I. The Economist's Response to
ELEMENTS OF ENVIRONMENTAL MACROECONOMICS
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|Abstract||A glittering anomaly|
|Introduction||Steps already taken in environmental macroeconomics|
|The environmental-macro economics of optimal scale||Carrying capacity as a tool of environmental macroeconomics|
|How big is the economy?||Policy Implications|
If one starts from the vision of the economic process as an open subsystem of a closed finite total system, then the question of how big the subsystem should be relative to the total system is hard to avoid. How then have we managed to avoid it? In two ways: first, by viewing the economic subsystem as infinitesimally small relative to the total system, so that scale become irrelevant because it is negligible; second, by viewing the economy as coextensive with the total system. If the economy includes everything, then the issue of scale relative to a total system does not arise. These polar extremes correspond to Boulding's colorful distinction between the "cowboy economy" and the "spaceman economy." The cowboy of the infinite plains lives off of a linear throughput from source to sink, with no need to recycle anything. The spaceman in a small capsule lives off of tight material cycles and immediate feedbacks, all under total control subservient to his needs. For the cowboy, scale is negligible; for the spaceman, scale is total. There is no material environment relative to which scale must be determined; there is no ecosystem, only economy. In each of these polar cases, the only problem is allocation. Scale is irrelevant.
It is only in the middle ground between the cowboy and the spaceman that the issue of scale does not get conflated with allocation. But as Boulding realized, the middle ground happens to be where we are. Between the cowboy and the spaceman economies is a whole range of larger and smaller "bull-in-the-china-shop economies" where scale is a major concern. We are not cowboys because the existing scale for the economy is far from negligible compared to the environment. But neither are we spacemen, because most of the matter-energy transformations of the ecosystem are not subject to human control either by prices or by central planning. In a finite system subject to the conservation of mass, the more that is brought under our economic control, the less remains under the spontaneous control of nature. As our exactions from and insertions back into the ecosystem increase in scale, the qualitative change induced in the ecosystem must also increase, for two reasons. The first is the first law of thermodynamics (conservation of matter-energy). The taking of matter and energy out of the ecosystem must disrupt the functioning of that system even if nothing is done to the matter and energy so removed. Its mere absence must have an effect. Likewise, the mere insertion of matter and energy into an ecosystem must disrupt the system into which it is newly added. This must be the case even without appealing to any qualitative degradation of the matter and energy thus relocated. The second reason is the second law of thermodynamics which guarantees that the matter-energy exacted is qualitatively different from the matter-energy inserted. Low-entropy raw materials are taken out, high-entropy wastes are returned. This qualitative degradation of the matter-energy throughput, along with the purely quantitative dislocation of the same, induces changes in the ecosystem which to us are surprising and novel because our information and control system (prices) assumes nonscarcity (nondisruptability) of environmental source and sink functions. Economic calculation is about to be overwhelmed by novel, uncertain and surprising feedbacks from an ecosystem that is excessively stressed by having to support too large an economic subsystem (Perrings 1987).
How big should the subsystem be relative to the total ecosystem? Certainly this, the question of optimal scale, is the big question for environmental macroeconomics. But since it is such a difficult question, and since we cannot go back to the cowboy economy, we have acquired a tendency to want to jump all the way to the spaceman economy and take total control of the spaceship earth. The September 1989 special issue of Scientific American entitled "Managing Planet Earth" is representative of this thrust. But, as environmentalist David Orr points out, God, Gaia or Evolution was doing a nice job of managing the earth until the scale of the human population, economy and technology got out of control. Planetary management implies that it is the planet that is at fault, not human numbers, greed, arrogance, ignorance, stupidity, and evil. We need to manage ourselves more than the planet and our self-management should be, in Orr's words, "more akin to child-proofing a day-care center than to piloting spaceship earth." The way to child-proof a room is to build the optimal scale playpen within which the child is both free and protected from the excesses of its own freedom. It can enjoy the light and warmth provided by electrical circuits beyond its ken, without running the risk of shorting out those circuits, or itself, by experimenting with the "planetary management technique" of teething on a lamp cord.
Our manifest inability to centrally plan economies should inspire more humility among the planetary managers who would centrally plan the ecosystem. Humility should argue for the strategy of minimizing the need for planetary management by keeping the human scale sufficiently low so as not to disrupt the automatic functioning of our life support systems, thereby forcing them into the domain of human management. Those who want to take advantage of the "invisible hand" of self-managing ecosystems have to recognize that the invisible hand of the market, while wonderful for allocation, is unable to set limit to the scale of the macroeconomy. Our limited managerial capacities should be devoted to institutionalizing an economic Plimsoll line that limits the macroeconomy to a scale such that the invisible hand can function in both domains to the maximum extent. It is ironic that many free marketeers, by opposing any limit to the scale of the market economy (and therefore to the increase in externalities), are making more and more inevitable the very central planning that they oppose. Even worse is their celebration of the increase in GNP that results as formerly free goods become scarce and receive a price. For allocation it is necessary that newly scarce goods not continue to have a zero price -- no one disputes that. The issue is that, for all we know, we might have been better off to remain at the smaller scale at which the newly scarce goods were free and their proper allocative price was still zero. The increase in measured national income and wealth resulting as formerly free goods are turned into scarce goods is more an index of cost than of benefit, as was recognized by the classical economist Lauderdale back in 1819 (Lauderdale 1819; Foy 1989).Return to top of section Return to beginning of Daly article A GLITTERING ANOMALY
Optimal scale of a single activity is a strange concept to economists. Indeed, microeconomics is about little else. An activity is identified, be it producing shoes or consuming ice cream, and a cost function and a benefit function for the activity in question are defined. Good reasons are given for believing that marginal costs increase and marginal benefits decline as the scale of the activity grows. The message of microeconomics is to expand the scale of the activity in question up to the point where marginal costs equal marginal benefits, a condition which defines the optimal scale. All of microeconomics is an extended variation on this theme.
When we move to macroeconomics, however, we never again hear about optimal scale. There is apparently no optimal scale for the macro economy. There are no cost and benefit functions defined for growth in scale of the economy as a whole. It just doesn't matter how many people there are, or how much they each consume, as long as the proportions and relative prices are right. But if every micro activity has an optimal scale, then why does not the aggregate of all micro activities have an optimal scale? If I am told in reply that the reason is that the constraint on any one activity is the fixity of all the others and that when all economic activities increase proportionally the restraints cancel out, then I will invite the economist to increase the scale of the carbon cycle and the hydrologic cycle in proportion to the growth of industry and agriculture. I will admit that if the ecosystem can grow indefinitely then so can the aggregate economy. But, until the surface of the earth begins to grow at a rate equal to the rate of interest, one should not take this answer too seriously.
The total absence in macroeconomics of the most basic concept of microeconomics is a glittering anomaly, and it is not resolved by appeals to the fallacy of composition. What is true of a part is not necessarily true for the whole, but it can be and usually is unless there is some aggregate identity or self-cancelling feedback at work. (As in the classic examples of all spectators standing on tiptoe to get a better view and each cancelling out the better view of the other; or, in the observation that while any single country's exports can be greater than its imports, nevertheless the aggregate of all exports cannot be different that the aggregate of all imports). But what analogous feedback or identify is there that allows every economic activity to have an optimal scale while the aggregate economy remains indifferent to scale? The indifference to scale of the macroeconomy is due to the preanalytic vision of the economy as an isolated system -- the inappropriateness of which has already been discussed.
As an economy grows, it increases in scale. Scale has a maximum limit defined either by the regenerative or absorptive capacity of the ecosystem, whichever is less. However, the maximum scale is not likely to be the optimal scale. Two concepts of optimal scale can be distinguished, both formalisms at this stage, but important for clarity.
1. The anthropocentric optimum. The rule is to expand scale, i.e., grow, to the point at which the marginal benefit to human beings of additional manmade physical capital is just equal to the marginal cost to human beings of sacrificed natural capital. All nonhuman species and their habitats are valued only instrumentally according to their capacity to satisfy human wants. Their intrinsic value (capacity to enjoy their own lives) is assumed to be zero.
2. The biocentric optimum. Other species and their habitats are preserved beyond the point necessary to avoid ecological collapse or cumulative decline, and beyond the point of maximum instrumental convenience, out of a recognition that other species have intrinsic value independent of their instrumental value to human beings. The biocentric optimal scale of the human niche would therefore be smaller than the anthropocentric optimum.
The definition of sustainable development does not specify which concept of optimum scale to use. It is consistent with any scale that is not above the maximum. Sustainability is probably the characteristic of optimal scale on which there is most consensus. It is a necessary, but not sufficient, condition for optimal scale.
What has macroeconomics contributed to environmental economics so far? As we have seen, the textbooks make no claim to any contribution whatsoever, but that is too modest. National Income Accounting is part of macroeconomics, and there has been an effort to correct our income accounts for consumption of natural capital. Current national accounting conventions also treat environmental clean up costs as final consumption rather than intermediate costs of production of the commodity whose production gave rise to those costs (Hueting 19080; Leipert 1986; Repetto 1987; Ahmad et al. 1989). Traditional national income accountants have not exactly been in the forefront of the effort to correct these two errors, and may even be said to be dragging their feet. However, the conservatively motivated and impeccably orthodox attempt to gain a closer approximation of true Hicksian income (maximum available for consumption without consuming capital stock) will surely make this effort an important foundation of environmental macroeconomics.
Inter-industry or input-output analysis is also a useful tool of environmental analysis, although it is hard to classify it as either micro or macro. But because of its close relation to national accounts, let us call it macro and credit it as an existing part of environmental macroeconomics. Certainly, it has been important in elucidating total (direct and indirect) requirements of materials and especially energy that must be extracted from the environment in order to increase any component of the economy's final bill of goods by some given amount.