Introduction to Ecological Economics

Introduction to Ecological Economics

• How do we challenge/design the economy to maximize growth; where we balance concerns with the environment
• Ecology – study of home
• Environment – management of home
• Eco Econ – how to we efficiently manage our home

Ecology vs. Economics

• A) Economic Growth; do we sacrifice short term growth for the environment? But we need economic growth to increase job creation?
• B) Prices Incentives and the Environment; Price to monetize damage to environment, so when we grow, we pay for the damage as we create. What is the opportunity cost? Can a dollar figure reflect the damage that comes out of the goods? Willingness to pay? Are some things too intangible to put a dollar value on? Should we put a price tag for unpaid labour?
• C) Market-driven technological innovation; how can we design markets that produce renewable goods. Putting a price for “bad tech” to increase clean tech growth, will this economic strategy work? Cars have been in for 100 years, nothing has changed.
• Key Questions are answered differently by ecological economists and economists (exam Q)
• Understand key pool of thinking between economics and ecological economics

Class 2

• Donald Trump thinks the environment is a subset of the economy (this is the key difference between economics and ecological economics)
• Microeconomics; study of allocation decisions of individuals and firms, and markets for specific goods and services
• Macroeconomics; study of allocation of decisions in the broader economy – including government spending and investment, taxation, and international trade

• Looking at everyone’s interests, but it’s hard to aggregate everyone’s interests and find a connection
• Dealing with forces that may not be predictable

• Economics has been around as a field of study for over 200 years. Early political economists are what is referred to as classical economists.
• Classical Economists (all were political economists who were broad in their approach). Some of these thinkers made explicit linkages between their ideas and the natural env. Value = Labour + Material (land, “real” wealth”)

• Adam Smith (top left); founder of free markets, enterprise, capitalism. Defined value as value of the land, and value of the labour put into land  (Wealth of Nations – 1776)
• Thomas Malthus (top right); argued that as population grows, we’ll run out of resources. (Essay on Population – 1798)
• Dave Ricardo (bottom left); developed theory of comparative advantage. Wanted to compare value of land relative to other countries (Comparative Advantage – 1815)
• Carl Marx (bottom middle); thinks Malthus is wrong. Thinks we can take care of environment is we plan the economy in a certain way. Communism and socialism. (Community Manifesto – 1848)
• William Stanely Jevons (bottom left); coal question. In the context of coal mining, wanted to see if effort you’re working compared to the wage you’re working is worth it. Same question in ecological economics, when does the loss of the environment become not worthwhile for the wealth we are earning (Coal Question – 1865)

• Neoclassical Economics

• ‘marginal revolution’ in late 1800s and early 1900s
• Idea of looking at scarcity and trade-offs at the margin, drawing on the law of diminishing marginal utility
• Supply and demand forces; changed of marginal utility of cost and labour
• Looking at marginal value instead of intrinsic value
• Neoclassical: Value = Price Equilibrium or Market Price (Supply, marginal cost and demand, marginal utility)

• Marginal utility; additional benefit of adding/consuming one more unit

• The more you consume, the less satisfaction you get out of something, so marginal utility goes down as you consume more (e.g. chocolate bars)

• Marginal cost; additional cost of producing one more unit of a good

• The bar graph is like a hockey stick. It’s a little higher at the top (for initiation costs), and then is goes down as it gets efficient, and then it rises up for the rest of the graph → goes up because there is a finite amount of resources and it gets harder to produce one good 

• Supply and Demand

• Related to marginal benefits and marginal costs
• When two curves meet, most efficient allocation of production and consumption of a good. (price vs. how much people are willing to pay for the benefit); optimal distribution

[pic 1]

• Scale; size of our economy
• Alfred Marshall; focusing on small markets, wanted to transform away from classical economics (based on intrinsic value), and something more based on science (a value free science).

• Value free science: no ethics or biases/preferences/politics in the theory

• Neoclassical Economics Key Assumption

• Markets are the most efficient way to allocate goods and services as there is no bias or influences
• Economic system operates as if humans are rational and self-interested actors. Assumes everyone has rational interest. Assuming a benefit will decrease if given repeatedly given to us
• Growth Is limitless

• Keynesian; resources are finite, creates a break in growth. Microeconomics is fine, in macroeconomics comes to a stop.
• Paul Samuelson; applied mathematical models In both microeconomics and macroeconomics
• Neoclassical doesn’t include environment because if resources become scarce, then price will go up and people will stop buying them
• Rise of the Environment

• 1950s1970s; unprecedented growth in North America
• 1962 Silent Spring; the growth is having a significant impact in the env around us. DDT (pesticide), made shell of bird eggs weaker and thinner, eventually leading to a silent spring (no birds left in the sky). Unrestricted industrial growth is damaging to the environment.
• Rising world population; not linear, it’s starting to grow up quite significantly. New era where we look back to Malthusian’s theory.
• 1972; UN Stockholm Conference: first ever world conference about the environment
• Oil Crisis; first connection between resource scarcity and their own lives as oil amount decreased
• 1980 CC; GHG leads to significant and irreversible changes in the way we can live

• Environmental Neoclassical Economics; pricing the ecosystem. The study of how the environment is integrated into economics. It’s a scientific approach. Defined as weak sustainability
• Key Assumptions follow Neoclassical Economics

• Environment is a resource that exists in the economy
• Some forms of growth are not bad
• Believe in efficiency; if market treats env properly, then the economy is efficient  
• Belief that technology and future technology will help solve future problems

• Analytical Lens

• Anytime env cost isn’t added into the price of the good/service, then the market has failed
• the environment cost then becomes an externality
• incentive systems; we need to pay for bad things
• measuring costs and benefits

• What about Ecological Economics

• Uses sciences and physics instead of mathematical models

• Key Texts

• The limits to growth; Neo-Malthusian argument.
• Small in beautiful; we have to treat env as a form of capital
• Third; figured out how physics related to economics
• Steady-state economics; popularized environmental economics

• Ecological Economics

• Highly critical of neoclasscial approach
• Concerned that growth has environmental impacts
• The way we define value should be defined by people, not supply and demand

• Don’t think humans are rational
• Referred to as strong sustainability 

• Economy is a subset of the environment
• Sees the cost of growth as significant
• Referred to as “strong sustainability”

• Opportunity cost; best alternative sacrifice when you choose to do something
• The Lens of Ecological Economics

• Worried about the scale of economy (Optimal Scale)
• Worried about equity. Richer countries take up more optimal spaces than developing countries.
• Worried about how we define efficiency

• Neoclassical defines efficiency as supply and demand being equal
• For environmental economics, worries if supply and demand being equal is enough to be defined as efficient. What about externalities like scale and distribution? In this definition of efficiency, will is truly lead us to be sustainable.

• Are ecological and environmental economics necessarily at odds with each other?

• Both is interested in finding a new way to quantify the environment
• Environmental economics has no limit on growth
• Ecological economics focuses more on sustainability and development, which is there a limit on growth
• Environmental economics has a greater reliance on economics
• Environmental economics says environment is a factor of economy, whereas ecological economics believes economy cannot exist without the environment

• Does the market have a set of value?

• It depends on how you define value
• What are the values that taken into consideration
• Market represents power, and economy helps more people than others
• CORPORATIONS have the strongest power
• But consumers have power over corporations by using the power of their dollar
• Consumer → Corporations → Markets

Class 3

• Environmental economics is a subfield of neoclassical economics
• Key assumption: growth is infinite
• Canada faces significant trade off b/w economy and env due to tar sands
• Economic growth: expansion of the size of the economy

How Neoclassical and Env Economists see Economic Growth:

• Value: economic growth improves human welfare

• Welfare Is the measurement of the benefits humans receive from growth

• Opportunity cost: insignificant

• Opportunity cost is the cost of choosing one option over another, insignificant if marginal cost = marginal benefits. Insignificance is particularly the case in microeconomics.

• Scale: no real constraints on economic growth (can grow infinitely)

• Neoclassical doesn’t assume scarcity
• Scale/optimal scale is poorly defined in neoclassical economics

Circular Flow Diagram → pre-analytic vision of Neoclassical economics

[pic 2]

• First loop; goods and services loop

• Households own key factors of production (land, people, capital/savings, income potential)
• Households contribute these factors of production to the markets in exchange for wages
• Firms: goods are refined and converted into addition goods and services that are sold to household

• Households holds factors of production; labour, land, capital
• Firms buy factors of production in exchange for wages
• Second loops; revenue/Capital loop

• Starts with households
• Firm take this capital, it becomes revenye and is used to purchase additional factors of production from households
• Wage-renter profit
• Capital returns back to household as wages

• households use wage to buy goods and services
• firms use the revenue to buy more factors of production
• Circular Flow Diagram shows that price and demand change the allocation of resources and capital. It shows how to maximize profit
• Leakage (not in picture)

• Savings
• Taxes
• Only domestic consumption

• If you have savings and don’t want to use it, bank will invest it or give it out as a loan, and those taxes and investments are injected back into the economy (this compensates for any leakages)
• In theory, the sum of injections in economic growth is greater than the sum of the leakages

How ecological economists see economic growth

• Value: link between economic growth and human welfare doesn’t include all “factors”

• Economy is not an isolate system
• There are other factors of human welfare aside from land, labor + capital
• Exchange value is used to define value in our economic system – reflects irrational thoughts and desires at the margin
• Leisure, family, environment

• Opportunity costs: significant

• What happens to the physical body of goods and services as they pass through the cycle?
• How can the economy be self-regulating without accounting for the physical inputs?

• Scale: There are physical limits to economic growth. Growth is not infinite.

• Scale is limited, we live in a world that is physically limited, therefore growth can not be infinite

• Things are valued at exchange value (are the margin). Doesn’t take into consideration the environment.

Jevonian View of Limits to Growth of Macroeconomy

• MDU = Marginal sacrifices made necessary by growing production + consumption

• E.g. disutility of labor, sacrifice of leisure, depletion, pollution, environmental destruction, congestion
• Marginal sacrifice eventually increases, assuming we sacrifice least important values first

• The point at which our work xceeds the value of our wages, begins with the same question about wages and work
• When does the cost of the earth’s ecosystem begin to exceed the value of the wealth produced?
• Marginal utility curve
• Jevonian said; what happens when work exceeds wages ?
• Environment, energy input from labour, leisure time etc. are sacrifices made for increasing factors of production, represented on the bottom curve
• Beyond the point A, there is uneconomic growth
• After point E; irreversible damages to the economy/environment
• Negative setbacks of growth exceeds the utility
• Why do we ignore the bottom curve

• Ideological interest to keep economy growing
• We think we have time and that we’ll figure out how to grow
• It’s too hard to measure

• Ecological economics says there are limits to growth and there are opportunity costs

When growth is bad:

• Uneconomic growth occurs when increases in production come at an expense of resources and well-being that is worth more than the items made. Arises from undesirable balance of quantities known as utility and disutility. Utility is the level of satisfaction of the population’s needs and wants (it is the population’s level of well-being.). Disutility refers to the sacrifies made necessary by increasing production and consumption. Such sacrificies can include labor, loss of leisure, exposure to pollution and congestion.

Limits to Growth

• Environmental economists think we can have limitless growth. As long as we have better technology, we can find a way to get resources. Still somewhat factor in env, but think they can replace natural stuff with man-made stuff and continue growth and marginal disutility (still part of neoclassical)

• Neoclassical economics believes that the loss of leisure and environment is fine because we convert these things into man-made capital that benefits us. As long as we’re transforming production into usable capital, the benefits outweigh the loss; concept of substitutability (replacing natural capital with manmade capital)
• As capital grows, we can buy more sustainable purchases
• Ecological Economics believes growth is physically limited.
• Fallacy of misplaced concreteness; ignoring the limits of growth
• Laws of thermodynamics:

• First law: states that there is only so much matter/energy on earth – matter can not be created nor destroyed (Earth is a closed System)
• Second Law: whenever work is done, or energy is used, the amount of ‘useable’ energy decreases.  When useable energy declines, entropy increases.
• Entropy: the amount of energy that is not available for work
• Entropy HourGlass: the economy is an hourglass with imited amounts of resources and energy. None can enter and none can leave. The sane in the upper half of the hourglass represents fossil fuels, when the sand passes through the gap in the hourglass, energy is used up.

[pic 3]

• For ecological economists: Throughput is the transformation of low entropy resources into high entropy products. Whenever through put happens, energy is used, entropy increases, and the amount of unusable energy increases  

• there is only so much matter and energy available (in terms of both stocks and flows) for economic activity
• Economic activity makes matter and energy move toward a  less useful state (movement is one way, not circular)
• Current economic activity is using matter/energy faster than it can be replaced by renewables

• Goods and services must equal outputs

Steady-State Economy (dealing with entropy)

• Earth is materially finite and non-growing
• So, instead of maximizing consumption, we should minimize throughput and that the economy is part of this finite global system

• Thus, economy can not grow forever and ultimately some sort of steady-state is desired. The key point is that these changes are bounded and no long-term trend in the system

Environmental Economists:

• Early 1990s, era of global free trade, the more trade we have the more growth

Rio 1992

• Must be sustainable development

NAFTA 1992

• Environmentalist said this is a horrible idea, and it’s going to go damage the environment too much

To prove that economic growth is good to the environmentalists, they mapped pollution alongside economic growth shows