1. Economics for Sustainability Professor Wayne Hayes November 7, 2011 V. 0.4 | Build #8

2. The goals of this session are: 1.Explain the basics of economics to sustainers. 2.Lay out an approach for harmonizing economics and sustainability.

3. Table of Contents 1.Introduction 2.Context: the AnthropoceneAnthropocene 3.The economyeconomy 4.Brands of economicsBrands of economics 5.Ecological economicsEcological economics 6.Eco-EconomicsEco-Economics

4. The growth of the economy undermines sustainability: depletes resources exceeds global and bioregional carrying capacity destroys ecosystems overwhelms natural waste disposal sinks alters the climate wages war on subsistence cultures produces shocking maldistribution of wealth and income.

5. How can the economy be turned around to reinforce sustainability? This alchemy must be resolved to promote sustainability. Economics and sustainability must be harmonized. Resolving the antagonism between economics and sustainability is basic to the enabling analysis.

6. Not everyone is happy with the economy.

7. Are we in the Anthropocene?

8. Examine indicators of the Anthropocene:

9. See the original report for indicators See especially table 1 and figure 2, page 617 of the original article on the Anthropocene.original article on the Anthropocene

10. What are the implications? Shanghai, 2007

11. We need to examine the economy, the engine of the Anthropocene.

12. How is economics defined? This standard definition of economics comes from the authoritative International Encyclopedia of the Social Sciences: "Economics... is the study of the allocation of scarce resources among unlimited and competing uses" (Vol. 4 472). I unpack the definition in my web site for the Economics of Sustainability.unpack the definition

13. The economy is market-driven and growth-compelled. The national economy is measured as the monetized market value of all the goods and services produced in the nation in a calendar year. For more detail and definition, go to my web page defining economics.my web page defining economics

14. Resolution: Situate the economy within society and ecology.

15. Resolve the antagonism between ecology and economy. Economy and ecology share the same Greek root, Oikos, meaning “the inhabited house” or “dwelling.”

16. Economy = Oikos + Nomos. The term “economy” derives from the Greek oikonomia, household management, based on oikos, "house," and nemein, "manage."

17. Ecology = Oikos + Logos. Now consider the related term, “ecology,” which is defined as "the branch of biology concerned with the relations of organisms to one another and to their physical surroundings." Ecology also derives from the ancient Greek term oikos, but instead of management, focuses on logos, "reason" (Oxford English Dictionary).

18. Which should come first, ecology or economy? Now, economy trumps ecology. But should we not understand our home, the Earth, before we muster the audacity to try to manage it?

19. Consider ends and means. Like humanity, should ecology (nature) be considered as an end in itself? Doesn’t economy refer to the efficient, if not always wise, allocation of means to fulfill ends?

20. Therefore, shouldn’t ecology precede economy? Consider this: The inversion of economy and ecology should be the first strategic move to harmonize ecology, economy, and society.

21. Harmonize economics within ecology.

22. Sachs provides an example of embedding economics. Fairness in a Fragile World by Wolfgang Sachs exemplifies several principles: 1.How to invert and to embed the economy within nature and culture. 2.How sustainable development can occur within non-OECD nations. 3.How to equitably harmonize technology, ecology, and society.

23. What brand of economics supports sustainability? We will consider three schools of thought: 1.Neo-classical economics, including contemporary neoliberalism 2.Ecological economics 3.Eco-economics.

24. Neo-classical economics includes micro- and macroeconomics. Neoclassical economics builds on the classical tradition that began with Adam Smith. Microeconomics examines the basic economic units, firms and consumers. Macroeconomics examines the aggregate economy as a unit of analysis.

25. Microeconomics examines the market behavior of the firm and the consumer. Microeconomics extends Adam Smith, assuming perfect competition among small firms and independent consumers. Price theory and market analysis defies the reality of mammoth transnational corporations as the principal agent of economic globalization.

26. Supply and demand within markets are basic to microeconomics.

27. Macroeconomics attempts to explain aggregate economic categories: Growth Consumption Unemployment Savings and investment Inflation Money and finance, including public finance The rates of interest The composition and level of imports and exports.

28. The macroeconomy is linked by complex feedbacks.

29. Since September 2008, macroeconomics has been problematic.

30. Economic growth is the engine of macroeconomics. In the world of macroeconomics, more is always better. No consideration is given to what is produced, so long as it enhances the total flow of goods and services. Prisons, bloated health care costs, responses to toxic spills, the repair of the damage caused by climate change all are "goods" that add to economic output--not "bads" which should be prevented.

31. Some, like Vandana Shiva, disagree: “Instead of living up to its promise to alleviate poverty, economic growth actually undermined ecological stability, thereby destroying people's livelihoods and causing further poverty. Moreover, development strategies have been based on the growth of the market economy, even when large numbers of people operate outside of this network. The emphasis on the market economy has resulted in the destruction of the other economies of nature's processes and of people's survival, but this destruction is seen as nothing more than the 'hidden negative externalities' of the development process. (87)” Shiva, Vandana. "Recovering the Real Meaning of Sustainability." Ed. Rajaram Krishnan, Jonathon M. Harris, and Neva R. Goodwin. A Survey of Ecological Economics. Washington, DC: Island Press, 1995. 86-88.

32. Neoclassical economics spawns economic globalization. The neoclassical brand projects economic globalization and the doctrine of neoliberalism to the world economy. See my web-based presentation on economic globalization.web-based presentation on economic globalization

33. Neoliberalism cannot be reconciled with sustainability. There exists no middle ground. The principles underlying each and the dynamics they drive are thoroughly incompatible. If neoliberalism triumphs, sustainability cannot be achieved, with drastic implications for future generations of humans and for the hospitality of the Earth for life. The stakes are high and the prospects grim.

34. Ecological economics tells a different story.

35. The founder of ecological economics is Herman Daly.

36. Ecological economics recasts economics. Daly, still grounded in economics, expands the boundaries. The economy has three essential functions: 1.Allocation : efficiency of resource use 2.Distribution : fairness 3.Scale : appropriate size. The impulse is to get bigger, to grow in scale.

37. Ecological economics supports markets for efficient allocation. Ecological economists are still practicing and trained as economists. They generally support markets as efficient allocators of scarce resources among competing ends. There are two exceptions: externalities and subsidies.

38. What is an “externality” and why does it matter? An externality is a consequence, positive or negative, of an economic activity that affects other parties without this affect being incorporated into market prices. Thus, market price deviates from the "true" social cost, sending the wrong signal.

39. Microeconomics ignores third-party effects, called externalities. Instead of recognizing such market distortions as externalities, neoclassical economists claim to catch sight of Adam Smith's "Invisible Hand" of the unfettered market. Neoclassical economics is not only blind to environmental degradation and social disintegration but is enthralled in a mystical séance of market perfection, a reification exceeded only by neo- liberalism.

40. Herman Daly comments on the trivialization of externalities by neoclassical economics: “When increasingly vital facts, including the very capacity of the earth to support life, have to be treated as ‘externalities,’ then it is past time to change the basic framework of our thinking so that we can treat these critical issues internally and centrally. (45)” Daly, Herman E. Beyond Growth: The Economics Of Sustainable Development. Boston: Beacon Press, 1996.

41. There are limits to ecological economics. The transition from neoclassical economics to ecological economics is essential, but is not sufficient. Too much is left out of the story: Ecological economics must incorporate a theory of political economics.

42. There are limits to the idea of externalities. Identifying externalities as a market failure is important but: 1.The political economic system, i.e. capitalism, staunchly resists internalizing externalities. 2.Beyond externalities is the essential issue of perverse subsidies and implicit industrial policy.

43. Are externalities built into the business plan of corporations? The modern firm transcends Adam Smith’s village shops and now includes immense and diversified global corporations. Their quest to maximize shareholder returns includes dumping costs onto others. The political muscle of such corporations protects external costs from being internalized and seeks government subsidies and bail outs. (See Annie Leonard’s The Story of Stuff for details.)

44. Perverse subsidies form a hidden industrial policy

45. Myers and Kent estimate subsidies at 5.6% of total global economy. The 2001 study found total subsidies to be about two billion dollars, or 5.6% of the prevailing world economy. (Myers, Norman, and Jennifer Kent. Perverse Subsidies: How Tax Dollars Can Undercut the Environment and the Economy. Washington, DC: Island Press, 2001.) Myers and Kent are scientists, not economists. Note that economists have not, to my knowledge, attempted to estimate the total costs of externalities or subsidies.

46. Distribution is ethical and political, not economics per se. The socially acceptable distribution of the goods and the bads produced by the economy is ultimately political and ethical. Left to itself, a market society (capitalism) will produce large maldistributions in wealth and income.

47. The market distributes according to economic class. In practice, the market-driven returns to capital, as profits and capital gains, accrue to the wealthy few, the capitalist class, while the returns to labor, wages and salaries, go to a multitude, the working class. This dynamic produces a class-based inequality of both wealth and income, which translates into differential political power.

48. In practice, distribution is done through politics as well as economics. In economic theory, distribution is considered as an efficient return to factors of production (land, labor, capital). But distribution is influenced by tax policy and government expenditures.

49. The distribution of income in the USA is now a matter of concern.

50. Macroeconomics fosters growth: bigger is always better. The appropriate size of the material economy is relative to nature's carrying capacity. This aspect of macroeconomics has been altogether disregarded by the dominant neoclassical school of economic thought. In sharp contrast, ecological economists such as Herman Daly have emphasized that scale is central to sustainability.

51. The distinction between development and growth is essential. Herman Daly says this well: “Since physical growth is limited by physical laws, while qualitative development is not, or at least not in the same way, it is imperative to separate these two very different things. Failure to make this distinction is what has made `sustainable development’ so hard to define. With the distinction, it is easy to define sustainable development as `development without growth--without growth in throughput beyond environmental regenerative and absorptive capacities.’ (69)” Daly, Herman E. Beyond Growth: The Economics Of Sustainable Development. Boston: Beacon Press, 1996.

52. What is the appropriate scale of the economy?

53. An eco-economy must go beyond ecological economics Daly-driven ecological economics challenges neoclassical defects, especially 1.Externalities as a market failure 2.The distinction between sustainable development and physical growth 3.The inherent differences in distribution of goods and bads. But ecological economics still emerges from economics, but an eco-economy broadens the scope even further and includes others.

54. An ontological shift from ideal theory to grounded substance is needed. The School of Athens by Raphael

55. Look around you: Ecosystem services are everywhere.

56. Ecosystem services and natural capital contribute to human well-being But natural capital and ecosystem services are not included in economic calculations such as GDP.

57. Natural capital extends the core idea of capital as a producer of value.

58. Eco-economics emerges outside the domain of formal economics. Seeks a holistic and pluralistic outlook. Supports a symbiosis with nature and facilitates a restoration of ecosystems. Respects the diversity of human culture. Expands the time horizon to a long-term, generational perspective Practices critical thinking. Encourages the participation of other folks besides professional economists.

59. Some help comes from economic historians. Key insight comes from economic historians who grasp the larger dynamic and embed the economy in society and nature. We will examine the thought of Karl Polanyi Henri Braudel Gilbert Rist Joseph Schumpeter --- and his intersection with Karl Marx.

60. Eco-economics is basic to Sustainability Two examples of eco-economics are 1.Lester Brown, Plan B 4.0 2.Bill McKibben, Deep Economy

61. The 99% are a new form of civil society enablers. The Occupy Movement provides witness and speaks back to power. They have done so recently in Chicago in response to Governor Scott Walker of Wisconsin. response to Governor Scott Walker

62. What do you think?