Ecological economics differs from mainstream economics in several key ways: 1) It views the economy as a subsystem of larger ecological systems, not separate from the environment. 2) It focuses on the throughput of resources and adheres to the laws of thermodynamics, concerned with resource depletion and waste assimilation. 3) It considers the scale of the economy relative to ecosystems and believes uneconomic growth can occur when scale becomes too large.

1. SUS6200 Macroeconomics and Ecological Economics Ecological Economics

2. Ecological Economics Differs from Environmental Economics It does not accept the preanalytic version of the world assumed by mainstream economics. It is concerned more broadly with ecosystem/economy interactions. It is concerned more broadly with social system/economy interactions. It has a longer view with explicit concern for future generations. It is concerned with the size of the economy.

3. Ecological Economics is a Diverse and Evolving Field Different practitioners have different foci.

4. Key Elements of Daly & Farley’s Ecological Economics Economy is seen as a subsystem of ecosystem, not the other way round. Focus on throughput and, therefore, attention to the laws of thermodynamics. Attention to scale of economy relative to ecosystem. Concern with ends and means. Position that world must evolve towards a "Steady-state" economy. Focus on future generations and just distribution.

5. Other Aspects of EE Not Emphasized in D&F (from Norgaard) Environmental sustainability depends on viable social systems. Coevolution. Progress toward the mutual well-being of nature and people is being thwarted by: excessive material consumption excessive material inequality

6. Norgaard Identifies the Following Which Distinguish Ecological Economics Focuses on whole rather than parts. Focuses on systems, social and natural, rather than components. Includes future generations in analysis. Uses physical laws in models. Focuses on materialism, inequality and growth.

7. 1) Economy is Seen as a Subsystem of the Ecosystem Economy is an open system - takes in resources, puts out waste. The earth is a closed system. Resources circulate but only energy flows in and out.

8. Classic diagram from NCE book Firm Household $ G&S Labor $ Environment waste resources

9. Diagram from Ecological Economics Ecosystem Economy matter energy matter energy recycling solar energy heat Welfare economic services ecosystem services Human Social Activity

10. 2) Focus on Throughput What is throughput? Natural resources are transformed into market goods and end up as waste. Resources move through the economy - production, consumption, disposal. This movement must follow the laws of thermodynamics.

11. Thermodynamics - It’s the Law 1st Law In any closed system matter and energy can be neither created nor destroyed. Matter and energy can be interchanged. You can’t make something from nothing. 2nd Law Energy and matter move towards a less ordered state. Transformations lead to increased entropy. Entropy increases in an isolated system.

12. Thermodynamics - It’s the Law How is this related to economics? Since we can’t make something from nothing, “production” is an illusion. We can recycle materials but it uses energy. Resource Degradation/ Pollution Throughput The faster the throughput, the faster the depletion and degradation and the more “lost opportunity.” Resource Depletion

13. Thermodynamics - It’s the Law How is this related to economics? It is important to evaluate flows in terms of ecosystems capacity to assimilate waste and provide resources and technological capacity to substitute. Resource Depletion Resource Degradation/ Pollution Throughput If our rate of throughput (growth) is greater than our regeneration capacity , this is occurring through drawing down natural capital.

14. Can't man-made capital make up for natural capital? The value delivered by the biosphere is estimated to be in the range of US$33 trillion per year (1997 dollars). Global economy delivers US$18 trillion per year. -The value of the world’s ecosystem services and natural capital NATURE , VOL 387 , 15 MAY 1997

15. Can Technology Save Us? Until man duplicates a blade of grass, nature can laugh at his so-called scientific knowledge.... -Thomas Edison

16. 3) Scale of the Economy Relative to the Ecosystem Full world, empty world. If you see the ecosystem as a subset of the economy, "full world" is not a relevant concept. If ecosystem is an input, growth can occur forever because technology can make up for lost ecosystem services. If economy is embedded in ecosystem, there are limits to growth .

17. Why is Scale Important? When economy was small relative to ecosystem, impacts of growth were not as significant. Rate of resource consumption more sustainable. Waste absorption capacity not over taxed. As world gets more full, costs associated with production start being more profound. Pollution Lost ecosystem services Climate change Depletion of resources Stress

18. Relatively Empty World Ecosystem Economy matter energy matter energy recycling solar energy heat Welfare economic services ecosystem services

19. Economy grows relative to ecosystem: Full World Ecosystem Economy matter energy matter energy recycling solar energy heat Welfare economic services ecosystem services

20. Are technological solutions enough to achieve sustainability?

21. Is There an Optimal Scale? Increased growth can have positive as well as negative consequences. At some point the costs of growth become greater than the benefits.

22. Diminishing Marginal Utility and Increasing Marginal Costs (or marginal dis-utility) MU MDU Uneconomic Growth Economic Growth MDU MU a b c

23. More common drawing of this concept: diminishing marginal benefits and increasing marginal costs. Benefits and costs Increasing growth in the economy -> Marginal benefits Marginal costs

24. Where are we on this graph? Benefits and costs Increasing growth in the economy -> Marginal benefits Marginal costs

25. Optimal Scale in Microeconomics Activity should increase until marginal costs are equal to and not greater than marginal benefits. Firms: how much to produce (set MC = MR) how much labor to hire (set W = VMPL) Consumers: how much of a product to buy (set MUx/Px = MUy/Py) Economy: how much of good X should be produced (Set MWTP = MC) When MC = MB, optimal scale is reached. There is no “optimal scale” in macroeconomics.

26. Marginal Costs Marginal costs of production must be going up for economy as a whole because resources are getting scarcer. If MC is increasing, AC must be increasing as well at some point. AC MC $ Q

27. Average Costs LRAC $ Q Short run and long run average costs are both assumed to eventually increase in microeconomics. SRAC1

28. LRAC Curve Also Slopes Upward for Economy as a Whole Optimal scale is used in mainstream economics to think about production. In ecological economics, natural capital becomes the limiting factor in production. It is important to know if ecosystem services and other aspects of natural capital are being depleted faster than they can regenerate. Hence the importance of thermodynamics.

29. Scale of Economy Also Relevant to Social Systems Church Nature Family Friends Market - buying and selling

30. " Getting and spending, we lay waste our powers."

31. 4) Concern with Ends and Means Most economics text start with these questions: What should be produced? How should it be produced? For whom? Add to this environmental sustainability aspects: What should be produced and what should be maintained? How should production and maintenance be accomplished? For whom should economic activity be undertaken?

32. Daly and Farley Go Further What ends do we desire? What limited or scarce resources do we need to attain these ends? What ends get priority and to what extent should we allocate resources to them?

33. Physics Technics Economics, Politics Ethics Religion, Philosophy Ultimate means (low-entropy matter-energy) Intermediate means (artifacts) Intermediate ends (health, safety, comfort) Ultimate ends (final cause) Realm of consumer Realm of producer Realm of philosophy, democracy, public discourse

34. Economists Pondering Ultimate Ends and Consumerism is Nothing New Simonde de Sismondi John Ruskin John Hobson Thornstein Veblen John Kenneth Galbraith

35. Simonde de Sismondi (1773–1842) Questioned whether economic growth is an end in of itself and is synonymous with increases in the public good. In the early 1800s he was already concerned about the excess of consumer goods and how this excess led to human suffering for production.

36. John Ruskin (1819 – 1900) Commodities have value only in as much as they satisfy human needs. Things we need are part of wealth, things we don't are illth . Economic theory assumes away the social aspects of life and treats avarice as a central human characteristic. The accumulation of wealth is not the final goal.

37. John Hobson (1858 - 1940) Mainstream economics focuses too much on the isolated human desires. "How far can economic conduct, with its accompanying desires and gratifications, be taken as a safe index of the desirable or organic welfare in its true sense?" i.e. WTP not the way to allocate resources. Industrial economies designed to over-emphasize production and consumption.

38. John Hobson Cont. Thought industrialization should be used to increase leisure but recognized that the demands of profiteering would use machines for turning out as many goods as possible to be marketed. Noted that the economic system has an internal logic but what is it intended for? To meet our material needs or to meet all our needs? (He also argued that capitalism was leading to imperialism and that, therefore, the market was dangerous and needed to be curtailed.)

39. Thorstein Veblen (1857 – 1929) Disagreed with the neoclassical view of the utilitarian consumer, as a simple calculator of pleasure and pain who behaved in the market place simply to maximize pleasure. "Rational Economic Man" was seen as insatiably acquisitive. Veblen disagreed with this characterization. Wrote the Theory of the Leisure Class . Famous for idea of conspicuous consumption. Began field of institutional economics.

40. John Kenneth Galbraith (1908-2006) The Affluent Society (1958) Argues that advertising has created false desires that are leading society away from true benefits and over production is having dire consequences .

41. John Kenneth Galbraith Cont. Focus on private consumption takes president over public goods provision, which tend to be less material. First economist to really focus on environmental consequences of consumption: " How much should a country consume ".

43. Other Thoughts on Ultimate Ends?

44. 5) Steady-State Economy What is the steady-state economy? Idea is to maintain constant stocks of wealth and people at level sufficient for a long, good life. Throughput for maintaining stocks has to be low and within the re-absorptive and regenerative capacity of the environment.

45. Human Capital Economic Production Process Goods and Services Evolving Cultural Norms and Policy Well Being ( Individual and Community) Consumption (based on changing, adapting preferences) Education, training, research. Building Investment (decisions about, taxes community spending, education, science and technology policy, etc., based on complex property rights regimes) Individual Public GDP Wastes Common Ecological services/ amenities having, being - having, - being negative impacts on all forms of capital being, doing, relating Restoration, Conservation Natural Capital Manufactured Capital having positive impacts on human capital capacity doing, relating Complex property rights regimes Solar Energy Social Capital Limited Substitutability Between Capital Forms Model of the Ecological Economic System Waste heat Institutional rules, norms, etc. Materially closed earth system From: Costanza, R., J. C. Cumberland, H. E. Daly, R. Goodland, and R. Norgaard. 1997. An Introduction to Ecological Economics. St. Lucie Press, Boca Raton, 275 pp.

46. Energy and the Steady State Fossil fuel is a stock-flow . Flow not limited but it will run out. Solar energy is a fund-service . It won’t run out but flow is limited. We have become more and more dependent on fossil energy. This allowed for industrial revolution. But this energy is running out.

47. Energy and the Steady State The alternative, of course, is to return to relying on current solar energy, in part by working with natural systems. This raises further issues: Humans are co-opting approximately 40% of the primary energy captured by terrestrial ecosystems. This indicates the extent to which human activity has already transformed the environment and the limits to further transformation.

48. 6 ) Focus on Future Generations and Just Distribution Some economists posit that increased growth will take care of distributional problems - there will be more pie for all. But if continued growth is not possible and we are actually at a point of uneconomic growth, consumption by wealthy is decreasing ability of poor to exist. As we use up resources, we decrease what is available for future generations. If we are to care about future generations, we need to also care about present generations.

49. Importance of distribution of income according to D&F Poor people can't care about sustainability. Excessively rich consume too many resources. Intergenerational distribution needs to be considered. Need to limit growth to ensure future well-being of planet. But, if pie must cease to grow, we need to redistribute. Arguably, efficiency. Marginal benefits to a poor person is greater than marginal loss to a rich person.

50. Tension between Pareto optimality and declining marginal utility If we admit to interpersonal comparisons of utility, then distribution isn't just about fairness but also about efficiency.

51. How does the distribution of wealth affect sustainability?

52. Redistribution Caps on income and wealth Conspicuous consumption is a negative externality. Status seeking is a zero sum game, reducing resources for future generations. People should not be able to capture values created by nature, society, other people (labor theory of value). Four sources of income: wages - return to labor profits - returns to entrepreneurship interest - returns to capital rent - return to land or other natural resources

53. Policies for Redistribution: Minimum income Distributing returns to capital – Why? Accounts for large amounts of money flowing to few individuals. Make more people capitalists and not just serfs. Ownership creates better stewardship (ESOPs)

54. Redistribute Returns to Natural Capital (Rent) Eliminate hidden subsidies: free rent on public goods. Ex. firms not paying for right to pollute. Land tax. Henry George. Tax on land not buildings.

55. Henry George (1839 - 1897) Tax on unimproved land Stimulate land improvement Reduce speculation Share value of rent with society

56. Order of Goals Ecological Economics focuses on three important goals: Sustainable scale Just distribution Allocative efficiency These goals need to be addressed in this order. Why?

57. Achieving a Steady State

58. Macro-Level Solutions Incorporate sustainability criteria in quantitative indices of national income, wealth, and welfare. Develop better regulatory and incentive-based instruments to assure sustainability (limits, taxes, and trading). True cost pricing (limits investment in non-sustainable enterprises). Invest in public goods (education, healthcare, technology).

59. Macro-Level Solutions Cont. Support policies that reduce population growth. Reduce the work week, especially to accommodate productivity increases.(More equal distribution of income required.) Limit trade. Actively assess new technologies for their beneficial aspects. Equalize income.

60. Using Markets to Promote Sustainability (Economic Imperialism) What is economic imperialism?

61. What are some problems with economic imperialism? Doesn’t address scale Hard to calculate the correct prices You can't figure out social values by aggregating individual values Macro-Allocation: Not good information for allocating resources between provision of market and non-market goods Commodification of society Spatial aspects of non-market goods

62. What are some positive aspects of economic imperialism? Market system is already in place to implement Lots of people believe in market more than direct regulation Other?

63. Micro-Level Solutions Ethical Profits Reduce throughput Reorient products/ services Encourage fair regulation Develop disruptive technologies

64. Regulations can lead to cost savings and clear benefits. Regulations can promote job growth. Encourage fair regulation Pre- 1960s, Pollution denial 1970s and ‘80s End-of-pipe regulation Late ‘80s and ‘90s Pollution prevention and stewardship Clean Tech, Eco-effectiveness, Cost savings, Opportunity

65. Comprehensive Efficiency Identity Reduce throughput MMK services gained NK services sacrificed MMK services gained MMK stock = MMK stock throughput throughput NK stock NK stock NK services sacrificed X X X Service Efficiency How well are man made resources meeting what they are designed for? How well are we allocating resources? MMK = Man-made capital stock (e.g. equipment, goods) NK = Natural capital stock (e.g. soil, minerals, living organisms)

66. Comprehensive Efficiency Identity MMK services gained MMK stock = MMK stock throughput throughput NK stock NK stock NK services sacrificed X X X Maintenance Efficiency or Durability How much man-made stock are we getting for a given level of throughput? Are things well-made and durable? MMK services gained NK services sacrificed Reduce throughput

67. Comprehensive Efficiency Identity MMK services gained MMK stock = MMK stock throughput throughput NK stock NK stock NK services sacrificed X X X Production Efficiency Are we getting a high level of throughput for the amount of NK stock available? MMK services gained NK services sacrificed Reduce throughput

68. Comprehensive Efficiency Identity MMK services gained MMK stock = MMK stock throughput throughput NK stock NK stock NK services sacrificed X X X Ecosystem Efficiency Amount of NK stock we can get for NK services sacrificed. MMK services gained NK services sacrificed Reduce throughput

69. Reorient products/ services Sustainable Value Pollution Prevention Pros: Cost and risk reduction Product Stewardship Pros: Reputation and legitimacy, future cost savings Clean Technology Pro: Innovation and repositioning Base of the Pyramid Pros: Growth and future value

70. Different strategies for different markets (from Capitalism at the Crossroads, S. Hart) Developed Markets: reducing corporate footprint Emerging Markets: avoiding collision between economic growth and resource depletion and degradation Traditional/Survival Markets: understanding needs, developing native capacities

71. Creative Destruction There are limitations with marginal improvements. Disruptive technologies Breaking away from path dependence. Seeing sustainability as an opportunity not risk avoidance . Firms with large amounts of fixed assets (oil industry for example) do not want to change as much as adapt. Service and retail are more able to switch course . Turnover in S&P 500: 1.5% per year in 1920 10% per year today -Creative Destruction, Foster and Kaplan

72. How does globalization affect sustainability?

73. Discussion Questions How can concepts from ecological economics be applied to businesses and management? How can a business be profitable in a steady-state economy?

74. Question: What Would New Economy Look Like?