Economics for Sustainability
Professor Wayne Hayes
November 16, 2011
V. 1.2 | Build #11
The goals of this session are:
1. Explain the basics of economics to
sustainers.
2. Lay out an approach for harmonizing
economics and sustainability.
Table of Contents:
Economics for Sustainability
1.
2.
3.
4.
5.
Framing: the Anthropocene
Understanding the economy
Brands of economics
Ecological economics
Eco-Economics
Part I: Framing
We start by framing our approach to the
intersection of economics and sustainability.
The Anthropocene grounds us in the merging of
Earth history with human history.
Return to TOC.
The growth of the economy
undermines sustainability:
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depletes resources
exceeds global and bioregional carrying capacity
destroys ecosystems
overwhelms natural waste disposal sinks
alters the climate
wages war on subsistence cultures
produces shocking maldistribution of wealth and
income.
How can the economy be turned
around to reinforce sustainability?
This alchemy must be resolved to promote
sustainability. Economics and sustainability must
be harmonized.
Not everyone is happy
with the economy.
We need an expanded
and updated context.
Adam Smith invented classical economics with
his seminal The Wealth of Nations in 1776. The
Industrial Revolution had just started.
We need to update and expand this context for
Ecology, Economics, and Ethics
The Industrial Revolution changed human social
relations and human relations with nature.
AP World History web site
provides an overview.
The Open Door web site
offers a history.
The Industrial Revolution changed
human social relations.
The Teacher Link site offers a depiction of the Industrial Revolution’s social condition.
Are we in the Anthropocene?
Examine indicators of
the Anthropocene:
See the original report
for indicators
See especially table 1 and figure 2, page 617 of
the original article on the Anthropocene.
What are the implications?
Shanghai, 2007
We need to examine the economy,
the engine of the Anthropocene.
How is economics defined?
This standard definition of economics comes
from the authoritative International
Encyclopedia of the Social Sciences: "Economics
. . . is the study of the allocation of scarce
resources among unlimited and competing
uses" (Vol. 4 472). I unpack the definition in my
web site for the Economics of Sustainability.
The economy is market-driven and
growth-compelled.
The national economy is measured as the
monetized market value of all the goods and
services produced in the nation in a calendar
year.
For more detail and definition, go to my web page defining
economics.
Resolution: Situate the economy
within society and ecology.
Resolve the antagonism between
ecology and economy.
Economy and ecology share the same Greek root,
Oikos, meaning “the inhabited house” or “dwelling.”
Economy = Oikos + Nomos.
The term “economy” derives from the Greek
oikonomia, household management, based on
oikos, "house," and nemein, "manage."
Ecology = Oikos + Logos.
Now consider the related term, “ecology,” which is
defined as "the branch of biology concerned with the
relations of organisms to one another and to their
physical surroundings."
Ecology also derives from the ancient Greek term oikos,
but instead of management, focuses on logos, "reason"
(Oxford English Dictionary).
Which should come first,
ecology or economy?
Now, economy trumps ecology.
But should we not understand our home, the Earth,
before we muster the audacity to try to manage it?
Consider ends and means.
Like humanity, should ecology (nature) be
considered as an end in itself?
Doesn’t economics refer to the efficient, if not
always wise, allocation of means to fulfill ends?
Therefore, shouldn’t ecology
precede economy?
Consider this: The inversion of economy and
ecology should be the first strategic move to
harmonize ecology, economy, and society.
Harmonize economics
within ecology.
Sachs provides an example
of embedding economics.
Fairness in a Fragile World by Wolfgang Sachs
exemplifies several principles:
1. How to invert and to embed the economy
within nature and culture.
2. How sustainable development can occur
within non-OECD nations.
3. How to equitably harmonize technology,
ecology, and society.
What brand of economics
supports sustainability?
We will consider three schools of thought:
1. Neo-classical economics, including
contemporary neoliberalism
2. Ecological economics
3. Eco-economics.
Return to TOC.
Neo-classical economics includes
micro- and macroeconomics.
• Neoclassical economics builds on the classical
tradition that began with Adam Smith.
• Microeconomics examines the basic economic
units, firms and consumers.
• Macroeconomics examines the aggregate
economy as a unit of analysis.
Microeconomics examines the market
behavior of the firm and the
consumer.
Microeconomics extends Adam Smith, assuming
perfect competition among small firms and
independent consumers. Price theory and
market analysis defies the reality of mammoth
transnational corporations as the principal agent
of economic globalization.
Supply and demand within markets
are basic to microeconomics.
But Pigovian taxes
can make a difference.
Put a tax on a commodity that creates negative
externalities:
For an explanation, see biography of Pigou at Concise Encyclopedia of Economics.
Some countries advocate
a fat tax on junk food.
Denmark taxes unhealthy foods. See an argument for the socalled fat tax designed to promote sustainable foods.
Macroeconomics attempts to explain
aggregate economic categories:
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Growth
Consumption
Unemployment
Savings and investment
Inflation
Money and finance, including public finance
The rates of interest
The composition and level of imports and
exports.
The macroeconomy is linked by
complex feedbacks.
The U.S. economy is NOT in recession
Although it sure feels like it is!
Repeat: Not everyone is happy
with the economy.
Since September 2008, economy
has stagnated.
Wages have fallen relative to GDP.
Productivity has risen
relative to wages.
Note the correlation between energy
and economic growth.
IMF head sees lost decade.
“Ultimately, we could face a lost decade of low growth
and high unemployment. . . . There are dark clouds
gathering in the global economy,” says IMF Managing
Director Chrisine Lagarde (Bloomberg Businessweek,
11/9/2011). “
Economic growth is the engine
of macroeconomics.
In the world of macroeconomics, more is always
better. No consideration is given to what is
produced, so long as it enhances the total flow
of goods and services. Prisons, bloated health
care costs, responses to toxic spills, the repair of
the damage caused by climate change all are
"goods" that add to economic output--not
"bads" which should be prevented.
Neoclassical economics spawns
economic globalization.
The neoclassical brand projects economic
globalization and the doctrine of neoliberalism
to the world economy. Growth goes global!
See my web-based presentation on economic
globalization.
Neoliberalism cannot be reconciled
with sustainability.
There exists no middle ground. The principles
underlying each and the dynamics they drive are
thoroughly incompatible. If neoliberalism
triumphs, sustainability cannot be achieved,
with drastic implications for future generations
of humans and for the hospitality of the Earth
for life. The stakes are high and the prospects
grim.
This conclusion is consistent with my
Statement of Concern
The Statement of Concern was listed in the
schedule and was reviewed in class.
Ecological economics tells
a different story.
Return to TOC.
The founder of ecological economics is
Herman Daly.
Ecological economics
recasts economics.
Daly, still grounded in economics, expands the
boundaries. The economy has three essential
functions:
1. Allocation: efficiency of resource use
2. Distribution: fairness
3. Scale: appropriate size. The impulse is to get
bigger, to grow in scale.
There are limits to
ecological economics.
The transition from neoclassical economics to
ecological economics is essential, but is not
sufficient. Too much is left out of the story:
Ecological economics must incorporate a theory
of political economics.
One way to think about
economics and sustainability is to
define the problem this way:
SY = VA / ( E + M )
where SY = sustainability
VA = value added
E = energy
M = matter
What is an “externality” and
why does it matter?
An externality is a consequence, positive or
negative, of an economic activity that affects
other parties without this affect being
incorporated into market prices. Thus, market
price deviates from the "true" social cost,
sending the wrong signal.
Microeconomics ignores
third-party effects, called
externalities.
Instead of recognizing such market distortions as
externalities, neoclassical economists claim to catch
sight of Adam Smith's "Invisible Hand" of the
unfettered market. Neoclassical economics is not only
blind to environmental degradation and social
disintegration but is enthralled in a mystical séance of
market perfection, a reification exceeded only by neoliberalism.
Herman Daly comments on the
trivialization of externalities by
neoclassical economics:
“When increasingly vital facts, including the very capacity of
the earth to support life, have to be treated as
‘externalities,’ then it is past time to change the basic
framework of our thinking so that we can treat these critical
issues internally and centrally. (45)”
Daly, Herman E. Beyond Growth: The Economics Of Sustainable Development.
Boston: Beacon Press, 1996.
There are limits to the idea of
externalities.
Identifying externalities as a market failure is
important but:
1. The political economic system, i.e. capitalism,
staunchly resists internalizing externalities.
2. Beyond externalities is the essential issue of
perverse subsidies and implicit industrial
policy.
Are externalities built into the
business plan of corporations?
The modern firm transcends Adam Smith’s
village shops and now includes immense and
diversified global corporations. Their quest to
maximize shareholder returns includes dumping
costs onto others. The political muscle of such
corporations protects external costs from being
internalized and seeks government subsidies
and bail outs. (See Annie Leonard’s The Story of
Stuff for details.)
Perverse subsidies form a
hidden industrial policy
Myers and Kent estimate subsidies at
5.6% of total global economy.
• The 2001 study found total subsidies to be
about two billion dollars, or 5.6% of the
prevailing world economy. (Myers, Norman, and
Jennifer Kent. Perverse Subsidies: How Tax Dollars Can
Undercut the Environment and the Economy. Washington, DC:
Island Press, 2001.)
• Myers and Kent are scientists, not economists.
• Note that economists have not, to my
knowledge, attempted to estimate the total
costs of externalities or subsidies.
Distribution is ethical and political,
not economics per se.
The socially acceptable distribution of the goods
and the bads produced by the economy is
ultimately political and ethical. Left to itself, a
market society (capitalism) will produce large
maldistributions in wealth and income.
The market distributes according to
economic class.
In practice, the market-driven returns to capital, as
profits and capital gains, accrue to the wealthy few, the
capitalist class, while the returns to labor, wages and
salaries, go to a multitude, the working class. This
dynamic produces a class-based inequality of both
wealth and income, which translates into differential
political power.
In practice, distribution is done
through politics as well as economics.
• In economic theory, distribution is considered
as an efficient return to factors of production
(land, labor, capital).
• But distribution is influenced by tax policy and
government expenditures.
The distribution of income in the USA
is now a matter of concern.
Business as usual continues the wealth
distortions.
The 1% has done well under President Obama,
especially banks.
Meanwhile, poverty in the U.S. is at a record
high of 49 million Americans, 16%.
Scale is essential to
ecological economics.
But the growth of the economy is essential to
orthodox economics, which never, ever
questions scale.
Close attention to scale is fundamental to
ecological economics.
Macroeconomics fosters growth:
bigger is always better.
The appropriate size of the material economy is
relative to nature's carrying capacity. This aspect
of macroeconomics has been altogether
disregarded by the dominant neoclassical school
of economic thought. In sharp contrast,
ecological economists such as Herman Daly have
emphasized that scale is central to sustainability.
Some, like Vandana Shiva, disagree:
“Instead of living up to its promise to alleviate poverty,
economic growth actually undermined ecological stability,
thereby destroying people's livelihoods and causing further
poverty. Moreover, development strategies have been based
on the growth of the market economy, even when large
numbers of people operate outside of this network. The
emphasis on the market economy has resulted in the
destruction of the other economies of nature's processes and
of people's survival, but this destruction is seen as nothing
more than the 'hidden negative externalities' of the
development process. (87)”
Shiva, Vandana. "Recovering the Real Meaning of Sustainability." Ed. Rajaram
Krishnan, Jonathon M. Harris, and Neva R. Goodwin. A Survey of Ecological
Economics. Washington, DC: Island Press, 1995. 86-88.
The distinction between development
and growth is essential.
Herman Daly says this well:
“Since physical growth is limited by physical laws, while
qualitative development is not, or at least not in the same way, it
is imperative to separate these two very different things. Failure
to make this distinction is what has made `sustainable
development’ so hard to define. With the distinction, it is easy to
define sustainable development as `development without
growth--without growth in throughput beyond environmental
regenerative and absorptive capacities.’ (69)”
Daly, Herman E. Beyond Growth: The Economics Of Sustainable
Development. Boston: Beacon Press, 1996.
Growth in the physical scale of the
economy must be distinguished from
development
“`Development’ refers to qualitative change,
realization of potentialities, transition to a fuller
or better state. . . . Sustainable development is
development without growth in the scale of
the economy beyond some point that is within
biospheric carrying capacity. (167, highlights
added)”
What is the appropriate scale
of the economy?
J. S. Mill defined a steady state
economy in 1848.
The seminal British philosopher and economist
John Stuart Mill (1806-1873) recognized that the
economy could not grow indefinitely.
He preferred a leisurely, aesthetic, and ethical
stationary state to destruction of nature and
diminished quality of life. See section IV.6.9 of
Principles of Political Economy.
An eco-economy must go beyond
ecological economics
Daly’s ecological economics challenges neoclassical
defects, especially
1. Externalities as a market failure
2. The distinction between sustainable development
and physical growth
3. The inherent differences in distribution of goods
and bads.
But ecological economics still emerges from economics.
An eco-economy broadens the scope even further and
includes non-economists in the conversation.
But, ecological economics is still a field
of economics.
This means that ecological economics is
committed to reforms based on ecological and
resource constraints. But ecological economics
does not question beyond the reforms, which
are rarely, if ever, enacted.
Frank Rotering offers provocative
critiques of ecological economics:
1. Foundations of ecological economics
2. Failure to confront the historical economic
reality of capitalism.
So, ecological economics must be
supplemented by eco-economics.
That is, ecological economics should not be
abandoned but should be extended. This draws
on analysts who may not be formally trained in
economics or true believers in its ontology and
epistemology.
Eco-economics emerges outside the
domain of formal economics.
• Seeks a holistic and pluralistic outlook.
• Supports a symbiosis with nature and
facilitates a restoration of ecosystems.
• Respects the diversity of human culture.
• Expands the time horizon to a long-term,
generational perspective.
• Practices critical thinking.
An ontological shift from ideal theory
to grounded substance is needed.
The School of Athens by Raphael
Some help comes from economic
historians.
Key insight comes from economic historians who
grasp the larger dynamic and embed the
economy in society and nature. We will examine
the thought of
• Karl Polanyi
• Henri Braudel
• Gilbert Rist
• Joseph Schumpeter --- and his intersection
with Karl Marx.
Professor John Ikerd provides the
common sense to grasp an ecoeconomy
Professor Ikerd, author of Sustainable
Capitalism: A Matter of Common Sense, drives
home his message in a short video.
To Karl Polanyi, economics is simply
the way society meets
its material needs.
Karl Polanyi proposes substantive economics rather
than formal economics. His empirical approach
grounds economics within history. His approach is
neither an ideal model based on presumptions about
human behavior nor does he ignore nature and society.
Discovering Polanyi’s substantivism is foundational to
the intersection of economics and sustainability found
here.
Formal versus substantive economics.
Karl Polanyi proposed in The Great Transformation that the term
'economics' has two meanings:
1. The formal meaning refers to economics as the logic of
rational action and decision-making, as rational choice
between the alternative uses of limited (scarce) means.
2. The substantive meaning presupposes neither rational
decision-making nor conditions of scarcity. It simply refers to
study of how humans make a living from their social and
natural environment.
Market economies must be embedded
in society and nature.
Markets are constructions which under
neoliberalism destroy the social fabric and the
natural environment within which markets are
embedded.
Eco-economics is basic to Economics
of Sustainability
See the syllabus and the sequence for
Economics of Sustainability, SUST640.
Natural capital and environmental
services invite physical science.
Return to TOC.
Look around you: Ecosystem services
are everywhere.
Ecosystem services and natural capital
contribute to human well-being
But natural capital and ecosystem services are
not included in economic calculations such as
GDP.
Natural capital extends the core idea
of capital as a producer of value.
But what is capital?
Capital is a social relation and a
physical means of production.
Marx: “Accumulated labour that serves as a
means to new production is capital.” (Nature
and Growth of Capital, 1867)”
Capital is embedded labor produced under
specific social relations. To Marx, natural capital
is internally contradictory. Capital is an artifact
and quite unnatural.
What about consumption?
Too much stuff!
Read about an artist’s awareness of stuff.
Dematerialization is essential.
Page 1.
• Paperless offices substitute digits for pulp, dead trees.
Example: Kindle.
• De-growth replaces the growth imperative. See the Barcelona
Declaration, 2010. Example: Cradle to Cradle design.
• Reductions in environmental footprints can be calculated.
• Service economy supersedes manufacturing economy.
Example: Interface carpet company.
• Spiritual values replace material values.
Dematerialization is essential.
Page 2.
• Less matter and energy per unit of GDP, on the way since
1980
• Living with less, downsizing
• Decrease in scale
Where does eco-economics lead us?
What’s next?
Following the clue of substantivism and
recognizing the absence of a political economy
here, the next step is to explore andd try to
define a Strategic Sustainability.
Stay tuned!