[*PG1]SUSTAINABILITY, DISTRIBUTION, AND THE MACROECONOMIC ANALYSIS OF LAW

Douglas A. Kysar*

Abstract:  Legal economic analysis has traditionally focused on the application of microeconomic theory to questions of legal import. Scholars have generally regarded macroeconomic effects of legal rules as lying beyond the purview of the legal decisionmaker’s jurisdiction. This Article argues that such exclusion of macroeconomic subject matter from legal analysis may rest on a scientifically erroneous view of the economic process. The conventional understanding of the economic process presumes an unlimited supply of material inputs and an infinite natural capacity to absorb waste outputs. Fundamental scientific principles suggest that this understanding is flawed. The economic process must necessarily be limited in scale by the capacity of the ecological superstructure to sustain it. Thus, in addition to the efficient allocation of resources, legal economic analysis also should be concerned with the sustainable maintenance of scale. Consideration of scale effects by legal decisionmakers cannot be safely ignored in the way that distributive effects have been, given that no political mechanism analogous to the tax and transfer system exists to regulate the scale of the macroeconomy.

Introduction

“[T]he true rationalism must always transcend itself by recurrence to the concrete in search of inspiration. A self-satisfied rationalism is in effect a form of anti-rationalism. It means an arbitrary halt at a particular set of abstractions.”1

[*PG2] In January of 1999, geologist Peter Barrett from Victoria University in Wellington, New Zealand, made a startling announcement at a gathering of international climate experts considering the effects of greenhouse emissions on global warming.2 According to Barrett, the West Antarctic ice-sheet, which is approximately the size of Mexico and is currently grounded below sea level, was showing signs of becoming unstable and potentially breaking away.3 Scientists have suspected since at least the mid-1990s that Antarctic ice-shelves, which float on the ocean surface and are attached to the grounded ice-sheets, are retreating at rapid rates.4 In early 1999, researchers at the University of Colorado at Boulder’s National Snow and Ice Data Center and the British Antarctic Survey confirmed this hypothesis by using satellite photos to identify a loss of nearly 3000 square kilometers from protective ice shelves around the Antarctic Peninsula in the last year alone.5 Compared to the total loss of only 7000 square kilometers in the previous fifty years, these latest fractures suggested that the 4.5 degree increase in mean temperature in Antarctica since the 1940s has had an escalating effect on glacial instability.6

What Barrett found more troubling, however, is the relationship between the “full retreat”7 of the ice-shelves and the crumbling of the West Antarctic ice-sheet. Melting ice-shelves have little net effect on sea levels because the shelves float on the ocean surface, displacing approximately the amount of water they contain.8 Ice-sheets, on the other hand, threaten to substantially increase global sea levels if they melt—a prospect rendered more likely by the steady disappearance of surrounding ice-shelves.9 Scientists estimate that complete melting of the West Antarctic ice-sheet could result in a six-meter rise in sea levels.10 A rise of just one meter would affect 3% of the total land area of the planet, including such major cities as New York, London, and Bangkok, and as much as 30% of the world’s cropland.11

[*PG3] Of course, there is much uncertainty over this prognosis and, indeed, some debate over whether the observed phenomena are significantly correlated with greenhouse emissions. Nevertheless, the hypothetical disintegration of the West Antarctic ice-sheet reveals many ways in which current global market mechanisms struggle to respond to ecological crises. Assuming that the next century will see the unhinging of the West Antarctic ice-sheet amidst unprecedented climate change, how would the market react? Because no private entity “owns” Antarctica, no property rights-holder has a financial incentive to prevent its steady disappearance. Nor would privatization of Antarctica alleviate this dilemma given that the instrumental value of the frozen land mass (climate stabilization) accrues to all of humanity, not simply its “owner.”12 Or, put another way, because the two billion people who live within one hundred kilometers of a vulnerable coastline13 face nearly insurmountable problems of coordination and imperfect information, collective market action to reverse global warming trends is unlikely. Indeed, because the people likely to face the most severe consequences of greenhouse emissions have yet to be born, few market actors currently exist to object out of that most powerful economic force: self-interest.

Political action is also hindered by the current market ethos. Because present beneficiaries of the market’s failure to internalize the costs of global warming will invest their rents in opposition to any efforts to force internalization, proponents of such market-corrective changes face a daunting political battle. Also, because attempts to price the environmental costs of global atmospheric change are scientifically complex and ethically controversial, market-corrective policies, even when enacted, are imperfect economic instruments. Finally, given that the global warming problem raises issues of international distributive equity that cannot be resolved by an increase in global economic activity (which, at least under current industrial practices, would exacerbate the global warming problem), developed nations accustomed to economic growth as a response to all questions of eq[*PG4]uity must undergo nothing short of a political and cultural transformation—a prospect rendered dim by the continued refusal of the United States to adopt the Kyoto Protocol.14

For these and other reasons, conventional economic policy struggles to respond to ecological crises such as the problem of global warming. This Article attempts to locate the cause of that struggle in the conceptual underpinnings of macroeconomic theory. Put simply, standard macroeconomics utilizes assumptions about the relationship between human and ecological activity that may well lack a sound scientific basis. Moreover, once alternative assumptions are put into place, the course of macroeconomic theory shifts in ways that carry dramatic implications for legal economic analysis. Most notably, the revised theory raises questions about the justification generally given for excluding macroeconomic subject matter from the study of law and economics.

Since its inception, law and economics has attracted criticism from scholars who find its assumptions unrealistic.15 For a long time, this response was purely critical in form, exposing as flawed the behavioral assumptions of law and economics without proposing corresponding changes to increase its veracity. In recent years, however, a group of scholars has devoted considerable insight and energy to the project of behavioral law and economics.16 This emerging subdisci[*PG5]pline fuses traditional neoclassical economic analysis with lessons drawn from cognitive psychology and decision theory research. The result is a law and economics grounded in assumptions that comport better with observed real-world behavior than the stylized rational actor model featured in conventional law and economics. The fruits of this effort are now dominating new research in law journals, such that it is no overstatement to conclude, “The future of economic analysis of law lies in new and better understandings of decision and choice.”17

With a few notable exceptions,18 this project to improve the veracity of law and economics assumptions has focused exclusively on the foundational principles of microeconomics.19 A group of dedicated scholars within economics, biology, and ecology departments have undertaken a parallel project to reform the assumptions of macroeconomics. These scholars—who have banded together under the moniker, ecological economists—adopt the same methodology as legal behavioral economists. They examine the most robust findings from disciplines outside of economics and utilize those findings to steer economic analysis toward what they believe is greater real-world relevance. As behavioralists instill microeconomic analysis with the teachings of cognitive psychology and decision theory, ecological economists bring the findings of ecology, biology, and environmental science to macroeconomics.

[*PG6] This Article introduces the field of ecological economics and analyzes its potential use as a macroeconomics20 for legal analysis. Rather than engage in a full critical evaluation of the foundational assumptions of ecological economics,21 this Article largely accepts them as true and asks the speculative question, “What would that mean for legal analysis?” As will be seen, the implications could be quite broad. Traditionally, legal economists have given little attention to macroeconomic subject matter.22 If the tenets of ecological economics are to be believed, this narrowness of focus may rest on unfounded assumptions about the nature of human economic activity and its relationship to the environment. Indeed, if the ecological economic understanding of this relationship is correct, the impact of legal rules on the macroeconomy could become an issue of central theoretical concern to legal scholars.

Ecological economics offers this potential because it is built around a more complex understanding of human economic goals than traditional economic analysis. Economists recognize two primary functions served by the market: the allocation of resources among competing uses (allocation) and the distribution of wealth among market participants (distribution). In grossly simplified terms, economists believe that the first function suggests market policies designed to maximize allocative efficiency, while the second function requires a social decision best left to the political process. Ecological economists argue that a third function served by the market has been overlooked by conventional analysis: moderation of the scale of human economic activity vis-�-vis the ecological superstructure upon which all life and activity depends (scale). While allocation determines the purposes for which resources are used, scale determines the rate and amounts of resources that are used.

[*PG7] Like their orthodox counterparts, ecological economists offer a norm to accompany this concept. Just as economists almost instinctively believe that allocative efficiency should be maximized, ecological economists tend to believe that the scale of the economy should be sustainable, that is, capable of reproduction in perpetuity (or its practical equivalent). Readers who are uncomfortable with some of the more dramatic implications of sustainability should bear in mind that the fundamental insight of ecological economics is a recognition of the concept of scale, not necessarily the norm of sustainability. Whether or not one accepts all of the implications of sustainability as a norm, ecological economists seek acknowledgment that human economic activity impacts the environment and that the size and rate of that impact is a legitimate subject of social and legal influence.

Part I of this Article begins with a brief history of ecological economics, tracing its development from a few foundational articles in the late 1960s and early 1970s to a lively transdisciplinary subject that forms the intellectual core of today’s major international efforts to achieve sustainable development.23 The fundamental principles of ecological economics are examined to provide the reader with a primer on this discipline which has been described as “the science and management of sustainability.”24 Representative applications of ecological economic concepts are reviewed, demonstrating the potential ability of such concepts to influence economic activity to become more consonant with the ecological needs of the earth.

Part II addresses several criticisms that have been raised against ecological economics and argues that most miss their mark.25 Often, critics of ecological economics raise attacks that reflect a misunderstanding of its basic concepts. As Part II demonstrates, once these criticisms are taken to their logical conclusions, they turn out to strengthen, rather than undermine the emerging discipline. Nevertheless, one particular criticism—relating to the possibility of market forces to inspire the discovery or creation of substitutes for scarce natural resources—remains a powerful challenge to ecological economics. Economists often view price as a built-in market mechanism for conservation: as resources grow scarce, they rise in price and inspire the development of substitute materials. Such dynamics, on the [*PG8]economist’s account, obviate the need for direct legal control of market exploitation of natural resources.

Ecological economists oppose this view by arguing, among other things, that widespread externalization of environmental costs undermines the reliability of the price mechanism as a regulator of resource-taxing activity. Moreover, they contend that even a perfectly functioning price system would fail to control the scale of the economy adequately. Many of the most important consequences of scale expansion are properly conceived of as price-determining, not price-determined. Decisionmaking about how massive the scale of the economy ought to grow in relation to the environment, therefore, should not occur exclusively through decentralized market microdecisions, no matter how well the price mechanism is functioning.

Part III speculates on the broader implications of ecological economics for legal analysis, assuming that ecological economists are correct in their view of the relationship between human and natural capital.26 This Part argues that incorporation of ecological economic insights into legal analysis is desirable both to enhance the use of macroeconomics within legal theory, and to ensure that scholars confront the problem of sustainability when making legal policy recommendations.

I.  An Introduction to Ecological Economics

The discipline of ecological economics is intimately concerned with the dynamic processes that drive environmental change, especially those processes that involve the intersection of human and ecosystem activity. Moreover, the discipline is also focused, like traditional economics, on market transactions. As such, the discipline is particularly well suited to guide economic and legal policymaking under conditions of increasing ecological strain. To better understand the potential advantages of ecological economics as an analytical framework, this Part begins with a brief review of its history, followed by a primer on fundamental ecological economic concepts.

A.  A Brief History

Although many ecological economic themes resonate with century old thoughts of the classic economist John Stuart Mill,27 the dis[*PG9]cipline’s modern origins can be traced to three landmark articles from the late 1960s and early 1970s.

1.  “The Economics of the Coming Spaceship Earth”

The first of the three landmark articles came in 1966 from past president of the American Economic Association, Kenneth Boulding. Entitled The Economics of the Coming Spaceship Earth, Boulding’s essay was a metaphorical masterpiece.28 His thesis was simple: while mainstream economists view the economy as an open system of pure exchange value with externalized environmental consequences, the steady progression of humanity toward the carrying capacity of the earth will require that economic activity be reconceived as a closed system within which environmental consequences must be considered. Of course, economists since Arthur Pigou have recognized the existence of “externalities” such as the cost of pollution from industrial activity.29 Yet Boulding’s essay revealed something deeper than Pigou’s mere microeconomic failure of private cost functions to reflect full social costs. The vivid and enduring language that Boulding used to explore the contrast between open and closed visions of the economic system revealed a macroeconomic problem—an economic culture predisposed to the creation of Pigouvian externalities on a massive, public scale.

Boulding summarized the mainstream economic perspective as the “cowboy economy,” in which natural frontiers are seen as limitless, resources as inexhaustible, and wastes as innocuous.30 Such a perspective fosters the “reckless, exploitative, romantic, and violent behavior” [*PG10]to be expected of a cowboy.31 Relative to the economist’s task, “[i]f there are infinite reservoirs from which material can be obtained and into which effluvia can be deposited, then the throughput [that is, the sheer volume of production and consumption in an economy] is at least a plausible measure of the success of the economy.”32 In other words, if there are no environmental or social repercussions to economic growth, then an increase in the gross national product (GNP) would seem to represent an uncontroversial macroeconomic goal. Indeed, Boulding argued that the preanalytic view of the economy as an open system unconstrained by environmental factors leads to an economics fixated with growth.33

In contrast to this “cowboy economy,” Boulding championed a view of the “‘spaceman economy,” in which the earth is a closed system necessitating consideration and careful planning of the consequences of human economic activity.34 In a spaceship, one cannot ignore the byproducts of production and consumption.35 Likewise on the “Spaceship Earth,” humans must be concerned with the capacity of the global vehicle to support their needs and accommodate their wastes.36 Therefore, “in the spaceman economy, throughput is by no means a desideratum, and is indeed to be regarded as something to be minimized rather than maximized.”37 Humans must be concerned with the quality of economic activity that occurs, particularly as it relates to the creation of enduring, efficient, and useful capital stocks. Like Mill,38 Boulding saw the shift of emphasis from the quantitative [*PG11]magnitude of income flows to the quality of capital stock as not just an environmental necessity, but an improvement in social welfare: “The essential measure of the success of the economy is not production and consumption at all, but the nature, extent, quality, and complexity of the total capital stock, including in this the state of the human bodies and minds included in the system.”39

Boulding concluded his essay by puzzling over why his views placed him in such a narrow minority of contemporary thinkers. There is, he suspected, a widely shared feeling that “the spaceman economy is still a good way off (at least beyond the lifetimes of any now living), so let us eat, drink, spend, extract and pollute, and be as merry as we can, and let posterity worry about the spaceship earth.”40 What troubled Boulding most about this perspective, besides its ethical myopia, was that he believed “[t]he shadow of the future spaceship . . . is already falling over our spendthrift merriment.”41 Over three decades later, the shadow would seem to have darkened and spread, yet mainstream economics is no more receptive to his ideas. As Boulding wryly noted in a reflection on his earlier article, “It seems to be very hard to organize a long-run crisis.”42

2.  “The Tragedy of the Commons”

While Boulding’s visionary essay contained the intellectual seeds from which ecological economics would spring, biologist Garrett Hardin’s famous 1968 article, The Tragedy of the Commons, might be considered the cultural beginning of ecological economics.43 Though its themes were well-explored over a decade earlier by an economist,44 Hardin’s eloquent article had a far-ranging impact precisely because his approach was not restricted to an economic inquiry. The fusion of Hardin’s biological insights with his elementary economic analysis produced a work of near-universal resonance. It is this brand of trans[*PG12]disciplinary thinking that has uniquely characterized ecological economics in the decades following The Tragedy of the Commons.

Hardin’s piece focused on the well-known problem posed by allowing open access to public resources.45 He described this problem by evoking simple agrarian imagery, much like that other 1960s economics masterpiece, The Problem of Social Cost:46

The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons . . . . [Because the positive effects of an additional animal accrue to the individual while the negative effects are spread across all commons users], the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to the herd. And another; and another . . . . But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit—in a world that is limited. Ruin is the destination toward which all men rush, each pursing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.47

This tragedy was, of course, long known to economists under such names as the problem of “common pool resources.”48 For many economists, however, the problem was a mere curiosity, a quirky be[*PG13]havioral exception to the general rule of allocative market efficiency.49 For Hardin, on the other hand, the tragedy of the commons was pervasive, explaining a wealth of urgent contemporary problems, from the extinction of marine life50 to the pollution of air and water51 to the rapid growth of human population.52

To circumvent the tragedy, Hardin recommended drastic legislative action, which he evocatively called “mutual coercion, mutually agreed upon by the majority of the people affected.”53 Like Mill and Boulding,54 Hardin viewed his recommendation as offering an affirmative improvement in social welfare in addition to its environmental benefits: “Individuals locked into a logic of the commons are free only to bring on universal ruin; once they see the necessity of mutual coercion, they become free to pursue other goals.”55

As a foundational article in the development of ecological economics, The Tragedy of the Commons served to remind economists that their discipline did not exist in a vacuum. The article’s implicit message, as Hardin would later reflect, was that economists could only continue their self-imposed disciplinary isolation at the cost of ecological health and, perhaps, human survival: “Before significant political change can be instituted, there must be a fundamental improvement in the theory and practice of economics, which needs to be firmly tied down to the sort of conservation laws that have proven essential to the progress of the natural sciences.”56 Ecological economics can be seen as the collaborative effort of a wide range of thinkers to respond to Hardin’s challenge.

3.  “The Entropy Law and the Economic Problem”

The third ecological economics pillar came in the form of a lecture by Vanderbilt economist Nicholas Georgescu-Roegen entitled The [*PG14]Entropy Law and the Economic Problem.57 The lecture’s themes were explored first in an earlier work which caused famed economist Paul Samuelson to note, “I defy any informed economist to remain complacent after meditating over this essay.”58 What Georgescu-Roegen attempted to accomplish was nothing short of a scientific refutation of macroeconomic theory. Invoking the laws of thermodynamics, Georgescu-Roegen argued that “matter-energy [necessarily] enters the economic process in a state of low entropy and comes out of it in a state of high entropy,” where entropy refers to the degree of chaos or disorder present in an energy source.59 Fossil fuels represent the product of millions of years of condensed solar energy—as such, they are potent sources of available energy (a low-entropy energy source). Once burned, the fossil fuels become a mixture of gases that dissipate into the atmosphere and become largely worthless, even harmful, to humans (a high-entropy energy source).

For Georgescu-Roegen, the important point was this: the second law of thermodynamics states that matter-energy irrevocably moves from a condition of low- to high-entropy, from ordered, available energy to chaotic, unavailable energy.60 In other words, “the cost of any biological or economic enterprise is always greater than the product.”61 Thus, although animals do grow in size and species do evolve in complexity, in actuality their physical growth and adaptation exacts a higher cost in terms of pure matter-energy than their new forms represent. More generally, any time that a material subsystem appears to have violated the second law of thermodynamics, one need only look outside the subsystem to find a source of low-entropy that is being driven to chaos. In short, Georgescu-Roegen demonstrated that the common-sense view of resources as limited, expressed earlier by Boulding, has theoretical support in physics: resources are limited because their use necessarily entails their dissipation.

Given this biophysical truth,62 Georgescu-Roegen set out to turn standard macroeconomics on its head. Rather than an isolated ex[*PG15]change loop capable of perpetual expansion, the economic process is fixed to a base of materials that is subject to identifiable constraints. “It is because of these constraints that the economic process has a unidirectional irrevocable evolution.”63 All economic activity must necessarily involve a step, however small, toward the exhaustion of available energy. Georgescu-Roegen’s conception of entropy laws and economic activity is unforgiving. Nuclear power, materials recycling, and any other technological “solution” to matter-energy scarcity is a delusion: “There is no free recycling just as there is no wasteless energy.”64 Even if humans were to give up their dependence on pollution-producing fossil fuels in favor of renewable energy sources, they could not escape the laws of entropy. Solar energy, too, tends to chaos in the long-run.65

Georgescu-Roegen’s conclusion is powerful, if daunting:

The upshot is clear. Every time we produce a Cadillac, we irrevocably destroy an amount of low entropy that could otherwise be used for producing a plow or a spade. In other words, every time we produce a Cadillac, we do it at the cost of decreasing the number of human lives in the future. Economic development through industrial abundance may be a blessing for us now and for those who will be able to enjoy it in the near future, but it is definitely against the interest of the human species as a whole, if its interest is to have a lifespan as long as it is compatible with its dowry of low entropy.66

In order to preserve the species as long as possible, Georgescu-Roegen believed that humans must adopt an ethic of prudent management of fixed terrestrial resources. He would later advocate the use of solar energy sources, stabilization of population sizes, reduction [*PG16]of consumption habits, and other policy measures as part of this prudent management.67

It bears noting that Georegescu-Roegen’s conclusion that humanity should “have a lifespan as long as it is compatible with its dowry of low entropy” represents a conflation of the concept of scale and the norm of sustainability.68 As described above,69 ecological economics does not require one to accept the goal of lengthening the survival of the species at any cost; rather, it requires one to acknowledge that some decision about intergenerational resource distribution must be made. From the perspective of ecological economics, Georgescu-Roegen’s main accomplishment was in throwing down a theoretical gauntlet to which mainstream economics has yet to respond. The failure to refute or even address the logic of Georgescu-Roegen’s argument created a void in standard economic analysis that ecological economics has sought to fill.

4.  The Emergence of Ecological Economics

In 1973, Herman Daly published a collection of essays, including the three just discussed, that marked the formal arrival of ecological economics as a field of study.70 The subject could only be described as transdisciplinary, utilizing concepts from a variety of fields including economics, ecology, biology, and physics, yet grounded in a set of foundational principles unique to it. Following this genesis, ecological economics gained steady acceptance until “[i]t now boasts several research institutes around the world, as well as the 1500-member International Society for Ecological Economics.”71 Since the Brundtland Commission focused the world’s attention on the concept of sustainability in 1987,72 ecological economics has only grown in prominence: no discipline has been more concerned with defining a sustainable level of human activity within the natural ecosystem than [*PG17]ecological economics. As a result, international leaders are increasingly turning to its practitioners for guidance.

Throughout this development, most have considered Herman Daly the intellectual figurehead of ecological economics.73 For twenty-five years, Daly has been challenging growth economic orthodoxy and championing the discipline of ecological economics. He taught at Louisiana State University for two decades before his views on the mixed value of economic growth attracted the attention of Robert Goodland at the World Bank.74 Goodland hired Daly to act as a senior economist at the World Bank for six years, during which Daly vigorously lobbied from within to change the Bank’s institutional disregard of the environmental costs of its projects.75 After resigning from the World Bank in 1994, Daly assumed his current position at the School of Public Affairs at the University of Maryland. His views achieved international recognition in 1996 when he was awarded, appropriately, the “alternative Nobel Prize.”76

B.  Some Fundamentals

Although the field is still relatively new and ill-formed, several fundamental concepts have gained sufficient acceptance to be called “standard” ecological economics. This Section examines those concepts in detail.

1.  The Relationship Between Ecological and Economic Systems

“The vision of modern economics in general, and especially of macroeconomics, is the familiar circular flow diagram.”77 The economy is viewed as a self-contained system within which exchange value circulates between producers and consumers. The macroeconomic loop makes no accounting of the actual resource materials from [*PG18]which goods are produced, or the waste matter into which goods are transformed during consumption. Physical dimensions of economic activity simply do not exist in the textbook circular flow diagram. Thus, resource depletion, environmental pollution, impairment of necessary environmental services such as water filtration or carbon absorption, or indeed any other relationship between economic activity and factors outside of the narrow universe of value exchange are ignored by standard macroeconomics. As Daly put it, “It is exactly as if a biology textbook proposed to study an animal only in terms of its circulatory system, without ever mentioning its digestive tract . . . .”78

Ecological economists believe that this conception is misguided. Human economic activity impacts the ecological sphere in all phases of production and consumption, in ways both patently obvious, such as the clear-cutting that has occurred in the majority of the forested areas of the globe,79 and deceptively subtle, such as the rise of greenhouse gases in the atmosphere from 277 ppmv (parts per million by volume) to 367 ppmv since pre-Industrial times.80 Humans are drawing down natural resources at rates that are geologically significant. The Ogallala aquifer, a massive underground source of filtered fresh water which lies beneath several states in the U.S. Great Plains, stood at a relatively constant level for millions of years. In recent decades, however, agricultural irrigation has caused the fossil groundwater to drop at an annual rate of four to six feet, compared to a natural recharge rate of only about one-half inch per year.81 The aquifer’s shallow southern reaches have already been depleted, causing irrigated land in Texas to shrink by 11%.82

Humans are diverting resources from their ecological paths, causing unforeseen and often harmful consequences. The Colorado River, whose annual water flow is allocated to industrial, agricultural, and municipal uses through a massive system of ten major dams,83 has [*PG19]rarely reached its mouth in the Gulf of California since 1993.84 The resulting salinization of water in the Gulf has decimated shrimp and other fisheries while straining the lives of area fishermen.85

Humans are setting in motion complex feedback loops whose little-understood mechanisms could become self-perpetuating. Melting of polar ice caps through global warming could cause the release of billions of tons of methane gas trapped beneath crystal structures on the edges of continental shelves.86 One cubic meter of this methane gas has the same ultraviolet radiation trapping effect as twenty cubic meters of carbon dioxide, the most voluminous greenhouse gas produced by human activity.87

In light of scientific theory and empirical evidence, therefore, ecological economists argue that the macroeconomic conception of market activity as an isolated system is erroneous. The economy appears to be limited by the constraints of nature. Or, as former Wisconsin governor Gaylord Nelson succinctly put it, “The economy is a wholly-owned subsidiary of the environment.”88

Nevertheless, even international institutions such as the World Bank continue to rely on the rarefied macroeconomic conception of exchange found at the beginning of standard texts.89 As Daly notes, “Things are no better when [one] turn[s] to the advanced chapters at the end of most macroeconomic texts, where the topic is growth theory.”90 For years the theory was stated as a simple function involving K and L, capital and labor. Resource flows and waste output flows were not even a factor in the equation. Thus, the only constraints on economic growth appeared to be the availability of man-made capital and human labor. The limitations of this conception can be demonstrated by a simple example. The United Nations currently estimates that all seventeen of the world’s major fisheries are being fished at or beyond capacity, and nine are in serious decline.91 In such a situation, the [*PG20]limit to economic growth is not the number of boats or fishermen; rather, the limit is the number of fish.

More recent attempts by economists such as Joseph Stiglitz to introduce resource flows into growth theory92 have also been challenged by ecological economists. In these revised equations, “the production function is almost always a multiplicative form . . . in which R [resource flows] can approach zero with Y [aggregate production] constant if only we increase K or L in a compensatory fashion.”93 The idea behind this formulation is that increased use of man-made capital and labor can compensate for reductions in the availability of natural resources or waste assimilative capacity. “Resources are seen as ‘necessary’ for production, but the amount required can be as little as one likes . . . .”94 Ecological economists believe that this brand of potential growth is also problematic—an increase in the absolute amount of man-made capital or labor generally entails an increase in the depletion of resources or the taxing of assimilative capacity. Such factors are more properly thought of as complements, not substitutes.

As an example of the orthodox view, many economic forecasters view China, with its 1.2 billion people, as an untapped market for goods associated with the affluent Western lifestyle.95 In other words, forecasters see the glimmer of economic growth in the development of China. Other commentators, however, argue that if the entire Chinese population were to adopt the lifestyle of consumers in a nation like the United States, the consequent ecological footprint would be catastrophic.96 Indeed, it does not appear that the Chinese could even eat like Americans, let alone buy, build, drive, and discard like Americans: “If the current world grain harvest, averaging 1.75 billion tons thus far during the 1990s, were boosted by roughly 15 percent to 2 billion tons, that harvest—if equitably distributed—could support [only] 2.5 billion people at the American level of consumption.”97 To [*PG21]be sure, growth in consumption levels in China will be accompanied by growth in the nation’s own productive capacity. It is far from clear, however, that arable land and agricultural productivity can be multiplied in the way that factories can.98

2.  The Laws of Thermodynamics

Assuming that environmental frontiers are not limitless, economics as the science of scarcity therefore must confront the scarcity of natural as well as man-made resources. While mainstream economists believe that they have found a theoretical avenue around this challenge,99 ecological economists confront it directly, incorporating the laws of thermodynamics into their analysis in order to better understand the quality of physical exchanges that occur between the ecological system and the economic subsystem. As Georgescu-Roegen demonstrated, such application reveals a disturbing truth about human economic activity (and indeed, about all activity within the material universe). The fixed quantum of matter-energy with which the universe is endowed must necessarily move from a state of high-availability to low-availability, of low-entropy to high-entropy, and of order to chaos. Thus, physical throughput in the human economy must always be conceived of as at least a partial liquidation of capital, rather than a mere expenditure of income.

For ecological economists, such cold fatalism is not cause for despair; it is cause for reform. Humanity is somewhat in control of the rate with which it advances entropic activity. A solar heated house only utilizes an infinitesimal fraction of the sun’s several billion years of activity. A house heated by coal-fired electricity, on the other hand, transforms millions of years of condensed solar energy into greenhouse gases that persist in the atmosphere for decades. The economic argument for refusing to adopt the use of renewable energy sources immediately, on a widespread basis, is no longer as strong as it once was. The cost of solar cells has declined from more than $70 per watt in the 1970s to $4 per watt today (in 1994 dollars), while the world market has grown from 34 megawatts in 1988 to an estimated 125 megawatts in 1997.100 The fastest growing energy market in the past decade has not been oil, coal, or natural gas, but wind power, growing [*PG22]from 2000 megawatts in 1990 to 7600 megawatts in 1997,101 and remarkably achieving cost-competitiveness with its heavily subsidized, arguably unsustainable counterparts.102 But most of this development is occurring outside of the United States. Nations such as China, Mexico, Kenya, and Vietnam all currently use solar electrification to provide power to remote rural villages.103 In the view of ecological economists, nothing prevents industrialized nations such as the United States from doing the same besides entrenched political power and a failure to perceive the true costs of current practices. In light of this situation, Georgescu-Roegen’s famous warning should be updated. It is not that Cadillacs prevent future spades and plows; it is that sport-utility vehicles prevent future wind turbines and solar cells.

3.  Optimal Scale and Sustainability

The foregoing discussion establishes another of the foundational principles of ecological economics: “The macroeconomy is an open subsystem of the ecosystem and is totally dependent upon it, both as a source for inputs of low-entropy matter-energy and as a sink for outputs of high-entropy matter-energy.”104 Given such a conception, an inescapable question arises regarding how much the economic subsystem can grow before it places an unsustainable burden on the natural ecosystem. Conventional economists fail to address this issue because the macroeconomy is conceived of as the superstructure—conceptually, nothing exists “around” the macroeconomy. Thus, there is no reason to suspect that it cannot grow ad infinitum.

As Daly has noted, this failing is surprising given that every other economic concept involves a limit or point at which marginal benefits do not exceed marginal costs.105 More than one commentator has speculated that the disappearance of limits in macroeconomics serves as a theoretical expedient to avoid difficult questions of distribution.106 Instead of adopting such an approach, Daly argues that the [*PG23]logic of marginal analysis must apply with equal force to macroeconomics—that is, there must be a point at which the benefits from an increase in the scale of the economy are outweighed by the environmental and social costs entailed by such an increase.107 Economists and other thinkers interested in the welfare of humanity must therefore confront the issue of determining the optimal scale of the economy.

The most widely cited attempt to articulate a principle for limiting the scale of economic activity comes from the 1987 report of the United Nations World Commission on Environment and Development, popularly known as the Brundtland Report.108 This report urged nations to undergo only sustainable development, which it defined as development that “meets the needs of the present without compromising the ability of future generations to meet their own needs.”109 As Susan Smith has explained, two principles underlie this notion of sustainable development: “[T]he Earth’s finite capacity to accommodate people and industrial development, and a moral imperative not to deprive future generations of natural resources essential to well-being and quality of environment.”110 Following the release of the Brundtland Report, several international agreements and statements of principles have further developed this goal of keeping human activity within the carrying capacity of the earth, including the Framework Convention on Climate Change,111 the Convention on Biological Diversity,112 the Rio Declaration,113 Agenda 21,114 and the Statement of Forest Principles.115

While these developments were initially viewed as an important step toward reaching a consensus to restrict the scale of the global economy, they have come under fire more recently for lacking the conceptual clarity needed to avoid unsustainable growth. Among ecological economists, Daly has been especially critical of the Brundtland [*PG24]Report’s ambiguity: “Sustainable development is a term that everyone likes, but nobody is sure of what it means.”116 Although the international community has agreed that it should not compromise the “needs” of future generations, it has not attempted to define what those “needs” will be. Should future generations be afforded only the natural resources necessary to maintain a basic level of subsistence? Should the “aesthetic” needs of the unborn be considered within the sustainable development rubric? What assumptions should be made about the ability of technological advancements to alleviate resource scarcities in the future? What type of allowance should be made for the limit of science’s ability to recognize and assess the impact of economic activity on ecosystem viability?

By leaving these and other difficult questions unanswered, the Brundtland Commission was able to achieve broad support for its guidelines. However, because of the conceptual looseness inherent in the notion of sustainable development, and because of the wide disagreement over its proper interpretation, the principle can and has been co-opted by just about any group with an interest in the debate.117 At times, this co-opting results in advocacy totally divorced from the foundational principles of sustainable development, as when policymakers aspire to “sustainable growth in the rate of increase of economic activity.”118 Failing to understand that the Brundtland Report’s thesis was that economic growth cannot continue indefinitely, these bullish thinkers advocate infinite acceleration in the rate of infinite growth.

In contrast to such vague verbiage, Daly has advocated the necessity of a “steady-state economy” in which the scale of human economic activity—that is, “the physical scale or size of the human presence in the ecosystem as measured by population times per capita resource use”119—does not exceed the point at which marginal macroeconomic benefits equal macroeconomic costs.120 Economists have typically ig[*PG25]nored this type of marginal analysis at the macroeconomic level, opting to believe that micro-level consumption choices generally reflect Pareto improvements, and that therefore the aggregate of such choices must also reflect enhancements in social welfare.121 In Daly’s view, however, prices only measure the scarcity of resources relative to each other.122 Micro-level choices may result in an efficient allocation of resources in relation to everything else, but they cannot determine an efficient absolute level of resource use. Therefore, just as full employment and fair distribution are macroeconomic goals that are not fully resolved by unfettered microeconomic activity, Daly believes that optimal scale is an issue that must be addressed by policy instruments operating on a macroeconomic level.123

“A necessary requirement for this optimal scale is that the economy’s throughput—the flow beginning with raw material inputs, followed by their conversion into commodities, and finally into waste outputs—be within the regenerative and absorptive capacities of the ecosystem.”124 In other words, in order to be truly sustainable, the material scale of the economy must be within the carrying capacity of the earth. Giving flesh to the concept of “carrying capacity” is a challenging task that needs to be addressed before Daly’s sustainable development can become a fully operable concept. Daly provides two fundamental principles toward that end: “Renewable resources should be exploited in a manner such that: (1) harvesting rates do not exceed regeneration rates; and (2) waste emissions do not exceed the renewable assimilative capacity of the local environment.”125 Non-renewable resources should be depleted at a rate equal to the rate of creation of renewable substitutes.126

These principles of resource use, however, are only the first step in what is an essentially scientific exercise. Determining whether a given level of population and per capita resource use is sustainable [*PG26]requires the expertise of ecologists, biologists, and environmental scientists, as well as economists. In Daly’s view, the practitioners of economics should continue to practice their bread and butter of maximizing the market’s allocative efficiency, but only after the optimal scale of that market has been determined by social consensus with input from both economic and noneconomic experts.127

A second task that is not exclusively economic involves determining the desirable mix of population size and resource intensity that will be used to consume society’s annual quota of natural capital and services. As noted above, the scale or level of physical throughput in the economy can be thought of as the product of population times per capita resource use.128 This definition implies that a smaller population could lead a more resource-intensive lifestyle than a larger one, while staying within ecologically-imposed constraints of sustainability. Conversely, a larger population must reduce its per capita resource use in order to maintain the ecological footprint of a smaller one. Because the level of throughput must not be allowed to exceed the point at which ecosystem losses exceed economic gains, society must make a conscious tradeoff between these two determinant factors of the scale of its economy. Obviously, such a tradeoff entails a moral, not merely an economic, choice. Figure 1 summarizes the foregoing discussion.

Figure 1

[*PG27] The x-axis gives the earth’s human population while the y-axis represents the per capita material resource use of that population. The product of these two factors gives the overall scale of material throughput in the economy. Two bold lines are superimposed on the graph to represent constraints on the attainable level of throughput at any given population size: the productive capacity of the human economy and the carrying capacity of the earth. The former generally increases with population size, while the latter decreases.129 Daly’s steady-state economy, in which throughput remains relatively constant and always within the carrying capacity of the environment, is represented by the dashed curve. A necessary implication of the steady-state economy is that as population increases along the curve, per capita material resource use must correspondingly decrease.

The majority of human economic history has occurred on the left half of the graph, in which the relevant limiting factor on throughput is not the carrying capacity of the ecological sphere, but instead the productive capacity of the human. This is Boulding’s “cowboy economy” in which the logical goal seems to be relentless pursuit of increases in human economic production.130 Ecological economists, however, believe that humanity has now moved to the “spaceman economy” on the right half of the graph, in which human productive capacity has outstripped the carrying capacity of the earth; that is, the binding constraint on material throughput is no longer our capacity to produce, but the earth’s capacity to generate resource inputs and absorb waste outputs.131 Here, society’s challenge is to limit [*PG28]economic activity rather than maximize it, a task that will require vastly different cultural values and political tools than the growth obsession of the “cowboy economy.”

It is important to note that intensity of material consumption need not be correlated with quality of life or welfare. Per capita material resource use is a scientific measure of the ecological impact of a society’s consumption habits; it is not a measure of the value that the society derives from those habits. Put differently, it is quite possible that reductions in material resource use levels can result in increases in overall welfare. When a region switches from coal-fired to comparably priced wind-generated electricity, for instance, resource use per capita drops appreciably with little discernible influence on the consumer’s lifestyle. If such reductions in resource intensity bring the region below the carrying capacity of the ecosystem, then the society can invest its newly created natural budget surplus in one of several ways. It can support a larger population at the same per capita resource use level, support the current population at a higher resource use level, or maintain both factors at current levels while deriving psychic benefit from the increased carrying capacity safety margin. Regardless of the region’s choice, however, welfare will have improved over the previous fossil fuel-based economy.

The central point is that welfare and resource intensity, although undoubtedly related, must still be analyzed as separate concepts. In the steady-state economy, it is of paramount importance that material throughput be maintained below limits imposed by the ecosystem. Welfare, however, can continue to grow as the economy focuses unprecedented attention on efficiency in the use of resources and the satisfaction of preferences.

4.  Measuring the Human Economy

Economics is fundamentally a quantitative discipline. As Samuelson puts it in his renowned textbook, “economics focuses on concepts that can actually be measured.”132 Following the lead of John Maynard Keynes and Simon Kuznets, macroeconomists have focused exclusively on quantifying the productive capacity of the human economy. [*PG29]However, as seen in the last Section, a second constraint on economic growth exists—the carrying capacity of the ecosystem. Moreover, even ignoring ecological limits to growth, there is little reason to suppose that increases in the sheer magnitude of the human economy are always desirable from the perspective of social welfare. Recognizing the practical worth of quantification (and the need to confront conventional economists in their own language), ecological economists have begun to focus attention on the task of measuring the intersection of economic and ecological spheres. This Section addresses the response of ecological economists to traditional indexes of social welfare such as the gross national product (GNP), while the next Section outlines efforts to quantify the value of the ecological sphere.

Current national accounting measures produce a variety of results that would strike noneconomists as odd. For instance, when the Exxon Valdez oil spill necessitated $2.1 billion in clean-up costs,133 the U.S. GNP rose by that same amount, despite the fact that ten years later only two of the twenty-three most damaged wildlife species have recovered and 40% of area fishermen suffer depression over their destroyed livelihoods.134 Similarly, as Superfund contributors muster the $31 billion needed to clean the 1355 worst locations on the E.P.A.’s list of nearly 40,000 hazardous waste sites,135 GNP views the expenditure as an increase in economic welfare, rather than just a restoration. GNP also ignores basic accounting principles by treating the unsustainable exploitation of natural capital as pure income. Centuries of logging and construction have resulted in the loss of all but 1% to 5% of the original forest cover of the United States,136 yet GNP has made no allowance along the way for the depreciation of scarce natural capital.

Social as well as ecological costs frequently appear as gains under GNP accounting. When the estimated one third of American adults [*PG30]who are obese spent $39 billion in one year on health care costs for obesity-related diseases,137 the macroeconomic indicators recorded an unmitigated credit. When the position of the United States as home to 1.7 million prisoners and the largest incarceration system in the world necessitated a doubling of state spending on prisons in the last decade,138 GNP rose to reflect the social “progress” of unprecedented prison construction. And when the American divorce rate doubled between 1970 and the present,139 GNP recorded an increase from the real estate transactions, attorney bills, and other expenditures necessitated by the higher number of family fractures.140

Such arguably counterintuitive results are an outgrowth of the “cowboy economy” in which more of anything is simply better, regardless of what it is. Standard national accounting measures such as GNP, and more recently gross domestic product (GDP), seek only to quantify the value of monetary transactions that occur in a given economy, with no distinction among purposes and no recognition of adverse consequences that result from such transactions. No allowance is made for the irreversible depletion of natural resource inputs, or the externalized costs of waste outputs. Indeed, such environmental costs are frequently treated as economic gains, leading to a perverse national incentive structure: A policy of maximizing GNP is “practically equivalent to a policy of maximizing depletion and pollution.”141

Nor is any accounting attempted of other “noneconomic” spheres such as the livelihood of communities, the stability of families, or the safety of schools. Unexamined pursuit of increases in GNP can lead to parasitic growth. Commercialization of social functions traditionally performed outside the economic sphere—such as the replacement of stay-at-home parenting by child care, prepared meals by convenience food, social networks by self-help tapes, and community [*PG31]activities by commercial entertainment—is a consequence encouraged by any national agenda that seeks to maximize GNP.

Nobel Prize-winning economist Simon Kuznets, one of the chief architects of the concept of GNP, warned that the measurement of GNP should never be mistaken for true national progress: “Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long run. Goals for ‘more’ growth should specify more growth of what and for what.”142 Many policymakers, however, have largely ignored this advice, seeking continual, indiscriminate growth in GNP as the ready salve for all manner of national problems. Ecological economists, on the other hand, have criticized GNP as a concept that fosters unsustainable economic practices while failing to achieve its aim of approximating human welfare. In its stead, Daly and theologian John Cobb, Jr., have offered a substitute national wealth accounting measure that corrects for many of the GNP’s failings.143

Called the Index of Sustainable Economic Welfare (ISEW), Daly and Cobb’s measure begins with total consumption expenditure data gathered by the U.S. Bureau of Economic Analysis and then proceeds to make a series of adjustments to arrive at a best estimate of sustainable economic welfare. The first adjustment, for income inequality, attempts to account for the fact that “an additional thousand dollars in income adds more to the welfare of a poor family than it does to a rich family.”144 This notion, which many accept as a consequence of the principle of diminishing marginal utility of income, has important implications for the calculation of economic welfare. If income distribution becomes more uneven over a period of time, unadjusted dollar flows for that period will overstate welfare. To correct for this dis[*PG32]tortion, Daly and Cobb alter consumption expenditure data to reflect the degree of income inequality in the economy.145

Next, Daly and Cobb add factors representing positive income streams from four sources that are currently absent from official consumption data—household labor,146 existing consumer durables,147 public streets and highways,148 and public spending on health and education.149 Conversely, deductions are made for expenditures that arguably do not contribute to improvement in economic welfare. For example, a portion of private spending on education is deducted to represent the “competitive” nature of such spending.150 Similarly, the authors disallow some private expenditures on health care because they view them as attributable to “growing health risks due to urbanization and industrialization.”151 Other costs deducted from total ex[*PG33]penditures because of their “defensive” nature include the costs of commuting,152 purchases of personal pollution control equipment such as air and water filters,153 and damages due to vehicular accidents.154

Having attempted to refine the calculation of economic welfare in accord with certain social realities, Daly and Cobb then turn to the realities of the environment in relation to the economic subsystem. They first deduct amounts relating to the current environmental damage imposed by economic activity, including the annual cost of water pollution,155 air pollution,156 noise pollution,157 loss of wetlands,158 and loss of farmland.159 These costs are the least controversial of Daly and Cobb’s estimates of environmental damage, as they represent tangible, present costs with little scientific dispute as to their existence.160 Moreover, the authors adopt a purposefully conservative approach to valuation of these costs. For instance, they do not include the costs of water pollution from nonpoint sources161 or the health-related costs of air pollution.162

The authors also attempt to account for the long-term environmental costs associated with economic activity. First, Daly and Cobb recognize that the consumption of nonrenewable resources constitutes in part “a cost borne by future generations that should be subtracted from (debited to) the capital account of the current genera[*PG34]tion.”163 To price this cost, the authors rely on the marginal cost of producing a renewable substitute: “For each unit of nonrenewable resource depleted, we have estimated the amount of money that would have to be invested in a process to create a perpetual stream of output of a renewable substitute for it.”164 Second, Daly and Cobb undertake the daunting task of estimating the economic impact of long-term build-up of thermal waste in the environment.165 Such accounting is of course destined to be inexact, but Daly and Cobb’s rough approximation seems at least preferable to the alternative of measuring the costs of global warming and ozone depletion at precisely zero. In a final set of adjustments, Daly and Cobb alter ISEW to account for changes in the domestic and international capital position of the national economy.166 These adjustments reflect the fact that current economic welfare can be maintained only if growth in the domestic capital stock keeps pace with population growth.

The foregoing calculations are summarized in Table 1, using the year 1990 as an example.167

As one can see, while the first subtotal of ISEW showed a consumer gain of $1737 billion for 1990, the end result revealed only $818 billion in net economic welfare created during the year. One can think of the $919 billion differential as a very rough estimate of the total cost of environmental and social externalities created by economic activity in 1990. Given that this amount is actually greater than the net value created that year, it is arguably an analytical strain to continue to refer to environmental and social costs as mere “externalities,” a term suggesting only minor effects of limited interest. To the contrary, under Daly and Cobb’s calculations, externalities appear to be a dominant effect of market transactions, suggesting that “it is time to restructure basic concepts and start with a different set of abstractions that can embrace what was previously external.”168

Contrasting the ISEW with GNP over a time series is also revealing. According to Daly and Cobb, GNP and ISEW both rose from 1951 until the 1970s (although the rate of growth in ISEW decreased from 1.57% to 0.21% between the 1960s and 1970s).169 In the 1980s, however, GNP continued to rise while ISEW actually declined by 0.43% per year.170 This decline suggests that continued increases in the scale of the human economy (as approximately signaled by increases in GNP) are anti-economic; that is, they impose more welfare costs than benefits (as signaled by decreases in ISEW). Thus, beginning in the late 1970s and early 1980s, the United States may well have shifted from the cowboy to the spaceman economy, with all its attendant problems.

Of course, Daly and Cobb’s figures are easily contestable, as would be any attempt to track and price the total social and environ[*PG36]mental costs of human economic activity. Nevertheless, even without deducting for resource depletion and long-term environmental costs—the two most controversial and difficult to quantify aspects of ISEW—the pattern of change in ISEW remains largely the same.171 This suggests, at an absolute minimum, that undifferentiated growth in GNP is not necessarily consonant with economic welfare and that reliance on GNP as a measure of national success should be reevaluated.172

5.  Valuing Ecosystem Services

In addition to reforming the measurement of national accounts, ecological economists have also devoted significant attention to quantifying the worth of ecosystem services. The attempt to place a monetary value on the elements of nature has long been controversial. Many view such attempts as an almost heretical failure to appreciate that nature is “priceless.” Rutgers University biologist David Ehrenfeld provides a representative, if charged, example of this view: “I am afraid that I don’t see much hope for a civilization so stupid that it demands a quantitative estimate of the value of its own umbilical cord.”173 Others attack the practice from the opposite extreme, believing that the survey methods frequently used to price natural resources are fraught with complexities that render valuations wildly overstated.174 Nevertheless, economists, policymakers, and courts continue [*PG37]to place economic values on natural resources through the use of such techniques as restoration or replacement cost valuations, travel cost valuations, hedonic pricing, and contingent or willingness-to-pay valuations.175

Commonly, the practice of commodifying nature occurs in the context of calculating after-the-fact damages awards for contamination of natural resources.176 Ecological economists have recently adopted a different approach, seeking to quantify the value of services provided by ecosystems before irreversible human disruption.177 The significance of focusing on ecosystem services, rather than natural resources, is that they are seen by researchers as largely irreplaceable and therefore more fundamental to human survival. Moreover, while the economy may be able to signal and adjust to specific resource scarcities, the services provided by the earth are generally not subject to economic signaling.178 Thus, in order to ensure the long-term sustainability of human economic activity, ecological economists believe that natural services which lack practical man-made substitutes should be given a quantified presence within economic decisionmaking. By generating even approximate figures for the value of these services, ecological economists hope to impress upon private and public decisionmakers the environmental costs of contemplated development schemes.

A celebrated example of such thinking can be seen in the City of New York’s decision to reclaim watershed areas in the Catskills mountains rather than build a capital-intensive water treatment facility.179 The Catskills have long been the primary source of purified water for New York City, but in recent years the water failed EPA standards for drinking water due to development in the mountains as well as increased sewage, pesticide, and fertilizer contamination.180 The city estimated that a purification plant would cost $4 billion to build plus annual operating costs, while restoring the natural integrity of the [*PG38]Catskills through land acquisition and restoration would cost only around $660 million.181 Thus, the City decided to invest in “natural capital” as a more efficient and aesthetically desirable alternative to the traditional industrial solution.

The City of New York’s choice was easy to make because the treatment plant option provided a clear and reliable measure of the worth of the Catskills watershed services. As James Salzman has noted, “Replacement cost provides an effective method for valuing services because one can compare dollar investments in natural capital and physical capital to determine payback periods and overall costs.”182 Ecological economists believe that if valuations of ecosystem services are available to policymakers at crucial decision times in that manner, economic development will become much more consonant with sustainable use patterns. For instance, researchers studying alternative management strategies for mangrove forests in Indonesia have found that when nontimber uses, including fish, locally used products, and erosion control, are included in cost-benefit calculations, sustainable timber practices are significantly more economic than traditional ones, yielding $4,800 per hectare rather than merely $3,600.183

Stanford University biologist Gretchen Daily edited a collection of studies performing just this type of analysis. Entitled Nature’s Services: Societal Dependence on Natural Ecosystems, the compendium gathers valuation essays by ecologists and economists on such diverse ecosystem services as air and water purification, watershed maintenance, waste treatment, biodiversity regulation, climate stabilization, crop pollinization, pest control, and soil renewal.184 To give just one example of their findings, the researchers estimate that if the nitrogen content of soil provided by existing natural processes had to be supplied by commercial fertilizer, the lowest-cost estimate for its agricultural use in the United States would be $45 billion per year, and for all land plants worldwide, $320 billion.185 Human activities that disrupt the provision of natural services—such as the impairment of nature’s $320 billion annual production of nitrogen by industrial farming [*PG39]techniques—should have a tangible price placed upon them, however imperfect, to reflect their ecological effects.

Subsequent work by an international team of researchers led by University of Maryland ecological economist Robert Costanza calculated an estimate of the economic value provided by the earth’s ecosystems in their totality.186 The researchers estimated values for seventeen essential services provided by sixteen types of ecosystems around the world, including open oceans, coastal areas, lakes and rivers, croplands, deserts, forests, and grasslands.187 Their total figure for the worth of global ecosystem services ranged from $16 trillion to $54 trillion annually, providing an estimate of nature’s macroeconomy that rivals or exceeds gross world product.188

Of course, in their totality, ecosystem services consist of the very ability to support human life, rendering their aggregate value equivalent to the very value one places on human existence. Economic tools are simply not designed to measure such concepts. By attempting to price the various subcomponents of ecosystems, however, ecological economists have begun to speak in a language that economists and policymakers can fathom and operationalize. As the Catskills watershed and Indonesian mangrove examples point out, the resulting dialogue can yield surprising agreement between environmental and economic interests. The Economists’ Statement on Climate Change, signed by over 2500 economists, including eight Nobel Laureates, offers an unqualified endorsement of such collaborative exercises in the context of reducing greenhouse emissions: “[S]ound economic analysis shows that there are policy options that would slow climate change without harming American living standards, and these measures may in fact improve U.S. productivity in the longer run.”189 Ecological economists believe that such “sound economic analysis” can become commonplace in the debate over competing business and environmental concerns.

[*PG40]6.  Discount Rates and Intergenerational Equity

A final issue of concern to ecological economists is the use of discount rates in regulatory and investment decisionmaking.190 When evaluating a particular investment decision, economists typically reduce expected costs and benefits to present value using a discount rate, or a percentage factor that adjusts the amount of a value over time. For instance, using a discount rate of 10%, an investment yielding $110 in year two is worth only $100 in year one. If the investment costs $105 to make in year one, it is not an economic choice. Such reasoning holds well in the context of paper investment decisions. However, when the expected yield consists of saved lives, preserved ecosystem services, and other nontangible benefits to present and future generations, it is not altogether obvious that the same analysis should apply. Nevertheless, economists have long taken discounting to be the appropriate response to questions of environmental importance. As early as 1913, economists noted that “[t]he primary problem of conservation, . . . expressed in economic language, is the determination of the proper rate of discount on the future with respect to the utilization of our natural resources.”191

Frequently, discount rates are determined based on the prevailing real rate of interest charged in capital markets.192 However, positive interest rates, which can be said to represent the growth potential of man-made capital, are a poor indicator of the growth potential of natural capital. The fact that capital may grow in a bank at 10% per year does not necessarily imply that an old growth forest will regenerate at an equal rate. A timber company adopting a 10% discount rate to determine harvesting schedules will “rationally” clear forests faster than they can regrow, essentially liquidating the natural capital of the forest rather than consuming only its annual income. In this manner, use of positive discount rates in development strategy can lead to an “optimal” choice that is unsustainable—”the impoverishment of future generations as a result of the profligacy of present generations in [*PG41]such cases is not just an incidental, but a desirable outcome of the decision making process.”193

Besides encouraging unsustainable investment strategies, discounting can also discourage ecologically desirable government regulations. Because society must often pay the costs of environmental regulation long before the benefits accrue, discounting of future costs and benefits frequently counsels against the adoption of environmentally-protective measures. Daniel Farber and Paul Hemmersbaugh provide an extreme illustration by positing the case of two alternative designs for a nuclear waste repository.194 The designs will cost the same amount and will both be paid for entirely in the first year. If the first design is adopted, no workers will be killed during construction but one billion people will be killed in five hundred years due to a radiation leak from the repository. If the second design is adopted, between one and two workers will likely be killed during construction but no leaks and therefore no deaths will occur in five hundred years. Using a discount rate of 5%, the regulator selecting between designs “will choose the first option because one billion lives 500 years hence have a lower present value than one life today.”195 Similar reasoning applies in less extreme, more common settings. Preventing greenhouse gas emissions, water contamination, species extinction, resource depletion, and many other environmental harms imposes current costs while offering mainly future benefits. As such, the measures routinely fail cost-benefit analyses that use a high positive discount rate.

Still, though, the impact of discounting on the environment is difficult to generalize. As Daly has pointed out, high positive discount rates can have two competing effects on natural resource exploitation.196 Although a high rate will shift the allocation of capital and labor to projects that exploit resources more quickly, the rate will also limit the total number of projects that are undertaken given that expected project benefits must overcome a higher opportunity cost value. Conversely, a low discount rate may slow the rate of resource extraction, but it may also increase the total number of extractive pro[*PG42]jects undertaken by making the projects appear more economic.197 Thus, the total effect of discounting on the environment is ambiguous, leading to what Richard Norgaard and Richard Howarth have called “the conservationist’s dilemma.”198

Norgaard and Howarth have attempted to solve this dilemma by separating the questions of intragenerational resource allocation, for which discounting is an appropriate policy tool, and intergenerational resource distribution, for which discounting is not.199 Economists frequently recognize that unfettered market outcomes will not necessarily result in a just distribution of resources between generations, just as they do not necessarily result in distributive justice within generations. Stiglitz, for instance, noted that “[t]here is . . . no presumption that the intertemporal distribution of income which emerges from the market solution will be ‘socially optimal . . . .’”200 Most economists, however, believe that the use of a discount rate is sufficient to solve the problem of intergenerational equity. As Stiglitz put it, “if the government correctly controls the rate of interest . . . then there would be no objection to the competitive determination of the rate of utilization of our natural resources.”201

However, as Norgaard and Howarth point out, the discount rate cannot simultaneously serve the purpose of intragenerational allocative efficiency and intergenerational distributive equity. As noted above,202 governments often look to market rates of interest in setting discount rates for policy proposals, yet interest rates, like prices, quantities, and other market outcomes, are dependent upon the initial distribution of resources, including intergenerational distributions. “Since all of the variables that go into the calculation of net present value of a project or policy proposal depend on the intergenerational [*PG43]distribution of income, what might appear to be a good social investment under one income distribution may be marginal or worse under another.”203 In other words, relying upon market rates of interest to guide social policies affecting intergenerational resource distribution presupposes the very judgment to be made.

Because he recognizes that discounting acts as a subtle proxy for important decisions of intergenerational equity in this manner,204 famed economist Robert Solow has suggested that the discount rate should be determined directly by society rather than by reference to market interest rates.205 Selection of a social discount rate, however, must be determined in large part by society’s view of the initial intergenerational distribution of resources. Following selection of the rate, a new equilibrium will emerge in which resources are distributed differently among generations. That new equilibrium will cause the current generation to reconsider its choice of the appropriate discount rate, which will result in still another equilibrium, and so on.

Thus, relying upon use of a discount rate to automatically “correct” the problem of intergenerational distribution is problematic, no matter how the rate is determined. Intergenerational distributive questions are rate-determining, not rate-determined. In other words, the decision whether to curtail greenhouse emissions should depend directly on whether society wishes to risk depriving future generations of climate stability, not on whether the discount rate will permit it to happen. As Norgaard and Howarth put it, “Questions which are fundamentally matters of equity should be treated as such.”206

Returning to Farber and Hemmersbaugh’s example helps to illustrate these considerations. On the standard approach, if a proposed regulation would save the lives of one billion people five hundred years from now, the value of those lives is discounted to a present value. In essence, economists attempt to measure what it is worth to society now to save the lives of a billion people in the future. As Farber and Hemmersbaugh demonstrate, it turns out not to be worth very much. However, the use of the present generation’s valuation of the [*PG44]worth of a future generation’s lives is a normative judgment that should not be obscured by arithmetic. As Lisa Heinzerling powerfully put it, “Generating numbers that are ultimately irrelevant to the questions to be resolved does more than waste precious regulatory resources. It changes the apparent nature of the decision itself, and permits politics and ideology to hide behind a mask of technical expertise.”207

7.  Summary

The foregoing discussion provides an overview of fundamental concepts and methodologies in ecological economics. Beginning with the principle that the environment’s capacity to regenerate resources and absorb wastes is limited, ecological economists argue that the scale of the human economy also must be subject to limits if it is to be sustainable over time. At some point, possibly already reached, economic expansion necessarily creates more environmental and social costs than gains. A national policy that seeks indiscriminate growth in the sheer volume of market transactions cannot be relied upon to recognize and respond to this point. Instead, policymakers must devise new economic tools for modeling the interrelationship between economic and ecological spheres of activity. Data derived from such tools can help inform the essentially moral decision of how best to regulate economic life to ensure sustainability for succeeding generations.

II.  Criticisms of Ecological Economics

The work of ecological economists has attracted considerable criticism from mainstream economists and other academics. As will be seen, these critiques frequently reflect misunderstandings about the basic premises of the new discipline. Moreover, they often raise points that are not in conflict with the writings of thinkers like Daly and instead play an even more central role in ecological economics than mainstream economics. Nevertheless, one particular critique—relating to the potential for market forces to cause resource conservation, technological innovation, and other limit-avoiding substitutions to arise as a matter of course from the market—represents a legitimate bone of contention with ecological economists. The debate cannot be resolved through theoretical analysis alone, but instead raises an em[*PG45]pirical question that only will be answered by the unfolding of global events over time. In other words, the debate at present hinges not on economic logic, but on the faith one places in human knowledge and the view one holds of the ultimate goals of human activity.

A.  Sustainable Growth vs. Sustainable Development

In a well-known article, philosopher Mark Sagoff challenged many of the teachings of ecological economics, including the view that growth in the economy is necessarily correlated with increased material throughput.208 As he notes, there is a great deal of evidence to suggest that increases in GNP may be achieved without corresponding increases in resource consumption or waste production. For instance, between 1973 and 1986 energy consumption in the United States remained virtually flat while economic production expanded by almost 40%.209 Likewise, “[s]ince 1973, France and West Germany have decreased per capita emissions from fossil fuels as their economies have expanded.”210 In the United Kingdom, demand for primary energy sources was less in 1990 than in 1974, even though the country’s national product had grown.211 Faced with evidence such as this, many commentators “[find] no reason to agree with the contention of ecological economists . . . that growth in the sense of greater gross domestic product is unsustainable because it necessarily strains natural limits and leads automatically to resource depletion and ecological demise.”212

Such criticisms unwittingly embrace the aspirations of ecological economists. Daly has steadfastly argued in favor of a conceptual distinction between types of economic expansion, a line which current national accounting measures such as GNP refuse to draw.213 Specifically, Daly refers to an increase in the sheer physical scale of the human economy, including especially the volume of resource depletion and waste emission, as growth.214 The creation of value without a corresponding increase in the economy’s physical burden on the [*PG46]environment, such as through increases in productive efficiency, Daly refers to as development.215

Making these distinctions explicit serves an important purpose for Daly: “We can . . . distinguish growth (quantitative expansion) from development (qualitative improvement), and urge ourselves to develop as much as possible, while ceasing to grow, once the regenerative and absorptive capacities of the ecosystem are reached (sustainable development).”216 In other words, commentators who cite increases in productive efficiency as evidence of the possibility of economic expansion without environmental devastation have merely described the economy of sustainable development that Daly and other ecological economists advocate.

B.  The Solar Exception to the Laws of Thermodynamics

Sagoff also has questioned the view that energy sources are subject to the laws of thermodynamics.217 By noting that “[i]f we ignore pollution problems, fossil fuels could subsidize the global economy for quite a while,”218 he purported to demonstrate that low-entropy terrestrial sources of fuel were not as limited as ecological economists portray. Of course, this argument appears to be challenging only the exact location of resource limits, not their existence. Moreover, in addition to the direct limit on fossil fuel production, there is also the indirect limit caused by the decreasing tolerance of the atmosphere to thermal waste. Exclusion of such “pollution problems” from consideration is a theoretical sleight of hand because pollution in the form of greenhouse emissions arguably has become the relevant constraint in fossil fuel consumption. “Indeed, falling [fossil fuel] extraction costs, considered as evidence against scarcity in another context, make the pollution problem worse [by increasing production].”219

In recognition of these constraints, Sagoff turns to renewable sources of energy, such as wind and solar power: “These sources—which dwarf fossil fuels in the amount of energy they make available—seemso abundantthat for practicalpurposesthey may be

[*PG47]regarded as infinite.”220 Again, Sagoff does not appear to have challenged the laws of thermodynamics. He has only argued that, in light of the massive life expectancy of the sun, solar power may be considered so abundant that the laws of thermodynamics do not appear, to humans, to be binding. But binding they remain.

In essence, what Sagoff has done is accept Georgescu-Roegen’s conclusion without accepting his logic. The very reason one should advocate conversion to renewable energy sources is that the laws of thermodynamics make their use arguably utility-maximizing for human development. Widespread adoption of renewable energy sources greatly expands the expected length of human survival and therefore helps to increase population-wide utility over time. Such potentially welfare-enhancing choices are more likely to be made under an economic world-view which accepts the laws of physics. Sagoff’s assumption—that “it is not obvious how the second law of thermodynamics limits economic growth”221—recognizes no adverse consequences from continued profligate consumption of fossil fuels, and therefore lends no urgency to the need to switch to “infinite” solar sources of energy. Georgescu-Roegen’s assumption—that fixed amounts of “matter-energy enter[] the economic process in a state of low entropy and [necessarily] come[] out of it in a state of high entropy”222—counsels the course of conduct that will result in the least reduction of low-entropy fuel sources in order to achieve a given level of output.

C.  Unemployment

The primary means by which ecological economic proposals are attacked in popular discourse is through juxtaposition of environmental and economic ends as if the two cannot coexist. Of such attacks, the most familiar seems to be the contention that limiting exploitation of resources would slow the economy and raise unemployment. Such arguments can be very persuasive in a society where increasing numbers of people feel insecure in their present employment223 and where real income has been stagnant or declining for the last three decades.224

[*PG48] Nevertheless, these arguments should be viewed with caution. The link between protecting the environment and raising unemployment is not unequivocal. Current fiscal policy taxes income, thereby raising the cost of labor, while not taxing, and frequently even subsidizing, energy production and resource extraction, thereby lowering the cost of capital. The natural result of such a state is to depress demand for workers while raising demand for machines. Thus, “[i]n Canada, the world’s biggest timber exporter, the number of jobs per volume harvested has fallen by 20 percent in the last 20 years, despite a substantial rise in harvest levels.”225 Shifting to a fiscal policy in which depletion quotas or taxes equalize the playing field between inputs would slow the drive toward automation and reduced use of labor.

Indeed, many sustainable business practices are more labor-intensive than their nonsustainable counterparts. Organic farming, for instance, requires more workers per hectare than conventional farming.226 Meanwhile, the evidence does not seem to suggest that declines in per hectare (as opposed to per worker) productivity from such sustainable practices are inevitable or even likely. In Indonesia, for instance, fifty-seven of sixty-six pesticides used on rice have been banned since 1986 in an effort to respond to the adaptation of the brown planthopper to previous chemical spraying.227 Pesticide subsidies, which had previously been as high as 80%, were phased out and funding was switched to integrated pest management, a technique that seeks to use natural pest control methods as the primary means of crop defense.228 “Since then, more than 250,000 farmers have been trained in IPM techniques, insecticide use has plunged by 60 percent and the rice harvest has risen more than 15 percent. Farmers and the Indonesian treasury have saved . . . more than $1 billion.”229 These possibilities are not restricted to Indonesia: experts estimate that pesticide use in the United States could be reduced by 50% for only a negligible (less than 1%) increase in food costs.230

[*PG49] The belief that ecologically sustainable business practices necessarily cause increased unemployment may simply result from a lack of imagination. Recreational use of U.S. National Forests generates nearly 2.6 million jobs and adds $97.8 billion to the national economy. Meanwhile, logging contributes only seventy-six thousand jobs and $3.5 billion.231 Yet job creation is the constant refrain of policymakers who call for increasing harvest levels and industry subsidies.232 Institution of sustainable economic policies may result in dynamic shifts in job concentrations, rather than an absolute loss of employment. Indeed, the employment challenge facing ecological economists might well turn out to be less difficult than the one facing their growth-oriented counterparts, which is, “[H]ow can full employment be maintained in an economy that becomes ever more capital- and energy-intensive in its technology while at the same time facing ever greater scarcity of the nonrenewable resources upon which its technology is based?”233

D.  The Possibility of Substitutes

In response to the challenge of ecological economists, mainstream economists often cite the possibility of substituting resources whenever particular scarcities threaten to constrain growth. Solow expresses this position well: “It is of the essence that production cannot take place without some use of natural resources. But I shall also assume that it is always possible to substitute greater inputs of labor, reproducible capital [e.g., technology], and renewable resources for smaller direct inputs of the fixed resource.”234 Moreover, economists often envision this substitution as arising automatically from market forces. As resource depletion results in dwindling stocks, prices rise and producers switch to one of the other available substitutes for natural resources. In short, economists believe that “increasing resource scarcity . . . always generate[s] price signals which . . . engender compensating economic and technological developments, such as [*PG50]resource substitution, recycling, exploration, and increased efficiency in resource utilization.”235

This Section reviews a number of ways in which ecological economists have responded to this line of argument.

1.  Externalities

In order for the market to effectively recognize resource scarcities and signal the need for substitution, prices must reflect all of the environmental costs associated with the production and consumption of a good.236 For instance, without some form of carbon tax placed on timber harvesting, worldwide lumber production could continue at a steady pace for at least a few more decades, with the market never recognizing a resource scarcity and therefore never warning actors to substitute other inputs for lumber. At the same time, however, the consequent climate impact from deforestation—which accounts for as much as one-third of the carbon dioxide released into the atmosphere as a result of human activity237—could impose costs on society of a tremendous magnitude. Ecological economists argue that externalities of this nature are a pervasive feature of market activity. Moreover, they argue that the modern understanding of ecosystem dynamics shows that externalities are far more complex and unpredictable than the simple polluting factory and neighboring clothesline posited as the standard economic example of such externalities.238

To enrich the textbook example, ecological economists describe actual and current cases in which market mechanisms cannot be relied upon to alert economic actors to scarcities of resources or impairments of ecosystem services. The most obvious examples occur in relation to what Daly calls the ecological “sink”—the land, water, and air systems that absorb the thermal waste of the economic process.239 As Hardin so eloquently pointed out, the waste absorption capacity of the environment is not subject to private ownership yet it is subject to [*PG51]unrestrained private use.240 Thus, the arsonists who cleared land in Indonesia by burning two million hectares of forest during 1997 had no economic reason to consider the health costs to the more than twenty million people who breathed hazardous smoke-filled air, hundreds of whom were killed and thousands of whom were sent to medical treatment facilities.241 Similarly, a small but un-priced contribution to worldwide climate change is the direct and foreseeable consequence of every individual’s turn of the ignition key in his or her car. Due to pervasive media coverage, this causal relationship is likely well-known, yet waste emissions continue to rise.

Other failures of the market to signal ecological scarcities result from “accidental” tragedies. Ecosystem processes are intensely complex and difficult to predict. Actions that are not motivated by the self-interest of the commons problem can still inadvertently result in ecological harm. For instance, farmers in industrialized nations have relied heavily on chemical pesticides and fertilizers to boost yields since the 1950s. Although the resulting “green revolution” fueled productivity growth for decades,242 unintended consequences of industrial farming have included an acceleration in the erosion of fertile topsoil,243 the rise of agricultural runoff to become a leading source of health-endangering water pollution in the United States,244 and the destruction of non-pest species such as pollinator insects that are indispensable to the production of other crops.245 These consequences are likely not the result of deliberate, self-interested externalization by agribusiness. However, their occurrence is just as much a tragedy of the commons as if they had been.

As an example of just how unexpected and dramatic the impact of economic activity can be on delicate ecosystems, consider the case of ballast water which is pumped in and out of ships as they follow international trading routes. “Ballast water exchange has become a [*PG52]manmade overlay to the globe’s natural currents—a network of artificial rivers running through the oceans.”246 Among the myriad small creatures that follow these artificial currents is the comb jelly which has