Three Problems with Economics: An Elaboration of Thomas Lovejoy’s “Foreward”

1. Three Problems with Economics: An Elaboration of Thomas Lovejoy’s “Foreward” • 1. Valuation • 2. Substitution • 3. Discounting

2. Neoclassical Sustainability • “Weak Sustainability” is based on the belief that what matters for future generations is per capita income, maintained by the total stock of capital.

3. Welfare = Net National Product (rate of return on capital stock) Total Capital Investment

4. Valuation: The Environment as a Commodity • Emphasis of standard environmental economics is putting prices on environmental features so they can be efficiently allocated by markets. • Everything has a price and all values are relative.

5. Strong Sustainability (Daly) • Rule 1. Use renewable resources at a rate equal to or less than their natural rate of regeneration. • Rule 2. Use non-renewable resources at a rate less than or equal to the rate of technological change (increasing efficiency in use or extraction, or finding new substitutes) • Rule 3. Waste flows for the economy should be less than the assimilative capacity of the environment • Keeps “natural capital” intact (sort of)

6. Weak sustainability again • Partha Dasgupta, Karl-Göran Mäler, Robert Repetto • “Capital” must include “natural capital” • If GDP is growing by drawing down stocks of forest, fish, … this is like living on savings, this is not weakly sustainable.

7. Net National Product = Hicksian income Natural Capital Manufactured Capital Human Capital   We’re growing by destroying this.

8. How close is this to Daly’s strong sustainability? • On the surface it’s about the same. • But there are some major issues: • 1. Substitutability between natural and human made capital. • 2. Hicksian income as social well-being (income broadly defined to include everything that gives people “utility”.

9. Ecological Sustainability • Protect the life support systems of the planet – clean water, clean air, biodiversity and climate stability • Recognize the connection between social stability and environmental stability • Recognize the critical dependence of the industrial economy on fossil fuel energy and the array of environmental and geopolitical problems this causes

10. Discounting and Global Warming Policy • The Nicholas Stern Review 2007 • The discussion among conventional economists (Dasgupta, Nordhaus, and Weitzman, for example) has focused on the choice of a discount rate.

11. The discount rate drives the policy recommendations • Nordhaus concludes that we should take a go slow approach to climate change mitigation because he uses a relatively high discount rate. (3%) • Stern concludes that we should take an aggressive approach to climate change mitigation because he uses a low discount rate. (1.4%)

12. The components of the discount rate • r = α + η g • α “pure time preference” how do we value the well-being of future generations • η the “elasticity of consumption” • g the growth rate of income (or well-being, or social welfare) • If g is growing people will be better off in the future (richer)

13. The growth rate of consumption (g) • Can be considered to be the same as productivity growth • May be negative if environmental and natural resource degradation is taken into account.

14. The evolution of weak sustainability • 1st keep per capita income (g) growing (or at least non-declining) • 2nd keep the capital stock used to produce income intact • 3rd include the services of nature as part of the capital stock

15. What is g? • How well off will future generations be? • Weak sustainability (Dasgupta/Mäler) – g is equal to the growth rate of total factor productivity. • A = TFP = ΔQ – aΔK – bΔL - cΔNK • When natural capital is included, several studies have found that g (TFP) is negative, that is, we’re maintaining economic growth by drawing down the services of nature.

16. Convergence of the policy recommendations of ecological and environmental economics • When past environmental destruction is taken into account, the discount rate will be negative. • They will have fewer economic resources with which to deal with environmental change. • We should sacrifice more consumption today to compensate those in the future because they will be poorer due to our past and current activities.

17. Neoclassical politics • The virtuous neoclassical economists (Arrow, Dasgupta, Mäler, Stern) use the standard model to support strong public environmental policy. (comes from a very low or even negative discount rate) • The evil neoclassical economists use the same model to argue for weak public environmental polices.

18. Substitution and Sustainability • An economy is sustainable if • Z = [(S/Y) – (δM/Y) - (δN/Y)] > 0 • Z is an index of sustainability • S is savings • Y is national income • δM is the depreciation of manufactured capital • δN is the depreciation of natural capital • This is the World Bank’s “Genuine Savings” indicator (Pearce and Atkinson)

19. Nauru and Weak Sustainability • Nauru is a tiny island in the South Pacific • Phosphate was discovered on Nauru in 1900 • During the past 100 years, almost the entire island was rendered uninhabitable by phosphate mining • “natural capital” was transformed in “financial capital” • In the 1980s Nauru’s trust fund amounted to more than $1 billion US. • Calculations show that it was “weakly sustainable”

20. Nauru in the mid-1990s • $1 billion trust fund • Population was about 5,000 Nauruans • Free education (higher education in Australia) • Free health care • Highest per capita income in the world • No one had to work

23. Nauru today • Trust fund disappeared because of bad investments, corruption, and the Asian financial meltdown of the 1990s • Now Nauru has no natural resources, its environment has been devastated, and it has no source of income • Shows that you can’t substitute back and forth between “natural” and “economic” kinds of capital.

24. Nauru example • Shows that destroying ecosystems and other features of the natural world is irreversible. • Ultimately, nature and money are not substitutes.

25. The Nauruization of the Global Economy • Staggering numbers on recent economic losses • The increasing importance of “finance” in the economy • Fragility of stocks of capital • Fragility of the entire socio-economic system

26. The economic crisis:economics and sustainability • Positive lessons: • Rational economic man is a poor model of human behavior • The need for government to protect the social good. • Money is not a substitute for nature

27. The current crisis and economic growth – Two views • “As the economy is currently structured economic growth is essential to well-being. We need to forget about protecting the environment for a while and start producing things again.” Or,

28. “The current economic crisis, along with the overwhelming evidence of the impending reorganization of the earth’s climate, and the impending catastrophic loss of biodiversity, calls for a fundamental reorganization of human society.”

29. What’s important and what isn’t? • “How much money would it take to wipe out world poverty, guarantee universal health care, stabilize population growth, and roll back the ravages of global warming” • $190 billion a year (Lester Brown) • AIG bailout alone - $170 billion (so far) • Value of credit default swaps - $41 trillion

30. Economics, Ethics, and Politics • “True crises are those difficulties that cannot be resolved within the framework of the system, but instead can be overcome only by going outside of and beyond the historical system of which the difficulties are a part.” Immanuel Wallerstein, World Systems Analysis, p. 76 • “No matter how cynical you get it’s hard to keep up.” Woody Allen