EcoEco –Contrasting Economic Worldviews

Contrasting Worldviews
In ecological economics, the steady state economy is the means for achieving societal wellbeing.  In conventional neoclassical economics, perpetual growth is pitched as the way to achieve wellbeing.  The reason for this distinction - and the fundamental difference between the two schools of thought - is the worldview.

In neoclassical economics, the ecosystems of the planet are viewed as a subset of the economy (Figure 1a).  The most basic model of the economy is a circular flow between firms and households (Figure 1b), in which the households provide labor and purchase goods and services, and the firms provide salaries and sell goods and services.  Upon inspection, flaws in these models become clear.  In the first case, even a casual observer can determine that the human economy is embedded within the ecosystems of the planet (Figure 2a).  Without land, water, air, natural resources, and ecosystem services, there is no economy.  In the case of the circular flow diagram, the structure has been reduced too much to model reality with any degree of accuracy.  The flow diagram disregards the laws of thermodynamics by omitting throughput.  A more accurate model (Figure 2b) realizes that natural resources (low-entropy matter and energy) are inputs to the circular flow, and pollutants (high-entropy waste products and heat) are outputs.  The flawed neoclassical worldview engenders a belief in perpetual growth.  The ecological worldview recognizes limits imposed by the natural world.

Multidisciplinarity
According to the International Society for Ecological Economics (ISEE), ecological economics exists because years of disciplinary specialization in scientific inquiry have left us unable to understand and manage the interactions between the human and environmental components of our world.  Such specialization in neoclassical economics has produced many insights, but it also has resulted in a lack of knowledge and skill to solve systemic problems associated with the interactions between the human economy and the natural world (e.g., climate change, species extinctions, and loss of ecosystem services).  Ecological economists embrace and synthesize insights and theories from other fields of study.  The ISEE provides an online encyclopedia with papers that explore the multidisciplinary nature of ecological economics.

A Bit of History
John Stuart Mill developed the idea of the steady state economy in the mid-19th century.  He believed that after a period of growth, the economy would reach a stationary state, characterized by constant population and stocks of capital.  Birth rates would equal death rates, and production rates would equal depreciation rates.  His own words eloquently describe the positive nature of such an economic system:  "It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement.  There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living and much more likelihood of its being improved, when minds cease to be engrossed by the art of getting on."


Sustainable Scale
Scale is simply a measure of the size of one object relative to another.  In this case, we are concerned with the size of the human economy relative to the ecosystems that contain it.  Sustainable scale is the most important characteristic of a steady state economy.  It is achieved when the human economy fits within the capacity provided by Earth's ecosystems.  Economic activity degrades ecosystems, interfering with natural processes that are critical to various life support services. In the past, the amount of economic activity was small enough that the degree of interference with ecosystems was sustainable.  The unprecedented growth of economic activity, however, has significantly shifted the balance with potentially disastrous consequences.  This is why getting the scale of the economy right (technically the point at which the marginal costs of growth equal the marginal benefits) is the highest priority for a steady state economy.  More detailed information is available from the Sustainable Scale Project.

Fair Distribution
Fair distribution of wealth is the second feature of a steady state economy.  Since continuous growth and sustainable scale are incompatible, growth cannot be relied upon to alleviate poverty, as has been done (ineffectively) in the past.  If the pie isn't getting any bigger, we need to cut and distribute the pieces in a fair way.  In addition, poor people who have trouble meeting basic needs tend not to care about sustainability, and excessively rich people tend to consume unsustainable quantities of resources.  Fair distribution of wealth, therefore, is a critical part of sustainability and the steady state economy.


Efficient Allocation
The conventional neoclassical school of economic thought focuses almost exclusively on efficient allocation of scarce resources.  The dominant thinking is that free and competitive markets, along with prices driven by supply and demand, result in efficient allocation of goods and services (in the absence of pesky, omnipresent externalities).  Efficient allocation is also important in a steady state economy - ecological economists support many market strategies to accomplish efficient allocation of resources - but only after achieving sustainable scale and fair distribution.  Efficient allocation, although a valid criterion for managing and using resources, means very little in an unsustainable or unjust economic system.