Ecological economics

Although ecology and economics share the common root "eco-" (from Greek Oikos or household), these disciplines have tended to be at odds with each other in recent years over issues such as the feasibility of continued economic growth and the value of natural resources and environmental services.

Economics deals with resource allocation or trade-offs between competing wants and needs. Economists ask, "what shall we produce, for whom, or for what purpose?" Furthermore, they ask, "when and in what manner should we produce these goods and services?" In mainstream, neoclassical economics, these questions are usually limited to human concerns: what will it cost to obtain the things we desire and what benefits will we derive from them?

According to classical economists, the costs of goods and services are determined by the interaction of supply and demand in the marketplace. If the supply of a particular commodity or service is high but the demand is low, the price will be low. If the commodity is scarce but everyone wants it, the price will be high. But high prices also encourage invention of new technology and substitutes that can satisfy the same demands. The cyclic relationship of scarce resources and development of new technology or new materials, in this view, allows for unlimited growth. And continued economic growth is seen as the best, perhaps the only, solution to poverty and environmental degradation .

Ecologists, however, view the world differently than economists. From their studies of the interactions between organisms and their environment , ecologists see our world as a dynamic, but finite system that can support only a limited number of humans with their demands for goods and services. Many ecological processes and the nonrenewable natural resources on which our economy is based have no readily available substitutes. Further, much of the natural world is being degraded or depleted at unsustainable rates. Ecologists criticize the narrow focus of conventional economics and its faith in unceasing growth, market valuation, and endless substitutability. Ecologists warn that unless we change our patterns of production and consumption to ways that protect natural resources and ecological systems, we will soon be in deep trouble.

Ecological economics

Ecological or environmental economics is a relatively new field that introduces ecological understanding into our economic discourse. It takes a transdisciplinary, holistic, contextual, value-sensitive approach to economic planning and resource allocation. This view recognizes our dependence on the natural world and the irreplaceable life-support services it renders. Rather than express values solely in market prices, ecological economics pays attention to intangible values, nonmarketed resources, and the needs and rights of future generations and other species . Issues of equitable distribution of access to resources and the goods and services they provide need to be solved, in this perspective, by means other than incessant growth.

Where neoclassical economics sees our environment as simply a supply of materials, services, and waste sinks, ecological economics regards human activities as embedded in a global system that places limits on what we can and cannot do. Uncertainty and dynamic change are inherent characteristics of this complex natural system. Damage caused by human activities may trigger sudden and irreversible changes. The precautionary principle suggests that we should leave a margin for error in our use of resources and plan for adaptive management policies.

Natural capital

Conventional economists see wealth generated by human capital (human knowledge, experience, and enterprise) working with manufactured capital (buildings, machines, and infrastructure) to transform raw materials into useful goods and services. In this view, economic growth and efficiency are best accomplished, by increasing the throughput of raw materials extracted from nature . Until they are transformed by human activities, natural resources are regarded as having little value. In contrast, ecological economists see natural resources as a form of capital equally important with human-made capital. In addition to raw materials such as minerals, fuels, fresh water, food, and fibers, nature provides valuable services on which we depend. Natural systems assimilate our wastes and regulate the earth's energy balance, global climate , material recycling , the chemical composition of the atmosphere and oceans, and the maintenance of biodiversity . Nature also provides aesthetic, spiritual, cultural, scientific and educational opportunities that are rarely given a monetary value but are, nevertheless, of great significance to many of us.

Ecological economists argue that the value of natural capital should be taken into account rather than treated as a set of unimportant externalities. Our goal, in this view, should be to increase our efficiency in natural resource use and to reduce its throughput. Harvest rates for renewable resources (those like organisms that regrow or those like fresh water that are replenished by natural processes) should not exceed regeneration rates. Waste emissions should not exceed the ability of nature to assimilate or recycle those wastes. Nonrenewable resources (such as minerals) may be exploited by humans, but only at rates equal to the creation of renewable substitutes.

Accounting for natural capital

Where neoclassical economics seeks to maximize present value of resources, ecological economics calls for recognition of the real value of those resources in calculating economic progress. A market economist, for example, once argued that the most rational management policy for whales was to harvest all the remaining ones immediately and to invest the proceeds in some profitable business. Whales reproduce too slowly, he claimed, and are too dispersed to make much money in the long run by allowing them to remain wild. Ecologists reject this limited view of whales as only economic units of production. They see many other values in these wild, beautiful, sentient creatures. Furthermore whales may play important roles in marine ecology that we don't yet fully understand.

Ecologists are similarly critical of Gross National Product (GNP) as a measure of national progress or wellbeing. GNP measures only the monetary value of goods and services produced in a national economy. It doesn't attempt to distinguish between economic activities that are beneficial or harmful. People who develop cancer from smoking, for instance, contribute to the GNP by running up large hospital bills. The pain and suffering they experience doesn't appear on the balance sheets. When calculating GNP in conventional economics, a subtraction is made, for capital depreciation in the form of wear and tear on machines, vehicles, and buildings used in production, but no account is made for natural resources used up or ecosystems damaged by that same economic activity.

Robert Repeto of the World Resources Institute estimates that soil erosion in Indonesia reduces the value of crop production about 40% per year. If natural capital were taken into account, total Indonesian GNP would be reduced by at least 20% annually. Similarly, Costa Rica experienced impressive increases in timber, beef, and banana production between 1970 and 1990. But decreased natural capital during this period represented by soil erosion, forest destruction, biodiversity losses, and accelerated water runoff add up to at least $4 billion, or about 25%, of annual GNP. Ecological economists call for a new System of National Accounts that recognizes the contribution of natural capital to economic activity.

Valuation of natural capital

Ecological economics requires new tools and new approaches to represent nature in GNP. Some categories in which natural capital might fit include:

• use values: the price we pay to use or consume a resource
• option value: preserving options for the future
• existence value: those things we like to know still exist even though we may never use or even see them
• aesthetic value: things we appreciate for their beauty
• cultural value: things important for cultural identity
• scientific and educational value: information or experience-rich aspects of nature.

How can we measure this value of natural resources and ecological services not represented in market systems? Ecological economists often have to resort to "shadow pricing" or other indirect valuation methods for natural resources. For instance, what is the worth of a day of canoeing on a wild river ? We might measure opportunity costs such as how much we pay to get to the river or to rent a canoe. The direct out-of-pocket costs might represent only a small portion, however, of what it is really worth to participants. Another approach is contingent valuation in which potential resource users are asked, "how much would you be willing to pay for this experience?" or "what price would you be willing to accept to sell your access or forego this opportunity?" These approaches are controversial because people may report what they think they ought to pay rather than what they would really pay for these activities.

Carrying capacity and sustainable ddevelopment

Carrying capacity is the maximum number of organisms of a particular species that a given area can sustainably support. Where neoclassical economists believe that technology can overcome any obstacle and that human ingenuity frees us from any constraints on population or economic growth, ecological economists argue that nature places limits on us just as it does on any other species.

One of the ultimate limits we face is energy. Because of the limits of the second law of thermodynamics, whenever work is done, some energy is converted to a lower quality, less useful form and ultimately is emitted as waste heat. This means that we require a constant input of external energy. Many fossil fuel supplies are nearing exhaustion, and continued use of these sources by current technology carries untenable environmental costs. Vast amounts of solar energy reach the earth, and this solar energy already drives the generation of all renewable resources and ecological services. By some calculations, humans now control or directly consume about 40% of all the solar energy reaching the earth. How much more can we monopolize for our own purposes without seriously jeopardizing the integrity of natural systems for which there is no substitute? And even if we had an infinite supply of clean, renewable energy , how much heat can we get rid of without harming our environment?

Ecological economics urges us to restrain growth of both human populations and the production of goods and services in order to conserve natural resources and to protect remaining natural areas and biodiversity. This does not necessarily mean that the billion people in the world who live in absolute poverty and cannot, on their own, meet the basic needs for food, shelter, clothing, education, and medical care are condemned to remain in that state. Ecological economics calls for more efficient use of resources and more equitable distribution of the benefits among those now living as well as between current generations and future ones.

A mechanism for attaining this goal is sustainable development , that is, a real improvement in the overall welfare of all people on a long-term basis. In the words of the World Commission on Economy and Development, sustainable development means "meeting the needs of the present without compromising the ability of future generations to meet their own needs." This requires increased reliance on renewable resources in harmony with ecological systems in ways that do not deplete or degrade natural capital. It doesn't necessarily mean that all growth must cease. There are many human attributes such as knowledge, kindness, compassion, cooperation, and creativity that can expand infinitely without damaging our environment. While ecological economics offers a sensible framework for approaches to resource use that can be in harmony with ecological systems over the long term, it remains to be seen whether we will be wise enough to adopt this framework before it is too late.

[William P. Cunningham Ph.D. ]

RESOURCES

BOOKS

Jansson, A.M., et al., eds. Investing in Natural Capital: the Ecological Economics Approach to Sustainability. Washington, D.C.: Island Press, 1994.

Krishnan, R., J.M. Harris, and N.R. Goodwin, eds. A Survey of Ecological Economics. Washington, D.C.: Island Press, 1995.

Prugh, T. Natural Capital and Human Economic Survival. Solomons, MD: International Society for Ecological Economics, 1995.

Turner, R.K., D. Pearce, and I. Bateman. Environmental Economics: an Elementary Introduction. Baltimore: The Johns Hopkins University Press, 1993.