Environment and Economy

Molly Scott Cato

• Publisher: Routledge
• Year: 2011
• eBook ISBN: 9781136848315
• Edition: 1
• Topic: Physical Sciences
• Subtopic: Geography
• Index: Geography

As environmental issues move to the centre of the political debate, more attention is being focused on the role our economy has played in creating the ecological crisis, and what a sustainable economy might look like. In spite of the success of the environmental movement in drawing attention to the crisis facing us, there has been comparatively little attention focused on the way the operation of the global economy contributes to this crisis.

Environment and Economy provides a stimulating introductory insight into the history of thinking that has linked the economy and the environment. It begins by introducing readers to the pioneers of this field, such as Fritz Schumacher and Paul Ehrlich, who first drew attention to the disastrous consequences for our environment of our ever-expanding economy. Part two of the book describes the main academic responses to the need to resolve the tension between economy and environment: environmental economics, ecological economics, green economics, and anti-capitalist economics. Partthree is structured around key themes including an introduction to economic instruments such as taxes and regulation; pollution and resource depletion; growth; globalization vs. localization and climate change. Each key issue is approached from a range of different perspectives, and working policies are presented in detail.

Written in an accessible style, this introductory text offers students with an engaging account of the way that the various traditions of economic thought have approached the environment, bringing them together for the first time in one volume. The text is complimented by boxes, case studies and recommended reading for each theme addressed. It will be of value to students interested in environmental sciences, geography, green issues and economics.

Part I
Setting the scene

1 Introduction: an economy within the environment

1.1. Environment and economy: friends or foes?

The purpose of this book is to introduce you to the way that economists think, and particularly how they think about the environment. It was US President Harry Truman who frustratedly called for a one-handed economist, because he was so tired of being told, ‘On the one hand this, but on the other hand that’. But, for my money, this pluralism in economic debate is a healthy sign, which should be encouraged. Economics is a social science and therefore is inevitably going to revolve around essentially contested concepts that generate an endless debate. In fact, if anything we have seen too little plurality in recent years, with a near-hegemonic domination by the neoclassical approach. So, while this book may not be one-handed, I have certainly tried to be evenhanded in explaining the perspective of a range of different types of economics.

Many books that explore the relationship between the economy and the environment begin by outlining and explaining the essential tension between the two. I am going to diverge from this path for the simple reason that I do not believe that such a tension is inevitable. More than 150 years ago, John Ruskin wrote the very useful small statement that sums up my view of the relationship between the economy and the environment: ‘There is no wealth but life.’ If we have come to a state of difficulty with our planet because we are seeking to consume more than she can provide, then the solution is straightforward: we need to rethink the way our economy works. The tension appears to be inevitable only if you accept that the structure and essential dynamics of our economic system cannot be changed. If our species is to have a future on this beautiful planet, we need to sort out the structural problem – and fast.

That is why I am a green economist. I make that point at the outset because the rest of this book will be taken up with a range of approaches to the relationship between economy and environment, or the economy–environment tension, as many of those represented will describe it. This is my book, and so I state my position at the outset. However, I will endeavour to give those with whom I disagree a fair hearing, and will refer you to other sources where you can find out more about them. Then it is your decision, and it is one you must take urgently – the need for our economy to establish a more comfortable relationship with our environment is pressing. My generation has only exacerbated this problem; the current generation of young people will spend their lives trying to solve it: I wish them every success.

As economists, what do we mean by ‘the environment’? It is clearly the source of all the resources that are used in the production of goods that are sold in the marketplace and that we use to support our lifestyles. In the chapters that follow, we will see how the different schools of economic thought have considered (in some cases only barely) the impact of economic processes on the environment. For some, the ‘exploitation’ of resources is an acceptable approach to economic life, while, at the other end of the spectrum, there are economists who believe that nature has a sacred value that can never be reduced to a price and bought or sold in the marketplace.

1.2. Complementarities and tensions within the economy– environment relationship

While it is my view that the tension between economy and environment is not inevitable, I am equally sure that the source of the current environmental stress – the evidence for which accumulates daily – is in economic activity. Table 1.1 lists some examples of the way economic processes impact on the environment. The first in the list is the problem of climate change – by far the most serious environmental problem the human race is facing – the primary cause of which is the burning of fossil fuels to produce energy for heating and production of goods, and to facilitate our transport systems. Fossil-fuel burning is also the primary cause of acidification, the culprits in this case being the oxides of sulphur and nitrogen. In addition to these pollution problems, our exploitation of more of the earth’s resources is destroying ecosystems, causing species extinction and shortage of land on which to grow crops. We are also rapidly depleting the non-renewable resources of the earth.

Ekins identifies the ‘agents’ of these ‘symptoms of unsustainability’, but he does not identify economic causes; but in most cases the problem has its origin in some productive system or other. In Table 1.2, I have suggested possible economic systems and processes that might have generated the symptoms identified by Ekins.

Table 1.1 Symptoms of environmental unsustainability and their causes

Table 1.2 also demonstrates how complex a task we have in pinning down exactly which economic process has caused the problem we may be concerned about. This is not only because the economy is globalized and made up of a vast number of players; it is also because many of the causes of the environmental stresses are interrelated. For example, China seeks to develop through massively expanding its productive capacity and exporting goods to the West. This requires energy, so many new power stations are built, creating a huge increase in China’s emissions of greenhouse gas emissions. To counter this, China also invests in a programme of hydroelectric energy generation, including the building of vast dam projects (using energy and producing CO₂ via the production of concrete). The dam projects displace hundreds of thousands of subsistence farmers, who are now drawn into an economic production and distribution system that itself relies on fossil fuels, where their previous existence did not. The dam projects also disturb the local ecosystem, causing species loss and loss of topsoil. Like truth, tracing the source of the economic causes of environmental problems is a process that is rarely pure, and never simple.

Table 1.2 Examples of economic processes that give rise to the problems identified in Table 1.1

Does it have to be like this? I am sure that it does not; we need to reverse our thinking about the environment. Rather than seeing it as a ‘problem’ we need to realize that the environment is our home, and the source of everything that we value. Once we adopt that perspective, we can begin to reorient our economy so that it finds the planet a comfortable home, rather than a treasure chest of resources to be raided and a bottomless pit for our wastes.

1.3. Economics and environment: some useful concepts

Three concepts are useful in exploring the relationship between the economy and the environment: efficiency, optimality and sustainability. The first two of these concepts arise from conventional economic approaches, but have a particular twist when we introduce the environment into the equation, and the third is a word that has taken on a special salience – and become the source of heated argument – as the environmental crisis has grown in scope and urgency.

Conventional economists have their own particular way of using the idea of ‘efficiency’, and this is largely in terms of missed opportunities. If resources are being used ‘inefficiently’ then opportunities are being squandered. Greater efficiency could bring net benefits in terms of greater consumption. However, from the perspective of environmental economics, we might wish to extend our consideration of efficiency. For example, for an electricity-generating company, the cheapest fuel is the most efficient fuel – conventional economics will often use the concept of efficiency in a purely financial way like this. However, if the generation of electricity using this fuel creates environmental damage, for example by producing emissions that turn into acid rain, then it might not be efficient from the perspective of society.

The concept of optimality starts out from the position we reached with our definition of efficiency, but then moves on to question the nature of the allocation of any particular good or service, and whether it is socially ideal. In the case of power generation, an efficient solution to the problem of how we allocate the good or service might be to build a polluting power station in areas where few people would experience the pollution. But would this be socially optimal? We would need to have some sense of the social damage and introduce concepts of justice and fairness into our consideration. Conventional economics considers that we have an optimal situation if no person can have their situation improved without any other person’s situation becoming less beneficial. But some environmental commentators might also consider that we should take into account other species, or even assume that the environment itself has a value that should not be diminished to achieve optimal human outcomes. And we might need to raise questions about the initial allocation.

Since the concept first passed into general usage, the meanings of the word sustainability have flourished like leaves on a tree. For the purposes of economics, the important thing when we think about sustainability is not only longevity, in the sense that an ecosystem or the planet as a whole will endure, but also that the quality of the environment has not been degraded by our activities. Amongst technically minded economists, the main argument concerning sustainability has been between what we might broadly refer to as neoclassical and ecological economists, and has centred around an argument over the extent to which nature is sacrosanct. Both groups are happy to consider the benefits we gain from nature as a form of ‘capital’, but they disagree about the extent to which other types of capital can be used as substitutes for natural capital. For example, can we afford to lose the rainforest so long as we can find a technological process that will be able to absorb CO₂ to the same extent (and provide all the other amazing resources and benefits the rainforest offers)? A neoclassical economist would argue that natural and man-made capital can stand in the place of one another, so that if we lose one we can rely on the other; ecological economists argue that they are both necessary, we need both of them to work together in our economy, and the loss of one cannot be made up for by more of the other. For an ecological economist, natural capital is of primary importance and is essentially limited. Beyond this rather technical discussion, the green economists would take the position more akin to that of the Iroquois, who thought that every decision should be made in the consideration of its impact on the seven following generations. From this perspective, sustainability means leaving the planet and its resources for our descendants in at least as good a state as we have enjoyed.

The discussion around the three key concepts that link the economy and the environment has made clear the distinct approaches that will form the structure of the remaining chapters of this book. We begin with neoclassical economics, which does not feel any particular need to address the environment as a special issue, because the market will naturally resolve all problems, including environmental problems. Beyond this heady optimism, we find the environmental economists, who introduce the environment as a source of special concern in their work, but continue to use the methods and tools of neoclassical economics when producing their analyses and prescriptions. Their approach can be contrasted with that of the ecological economists, whose origin lies in an attempt to unite the understandings of ecology and economics. Ecological economists take a much more sceptical attitude to conventional marketbased approaches, and question the assumption made by environmental economists that the tension between economy and environment can be resolved by market solutions.

All these approaches find some place within university curricula, but recently more radical views have begun to be heard, which are sceptical about the ability of any academic study to solve the problems generated by the environment–economy tension. On the one hand, these radical approaches argue that the system of thinking prevents progress being made in analysis and prescription; on the other, they argue that fundamental change is also required in terms of the way that the economy is structured. These anti-capitalists and the green economists have been addressed separately in this book, but they share a critical view of capitalism as an economic system.

1.4. The environment in early thinking about economics

The tale of the encounter between economists and the environment goes back to the very earliest days of economic thinking, which is generally considered to have begun with the French physiocrats: ‘The physiocrats of mid-eighteenth-century France – the first economic theorists – tried to explain economics in accordance with natural law and saw agriculture and Mother Earth as the source of all net value’ (Daly and Townsend, 1993: 13). The ‘physiocracy’ envisaged by these aristocratic theorists literally meant the ‘rule of nature’, and they saw land as central to the economy. This is not as green as you might at first imagine, though, since their motivation was to oppose political intervention and, at this time before the economy had expanded so as to put pressure on the planet, they supported the free expansion of economic activity. In this sense, we might see them as having more in common with proponents of the free market, and their faith in the ability of the natural law of competition to guide an economy in the most benign direction.

The physiocrats represented the agricultural interest in France, and stood in opposition to the ‘mercantilists’, at a time when trade was beginning to expand rapidly. The mercantilists argued for a market regulated so as to ensure the most efficient and rapid production of manufactured goods, which could then be traded. They began to equate wealth with money, as opposed to the physiocratic view that all wealth came from the land. From a mercantilist perspective, land was less important than capital, and so one of the aims of trade was for the state to accumulate reserves of precious metals. The role of the state, according to the mercantilists, was to protect domestic production and trade through the use of tariffs and subsidies. At this stage, ‘the land’, which we might see as at least partly analogous to ‘the environment’, began to slip from its central place in thinking about the economy; apart from in the work of a few heterodox theorists it was not to regain that place until the advent of a green approach to economics in the late twentieth century. This loss of focus on the environment as the true source of wealth may help to explain the uncomfortable relationship that has developed between the economy and the environment.

Mercantilism was replaced from the late eighteenth century onwards by the theories of the classical economists (Adam Smith, David Ricardo and John Stuart Mill), who foregrounded the important role of labour for the first time in economy theory: ‘The classical economists, witnesses to the problems of mercantilism as well as the beginnings of the Industrial Revolution, saw labor as the source of wealth and the division of labor and improvement in the “state of the arts” as the source of productivity’(Daly and Townsend, 1993: 13). Adam Smith’s famous account of the greater productivity that could be achieved when the various tasks involved in making pins were divided so that a person specialized in just one task was the original model for all subsequent arguments for a division of labour in manufacturing. The classical economist David Ricardo penned the theory of comparative advantage, which argues that a country will achieve the highest standard of welfare if it concentrates on producing whichever good it produces most efficiently, and trading for the rest. This theory is flawed in various ways, perhaps particularly because it does not take into account the environmental consequences of vastly expanded trade (see further discussion of this in Chapter 12).

Thus we can see that the originators of the discipline of economics set the real stuff of the productive economy – people and their work, the land and its resources – at the heart of their study. However, the history of economics over the past century and a half has seen a movement away from these concerns. The first extant school of economic thought that is represented in this book is neoclassical economics, which is also the dominant paradigm in the Western academy in these early years of the twenty-first century. It is a study of economics that has drifted away from the real world – the environment within which all economic activity takes place and which provides all economic resources – focusing rather on modelling the world mathematically and interpreting human motivations and expectations.

I would identify myself as a heterodox economist, and my commitment to a pluralist approach to the teaching of economics is the reason that this book represents the views of economists from a range of traditions. This is unusual for an economics textbook, since today the neoclassical paradigm is dominant in our universities, and...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Boxes
• Case studies
• Abbreviations
• Preface
• Acknowledgements
• Part I Setting the scene
• Part II Economic schools and the environment
• Part III Issues and policies
• Glossary
• Notes
• Bibliography