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Central Concepts of Ecological Economics

 

The list below introduces some of the key concepts of ecological economics. Only about two decades old, ecological economics is a rapidly-evolving, pluralistic discipline. Your thoughts, critiques, and engagement are welcome.

Central concepts of ecological economics:

The concepts and definitions presented here are drawn from "An Introduction to Ecological Economics" by Robert Costanza, John Cumberland, Herman Daly, Robert Goodland and Richard Norgaard (St. Lucie Press, 1997); "Ecological Economics: Principles and Applications" by Herman Daly and Joshua Farley (Island Press, 2004) and "Nature's Services: Societal Dependence on Natural Ecosystems" edited by Gretchen C. Daily (Island Press, 1997).

 
Underlying assumption about the Earth and the economy

A central tenet of ecological economics is that the planet is the foundation of the economy. The economy does not exist in a vacuum in space but rather is part of, and dependent upon the Earth. The economy draws on the Earth as a source of natural materials and resource inputs, such as fossil fuels, minerals, and renewable resources. The economy also draws on the Earth as a sink for its wastes, such as carbon dioxide, toxic chemicals, chloro-flourocarbons, and other outputs.

In addition to these "source" and "sink" functions, the economy, like all human systems, depends on the intricate natural processes that support human life on Earth. Read more on ecological services. [link to ecological services definition]

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What markets do well

Think of the lunch you ate yesterday. Tens, if not hundreds, of individuals and companies helped to grow, produce, transport, package and prepare the ingredients of your lunch. Many of the individuals who helped to make your lunch do not know you, and do not know each other. Yet all of their actions were coordinated. Through market mechanisms, decentralized decisions by thousands of independent firms and households are communicated and coordinated. A market brings together buyers and sellers, balancing supply and demand - possibility and desirability - through the signal of prices. In essence, markets are important because they help organize economic activity and direct resources to where they are valued (as indicated by willingness and ability to pay).

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What markets don't do well

When a market "fails," it is inefficient. This means the market is no longer working well and there is no guarantee that the benefits of the transactions occurring in the market outweigh their costs. For example, if the production and sales of a product causes cancer on a wide scale, and those costs are not factored into the product's price, the product may be causing more costs than benefits.

A number of factors cause markets to fail. Markets fail when significant costs or benefits to a third party are not reflected in the product price (externality), when the costs of bringing buyers and sellers together are high (high transaction costs), when a single firm controls sales (monopoly) or purchases (monosony), when buyers or sellers lack important information about a product, and when allocating natural capital, which lacks the characteristics required for efficient market allocation. In addition, because future generations cannot participate in today's markets, the market cannot efficiently allocate resources across future generations. When a market fails, non-market institutions are required to restore its functioning.

Also, in the best of circumstances, well-functioning markets are not designed to address certain societal ends such as sustainability and justice (see the following sections).

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Sustainability ("scale")

As the size of the economic subsystem has expanded relative to the size of the sustaining global ecosystem, science has discovered that the "source" and "sink" functions of the global ecosystem are increasingly stressed. Humans are displacing a large percentage of the total biomass available on the planet and have over-fished to such an extent that most global fisheries are now in a state of decline or collapse. Our wastes are raising the temperature of the globe, eroding the ozone shield, and contaminating our bodies with toxic chemicals.

In the transition from an "empty" to a "full" world, humanity is discovering that the economy does not expand into a vacuum but instead expands at the expense of ecological services crucial to human well-being. As a result, ecological economists point to the importance of sustainability or "scale." This involves looking at the scale of human economic activity relative to the capacity of the global ecosystem to support it. In light of scale concerns, a key goal of ecological economics is to maximize human welfare while stabilizing or reducing the amount of physical matter and energy (called "throughput") moving through the economy from useful resources to wastes.

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Justice ("distribution")

Distribution refers to how economic and ecological goods and services are distributed among people. Distribution issues extend into areas where markets do not function well. How are resources distributed between nations, within nations, between races and genders? What portion of the Earth's wild ecosystems are devoted to human use, and what portion is left for other species? How are resources divided between present and future generations?

John Rawls, the author of "A Theory of Justice," has outlined a thought experiment useful in thinking about whether the economic system is just. Imagine that all members of the current generation and the next ten generations were in a pre-born situation in the sky, and did not yet have any information about the conditions, location, or generation into which they would be born. Asked to design an economic system for their lives on Earth, they would design a system that would ensure that those born into certain circumstances, countries or generations would not be significantly worse off than those born into other circumstances, countries or generations.

In contrast to such a system, the economic system now operating in most places in the world directs most products and services to a small portion of the people in the present generation. Because the system delivers economic outputs to those with the means to pay the most, 20% of the world's population, largely those born in wealthy countries, currently consume 80% of the world's resources. Chiefly as a function of economic variables, children born in the United States have a life expectancy of 76.9 years while those born in sub-Saharan Africa have a life expectancy of 46.5 years. In addition, market and economic decisions based on maximizing net present value pull benefits to the present and push costs onto future generations.

Ecological economists believe these equity questions need to be faced and addressed. While consideration of these questions does enter into the realm of the "normative" - i.e., the realm of values - ignoring these questions is also profoundly normative.

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Policy design: frameworks for the market

Because the market cannot address issues of sustainable scale and equity, an ecological economic approach structures analysis by tackling these issues explicitly.

In the ecological economic view, it is essential to first establish policy mechanisms that ensure that overall scale of economic activity remains within the bounds of the global ecosystem to support it. Once sustainable scale is established, the next issue to be addressed is that of distribution among members of current generations and across all generations. Once policies to address scale and distribution have been established, the market can then be free to operate within these bounds.

To use an analogy from Daly and Farley, on this voyage on the ship Earth, we can't just look at whether cargo is efficiently loaded on the ship. Because too heavy a load will cause the ship to sink, we need to keep the weight load within limits resulting from ship design and ocean conditions. In addition, it is also crucial to make sure that all the passengers have sufficient resources for the voyage. Once those two issues are addressed, the ship can then be efficiently loaded.

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The goal of ecological economics

The goal of ecological economics is to have a healthy economy in a healthy ecosystem that provides a high quality of life for all people. This perspective reflects the increasing recognition by humanity that a healthy economy and a healthy ecosystem must go together. Human welfare will not be sustained over time if ecosystems are liquidated.

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Expanded criteria: democracy

In addition to the goals of sustainability and justice, non-profit environmental advocates within the ecological economic community recommend the explicit addition of principles of inclusive decision-making.

In our medical system, before a doctor can perform a medical procedure on a patient, the patient must give informed consent. In addition, strict rules prohibit many form of experimentation on humans. These norms of consent stand in stark contrast to the lack of consent by most global peoples to the massive experiments currently being run on humanity's life support systems.

True democracy means that those who are impacted by a decision have a say in the decision. Today most of the consequential decisions made about humanity, and its life support system, fail to meet this standard. To truly realize democratic norms, decision-making processes at all levels will need to greatly evolve.

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Views of the economic process

Traditionally, the economic process has been viewed as inefficient when valuable resources were not utilized for economic activity. To make good use of these assets, otherwise "wasted" resources were taken from the ecosystems of the Earth and turned into economic value. For example, in the traditional view, trees standing in a forest represented "waste." Fish in the ocean were of no use unless they were put on somebody's table. This is where the growth paradigm has come from -- the view that the more goods and services produced, the more welfare results. An economy is not deemed efficient unless it is operating on the production possibility frontier, using all available resources to the fullest.

In the ecological economic view of the economic process, trees in the forest and fish in the ocean just as they are produce a lot of value. In addition, ecological economics explicitly recognizes that the economic process generates waste products. As resources are converted into goods and services, chemical and physical wastes are produced. The laws of physics dictate that the flow of matter and energy through the economy is a one way flow from low entropy (high usefulness) to high entropy (low usefulness).

Thus, rather than trying to maximize the amount and speed of conversion of resources into products, the ecological economics argues for maximizing the combined value generated by unconverted natural ecosystems and gained when we convert natural resources into products. In addition, the ecological economic view also argues for minimizing the waste the process produces. Essentially, ecological economics argues that we should seek to derive as much value as possible out of the combination of human-produced and natural capital (see redefining efficiency).

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Redefining efficiency

If the economy expanded into a void, it would not encroach on anything. Its growth would be without an opportunity cost. But since in fact it grows into and eats away the finite global ecosystem, growth in economic scale results in an opportunity cost as well as a benefit.

In the traditional economic view, efficiency is attained when scarce resources are employed to produce the most monetary value, which in turn is taken as an indicator of welfare. This definition of efficiency neglects nonmarket goods and services.

The root goal of economics is to provide human welfare. The ecological economic measure of efficiency recognizes that human welfare is provided by both ecological services as well as human-made capital. This measure, called comprehensive efficiency, is the ratio of services flowing from the human-made capital stock to the services sacrificed from the natural capital stock as a result. This definition reflects the trade off between services gained and services lost as the economy grows.

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Categories of resources: stock-flow and fund-service

A stock-flow resource is transformed materially into what it produces. It can be used up at almost any rate. Examples of stock-flow resources include oil, minerals or timber. A fund-service resource, in contrast, provides a service at a fixed rate and does not become a part what it produces. Examples of fund-services are ecosystem services such as purification of air and water, detoxification and decomposition of wastes, and generation and renewal of soil fertility.

The relationship between natural capital stock-flow and fund-service resources is important for informed economic decisions. The use of a biological stock-flow resource (such as timber) at a unsustainable level also depletes a corresponding fund and the services it provides. For example, removing trees from a forest alters the ability of the forest to provide the other ecosystem services it previously provided. Thus, economic decisions that consider only the biological stock-flow aspect of a resource will be incomplete and distorted.

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Concepts of value

Value in economics has been measured through monetary currency through markets.

The ecological economic definition of value is that anything that contributes to life or life enjoyment is of value. Some value is easily measured in currency and some is not. Some value can be compared in monetary terms and other value cannot. A pound of wheat and a pound of corn, for example, can be traded in the marketplace based on relative monetary value. On the other hand, the ozone layer provides value that is very particular and cannot really be compared or traded against the value of wheat or corn.

Ecological economics recognizes that much value is held in both human-created capital and natural capital. A 1997 study by Robert Costanza indicated that the value of the Earth's natural capital exceeds the total world GNP. While this study is preliminary, it indicates that the Earth's natural capital is of substantial value to humans. Traditional economics measures the value of human-produced capital pretty well. In contrast, however, it has not been measuring natural or social (see definition section) capital well, and thus tremendous amounts of value have been lost. Because the market has great limitations in ascribing value, we need a more sophisticated way of looking at value. Ecological economic approaches can facilitate more complete and informed decisions.

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Natural capital and human-made capital as complements

The ecological economic view is that natural capital and human-made capital are often complements rather than substitutes. The economic principle of substitution states that practically no good is irreplaceable. Users are able to substitute one good for another when relative prices change.

Ecological economics points out that for many forms of natural capital and ecological services, substitutability is often highly limited. For example, when native mangrove ecosystems are removed from coastlines, their dampening effect on storms is lost and tens of thousands of increased deaths can result from coastal storms, as happened in Orissa , India . While an enormous wall could be built along the entire coast to try to recreate the hurricane protection previously provided by natural systems for free and in perpetuity, this is an impossibly expensive alternative.

Ecological economists argue that the more accurate description of the relationship between human-made and natural capital is one of complementarity.

The productivity of human-made capital is increasingly limited by the decreasing supply of complementary natural capital. For example, as fish become more scarce, additional fishing boats will not relieve the scarcity. As the limiting factor shifts from human-made to natural capital and as natural capital becomes more scarce and thus more valuable, ecological economics argues for economizing on natural capital.

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Measuring welfare

The gross national product (GNP) is the market value of the aggregate production of goods and services in a country during a year. GNP is a measure of economic growth and is often interpreted as an indicator of welfare. For instance, it is often assumed that a society is becoming better off if its GNP is growing.

However, as ecological economists point out, the GNP does not distinguish between economic transactions that increase welfare and those that make us worse off. If the groundwater is polluted leading people buy bottled water, the GNP goes up even though we are all poorer because water is no longer as cheap as it used to be. If people get cancer from exposure to toxic chemicals and have to pay hospital costs, the GNP goes up while welfare decreases.

Ecological economists instead argue for measures of economic activity that distinguish costs from benefits. In addition, ecological economists are also looking at more sophisticated assessments of human welfare, such as measures that consider factors other than consumption.

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Recognizing the nature of the choices we face

Traditionally in societal decision-making, policies have often been created by acting as though many social and environmental policy matters concern risk. Risk is where you have a die with six sides and you know the probability of getting each side.

The nature of many of the problems facing us really has more to do with uncertainty. Uncertainty involves not knowing how many faces are on the die or whether it is weighted. Uncertainty is a much more difficult problem than risk. There are ways to place some bounds on uncertainty but that does not mean it can ever be reduced it to risk. There is a lot of uncertainty inherent in decisions about ecosystems. The Puget Sound in the Pacific Northwest is a great example. It is difficult to know exactly what is going on in the Puget Sound ecosystem. We don't exactly understand what is happening with fisheries, the relationships between the organisms, or the total impact of toxics on the ecosystem.

In addition to uncertainty, irreducibility and irreversibility are also major dynamics that need to be considered in policy making. Many ecological problems affecting a system are intricately interrelated and cannot be successfully analyzed only in their component parts. In addition, once we have driven a species to extinction or devastated much of a watershed, we may not be able to go back. In ecological systems, there can be thresholds that once surpassed represent a point of no return.

In light of these dynamics, ecological economists believe that it is irresponsible to bet the future of humanity and the diversity of the planet on uncertain technological developments. They believe that in the case of complex systems like the Earth's biophysical cycles and ecosystems, where some decisions are irreversible and uncertainty is high, a precautionary approach is most prudent in economic, environmental and social terms. In the face of high stakes uncertainty, ecological economists believe we should take steps to reduce uncertainty, encourage but not bank on technological development, and develop mechanisms to safeguard against potentially catastrophic effects.

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Assessing the costs and benefits of maximizing global trade

Specialization is the tendency of participants in the economy to focus their activity on tasks to which they are particularly suited. Exchange complements specialization by enabling individuals to trade the goods in which they specialize for those produced by others. These principles are an important source of economic efficiency and productivity in many cases. However, when it comes to international economics, there may be countervailing considerations that are may decrease or outweigh the gains from specialization and exchange.

The current rules of economic globalization assume more specialization and exchange is always better. This theoretical assumption seems to be blinding us to evidence suggesting maximizing global specialization and exchange may actually be undermining the conditions required for efficient market allocation. Specifically, current global trade conditions are creating: 1) fewer bigger firms more able to exercise monopoly power, 2) more negative externalities (by weakening environmental and social regulation and increasing fossil fuel use) and 3) more monopolies on information. Empirical evidence also suggests current global trade rules are leading to even greater concentrations of wealth both within and between countries.

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