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Ecological Economics

Principles and Applications

ISLAND PRESS

Why Study Economics?

WHAT IS ECONOMICS?

Economics is the study of the allocation of limited, or scarce, resources among alternative, competing ends. We can choose, for example, to allocate steel to plowshares or SUVs. These products in turn are apportioned to different individuals—Somalian farmers or Hollywood stars, for example. Of course, as a society we don't consciously choose to allocate steel to a particular number of plows or SUVs. But we do have collective desires, the sum of the individual choices that each of us makes to buy one thing or another. Really, economics is about what we desire and what we're willing to give up to get it.

In fact, three critical questions guide economic inquiry, and there is a clear order in which they should be asked:

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?

This last question cannot be answered without deep reflection on the answers to the first two questions. Only after we have answered all these questions can we decide which are the best mechanisms for allocating those resources.

Traditionally, economists have said that the answer to the first question is "utility" or human welfare. Welfare depends on what people want, which they reveal through market transactions—by what goods and services they buy and sell. Naturally, this only reveals preferences for market goods and implicitly assumes that nonmarket goods contribute little to welfare. Humans are assumed to be insatiable, so welfare is increased through the ever-greater provision of goods and services, as measured by their market value. Thus, unending economic growth is typically considered an adequate, measurable proxy for the desirable end.

This view is fundamental to the main school of economics today, known as neoclassical economics (NCE). Since neoclassical economists assume that markets reveal most desired ends and that most scarce resources are market goods, they devote most of their attention to the mechanism for allocating resources to alternative ends, which is, of course, the market. The reason the market is considered the appropriate mechanism is that under certain restrictive assumptions it is efficient, and efficiency is considered a value-free, objective criterion of "the good." Efficient allocation is shorthand for Pareto efficient allocation, a situation in which no other allocation of resources would make at least one person better off without making someone else worse off (the name Pareto is for economist Vilfredo Pareto). Efficiency is so important in neoclassical economics that it is sometimes taken to be an end in itself.

But we should bear in mind that if our ends were evil, then efficiency would just make things worse. After all, Hitler was rather efficient in killing Jews. Efficiency is worthwhile only if our ends are in fact good and well-ordered—a job not worth doing is not worth doing well. We will return to this in our discussion of an ends-means spectrum in Chapter 3.

Ecological economics takes a different approach than its neoclassical counterpart. In ecological economics, efficient allocation is important but far from being an end in itself. Take the example of a ship. To load a ship efficiently is to make sure that the weight on both sides of the keel is the same, and the load is distributed from front to back so that the ship floats evenly in the water. While it is extremely important to load the cargo efficiently, it is even more important to make sure that not too much cargo is placed on the ship. It is of little comfort if an overloaded ship founders efficiently! Who is entitled to place their cargo on the ship is also important; we wouldn't want the passengers in first class to hog all the cargo space so that those in steerage lack adequate food and clothing for their voyage.

Ecological economists look at the Earth as a ship and gross material production of the economy as the cargo. The seaworthiness of the ship is determined by its ecological health, the abundance of its provisions, and its design. Ecological economists recognize that we are navigating unknown seas and no one can predict the weather for the voyage, so we don't know exactly how heavy a load is safe. But too heavy a load will cause the ship to sink.

Neoclassical economists focus solely on allocating the cargo efficiently. Environmental economics, a subset of neoclassical economics, recognizes that welfare also depends to a large extent on ecosystem services and suffers from pollution but is still devoted to efficiency. As markets rarely exist in ecosystem services or pollution, environmental economists use a variety of techniques to assign market values to them so that they, too, may be incorporated into the market model. Ecological economists insist on remaining within the weight limits (or in nautical terms, respecting the Plimsoll line) determined by the ship design and the worst conditions it is likely to encounter and making sure that all passengers have sufficient resources for a comfortable voyage. Once those two issues have been safely resolved, the hold is efficiently loaded.

Substantial evidence exists that the cargo hold is already too full for a safe voyage, or at least nearing capacity, and many passengers have not been allowed to load the basic necessities for the voyage. Certainly we seem to have too many greenhouse gases in the hold, too many toxic compounds. To make room for an ever-growing cargo, we have ripped out components of the ship we deem unimportant. But we live on a very complicated ship, and we know very little about its design and the impact of our choices on its structural integrity. How many forests and wetlands are needed to keep it afloat? What species are crucial rivets, whose loss will compromise the ship's seaworthiness? Ecological economics addresses these issues. It also assumes that our goal is not simply to load the ship to the limit but to maintain areas of the ship for our comfort and enjoyment, to revel in the exquisite beauty of its craftsmanship, and to maintain it in excellent condition for future generations.

So why study economics? If we do not, we will probably end up serving less important ends first and running out of resources while more important ends remain unmet. We are also likely to overload and swamp the ship unless we have studied the seas in which it will be sailing, as well as the ship's own design and functioning.

THE PURPOSE OF THIS TEXTBOOK

This textbook is designed to introduce ecological economics as a necessary evolution of conventional economic thought (neoclassical economics) that has dominated academia for over a century. Our text will critique not only neoclassical economic theory but also the pro-growth market economy that in many people's minds has come to be virtually synonymous with American democracy. Ecological economists do not call for an end to markets. Markets are necessary. What must be questioned is the prevailing belief that markets reveal all our desires, that they are the ideal system not only for allocating all resources efficiently but also for distributing resources justly among people, and that markets automatically limit the overall macroeconomy to a physical scale that is sustainable within the biosphere.

Part of our goal is to explain markets and show what they do well. Another part of our goal is to show why the unregulated market system is inadequate for allocating most of the goods and services provided by nature. This portion of the text should not be controversial—most of the basic arguments actually come from neoclassical economics, and it is only by drawing attention to their full implications that we depart from orthodoxy.

More contentious (and more important) is the call by ecological economics for an end to growth. We define growth as an increase in throughput, which is the flow of natural resources from the environment, through the economy, and back to the environment as waste. It is a quantitative increase in the physical dimensions of the economy or of the waste stream produced by the economy. This kind of growth, of course, cannot continue indefinitely, as the Earth and its resources are not infinite. While growth must end, this in no way implies an end to development, which we define as qualitative change, realization of potential, evolution toward an improved but not larger structure or system—an increase in the quality of goods and services (where quality is measured by the ability to increase human well-being) provided by a given throughput. Most of you have ceased growing physically yet are probably studying this text in an effort to further develop your potential as humans. We expect human society to continue developing, and indeed argue that only by ending growth will we be able to continue developing for the indefinite future. Fortunately, many desirable ends require few physical resources.

The idea of "sustainable development," to be discussed later, is development without growth—that is, qualitative improvement in the ability to satisfy wants (needs and desires) without a quantitative increase in throughput beyond environmental carrying capacity. Carrying capacity is the population of humans that can be sustained by a given ecosystem at a given level of consumption, with a given technology. Limits to growth do not necessarily imply limits to development.

Conventional neoclassical economists might define economic growth as the increase in an economy's production of goods and services, typically measured by their market value, that is, an increase in gross national product (GNP). However, an economy can develop without growing, grow without developing, or do both at the same time. GNP lumps together quantitative growth with qualitative development—two very different things that follow very different laws—and is thus not a very useful measure.

In spite of the distinction between growth and development, calling for an end to growth requires an almost revolutionary change in social perceptions of the good (our ends and their ranking), a theme that will recur throughout this text. As we are all aware, the transition from adolescence to maturity is a difficult time for individuals and will be for society as well.

The market economy is an amazing institution. Market forces are justly credited with contributing to an unprecedented and astonishingly rapid increase in consumer goods over the past three centuries. Poor people in affluent countries today have many luxuries that kings of Europe could not have dreamed of in centuries past, and we have achieved this through a system that relies on free choice. In the market in its pure form, individuals are free to purchase and produce any market good they choose, and there is no controlling authority apart from the free will of individual humans. Of course, the pure form exists only in textbooks, but competitive markets do show impressive powers of self-regulation. Arguments for modifying such an admittedly impressive system must be persuasive indeed. However, a brief detour into the history of markets and economics suggests that such modifications occur all the time.

Coevolutionary Economics

As Karl Polanyi showed in his classic The Great Transformation, the economic system is embedded as a component of human culture, and like our culture, it is in a constant state of evolution. In fact, our ability to adapt to changing environmental circumstances through cultural evolution is something that most clearly distinguishes humans from other animals. Economic, social, and political systems, as well as technological advances, are examples of cultural adaptations. All these systems have adapted in response to changes in the environment, and these adaptations in turn provoke environmental change, to which we must again adapt in a coevolutionary process. Examples of some of the major coevolutionary adaptations and their implications for future change will help illustrate this concept.

From Hunter-Gatherer to Industrialist

For more than 90% of human history, humans thrived as small bands of nomadic hunter-gatherers. Anthropology and archaeology together provide us with a reasonable understanding of the hunter-gatherer economy. Rather than the "nasty, brutish and short" life that many imagine, early people met their basic needs by working only a few hours a day, and resources were sufficient to provide for both young and old who contributed little to gathering food. A recent study of the !Kung, who live in a very arid, marginal environment, found that 10% of the population was over 60, which compares favorably with populations in many industrialized countries.

Small bands of hunter-gatherers would deplete local resources and then move on to places where resources were more abundant, allowing the resource base in the previous encampment to recover. Mobility was essential to survival, and accumulating goods reduced mobility. Numerous chronicles by anthropologists attest that hunter-gatherers show very little concern for material goods, readily discarding their possessions, confident in their ability to make new ones as needed. Property rights to land made no sense in a nomadic society, and prior to domestication some 10,000 years ago, property rights to animal herds were virtually impossible. Food was also shared regardless of who provided it, perhaps partly because of technological limits. Some food simply cannot be harvested in discrete bundles, and if hunters bring home a large game animal, unshared food would simply rot or attract dangerous predators. Studies of the !Kung and other tribes found that both young and old were generally exempt from food gathering, and even many mature men and women simply chose not to participate in this activity very often yet were given equal shares of the harvest.

If private property and wealth accumulation were impractical and absent from human society for most of human existence, it is hard to argue that these are inherent characteristics of human nature rather than cultural artifacts.

Gradually hunter-gatherer societies developed the technology to store large quantities of food for months on end, an essential precursor to agriculture. Agriculture ended the nomadic lifestyle for many early peoples. People began to settle in towns or small communities, which led to greater population concentrations than had previously been possible. The technologies of storage and agriculture changed the nature of property rights. Certainly agriculture itself made some form of property rights to land essential. Surplus production allowed greater division of labor and specialization, which in turn led to ever-greater production, fostering extensive trade and eventually the development of money. Greater populations, the need to protect increasing riches against other groups, and the need to defend property rights within the community meant more need for government, and ruling classes developed. Ruling classes and the needs of the state clearly had to be supported through the productive capacity of others, which inevitably led to some sort of tax system and concentrations of wealth in the upper echelons of the hierarchy.

The chain of evolutionary events did not end there, of course. Higher populations and agriculture would have disrupted local ecosystems, eventually decreasing their capacity to produce food and materials independently of agriculture. This only increased the demands society would place on agriculture. These demands, accompanied by a more rapid exchange of ideas in denser communities, stimulated new technologies, such as large-scale irrigation. Irrigation over time led to increased soil salinity, eventually reducing the capacity of the ecosystem to sustain such high population levels without further agricultural innovations or migration.

The Industrial Revolution

Ever-greater surplus production, accompanied by better ships, allowed trade on an expanding scale. Traders exchanged not only goods but also ideas, further speeding up the rate of technological progress. Among the crucial technological leaps was the ability to extract and use fossil fuels and other nonrenewable mineral resources. It is no coincidence that the market economy and fossil fuel economy emerged at essentially the same time. Trade also allowed specialization to take place across regions, not only across individuals within a society. Technological advance, fossil energy, and global markets laid the groundwork for the Industrial Revolution.

The Industrial Revolution had profound impacts on the economy, society, and the global ecosystem. For the first time, human society became largely dependent on fossil fuels and other nonrenewable resources (partially in response to the depletion of forests as fuel). Fossil fuels freed us from dependence on the fixed flow of energy from the sun, but it also allowed the replacement of both human and animal labor by chemical energy. This increased energy allowed us ever-greater access to other raw materials as well, both biological and mineral. New technologies and vast amounts of fossil energy allowed unprecedented production of consumer goods. The need for new markets for these mass-produced consumer goods and new sources of raw material played a role in colonialism and the pursuit of empire. The market economy evolved as an efficient way of allocating such goods, and stimulating the production of even more.

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Excerpted from Ecological Economics by Herman E. Daly, Joshua Farley. Copyright © 2011 Herman E. Daly Joshua Farley. Excerpted by permission of ISLAND PRESS.
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