54 primavera - Verano 2010 economics approaches nature’s household. Section three offers a comparison between neoclassical economics and ecological economics on how they approach global climate change. Finally, section four offers some concluding remarks. II. Two opposing views In classes, I have used the phrase “let’s take environmental issues seriously” as a wakeup call to address environmental concerns from multidisciplinary views. The point is that truth lies outside the boundaries of any single discipline. In fact, many of our scientific presumptions and opinions often draw from insights, theories, and laws crafted and/or harnessed by a multitude of disciplines. After all, concerns over environmental distress often arise through the interplay between attitudes, volitions and the source and sink roles played by nature. Like other scientists, economists approach this interplay through various standard and notso-standard paradigms, two of which have become known as environmental economics and ecological economics. Nature’s Household and the Economizing Problem: Constraints and Choices according to Environmental Economics Environmental economics stems from neoclassical or standard economic analysis, which seeks an optimal allocation of resources via the marginal productivity distribution of income.10 From its neoclassical foundations, environmental economics invokes the use of incentives, especially market incentives, to correct private outcomes in the presence of externalities (e.g., third party non-consented effects that may arise because of the overuse of a resource or good). Environmental economics assumes that there is some degree of substitutability between natural capital and physical (human-made) capital, such as buildings, roads, entrepreneurial talent, while treating the market economy as a closed system in which nothing comes either in or out. From this perspective, there is hardly any need to worry about biophysical constraints, particularly, entropy or the dissipation of efficiency matter-energy. In a closed system, energy is only transformed (1st law of thermodynamics). The implication of this is that resources, goods and services can supposedly flow from households to business and vice versa perpetually. In case markets do not live up to their expectations, that is, deliver the most efficient allocation of resources, policy instruments are invoked to (a) grease the wheels of this perpetual-motion of goods/resources, and (b) correct any externalities and distribution of income problems that may emerge along the way. Popular environmental economic techniques for assessing externalities and the valuation of 10 In his Principles of Political Economy and Taxation, classical political economist David Ricardo developed formally the marginal productivity distribution of income, which posits that income is distributed across different members of society according to their marginal contribution to output. resources or the amenities resources directly or indirectly provide, include: Cost-benefit analyses, contingent valuation as in survey methods to determine willingness to pay to enjoy an amenity or accept a charge for enjoying (using) a resource, hedonic pricing, and the estimation of empirical production functions (Harris 2006, pp. 106-114). Reexamining Constraints and Choices: Closed versus Open Systems, Natural Capital and Ecological Economics Ecological economics is fairly young compared to its rather obtrusive neoclassical sibling. Ecological economics redirects contemporary economics to classical political economy on the basis of its views regarding energy inputs and limits to output and entrepreneurial will in the wake of diminishing marginal productivity of labor coupled with land of poorer quality.11 Ecological economics is also heavily influenced by Kenneth Boulding’s ideas regarding open versus closed systems, and Nicholas Georgescu-Roegen’s and Herman Daly’s imperative contributions on formally strapping the economic process by its biophysical constraints, particularly, underscoring the second law of thermodynamics, entropy, in the economic process. Ecological economics departs from classical political economy and neoclassical economics from its interpretation of the economic system or circular flow of the economy as an open subsystem within a larger albeit closed, finite, and non-growing ecosystem.12 From this perspective, the only energy flowing into the ecosystem is provided by our nearest star, the sun, which grants us with the photosynthesis process. Energy flowing out of the ecosystem is by-product waste and heat. An economic system that grows within a closed, finite and non-growing ecosystem is bound to increase its share of net photosynthetic product.13 In spite of characterizing the economy as an open system, ecological economists argue that the interaction between resources to produce commodities (goods and services) and by-product waste can lead to losses in energy efficiency (rising entropy) given a diminishing resilience of the ecosystem to perform its functions both as source of resources and a sink for our by-product waste. 11 This was initially expounded by D. Ricardo’s in his theory of rent and accumulation. A superb summary of this theory is found in Foley, D. (2006) Adam’s Fallacy: A Guide to Economic Theology. Cambridge, ma: Belknap Press. 12 Daly, H. (1996) Beyond Growth: The Economics of Sustainable Development. Boston, ma: Beacon Press. 13 This is known as “ecological footprint” analysis
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