Global Warming and Economic Theory

Something extraordinarily strange happens when we ask about the relationship between economic theory and global warming.

We: ¨How is global warming related to economics?¨

Google: ¨Global warming will primarily influence economic growth through damage to property and infrastructure, lost productivity, mass migration and security threats¨

Read again.

¨Global warming will primarily influence economic growth through damage to property and infrastructure, lost productivity, mass migration and security threats¨

Again, but now more critically:

Economic growth will primarily influence global warming.

In this post, we first introduce several concepts that can push us out of our classic views on what is a healthy economy.

What Does Economic Theory?

  • An economy is an extensive set of inter-related production and consumption activities that aid in determining how scarce resources are allocated.
  • In an economy, the production and consumption of goods and services are used to fulfill the needs of those living and operating within it.
  • Market-based economies allow goods to flow freely through the market, according to supply and demand.

Outdated Economical Thinking Caused Global Warming

Wealth creation

If we hypothesize that neo-liberal economical thinking is a determining factor that caused global warming and impaired sustainability, which what theory should we replace the standard theoretical frame of exchanging material goods, that is economic theory?

What questions should we answer, regarding the definition of economics if we change the aim of economic theory from wealth creation to create sustainability? Could we design a new mechanism that creates the right incentives to align supply and demand fairly and sustainable?

New Economic Theory Building

Fortunately, there are some initiatives to arrive at healthier economic theories. With healthy economic thinking we mean economic thinking focused on sustainability, not wealth.

With difficulty we spotted some promising developments, because there are hardly any media that write about these new quests. Names such as ecological economics, bio-economics, eco-economics or eco-capitalism characterize them. As far as we have been able to find out, there is no government, NGO or political forum that pays attention to this new, healthier, economic theory building.

  • Eco-capitalism or Environmental Economics
  • Ecological economics, bio-economics, or eco-economics

As you will note, there is a fundamental difference between these two approaches, Wikipedia provided largely the descriptions of concepts presented in this post.

Eco-capitalism or Environmental Economics

Eco-capitalism, also known as environmental capitalism or  green capitalism, is the view that capital exists in nature as “natural capital” (ecosystems that have ecological yield) on which all wealth depends. Therefore, governments should use market-based policy-instruments (such as a carbon tax) to resolve environmental problems.

Ecological Economics

By treating the economy as a subsystem of Earth’s larger ecosystem, and by emphasizing the preservation of natural capital, we differentiate the field of ecological economics from environmental economics, which is the mainstream economic analysis of the environment. Ecological and environmental economics are different schools of economic thought, with ecological economists emphasizing strong sustainability and rejecting the proposition that physical (human-made) capital can substitute for natural capital.

Differences between the physical human-made capital and natural capital?

Human-made capital capital is a term used to describe goods that are used to produce other goods and services, such as machines, tools, buildings and infrastructure and can also include “financial capital’”( money and other economic assets).

Natural capital is the world’s stock of natural resources, which includes geology, soils, air, water and all living organisms. Some natural capital assets provide people with free goods and services, often called ecosystem services. Two of these (clean water and fertile soil) underpin our economy and society and thus make human life possible.

It extends the economic notion of capital (resources which enable the production of more resources) to goods and services provided by the natural environment. For example, a well-maintained forest or river may provide an indefinitely sustainable flow of new trees or fish, whereas over-use of those resources may lead to a permanent decline in timber availability or fish stocks. Natural capital also provides people with essential services, like water catchment, erosion control and crop pollination by insects, which ensure the long-term viability of other natural resources. Since the continuous supply of services from the natural capital assets depends on a healthy, functioning environment, the structure and diversity of habitats and ecosystems are important components of natural capita.

The most cogent example of how the different theories treat similar assets is tropical rainforest ecosystems, most obviously the Yasuni region of Ecuador. While this area has substantial deposits of bitumen, it is also one of the most diverse ecosystems on Earth and some estimates establish it has over 200 undiscovered medical substances in its genomes – by logging the forest or mining the bitumen, it would destroy most of it.

Analysis that view the rainforest primarily as a source of wood, oil/tar and perhaps food, undervalues the instructional capital of the gnomes. The government of Ecuador set a price of US$350M for an oil lease intending to sell it to someone committed to never exercising it at all and instead preserving the rainforest. In doing so, it also valued leaving the extremely carbon-intensive (“dirty”) bitumen in the ground,

Ecosystem Services

Ecosystem services are the many and varied benefits to humans provided by the natural environment and from healthy ecosystems. Such ecosystems include, for example, agro-ecosystems, forest ecosystems, grassland ecosystems and aquatic ecosystems. These ecosystems, functioning in healthy relationship, offer such things like natural pollination of crops, clean air, extreme weather mitigation, and human mental and physical well-being. Collectively, these benefits are becoming known as ‘ecosystem services’, and are often integral to the provisioning of clean drinking water, the decomposition of wastes, and resilience and productivity of food ecosystems.

We group ecosystem services into four broad categories: provisioning, such as the production of food and water; regulating, such as the control of climate and disease; supporting, such as nutrient cycles and oxygen production; and cultural, such as spiritual and recreational benefits

To help inform decision-makers, many ecosystem services are being valuated in order to draw equivalent comparisons to human engineered infrastructure and services.

However, we are in desperate need for better ideas to evaluate ecosystem services that are not expressed in money or increased per capita consumption (the typical economic measure of “standard of living”). But how?

Environmental and ecological economics on the spectrum of adherence to sustainable development. 

The danger in evaluating options is the slip back into classic economic thinking. To make this clear, we are mentioning two opposing concepts: Weak and Strong Sustainability.

Weak and Strong Sustainability

Neoclassical economists maintain that man-made capital can, in principle, replace many natural capital. This is the weak sustainability view, essential that every technology can be improved upon or replaced by innovation, and that there is a substitute for all scarce materials.

See the source image

At the other extreme, the strong sustainability view argues that the stock of natural resources and ecological functions are irreplaceable. From the premises of strong sustainability, economic policy has a fiduciary responsibility to the greater ecological world, and that sustainable development must therefore take a novel approach to valuing natural resources and ecological functions.

Still a Question

See the source image

But still is the question: How do we operationalize this in our daily lives: choice when shopping, investment decisions of companies, etc.? The danger in evaluating options is the slip back into classic economic thinking. How can we embed Strong Sustainability in our thinking habits, automatically, without having to resort to empty statements such as we found somewhere:

¨Green Economy demands a fresh mindset and an innovative outlook of doing business. It likewise causes new capacities, skills set from labor and professionals who can competently function across sectors, and able to work as effective components within multi-disciplinary teams¨.

The real question is: ¨How do we change the mechanics of our daily, nearly automated or conditioned choices, in families, companies and governments? ¨ We need definitely better ideas than ¨best money¨.

Over twenty refrigerated trucks a week go to Morocco to have shrimps peeled there, where they transported it back to the Netherlands. That’s perfect business logic. Many women are available in Morocco who want to work hard and hygienically at low labor costs. A “Weak Sustainability” solution would be the use of innovative electric refrigerated trucks.

What would a “Strong Sustainability” solution look like?

Actually, they invented a shrimp peeling machine, which makes transportation and long-term refrigeration of shrimp obsolete, and the women in Morocco.

A New Currency

What if the new currency would be energy? What if we buy and sell things and services in joules? What would happen? What will change? What is the difference with money? What would the benefits be? In what circumstances could that work? Can we test that or set up a simulation of it?

Related posts

  • Training in Economics is a Serious Handicap.  The poor results of deliberate economic policies suggest that hidden assumptions in economic theory itself cause the recurring problems. It applies a mechanistic approach for modelling complex systems, dating back to Newton’s theories about the behaviour of independent particles, in timeless and unchanging conditions. 
  • Blue Economy. Entrepreneur Gunter Pauli’s believes that “What is necessary for life should be free”. Inspired by natural systems, he has been searching for the science that can a foundation for business models to achieve that vision.
  • Rethink Investment Strategies. Traditionally, finance and nature have been regarded as opposites. Yet investors might learn from nature and this approach may lead to more socially responsible investing that may help society. In addition,  the investment strategies may also be beneficial for the investor.
  • The New Currency is Time. What if we leave an economy based on exchange of goods for an economy totally based on an exchange of time?

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