Discovery Guides Areas


Environmental Economics: Basic Concepts and Debates
(Released April 2007)

  by Ethan Goffman  


Key Citations



Ecological Economics: Altering Assumptions


The field of Ecological Economics was founded in the 1970s, based on critiques of classical economics as making the environment an extension of economics, just another factor of production, a cost of doing business. If Environmental Economics starts from classical economics and extends it to apply to environmental matters, Ecological Economics considers the earth and its ecosystems as the larger system, of which the human economy is just a subset. In this paradigm there is an economy of nature, a distribution of goods and services, in which human activity is merely one aspect of natural activity. Humans, like all living creatures, draw sustenance from the environment and create "waste," although our waste products may be other creatures' (animal, plant, or single-celled organism) food sources. In the long run, the system will find uses for all "waste" products, evolving and regenerating, although humans will not necessarily be part of the picture.

Ecological economists point out that humans are part of an environmental system that follows the first law of thermodynamics, the conservation of mass and energy. Thus the economy can never grow beyond the limits of the environment. This does not mesh with the classical economic schemata in which land-which stands in for the environment-is a subset of the entire economy, which can grow forever:

diagram of the environment embedded within the economy

In contrast, for ecological economists the economy functions as part of a larger ecosystem:

diagram of the economy embedded within the environment

Human activity is simply part of a larger-and finite-flow of energy, goods, and services. Given its emphasis on larger ecological systems, ecological economics "generally assumes a longer time horizon than" environmental economics and "pays more attention to cause-effect chains, interactions and feedback between natural and human-economic systems" (van den Bergh 6).

One important project to arise from ecological economists' emphasis on the larger environment is the attempt to evaluate the total value of all the world's ecosystems. A notable 1997 paper by Costanza, et al. estimated a total worldwide annual value of between US$16 and 54 trillion on crucial natural services, defined as "flows of materials, energy, and information from natural capital stocks which combine with manufactured and human capital services to produce human welfare" (254). The paper included 17 services provided by Mother Nature yet often overlooked by economists, such as climate regulation, nutrient cycling, crop pollination, and recreation. The authors qualified their argument by noting the problematic nature of many of their estimates, which rely on a number of assumptions, and the difficulty of quantifying nature. At the extreme end, they point out, "It is trivial to ask what is the value of the atmosphere to humankind, or what is the value of rocks and soil infrastructure as support systems" (255). While employing the quantification techniques common to economists, the article shows a skepticism, common to ecological environmentalists, regarding the over-reliance on such techniques.

diagram of varying models of ecological and economic relationships
Different visions of the economy based on disparate world views. Conventional economics model (a) and expanded ecological economics model (b)
Environmental economists and ecological economists, then, use many of the same concepts, trying to figure out interactions between the human economy and the environment, trying to evaluate mechanisms by which our economic choices will allow for better human lives in the long-term, to enhance sustainability. Still, ecological economists question the tendency of many economists to quantify as much as possible so that they can fit heterogeneous matter into a system easily graphed, and measure costs and benefits. As Daly and Farley put it, the attempt "to put monetary values on nonmarket goods such as ecosystem services not only compounds . . . ethical issues with serious methodological problems, but also implicitly assumes that natural capital and manmade capital are perfect substitutes, a position that most ecological economists strongly reject" (236). While this critique might simplify the views of many economists, it points to mutual mistrust between ecologists and economists that may lead each to feel that the other is naíve. Sonia Conly, a retired federal financial economist, sees "ecological economics as a special case of environmental economics in which the social rate of discount is assumed to be zero and technological progress is also assumed to be zero." In this perspective, ecological economists underestimate the ability of future generations to react to environmental changes.

Ecological economists, conversely, question traditional economists, for whom "sustainable development is usually regarded as being identical to sustainable growth" (van den Bergh 5). By contrast, many ecological economists believe in more radical change, toward a steady state economy that "undergoes neither growth nor recession. To be more specific, it has constant populations of people . . . and constant stocks of capital" (Czech & Daly 599). It also has a constant level of throughput, defined as "the flow of natural resources from the environment, through the economy, and back to the environment as waste" (Daly & Farley 7). Ecological environmentalists believe that the idea of incessant growth is no longer viable and that, since we are depleting long-term stocks of natural resources, we have already reached an unsustainable crisis state. Rather, they argue, we must concentrate on improving quality of life in ways apart from increasing Gross National Product (GDP).

consumer goods spilling over
Artist Gilberta Daniels Goodwin depicts the Gross National Product

The relationship between lowering throughput and GDP is a problematic one. While historically GDP and throughput have correlated strongly, it is unclear whether they must continue to do so. As Daly and Farley put it, "Better technologies, as well as a better ordering of our priorities, can reduce the throughput without lowering the quality of life" (33). Ecological economics also question "strict and fixed assumptions in traditional economic theory with regard to individual behavior," tending toward the belief that behavior is largely motivated by social expectations, and that these can be altered. Humans, then, are not seen as motivated strictly by self interest, but as beings shaped by, and interacting with, social and natural environments.

Go To Growth & the Environmental Kuznets Curve

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