Economics for Sustainability

1
Economics for Sustainability

• Professor Wayne Hayes
• November 7, 2011
• V. 0.4 Build 8

2
The goals of this session are

1. Explain the basics of economics to sustainers.
2. Lay out an approach for harmonizing economics and
   sustainability.

3
Table of Contents

1. Introduction
2. Context the Anthropocene
3. The economy
4. Brands of economics
5. Ecological economics
6. Eco-Economics

4
The growth of the economy undermines
sustainability

• depletes resources
• exceeds global and bioregional carrying capacity
• destroys ecosystems
• overwhelms natural waste disposal sinks
• alters the climate
• wages war on subsistence cultures
• produces shocking maldistribution of wealth and
  income.

5
How can the economy be turned around to
reinforce sustainability?

• This alchemy must be resolved to promote
  sustainability. Economics and sustainability must
  be harmonized.
• Resolving the antagonism between economics and
  sustainability is basic to the enabling analysis.

6
Not everyone is happywith the economy.
7
Are we in the Anthropocene?
8
Examine indicators of the Anthropocene
9
See the original report for indicators

• See especially table 1 and figure 2, page 617 of
  the original article on the Anthropocene.

10
What are the implications?
Shanghai, 2007
11
We need to examine the economy,the engine of the
Anthropocene.
12
How is economics defined?

• This standard definition of economics comes from
  the authoritative International Encyclopedia of
  the Social Sciences "Economics . . . is the
  study of the allocation of scarce resources among
  unlimited and competing uses" (Vol. 4 472). I
  unpack the definition in my web site for
  the Economics of Sustainability.

13
The economy is market-driven and growth-compelled.

• The national economy is measured as the monetized
  market value of all the goods and services
  produced in the nation in a calendar year.
• For more detail and definition, go to my web page
  defining economics.

14
Resolution Situate the economy within society
and ecology.
15
Resolve the antagonism betweenecology and
economy.

• Economy and ecology share the same Greek root,
  Oikos, meaning the inhabited house or
  dwelling.

16
Economy Oikos Nomos.

• The term economy derives from the Greek
  oikonomia, household management, based on oikos,
  "house," and nemein, "manage."

17
Ecology Oikos Logos.

• Now consider the related term, ecology, which
  is defined as "the branch of biology concerned
  with the relations of organisms to one another
  and to their physical surroundings."
• Ecology also derives from the ancient Greek term
  oikos, but instead of management, focuses on
  logos, "reason" (Oxford English Dictionary).

18
Which should come first,ecology or economy?

• Now, economy trumps ecology.
• But should we not understand our home, the Earth,
  before we muster the audacity to try to manage it?

19
Consider ends and means.

• Like humanity, should ecology (nature) be
  considered as an end in itself?
• Doesnt economy refer to the efficient, if not
  always wise, allocation of means to fulfill ends?

20
Therefore, shouldnt ecology precede economy?

• Consider this The inversion of economy and
  ecology should be the first strategic move to
  harmonize ecology, economy, and society.

21
Harmonize economicswithin ecology.
22
Sachs provides an exampleof embedding economics.

• Fairness in a Fragile World by Wolfgang Sachs
  exemplifies several principles
• How to invert and to embed the economy within
  nature and culture.
• How sustainable development can occur within
  non-OECD nations.
• How to equitably harmonize technology, ecology,
  and society.

23
What brand of economicssupports sustainability?

• We will consider three schools of thought
• Neo-classical economics, including contemporary
  neoliberalism
• Ecological economics
• Eco-economics.

24
Neo-classical economics includesmicro- and
macroeconomics.

• Neoclassical economics builds on the classical
  tradition that began with Adam Smith.
• Microeconomics examines the basic economic units,
  firms and consumers.
• Macroeconomics examines the aggregate economy as
  a unit of analysis.

25
Microeconomics examines the market behavior of
the firm and the consumer.

• Microeconomics extends Adam Smith, assuming
  perfect competition among small firms and
  independent consumers. Price theory and market
  analysis defies the reality of mammoth
  transnational corporations as the principal agent
  of economic globalization.

26
Supply and demand within markets are basic to
microeconomics.
27
Macroeconomics attempts to explain aggregate
economic categories

• Growth
• Consumption
• Unemployment
• Savings and investment
• Inflation
• Money and finance, including public finance
• The rates of interest
• The composition and level of imports and exports.

28
The macroeconomy is linked by complex feedbacks.
29
Since September 2008, macroeconomics has been
problematic.
30
Economic growth is the engineof macroeconomics.

• In the world of macroeconomics, more is always
  better. No consideration is given to what is
  produced, so long as it enhances the total flow
  of goods and services. Prisons, bloated health
  care costs, responses to toxic spills, the repair
  of the damage caused by climate change all are
  "goods" that add to economic output--not "bads"
  which should be prevented.

31
Some, like Vandana Shiva, disagree

• Instead of living up to its promise to alleviate
  poverty, economic growth actually undermined
  ecological stability, thereby destroying people's
  livelihoods and causing further poverty.
  Moreover, development strategies have been based
  on the growth of the market economy, even when
  large numbers of people operate outside of this
  network. The emphasis on the market economy has
  resulted in the destruction of the other
  economies of nature's processes and of people's
  survival, but this destruction is seen as nothing
  more than the 'hidden negative externalities' of
  the development process. (87)
• Shiva, Vandana. "Recovering the Real Meaning of
  Sustainability." Ed. Rajaram Krishnan, Jonathon
  M. Harris, and Neva R. Goodwin. A Survey of
  Ecological Economics. Washington, DC Island
  Press, 1995. 86-88.

32
Neoclassical economics spawns economic
globalization.

• The neoclassical brand projects economic
  globalization and the doctrine of neoliberalism
  to the world economy.
• See my web-based presentation on economic
  globalization.

33
Neoliberalism cannot be reconciled with
sustainability.

• There exists no middle ground. The principles
  underlying each and the dynamics they drive are
  thoroughly incompatible. If neoliberalism
  triumphs, sustainability cannot be achieved, with
  drastic implications for future generations of
  humans and for the hospitality of the Earth for
  life. The stakes are high and the prospects grim.

34
Ecological economics tells a different story.
35
The founder of ecological economics is Herman
Daly.
36
Ecological economics recasts economics.

• Daly, still grounded in economics, expands the
  boundaries. The economy has three essential
  functions
• Allocation efficiency of resource use
• Distribution fairness
• Scale appropriate size. The impulse is to get
  bigger, to grow in scale.

37
Ecological economics supports markets for
efficient allocation.

• Ecological economists are still practicing and
  trained as economists. They generally support
  markets as efficient allocators of scarce
  resources among competing ends.
• There are two exceptions externalities and
  subsidies.

38
What is an externality and why does it matter?

• An externality is a consequence, positive or
  negative, of an economic activity that affects
  other parties without this affect being
  incorporated into market prices. Thus, market
  price deviates from the "true" social cost,
  sending the wrong signal.

39
Microeconomics ignoresthird-party effects,
calledexternalities.

• Instead of recognizing such market distortions as
  externalities, neoclassical economists claim to
  catch sight of Adam Smith's "Invisible Hand" of
  the unfettered market. Neoclassical economics is
  not only blind to environmental degradation and
  social disintegration but is enthralled in a
  mystical séance of market perfection, a
  reification exceeded only by neo-liberalism.

40
Herman Daly comments on the trivialization of
externalities by neoclassical economics

• When increasingly vital facts, including the
  very capacity of the earth to support life, have
  to be treated as externalities, then it is past
  time to change the basic framework of our
  thinking so that we can treat these critical
  issues internally and centrally. (45)
• Daly, Herman E. Beyond Growth The Economics Of
  Sustainable Development. Boston Beacon Press,
  1996.
•  

41
There are limits toecological economics.

• The transition from neoclassical economics to
  ecological economics is essential, but is not
  sufficient. Too much is left out of the story
• Ecological economics must incorporate a theory of
  political economics.

42
There are limits to the idea of externalities.

• Identifying externalities as a market failure is
  important but
• The political economic system, i.e. capitalism,
  staunchly resists internalizing externalities.
• Beyond externalities is the essential issue of
  perverse subsidies and implicit industrial policy.

43
Are externalities built into thebusiness plan of
corporations?

• The modern firm transcends Adam Smiths village
  shops and now includes immense and diversified
  global corporations. Their quest to maximize
  shareholder returns includes dumping costs onto
  others. The political muscle of such corporations
  protects external costs from being internalized
  and seeks government subsidies and bail outs.
  (See Annie Leonards The Story of Stuff for
  details.)

44
Perverse subsidies form a hidden industrial
policy
45
Myers and Kent estimate subsidies at 5.6 of
total global economy.

• The 2001 study found total subsidies to be about
  two billion dollars, or 5.6 of the prevailing
  world economy. (Myers, Norman, and Jennifer Kent.
  Perverse Subsidies How Tax Dollars Can Undercut
  the Environment and the Economy. Washington, DC
  Island Press, 2001.)
• Myers and Kent are scientists, not economists.
• Note that economists have not, to my knowledge,
  attempted to estimate the total costs of
  externalities or subsidies.

46
Distribution is ethical and political, not
economics per se.

• The socially acceptable distribution of the goods
  and the bads produced by the economy is
  ultimately political and ethical. Left to itself,
  a market society (capitalism) will produce large
  maldistributions in wealth and income.

47
The market distributes according to economic
class.

• In practice, the market-driven returns to
  capital, as profits and capital gains, accrue to
  the wealthy few, the capitalist class, while the
  returns to labor, wages and salaries, go to a
  multitude, the working class. This dynamic
  produces a class-based inequality of both wealth
  and income, which translates into differential
  political power.

48
In practice, distribution is done through
politics as well as economics.

• In economic theory, distribution is considered as
  an efficient return to factors of production
  (land, labor, capital).
• But distribution is influenced by tax policy and
  government expenditures.

49
The distribution of income in the USA is now a
matter of concern.
50
Macroeconomics fosters growth bigger is always
better.

• The appropriate size of the material economy is
  relative to nature's carrying capacity. This
  aspect of macroeconomics has been altogether
  disregarded by the dominant neoclassical school
  of economic thought. In sharp contrast,
  ecological economists such as Herman Daly have
  emphasized that scale is central to
  sustainability.

51
The distinction between development and growth is
essential.

• Herman Daly says this well
• Since physical growth is limited by physical
  laws, while qualitative development is not, or at
  least not in the same way, it is imperative to
  separate these two very different things. Failure
  to make this distinction is what has made
  sustainable development so hard to define. With
  the distinction, it is easy to define sustainable
  development as development without
  growth--without growth in throughput beyond
  environmental regenerative and absorptive
  capacities. (69)
• Daly, Herman E. Beyond Growth The Economics Of
  Sustainable Development. Boston Beacon Press,
  1996.

52
What is the appropriate scaleof the economy?
53
An eco-economy must go beyond ecological economics

• Daly-driven ecological economics challenges
  neoclassical defects, especially
• Externalities as a market failure
• The distinction between sustainable development
  and physical growth
• The inherent differences in distribution of goods
  and bads.
• But ecological economics still emerges from
  economics, but an eco-economy broadens the scope
  even further and includes others.

54
An ontological shift from ideal theory to
grounded substance is needed.
The School of Athens by Raphael
55
Look around you Ecosystem services are
everywhere.
56
Ecosystem services and natural capital contribute
to human well-being

• But natural capital and ecosystem services are
  not included in economic calculations such as GDP.

57
Natural capital extends the core idea of capital
as a producer of value.
58
Eco-economics emerges outside the domain of
formal economics.

• Seeks a holistic and pluralistic outlook.
• Supports a symbiosis with nature and facilitates
  a restoration of ecosystems.
• Respects the diversity of human culture.
• Expands the time horizon to a long-term,
  generational perspective
• Practices critical thinking.
• Encourages the participation of other folks
  besides professional economists.

59
Some help comes from economic historians.

• Key insight comes from economic historians who
  grasp the larger dynamic and embed the economy in
  society and nature. We will examine the thought
  of
• Karl Polanyi
• Henri Braudel
• Gilbert Rist
• Joseph Schumpeter --- and his intersection with
  Karl Marx.

60
Eco-economics is basic to Sustainability

• Two examples of eco-economics are
• Lester Brown, Plan B 4.0
• Bill McKibben, Deep Economy

61
The 99 are a new form ofcivil society enablers.

• The Occupy Movement provides witness and speaks
  back to power.
• They have done so recently in Chicago in response
  to Governor Scott Walker of Wisconsin.

62
What do you think?