New Economy Journal

Ecological Economics: The Economics of Sustainability

The Ecological Economics Issue

Volume 1, Issue 4

July 2019

By - Dr Mark Diesendorf

Piece length: 1,329 words

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In the 1970s and 1980s a few neoclassical economists began to realise that their discipline had failed to explain the origin of environmental pollution and how to mitigate it. Even when markets were operating well, industries were continuing to pollute. The fundamental problem was, and remains, that neoclassical economics is based on the separation of the economy from the natural environment. Yet the environment provides the resource base for the economy and amenities that we take for granted, such as a climate suitable for the human socio-economy and clean air and water. Furthermore, the economy uses the environment as a waste dump. Prior to the 1970s, most economists saw the environment as an ‘externality’, whose costs are not included in the market prices of the products and services responsible for the pollution.[1] The inadequacies of failing to address ‘externalities’ had been pointed out in the 1920s by the economist Arthur Pigou.

Eventually, a new branch of neoclassical economics, called environmental economics, was developed to recognise these dependencies.[2] The bestselling book, Blueprint for a Green Economy, by David Pearce and colleagues, popularised this approach.

From environmental to ecological economics

Although environmental economics made some people, especially economists, more aware of the importance of the environment, it retains the limitation inherent to neoclassical economics: it is tied to using markets to handle ‘externalities’ such as environmental pollution (Jacobs 1991).[3]

For example, to mitigate human-induced climate change, environmental economics is constrained to market mechanisms like a carbon price. This would be valuable as part of a portfolio of climate response policies - indeed it reduced greenhouse gas (GHG) emissions from the Australian National Electricity Market during the short period (mid-2012 to mid-2014) of its existence.[4] But in the real world, where markets are generally imperfect, pricing is insufficient as a mitigation policy. People who live in rental accommodation are restricted from making their homes more energy efficient, whatever the carbon price. People who live on an urban fringe with inadequate public transport are forced to drive their cars, whatever the carbon price. Strategic long-term planning is needed to build the infrastructure (e.g. new long-distance transmission lines; new railway lines) for a sustainable energy future – the market won’t build it automatically.[5]

More fundamentally, neoclassical economics, even with an environmental branch, fosters the endless growth in population and economic activity on a finite planet. Yet, at one conceptual level, environmental impact is driven by population multiplied by affluence (economic activity per person) multiplied by technological impact, the well-known I=PAT identity. Neoclassical environmental economics doesn’t recognise that there are limits to growth in population and the biophysical economy on planet Earth. We must go beyond environmental economics.

Ecological economics

In the 1970s, when some economists were developing environmental economics, another economist, Herman Daly, was developing a far more radical field of knowledge that he called ‘steady-state economics’, or SSE.[6] It subsequently evolved into the nominally interdisciplinary field of ‘ecological economics’ - the economics of sustainability. Hamilton has neat diagrams illustrating the difference between environmental and ecological economics.[7] Daly’s original definition of an SSE is:

an economy with constant stocks of people and artifacts [sic], maintained at some desired, sufficient levels by low levels of maintenance “throughput”, that is, by the lowest feasible flows of matter and energy…”

It should be emphasized that this definition is a biophysical one that cannot be measured directly by a monetary index like GDP or GNP. In theory it is possible to have a biophysical SSE while monetary economic growth continues. There are hints that this may be possible: for example, in Denmark GHG emissions have been declining since 2006, due to the increasing substitution of renewable electricity for fossil fuelled electricity, while economic growth has continued. However, it must be acknowledged that, more generally, around the world, economic growth is at present accompanied by growth in the use of energy, materials and land. Breaking the nexus will be difficult. If it turns out to be impossible, then a steady-state economy may end up stopping growth in the monetary economy as a by-product of stopping growth in the biophysical economy, i.e. in the use of energy, materials and land.

Research on SSE

The key issues are how full employment, or at least low unemployment, could be maintained in an SSE and whether an SSE would reduce social equity. Two studies, using different approaches, suggest that an SSE, together with environmental and social improvements, is possible, although difficult to implement politically. Each study explores several different policy scenarios for transitioning to an SSE.

The first approach is by Peter Victor, an economist who works on environmental issues. He used a macro-economic model of the Canadian economy to generate scenarios, some of which indicated that it’s possible to move the economy towards prosperity and well-being without increasing GDP.[8] Incidentally, Victor is well aware of the inadequacies of GDP as an index of well-being:

It says nothing about distribution, excludes many factors that influence well-being such as environmental damage and other social costs, gives no value to unpaid work, and includes some expenditures on items such as increased commuting and home alarms whose contribution to well-being is questionable.”

However, in talking to economists, it’s important to start by using their language.

The second approach, by Graham Turner, uses the Australian Stocks and Flows Framework (ASFF) to model the Australian socio-economy in biophysical terms. Stocks are quantities of physical items, such as land, livestock, people and buildings at a point in time. Flows are the rates of change over a time period, e.g. net addition of agricultural land, new computers, births, deaths and immigration.[9]

Although they use different methods, both approaches yield similar results. In scenarios where a freeze is imposed on growth either in the monetary economy or the biophysical economy, and no other supportive policies are implemented, a large fraction of the population becomes unemployed, as expected. But, if a range of policies are implemented to foster new jobs and share them around, then an SSE with low unemployment, less poverty and reduced GHG emissions is possible. A typical portfolio of supportive policies is: shorter working week; stabilised population; investment in ‘green’ infrastructure; expansion of health care, social services and education; and possibly more local manufacturing in place of some imports.

Goals and principles of sustainable development

The separate studies by Victor and by Turner show that it’s possible to have an SSE that’s a healthy socio-economy with low unemployment, improved social equity and greatly reduced GHG emissions. However, a sustainable society and civilisation demands more than attention to individual environmental issues. First, for intellectual rigor, we must distinguish between the goal of sustainability, the mountain we are trying to climb, and the process or pathway towards the summit, sustainable development (called ecologically sustainable development in Australia). Then, to be meaningful and effective, the sustainable development process must be guided by a set of principles and goals. The following have been selected from the international literature, including the Australian Ecologically Sustainable Development (ESD) process:[10]

  • Conservation of biodiversity and ecological integrity;
  • Intergenerational equity;
  • Intragenerational (i.e. social) equity;
  • Precautionary Principle;
  • Improvement of individual and community well-being;
  • Conservation of cultural diversity;

To this should be added the process of community participation in decision-making. While the first five principles/goals were included at the start of the Australian ESD process, intragenerational equity was subsequently rejected by the then Labor government  and the conservation of cultural diversity was never considered. So Australians still have to agree on a pathway.[11]

Ecological economics today

Nowadays the interdisciplinary field of ecological economics comprises several different strands: broadening neoclassical economics;[12] environmental protection based on environmental science;[13] social justice;[14] and ‘barefoot economics’.[15] Although nominally considered to be interdisciplinary or even transdisciplinary, ecological economics still seems to be dominated by economists (albeit enlightened ones), with guidance from environmental scientists. It is under-represented in political economy,[16] and political science.[17] Multiple pathways are needed to reach the summit of Mount Sustainability and ecological economics is one of them.

  • [1] Hamilton, ‘Foundations of ecological economics’ in M Diesendorf & C Hamilton (eds), Human Ecology Human Economy: Ideas for an ecologically sustainable future (Sydney: Allen & Unwin,1997) 35-63.
  • [2] Ibid.
  • [3] Jacobs, The Green Economy: Environment, sustainable development and the politics of the future (London: Pluto Press, 1991).
  • [4] Saddler, National Energy Emissions Audit: Electricity update (TAI, May 2019), see especially Fig.4.
  • [5] Diesendorf, Sustainable Energy Solutions for Climate Change (Routledge, 2014), especially Chapters 4 & 8.
  • [6] Daly, Steady-State Economics: The economics of biophysical equilibrium and moral growth (San Francisco: WH Freeman and Company, 1977).
  • [7] Hamilton, ‘Foundations of ecological economics’ in M Diesendorf & C Hamilton (eds), Human Ecology Human Economy: Ideas for an ecologically sustainable future (Sydney: Allen & Unwin,1997) 35-63, Figs 2.1 & 2.2.
  • [8] See also Victor & Rosenbluth, ‘Managing without growth’ (2007) 61:2-3 Ecological Economics 492-504; Victor, ‘Growth, degrowth and climate change: A scenario analysis’ (2012) 84 Ecological Economics 206-212.
  • [9] Turner, ‘Consumption and the environment: impacts from a system perspective’ in: Newton (ed.), Urban Consumption (Collingwood: CSIRO Publishing, 2011) chapter 4; reprinted as Turner, ‘Physical pathway to a steady state economy’ in: H Washington & P Twomey (eds) A Future beyond Growth: Towards a steady state economy (London & New York: Earthscan from Routledge, 2016) 112-128.
  • [10] Diesendorf, ‘Principles of ecological sustainability’ in M Diesendorf & C Hamilton (eds), Human Ecology Human Economy: Ideas for an ecologically sustainable future (Sydney: Allen & Unwin, 1997) 64-97.
  • [11] Diesendorf, ‘Principles of ecological sustainability’ in M Diesendorf & C Hamilton (eds), Human Ecology Human Economy: Ideas for an ecologically sustainable future (Sydney: Allen & Unwin, 1997) 64-97.
  • [12] E.g. the textbook Daly & Farley, Ecological Economics: Principles and applications (Washington DC: Island Press, 2nd Ed., 2011).
  • [13] E.g. Ehrlich PR, Holdren JP & Ehrlich AH, Ecoscience: Population, resources, environment (W.H. Freeman, 1978).
  • [14] E.g. Langhelle, ‘Sustainable development and social justice: expanding the Rawlsian framework of social justice’ (2000) 9 Environmental Values 295-323.
  • [15] Max-Neef, From the Outside Looking In (London: Zed Books, 1992).
  • [16] For exceptions see Jacobs, The Green Economy: Environment, sustainable development and the politics of the future (London: Pluto Press, 1991); Burkett, Marxism and Ecological Economics: Toward a red and green political economy (Brill, 2006).
  • [17] An exception is Baker et al. (eds), The Politics of Sustainable Development (London: Routledge, 1997).

Bibliography

  • Baker et al. (eds), The Politics of Sustainable Development (London: Routledge, 1997)
  • Burkett, Marxism and Ecological Economics: Toward a red and green political economy (Brill, 2006)
  • Daly, Steady-State Economics: The economics of biophysical equilibrium and moral growth (San Francisco: WH Freeman and Company, 1977).
  • Daly & Farley, Ecological Economics: Principles and applications (Washington DC: Island Press, 2nd Ed., 2011)
  • Diesendorf, ‘Principles of ecological sustainability’ in M Diesendorf & C Hamilton (eds), Human Ecology Human Economy: Ideas for an ecologically sustainable future (Sydney: Allen & Unwin,1997) 64-97
  • Diesendorf, Sustainable Energy Solutions for Climate Change (Routledge, 2014)
  • Ehrlich PR, Holdren JP & Ehrlich AH, Ecoscience: Population, resources, environment (W.H. Freeman, 1978)
  • Hamilton, ‘Foundations of ecological economics’ in M Diesendorf & C Hamilton (eds), Human Ecology Human Economy: Ideas for an ecologically sustainable future (Sydney: Allen & Unwin,1997) 35-63
  • Jacobs, The Green Economy: Environment, sustainable development and the politics of the future (London: Pluto Press, 1991)
  • Langhelle, ‘Sustainable development and social justice: expanding the Rawlsian framework of social justice’ (2000) 9 Environmental Values 295-323
  • Max-Neef, From the Outside Looking In (London: Zed Books, 1992)
  • Saddler, National Energy Emissions Audit: Electricity update (TAI, May 2019)
  • Turner, ‘Consumption and the environment: impacts from a system perspective’ in: Newton (ed.), Urban Consumption (Collingwood: CSIRO Publishing, 2011) chapter 4
  • Turner, ‘Physical pathway to a steady state economy’ in: H Washington & P Twomey (eds) A Future beyond Growth: Towards a steady state economy (London & New York: Earthscan from Routledge, 2016) 112-128
  • Victor & Rosenbluth, ‘Managing without growth’ (2007) 61:2-3 Ecological Economics 492-504
  • Victor, ‘Growth, degrowth and climate change: A scenario analysis’ (2012) 84 Ecological Economics 206-212

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