Chapter 1: Why Study Economics?
Ecological Economics:
Principles and Applications
By Herman E. Daly and Joshua Farley
Chapter 1: Overview
Introduce general definitions and concepts of the field
of economics and contrast neo-classical econmics
with ecological economics.
Compare and contrast growth and development.
Brief overview of the co-evolution of economics with
human cultures.
What is Economics?
Economics is the study of the allocation of limited, or
scarce, resources among alternative, competing ends.
In a sense economics aims to understand what “we”
desire and what we’re willing to give up.
Economic Inquiry
Three critical questions of economic inquiry:
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?
Economic School of Thought
Neoclassical Economics:
- Favors continuous growth to provide all desired
goods and services demanded by the
market.
-Pareto efficient - when there is no other allocation
in which some other individual is better off
and no individual is worse off. (This bypasses
questions of justice and fairness of distribution)
-Rarely considers question 3 of economic inquiry.
Fundamental Assumptions of
Neoclassical Economics
Neoclassical economics is characterized by several assumptions common to many schools of
economic thought. There is not a complete agreement on what is meant by neoclassical
economics, and the result is a wide range of neoclassical approaches to various problem areas
and domains—ranging from neoclassical theories of labor to neoclassical theories of
demographic changes. As expressed by E. Roy Weintraub, neoclassical economics rests on
three assumptions, although certain branches of neoclassical theory may have different
approaches:[8]
1) People have rational preferences among outcomes that can be identified and
associated with a value.
2) Individuals maximize utility and firms maximize profits.
3) People act independently on the basis of full and relevant information.
From these three assumptions, neoclassical economists have built a structure to understand
the allocation of scarce resources among alternative ends—in fact understanding such
allocation is often considered the definition of economics to neoclassical theorists.
Neo-Classical Economics
key assumptions relevant to Ecol Econ…
- Economists maximize ‘utility’ or human welfare.
Human welfare is revealed by market
transactions (‘The Invisible Hand’ of the
marketplace ooooh ) and the implicit
assumption is that non-market goods contribute
little to welfare.
- Welfare increased by ever greater provision of
goods and services as measured by market
value – thus unending economic growth is
considered a legitimate and desirable goal
Ecological Economics
One way ecological economics differs from
neoclassical economics is its consideration of
environmental limits.
“Ecological economics distinguishes itself from
mainstream economics in its preanalytic vision of the
economic system as a subsystem of the sustaining
and containing global ecosystem.”
Pg 57
Ecological Economics
key assumptions….
• Markets do not reveal all of our desires.
• Markets do not distribute resources justly.
• Markets do not recognize optimal scale.
Ecological Economics
Environmental Economics
Ecological Economics
(Subset of Neoclassical Economics)
Economy
Earth
Systems
Earth Systems
Economy
Environmental Economics -> Internalizes externalities -.> Optimizes efficiency
(still a neo-classical economic paradigm)
Three Economic Terms
Growth: measurable increase in size, or increase in
throughput.
Throughput: the flow of natural resources from the
environment, through the economy, and back to the
environment as waste.
Development: Increase in human wellbeing without
changing throughput. The advancement of political
and social freedoms1. The increase in quality of goods
and services, as defined by their ability to increase
human well-being.
Growth vs Development
While growth measures an increase in throughput,
development measures the increase of prosperity, freedom,
and health.
Development can occur independent of economic growth.
At what point will unending growth (increase of throughput)
defy ecological restraints? Because there is such a growth
boundary, how should the economy adapt.
Sustainable Development is development without growth
Micro vs. Macro Economics
• Microeconomics: efficient allocation of
resources to maximize utility
• Macroeconomics: focuses on promoting
economic growth, employment, and
inflation.
Three more terms
Scale - The relationship between the size of an economy
and ecosystem that supports it. How close are we to
‘carrying capacity’
Allocation - The apportionment of resources to different
goods and services. Guns or Butter?
Distribution - The apportionment of resources between
different individuals (in space and time).
Intergenerational equity? Should there be a middle class?
Coevolutionary Economics
Economic, social, and political
systems adapt to changes in
the environment and also
respond to and provoke
environmental change. As
Technology advances many of
these changes accelerate.
Just for the record: I want you to know I hate these kinds of
Diagrams with boxes and arrows.
From Hunter Gatherer to Industrialist
Hunter-Gatherers - Making up 90% of human history. Small,
highly mobile groups of people with low value for property rights
and material goods.
Question: Primitive Harmony or Nasty, Brutish, and Short?
Economic Evolution
• With the onset of the Agricultural Revolution two
important phenomena manifested:
• Private Property & Wealth Accumulation
Q: Are these an inherent characteristic of human
nature or a cultural artifact?
• Food Storage -> Agriculture -> Sedentism
Storage and Agriculture fundamentally
changed the nature of Property Rights and
our relationship to land
• Agriculture -> Cities ->Money -> Armies -> Hierarchy
The Industrial Revolution
• Surplus Production resulting from Agriculture
results in Trade, Shipping, Specialization
• Economic activity becomes dependent first on
wood, then coal, then fossil fuel as human and
animal labor replaced with chemical energy.
• Fossil fuel freed us from dependence on the sun.
We burn 400 years of stored sunshine every year.
(http://www.eurekalert.org/pub_releases/2003-10/uou-bm9102603.php )
My Three Quotes…
Civilization advances by extending the number of important
operations which we can perform without thinking of them.
~Alfred North Whitehead
We are always only one failed generational transfer of knowledge
away from darkest ignorance"
~Herman Daly
I don't know how man will fight World War III, but I do know how
they will fight World War IV; with sticks and stones
~ Albert Einstein
Some other good ones… 
•
Some people worry that artificial intelligence will make us feel inferior, but then, anybody
in his right mind should have an inferiority complex every time he looks at a flower.
~Alan C. Kay
•
For a list of all the ways technology has failed to improve the quality of life, please press
three.
~Alice Kahn
•
We've arranged a civilization in which most crucial elements profoundly depend on science
and technology. We have also arranged things so that almost no one understands science
and technology. This is a prescription for disaster. We might get away with it for a while,
but sooner or later this combustible mixture of ignorance and power is going to blow up in
our faces.
~Carl Sagan
•
The saddest aspect of life right now is that science gathers knowledge faster than society
gathers wisdom.
~Isaac Asimov
•
The production of too many useful things results in too many useless people. ~Karl Marx
Why Study Economics?
To understand what markets do well.
To understand the ways in which the unregulated market
is inadequate for the allocation of ecosystem goods and
services.
“Though the current economic system has been around for a remarkably short time in
relation to past systems, it has wrought far greater environmental changes. These
changes have redefined the notion of scarce resources, and they demand
correspondingly dramatic changes in economic theory and in our economic system.
Change in our economic system is inevitable. The only question is whether it will occur
as a chaotic response to unforeseen disruptions in the global life support system, or as
a carefully planned transition toward a system that operaties within the physical limits
imosed by a finite planet and the spiritual limits expressed in our moral and ethical
values. The answer depends largely on how fast we act, and the burning question is:
How much time do we have?”
Rates of Change
Human Population Milestones
1800
1930
1960
1975
1987
1999
human population
human population
human population
human population
human population
human population
reaches
reaches
reaches
reaches
reaches
reaches
1 Billion
2 Billion
3 Billion
4 Billion
5 Billion
6 Billion
My father was born in 1926. Of these 6 milestones he saw
The world reach 2, 3, 4, 5, 6 and maybe 7 Billion
(6 of the 7 milestones in a single human lifetime)
What are the rates of:
Biological Evolution?
Cultural Evolution?
Technological Evolution?
Question: Is this a problem for humanity and civilization?
In Review
Neoclassical and ecological economics both study the
allocation of scarce resources.
Neoclassical economics places more faith in “the
market” for proper allocation or scarce resources.
Ecological Economics understands that the global
economy operates within the global ecosystem and is
more focused on identifying optimal scale and just
distribtuion.
Discussion Question
• Why might excessive resource use have greater impacts on future
generations than on the current one” Look back at the definition
of Pareto Efficient Allocation. If the current generation is the de
facto owner of all resources, could it be Pareto efficient for the
current generation to consume fewer resources so that future
generations are better off?
• Terms to know:
Ends and Means
Pareto Efficient Allocation
Coevoluationary Economics
Growth vs. Development
Throughput
Allocation, Distribution & Scale