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 ThoughtNeoclassical 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 Economicskey assumptions….

• Markets do not reveal all of our desires.

• Markets do not distribute resources justly.

• Markets do not recognize optimal scale.

Ecological Economics

Earth Systems

Economy

Ecological Economics

EarthSystems

Economy

Environmental Economics(Subset of Neoclassical Economics)

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.

1. Sen, A. 1999. Development as Freedom. New York: Alfred A. Knopf, Inc.

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 IndustrialistHunter-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 AccumulationQ: Are these an inherent characteristic of human

nature or a cultural artifact?

• Food Storage -> Agriculture -> SedentismStorage 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 ChangeHuman Population Milestones

1800 human population reaches 1 Billion1930 human population reaches 2 Billion1960 human population reaches 3 Billion1975 human population reaches 4 Billion1987 human population reaches 5 Billion1999 human population reaches 6 Billion 

My father was born in 1926. Of these 6 milestones he sawThe 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 Growth vs. DevelopmentPareto Efficient Allocation ThroughputCoevoluationary Economics Allocation, Distribution & Scale