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PROMPT:

Referring to Ruth (2006) articled titled “A quest for the economics of sustainability and the sustainability of economics”: Explain in your own words at least 2 of the 4 introduced themes of natural economics. What are the differences between ecological economics and industrial ecology fields?

 

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Ecological Economics 56 (2006) 332 – 342 www.elsevier.com/locate/ecolecon ANALYSIS A quest for the economics of sustainability and the sustainability of economics Matthias Ruth* School of Public Policy, University of Maryland, 2202 Van Munching Hall, College Park, MD 20742, USA Received 29 September 2004; received in revised form 22 June 2005; accepted 14 September 2005 Available online 2 November 2005 Abstract This paper briefly reviews key insights from natural resource and environmental economics, ecological economics and industrial ecology in an effort to identify the major contributions of these fields to the understanding and promotion of sustainable development. Each is based on overlapping worldviews, methods and tools. Their synthesis and extension– subsumed under the rubric of dNatural EconomicsT–is suggested as a new thrust in environmental research, offering valuable guides to policy making. An early illustration of the application of natural economics in New Zealand is presented. D 2005 Elsevier B.V. All rights reserved. Keywords: Sustainable development; Resource economics; Environmental economics; Ecological economics; Industrial ecology; Natural economics 1. Introduction Environmental issues are complex and to understand them requires interdisciplinary approaches (Funtowicz and Ravetz, 1993). Methods and insights from economics, biology, chemistry and physics are being applied, individually, and increasingly in combination to advance understanding of environmental issues (Ruth, 1993). From the last century of environmental research and application, a set of fundamental principles has emerged to guide future research and * Tel.: +1 301 405 6075; fax: +1 301 403 4675. E-mail address: mruth1@umd.edu. URL: http://www.publicpolicy.umd.edu/faculty/ruth/index.htm. 0921-8009/$ – see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2005.09.012 decision making. First, natural processes and human activities are subject to the self-enforcing, self-organizing and self-regulating laws of nature. As humans, we can reason and we can actively shape the biophysical and socioeconomic realms within which we make decisions; consequently our self-exacting laws and self-actualizing behaviour govern the accessibility of natural and developed resources. Second, we are appropriating ever larger stocks and flows of materials and energy, and this appropriation ever more aggressively alters the biophysical and socioeconomic environment. Sustainability requires us to assume a custodian’s accountability for resources essential to meeting our needs, and a steward’s responsibility for the resources required for meeting our wants. M. Ruth / Ecological Economics 56 (2006) 332–342 While the first of these insights concentrates on bnatural lawsQ, the second addresses the moral dimensions of human activity. The key to achieving sustainability is to understand both. Efficiency and effectiveness are preconditions for any morally acceptable resource use—inefficiency and ineffectiveness imply waste. In turn, wasteful behaviour implies we fail as accountable custodians and responsible stewards. Since the concepts of efficiency and effectiveness fall within the purview of economics, concepts from economics are central when trying to understand and guide human activity. However, because modern economics concentrates more on efficiency than on effectiveness, and only addresses a subset of issues relevant to achieving sustainability, its approach and methods must be revised. To identify shortcomings and suggest changes, this paper first reviews (in Section 2) some of the contributions concepts from neoclassical economics have made to our understanding of resource extraction, and how the adverse environmental side effects of production and consumption can be included in economic decision making. These two areas of investigation take place, respectively, in resource economics and environmental economics. However, the main focus of Section 2 is on six challenges for modern economics if it is to promote sustainability by contributing to investment and policy decision making. Section 3 identifies contributions, from ecological economics and industrial ecology, to the understanding of human–environment interactions. The main focus here is on a set of broad strands of research and policy advice, generated over the last decades. The themes emerging from Sections 2 and 3 provide the basis for the synthesis presented in Section 4, where I return to basic insights for environmental research and decision making, before closing the paper with some guidance for environmental research and an illustration of an early application of natural economics in the New Zealand context. 2. Resource and environmental economics 2.1. Basic tenets and approaches Thirty years ago, economist Robert Solow, in his lecture on bThe Economics of Resources and the 333 Resources of EconomicsQ, beautifully summarized and contributed to more than 50 years of theory about the optimal extraction of nonrenewable resources (Solow, 1974). Many of the insights available then, and since, trace back to articles by Lewis C. Gray (1913, 1914) and Harold Hotelling (1931). Their theoretical investigations identified conditions for inter-temporally optimal extraction of resources, and showed how changes in the value of resource stocks and the materials extracted from them must relate to the interest rate, which guides investment decisions in the economy. The marginal cost of resource extraction, together with the opportunity cost of a unit of the resource in the ground, helps set the price for the resource and, for a given demand, determines extraction rates. As extraction proceeds, the opportunity cost of a unit of the resource rises. Ultimately, the optimal extraction path leads to depletion when price reaches a level where demand is choked off (Dasgupta and Heal, 1974). Early efforts presented results under standard conditions of perfect knowledge about such things as technological conditions, resource endowments, perfectly operating markets and fixed preferences. Recent research has relaxed many of these assumptions and generated many variations around the themes identified in early works on the topic. Since the oil price shocks of the 1970s, much effort has gone into empirical testing of the Hotelling model. Evidence that it adequately describes resource extraction paths is mixed (Smith, 1981; Farrow, 1985), and the logical underpinning of such testing has shown to be misguided at best (Norgaard, 1990). A separate strand of research in economics has concentrated on the environmental damage arising from production and consumption, and how costs associated with this damage may be incorporated into the prices of the goods and services bought by households, firms and government. Environmental economics concentrates on such internalization of externalities and traces its basic insights back to the works by Arthur Cecil Pigou (1932) and Ronald Coase (1960). It finds modern applications in the design of sulfur trading systems to combat acid rain, tradable permits in fisheries management, carbon taxes to reduce emissions of greenhouse gases and other market-based instruments that use the price 334 M. Ruth / Ecological Economics 56 (2006) 332–342 mechanism to discourage socially undesirable repercussions of economic activity and encourage desirable actions. Even though internalization of externalities through market-based mechanisms remains a popular theme among economists, market-based approaches to resource and environmental problems are often greeted with deep skepticism by those having to balance economic efficiency with issues of effectiveness, fairness and justice. Notwithstanding problems of empirical dubiousness, logical inconsistencies and political infeasibilities, insights from traditional natural resource and environmental economics have shaped our understanding of how humans may make better use of the environment. They have highlighted how technology shapes extraction decisions through time, how decisions today affect the welfare of future generations and how the market coordinates decisions of myriad households and firms within and across countries. In so doing, these insights provide an important starting point from which to address issues of sustainability. 2.2. Six challenges to traditional resource and environmental economics Many graduate curricula and professional journals are filled with variations on the same themes of basic natural resource and environmental economics, and careers are built by pursuing inquiry within one of these areas as if it were separate from the other or divorced from broader social, institutional and ecosystem contexts. However, if economics is to be a serious force in shaping the debate about sustainability, it must meet at least the following six challenges: 1. Integration of Resource and Environmental Economics: Resource extraction has an immediate impact on the local and global environment, as is clearly demonstrated by the mining of ores or extraction of hydrocarbons. Conversely, limits on the environment’s capacity to absorb and assimilate waste can constrain resource extraction—a good example is the effect of eutrophication on the population growth, and therefore catch, of fish. Continuing to conceptually separate analyses of resource extraction from issues of environmental harm will, at best, provide partial answers to ques- tions asked by society; moreover, it may literally (as well as mathematically) encourage locally optimal strategies at the expense of globally optimal ones. 2. Consistency with Physical and Biological Principles: Few economics textbooks teach undergraduates or graduates that materials and energy are essential inputs into any production process; instead, most include models that deal only with labour and capital, explore implications of different degrees of substitutability of one for the other and identify the implications of substitutability for optimal output. They then proceed as if materials and energy could be treated in the same way, and as if production only entailed desired output. While many individual production processes could in principle be carried out with no, or almost no labour, or alternatively with no, or almost no capital, clearly they all require materials and energy. For example, to make a ton of iron requires at least a ton of materials plus considerable energy to remove oxygen and impurities from the iron oxides in those materials; moreover, the process leads to the generation of waste materials and waste heat. No amount of capital or labour can overcome these physical (thermodynamically determined) requirements for materials and energy nor prevent the generation of wastes, yet conventional economic descriptions of production processes ignore those physical constraints (Amir, 1991; Ruth, 2005). To provide meaningful tools for investigating sustainability, economics must be consistent with physical reality. Resource and environmental economics are similarly naı̈ve when representing ecological processes, ranging from the representation of carrying capacities, to ideas about climatic variability in space and time, or to dispersion of pollutants in air, water and soils. I will return to some of these examples in the closing section of this paper. 3. Development of a Systems Perspective: It is frequently argued that while physical constraints may operate at the process level, capital accumulation and technology substitution in the larger economy may help decouple economic processes from environmental constraints. For example, Robert Solow (1974, p. 2) makes the distinction between reproducible capital, such as a printing press or building, and non-reproducible capital, such as a pool of oil M. Ruth / Ecological Economics 56 (2006) 332–342 or vein of iron, and argues that b[t]he only difference is that the natural resource is not reproducibleQ, without recognizing that humanmade capital will not be reproducible either, once the natural resources are gone. Such partial systems analysis can lead to theories that are meaningless from a broader systems perspective. 4. Acknowledgment of Legacy Effects: Human-made capital is rarely as malleable as economics assumes—labour is rarely as mobile, physical and institutional infrastructures are lumpy and change only slowly, and ecosystem goods and services are locally concentrated. All are characterized by age structures (capital vintages, demographics, successional stages, etc.) that fundamentally determine how, when, and where capital, labour, and environmental goods and services can be used. To promote sustainability requires keen attention to the patterns and processes of using capital, labour, infrastructure, and goods and services from the natural environment. It is the patterns and processes into which we are locked, and our choice of means to break out of them, that determine the extent to which human-environment interactions are, or can become, sustainable. 5. Recognition of Interdependencies of Allocation, Distribution and Scale: Economics has focused on issues of optimal allocation and has moved issues of distribution and scale to its sidelines. For economic decisions to contribute to economic, environmental and social sustainability, they must also be sensitive to those issues and recognize their interrelationships. While optimal allocation implies efficiency, the issues of distribution and scale call for measures of effectiveness. 6. Demonstration of Policy Relevance: Economics has prided itself on the mathematical sophistication of its models and the range of empirical analysis found within its domain. While both are key to any rigorous academic discipline, it is increasingly obvious that for economics to make a difference in real-world decision making, it will not be sufficient to arrive at the end of an eloquent mathematical derivation or extensive econometric analysis and point to its potential policy relevance. Instead, it is the decision makers and other stakeholders who can and must judge the relevance of an eco- 335 nomic analysis. Getting stakeholders to rally around economic insights will require more transparency and critical assessment of underlying model assumptions; it will challenge economics to interface more actively with other disciplines and to consider not just the efficiency of proposed solutions, but also their effectiveness. Historically, much of economics has dealt with issues of relatively low complexity, such as the optimal extraction of a mineral or the internalization of an externality; moreover, much of the analysis was static or equilibrium-focused. Consequently, there was neither a perceived need nor room for the inclusion of a wide range of information—some of which is held by members of other disciplines, and some by stakeholders elsewhere in society. Not surprisingly, the economics discipline was (and still is) largely engaged in a monologue and a unidirectional information exchange with the rest of society. An alternative world view posits that as the complexity of the issues under investigation increases and the spatial and temporal reach of the problems (and solutions) increases, it becomes increasingly relevant to draw on stakeholder knowledge. Stakeholder involvement can then also help bridge the gap between research and implementation (Cohen, 1997; Costanza and Ruth, 1998) and reduce the frustration of economists who complain that their voices are not heard. In closing this section, let me outline a mind-set that may promote an economics of sustainability and the sustainability of economics. First, academia has increasingly emphasized the use of discipline-specific knowledge in interdisciplinary research, but for economics this was often an unidirectional relationship. Thus, economics was a valuable contributor, but did not substantially change its own mind-set in response to needs for better interdisciplinary models. Second, much of modern economics ignores spatial considerations and remains equilibrium-oriented. In contrast, ecologists tell us about the importance of concentrating on processes that occur across temporal and spatial hierarchies. Much must be done to economic models to reflect adequately the qualitative differences in system performance apparent at these different hierarchical levels. Third, much of modern economics is basic and context free—the infamous bphysics of the social 336 M. Ruth / Ecological Economics 56 (2006) 332–342 sciencesQ. History and culture matter to outcomes; they should matter to economics as well. At the turn of the 19th century, Alfred Marshall called for economics, in its later stages of development, to be guided by biological principles instead of treating the world like a mechanistic system (Marshall, 1898). The time may be right to follow his call. Conversely, should economics continue along the path it has followed throughout much of the last century, it will not only risk failing to contribute to the sustainability debate, but may itself not be sustainable. A society faced with allocating scarce resources to meet its needs may eventually decide to allocate fewer resources to the discipline that claimed to study the best use of scarce resources but failed to deliver its promised valuable insights. Without an economics of sustainability, there may be no sustainability of economics. 3. Ecological economics and industrial ecology Ecological economics and industrial ecology developed partly to address the need for biophysical reality in the analysis of human–environment interactions. Ecological economics is based on the tenet that all economic activity must be regarded as a subset of the ecosystem in which the economy is embedded and on which it depends. Of specific concern are the limits of ecosystems to handling human impacts and of the possibilities for human systems to maintain or increase quality of life. One strand of ecological economics research points to the many valuable contributions that ecosystems make to the economy by providing goods (e.g., timber, fur, fish, etc.) and services (e.g., waste absorption, pollination, etc.). Because there are no markets for many of these goods and services, economic inefficiencies and misallocations result (Costanza et al., 1997). Pricing ecosystem goods and services would more appropriately reflect their contribution to the economy. In the absence of markets, monetary values are derived through contingent valuation studies (Bateman and Willis, 1999) or by imputing values from other ecosystem goods and services for which markets exist. Estimates of monetary values of non-marketed ecosystem goods and services are then used to suggest mechanisms and policies to collect revenue from use, provide incentives for efficient use, or compensate for loss of ecosystem goods and services. This binstrumentalistQ approach has received much attention amongst researchers and policy makers because it is conceptually appealing, complements existing economic approaches and provides easily interpreted, quantitative results. However, the valuation of ecosystem goods and services is often plagued with its own empirical and conceptual problems (Toman, 1998; Turner et al., 1998). Many data issues arise from the complexity of ecosystem processes, often making it necessary to use data from one site for another, or extrapolating from limited observations to larger spatial or temporal scales. Selection biases often creep into ecosystem valuation studies because these studies focus on the goods and services we appreciate (such as the existence of wetlands for storm water control, water purification and maintenance of biodiversity), and not on those that we do not like (such as adverse health impacts prompted by the presence of breeding grounds for vectors and the diseases …
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