Economics for Sustainability

Professor Wayne HayesNovember 16, 2011

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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. Framing: the Anthropocene 2. Understanding the economy 3. Brands of economics 4. Ecological economics 5. 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.

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The growth of the economy undermines sustainability:

• 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 happywith the economy.

We need an expandedand 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 betweenecology 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 economicswithin ecology.

Sachs provides an exampleof 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 economicssupports sustainability?

We will consider three schools of thought:1.Neo-classical economics, including contemporary neoliberalism2.Ecological economics3.Eco-economics.

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Neo-classical economics includesmicro- 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 advocatea fat tax on junk food.

Denmark taxes unhealthy foods. See an argument for the so-called fat tax designed to promote sustainable foods.

Macroeconomics attempts to explain aggregate economic categories:

• 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 happywith 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 engineof 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.

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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 toecological 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 = sustainabilityVA = value addedE = energyM = 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 ignoresthird-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 neo-liberalism.

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 thebusiness 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 toecological 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 scaleof 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, especially1.Externalities as a market failure2.The distinction between sustainable development and physical growth3.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 economics2. 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 eco-

economy

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.

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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!