7e. 
Ecological Economics: Uneconomic Growth
vs. A Steady State Economy

Ecological Economics

Like eco-Marxism, ecological economics critiques capitalism for being an unsustainable system.  Dominant (neoclassical) economic models and policies only assign value to goods and services that can be bought and sold on the market; pollution, biodiversity loss, climate change and other social and socio-ecological problems are dismissed as "externalities" because they do not have a market price (or, at best, are only indirectly reflected in market prices). In contrast, ecological economics is a field of economics that analyzes "the economy" in terms of stores and flows of energy, material and waste (i.e., metabolic throughput) rather than in terms of prices.  With this approach, all socio-ecological processes are "counted." Ecological economics understands the economy as a socio-ecological process that must obey the fundamental laws of thermodynamics, as we discuss further below. Ecological economics should not be confused with environmental economics which tries to develop market-based policy tools for reducing pollution in ways that do not fundamentally challenge capitalism's profit-driven, growth-oriented political-economic system. 

Figure 1 compares the traditional view of the economy with how ecological economists conceptualize the economy as an open sub-system of the larger finite biosphere (or ecosphere). The ecosphere is non-growing and materially closed except for continual though non-growing amounts of solar energy (Daly, 2015). Material and energy that goes through the economy is degraded (in adherence with the Second Law of Thermodynamics). 

(Icon) Dilyanah/iStock/Getty Images; © Course Author and University of Waterloo

Gaeanautes (2015)

Empty World or Full World?

Figure 2 contrasts the mainstream view of the environment as something that is still available to be exploited and filled with pollution (i.e., an "empty world") with the view of the "full world" by ecological economists in which the economy has reached or exceeded the ecological limits of the planet. In an empty world, human welfare (i.e., general well-being) comes mostly from ecosystem services (green arrow) whereas in a full world welfare comes mostly from economic services (brown arrow).

The problem today is that we are living in an full world but acting as if we are living in an empty world (Daly, 2015). This leads us to extract resources, create pollution and undermine ecosystem services in ways that undermine the future economy, and in turn human welfare. Recognizing that we are living in a full world is to realize that the limiting factor on economic growth is not technology or labour but rather natural capital (Daly, 2015). For example, the limits to growth of the fishing industry today is not the number of fishing vessels or the size of the fishing nets, but rather the bioproductivity and health of fish in the ocean (Figure 3). 

The Limits of Substitution

Because the ecosphere is finite, a growing economy will necessitate trade-offs between the ecosphere and economy.  Ecological economics rejects the belief within neoclassical economics that "natural capital" can be simply substituted "human capital," as we discussed in module 6 (Market-based Approaches). This trade-off is shown in Figure 2 by the size of the brown and green arrows. In our example of the fish industry, a lack of fish in the ocean cannot simply be compensated by improved technology. Technologies designed to find and catch increasingly hard-to-find fish, will only exacerbate the problem. The prospect of "fish farms" may partly offset the loss of freely available fish in the oceans, but fish farms come with their own set of ecological problems including demands for freshwater supply and fish food that (if comprised of smaller fish) may exacerbate the overfishing problem.

Laws of Thermodynamics

One of the founding theorists of ecological economics, Herman Daly (2015), explains trade-offs between economic growth and the well-being of ecosystems in terms of the laws of thermodynamics:

When the economy grows in physical dimensions, it incorporates matter and energy from the rest of the ecosystem into itself. It must, by the law of conservation of matter and energy (First Law of Thermodynamics), encroach on the ecosystem, diverting matter from previous natural uses. More human economy (more people and commodities) means less natural ecosystem. In this sense, the statement that there is “no conflict” is false. There is an obvious physical conflict between the growth of the economy and the preservation of the environment.

The Second Law, that the entropy (or disorder) of the universe is always increasing, imposes a qualitative degradation of the environment— by extracting low-entropy resources and returning high-entropy wastes. The Second Law of Thermodynamics thus imposes an additional conflict between expansion of the economy and preservation of the environment, namely that the order and structure of the economy is paid for by imposing disorder in the sustaining ecosphere. Furthermore, this disorder, exported from the economy, disrupts the complex ecological interdependencies of our life-supporting ecosystem.

The degradation of materials and energy through economic activities according to the Second Law reflect biophysical limits to recycling and economic efficiencies as a path towards sustainability.

Uneconomic Growth

Unlike neoclassical economics, ecological economists accept that there are limits to economic growth. Economic growth currently depends on environmental degradation that undermines the future economy, so there is a limit (likely already passed) beyond which economic growth is better understood as uneconomic growth. Moreover, ecological economists argue that since we have likely already exceeded Earth's socio-ecological carrying capacity, wealthy countries will need to "degrow" their economies. 

Current measures of the economy and economic growth, such as GDP, are critiqued by ecological economists for failing to capture the growth of undesirable things such as pollution (i.e., "externalities") or for reflecting environmental problems as something positive for the economy. For example, cleaning up an oil pipeline spill or fixing a bridge washed away from climate change-induced flooding both generate economic activity that increase the GDP. Of course, spending resources on oil cleanups or bridge repairs means there is less resources to spend on other forms of human development (e.g., education, art, or affordable housing) or other long-term economic investments.

Using GDP to measure the economy conflates "growth" with "development": 

"Since GDP reflects both harmful and beneficial activity, ecological economists have not considered it to be a desideratum in itself. Instead, they have distinguished growth (quantitative increase in size by accretion or assimilation of matter) from development (qualitative improvement in design, technology, or ethical priorities). Ecological economists advocate development without growth—qualitative improvement without quantitative increase in resource throughput beyond an ecologically sustainable scale. Given this distinction, one could indeed say that there is no necessary conflict between qualitative development and the environment. GDP accounting mixes together both growth and development, as well as costs and benefits. It thus confuses more than it clarifies.

Steady State Economy

In contrast to a capitalist economy based on growth (and uneconomic growth), ecological economists propose transitioning to a steady state economy:

Theoretically and temporarily, a steady state economy may have a growing population with declining per capita consumption, or vice versa, but neither of these scenarios are sustainable in the long run. Therefore, “steady state economy” connotes constant populations of people (and, therefore, “stocks” of labor) and constant stocks of capital. It also has a constant rate of throughput; i.e., energy and materials used to produce goods and services.

Within a given technological framework these constant stocks will yield constant flows of goods and services. Technological progress may yield a more efficient “digestion” of throughput, resulting in the production of more (or more highly valued) goods and services. However, as emphasized in biophysical economics (which may arguably be classified as a subset of ecological economics), there are limits to productive efficiency imposed by the laws of thermodynamics and therefore limits to the amount and value of goods and services that may be produced in a given ecosystem. In other words, there is a maximum size at which a steady state economy may exist. Conflicts with ecological integrity and environmental protection occur long before a steady state economy is maxim.

Here are fifteen policies for realizing a steady state economy outlined by the Centre for the Advancement of the Steady State Economy (2018). The footnotes refer to the original articles from which these policies are derived:

1. Formally adopt the steady state economy as the overarching economic goal. In the USA, for example, this should be specified in legislation, namely a Full and Sustainable Employment Act ⁽¹⁾.
2. Maintain a network of conservation areas sufficient in size and diversity to ensure the long-term provision of vital ecosystem services. ⁽⁷⁾
   
3. Stabilize population, and aim for a long-term population size that enables a high standard of living for everyone without undermining ecological systems and the life-support services they provide. ⁽⁵⁾
4. Gradually reset existing fiscal, monetary, and trade policy levers from growth toward a steady state. For example, manage the money supply and redevelop the tax code with the new macroeconomic policy goal as a guide. ^(1,2)
5. Limit the range of inequality in income and wealth, including both a minimum and maximum allowable income. Implement tax reforms to tax “bads” (e.g., pollution and depletion of natural resources) rather than goods (e.g., income from wages). ^(1,5)
6. Employ cap-auction-trade systems in the commons sector for allocating basic resources. Set caps based on biophysical limits. Use auctions to distribute rights to extract resources. Equitably redistribute auction payments through public trusts. Implement a trading system for extraction rights to achieve efficient allocation of resources to those uses with the highest demand. ⁽⁵⁾
7. [Expanding leisure time: Reduce conventional work time in favor of part-time work, personal work, and leisure, thereby embracing well-being as a core metric of prosperity while reducing the drive for limitless production.] ⁽⁴⁾
8. Overhaul banking regulations, starting with gradual elimination of fractional reserve banking, such that the monetary system moves away from a debt structure that requires continuous economic growth.⁽³⁾
9. Adjust zoning policies to limit sprawl and promote energy conservation.
10. Continue to monitor GDP, but interpret it as a measure of the size of the economy and an indicator of environmental impact. Use other indices to measure economic welfare and social progress, such as the Genuine Progress Indicator. ^(1,3)
11. Prevent unconstrained capital mobility so that financial resources are more directly tied to the real assets they represent. ⁽⁵⁾
12. Work toward full internalization of costs in prices (e.g., costs associated with environmental protection and fair labor laws), and adopt compensating tariffs to protect efficient national policies of cost internalization from standards-lowering competition from other countries. ⁽⁵⁾
13. Institute policies that move away from globalization and toward localization to conserve energy resources, provide high-quality local jobs, and maintain local decision-making authority. ^(3,5)
14. Limit the scope of advertising to prevent unnecessary demand stimulation and wasteful consumption.
15. Establish a Bureau of Population and Consumption to replace the Council of Economic Advisers and to report on sustainability criteria. ⁽¹⁾