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Economics unit
Show a movie? ‘the end of poverty’ / ‘life & debt’
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A few admin…
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Please email me your schedule
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Do we need a ½ hour meeting on Thursday/Friday? A
Saturday morning coffee?
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Activity #1: Envision…
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Good reading…
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All posted on the web…
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Comment…
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[may move it all to moodle once I’ve got an account]
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Economics in Context:
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What is economics?
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economics: the study of the way people organize themselves to sustain life
and enhance its quality
Positive vs normative questions
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Positive questions: how things are
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Normative questions: how things should be
“Defining poverty is both a positive and a normative task. …It
requires us to decide whether poverty should be defined in terms of
people’s opportunities in life, or only with respect to what they have
made of those opportunities; whether a definition should look only
at what people possess as private property, or should also take into
account access to goods and services that are provided by the
society.”
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What for?: ‘wealth’ and ‘efficiency’
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In discussing goals  need to start with normative question. What is economic
activity FOR?
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Intermediate and final goals
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A final goal requires no further justification: it is an end in itself
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An intermediate goal is something that is desirable because its achievement will bring
you closer to your final goal(s)
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Wealth is whatever confers the ability to produce and procure valued goods
and services.
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Efficient process: uses the min value of resources to achieve desired result
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An efficient use of resources is one that does not involve any waste. Inputs are
used in such a way that they yield the highest possible value of output, or a
given output is produced using the lowest possible value of inputs.
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Our assumption: well-being
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We assume that most normal people want to have happy,
pleasant lives in a healthy social and physical environment –
and that most people would like to contribute to ensuring
that the social and physical conditions for a good life can
continue into the future.
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Well-being is a shorthand term for the broad goal of
promoting the sustenance and flourishing of life
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(some) Final goals:
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Satisfaction of basic physical needs; happiness; realization of
one’s potential; fairness (what is ‘fair’?); freedom in economic and
social relations; participation in social decision making; a sense
of meaning in one’s life; good social relations; and – of course ecological balance
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Economics and well-being
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An economic actor (economic agent) is an individual, group, or organization
that is involved in the economic activities of resource maintenance or the
production, distribution, or consumption of goods and services.
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Negative externalities are harmful side effects, or unintended
consequences, of economic activity that affect persons, or entities such as
the environment, that are not among the economic actors directly
responsible for the activity.
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Positive externalities are beneficial side effects, or unintended
consequences, of economic activity that accrue largely to persons or entities
that are not among the economic actors directly involved in the activity.
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Examples?
Policies?
Examples?
Policies?
Transaction costs are the costs of arranging economic activities
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3 basic economic questions
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• What should be produced, and what should be
maintained?
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• How should production and maintenance be
accomplished?
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What kinds of products should be made? How much of each?
What resources need to be preserved?
By whom and using what kinds of resources, technologies
and methods?
• For whom should economic activity be undertaken?
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What are the principles and practices that will determine
how the produced goods and services are distributed among
different people?
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From ‘Vulnerable Planet’
Your thoughts? Various factors:
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Monopoly capitalism  globalized monopoly capitalism
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Synthetic products as basic elements of industrial output
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Scale of economic production/economic “progress”
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From ‘Vulnerable Planet’:
economics and environment
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Synthetic products as basic elements of industrial output
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Advances in five fields: steel, coal-petroleum, chemicals, electricity, and internal
combustion engine
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Progress in physics and chemistry not accompanied by an equally rapid expansion
in the knowledge of how such substances might affect the environment
Scientific management also changed labor’s relation to the production
process; worker reduced to status of an instrument of production; moving
control of the job from the worker to management
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Taylor (1911): dissociation of labor process from skills of the workers; (2) separation
of conception from execution; and (3) use of this monopoly of knowledge to control
each step of the labor process and its mode of execution
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Transform skilled labor to simple, interchangeable parts
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Thus: human labor commodified further + human productive and cultural diversity
decreased
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Commodification….
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As labor became more homogeneous  so did much of
nature. Examples?
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Scientific forester’s goal:
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“the maximum amount of nutrients, water, and solar energy into
the next cut of timber. S/he cleans up the diversity of age and size
classes that are less efficient to cut, skid, process and sell. S/he
eliminated slow-growing and unsalable trees, underbrush and
any animals that might harm her/his crop. S/he replaces natural
disorder with neat rows of carefully spaced, genetically uniform
plantings of fast growing Douglas-firs. S/he thins and fertilizers to
maximize growth. S/he applies herbicides and insecticides and
suppresses fires to protect this crop against the ravages of nature
that must be fought and defeated.”
What is the result of this ‘goal’?
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Synthetic age
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After WWII – “productive technologies with intense impacts
on the environment have displaced less destructive ones.
…counterecological pattern of growth”
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Examples?
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Artificial fertilizers; pesticides; synthetics fibers; plastics;
detergents with high phosphate content
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“it is therefore the pattern of economic growth rather than
growth (or population) itself that is the chief reason for the
rapid acceleration of the ecological crisis in the postwar
period.”
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I=P–A-T
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Environmental Impact (I) = Population – Affluence – Technology
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1972 study by Commoner:
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Population accounted for only 12-20% of total changes in impact of these pollutants
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Affluence: goods/population
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Technology: pollution/economic good
Automobiles
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Optional supplemental reading (‘Driving South: The Globalization of auto consumption
and its social organization of space.’ )
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Petrochemicals
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There is.. “an increasing differentiation between farming and agriculture.
Farming is producing wheat; agriculture is turning phosphates into bread.”
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Including: commodification of seed production  inorganic fertilizers, herbicides,
pesticides
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The Four laws of ecology and
economic production
Everything is connected to everything else
1.
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….dramatic collapse
Everything must go somewhere
2.
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1st law Thermodynamics: no final waste, matter and energy are
preserved, and waste produced in one ecological process is
recycled in another
Nature knows best
3.
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‘any major man-made change in a natural system is likely to be
detrimental to that system’
Nothing comes from nothing
4.
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2nd law Thermodynamics: energy is ‘used up’ but not destroyed;
energy is transformed into forms are not longer available for
work
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2 paradigms of
Economics and Ecology
1. the ecological paradigm, based on the science of ecology,
stresses the health and survival of ecosystems.
2. the economic paradigm relies on environmental economics
– the application of economic theory to environmental issues
– and emphasizes maximizing the welfare of humans, even if
this means harming the environment.
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Ecological economics – attempts to resolve the differences
+ Dominant pattern of capitalist development
The only lasting connection between things is the cash nexus
1.
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Cash nexus has become the sole connection between human beings
and nature
It doesn’t matter where something goes as long as it doesn’t reenter the circuit of capital
2.
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externalities
The self-regulating market knows best
3.
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For profit, not for nutrition – ‘quality of food is debased, birds and other
species are killed, and human beings are poisoned’
Nature’s bounty is a free gift to the property owner
4.
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Kapp: ‘capitalism must be regarded as an economy of unpaid costs,
unpaid in so far as a substantial portion of the actual costs of production
remain unaccounted for in entrepreneurial outlays’. Who pays?
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Ecologists vs Economists
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Ecologists: Concerned with?
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Resilience…
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Sustainability
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Intrinsic value
Economists: Concerned with?
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Efficiency and “material wealth”
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Only consider environment that is useful to humans
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So if money is the guide…
Henry Ford II answered the question- why Detroit automakers prefer to make
large, gas-guzzling cars:
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“minicars make miniprofits”
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“Few trends could so thoroughly undermine the very foundations of our free
society as the acceptance by corporate officials of a social responsibility other
than to make as much money for their stockholders as possible.” -Milton
Friedman 1962
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Capitalism cannot exist without constantly expanding the scale of production:
any interruption in this process will take the form of an economic crisis.
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“~Resources are infinite and the economy can grow forever”
-Julian Simon
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Common statement: “There is no conflict between economic growth and
environmental protection.” --- “sustainable economic growth.”
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“Anyone who thinks you can have infinite growth on a finite planet is either a
madman or an economist.” Kenneth Boulding
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(Correct) Economic theory
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1. The recognition that natural processes provide an essential
support to human well-being that needs to be adequately
taken into account in all attempts at measuring well-being.
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2. The recognition that this support is finite and that there are
limitations both in terms of the inputs which can be extracted
from the biosphere and the waste outputs which can be put
back into it.
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Redefining national income and
wealth
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What is GNP/GDP?
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GDP can be characterized as a (rough) measure of the
amount of “throughput” going on in an economy—as
measuring the level of activity whose purpose it is to turn
renewable and non-renewable resources into new products.
How does “throughput” relate to sustainable well-being? Is
more “throughput” always a good thing?
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Two broad categories of human activities:
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Those rewarded by a payment – a monetary flow
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Those which aren’t rewarded by a monetary flow
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Not included in GDP/GNP
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Factors of production
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Land
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term which is used by economists to represent all natural
resources used in economic production, including soils, water,
forests, species, minerals, fossil fuels, and other such resources.
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Labor
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Capital
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What we typically call ‘capital’ is ‘manufactured capital’
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Natural capital: all natural resources + environmental health are
included
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Human capital: the value of the knowledge and skills of people.
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GDP/GNP
GDP includes monetary flows which correspond to a decrease in
well-being
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How can economists deal with monetary flows which not only do not
increase well-being but may even decrease it?
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One approach is to measure defensive expenditures made to
eliminate, mitigate or avoid damages caused by other economic
activity.
GDP neglects the depreciation of natural capital
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GDP can be measured as the sum of the domestic value added in all
sectors of the economy
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This process of wearing out, repairing, and replacing capital is taken into
account by measuring the depreciation of manufactured capital. If
we subtract an estimate of manufactured capital depreciation from
gross domestic product, we obtain net domestic product (NDP)
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NDP = GDP – depreciation of manufactured capital
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NDP
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If we had high short-term consumption but allowed all our capital stock to
wear out without replacement, measured GDP would give an erroneously
positive impression of how well we were doing economically. NDP would be
a better measure since it would show the negative effects of the loss of
productive capital.
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NDP: - applies only to manufactured capital
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What about natural capital?
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The process of production uses up nonrenewable natural
resources such as coal, oil, and minerals. Often renewable
natural resources such as productive soils, forests, and
fisheries are also depleted or damaged through over-use.
And wastes and pollution
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Alternatives to GDP
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net domestic product is obtained by subtracting depreciation of
manufactured capital from GDP.
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Further adjusting GDP to account for the depreciation of natural
capital yields environmentally-adjusted net domestic product
(EDP): EDP = GDP – depreciation of manufactured capital –
depreciation of natural capital
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requires a monetary estimate for the depreciation of natural capital.
considers how much a nation is saving for the future
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The World Bank’s genuine saving measure (S*) adds a social and
environmental element to national saving rates. A nation’s genuine
saving rate is calculated as:
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S* = gross domestic saving – produced capital depreciation +
education expenditures – depletion of natural resources – pollution
damage
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Natural Capital
“We treat the earth like a
business in liquidation.”
Herman Daly
Opportunity cost. Loss is not counted.
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How to “account”?
Economies are based on natural capital (physical assets provided by
nature), manufactured capital (physical assets generated by human
productive activities applied to natural capital), social capital (trust, mutual
understanding, shared values, and socially held knowledge) and human
capital (people’s capacity for labor and their individual knowledge and
skills). Only the value of manufactured capital (structures and equipment)-and recently, software--is estimated in the current national accounts.
Can you think of ways that the stocks of natural, social, and human capital
might be measured?
What kind of information would be needed?
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“accounting”
1. Resource functions: the natural environment provides natural resources
that are inputs into human production processes.
2. Environmental service functions: the natural environment provides the
basic habitat of clean air, drinkable water, and suitable climate that directly
support all forms of life on the planet.
3. Sink functions: the natural environment serves as a “sink” which absorbs
(up to a point) the pollution and wastes generated by economic activity.
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Different kinds of value
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Use value: the values placed on a resource by those who
directly use it.
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Non-use value:
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Option value: value of preserving the option of doing something
else by doing nothing
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Existence value: value of preserving something for its mere
existence
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Bequest value: value of leaving an undamaged (less damaged)
world to future generations
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Another problem with GDP
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Accounting for households:
missing
Only two aspects of household production are currently
counted in GDP:
1.
the services of the house itself (the rent paid explicitly or
implicitly by residents) and,
2.
the services provided by paid household workers such as
housekeepers and gardeners.
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History of exclusion
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Households not ‘productive’
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Not producing economic goods
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Gender split: ‘economy’ – man’s world; ‘home’ – woman’s world
‘too hard to distinguish from consumption’
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third person criterion: the convention that says that an activity
should be considered to be production (rather than leisure) if a
person could buy a market replacement or pay someone to do
the activity in his or her place
‘GDP measures market production’
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GDP aims to only measure production for the market. Since
household outputs are not sold, this argument goes, it is consistent to
exclude them from GDP.
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The problem with this argument is that a substantial portion of
GDP already reflects nonmarket production
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Accounting for household production
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Why? How?
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Time use surveys
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Accounting for household production
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Replacement cost method
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Opportunity cost method
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(for estimating the value of household production): valuing hours
at the amount it would be necessary to pay someone to do the
work
(for estimating the value of household production): valuing hours
at the amount the unpaid worker could have earned at a paid job
Many counties, including US, Australia, Canada, India, Japan,
Mexico, Thailand and the United Kingdom, have conducted
or are conducting national time use surveys to aid their
understanding of unpaid productive activities.
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How to measure economic wellbeing?
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Since the goal of macroeconomics is human well-being, we
need to be sure the indicators we pay most attention to are
ones that relate to the goal we want to achieve!
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Re growth in production per capita, need to ask: what, for
whom, and how
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Well-being reducing products? Defensive expenditures?
Loss of leisure? Loss of human and social capital formation?
Well-being reducing production methods? Unequal
distribution?
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Other indicators
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Index of sustainable welfare (1989)
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Genuine Progress Indicator
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a measure of economic well- being that adds many benefits, and subtracts
many costs, that are not included in GDP. This measure is calculated by
the nonprofit group Redefining Progress.
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- starting point is the Personal Consumption Expenditures (PCE)
component of GDP for each year, as calculated by the BLS, on the
reasoning that this number approximates the welfare associated with
consumption. Then include externalities: (+) values; (-) social costs; (-)
environmental costs
Human Development Index
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an index of well-being made by combining measures of health, education,
and income. Calculated by the United Nations Development Program
(UNDP).
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Life expectancy at birth; An index reflecting a combination of the adult
literacy rate and statistics on enrollments in education; GDP per capita
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Index: between 0 and 1 (Lebanon. 2007. 0.803)
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Index of Sustainable Economic
Welfare (ISEW)
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partnership between an economist, Herman Daly, and a
theologian, John Cobb.
1.
They construct an indicator of aggregate welfare by taking
into account the current flow of services to humanity from all
sources (and not only the current output of marketable
commodities which is relevant to economic welfare)
2.
They deduct spending whose purpose is defensive or
intermediate and not welfare- producing
3.
They account for the creation and losses of all forms of
capital by adding the creation of man-made capital and
deducting the depletion of natural capital
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Resources – as defined in
economics
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Public goods and common property
resources
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Rival: Goods whose use is limited to one user at a time.
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Excludable: The right to use or consume the good can be refused to
others.
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A good that is both rival and excludable is called a private good.
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Music at a concert is – non-rival and excludable. Why?
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Club-goods: the “access-right” is the membership, which allows the
members to enjoy all the club’s facilities in common
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Common property resources: rival and non-excludable
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Public goods: non-rival and non-excludable
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Congestion threshold
Excludable
Rival}
Non-rival}
Non-rival,
congestible
Market Good:
Food, clothes, cars, land,
timber, fish once captured,
farmed fish, regulated
pollution
Potential market good
(Tragedy of the “noncommons”)but inefficient:
patented information,
Pond, roads (congestible),
streetlights
Private beaches, private
gardens, toll roads, zoos,
movies
Non-Excludable
Open Access Regime:
(misnamed: Tragedy of the
commons)
Oceanic fisheries, timber
etc. from unprotected
forests, air pollution, waste
absorption capacity
Pure Public Good:
climate stability, ozone layer,
clean air/water/land,
Biodiversity, information, habitat,
life support functions, etc.
Public beaches, gardens,
roads, etc.
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Open Access Resources
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Overuse of non-excludable or open access resources is a
phenomenon that has been called the tragedy of the
commons
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paradox of aggregation: if everyone tries to obtain more for
themselves, this behavior results in less for everyone. The
pursuit of personal interest leads each individual user to take
as much as possible of the resource, which increases the
overall level of extraction of the resource and drives it
irremediably to its destruction – and to the ruin of all the
users.
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Global commons: When the scope of a resource is regional or
even global (ex: oceans. Atmosphere)
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Exceeding the limits: collapse
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Numerous examples
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Sumerians of southern Mesopotamia,
Problematic examples: From ‘From Genocide to Ecocide: The
Rape of Rapa Nui. (2005)’ – Activity #2 
Your thoughts? 
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Relevance to NRM?
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Climate change
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Example: Climate Change
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What is it?
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What are its impacts?
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Negative.
Positive.
Less predictable impacts
Positive feedback effects
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How to evaluate these impacts?
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Economists have employed the tool of cost- benefit analysis.
Others have criticized this approach as attempting to put a
monetary valuation on issues that have great social, political,
and ecological implications, which go far beyond money value.
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Activity #3 – due in 2 Sunday night
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Examine other forms of economic measurement (other than
GDP) and compare them with well-being.
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Discuss relationship between economic growth and poverty
reduction.
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Discuss relationship between natural resource imports,
natural resource exports, and economic growth?
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Your project
A change…
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+ A livelihoods-based analysis of the evolution
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of natural resources management in----…a farming “community” in Lebanon
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Teams of 3. Each team examining farmers in a particular village. Each team would
follow the same time line (beginning in '75),
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Study how resources are organized in space and time, and how they are allocated, and
how it has evolved through time
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assess how the human, natural, financial, physical and social capitals have changed over
time, and, consequently, how the farmers currently have been impacted, and how they
manage – using the Sustainable Livelihoods Framework
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Produce a problem tree analyses for particular issues that you find, to root the
superficial management problems and examine their complexity and relationships.
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organize joint groups with local people to do a participatory research and come up with
hand drawn participatory maps
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By Sunday, please email me your teams, and the particular geographic community
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Next unit: ecology
Readings: in the office, and to be added to the website
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