1. Neoclassical Economics
Also called: Welfare Economics, Walrasian economics, or Computable General Equilibrium Theory
The political form is called “Neoliberal” Economics (liberal means conservative), meaning belief in deregulation, more trade, fewer social programs, etc.
Neoclassical economics is the basic framework most economists use to address environmental issues.

2. Eras of economics
Classical economics was centered around ethics and “moral philosophy”. Adam Smith, David Ricardo, John Stuart Mill
Neoclassical economics was built around Newtonian physics or “classical mechanics” Vilfredo Pareto, William Jevons, Leon Walras
Behavioral economics is returning to science-based psychology, neuroscience and anthropology using controlled experiments
“Back to Bentham” Daniel Kahneman

3. The worldview of neoclassical economics
Ideas underlying it go back hundreds if not thousands of years
It’s grounded in some important “creation myths” of Western civilization
1. Divine spontaneous order
2. “Natural man” as free from social bonds
3. “Original Sin” (greed) and “Salvation” (through markets)

4. “Economic man” is part of Western “cosmology”
Economic man – It is “human nature” to be materialistic, greedy and selfish.
“And what is friendship? Has it been sought for and so greatly praised by all ages and nations for any other reasons than the satisfactions arising from the performance of mutual services such a giving and receiving whatever men need?” Lozenzo Valla (1432)
Selfish pleasure is not only the highest good, it is the only good. The only purpose of friendship is to gain personal advantage.

5. Thomas Hobbes – 1600s
"[Let us] … return again to the state of nature, and consider men as if but even now sprung out of the earth, and suddenly (like mushrooms), come to full maturity, without any kind of engagement with each other.” (Thomas Hobbes 1651)
Robinson Crusoe, “Natural man” free of society
In economic theory this is called “Self-regarding preferences” - preferences are independent of social or environmental context

6. What economist said this?
“Wherever there is great property, there is great inequality. For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many.”
“Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all…”

7. Adam Smith

8. Adam Smith (1723-1790) The Wealth of Nations (1776)
The Theory of Moral Sentiments (1759)
Wrote about the economic system as centered within a moral society with a code of ethical behavior
Talked about the division of the economic surplus among different classes
And, of course, the “invisible hand”

9. 20th century - Economics became a theory of allocation
“Economics is the science of the allocation of scarce resources among alternative ends.” (Lionel Robbins)
Production function: Q = f(K,H,L) the study of production became how to “optimally” combine inputs to produce a given output
Utility function: U=f(X,Y,Z) utility came to be equated with consuming market goods

10. Basic question How to measure individual welfare or “happiness”?
How to measure the “happiness” of society?
In standard economics (as in Cost Benefit Analysis) happiness is equated to the consumption of economic goods. Social happiness is just the sum of individual happiness (GDP).
There are lots of new measures of “well-being” GPI, the Index of Sustainable Welfare

11. Essential assumptions of neoclassical economics
Economic man (isolated individuals)
Perfect competition (isolated firms)
Equilibrium

12. Goods trading game
Write down the names of 5 items costing between $100-$500. Then mix them up and start trading.
1. Total amount fixed
2. distribution fixed
Basic model is a static exchange of a fixed amount of goods, with some starting income distribution

15. Production of Goods (technology)
Demand for Goods (preferences)
The basic economic model is for a barter economy, no money or prices.

17. The goal is “Pareto optimality” (or “Pareto efficiency”
Pareto optimality in exchange exists when no further trading of goods can make one person better off without making another worse off.
Pareto optimality in production exists when no further trading of productive inputs can increase the output of one firm without decreasing the output of another firm.

18. Market failure = wrong prices
The failure of the market to achieve a socially efficient outcome because prices are “wrong”
Monopoly power
Public goods
Externalities
All these cause prices to be “wrong”
Private price does not equal the social price of a particular good

19. Externalities
Factory
Houses

20. Pollution is an externality

21. Solutions to externalities
Taxes or subsidies (to insure that the prices are “correct”)
Assign property rights

22. Implications of the economic model for environmental value and policy
Environmental features are treated as commodities subject to trade.
Environmental features should have a price that determines how they should be allocated by society.
Prices are determined by the stable, isolated and rational preferences of individuals.

23. What is the value of the Environment?
The market economy sees nature only as an economic input. (“natural capital’) Not to use nature is to waste resources.
Economists – To save nature, put a price on it so its services can be “efficiently” allocated by the market.
Nature is “natural capital”. It’s a “positive externality” that is improperly priced (too cheap or even free)

25. A Potential Pareto Improvement
J.R. Hicks and Nicholas Kaldor (1939)
Shielded economics from seriously considering income distribution. “It’s not our problem.”
The upshot of the PPI is that when economists look at the effects of policy they only look at totals, not changes in distribution.

26. Cost-Benefit Analysis
An attempt to find Potential Pareto Improvements
Used for project analysis (new highway for example, climate change policies, health and safety regulations etc.)
The anchor for CBA is individual preferences (benefits)
CBA uses this basic framework of welfare economics

27. Discounting Everything in the future is reduced to “present value”
The starting point is a “self-regarding” individual at a point in time (Robinson Crusoe, Hobbes’ mushroom men)
To an individual now, things that you get in the future are worth less.
Would you rather have $100 now or $100 one year from now?

28. More discounting
If you are indifferent between having $100 now or $110 a year from now. Your discount rate is 10%.
Another way to put it: The present value of $100 received a year from now is $90.

29. The present value of $10,000 at a 5% discount rate
10K
Present
value 8K 6K 4K 23 47 71 95
Years into the future

30. Discounting – true or false
$100 today is worth more to me than $100 a year from now.
A scenic view is worth more now than in 10 years from now?
A human life is worth more today than in 5 years, 10 years? 50 years? 100 years?
What is the value of a human life?

31. Discounting is complicated
A date with your favorite movie star or model today is worth more than a date 6 months from now.
Suppose you are given meals at two restaurants, one average and one really good. One is in two weeks and one is in one month. Which would you take first, the average one or the really good one?

32. Sustainability
Weak Sustainability (economic): Sustain the growth of the market economy. This is done by maintaining the capital stock used to produce goods and services.
Strong Sustainability (ecological): Sustain the Earth’s life support systems, insure a stable and equitable socio-economic system. Not well-defined.

33. Weak Sustainability
WS is based on the belief that what matters for future generations is only per capita income, maintained by the total stock of “capital” including manufactured, human and natural capital
Key assumptions are substitutability, self-regarding individuals and firms, GNP as a measure of welfare, Potential Pareto Improvement, discounting the future

34.   Net National Product Natural Capital Manufactured Capital Human

35. (rate of return on capital stock)
Net National Product
(rate of return on capital stock)
Total Capital Investment
(Natural, Manufactured and Human Capital)

36. Depletion of “natural capital”6% 5%
Growing Forest
Money in the bank receiving interest
Whether or not to cut down the forest depends on the rate the
trees are growing and the rate of interest.

37. Economic Output
Climate Change
Mitigation A B
Society’s
Capital Stock
Choose option B (mitigation) only if it adds more to economic output than does option A (no mitigation)

38. Pearce and Atkinson Weak Sustainability
An economy is sustainable if
Z = [(S/Y) – (δM/Y) - (δN/Y)] > 0
Z is an index of sustainability
S is savings
Y is national income
δM is the depreciation of manufactured capital
δN is the depreciation of natural capital
This is the World Bank’s “Genuine Savings” indicator

39. Nauru and Weak Sustainability
Nauru is a tiny island in the South Pacific
Phosphate was discovered on Nauru in 1900
During the past 100 years, almost the entire island was rendered uninhabitable by phosphate mining
“natural capital” was transformed in “financial capital”
In the 1980s Nauru’s trust fund amounted to more than $1 billion US.
Calculations show that it was “weakly sustainable”

43. CBS News story about Nauru 1985

44. Nauru today
Trust fund disappeared because of bad investments, corruption, and the Asian financial meltdown of the 1990s. All the financial records burned up in a fire in the 1990s.
Now Nauru has no natural resources, its environment has been devastated, and it has no source of income
Shows that you can’t substitute back and forth between “natural” and “economic” kinds of capital.

45. Alternatives to cost-benefit analysis
Precautionary principle – err on the side of caution
Focus on the environment as a public good that should be preserved, not an external effect that can be corrected by markets and getting the prices right.
The importance of uncertainty and risk.
Climate change – According to climate change models (MIT) the is about a 10% chance that the earth’s average temperature could increase by more than 7 degrees Celsius by 2100.

46. Can markets protect species?
Should there be a market for ivory? A lot of economists say yes because it gives an economic reason to protect and preserve species like elephants and rhinos.
BUT:
Discounting problem. (tree versus money in the bank)
Demonstration effects – makes it OK to wear ivory jewelry. Markets always want to expand. Shaming is important!

47. Cecil the Lion

48. Will trophy hunting protect endangered species?
The nature of markets is to grow. For example, Safari Club International gives its members World Hunting Awards for the following categories, among others: Africa Big Five, Africa 29, European Deer Slam, and South America Indigenous Animal Slam (
Trophy hunting encourages more hunting and the hunting of ever more exotic species to gain more status. Canned hunting on managed reserves where the price of killing a lion may be a few thousand dollars, leads to a demand for killing “authentic” wild lions at prices of tens of thousands of dollars.

49. Canned lion hunting
(news story from 10Sep2016)

50. Who are the stakeholders in whether to allow trophy hunting?
Botswana (doesn’t allow trophy hunting) There is a preservation ethic – tour guides, villagers who get money from ecotourism, ecotourists
Namibia – (allows hunting) Trophy hunters, hunting guides, whoever gets the money from the hunting fees.
Environmentalists – ethics, ecological and social context
Neoliberal “ecomodernists” –the market is always right. Its judgment is always better than that of mortal humans.

51. Free market ideology
Libertarians – minimal government, personal freedom of choice. Hobbesian individuals, no collective choice.
Neoclassical economists – Let markets allocate society’s resources, recognize the role of governments in correcting market failure
Neoliberals – The government should actively promote and protect the market and “modernism”. e.g. trade treaties that protect corporations from control by governments.