By William Krehm,
More than twenty years ago, I developed a model of the economy as a complex of subsystems: social, economic, and ecological, each with its own code and entropy build-up. However, their interactions determine whether the system as a whole might be sustainable or headed towards a break-down.
The paper was published in France and later appeared in book form, but it produced hardly a ripple.1
Today, however, models based on system theory are turning up with increasing frequency in environmentalists literature. Ecological Economics: The Science and Management of Sustainability, edited by Robert Costanza, Columbia University Press, NY, 1991, is a distinguished anthology of such efforts.
It consists of a joint summary article by three authors, Costanza, Herman E. Daly, and Joy A. Batholomew entitled, “Goals, Agenda and Policy Recommendations for Ecological Economics,” followed by 31 articles on (1) Developing an Ecological Economic World View (10 articles); (2) Accounting, Modeling and Analysis (7 articles); and (3) Institutional Changes and Case Studies (12 articles). This review will focus only upon those few articles which I found most interesting.
Breaking Loose from the Dead Hand of Market Theory
Most of the essays attempt to break loose from the dead hand of market theory. The latter views the economy as governed by the rationality of supply and demand on a fictitious self-equilibrating “pure and perfect” market. And yet, though they set out to free themselves from this stultifying model, the essays stop short of challenging the genetic code of conventional economics – marginal value theory that sees all price (and value that it identifies with price) as determined by supply and demand curves. By the premises of the model these curves always intersect at equilibrium points to which the market ever tends. Whoever works within this ideological cocoon must remain its prisoner. A brief review of several of the most interesting papers collected by Costanza follows.
Roefie Hueting, “Correcting National Income for Environmental Losses: a Practical Solution for a Theoretical Dilemma,” considers whether it is possible to construct “shadow prices for environmental functions that are directly comparable to the market prices of goods and services produced by man.” Wisely, if unhappily, he decides upon a, “practical and defensible solution for this problem, namely, estimating the costs of the measures to meet the standards for sustainable use of the functions of the environment.”
In short, he reverts to the cost of production theory of value and prices of John Stuart Mill and others. A cost-of-production value theory offered Adam Smith a useful angle for certain problems that might have occurred to him at the moment. But when marginal theory took over under Jevons, Walras, Menger, price and value became synonymous with what was established by the last transaction on a market specially conceived to make possible the application of the maxima-minima technique of calculus. Naively enough, the use of calculus was mistaken for a guarantee of scientific method.
In this strictly market perspective, the destruction of the environment by industry appears as wealth creation since it keeps down the highly selective cost recognized by our accountancy.
Several authors in the anthology do resort to actual restoration costs to bring environmental factors into our bookkeeping. In this way Henry M. Peskin in “Alternative Environmental and Resource Accounting Approaches,” adjusts the conventional Gross National Product by deducting from it environmental damage to yield a GNP1. Similarly he adds to it environmental benefits resulting, for example, from the capacity of healthy forests to recycle a modest degree of pollution (GNP2). The sum of these two adjustments yields GNP3, the net GNP. The unadjusted GNP currently used is labelled GNP4. Peskin, in fact, disaggregates the perceived GNP to disclose the impact on the environment. This is based upon addition of average costs plus a mark-up – the sort of calculation that businessmen and accountants employ rather than shooting for zero returns on the last unit produced, as conventional theory would have it.
But even so, Gross National Product remains a highly flawed statistic. To cite a single example, GNP ignores the household sector of the economy the services of which are unpriced. When a wife gets herself a job to help meet the mortgage payments, the family is likely to replace much homecooking with junk foods. But that replacement shows up as an increased GNP and hence greater well-being.
The Price Indexes are Key
Far more important than the GNP are the price indexes, which serve as master switches in the economy. Any upward movement of the Consumer Price Index will immediately be interpreted as “too many dollars chasing too few goods,” i.e., market inflation, and will spur the central bank to jack up interest rates.
But in our mixed economy higher prices could be brought on by some very different things. Legislation may have required industries to lessen their pollution of the environment, and the cost of this would have to show up in higher prices. The benefits, however, would be ignored by the CPI since the resulting cleaner air or water would neither be priced nor marketed but be available as common goods. Attempting to suppress such price movements with higher interest rates would only increase clean-up costs and all else and contribute to real inflation.
Clearly our price indexes must be unbundled to disclose the different real causes of any given price movement – much as Peskin has done with the GNP. There is a simple way of doing this. The index already includes the cost of environmental care in the higher prices of all the items in the basket of goods and services from which the index is calculated. Where such clean-up has been carried out by producers, its costs find their way into prices directly. Where a government has taken care of the clean-up (say by building a new sewage treatment plant), those costs will show up in prices substantially through taxation. All that is necessary to do, is to introduce a new item into the sampling of goods priced at zero. This new item is weighted according to the total expenditures on environment expressed as a proportion of the entire GNP. Solving the problem via cost, in fact, closely parallels the method of Peskin in disaggregating the GNP2.
Such a disaggregation of our price index would defuse much of the anti-social and anti-environmental bias that has brought the world to its present plight.
Bringing Society into the Ecoeconomic System
One of the most intriguing essays in the Costanza anthology is by Herman E. Daly of the World Bank, “Elements of Environmental Macroeconomics.” Daly makes the important point that the expression “optimal allocation” of resources as used by economists refers to the best use of resources within the economy. “Optimal scale of the whole economy relative to the ecosystem is an entirely different problem (a macro-macro problem). The micro allocation problem is analogous to allocating optimally given amount of weight in a boat. But once the best relative location of weight has been determined, there is still the question of the absolute amount of weight the boat should carry. This absolute optimal scale of load is recognized in the maritime institution of the Plimsoll line. When the watermark hits the Plimsoll line the boat is full, it has reached its safe carrying capacity.”3
That certainly brings the relationship of the economy with the ecology into focus. But it still omits another vital subsystem – the internal short-term sustainability of society itself. If the distribution of worldly goods denies important sectors of society minimal living standards, strife could break out below deck. This could lead to drastic shifts of cargo, and in Plimsoll line might end up at a hazardous angle to the surface of the water. That would rule out any prudent conservation of the ecology and much else. That should be apparent from the current state of affairs in Somalia, Bosnia and other spots on the planet.
To the two systems that Daly handles with insight must be added a third – society itself. Economics, manipulating a very few flawed statistics in accordance with a largely irrelevant model, leaves little room for either society or the ecology. It is necessary to integrate both of these into our thinking.
This leaves us with three major subsystems to deal with – the ecology, society, and the economy. Our task is to devise a common code to make this possible.
The effort to create a discipline of ecological economics may be of help for teaching economists to deal with even the narrower economy. The paper of Paul Christensen, of Hofstra University: “Driving Forces, Increasing Returns and Ecological Sustainability,” is particularly rich in such leads. He cites P. Mirowski’s view that, “it was the idea of energy, transposed to utility, which provided the inspiration behind the neoclassical revolution. Neoclassicals simply substituted utility for energy in the equations of analytical mechanics. Treating utility like energy provided economics with a powerful metaphor for individual action, a rigorous set of mathematical techniques…, a theory of economizing (in the principle of least effort), and a theory of optimality.”4
In fact, it was on this banana peel of analogy that economists slipped into the illusion that they were handling economics with the mathematical rigor that Newton had applied to the planets. But they were, on the contrary, casting off their last ties to the real world. Christensen writes: “Walras assumes that an individual good yields a flow of output just as ‘a field grows a crop year after year,’ and ignores the flows of materials and energy that are converted into a crop, and the energy needed in industrial processes…. In the field theory of production, output is obtained from varying combinations of input which are combined like objects in a picnic basket. Production techniques are defined not in terms of physical logic but by input proportion.”5
“A biophysical organization approach to ecological economics starts from a recognition of the environmental, technological, individual and social resources and support systems of productivity…. We must make hard choices about the technologies and institutions we choose to employ. Obviously, market-based signals and policies will be vital in spurring these choices. But technological and social policies are also crucial and these cannot be meaningfully evaluated from an atomistic and mechanistic framework based on nineteenth century physics.”6
Environmentalists, for their part, do not always look beyond the environmental subsystem in pursuing their conservationist concerns. Thus in their paper “Sustainability and Discounting the Future,” Richard B. Norgaard and Richard B. Howarth describe what they call, “The Conservationist’s Dilemma” with interest rates: “Faced with the pervasive use of discounting, conservationists have typically preferred lower discount rates over higher rates because lower rates favor the management of slow-growing trees, the protection of biodiversity, and the conservation of exhaustible resources. Yet conservationists have also argued for the use of high discount rates to make projects with deleterious environmental consequences appear uneconomic.”7
Bryan G. Norton, in “Ecological Health and Sustainable Resource Management,” argues against “mystical concepts of holism…. I agree…that mystical concepts of holism are not very helpful in management decisions. How does knowing nature is sacredas-a-whole tell us where to put the garbage? Worse, mystical holism is often associated with a dangerous ‘top-down’ thinking. If a superorganismic intelligence, with a good of its own, directs natural events, it is tempting to conclude that the part has value insofar as it serves the ends of a larger, superorganismic whole. It is this tendency that leads, with some justification, to charges of environmental fascism. But environmentalists have been careful to dissociate themselves from a view of ecosystem health that elevates ecosystem functioning above the basic rights of human individuals.”8
Reconciling an Operational Rationale
The management of so complex a system requires an operational rationale that would allow us to reconcile the needs of the component subsystem. The example of entropy system as physics can be fruitful, though it is important to keep in mind that this is a useful analogy rather than a proof of anything per se. in a physical entropy system work can be done only if there is a potential difference between two energy levels. As work is performed by the system that potential difference is used up. Though heat is present wherever molecular motion occurs, heat will flow between two bodies only if they are at two energy levels. When that differential is run down, the “heat death” ensues – the remaining heat is not available to us, it becomes locked in entropy. We may utilize some of the remaining heat only by tapping in to another system – for example letting the locked-in heat of our first system flow into a colder system and thus consume the potential difference (negentropy) there. Similarly, negentropy, in one form of energy can be restored by drawing on the negentropy of a different form of energy – say gravity, electromagnetism, nuclear energy. We know this is so because of the work equivalence of different energy forms established by experiment.
In a complex entropy system that requires the functioning of all component subsystems, care must be taken not to cannibalize one subsystem in the interest of another. For then the whole breaks down.
Such complex physical entropy systems are suggestive for our problem in modeling our ecoeconomy. The means and motivations that allow each system to function must be respected, and this can be expressed by analogy as quasi-potential differences. But it is important to note that they are not strictly interchangeable. In their proper places, however, they are all essential for the whole to function in a sustainable way.
An example may clarify the point. A highly competitive market may threaten a lumber industry with bankruptcy – the margin (or potential difference) between its costs and selling prices may have been eroded to the point of leaving no profit. It may seek to cope with that problem by shifting to clear-cutting public forest stands rather than selecting individual mature trees for felling. In this way the industry may lower its costs, and within a certain time horizon, may survive. But it has tapped the negentropy between the rate of cutting and the forest rate of regrowth. So long as the cut was below the forest’s recuperative powers, that subsystem had negentropy. Once the cutting caught up with and even exceeded the capacity for regrowth, the negentropy was being destroyed.
It may be that clear-cutting the forest was imposed by the fuel or job needs of the local population. Their minimum survival need could no longer be satisfied by the old forestry practices. Further jobs or further fuel could, for a while, become available by ravaging the forest – i.e., tapping the negentropy of the forest to restore the local communities’ dwindling negentropy. In the long run, however, that would be self-defeating since the destruction of an essential subsystem would eventually undermine the functioning of the system as a whole.
Within each of our three major subsystems there are many component subsystems vital for the functioning of the whole system. Each is subject to its own “entropy” build-up. For example, though we talk of the ecological subsystem, there are in fact, innumerable distinct subsystems within the ecology, and their entropy build-ups may at times be at cross purposes. The CO2 accumulation in the atmosphere is usually seen as contributing to the greenhouse effect. CFCs destroy the ozone layer, but on the other hand, seem to have a negative greenhouse effect. While destroying ozone layer negentropy (the maximum ozone destruction compatible with human survival, less the ozone layer destruction already achieved), they would seem to increase the greenhouse effect negentropy by contributing to cool rather than heat the atmosphere.
The case of economic growth illustrates the point in a more complex way. In order to keep our mixed economy functioning, growth is necessary to provide the aggregate demand that will make possible the investment to achieve enough employment. But once we have learned the severe limitations of exponential growth of our non-reproducible resource industries, it is clear that the economy cannot provide that growth by tapping the negentropies of the environment. Fortunately economic growth does not necessarily mean more automobiles, tin cans, or bubble gum. It could just well, take more environment-friendly forms such as nature hikes, adult education, and drama and concerts. These could be organized either for profit or by the public sector and fully respect the negentropies of the economy.9
To reconcile the essential subsystems we must qualify and reconcile the margins of tolerance of each. This is achieved by the analogy with physical negentropy.
Our Comment
Bill’s recognition that our accountancy must factor in the environment and society, reflects both his commitment to a progressive economic system that promotes intrinsic as well as monetary values, and to his appreciation of the need for systems thinking.
Élan
Endnotes
1. Krehm, William (1977). Babel’s Tower – The Dynamics of Economic Breakdown. Toronto: Thornwood Publications.
2. The formula for the adjusted Price Index would be:
See Allen, R.G.D. (1975). Index numbers in Theory and Practice (p. 10). MacMillan.
3. Daly, p. 35.
4. Christensen, p. 77.
5. p. 78.
6. p. 82.
7. Norgaard and Howarth, p. 90.
8. Northon, p. 109.
9. “Growth,” commonly used by economists, has fallen into ill repute with many environmentalists who favor “development” – a term that also casts a shadow with some. These are purely matters of terminology that can be settled by consensus.
