Chapter 4: Ecological Economics
By Herman Daly and Joshua Farley


 A Finite Planet
 The Laws of Thermodynamics
 Stock Flow Resources and Fund Service Resources
 Excludability and Rivalness
 Goods and Services provided by the sustaining System


 The economic system is
A subsystem of the Planet’s
Ecosystems. A big question
For Ecological Economics is
When is the economic
System too big? When is enough enough? What policies will be effective in keeping the economy within its optimal size? This requires a clear understanding of specific attributes of goods and services that the economic system must allocate among alternative ends.


 Finite supply of fossil fuels, soil, minerals, and water.
 Let’s face it – The earth is essentially a finite chunk of matter.
 Steady influx of sunlight.
 Proposition: Economic growth cleans the environment and preserves ecosystems. (true or false?)
 Evidence: As U.S. economy developed over last 30 years our water is cleaner and forest extent has expanded.
 Proposition: The economy cannot continue to grow indefinitely.
(true or false?)
 Evidence: At a continuous annual 1% growth rate the human population would have a mass greater than the entire planet in just over 3,000 years? (let’s do a cocktail napkin calculation)


 “We have finite supplies of energy, finite supplies of raw materials, finite absorption capacities for out wastes, and poorly understood but finite capacities for ecosystems to provide a host of goods and services essential for our survival. And evidence suggests that we are reaching the limits with respect to these resources. With continued growth in production, the economic subsystem must eventually overwhelm the capacity of the global ecosystem to sustain it.”
 Can economic development grow indefinitely?


 Big names in Thermodynamics:
Sadi Carnot, James Joule, Herman
Helmoholtz, Rudolf Clausius.
Key Observation: Heat naturally flows from hot place to cool place.
To get it to go the other way costs energy.
 1) Energy cannot be created or destroyed
 2) Entropy is always increasing

 Free Energy – The energy available to do work.

 Bound Energy – Energy in the form of heat that cannot be transferred to produce work.
 Entropy – Bound Energy in the universe that is always increasing.
 Heat is a form of Energy
 Question: Would you invest in a revolutionary new automobile designed to capture its own
exhaust and burn it again?

nd
http://www.scientificamerican.com/article.cfm?id=how-nature-breaks-the-second-law

Question: If matter/energy moves inexorably towards greater disorder, how , then do we explain life? Is life not a spontaneous order that emerged from the chaotic maelstrom that was our early Planet?
Answer: The Earth is a closed but not an isolated system. We are bathed continuously in low-entropy sunlight that allows for the complexity and order of life to emerge and increase. Life does not violate the 2 nd law of thermodynamics.

 “If we accept the laws of thermodynamics, the entire nature of the economic system is entropic. The First Law of
Thermodynamics tells us that we cannot make something from nothing (there is no such thing as a free lunch  ), and hence that all human production must ultimately be based on resources provided by nature. The 2 nd law tell us that whatever resources we transform into something useful must disintegrate, decay, fall apart, or dissipate into something useless, returning in the form of waste to the sustaining system that generated the resource.”
 Question: If humanity presently burns 400 years of ancient sunshine (fossil fuels) every year – what kind of percentage change in throughput would we have to make in order to live within the energy supply provided by the sun?


 Conventional economics uses the phrase “Factors of
Production” to describe the inputs to the production process that are necessary to produce outputs. Typically these are Capital, Labor, and Land.
 Ecological Economics uses the terms ‘Stock-Flow’ resources and ‘Fund-Service’ resources to distinguish between two fundamentally different types of resources.
 Example: Pizza Making (dough, sauce, cheese, pepperoni are Stock-Flow and kitchen are
[material cause]; whereas the oven, cook,
Fund-Service [efficient cause])


 Are materially transformed into what they produce
(material cause)
 Can be used at virtually any rate desired (subject to the availability of the fund-service resources required for their transformation), and their productivity is measured by the number of physical units of the product into which they are transformed.
 Can be stockpiled.
 Are used up, not worn out.
 Examples: Fossil Fuels, Pizzas, Copper


 Are not materially transformed into what they produce
(efficient cause)
 Can only be used at a given rate, and their productivity is measured as output per unit of time.
 Cannot be stockpiled.
 Are worn out, not used up.
 Examples: Ricardian Land, Sunlight, Labor


 Think about a specific ecosystem –
Make a list of three stock-flow resources provided by (or found in) that ecosystem, and three fund-service resources. (Note: You will have to be very specific about the use of each resource. For example, drinking water is a stock-flow whereas water for swimming is a fund service).


 Excludability – A legal concept that when enforced allows an owner to prevent others from using his or her asset. An
excludable resource is one whose ownership allows the owner to use it while simultaneously denying other the privilege.
 Rivalness – An inherent characteristic of certain resources whereby consumption or use by one person reduces the amount available for everyone else. A rival resource is one whose use by one person precludes use by another person.
A nonrival resource is one whose use by one person does not effect its use by another.

 Rival or Nonrival?

Market or Non-Market?
Fresh Water
A bicycle
A house
 Excludable or Non-excludable?
Fresh Air Pizza Gold
A Car
A farm
Gasoline Land
A weed whacker A computer
Pollination by Bees A bowl of cherries
True or False?: 1) All stock-flow resources are rival.
2) All fund-service goods are nonrival.
3) All Ecosystem service are non-excludable.

Goods and Services provided by the Sustaining System

 1) Fossil Fuels 2) Minerals
 3) Water
 5) Solar Energy
4) Land
6) Renewable resources
 7) Ecosystem Services 8) Waste Absorption
 Question: How do the concepts of rivalness, excludability, entropy, fund-service, and stock-flow apply to these eight important types of natural capital?


 Laws of Thermodynamics Fund-Service Resource
 1) Conservation of
Matter/energy
 2) The law of increasing
Entropy
Stock-Flow Resource
Rival & nonrival resources
Eightfold classification of
Excludable and nonexcludable resources