Ecological Economics and Business Opportunity

Fall, 2011

Maggie Winslow, PhDPresidio Graduate School

US Chamber of Commerce: “Campaign for Free Enterprise”

• JUNE 10, 2009

• $100 million campaign to “defend the free market system”. It includes:– A public education ad buy. – Issue advocacy program tied to the 2010

midterm elections.

Allocate resources based on market price

S

D

Q

P

P*

Q*

Theory of Rational Markets

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Classic Diagram From Macroeconomics

Firms Households

$

Goods and Services

Labor

$Ecosystem

Classic Diagram From Macroeconomics

Firms Households

$

Goods and Services

Labor

$Environment

Ecosystem

Classic Diagram From Macroeconomics

Firms Households

$

Goods and Services

Labor

$Ecosystem

Diagram from Ecological Economics

Ecosystem

matterenergy

matterenergy

recycling

heat

Economy

Thermodynamics - It’s the Law

1st LawIn any closed system matter and

energy can be neither created

nor destroyed.

Matter and energy can be

interchanged.

You can’t make something You can’t make something

from nothing.from nothing.

Thermodynamics - It’s the Law

1st LawIn any closed system matter and

energy can be neither created

nor destroyed.

Matter and energy can be

interchanged.

You can’t make something You can’t make something

from nothing.from nothing.

2nd LawEnergy and matter move towards Energy and matter move towards

a less ordered state.a less ordered state.

Transformations lead to increased Transformations lead to increased

entropy. Entropy increases in an entropy. Entropy increases in an

isolated system.isolated system.

Recycling uses energy. Recycling uses energy.

“Production” is an illusion.

ThroughputThroughput

“Production” is an illusion.

Resource Degradation/Resource Degradation/PollutionPollutionThroughputThroughputResource DepletionResource Depletion

“Production” is an illusion.

Resource Degradation/Resource Degradation/PollutionPollutionThroughputThroughput

The faster the throughput, the faster the depletion and degradation and the more “lost

opportunity.”

Resource DepletionResource Depletion

Limits to Growth

Ecosystem’s capacity to 1. regenerate renewable resources2. restore ecosystem services

Technological capacity to3. recycle and/or substitute non-renewable resources

Can't man-made capital make up for natural capital?

The value delivered by the biosphere is estimated to be in the range of US$33 trillion per year (1997 dollars).

Global economy delivers US$18 trillion per year.

-The value of the world’s ecosystem services and natural capitalNATURE, VOL 387, 15 MAY 1997

Can Technology Save Us?

Until man duplicates a blade of grass, nature can laugh at his so-called scientific knowledge....

-Thomas Edison

Consequences of Economic Growth

• Increased growth can have positive as well as negative consequences.

• At some point the costs of growth become

greater than the benefits.

Is there is an optimal size for our economy

Benefits and costs

Size of the economy

Marginal benefits Marginal costs

Optimal Scale in Microeconomics

• Activity should increase until marginal costs are equal to and not greater than marginal benefits. – Firms:

• how much to produce (set MC = MR)• how much labor to hire (set W = VMPL)

– Consumers: • how much of a product to buy (set MUx/Px = MUy/Py)

– Economy: • how much of good X should be produced (Set MWTP = MC)

• When MC = MB, optimal scale is reached.• There is no “optimal scale” in macroeconomics.

Marginal Costs• Marginal costs of production must be going up

for economy as a whole because resources are getting scarcer.

• If MC is increasing, AC must be increasing as well at some point.

AC

MC$

Q

LRAC Curve Also Slopes Upward for Economy as a Whole

• In ecological economics, natural capital becomes the

limiting factor in production.

• It is important to know if ecosystem services and other aspects of natural capital are being depleted faster than they can regenerate.

• NNP = GNP – C – MMKd - NKd

Scale of Economy Also Relevant to Social Systems

Church

Nature

FamilyFriends

Market - buying and selling

"Getting and spending, we lay

waste our powers."

Ultimate Ends

What ends do we desire?What resources do we need to attain

these ends?What ends get priority?

Economists Pondering Ultimate Ends and Consumerism is Nothing New

• Simonde de Sismondi (b. 1773)

• John Ruskin (b. 1819)

• Thornstein Veblen (b. 1857)

• John Hobson (b. 1858)

• John Kenneth Galbraith (b. 1908)

Closed System and the Steady State• Nicholas Georgescu-Roegen (1906 - 1994):

As we rely less and less on current solar energy (flow) and more and more on fossil hydrocarbon and other mined resources (stock), economic activity needs to be understood as moving toward a closed system and subject to the 2nd law of thermodynamics.

• Economic activity as an entropic process - takes high quality energy and materials and reduces them to waste heat and dispersed minerals.

Human Capital EconomicProductionProcess

GoodsandServices

EvolvingCulturalNorms andPolicy

Well Being(Individual andCommunity)

Consumption(based on changing,adapting preferences)

Education, training,research.

Building

Investment(decisions about, taxescommunity spending,education, science andtechnology policy, etc., basedon complex propertyrights regimes)

Individual Public

GDP

Wastes

Common

Ecologicalservices/amenities

having, being

- having,- being

negative impacts on all forms of capital

being, doing, relating

Restoration,

ConservationNatural Capital

ManufacturedCapital

having

positive impacts on human capital capacity

doing, relatingComplex propertyrights regimes

SolarEnergy

Social Capital

Lim

ited

Su

bst

ituta

bili

tyB

etw

ee

n C

ap

ital F

orm

s

Model of the Ecological Economic System

Waste heat

Institutionalrules, norms, etc.

Materially closed earth system

From: Costanza, R., J. C. Cumberland, H. E. Daly, R. Goodland, and R. Norgaard. 1997. An Introduction to Ecological Economics. St. Lucie Press, Boca Raton, 275 pp.

Question: Can we have a vibrant economy (e.g. high employment levels) while limiting the extraction of scarce resources and the degradation of natural capital? YES!

Y= C+I+G+NX

Income (Y, GDP) = consumption + investment+ government

spending+ net exports

Y= C+I+G+NX Consumption

• Cg - Consumption of non-durable goods and energy-intensive services

• Cs - Consumption of human-capital intensive services

• Cm - Household investment in consumer durables.

We need to limit Cg but can let the others grow.

Y= C+I+G+NX Investment

• Ime - Investment in energy-intensive manufactured capital

• Imc - Investment in energy-conserving manufactured capital

• In - Investment in natural capital

• Ih - Investment in human capital

Here we need to limit Ime.

Y= C+I+G+NX Government Spending

• Gg - Non-durable goods and energy-intensive services

• Gs - Human capital-intensive services

• Gme - Investment in energy-intensive manufactured capital

• Gmc - Investment in energy-conserving manufactured capital

• Gn - Investment in natural capital

• Gh - Investment in human capital

Here we need to limit Gg and Gme.

What Would New Economy Look Like?

Fewer, more durable goods

More services

Living Smaller

Shorter work weeks

Macro-Level Solutions

• Incorporate sustainability criteria in quantitative indices of national income.– Include loss of natural capital as a negative in GDP.

• Develop better regulatory and incentive-based instruments to assure sustainability.

• Invest in public goods.

• Provide preferential interest rates for investments in energy efficiency and renewables.

Macro-Level Solutions Cont.• Support policies that reduce population growth.

• Reduce the work week, especially to accommodate productivity increases.

• Actively assess new technologies for their beneficial aspects.

• Equalize income.

Micro-Level Solutions

EthicalProfits

Reduce throughput

Reorient products/services

Encourage fair regulation

Develop disruptive

technologies

Encourage fair regulation

Pre-1960s, Pollution denial

1970s and ‘80sEnd-of-pipe regulation

Late ‘80s and ‘90sPollution prevention

and stewardship

Clean Tech, Eco-effectiveness,

Cost savings,Opportunity

Reduce throughput

MMK services gained

NK services sacrificed

MMK services gained

MMK stock= MMK stock

throughputthroughputNK stock

NK stockNK services

sacrificed

X X X

Comprehensive Efficiency Identity

MMK = Man-made capital stock (e.g. equipment, goods)NK = Natural capital stock (e.g. soil, minerals, living organisms)

Reduce throughput

MMK services gained

NK services sacrificed

MMK services gained

MMK stock= MMK stock

throughputthroughputNK stock

NK stockNK services

sacrificed

X X X

Comprehensive Efficiency Identity

Service EfficiencyHow well are man made resources meeting what they are designed for? How well are we allocating resources?

MMK = Man-made capital stock (e.g. equipment, goods)NK = Natural capital stock (e.g. soil, minerals, living organisms)

Reduce throughput

MMK services gained

MMK stock= MMK stock

throughputthroughputNK stock

NK stockNK services

sacrificed

X X X

Comprehensive Efficiency Identity

Maintenance Efficiency or DurabilityHow much man-made stock are we getting for a given level of throughput?Are things well-made and durable?

MMK services gained

NK services sacrificed

Reduce throughput

MMK services gained

MMK stock= MMK stock

throughputthroughputNK stock

NK stockNK services

sacrificed

X X X

Comprehensive Efficiency Identity

Production EfficiencyAre we getting a high level of throughput for the amount of NK

stock available?

MMK services gained

NK services sacrificed

Reduce throughput

MMK services gained

MMK stock= MMK stock

throughputthroughputNK stock

NK stockNK services

sacrificed

X X X

Comprehensive Efficiency Identity

Ecosystem EfficiencyAmount of NK stock we can get for NKservices sacrificed.

MMK services gained

NK services sacrificed

Reorient products/services

Sustainable Value

Pollution PreventionPros: Cost and risk reduction

Product StewardshipPros: Reputation and legitimacy, future cost savings

Clean TechnologyPro: Innovation and repositioning

Base of the PyramidPros: Growth and future value

Different strategies for different markets (from Capitalism at the Crossroads, S. Hart)

Developed Markets: reducing corporate footprint

Emerging Markets: avoiding collision between economic growth and resource depletion and degradation

Traditional/Survival Markets: understanding needs, developing native capacities

Creative DestructionThere are limitations with marginal improvements.

Disruptive technologies

Breaking away from path dependence.

Seeing sustainability as an opportunity not risk avoidance.

•Firms with large amounts of fixed assets (oil industry for example) do not want to change as much as adapt.

•Service and retail are more able to switch course.

Turnover in S&P 500: 1.5% per year in 1920 10% per year today

-Creative Destruction, Foster and Kaplan

What Do You Want the New Economy to Look Like?