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Special series: Ecological economics, part 1

NewsNotes, January-February 2009

As humanity faces the reality of climate change and reaches the exhaustion of a number of natural resources, we realize that our economy, which is fundamentally built on the concept of never-ending exponential growth, must drastically change if we are going to live within the confines of the Earth. This series of six articles looks at ecological economics and the idea of a steady state economy that will provide livelihoods while fitting within the footprint of the Earth.

A new economics for a full world

The basic rules that guide conventional economics were created at a time when the world seemed empty, when people could expand out into apparently endless lands. Natural resources were abundant and free. Governments were very effective in using up resources to build massive infrastructures and weapons systems, driven by the allure of growing into an apparently limitless world. Yet times are rapidly shifting, and we find ourselves reaching limit after limit in terms of land, water, food, oil, etc. Our full world requires a very different type of economy, an economy that is designed to fit within the physical limits of the Earth, not an economy that imagines that it can grow forever.

Traditional economists downplay or even ignore the ways in which our economy depends on resources and natural systems and instead focus exclusively on the importance of labor and capital in producing goods. One example of this thinking was economist William Nordhaus’ statement that global warming would have little impact on the U.S. because it will only affect agriculture which is only three percent of the gross national product.

Developed in the years preceding World War II, "economic growth" through the expansion of the gross domestic product (GDP, the total value products and services produced within the territorial boundaries of a country) has been the focus of governments ever since. (Gross national product, GNP, which is the GDP of a country plus capital gains from overseas investments minus income earned by foreign nationals domestically, is used less frequently.) Both measure economic growth and have been assumed to measure general wellbeing. Yet, as a measurement, GDP is fundamentally flawed. Numerous studies have shown that self-declared happiness only increases with rising income until basic needs are met. After that, increases in income have little or no effect on happiness. Yet countries in the global North with already high per capita GDPs seek to further increase it in the blind hope that this will make people “happier.”

Another enormous flaw in GDP is that it counts the consumption of natural resources as income, instead of an expense, or reduction in capital. If a country extracts non-renewable minerals, it is treated as positive income in GDP measurements, despite the fact that the country is losing irreplaceable natural capital. Businesses must account for depreciation and spending of their human-made capital like trucks and factories, but in the world of conventional economics, GDP treats natural capital as unlimited.

Another serious flaw in calculating the GDP is that it counts as positive defensive spending made to protect ourselves from the unwanted side effects of production and consumption by others. Think of them as “anti-bads” spending rather than goods. They are incurred to counteract the negative effects of other people’s consumption or production. For example, to avoid overcrowding, crime, and air or noise pollution, many people have moved out of cities, bought more cars and spent more on gas. Or, if someone chose to stay in the city, they might have spent money to soundproof their apartment, install air filters, or buy a home security system. Medical expenses and car repairs after a traffic accident are other examples of defensive costs. Even money spent cleaning up toxic waste sites left behind by irresponsible businesses is counted as positive by the GDP. All of these costs should be counted as a cost of production applied to the activity that made them necessary, which would increase the price and reduce the amount of that activity. Instead we treat them as purely voluntary costs and add them to the GDP. These costs expand the economy, but do not increase well being.

A truly illogical aspect of our current economy is how conventional economics treats limited goods (including dwindling natural resources like water, oil, minerals, fish, etc.) as non-scarce, placing low or no value on these things, while treating abundant goods, such as knowledge, as scarce through our patent and copyright systems. Especially today, when countries around the world need to rapidly adapt to climate change, the free transfer of knowledge is indispensible. The current patent system must be replaced with one that encourages innovation without resulting in prohibitively expensive products.

A final area of conventional economics that must fundamentally change is how most governments currently tax “goods” like workers’ incomes and production while not taxing “bads” like resource depletion. Taxes are effective tools for influencing behavior. Decades ago, we thought resources were plentiful and seemingly endless, so it made sense not to tax resource use. Our current tax structure encourages employers to hire fewer workers and use more energy-intensive and resource-intensive production methods that are taxed less. By not taxing resource use, we send a message that resources can be squandered.

But we now know that resources are in short supply. Governments should change the tax system – which is an effective tool for influencing behavior – by removing taxes that make hiring people more expensive, and by taxing resource usage. Compensations can be made to assure that people with low incomes would not be priced out of basics like heating their houses or basic transportation.

We place “sin taxes” on products like alcohol and cigarettes in an effort to lower their usage. In the same way, we should use taxes to reduce other modern day sins. (Pope Benedict XVI recently declared pollution and excessive wealth to be cardinal sins.) A “sin tax” on pollution and wages above a certain level would be appropriate.

Ecological, or steady state, economics looks at the real world and designs an economic system that would respect the limits of the Earth. The model focuses on the three fundamentals of scale (size of the economy relative to its sustaining ecosystem), distribution of wealth and allocation of resources. We will explore these and other themes in the rest of this series on ecological economics during 2009.

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