winslow ecological economics fa2011
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Slides for lecture on ecological economics and business opportunities.TRANSCRIPT
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?