Q: What is ecological economics?
Ecological economics is a trans-disciplinary field. It's not trying to be a subdiscipline of economics or a subdiscipline of ecology, but really it's a bridge across not only ecology and economics but also psychology, anthropology, archaeology, and history. That's what’s necessary to get a more integrated picture of how humans have interacted with their environment in the past and how they might interact in the future. It’s an attempt to look at humans embedded in their ecological life-support system, not separate from the environment. It also has some design elements, in the sense of how do we design a sustainable future.? It’s not just analysis of the past but applies that analysis to create something new and better.
Q: How does it differ from environmental economics?
Environmental economics is a subdiscipline of economics, so it's applying standard economic thinking to the environment. Mainstream economics, I think, is focused largely on markets and while it recognizes that there are externalities, they are external—they're out there. Ecological economics tries to study everything outside the market as well as everything inside the market and bring the two together.
Conventional economics doesn't really recognize the importance of scale—the fact that we live on a finite planet, or that the economy, as a subsystem, cannot grow indefinitely into this larger, containing system. There are some biophysical limits there. The mainstream view doesn’t recognize those limits or thinks that technology can solve any resource constraint problems. It’s not that we can't continue to improve the human situation. But we have to recognize that the environment creates certain limits and constraints on that, and we can define a safe operating space within which we can do the best we can.
Q: You just mentioned scale. Elsewhere you have talked about distribution and allocation as key parts of ecological economics. Could you explain those as well?
The three interrelated goals of ecological economics are sustainable scale, fair distribution, and efficient allocation. All three of these contribute to human well-being and sustainability.
Distribution has many different impacts, not the least of which is its impact on social capital and on quality of life. We find that if the distribution of income is too big, that creates competing groups within society. You lose cooperation. There is actually research to show that more unequal societies are less productive in the end because they spend a lot of their energy trying to maintain that gap. So distribution has a lot of direct and indirect feedbacks on how the society is actually functioning that the conventional view tends to ignore. It just focuses on having more, the idea being that the more we have the more we can spread around. But I think we're getting into a time where we have to worry about distribution. We may not always have more to spread around.
Allocation is important within mainstream economics. But to think that the market is efficient at allocating resources requires a long list of assumptions that are seeming less and less realistic—not the least of which being that there has have to be no externalities. We're finding that the natural and social externalities are actually larger than the internalities of what's going on in the market. In that situation, you can't expect the market to efficiently allocate resources.
How do we fix that? Well, part of it is internalizing those externalities—pricing carbon, pricing impacts on other natural resources and ecosystem services. I'm involved with a company called Trucost that works on just that, quantifying the external environmental cost of a company and using that information to inform investors and the companies themselves about how they can reduce their external cost.
Q: You mentioned natural and social externalities. What is a social externality?
Maybe the simplest example would be the run- up of house sizes and house expenses that led to the housing bubble. Why do people think they need a bigger house? It's not because they really need a bigger house to satisfy their housing needs. It's only a status need. Other people in their peer group have a bigger house. It's really an arms race that drives this phenomenon. And arms races are not really socially productive. They just consume resources.
That's a social externality: someone getting a bigger house causes other people to think they need one. They buy houses that are outside their price range, for example, and over-extend themselves, and have to work harder in order to pay off the mortgage. And, actually, their quality of life suffers rather than improves by having this larger house.
Robert Frank, an economist from Cornell, offers a solution of changing the income tax rules so that we tax only consumption and not savings, and we tax consumptions at a very high, progressive rate. You could have as much income as you wanted, but if you chose to spend it on luxury goods, then you would be taxed at a very high rate. If you chose to invest it in things that are going to be socially more productive, then you wouldn't be taxed at all.
Q: With the current economic system, growth is …
Q: So how does it look different in ecological economics?
Standard economists don't seem to understand exponential growth. Ecological economics recognizes that the economy, like any other subsystem on the planet, cannot grow forever. And if you think of an organism as an analogy, organisms grow for a period and then they stop growing. They can still continue to improve and develop, but without physically growing, because if organisms did that you’d end up with nine-billion-ton hamsters.
So, in nature, things don't grow forever. If you want to tie economics back to nature, you have to recognize that the economy is going to stop growing at some point. That's not necessarily a bad thing. That's the way natural systems work. So what we need to do now is make the transition from the growth phase to the steady state; all natural systems do that. Think of a successional system in ecology. In an open field, all of the incentives in that system are to grow as fast as possible, to capture as much territory as you can as quickly as possible. And that's what we've been doing over the last several millennia. But once the field is filled up with early successional plants, they're more cooperation oriented, more steady-state. They're not going to keep growing.
What does that mean in terms of the economy? I think it means a shift away from sort of brute-force competition towards more cooperative, alliance-building, stable kinds of relationships. And if you want to translate that to the business community, it means that the cut-throat competition is probably going to come to an end, and we'll have more collaboration among the different parts of the system.
[This article has been reproduced with permission from Qn, a publication of the Yale School of Management http://qn.som.yale.edu]