Economics versus Ecology Richard Jones Philosophy Café Cardiff Tuesday 20th September 2011

My Background B.Sc (Econ) Economics and Geography from University College London 1995 – 1998. M.Sc Environmental and Resource Economics also from UCL, 1999.

ECONOMIC ANALYSIS GROUP - DISCUSSION PAPER Investment Incentives and Market Power: An Experimental Analysis by Dean V. Williamson,(1) Céline Jullien,(2) Lynne Kiesling,(3) Carine Staropoli(4) EAG 06-5 January 2006

Think like an economist Costs and Benefits Wider definition of ‘Costs’ Money, time, effort, unseen costs Subjective Incentives Economic Moral / Social Human Behaviour as a result of changes or differences in costs, benefits and incentives “There is no such thing as a free lunch” Costs to individuals, firms and society

Economic Systems We need a system for producing goods and services that people want and allocating them within a society to consumers. This needs to be done efficiently Command Economy Government decides what to produce Demand and supply misjudged Capitalist Market Economy Firms and consumers have freedom to decide Little Government Interference Price system allocates resources efficiently Competition

Free Market Economy Reduced prices Increased choice and quality Efficiency Driving Forces Profit Incentives linked to productivity Individual Motives Not benevolence (Adam Smith)

Market Imperfections Inequality Market Power / Collusion No perfect competition Imperfect Information Resource Immobility Inflexibility of prices, wages etc. Government ‘Interference’

Market Failure Not all needs met Inefficiency Overproduction of bad things (e.g drugs) Underproduction of good things (public goods) Serves individuals, not necessarily good for society Environmental and Social Problems Bubbles Competition can be wasteful …….Crucial Role for Government!!

What determines Value? Use Values Exchange Values What about…. Value of Labour Social Values Existence Values Intrinsic Values How does the market deal with this? Water or Diamonds? Water is more useful and more important But….diamonds are scarce!

Scarcity and demand make a high price! “It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price”. (Nineteenth Century proto-marginalist, Richard Whately) “things only have value insofar as such people want such goods” (Eugen von Böhm-Bawerk)

Its all Marginal We dont normally make all or nothing / total decisions (e.g food versus clothes) But rather…. Little more food for a little less clothing This is Marginal Choice, decisions based on our marginal evaluations of the alternatives This…. Only look at decisions in front of you, comparing costs and benefits Ignores sunk costs Ignores historical decisions Specifies what choices individuals have control over

Marginal Decision Making “it is on the margin, and not with a view to the big picture, that we make economic decisions,” (19th century Austrian economist Eugen von Böhm-Bawerk)

Is the Market amoral?? Rewards Power Rewards Scarcity Provides Things we Want, not Need Based on the Individual Self Interest No Relation to Value But, at the same time, “Economics deals with the way people actually behave, Morality deals with way people ought to behave” (Levitt and Dubner, Freakonomics) People respond to Incentives People can be rational

Economics v Ecology Economics = oikonomos = oikos (house) and nemein (to manage) = “One who manages a household”. Managing (man's) house Ecology = oikos (house) and 'logie' (study of) = studying nature's house Economics - management (man's house) Ecology - understanding (nature's house)

Comparing the Terms Economics is about Allocation of scarce resources Trade offs, priorities and sacrifices Value Ecology is about Conservation and Preservation of the whole system Everything as a whole!

Comparisons

Feedback Negative feedback Output from the system negates the input High oil prices in 1970 Fox population increase Positive feedback Output from the system amplifies the input Black Rhinos Melting snow Feedback from nature onto Humans to make us change our behaviour?

Environment as Part of the Economy another 'sector' of the economy just another input an externality

Environment’s Use to the Economy Ecosystem services Food, energy, water, minerals, culture, assimilation Value of land etc Can we value the Environment therefore? Crops traded on markets House prices Cost of Health, Lost Earnings

Environmental Economics Demand and Supply for environmental improvement Marginal Costs Costs of Clean Up Measuring Benefits Difficult to measure because they are not always monetary. Revealed preferences through a survey Mimic real Behaviour in Market Place Rich votes count more!

Environmental valuation

But…… Economics has a limited world view Economics ignores the larger world view of Nature What happens when scale of development increases? Connectivity increases Externalities must be internalised Abandon concept of Externality altogether? Are we part of a single, integrated system?

Economy as part of the Environment Nature should not be a commodity or treated as a subset of the economy Economy is embedded within an environmental system and a subset of ecology It is the system within which we operate. Ecology is multi functional

Ecological Economics The study of the flows of energy and materials that enter and exit the economic system Include natural process (eg input of solar energy) in the circular flow of income The economic value of natural capital and ecosystem services Nature contributes to the creation of wealth Laws of thermodynamics, the conservation of mass and energy. Cant create or destroy energey – ultimate limits Energy is dissipated Plural value system

Or more simply… free-life-web.org/resources/economics/

From Ethan Goffman’s ‘Environmental Economics: Basic Concepts and Debates’ (Released April 2007) Two Approaches

Can we really reflect nature in the Economy? National Accounts only reflects what is traded on markets GDP is total value of all goods and services produced Flow onto market place in money values Value of crops traded on markets is a flow (cash flow) Flow of incomes to factors of production Value of what is produced Does not include non market activities (such as housework) GDP doesn’t account for the stock that is lost We rely on stock for welfare, sustainability etc We want to keep stocks and sustain flow of income without depleting stocks

Summary Table

R.M Baker (1985) “An Introduction to Ecology and Industrial Society”. Polytechnic of Wales

Future The environment could survive without an economy, but without the environment the economy is doomed. Has resilience reduced to produced more? What are the ultimate limits? ecological, moral, time, space, political What is scarcity? Natural, economic, other forms? Is anything ‘free’? Must we grow to clean up? What resources are more important? Can we adapt the process to environmental limits or bend limits to fit the process?

References Charles Wheelan (2010). Naked Economics: Undressing the Dismal Science. Foreword by Burton G. Malkeil. Steven Levitt and Stephen J. Dubner (2009). 'Superfreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance'. William Morrow/HarperCollins. Steven Levitt and Stephen J. Dubner (2005). 'Freakonomics: A Rogue Economist Explores the Hidden Side of Everything'. William Morrow/HarperCollins. David Smith 'Free Lunch: Easily Digestible Economic's Robert H Frank The Economic Naturalist: Why Economics Explains Almost Everything Jim Blair. Green Libertarianism: Ecology vs Economics? http://www.bigissueground.com/politics/blair-greenlibertarian.shtml Stephen Polasky. Ecology and Economics. http://www.actionbioscience.org/environment/polasky.html John F. Babson. Ecology vs. Economy. http://www.polyu.edu.hk/~gec/student_area/publication/bulletin_Oct2000/bulletin2a.pdf William Rees. On Dangerous Disconnect Between Economics and Ecology http://www.nakedcapitalism.com/2011/07/on-dangerous-disconnect-between-economics-and-ecology.html Ethan Goffman (April 2007) 'Environmental Economics: Basic Concepts and Debates' Ecological Econmics - Kenneth E. Boulding, Nicholas Georgescu-Roegen, Herman Daly, Robert Costanzas