ECOLOGICAL ECONOMICS

Economics is frequently defined as the science of the allocation of scarce resources among alternative desirable ends. The first question this implies—What are the desired ends?—is ultimately a question of values and ethics. Most economists would agree that while the ultimate desired end is too difficult to define, increasing social welfare serves as a reasonable placeholder. Seeking to establish itself as an objective, value-free science, mainstream (neoclassical) economics strives to maximize welfare as measured by the dollar value of market goods plus the imputed dollar value of nonmarket goods and services produced. Therefore neoclassical economists, including natural resource and environmental economists, devote most of their attention to markets, which under certain strict conditions efficiently allocate resources toward uses that maximize dollar values. Taking an explicitly ethical position, ecological economics asserts that ecological sustainability and just distribution take priority over efficient allocation as prerequisites to increasing social welfare. Markets cannot be relied upon unless these first two priorities have been met.

Once the desired ends have been determined, ecological economists rely on insights from physics and ecology to assess the nature of the scarce resources. Only then do they seek appropriate allocative mechanisms, drawing from mainstream economics as well as other social sciences. Ecological economics embraces the full complexity of the economic question, and the full range of inquiry necessary to answer it. It lays no claim to being a value-free science, but rather works to be a transdisciplinary field, integrating knowledge and skills from both the humanities and sciences. (Costanza, Daly, and Bartholomew 1991; Norgaard 1989).

As an emerging transdiscipline, ecological economics has an exceptionally broad scope of inquiry, and has not yet achieved the level of consensus that characterizes an established science. This overview leaves out much brilliant work, and not all ecological economists will agree with all it says.

The Resources of Nature and the Nature of Resources

An understanding of scarce resources begins with hard science and the laws of thermodynamics. The first law states that the quantity of matter-energy cannot be created or destroyed and remains constant in a closed system. Everything produced by humans (human-made capital) must come from raw materials supplied by nature (natural capital). Any waste produced by the economy must return to the ecosystem. In contrast, most standard microeconomics textbooks argue that through specialization and trade, society can "increase production with no change in resources" (Parkin 2003, p. 42).

The second law of thermodynamics states that entropy never decreases in an isolated system. From the perspective of economics, entropy can be thought of as a measure of used-up-ness, or the extent to which the capacity of matter-energy to perform work or be useful has been exhausted. When oil is burned to run an engine or heat a house, the energy it contains is not destroyed in performing this work, but it cannot be used again for the same purpose. When the steel in cars rusts and flakes off, it does not disappear but is scattered about the ecosystem so randomly one cannot gather it back up. The quantity of matter-energy is constant in a system, but the quality is constantly deteriorating. These laws suggest that human-made capital will inevitably be used up or worn out and return to the ecosystem as high entropy waste. A constant flow of low entropy natural capital is required simply to maintain the economy.

Fortunately the Earth is not an isolated system, because the sun provides a daily source of low entropy energy. But it is this solar inflow that limits the physical size of the economy in the long run, not the nonrenewable stock of fossil fuels. While fossil fuels can be used up as quickly as one chooses, solar energy comes at a fixed rate. People can therefore use fossil fuels to achieve rapid physical growth of the economic system, but not to create a sustainable system (Georgescu-Roegen 1971).

Humans depend not only on raw materials provided by nature, but like all other species on the planet, are sustained by the solar-powered life support functions of healthy ecosystems. All of human technology simply cannot provide the climate stability, waste absorption capacity, water regulation, and other essentials that more than 6 billion people require to survive. In other words, natural capital has two components. Ecosystem goods are the raw materials provided by nature, as well as the structural components of the ecosystem. Ecosystem services are the valuable functions that emerge when those structural components interact in a complex ecosystem to create a whole greater than the sum of the parts. When humans remove low entropy raw materials from nature to build the economy and return high entropy waste, they must pay an opportunity cost measured in both ecosystem goods and services lost.

These laws of thermodynamics are responsible for the core vision of ecological economists: The human system is sustained and contained by the global ecosystem. When the physical size of the economic system increases, it does not expand into a void, but must instead consume and displace the natural capital on which humans depend for survival (Daly and Farley 2003).

Scale, Distribution, and Allocation

As a consequence of the ecological economists' core vision, their primary concern is with scale—the physical size of the human economy relative to the ecosystem that contains and sustains it. The scale of the economy cannot exceed the capacity of the ecosystem to sustain it. This priority emerges from an understanding of the laws of physics combined with an ethical responsibility to future generations.

Sustainable scale is necessary, but inadequate. Virtually all economists accept the law of diminishing marginal utility—the more one has of something, the less an additional unit is worth. As human-made capital increases, its marginal utility diminishes. A corollary is the law of increasing opportunity costs—as natural capital dwindles, the opportunity costs of continued losses increase. Increasing opportunity costs must eventually surpass diminishing marginal utility. At this point, an economic system has reached its optimal scale, and the physical growth of the economy should stop—though economic development, as measured by improvements in social welfare, can still continue.

Two hundred years ago when market economies were emerging, human-made capital was relatively scarce and natural capital abundant. Economists logically focused on allocating the former. In the early twenty-first century, however, it is natural capital that constrains economic development. If people need more fish or timber, the problem is depleted fish stocks and forests, not a shortage of boats or chainsaws. It is likely that humans have exhausted nearly half the planet's supply of conventional petroleum in less than 150 years (Campbell and Laherrère 1998), threatening to destabilize the global climate in the process. Yet natural capital does not increase in fecundity or quantity in response to an increase in price—the driving force behind markets.

However while natural capital does not respond to price signals, technology does: As a resource becomes scarce, its price goes up, and people can either use it more efficiently or create a substitute, leading many conventional economists to conclude that resource scarcity imposes no limits on economic growth. At one extreme, economists such as Julian Simon deny that natural resources are finite and argue that a growing human population brings more brainpower to solve society's problems (Simon 1996). Similar claims from statistician Bjørn Lomborg (2001), supposedly based on evaluation of empirical data, have received considerable publicity, but the quality of his scholarship raises serious concerns (Rennie 2002). For example, he accepts without question a doubling and even tripling of estimated oil reserves in several member states of the Organization of the Oil Exporting Countries (OPEC) that took place shortly before their quota negotiations in 1988, while rejecting as implausible four out of five scenarios for climate change from an intensively peer-reviewed report by leading scientists working with the International Protocol on Climate Change (Schneider 2002). Nonetheless more credible technological optimists such as Amory Lovins are actively creating pollution reducing, resource and energy efficient technologies such as the hydrogen powered hyper-car.

While not denying its importance, ecological economists are leery of undue faith in technological advance for both practical and ethical reasons. In practical terms few ecosystem services even have a price to signal market scarcity and thus induce technological innovation, and even imputed prices cannot capture the fact that most ecosystem services do not have clear substitutes (Gowdy 1997). While there is a greater capacity to develop substitutes for ecosystem goods than for services, efficiency improvements have physical limits, and continued economic growth must eventually lead to more resource use, more waste output, and diminishing marginal utility—a growing fleet of hyper-cars will still require more roads and parking lots and induce more traffic jams. The fact is that efficiency in resource use rarely stimulates frugality, but frugality quite often stimulates efficiency (Daly and Farley 2003). From the viewpoint of ethics, no one can say for certain what technologies will emerge and when, and the gamble is whether or not future technologies will create substitutes for critical resources before they are exhausted. Ecological economists weigh the gains from winning against the costs of losing. If the technological optimists are wrong, continued increases in the rate of resource use could lead to the irreversible loss of vital ecosystem life support functions. If the optimists are right, then limiting resource extraction and waste emissions will impose only short term costs to standards of living while technological innovation develops substitutes.

Thus ecological economists operate on the assumption that natural capital has become the scarcest resource required to achieve the desired ends, and recognize that markets fail to respond to this scarcity and cannot be relied on as a mechanism for determining desirable scale. Environmental economists in contrast believe markets can determine desirable scale if they calculate the dollar value of ecosystem services then feed this information back into the market system. However all economic production degrades ecosystem services through resource extraction and again through waste emissions. Two prices must be calculated for every price the market detects. This defeats the whole purpose of a market whose virtue is its reliance on decentralized information. Ecological economists believe scale should be determined by a participatory democratic process informed by appropriate experts and the ethical values of citizens. Stakes are high, decisions are urgent, and facts are uncertain. Society must act quickly, but should err on the side of caution and leave room to adapt as it learns more (Funtowicz and Ravetz 1992; Prugh, Costanza, and Daly 2000). The Endangered Species, Clean Air, and Clean Water acts in the United States and the Montreal Protocol on ozone depleting substances are only a few examples of this approach. In sum, while environmental economists in contrast strive to calculate prices first, and then allow scale to adjust, ecological economists strive to determine the desirable scale first, and then allow prices to adjust.

The second priority for ecological economists is just distribution, which emerges in part from their concern with scale. What ethical system would allow a concern for the welfare of people not yet born, and ignore the welfare of those alive and suffering today? If a finite planet imposes finite limits on the size of the economy, then society cannot grow its way out of poverty, and alleviating poverty requires redistribution. On practical grounds, no one living in poverty can really afford to think about the future—hungry people around the world will sacrifice essential natural capital for immediate needs. Unjust distribution is therefore incompatible with ecological sustainability.

How markets allocate resources depends on the initial distribution. For example, a society with highly unequal distribution will allocate resources toward both slums and yachts, while one with more equal distribution will allocate resources toward neither. A given market allocation is therefore no more desirable than the initial distribution that produced it. Nonetheless the tradition in neoclassical economics is to leave the distribution question to other disciplines or policymakers, while ecological economists consider just distribution a prerequisite to desirable allocation.

Distribution should also be decided by a participatory democratic process. Three principles can guide the decision. Wealth created by nature and society as a whole should be equally distributed. Those who degrade that wealth, through pollution or resource depletion, for example, should compensate society for its loss. Those who benefit from society should provide compensation in proportion to their gains.

The third priority for ecological economists is efficiency. Once society has ensured the preservation of enough natural capital to sustain the system, and that remaining resources are justly distributed, those resources should be allocated toward uses that generate as much welfare as possible. Markets can be an efficient allocative mechanism when resources are privately owned, use by one person precludes used by another, and production and consumption have minimal impacts on others. When these conditions do not hold, markets alone will fail to generate efficient outcomes, and society must again rely on participatory democratic decision making to allocate resources, complemented when appropriate by market mechanisms.

JOSHUA C. FARLEY

SEE ALSO Environmental Economics;Environmental Ethics;Sustainability and Sustainable Development.

BIBLIOGRAPHY

Campbell, Colin J., and Jean H. Laherrère. (1998). "The End of Cheap Oil." Scientific American March: 78–83. This article offers a solid, multi-tiered analysis predicting that oil production will peak within the next few years, leading to a dramatic increase in oil prices.

Costanza, Robert; Herman Daly; and Joy Bartholomew. (1991). "Goals, Agenda and Policy Recommendations for Ecological Economics." In Ecological Economics: The Science and Management of Sustainability, ed. Robert Costanza. New York: Columbia University Press. This chapter is an excellent brief introduction to the field of ecological economics.

Daly, Herman, and John J. Cobb, Jr. (1989). For the Common Good: Redirecting the Economy Toward Community, the Environment, and a Sustainable Future. Boston: Beacon Press. This award winning book remains one of the best and most complete introductions to ecological economics, and the first description of the index of sustainable economic welfare.

Daly, Herman H., and Joshua Farley. (2003). Ecological Economics: Principles and Applications. Washington, DC: Island Press. Textbook that provides a comprehensive and readable introduction to ecological economics, suitable for upper level undergraduates and graduate students.

Funtowicz, Silvio O., and Jerome R. Ravetz. (1992). "Three Types of Risk Assessment and the Emergence of Post-Normal Science." In Social Theories of Risk, ed. Sheldon Krimsky and Dominic Golding. Westport, CT: Praeger. This chapter describes a general approach for solving ecological economic problems when facts are uncertain, decisions are urgent, stakes are high and values matter.

Georgescu-Roegen, Nicolas N. (1971). The Entropy Law and the Economic Process. Cambridge, MA: Harvard University Press. A classic work in ecological economics; the first comprehensive analysis of the importance of the entropy law to economics.

Gowdy, John. 1997. "The Value of Biodiversity: Markets, Society, and Ecosystems." Land Economics 73: 25–41. Presents a fine analysis of different types of value and clarifies the limits to monetary valuation.

Heilbroner, Robert, and Lester Thurow. (1981). The Economic Problem. Englewood Cliffs, NJ: Prentice-Hall.

Lomborg, Bjørn. (2001). The Skeptical Environmentalist: Measuring the Real State of the World. New York: Cambridge University Press. An influential but poorly researched example of the cornucopian world view that natural resources and waste absorption capacity are limitless, and the laws of thermodynamics are essentially irrelevant to economics.

Norgaard, Robert. (1989). "The Case for Methodological Pluralism." Ecological Economics 1(1): 37–58. Explains why complex ecological economic problems demand a transdisciplinary approach.

Parkin, Michael. (2003). Microeconomics, 6th edition. Boston: Addison Wesley. A standard microeconomics textbook.

Prugh, Thomas T.; Robert R. Costanza; and Herman H. E. Daly. (2000). The Local Politics of Global Sustainability. Washington, DC: Island Press. This short, readable book describes participatory democratic processes, and presents them as an effective mechanism for the sustainable and just allocation of resources.

Rennie, John. (2002). "Misleading Math about the Earth: Science Defends Itself against The Skeptical Environmentalist." Scientific American 286(1): 61. A brief editorial that introduces a series of articles describing the factual and analytical errors in Lomborg's The Skeptical Environmentalist.

Schneider, Stephen. (2002). "Global Warming: Neglecting the Complexities." Scientific American 286(1): 60–63. One in the series of articles introduced by John Rennie (see above).

Simon, Julian Lincoln. (1996). The Ultimate Resource 2, revised edition. Princeton, NJ: Princeton University Press. One of the first, best written and most influential descriptions of the cornucopian world view (see annotation following The Skeptical Environmentalist).