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July 20, 2009 | by  | in Features |
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Green Economics and how it might work

In times of the global economic recession and ecological crisis, it is obvious a radical response is needed. World-renowned economist Herman Daly maintains the future of human civilisation is dependent on a new economic model, based on a dynamic model—known as the steady state economy—preserving the environment we are all dependent upon.

There needs to be a shift away from the current paradigm of the growth economy towards a system that emphasises conserving natural capital and views the economy as a subset of the environment. Neoclassical economics has ignored the environment. The current system views environment and economy as intertwined. Any environmental problem can be solved by the market or by governmental interference.

Traditional economic theory is based on general equilibrium models: a giant system of thousands of simultaneous equations balancing supply and demand. These determine the price and quantity of goods and services. It assumes that there is an infinite resource base and also an infinite waste sink with no feedbacks. Simply put, resources will never run out and pollution will never occur. This leads to the notion that infinite growth is possible.

However, a litany of environmental problems, including destruction of the ozone layer, climate change, acid rain, deforestation, overpopulation, loss of biodiversity, soil erosion, desertification, floods, famine, overfishing, hazardous wastes, expanding landfills, fresh water depletion and the depletion of nonrenewable resources, to name a few, are symptoms of the shortcomings of the current economic system.

The planet is approximately in a steady state. Neither the mass nor the surface is growing or shrinking and the flows of energy inwards and outwards are roughly equal. Energy and matter enter the economy as inputs, are turned into goods and services, and leave as wastes. This flow is known as throughput.

Steady state economics draws from the work of Nicholas Georgescu-Roegen’s The Entropy Law and the Economic Process (1971). This explains how the second law of thermodynamics can be applied to the economy. In a closed system such as the planet, where the energy balance is around zero, the availability of useful energy decreases. Production of economic goods transforms matter-energy from a state of low entropy to a state of high entropy. Entropy is a measure of the disorder within a closed system.

The second law implies that matter can only be recycled a number of times and that energy can be recycled. However it takes more energy to do the recycling than the amount of energy being produced. The law also implies that creating order by means of producing goods will create greater disorder elsewhere in the environment. Therefore the entropy law puts a limit on how much we can produce. Therefore unlimited growth is impossible.

The planet’s interdependence has its limits too, and in turn limits growth. The environment provides vital services such as non-renewable resources which excessive economic growth exhausts. Forests, for example, can be considered as floating lakes. They hold topsoil in place, preventing erosion; help absorb rainwater, thereby preventing flooding; and they also remove carbon dioxide, produce oxygen and many other important ecological services. Deforestation removes all of these services.

However, in neoclassical economics, this forest can be turned into books on the topic of the ecological services of trees and people can go to the library and learn about the ecological services trees provide. This economic theory treats factors of production as substitutes; natural capital can be replaced by human capital or physical capital. If there is less of one (such as labour) it can be replaced by another (machinery) and you can still get the same output.

Before the industrial age, when the economy was small compared to the ecosystem, physical capital was the limiting factor. Fish in the sea were abundant. The number and capacity of fishing boats determined the catch size. Today however, Daly argues, the factors’ roles have changed—the economy has become very large relative to the ecosystem—making natural capital the limiting factor. The depleted fish stock in the sea will determine the number of fish that can be taken as opposed to the technologically advanced fishing fleet.

Steady state economics argues that different forms of capital are complementary and cannot be substituted. They have to be used in fixed proportions. Adding one cannot make up for having less of another. The ever-decreasing supply of natural capital cannot be replaced by adding more physical capital (which is made from natural capital in the first place).

The basic premise behind the steady-state economy is to maintain constant stocks of wealth and people at levels that will suffice for a long and good life. The throughput by which these stocks are maintained should be at a low level and within the regenerative and absorption capacities of the ecosystem. Greenhouse gas emissions should only occur if the planet is able to absorb these gases back into natural sinks, as opposed to being stored into the Earth’s atmosphere. The system is therefore sustainable and can continue indefinitely. The goal of progress in a steady-state economy is not to get bigger but to get better. Rather than increase monetary wealth for a few, it increases the well-being of the many.

The idea of optimal scale is an important concept in steady-state economics. As we increase the production of any good, we also increase the costs and the benefits. Economics teaches that the firm’s optimal scale of operations is that at which marginal revenue equals marginal cost—the addition to the firm’s revenue from the last unit of output produced and sold equals the addition to cost. If the firm grows beyond the optimum, then the costs will go up by more than the benefits. Consequently, growth will make the firm poorer rather than richer.

Analogously, the economy’s optimal scale is the output level at which the marginal gain from growth (additional utility from increasing the man-made capital stock) equals the marginal cost of growth (lost services from natural capital, pollution, resource depletion, environmental degradation, and so on). Beyond this point, growth generates more costs than benefits. Unfortunately, Daly believes, the world economy has already exceeded optimal size. It is now so large that it is overloading the ecosystem’s ability to serve as a source and a sink.

Opponents of the steady-state economy with no previous record of concern for the poor attack steady-state advocates as foolish, who are already rich and just want to prevent the poor from becoming wealthy. However, many proponents of the steady-state economy accept and declare the necessity of limits to inequality in the distribution of wealth. In reality, many people who have advocated for less inequality in the distribution of wealth on ethical and political grounds are also advocated for environmental protection. It is often those who are proponents of economic growth who avoid the distribution issue and spout on about the fallacy of the trickledown effect.

Until recently, the world economy had been growing, and yet we still have extreme poverty. It should be obvious that what actually grows is the reinvested surplus, such as profits and the benefits of growth go to the owners of the surplus, who are not the poor.

Another argument of those who oppose the steady-state economy and think that the current system is the answer is that of technology being able to solve our problems. We shouldn’t worry about peak oil, as electric cars will become cheap and viable for everybody. However, there are a couple of issues here. There is a limited amount of platinum available in the world. This is an important component for the vehicle’s battery. There is not enough platinum to produce enough cars to replace the current petroleum-based vehicle fleet on the planet.

This blind faith that technology will solve all our problems is just that, blind faith. These solutions will be far more expensive than the preventive measures available. These solutions may in fact cause more problems rather than solving the current environment problems.

The most important point is that petroleum isn’t just used for fossil fuels. It is also an important chemical feedstock used in just about every produced good. It is literally the lubricant for the world’s economy. Under the current economic system, a substitute should be able to replace this vital feedstock. However, this substitute is not forthcoming. If the prediction by the International Energy Agency is true, then peak oil is expected to occur around 2030. Many predict that it will happen much sooner. When this happens, the current economic system will not be able to handle this oil shock. This current recession will be nothing compared to what will happen to the global economy when this happens.

There will be a plethora of environmental problems that will plague the planet in the coming decades. The current economic model can be found to be the root cause of these problems. It would be therefore foolish to think that this model will then be able to solve them. Therefore it is time to replace it with a model that values the environment and society over the importance of the economy. As Albert Einstein once said:

“The world will not evolve past its current state of crisis by using the same thinking that created the situation.”

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