A Brief Introduction to Ecological Economics Joshua Farley, PhD University of Vermont Community Development and Applied Economics & Gund Institute for Ecological Economics

What is Economics?  The allocation of scarce resources among alternative desirable ends

Sequence of 5 questions…  What are the desirable ends?  What are the scarce resources?  What are the characteristics of these resources relevant to allocation?  What are the characteristics of human nature relevant to allocation?  How do we allocate?

…with changing answers: Coevolutionary economics  Hunter-gatherer economics Accumulation = death Accumulation = death  Economics of early agricultural societies Depended on technological advance Depended on technological advance Advent of property rights Advent of property rights  Industrial market economics Use of non-renewable resources: FOSSIL FUELS Use of non-renewable resources: FOSSIL FUELS  Ecological economics Driven by the growing scarcity of natural capital Driven by the growing scarcity of natural capital Demands transdisciplinary approach Demands transdisciplinary approach

What are the Desirable Ends?

Desirable Ends  A high quality of life for this and future generations.

Quality of life = fulfillment of human needs  Much more than consumption  Explicitly normative question: draws on ethics, philosophy, religion  Market goods only one of many human needs  Satiation occurs

Three necessary intermediate ends, in order of importance:  Ecologically sustainable scale  Socially just distribution of resources within and between generations  Economically efficient allocation  To understand why these are necessary, we need to understand the scarce resources

What are the scarce resources?

Draws on physics and ecology  Laws of thermodynamics  Dual nature of resources provided by nature

First law of thermodynamics First law of thermodynamics  Matter energy cannot be created or destroyed We cannot create something from nothing, nor nothing from something We cannot create something from nothing, nor nothing from something All economic production requires natural capital All economic production requires natural capital Continuous physical growth of the economy is impossible Continuous physical growth of the economy is impossible

Second law of thermodynamics Second law of thermodynamics  Entropy never decreases in an isolated system Things fall apart, wear out, become waste Things fall apart, wear out, become waste Irreversible, evolutionary, qualitative change Irreversible, evolutionary, qualitative change No work, no production without low entropy energy No work, no production without low entropy energy Finite stock of accumulated low entropy Finite stock of accumulated low entropy Finite rate of flow of solar energy Finite rate of flow of solar energy The ultimate limit to the physical size of the economic system is the low entropy provided by solar energy The ultimate limit to the physical size of the economic system is the low entropy provided by solar energy

Production Requires Throughput Production Requires Throughput  Laws of Thermodynamics: What goes in must come out  Raw materials and waste  Left out in the abstraction process in neoclassical economics  Throughput = Cost

Ecosystem goods  Low entropy matter-energy  Finite  Examples Timber Timber Fish Fish Fossil fuels Fossil fuels Minerals Minerals Water Water  Mostly market goods

Ecosystem goods  Raw materials = ecosystem structure  Materially transformed into what it produces  Used up, not worn out: use = depletion  We choose how fast to use them  Competition in consumption

Ecosystem services  Examples Poorly understood life support functions Poorly understood life support functions Nutrient cycling Nutrient cycling Water regulation Water regulation Climate regulation Climate regulation Erosion control Erosion control Recreation, etc., etc. Recreation, etc., etc.  Mostly non-priced Scarcity  price increase  innovation Scarcity  price increase  innovation

Ecosystem services  Structure generates function= ecosystem services  Not transformed into what it produces  Solar powered  Cannot choose how fast to use them  Most not depleted through use: Cooperative in consumption  Highly complex: Characterized by uncertainty and ignorance

So What?  Economic production depletes ecosystem structure, and generates waste  Depletion of ecosystem structure and waste emissions both deplete ecosystem services  Both ecosystem goods and services are essential  Economic growth has an enormous opportunity cost, measured in the depletion of ecosystem services

Human made capital has grown more abundant, and natural capital more scarce

Primacy of Scale  Sustainable growth is an oxymoron  BUT welfare is a psychic flux, not a physical flux.  Economic development is possible, but not continuous economic growth

Market relevant characteristics of scarce resources

Excludability  Excludable resource regime One person can prevent another from using the resource One person can prevent another from using the resource Necessary for markets to exist Necessary for markets to exist  Non-excludable No enforceable property rights No enforceable property rights Can’t charge for use Can’t charge for use  Some resources non-excludable by nature. None are inherently excludable.

Rivalness  Rival resources My use leaves less for you to use My use leaves less for you to use  Non-rival (or non-subtractable) My use does not leave less for you to use My use does not leave less for you to use Rationing through prices reduces benefits without reducing costs: INEFFICIENT Rationing through prices reduces benefits without reducing costs: INEFFICIENT  Innate characteristic of the resource, not a result of institutions

Allocation

How do we allocate? Rival: competition Non-rival: cooperation Excludable: Markets possible Non-Excludable: No market possible Market Good: Ecosystem structure, Waste absorption capacity (e.g. CO 2 ) Tragedy of the non- commons: patented information Pure Public Good: Most ecosystem services unpatented information Open Access Regime “tragedy of the commons”: Unowned ecosystem structure, waste absorption capacity (e.g. SO 2 )

Ecologically sustainable and desirable scale  Macro-allocation: How much ecosystem structure needed to provide life support functions, how much available for economic production?  When-to-stop rule

Ecologically sustainable and desirable scale  Scale must be price determining, not price determined  Democratic decision-making, informed by scientific expertise and precautionary principle  Democracy, not plutocracy

Socially just distribution  Guiding principles Value created by nature or society is part of commonwealth (economic profit, rent) Value created by nature or society is part of commonwealth (economic profit, rent) Value added by sweat of brow belongs to individual (normal profit) Value added by sweat of brow belongs to individual (normal profit)  End enclosure of the commons

Economically efficient micro-allocation  Depends entirely on specific resource  Non-excludable resources must be cooperatively provided, unpriced  Non-rival resources should be cooperatively provided, unpriced Owned and provided by the polis Owned and provided by the polis Democracy, not plutocracy Democracy, not plutocracy

Economically efficient micro-allocation  Should be based on ethics and science, not ideology  Capitalism: all markets all the time Plutocratic decision rule Plutocratic decision rule  Socialism: all government ownership, all the time Democratic decision rule (in a democracy) Democratic decision rule (in a democracy)

Can We Cooperate?

How do people behave?  Homo economicus Self interest Self interest Always wants moreAlways wants more Purely competitivePurely competitive “homogenous globules of desire”“homogenous globules of desire” Rational actor Rational actor What is rational?What is rational? Are people purely rational, or also emotional and spiritual?Are people purely rational, or also emotional and spiritual?

How do people behave?  Or are we cooperative, social animals, concerned about the future that differ across cultures? e.g. H. comunicus, concern for fairness and community preferences e.g. H. comunicus, concern for fairness and community preferences H. naturalis, concern for sustainability and whole system preferences H. naturalis, concern for sustainability and whole system preferences  Brain Chemicals: Dopamine and Oxytocin

Is Sustainability a Sacrifice? Is Sustainability a Sacrifice?

What Makes People Happy?  Money? (Not very, and only relative wealth once basic needs are met) (Not very, and only relative wealth once basic needs are met)  Desiring less  Friends  Marriage  Religion/community  Helping others

What makes people unhappy?  Pursuit of material gain “young adults who focus on money, image and fame tend to be more depressed, have less enthusiasm for life and suffer more physical symptoms such as headaches and sore throats than others.”  Comparing yourself with others Status is a never-ending tread-mill Status is a never-ending tread-mill

Conclusions  Efficiency is allocation of resources in a way that maximizes quality of life for this and future generations  Economic growth has high opportunity costs, low marginal benefits  Things that make us happy are most compatible with sustainability