path dependence.

Seeing sustainability as an opportunity not risk avoidance.

•Firms with large amounts of fixed assets (oil industry for example) do not want to change as much as adapt.

•Service and retail are more able to switch course.

Turnover in S&P 500: 1.5% per year in 1920 10% per year today

-Creative Destruction, Foster and Kaplan

How does globalization affect sustainability?

Discussion Questions

1. How can concepts from ecological economics be applied to businesses and management?

2. How can a business be profitable in a steady-state economy?

Question: What Would New Economy Look Like?

Winslow ecological econonomics

Education

Transcript of Winslow ecological econonomics