Defunct Economic Theories

Defunct Economic Theories Economics for an Empty World Economic theory has come to be the major discipline which influences policy makers at all levels of government. Today's economic theory has its roots in the 19th century when the world was relatively empty in terms of people, throughput and wastes. The theory has changed over the course of the last century, but unfortunately, has not adjusted to the fact that the world has become fuller of people, material things, wastes and toxicity. Today, several key theoretical concepts from neoclassical economics are unsupportable, yet they continue to influence government decision makers (see Critique of Neoclassical Economic Theory). Several of these very dubious concepts, and the absence of others are particularly relevant to scale.

The Power of Market Mechanisms The market economy is the playing field of neoclassical economics. What the market does best, is most efficient at, is the allocation of resources based on supply and demand. Supply and demand are calculated to determine the point at which the production of a certain good or service no longer reaps a profit. Microeconomics is primarily about supply and demand. It determines when allocation of labour, capital and resources is no longer efficient because the supply is outstripping the demand. This very clear “when to stop rule” maintains an efficiency in the market by avoiding wasteful allocations. The “when to stop” rule influences the amount of material throughput on the microeconomic level – but the regulator is profit, not ecosystem integrity or social justice.

The Missing "When to Stop Rule" There is no theoretical underpinning for a “when to stop rule” for aggregate macroeconomic activity in neoclassical economics. Lacking such a conceptual framework, neoclassical econmics is not able to indicate when the global allocation of labour, capital and resources should stop because it is “uneconomic,” that is, when costs exceed benefits. There is no method for measuring the point at which this uneconomic activity begins; nor is there even a concept that suggests this point exists. However there is considerable evidence from a variety of scientific disciplines that indicate this “when to stop” question should be asked if global ecosystems are to survive (see Areas of Concern).

Limits of the Market Economy Despite its many strengths, neoclassical economic theory requires more of the market than it can deliver. Some of these limitations may be fixable; other problems require reformulation of theory and development of new techniques. Some of the more serious market failures include:

Monitoring Well Being The policy emphasis on economic growth has led to increases in Gross Domestic Product (GDP) being regarded as increases in human well being. But GDP is a measure of gross production and consumption and does not assess the value of either to human well being. Many aspects of production and consumption contribute to human misery and ecological degradation, but nonetheless add to GDP. Alternative measures being developed attempt to clarify what is a “good” or a “bad” type of production or consumption (e.g. the ISEW or Index of Sustainable Economic Welfare; and the GPI, or Genuine Progress Indicator). Comparisons of these alternatives to GDP over time show that GDP continues to grow while these other measures either decline or remain stable. Suppressing Externalities In economic theory an externality is an unintended cost or benefit to a party not directly involved in a particular market exchange. Ecological degradation is considered an externality, such costs being borne not by the market participants, but by the general public, future generations, and non-human species. If those involved in the relevant market transaction bore these externalized costs, then many currently profitable transactions would become uneconomic and cease. The policy emphasis on economic growth has led governments to allow or even encourage businesses to externalize costs as a way of facilitating continued growth. These practices serve to increase material throughput and create not only serious local and regional environmental problems, but also serve to alter global ecosystem services upon which we depend (see Areas of Concern) Non-Market Goods and Services Many goods and services that are either essential for survival, or contribute greatly to human well being, cannot become part of the market system because they are non-rival. This means they can be enjoyed without interfering with others'' enjoyment of them. Some of these non-market goods and services are provided by ecosystems (eg. UV radiation protection, or scenic beauty). Other non-market goods or services are provided by social systems (eg. either as public goods like democracy; or private services like friendship). Economic theory encourages practices which attempt to price these goods and services so that they can enter the market and contribute to growth. But doing so ignores the issues of sustainability and social and ethical values involved with these non-market goods and services. Price does not, and cannot, capture everything of value. Attempting to bring non-market goods and services into the market economy only serves to increase material throughput without adding to human well being. Maximizing the Wrong Thing Economic theory focuses on maximizing utility as measured by consumption. Maximizing consumption, it is believed, is the way to satisfy the broadest range of insatiable human wants. But it is the satisfaction of needs, not consumption itself, which is the appropriate goal. And humans needs are much more complex than those which can be satisfied in a market exchange. By focusing on consumption of market-based goods and services, neoclassical economic theory encourages material throughput, and provides false hope of meeting the full range of human needs with such consumption. Combined with a growing global population and increasing technology-driven throughput, neoclassical economic''s misplaced maximization of consumption is challenging ecosystem integrity.
Continuous Growth Neoclassical economics is based on generating profit to reinvest in more production, or research and development as an intermediate step to the same end. All profit is ultimately based on a surplus from agriculture and extractive industries – mining, logging, ranching and fishing. The money supply expands as profit based on this surplus grows. Any other expansion of the money supply is inflationary. Even speculative investments are ultimately based on real resources. If speculation is overly optimistic, inflation occurs, and any apparent increases in the money supply are illusory. Either an "adjustment for inflation” is required, or a more painful "market correction" occurs. Another way of thinking about the importance of extractive industries is to consider that no profit is possible without material throughput.

Ignoring Nature Despite this obvious and fundamental connection of economic growth to the natural world, neoclassical economic theory ignores the role of nature in the economic production process. When first developed, economic theory spoke about the factors of production in terms of land, labour and capital. Modern economic textbooks focus only on labour and capital. “Land” (meaning all natural resources) is regarded as unessential because capital is considered to be an adequate substitute. This elimination of land and the elevation of capital in economic theory, came about as economists noted that substitutes could be found for one resource which became scarce by investing profit in another resource (coal as a substitute for wood as fuel; later petroleum became a substitute for coal). These transitions gave rise to the illusion that with enough money, anything is possible.

Pillars of Economic Growth Theory Technological progress, along with substitutability, is the other foundation pillar of continuous growth theory. It is assumed that with enough money, research will always provide a technical solution to either increase efficiency, or to substitute for some valuable resource which becomes scarce through overuse.

Technological Progress as a Perpetual Motion Machine Neoclassical economists believe that technological progress will allow for the every increasing production of goods and services. More goods and services mean more profit, which can then be reinvested in more production. But in addition to conferring many benefits, technological change has also led to ever increasing amounts of material throughput (see Causes of Scale Problems: Economic Growth). This occurs even when increasingly efficient use of natural resources stems from technology. Increased efficiencies can lead to gross increases in throughput because the greater efficiencies allow us to use more of the resource. Coupled with the increase in human population and the spread of the market economy, gross increases in throughput are common despite more sophisticated technologies. [sidebar re increased fuel efficiency leading to more cars and miles driven] Indeed, increases in some technologies (see Energy) allow others to produce ever increasing levels of throughput (eg. cheap energy leads to increased transportation, which leads to increased trade, which leads to more material throughput).

Problems with the Pillars Substitutability is limited in the real world if not in neoclassical economic theory. Some resources, such as water have no substitutes, yet are essential to support life. But many of today’s major environmental challenges are not matters of resource substitution, but of overwhelmed sink capacities. What substitutes are there for the atmospheric ozone layer, biodiversity, or the carbon cycle and greenhouse effect? The neoclassical economist’s claim that capital is a substitute for natural resources ignores the inherent connection between nature and profit. The biodiversity and other ecosystem services provided by nature are the source of all our wealth.

Violating the Laws of Physics Assuming that one piece of nature is substitutable for another (because it can be transformed by technology) ignores the second law of thermodynamics (see Basic Concepts: Thermodynamics). Some pieces of nature are more valuable precisely because of their unique characteristics which cannot be duplicated by technology (coal combusts at a certain temperature and produces energy, a rock does not). It is these unique characteristics produced by nature that are important to us in terms of the services they provide. It is also these unique characteristics that are destroyed in the production process (once the piece of coal is burned, we can never again use the dissipated heat and ash to generate more energy). According to the second law of thermodynamics this loss of unique characteristics in the production process is inevitable, and always results in a degradation of the original resource. Technology may delay this process for a while, but inevitably the second law will apply. The bottom line is not profit, but the laws of physics which determine the limits to substitutability,technological progress, and ecosystem services.

Continuous Economic Growth Incompatible with Sustaining Ecosystem Integrity There are no substitutes for the enormous variety of critical ecosystem services we rely on for our well being (see Basic Concepts: Ecosystem Functions & Services). Nature provides these services on its own, and very economically, as long as human generated material throughput does not interfere. This is what the process of evolution of species and ecosystems is all about. Not only are there no substitutes for these critical services, but their complex, dynamic and emergent properties means that no amount of technological progress will be able to reproduce even a fraction of what these natural systems provide, regardless of the amount of money, research and energy we devote to such tasks. If we continue to rely on the fallacious notion of substitutability, and the illusory promise of technological progress, the two pillars of continuous growth theory, we will ensure the speediest possible route to ecosystem catastrophe.

Human Hubris Human creativity is one of the wonders of the universe. It is no simple matter to balance this powerful gift with a humility which reflects an appreciation of nature’s dynamic complexities and limits. Our ability to achieve an appropriate balance will determine whether our economic activities can achieve a sustainable scale. The emergent and non-linear properties of complex ecosystems means there is an irreducible uncertainty inherent in our understanding of these systems. Striving to reduce our ignorance is an inherent and endearing human trait. Yet, acknowledging the biophysical limits of nature is essential for our survival. Our greatest challenge is to continue exploring these limits while still respecting their inevitable implications.