Economics of Sustainability: Economics

Summary: Economics is defined and critically examined in the context of sustainability. Note: This page is preliminary and meant to provide a brief explanation of economics as background to my graduate and my undergraduate students.

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Defining Economics

This standard definition of economics comes from the authoritative International Encyclopedia of the Social Sciences: "Economics . . . is the study of the allocation of scarce resources among unlimited and competing uses" (Vol. 4 472). This definition must be unpacked for the pursuit of the Economics of Sustainability.

Note the presuppositions of pervasive scarcity, of the lack of limits to which scarcity must be devoted, and of the competition (not cooperation) among ends. The obvious goal of economics, given these premises, is efficiency of allocation of scarce means towards satisfying insatiable ends through the ever-increasing cornucopia of production. The presumed mechanism for the economic problem of efficiency is the market. The ultimate end of economic production is more production.

The means of production, called resources, are neatly bundled among three broad categories: land, labor, and capital. These are the factors of production that must be efficiently applied to maintain production. The solution to the economic problem is thus rendered as a neutral and technical application of scarce resources to efficiently produce output, goods and services that can be confidently measured by price in the marketplace. The product of the economy by definition can only partially satiate the unlimited appetite for goods and services. The solution involves more production, called economic growth.

Efficiency is the domain of micro-economics and growth is the domain of macro-economics. Efficiency and sustainability complement each other through the explicit acknowledgement of side-effects and subsidies. To explain efficiency, we should examine separately the factors of production.

Growth Versus Development: The Physical Economy, Not the Money Economy

The paradigmatic shift to Sustainable Development requires that we think in terms of matter and energy, not money. This plays on what economists call the money illusion (Fischer) and the veil of money (Keynes).The paradigmatic shift to Sustainable Development requires that we think in terms of matter and energy, not money.

Growth in the physical scale of the economy must be distinguished from development, which is defined by Herman Daly in this way:

"Development" refers to qualitative change, realization of potentialities, transition to a fuller or better state. . . . Sustainable development is development without growth in the scale of the economy beyond some point that is within biospheric carrying capacity. (167, highlights added)

Therefore, the Economics of Sustainability fundamentally redefines the mission of economics, tailoring economics to promote sustainability. This is beyond tinkering with economics to incrementally adjust to sustainable development. The first act in the Economics of Sustainability is to dethrone, not to deprecate or to discard, economics.

Put simply, to think about economics and sustainability, define the problem in this way:

SY = VA / ( E + M )
where SY = sustainability
VA = value added
E = energy
M = matter

This succinct formulation captures Daly's point: distinguish the money economy from the physical economy. Related to this is a distinction made by Aristotle between economics (real, physical, social) and Chrematistics, the manipulation of money for the acquisition of more money. This was acknowledged by Karl Marx as the forerunner of another famous and pithy model:

C --> M --> C and M --> C --> M'
where C = commodity
M = money and M' = money after the transaction is fulfilled (Marx, Capital Vol. 1)

Aristotle appears to have identified the source of an important distinction between use value and exchange value, which was also picked up by Marx. Clearly, sustainability is based on what is real, use value. To the extent that use value and exchange value diverge, which is basic to Daly's formulation of ecological economics, orthodox micr- and macro-economics sends out the wrong information.

©Wayne Hayes, Ph.D. | Initialized: 12/9/2010 | Last Update: 10/22/2013 | V. 0.6 Build #10