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Show a movie? ‘the end of poverty’ / ‘life & debt’

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1 Show a movie? ‘the end of poverty’ / ‘life & debt’
Economics unit Show a movie? ‘the end of poverty’ / ‘life & debt’

2 A few admin… Please email me your schedule
Do we need a ½ hour meeting on Thursday/Friday? A Saturday morning coffee?

3 Activity #1: Envision… Good reading… All posted on the web… Comment…
[may move it all to moodle once I’ve got an account]

4 Economics in Context: What is economics?
economics: the study of the way people organize themselves to sustain life and enhance its quality Positive vs normative questions Positive questions: how things are Normative questions: how things should be “Defining poverty is both a positive and a normative task. …It requires us to decide whether poverty should be defined in terms of people’s opportunities in life, or only with respect to what they have made of those opportunities; whether a definition should look only at what people possess as private property, or should also take into account access to goods and services that are provided by the society.”

5 What for?: ‘wealth’ and ‘efficiency’
In discussing goals  need to start with normative question. What is economic activity FOR? Intermediate and final goals A final goal requires no further justification: it is an end in itself An intermediate goal is something that is desirable because its achievement will bring you closer to your final goal(s) Wealth is whatever confers the ability to produce and procure valued goods and services. Efficient process: uses the min value of resources to achieve desired result An efficient use of resources is one that does not involve any waste. Inputs are used in such a way that they yield the highest possible value of output, or a given output is produced using the lowest possible value of inputs.

6 Our assumption: well-being
We assume that most normal people want to have happy, pleasant lives in a healthy social and physical environment – and that most people would like to contribute to ensuring that the social and physical conditions for a good life can continue into the future. Well-being is a shorthand term for the broad goal of promoting the sustenance and flourishing of life (some) Final goals: Satisfaction of basic physical needs; happiness; realization of one’s potential; fairness (what is ‘fair’?); freedom in economic and social relations; participation in social decision making; a sense of meaning in one’s life; good social relations; and – of course - ecological balance

7 Economics and well-being
An economic actor (economic agent) is an individual, group, or organization that is involved in the economic activities of resource maintenance or the production, distribution, or consumption of goods and services. Negative externalities are harmful side effects, or unintended consequences, of economic activity that affect persons, or entities such as the environment, that are not among the economic actors directly responsible for the activity. Examples? Policies? Positive externalities are beneficial side effects, or unintended consequences, of economic activity that accrue largely to persons or entities that are not among the economic actors directly involved in the activity. Transaction costs are the costs of arranging economic activities

8 3 basic economic questions
• What should be produced, and what should be maintained? What kinds of products should be made? How much of each? What resources need to be preserved? • How should production and maintenance be accomplished? By whom and using what kinds of resources, technologies and methods? • For whom should economic activity be undertaken? What are the principles and practices that will determine how the produced goods and services are distributed among different people?

9 From ‘Vulnerable Planet’
Your thoughts? Various factors: Monopoly capitalism  globalized monopoly capitalism Synthetic products as basic elements of industrial output Scale of economic production/economic “progress”

10 From ‘Vulnerable Planet’: economics and environment
Synthetic products as basic elements of industrial output Advances in five fields: steel, coal-petroleum, chemicals, electricity, and internal combustion engine Progress in physics and chemistry not accompanied by an equally rapid expansion in the knowledge of how such substances might affect the environment Scientific management also changed labor’s relation to the production process; worker reduced to status of an instrument of production; moving control of the job from the worker to management Taylor (1911): dissociation of labor process from skills of the workers; (2) separation of conception from execution; and (3) use of this monopoly of knowledge to control each step of the labor process and its mode of execution Transform skilled labor to simple, interchangeable parts Thus: human labor commodified further + human productive and cultural diversity decreased

11 Commodification…. As labor became more homogeneous  so did much of nature. Examples? Scientific forester’s goal: “the maximum amount of nutrients, water, and solar energy into the next cut of timber. S/he cleans up the diversity of age and size classes that are less efficient to cut, skid, process and sell. S/he eliminated slow-growing and unsalable trees, underbrush and any animals that might harm her/his crop. S/he replaces natural disorder with neat rows of carefully spaced, genetically uniform plantings of fast growing Douglas-firs. S/he thins and fertilizers to maximize growth. S/he applies herbicides and insecticides and suppresses fires to protect this crop against the ravages of nature that must be fought and defeated.” What is the result of this ‘goal’?

12 Synthetic age After WWII – “productive technologies with intense impacts on the environment have displaced less destructive ones. …counterecological pattern of growth” Examples? Artificial fertilizers; pesticides; synthetics fibers; plastics; detergents with high phosphate content “it is therefore the pattern of economic growth rather than growth (or population) itself that is the chief reason for the rapid acceleration of the ecological crisis in the postwar period.”

13 I = P – A - T Environmental Impact (I) = Population – Affluence – Technology 1972 study by Commoner: Population accounted for only 12-20% of total changes in impact of these pollutants Affluence: goods/population Technology: pollution/economic good Automobiles Optional supplemental reading (‘Driving South: The Globalization of auto consumption and its social organization of space.’ ) Petrochemicals There is.. “an increasing differentiation between farming and agriculture. Farming is producing wheat; agriculture is turning phosphates into bread.” Including: commodification of seed production  inorganic fertilizers, herbicides, pesticides

14 The Four laws of ecology and economic production
Everything is connected to everything else ….dramatic collapse Everything must go somewhere 1st law Thermodynamics: no final waste, matter and energy are preserved, and waste produced in one ecological process is recycled in another Nature knows best ‘any major man-made change in a natural system is likely to be detrimental to that system’ Nothing comes from nothing 2nd law Thermodynamics: energy is ‘used up’ but not destroyed; energy is transformed into forms are not longer available for work

15 2 paradigms of Economics and Ecology
1. the ecological paradigm, based on the science of ecology, stresses the health and survival of ecosystems. 2. the economic paradigm relies on environmental economics – the application of economic theory to environmental issues – and emphasizes maximizing the welfare of humans, even if this means harming the environment. Ecological economics – attempts to resolve the differences

16 Dominant pattern of capitalist development
The only lasting connection between things is the cash nexus Cash nexus has become the sole connection between human beings and nature It doesn’t matter where something goes as long as it doesn’t re- enter the circuit of capital externalities The self-regulating market knows best For profit, not for nutrition – ‘quality of food is debased, birds and other species are killed, and human beings are poisoned’ Nature’s bounty is a free gift to the property owner Kapp: ‘capitalism must be regarded as an economy of unpaid costs, unpaid in so far as a substantial portion of the actual costs of production remain unaccounted for in entrepreneurial outlays’. Who pays?

17 Ecologists vs Economists
Ecologists: Concerned with? Resilience… Sustainability Intrinsic value Economists: Concerned with? Efficiency and “material wealth” Only consider environment that is useful to humans

18 So if money is the guide…
Henry Ford II answered the question- why Detroit automakers prefer to make large, gas-guzzling cars: “minicars make miniprofits” “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” -Milton Friedman 1962 Capitalism cannot exist without constantly expanding the scale of production: any interruption in this process will take the form of an economic crisis. “~Resources are infinite and the economy can grow forever” -Julian Simon Common statement: “There is no conflict between economic growth and environmental protection.” --- “sustainable economic growth.” “Anyone who thinks you can have infinite growth on a finite planet is either a madman or an economist.” Kenneth Boulding

19 (Correct) Economic theory
1. The recognition that natural processes provide an essential support to human well-being that needs to be adequately taken into account in all attempts at measuring well-being. 2. The recognition that this support is finite and that there are limitations both in terms of the inputs which can be extracted from the biosphere and the waste outputs which can be put back into it.

20 Redefining national income and wealth
What is GNP/GDP? GDP can be characterized as a (rough) measure of the amount of “throughput” going on in an economy—as measuring the level of activity whose purpose it is to turn renewable and non-renewable resources into new products. How does “throughput” relate to sustainable well-being? Is more “throughput” always a good thing? Two broad categories of human activities: Those rewarded by a payment – a monetary flow Those which aren’t rewarded by a monetary flow Not included in GDP/GNP

21 When a good or service is purchased, two kinds of flow occur: the good moves from the firm to the household and a corresponding payment moves from the household to the firm. Similarly, when firms purchase factors of production, a payment of money for the use of these factors accompanies the flow of factor services from households to firms. These transactions are symbolized on the graph above by the arrows going in both directions – from firms to households and vice versa. We distinguish between the two kinds of flows, real economic flows and the monetary flows which are their counterpart. The former are called "real" as they correspond to transfers of tangible things: goods and services flowing from firms to households; factors of production flowing from households to firms Can we locate the environment or natural resources in this picture? Certainly natural resources are essential to production: agriculture requires productive soils, industry requires fuels, water, and minerals. Consumers need drinking water, and many environmental resources, such as beaches and woodland, are in high demand. How is all this reflected in the circular flow?

22 Factors of production Land Labor Capital
term which is used by economists to represent all natural resources used in economic production, including soils, water, forests, species, minerals, fossil fuels, and other such resources. Labor Capital What we typically call ‘capital’ is ‘manufactured capital’ Natural capital: all natural resources + environmental health are included Human capital: the value of the knowledge and skills of people. The first thinkers who studied economic mechanisms during the eighteenth and nineteenth centuries recognized the importance of land in the production process, and emphasized the existence of natural constraints on economic growth. in the second half of the 19th century, economists focused increasingly on the two other factors of production, capital and labor, which were essential in the growth of the industrial sector, as rapid industrialization became the major economic phenomenon of these times. Only recently, with the increasing urgency of environmental and resource problems at local, national, and global levels, have economists once again focused on the issues of natural resource constraints and the issue of what has come to be called natural capital. Natural capital includes all natural resources as well as the environment. It is essentially an updated interpretation of the classical economic concept of "land".




26 GDP/GNP GDP includes monetary flows which correspond to a decrease in well-being How can economists deal with monetary flows which not only do not increase well-being but may even decrease it? One approach is to measure defensive expenditures made to eliminate, mitigate or avoid damages caused by other economic activity. GDP neglects the depreciation of natural capital GDP can be measured as the sum of the domestic value added in all sectors of the economy This process of wearing out, repairing, and replacing capital is taken into account by measuring the depreciation of manufactured capital. If we subtract an estimate of manufactured capital depreciation from gross domestic product, we obtain net domestic product (NDP) NDP = GDP – depreciation of manufactured capital

27 NDP NDP: - applies only to manufactured capital
If we had high short-term consumption but allowed all our capital stock to wear out without replacement, measured GDP would give an erroneously positive impression of how well we were doing economically. NDP would be a better measure since it would show the negative effects of the loss of productive capital. NDP: - applies only to manufactured capital What about natural capital? The process of production uses up nonrenewable natural resources such as coal, oil, and minerals. Often renewable natural resources such as productive soils, forests, and fisheries are also depleted or damaged through over-use. And wastes and pollution

28 Alternatives to GDP net domestic product is obtained by subtracting depreciation of manufactured capital from GDP. Further adjusting GDP to account for the depreciation of natural capital yields environmentally-adjusted net domestic product (EDP): EDP = GDP – depreciation of manufactured capital – depreciation of natural capital requires a monetary estimate for the depreciation of natural capital. considers how much a nation is saving for the future The World Bank’s genuine saving measure (S*) adds a social and environmental element to national saving rates. A nation’s genuine saving rate is calculated as: S* = gross domestic saving – produced capital depreciation + education expenditures – depletion of natural resources – pollution damage


30 “We treat the earth like a business in liquidation.” Herman Daly
Natural Capital “We treat the earth like a business in liquidation.” Herman Daly Opportunity cost. Loss is not counted.

31 How to “account”? Economies are based on natural capital (physical assets provided by nature), manufactured capital (physical assets generated by human productive activities applied to natural capital), social capital (trust, mutual understanding, shared values, and socially held knowledge) and human capital (people’s capacity for labor and their individual knowledge and skills). Only the value of manufactured capital (structures and equipment)--and recently, software--is estimated in the current national accounts. Can you think of ways that the stocks of natural, social, and human capital might be measured? What kind of information would be needed?

32 “accounting” Resource functions: the natural environment provides natural resources that are inputs into human production processes. Environmental service functions: the natural environment provides the basic habitat of clean air, drinkable water, and suitable climate that directly support all forms of life on the planet. Sink functions: the natural environment serves as a “sink” which absorbs (up to a point) the pollution and wastes generated by economic activity.

33 Different kinds of value
Use value: the values placed on a resource by those who directly use it. Non-use value: Option value: value of preserving the option of doing something else by doing nothing Existence value: value of preserving something for its mere existence Bequest value: value of leaving an undamaged (less damaged) world to future generations

34 Another problem with GDP

35 Accounting for households: missing
Only two aspects of household production are currently counted in GDP: the services of the house itself (the rent paid explicitly or implicitly by residents) and, the services provided by paid household workers such as housekeepers and gardeners.

36 History of exclusion Households not ‘productive’
Not producing economic goods Gender split: ‘economy’ – man’s world; ‘home’ – woman’s world ‘too hard to distinguish from consumption’ third person criterion: the convention that says that an activity should be considered to be production (rather than leisure) if a person could buy a market replacement or pay someone to do the activity in his or her place ‘GDP measures market production’ GDP aims to only measure production for the market. Since household outputs are not sold, this argument goes, it is consistent to exclude them from GDP. The problem with this argument is that a substantial portion of GDP already reflects nonmarket production

37 Accounting for household production
Why? How? Time use surveys

38 Accounting for household production
Replacement cost method (for estimating the value of household production): valuing hours at the amount it would be necessary to pay someone to do the work Opportunity cost method (for estimating the value of household production): valuing hours at the amount the unpaid worker could have earned at a paid job Many counties, including US, Australia, Canada, India, Japan, Mexico, Thailand and the United Kingdom, have conducted or are conducting national time use surveys to aid their understanding of unpaid productive activities.

39 How to measure economic well-being?
Since the goal of macroeconomics is human well-being, we need to be sure the indicators we pay most attention to are ones that relate to the goal we want to achieve! Re growth in production per capita, need to ask: what, for whom, and how Well-being reducing products? Defensive expenditures? Loss of leisure? Loss of human and social capital formation? Well-being reducing production methods? Unequal distribution?

40 Other indicators Index of sustainable welfare (1989)
Genuine Progress Indicator a measure of economic well- being that adds many benefits, and subtracts many costs, that are not included in GDP. This measure is calculated by the nonprofit group Redefining Progress. - starting point is the Personal Consumption Expenditures (PCE) component of GDP for each year, as calculated by the BLS, on the reasoning that this number approximates the welfare associated with consumption. Then include externalities: (+) values; (-) social costs; (-) environmental costs Human Development Index an index of well-being made by combining measures of health, education, and income. Calculated by the United Nations Development Program (UNDP). Life expectancy at birth; An index reflecting a combination of the adult literacy rate and statistics on enrollments in education; GDP per capita Index: between 0 and 1 (Lebanon )

41 Index of Sustainable Economic Welfare (ISEW)
partnership between an economist, Herman Daly, and a theologian, John Cobb. They construct an indicator of aggregate welfare by taking into account the current flow of services to humanity from all sources (and not only the current output of marketable commodities which is relevant to economic welfare) They deduct spending whose purpose is defensive or intermediate and not welfare- producing They account for the creation and losses of all forms of capital by adding the creation of man-made capital and deducting the depletion of natural capital

42 Resources – as defined in economics

43 Public goods and common property resources
Rival: Goods whose use is limited to one user at a time. Excludable: The right to use or consume the good can be refused to others. A good that is both rival and excludable is called a private good. Music at a concert is – non-rival and excludable. Why? Club-goods: the “access-right” is the membership, which allows the members to enjoy all the club’s facilities in common Common property resources: rival and non-excludable Public goods: non-rival and non-excludable Congestion threshold

44 Non-Excludable Excludable Open Access Regime: (misnamed: Tragedy of the commons) Oceanic fisheries, timber etc. from unprotected forests, air pollution, waste absorption capacity Market Good: Food, clothes, cars, land, timber, fish once captured, farmed fish, regulated pollution Rival} Potential market good (Tragedy of the “non-commons”)but inefficient: patented information, Pond, roads (congestible), streetlights Pure Public Good: climate stability, ozone layer, clean air/water/land, Biodiversity, information, habitat, life support functions, etc. Non-rival} Private beaches, private gardens, toll roads, zoos, movies Non-rival, congestible Public beaches, gardens, roads, etc.

45 Open Access Resources Overuse of non-excludable or open access resources is a phenomenon that has been called the tragedy of the commons paradox of aggregation: if everyone tries to obtain more for themselves, this behavior results in less for everyone. The pursuit of personal interest leads each individual user to take as much as possible of the resource, which increases the overall level of extraction of the resource and drives it irremediably to its destruction – and to the ruin of all the users. Global commons: When the scope of a resource is regional or even global (ex: oceans. Atmosphere)

46 Exceeding the limits: collapse
Numerous examples Sumerians of southern Mesopotamia, Problematic examples: From ‘From Genocide to Ecocide: The Rape of Rapa Nui. (2005)’ – Activity #2 - Your thoughts?  Relevance to NRM?

47 Climate change

48 Example: Climate Change
What is it? What are its impacts? Negative. Positive. Less predictable impacts Positive feedback effects How to evaluate these impacts? Economists have employed the tool of cost- benefit analysis. Others have criticized this approach as attempting to put a monetary valuation on issues that have great social, political, and ecological implications, which go far beyond money value.

49 Activity #3 – due in 2 Sunday night
Examine other forms of economic measurement (other than GDP) and compare them with well-being. Discuss relationship between economic growth and poverty reduction. Discuss relationship between natural resource imports, natural resource exports, and economic growth?

50 Your project A change…

51 A livelihoods-based analysis of the evolution of natural resources management in-----
…a farming “community” in Lebanon Teams of 3. Each team examining farmers in a particular village.  Each team would follow the same time line (beginning in '75), Study how resources are organized in space and time, and how they are allocated, and how it has evolved through time assess how the human, natural, financial, physical and social capitals have changed over time, and, consequently, how the farmers currently have been impacted, and how they manage – using the Sustainable Livelihoods Framework Produce a problem tree analyses for particular issues that you find, to root the superficial management problems and examine their complexity and relationships. organize joint groups with local people to do a participatory research and come up with hand drawn participatory maps By Sunday, please me your teams, and the particular geographic community

52 Next unit: ecology Readings: in the office, and to be added to the website

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