Necessity & Sufficiency – Insights on Sustainability from Ecological Economics

in answer to the question:

Do Market Systems (as we know them) largely fail to account for the impacts of ecosystem degradation on human welfare ?

Michael Barkusky

BA (Honours – Economics) MBA, CPA,CGA

Pacific Institute for Ecological Economics

Vancouver BC

A Helpful Four-fold Distinction

Helpful in Economics, as much as it is in Pure Logic and in Mathematics:

• Necessary (but not Sufficient)

• Sufficient (but not Necessary)

• Necessary and Sufficient

• Neither Necessary nor Sufficient

Ecological Economics

• An approach to economics, not a sub-field of economics

• Shares much with mainstream economics • Rejects a few unrealistic assumptions and some

misleading models and propositions • Is inter-disciplinary in style • Takes a long-term, biophysical approach • More optimistic about certain human traits • More pessimistic about perpetual GDP growth

In common with Mainstream Economics

• Qdi = f (Pi, ,,,,,,); and ∂Qdi / ∂Pi < 0 (i.e. Demand Curves are downward-sloping) • Qsi = g (Pi, ,,,,,,); and ∂Qsi / ∂Pi > 0 (i.e. Supply Curves are upward-sloping) • “Wants” exceed “what can be supplied at zero or

very modest cost • Free goods (and services) tend to be consumed to

the point of satiation • Individuals discount the future (to some extent)

relative to the present

Perfect Competition

In common with Mainstream Economics (continued)

• Markets are frequently the most efficient method of allocating scarce goods and services amongst competing ends

• People cannot be expected to act contrary to significant (net) individual incentives

[Ecological Economists do not subscribe to these propositions as sweeping generalities however, they would qualify them significantly]

Qualifications:

For markets to work efficiently,

• Goods or services traded must be rival or excludable

• Market participants must be “price takers”

• Information must be adequate and symmetrically distributed.

Note: Market outcomes are then efficient (i.e. non-wasteful), but not necessarily just, in a distributional sense.

Eight Points of Departure from Standard Economic Thinking ..

1. Is the Economy embedded in the Environment or vice versa ?

2. Are the Laws of Thermodynamics relevant to Economics ?

3. What is the optimum macro scale of the human economy ?

4. How pervasive are externalities ?

5. How commonly are externalities multi-lateral rather than bilateral ?

6. Do we address “emergent externalities” from a democratic, anthropocentric point of view, or from a scientific, bio-centric point of view ?

7. How should we address public goods and bads ?

8. Is it more realistic to think of Manufactured Capital as a Substitute or as a complement to Natural Capital ?

The Mainstream Economics View

`

Mainstream – Anthropocentric, and typical so-called “Free Market” View

Blue Zone:

The Market Sector of the Human Economy

Pink Zone:

The Public Goods Sector

Green Zone:

Land and Resources “protected” by Social Choice from economic development (something of a luxury)

The Ecological Economics View

Ecological Economist’s View

New diagram - same colour-coding !

• Sustaining global ecosystem (outer oval) finite and non-growing

• Market and Public Goods sectors are inter-dependent

• Human-oriented sectors dependent on ecosystem structure and function

• As they grow human-oriented sectors tend to displace ecosystem elements and degrade ecosystem function

• => there may well need to be limits to “economic” growth !

Recall: Environmental vs. Ecological Economics

Environmental Economics Ecological Economics

ECO-SPHERE

ECONOMY

ENVIRON-MENT

SOCIETY ECONOMY

ECONOMY

SOCIETY

ECOSPHERE

Ecological Economics: a holistic approach

ECOLOGICAL ECONOMIC APPROACH

Differing views of Costs and Revenues

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

0 10 20 30 40 50 60

TC

TR

Review: Present Value Maximization Two alternatives:

Immature tree: Grows 3.5%/year in both size and value

Money: Can be invested in bonds yielding 5% per year

Key Propositions of Ecological Economics

1. The human economy is part of a bigger “social system” in turn embedded in a larger environment governed by biophysical realities and bio-geochemical cycles

2. The human economy cannot prosper, indeed cannot survive in a biophysically hostile environment

3. The scale of the surrounding “environment” cannot be significantly increased by human choices and action

Key Propositions of Ecological Economics (continued)

4. When the human economy expands, it displaces other ecological processes

5. That part of the “environment” still largely undisturbed by human beings, tends to be more biodiverse and is potentially very resilient, yet is often very vulnerable to anthropogenic disturbance

6. The 1st and 2nd Laws of Thermodynamics are highly relevant binding constraints on economic activities

Key Propositions of Ecological Economics (continued)

7. The biologist’s concept of “carrying capacity” may be more difficult to apply to human society than to populations of other animals, but cannot reasonably be as irrelevant

8. External Costs (externalities) are pervasive and more commonly multilateral rather than bilateral

9. New Externalities emerge over time, especially as human population density rises, and as minimally-disturbed ecosystems shrink

Key Propositions of Ecological Economics (continued)

10. Prices that are set without regard to relevant external costs, can seriously distort resource allocation

11. Absent full internalization of all known and all future emergent externalities, a market economy cannot determine its own optimum macroeconomic scale

12. Man-made Capital is only complementary to Natural Capital, and is generally a poor substitute for critical Natural Capital assets.

Key Propositions of Ecological Economics (continued)

13. Adjusting market prices upwards or downwards through Pigouvian Taxes, in the interests of better approximating the effects of external costs is both necessary and helpful (but probably not sufficient)

14. Quantitative caps or quotas may be needed in addition to, or in place of Pigouvian Taxes in some instances

15. Outright bans, mandatory product standards and other “command and control” mechanisms, while often inferior to Pigouvian Taxes and Tradable Quotas, may be more socially efficient in certain cases

Conclusions

• Corporate Social Responsibility, Conscientious Consumer Behaviour, Socially-Responsible Investing and Buying Local are all necessary, but not sufficient for attainment of Sustainability.

• Good tax and other micro-level public policies are also necessary, but not sufficient for attainment of Sustainability.

• Both are better than either alone

Conclusions (continued)

The Status Quo

(“Business as Usual”)

is neither

necessary nor sufficient

for a prosperous future.