Green Economics

Confronting the Ecological Crisis

Robin Hahnel

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317469360
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

This book's pluralistic, non-dogmatic, and committed investigation of the values of ecological sustainability, economic justice, and human dignity provides balanced analysis of environmental problems and their potential solutions.

Part I

Toward a New Paradigm

Part I explores important components of a new environmental economic paradigm needed to broaden the intellectual framework beyond the simplistic problematic of allocating scarce natural resources to competing insatiable wants and disposing of the wastes of economic activity in the least costly way.

Chapter 1

Something Happened on the Way to the Twenty-First Century

Mainstream economic theory is based on a paradigm that dates back to the eighteenth century, and critics argue that is part of the problem. The world was a very different place when a Scottish moral philosopher wandered the grounds of the University of Glasgow in absent-minded reverie, thinking thoughts that would launch a new economic discipline that was called “political economy” before becoming simply “economics.” When Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, there were less than 800 million people roaming the earth, only the indigenous tribes and a handful of French Canadian trappers had any idea what lay between the Mississippi River and the Pacific coast of North America, and Captain James Cook, spurred on by a British Admiralty reward of 20,000 pounds, was searching in vain off the coast of Alaska for a Northwest Passage back to the Atlantic Ocean. With the exception of small parts of China, India, and Europe, the world was a mostly empty place when the discipline of economics was launched.

No wonder Adam Smith believed the value of goods and services was determined entirely by the amount of labor it took to produce them and never integrated the opportunity costs of using natural resources into his explanation of prices. No wonder it never dawned on Adam Smith that there might be effects on people other than buyers and sellers of producing and consuming the goods they bartered over in market exchanges. In a largely empty world, neither resource exhaustion nor effects on external parties were likely to be top concerns for creative minds trying to unravel the important economic conundrums of their day.

Full-World Economics: Limits to Growth

By the time this book is printed, roughly 7 billion people will be crowding into the same space occupied by only 800 million in Adam Smith’s day. The world is different today. It is now more full than empty, and one would think the underlying presumptions that make up the gestalt that informs our economic paradigm would reflect this difference. But as ecological economists point out, modern-day economics, to its detriment, remains largely an empty-world economics as our colleagues in the mainstream continue to operate under the influence of a paradigm pioneered well over 200 years ago (Costanza et al. 1997).

Mainstream economic theory managed to integrate the opportunity cost of using scarce resources into its theory of prices long ago. But ecological economists are right to point out that mainstream economics continues to largely ignore potentially problematic relations between human economic activity and the natural environment in the aggregate. Again, the history of economic thought can help us understand how this could have happened.

Only the Great Depression and incessant prodding by John Maynard Keynes forced the profession to acknowledge that traditional economic theory was not up to the task of dealing with important macroeconomic issues. When mainstream economics underwent its great makeover in the mid-twentieth century and economic theory was divided into two distinct branches, micro-economic theory and macroeconomic theory, the field of natural resource economics was assigned to the micro branch, where theories of optimal pricing and extraction rates for nonrenewable and renewable resources were further elaborated. Afterward, any concerns about potential macro problems between the economy and the natural environment in a world that was filling quickly were implicitly assigned to macroeconomists. But macroeconomists’ attention was long focused elsewhere.

Early macroeconomists, preoccupied with fallacies that Keynes exposed in traditional economic thinking that had nothing to do with environmental issues, quickly became very busy tackling the job of building new macro-economic models that no longer rested on a false premise known as Say’s Law. This was a compelling priority because otherwise economists would continue to be unable to provide sensible advice about appropriate fiscal and monetary policies to address macroeconomic problems such as unemployment and inflation. Unfortunately, none of this important work lent itself to creation of a macro environmental economics to compliment micro natural resource economics.

When macroeconomists finally turned their attention to long-run issues, they built on early work by Roy Harrod (1939) and Evsey Domar (1946) on the relation between saving rates, capital output ratios, and the rate of growth of output. They used an aggregate production function that defined output as a function of labor and produced capital with no reference to natural resources whatsoever, instead focusing on how to incorporate technical change into their analysis to help explain what was an embarrassingly large residual that the growth of labor supplies and capital stocks did not seem to account for (Solow 1956, 1957). As a result, even among macroeconomists whose primary concern was long-run economic growth, there was little interest in how natural resources might impose limits on the growth of output. Concerned with other problems and increasingly isolated from natural resource economists who worked on the micro side of the profession’s theoretical partition, mainstream macroeconomists continued to function with an empty-world paradigm.

Publication of a study titled Limits to Growth (Meadows et al.) commissioned by the influential Club of Rome think tank in 1972 marked a turning point in popular thinking, but not in thinking inside the mainstream of the economics profession. Robert Solow, for example, questioned the quality of some of the data the authors of the report used in a critical article published in Newsweek. And Allen Kneese and Ronald Ridker from Resources for the Future questioned what they called the report’s overly conservative assumptions about technological change. Chapters 3 and 5 review what has been an ongoing debate ever since between so-called technological pessimists and optimists about environmental limits to growth. But the point for now is that mainstream macroeconomic growth theory continued to ignore any constraints imposed by nonrenewable natural resources, as well as resources that were renewable but only at rates that were often lower than the rates at which the world’s economies were exploiting them.

Ecological economists also point out that an empty-world vision blinds mainstream economists to danger from wastes that the production of desirable goods and services generates as by-products. The harmful effects of particular pollutants on humans are now widely recognized by mainstream environmental economists, and this subject has been dutifully added to the study of natural resources in mainstream environmental economics curricula and textbooks. But ecological economists point to an additional problem caused by wastes based on their full-worldview. Just as a full-world paradigm sensitizes researchers to ways in which the natural environment is overtaxed as a source of resources as inputs into economic activities, it also draws attention to limits on the capacity of the biosphere to serve as a sink to absorb and store wastes that are outputs of economic activities in relatively harmless ways. In effect, the Club of Rome report suggested that humans were on a trajectory to die of starvation as they exhausted needed environmental resources. Thirty years later, many environmentalists began to worry that people might asphyxiate themselves first as they exhaust even faster the capacity of the biosphere to act as their sink.

Ecological economists introduced a very useful concept they call throughput to reorient thinking about how the natural environment limits growth as both a source of natural resources and as a sink for wastes. Throughput is defined as physical matter of one kind or another that enters the economic system and physical matter that exits the economic system as waste of some kind. As ecological economists point out, as long as the human species remains earthbound and since physical stocks of different categories of natural resources are finite, and the capacity of the biosphere and upper atmosphere to absorb physical wastes of different kinds is also finite, economic throughput cannot grow infinitely. Ecological economists turn this fact—which is undeniable in and of itself—into a relevant point by arguing that (1) much thinking about economic goals and strategies implicitly ignores this fact, and (2) the future of our present economic system seems to be predicated on the false assumption that throughput can grow infinitely.

Full-World Economics: Externalities Are the Rule, Not the Exception

There is a second important consequence of changing from an empty-world to a full-world mind-set that ecological economists do not emphasize sufficiently. Not only are people more likely to bump into the limits of the physical world when there are more of them, but also people are more likely to bump into each other when there are 7 billion of them than when there were only 800 million. Changing from an empty- to a full-world economic paradigm reverses an assumption that is crucial to every major conclusion and economic theorem about markets and market systems.

An externality is defined as an effect on any party other than the buyer or seller when a good or service is produced, exchanged, and consumed. In other words, whenever anyone who is “external” to the market decision-making process is affected by the decision a buyer and seller agree to, this is termed an external or third-party effect. An externality can occur either when a good or service is produced or when it is consumed, and an external effect can be either negative or positive.

According to Adam Smith’s theory of the “invisible hand” (Smith [1776] 1999), when self-interested behavior on the part of buyers and sellers in competitive markets drives the market toward its equilibrium price and quantity, this quantity will also be the socially efficient amount of the good or service to produce and consume. But as we will discover in Chapter 4, Adam Smith’s invisible hand works in a market only if there are no externalities. The first fundamental theorem of welfare economics states that any general equilibrium of a private enterprise, competitive market economy will be socially efficient. But this theorem is true only if there are no externalities. The second fundamental theorem of welfare economics states that any socially efficient outcome—of whatever degree of equality or inequality one might desire—can be achieved as the general equilibrium of a private enterprise market economy with the appropriate initial assignment of ownership rights over productive resources. But this theorem is true only if there are no externalities. In sum, the conclusion that markets can be relied on to allocate scarce productive resources and distribute consumption goods efficiently is warranted only if externalities are the exception and not the rule, which is where the difference between an empty- and full-world mind-set comes in.

In an empty world it is far more reasonable to presume—as a general operating principle, or default option—that externalities are the exception, not the rule. A careful reading of his work suggests that it never occurred to Adam Smith that there might sometimes be costs to society above and beyond the costs producers pay for. Operating with an eighteenth-century, empty-world mind-set, Smith assumed that the costs to private producers covered all the costs anyone in society bore when goods were produced.¹ The notion that this assumption might not always be warranted, that there might sometimes be negative effects associated with production on third parties, parties external to the market decision-making process, and therefore that the cost to society as a whole of making a good might sometimes differ from the cost borne by the private producer did not occur to anyone in the economics profession until the twentieth century, when the world was much fuller and A.C. Pigou first defined the concept of an externality (Pigou [1912] 2009). But even after Pigou succeeded Alfred Marshall at Cambridge University in 1908 and served as the primary lecturer on welfare economics for thirty-five years, externalities, and corrective measures economists still call Pigovian taxes and subsidies in his honor, remained a minor, technical footnote in the profession’s thinking about the market system. Externalities were not taken seriously until popular concern over pollution—which economic theory defines as a negative externality—led to the rise of the modern environmental movement in the 1970s, when the world was much fuller. Yet mainstream microeconomic theory continues to operate under the implicit assumption that external effects are insignificant in all but a few markets, despite compelling reasons to believe otherwise that we explore in Chapter 4.

Ecosystem Complexity

The bottom line is that the biological world turns out to be more of a mystery than many people once assumed. This comes as something of a surprise because the rate of growth of knowledge in the biological sciences has been astounding over the past few decades. Just as there was an age when scientific discoveries were most notable in physics, there have probably been more pathbreaking discoveries in biology recently than in any other scientific field. But while discoveries have deepened our understanding of how individual organisms and parts of organisms work, and arguably made the effects of interventions on individual organisms and microorganisms more predictable, new knowledge concerning how biological systems function suggests that predicting the effects of interventions on system trajectory is more difficult than previously believed.

We are now smart enough to know that eliminating one species in an ecosystem may well unleash a chain of effects reaching many other species that appeared to be far removed. But this new knowledge often makes us less, not more, certain of what to predict. Even when biologists successfully unravel one long causal chain with many surprising links, it only heightens awareness of how many other long causal chains must also be out there about which we remain clueless. We are now smart enough to know that ecosystems can have tipping points where the effects of applying pressure of one kind or another suddenly change dramatically. But knowing tipping points exist without knowing how to pinpoint where they are only makes us feel less certain about our ability to predict outcomes. We are now smart enough to know that even if an ecological system were deterministic with no random elements, if it is a chaotic, complex dynamic system, outcomes can be surprisingly sensitive to small variations in initial conditions, making long-run predictions impossible.² And of course random elements are numerous and greatly magnify our ability to predict outcomes. Again, knowing more only makes us less certain about predicting the effects of human interactions on ecosystems. In sum, in the field of biological systems much new knowledge has been humbling for any w...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgments
• Introduction
• Part I. Toward a New Paradigm
• Part II. Why the Environment Is at Risk
• Part III. Environmental Policy
• Part IV. Climate Change
• Appendix to Part IV: Exercise on Climate Control Treaties
• Conclusion
• References
• Index
• About the Author