Ecological economics: the next logical stepPosted: 11/06/2010
The American economy, and much of the world economy, is organized around principles of neoclassical economics (NCE). Neoclassical economists consider perfect markets without any outside interference the ideal means to build an economy with. Those economists believe that NCE principles create the most efficient allocation of resources throughout the economy. The goal for neo-classical economists is growth; economic growth signifies the distribution of market goods and services, and in the minds of neo-classical economists, economic growth is a proxy for consumer satisfaction.
While NCE is the dominant paradigm, ecological economics (EE) offers better framework during a time of ecological constraint. Many of the resources that through their abundance created the conditions for the Industrial Revolution and the rapid economic growth of the last two centuries are becoming scarce. Ecological economists recognize that Earth and its ecosystems are not subsets of the human economy, but rather that the human economy is a subset of the Earth. As such, ecological economists are concerned with the question of scale, what the appropriate and sustainable size of the economy is relative to the ecosystems that support it.
Both NCE and EE recognize the concepts of marginal cost (the additional cost of producing a market good) and marginal utility (the additional satisfaction one receives from a market good), and seek out the optimal scale whereby the greatest marginal utility is achieved at the most efficient marginal cost. However, NCE only considers these concepts in terms of the microeconomic and not the macroeconomic level; EE examines the optimal scale of the larger macro economy. By looking at the big picture, ecological economists examine the throughput of the human economy, and recognize a conceptual flaw in NCE.
Neoclassical economists look at the economy as the whole, and the natural capital that the Earth and its ecosystems provide as a mere subset of that economy. The NCE view of the economy is a circular one, between production and consumption: businesses and consumers interact to create supply and demand. The circular flow model that neoclassical economists use to illustrate those relationships is simple, but like their view of the economy as the whole, it does not properly recognize the natural capital that allows the economy to operate.
The NCE model creates the illusion of a perpetual motion machine, which is impossible. The Second Law of Thermodynamics identifies that any closed system degrades through entropy. In the case of the macro economy, this means that resources cannot be recycled completely. The throughput of the macro economy is enormous, and growing. However, this enormous throughput occurs on a finite planet, with finite resources. Specifically the fossil fuels and minerals that drive the macro economy, nonrenewable on a human scale, are finite. The capacity of the Earth’s ecosystems to provide water and waste services is finite. Ecological economists recognize that growth is not sustainable, but differentiate growth from development.
That distinction between growth and development is helpful when considering how a business might operate through the principles of ecological economics. Minimizing the throughput of resources is crucial on the finite Earth. A business might consider offering a service instead of a product, and designing the materials to be provided to customers with their entire life cycle in mind (through a Life Cycle Assessment). Interface, Inc. designed their modular carpet tiles with those very goals. Interface will replace individual tiles when they become worn, and recycle those tiles as much as possible. In fact, Interface works continuously to minimize the amount of petrochemicals in their product, and the ecological footprint of its supply chains. By offering a service instead of a product, a business can maintain customers over the long term instead of trying to sell as many products as possible while cutting costs to maximize profit margin. On a finite planet, that behavior is simply not sustainable.
While EE principles are appealing, they do present limitations, especially within the dominant NCE paradigm that defines the macro economy. First of all, a business must consider optimal scale carefully; long supply chains are not sustainable over the long term in a finite world. Second, finance is a quandary, especially if the business is for-profit. Investors and stockholders will demand healthy and steady profit margins, which are difficult to maintain when competing against businesses that consider growth as the primary goal. Finally, the concept of providing a service instead of a product is difficult in terms of modern accounting practices. Interface, for example, whose customers tend to pay through capital expenses, are sometimes reluctant to shift those costs to current expenses. However, EE provides a growing framework for sustainable business that is already evident in developments like the B Corporation. In a finite world, ecological economics provides a necessary course correction to neoclassical economics.