Friday, December 9, 2011

ECONOMY: Ecological Economics by Joshua Farley


Many people would agree that the central desirable end of economic activity is a high quality of life for this and future generations. Conventional economists argue that humans are insatiable, and therefore economics should focus on endless economic growth and ever-increasing consumption. Considerable evidence, however, suggests that humans are in fact satiable-there is a point beyond which increasing consumption does not make us better off.

Market economies—in which the prices of goods and services are determined by the interplay of supply and demand in voluntary exchanges—play a critical role in the modern world. Market forces determine the quantity of oil pumped, minerals mined, forests cut, and fish caught. They determine the industries to which these resources are allocated, how much labor and capital are employed to convert them to market products, and who gets to consume those products.

In theory, competitive markets1 allocate factors of production—resources like energy, raw materials, land, labor, and capital—toward the most profitable goods and services and, in turn, allocate the goods and services toward those who value them the most, as measured by their willingness to pay. The competitive markets described in textbooks in theory maximize monetary value while ensuring that consumers are able to purchase market products as cheaply as they can be produced. What’s more, competitive markets achieve all this through a process based on free choice and decentralized knowledge, without centralized coordination.

The Great Depression, however, revealed huge flaws in market economic theory. Markets sometimes left vast numbers of skilled laborers unemployed, left machinery idle, and left food to rot on farms while the poor went hungry. The Great Depression helped economists understand that sometimes markets required government intervention to function well and to allocate resources appropriately. Confronted with this crisis, economists developed the field of macroeconomics, which explained how governments could use monetary and fiscal policies to keep economies healthy and growing.

When macroeconomics emerged, however, practically no one was aware of the coming challenges of global climate change, peak oil, biodiversity loss, resource depletion, or overpopulation. Economists focused on the problem of how to convert seemingly abundant natural resources into apparently scarcer economic goods and services. Since then, production of economic goods and services has increased more than eighteenfold in the United States, and nearly as much in the world as a whole. We have learned that intact ecosystems provide vital life-support functions upon which we, like all other species, depend for our survival, and that human activities threaten the planet’s ecosystems.

Unfortunately, market systems largely fail to account for the impacts of ecosystem degradation on human welfare. The ecological and resource crises we currently face are orders of magnitude more serious than the Great Depression, as they threaten not only the economic system but also human survival. We must develop a new type of economics that addresses these shortcomings.

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