Economics
Nejem Raheem
Department of Economics
University of New Mexico
Economics is the scientific study of the allocation of resources under scarcity: how we behave when trying to use any resource (e.g., time, money, duikers) that exists in insufficient quantity to satisfy all users. Its major divisions are macroeconomics (national and international level interactions) and microeconomics (individual and firm level interactions). Most economists working on environmental issues are microeconomists, given that historically most conservation problems have concerned aggregations of individuals in groups smaller than nations. Given global and cross-border issues such as climate change and invasive species, macroeconomics, which addresses trade and economic growth, is pertinent to conservation. We will discuss both divisions.
Within microeconomics, the conservation-relevant sub fields are natural resource, environmental, ecological, and institutional economics (some see ecological economics as a completely separate discipline). There are also smaller sub fields such as evolutionary economics, but as these tend not to be used much in the field or by agencies, we will not deal with them. Within these given sub fields, there is some distinction made between academic and applied economics, and between different schools of thought within each sub field.
Within macroeconomics, there are many environmental assessments of international trade models and effects, and ecological economics properly tackles the effects of economic growth in a status quo system on ecological quality. However, there is not a similar nomenclature for these sub fields of macro.
The formal science of economics arguably arose in the early 18th century with the “Essai” of Richard Cantillon, though it is common for introductory classes to attribute the disciplines origins to either Adam Smith or David Ricardo, and sometimes to Francois Quesnay or Thomas Malthus. These economists are associated with what is called “Classical” economics. While many scholars contend that these earlier economists’ work holds truer than ever, most work in economics, especially applied microeconomics, falls under the category of “Neoclassical” economics.
Neoclassical economic theory is the bulk of what is taught in universities today, and almost all government agencies (at least in the US) use some sub field. of neoclassical economics for cost-benefit analyses and policy development. Neoclassical economics (particularly micro) relies on several fundamental assumptions about human behavior, such as ordered and rational preferences, and complete information about any good being traded. Two further, central assumptions are that individuals maximize “utility” (some measurable quantity of satisfaction); and firms maximize profit (total revenue minus total cost). Microeconomics and all its sub fields are therefore “utility-theoretic” as individuals’ decisions are predicated on a “utility function,” a mathematical function that explains the relationship between consumption of some good (or service) and the satisfaction that an individual derives from it. Given these foundations, economic theory posits that under certain conditions, an unfettered market (simply a situation where buyers and sellers can communicate and exchange) will tend to allocate resources to the highest bidder. As that bidder is willing to pay the most for the resource, it follows that they value the resource more than any other bidders. Therefore it can be said that this person “should” receive it. This is a contentious argument, particularly outside the discipline. We will deal with some of those contentions below. The mathematization of economics has increased in recent decades with improvements in both computing power and concurrent improvements in the theory. Some famous mathematical economists are Paul Samuelson, J.R. Hicks, and Milton Friedman.
Neoclassical macroeconomics arose principally from the work of John Maynard Keynes during the Great Depression. Prior to that catastrophe, many economists believed and taught that markets in the macroeconomy responded smoothly to demand or supply shifts and yielded new equilibria fairly rapidly. Since markets did such good work, the theory held, there was little space or need for government intervention, which in macroeconomics typically takes the form of monetary (money supply and interest rates) or fiscal (taxes and government spending) policy. The Depression showed us that markets often do not work perfectly, and that the assumption of smooth transitions was necessarily based on assumptions such as full employment and maximized production capacity. The Keynesian system allows that there is often slack in the system, such as less than optimal production, or unemployment, so transitions between equilibria are often slow or “sticky”. Neoclassical macroeconomics therefore admits of the importance of policy interventions. Macroeconomics is both theoretical and empirical, and mathematics is prominent in both. Macroeconomics incorporates trade analysis, explorations of economic growth (usually measured via Gross Domestic Product-GDP-though that is changing), and the effects of monetary or fiscal policy. Macroeconomic indicators such as inflation are used as criteria for membership in the European Monetary Union.
It should be made clear that while macro- and microeconomics differ principally in the size of the decision making aggregation they consider, and share some fundamental assumptions, they are two very different fields of inquiry. While many results of graphical analyses will look similar, the underlying structure of macroeconomic behavior is not just an aggregation of all the pertinent microeconomic actors. However, microeconomics makes good use of the effects of changes in macro indicators on micro behavior.
A Brief History and Description of Conservation-Pertinent Economics
The economist with whom biologists may be most familiar is Thomas Malthus, who predicted that human population growth would outstrip our ability to feed ourselves, resulting in societal collapse. Most contemporary growth theory in economics disagrees with this, but many in other fields point out that Malthus is, in fact, correct.
While this might seem like the beginning of an ecological consciousness in economics, the fields of environmental and ecological economics really arose in the mid-20th Century. Their predecessor, natural resource economics, is the economics of resource extraction, such as mining, logging, and farming, often dealing with the determination of optimal extraction rates. As such, natural resource economics is an extension of conventional economics (specifically production theory) to the agricultural and extractive realms.
Environmental economics deals with areas where markets either don’t work well or don’t exist. It makes the robust assumption that environmental goods provide for human well being even if they are not consumed directly. Environmental economics typically deals with the concepts of “market failures” and “externalities.” Ecological economics deals with the understanding that human exchange systems are invariably based on natural exchange systems, and are bound by the same constraints (the laws of thermodynamics among them).
Market failure is due to the absence of one or more of the prerequisites for functioning markets: perfect information about the good or service in question; a uniform product and no externalities. An externality is an outcome of either consumption or production whose effects are not paid for (“internalized”) by the producer or consumer. These can be positive, such as the public health benefits of municipal drinking water; or negative, such as the effects of coastal erosion due to destruction of mangrove forests for aquaculture. It is widely accepted among economists that many goods and services fall into the “market failure” category for many different reasons. We often lack complete information about the goods and services that ecological systems provide, in which case it is not possible to for markets to allocate them efficiently because we do not understand the nature of their true value or the costs of their destruction. Economists therefore perceive market failure as a major reason why environmental resources are often consumed at an unsustainable rate or destroyed-they simply aren’t priced correctly.
What is usually called environmental economics seeks to define prices for environmental benefits and costs, so that by inclusion in a market framework, their allocation can be optimized. Any cost-benefit analysis requires that all possible benefits and costs be quantified and discounted through time. Any project with potential environmental outcomes (positive or negative) must therefore include all environmental benefits and costs in a quantified form. Quantified here means “reported in monetary terms,” as the cost-benefit ratio that might determine a project’s future is a monetary ratio. Therefore, environmental effects must be monetized, and environmental economists undertake that monetizing.
Ecological economics is the study of the interdependence of human (economic) and natural (ecological) systems. Its most famous exponents are Herman Daly and Robert Costanza, though there are many others. The ecological program originally promoted by ecologists has taken hold in the social sphere within the field of Ecological Economics. The vision of the field is expressed in a statement by International Society for Ecological Economics (ISEE): An increasing awareness that our global ecological life support system is endangered is forcing us to realize that decisions made on the basis of local, narrow, short-term criteria can produce disastrous results globally and in the long run. We are also beginning to realize that traditional economics and ecological models and concepts fall short in their ability to deal with global ecological problems. Ecological economics is a trans disciplinary field of study that addresses the relationships between ecosystems and economic systems in the broadest sense.
Costanza describes it thus “Ecological economics is a trans disciplinary effort to link the natural and social sciences broadly, and especially ecology and economics.” Ecological economics is generally not defined as a sub field. of neoclassical economics, as it posits that most conventional economic analysis, even the attempt to put prices on environmental goods, is misinformed and shortsighted. Ecological economics sees economics as a sub field. of ecology, and its work arises from natural laws, particularly the laws of thermodynamics. For instance, “new growth theory” in neoclassical macroeconomics posits that a nation’s economy can essentially grow without limits, as profit drives endless innovation and technology substitutes for dwindling natural capital. To an ecological economist, as to many ecologists, this view is impossible and foolish.
Fundamental concepts within this pluralist field include: the economy is subject to biophysical constraints; there should be globally fair distribution of the goods and services necessary for a ‘good life’; and environmental management should be both economically efficient and inherently precautionary and adaptive. Ecological Economics thus holds promise as an emerging “research tradition” which can address complicated trans disciplinary sustainability issues, such as the linkages between ecosystems and institutions at multiple temporal, spatial and functional scales. As a newly emerging field, Ecological Economics is one in transition. The executive of the ISEE recently called for input from the Society’s membership in helping to develop a ‘paradigm’ that outlines a theoretically consistent research program distinct from neoclassical economics.
An ecologically economic perspective of economic growth is summarized in a position taken by the United States Society for Ecological Economics. The position states, among other things, “There is a fundamental conflict between economic growth and ecosystem health (in such areas as biodiversity conservation, clean air and water, atmospheric stability).” With a focus on biodiversity conservation, the North America Section of the Society for Conservation Biology adopted a similar position on economic growth, and The Wildlife Society adopted a position describing the “erosive impact of economic growth on wildlife.”
Another important school of thought is “Institutional Economics.” The essential premise of this school is that the rules, or institutions, that govern transactions and behavior of any given system are what define it, rather than generalizations about human behavior. Institutional economics works with many of the central ideas of neoclassical micro, but with contributions from other disciplines, such as anthropology and law. One defining difference between institutional and neoclassical macroeconomics is the concept of “bounded rationality.” Neoclassical microeconomics assumes that all agents are rational, and carry around the same, perfect model of decision making. Boundedly rational agents instead “experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information.” Another difference can be found in the concept of “transactions costs.” These are the costs (monetary, time, psychic, organizational) that attend any transaction between economic agents. Much analysis in neoclassical micro and macro minimizes transaction costs as superfluous to the actual transaction. For instance, legal rules (an institution) governing the #### of water rights (transaction) are perceived in the neoclassical world as an impediment to a functioning market. To an institutionalist, they are the center of the analysis.
Institutional economists have developed superb frameworks for analyzing, among other things, small natural resource management regimes. These regimes typically lie between purely private provision and purely public provision (for instance of national defense). They represent collective-action provision, which requires functioning social norms, tight social networks, and an understanding of the diversity of human intentions, not just utility or profit maximization. These analyses are typically closer to the understanding of more traditional cultures, which often occupy center stage in the conservation debate. Institutional economics rejects neither environmental nor ecological economics, but instead has found a more philosophical and social approach to analyzing the benefits and costs of any transaction or change as “nested” within a set or sets of often highly local rules. Some well-known institutionalists are Elinor Ostrom, Daniel Bromley, and Douglas North.
All of the schools of thought are useful in conservation. Many environmental or conservation problems are the result of human exchange systems. Both schools use statistical modeling to describe interactions, and as such are compatible with the training and data resources of many natural scientists.
The inclusion of environmental costs and benefits in project planning can result in better project design, or the scrapping of harmful projects. Additionally, the economics most people have studied is neoclassical micro, so policy explanations and modifications that arise from that school of thought are often easier to grapple with.
Ecological economics models economic decisions and systems as biological systems and as such introduce natural-world constraints into economic decision making., therefore giving us the chance to bring production and consumption back in line with ecological realities. This is a powerful framework for reassessing and ultimately changing how we do business, how we live and behave.
Institutional economics, with its broad perspective on human behavior, provides insights into the long-term mechanisms that determine any set of outcomes in a given economy, whether a village or a nation. Institutional economics provides welfare measures derived from the complex interactions typical of human societies, and helps us to analyze and predict how a given set of institutions will interact with market incentives and external pressures to drive ecologically destructive or beneficial behaviors.
Economics can challenge conventional wisdom on the relationship between humans and the environment. As many conservation problems are anthropogenic, they require insight into their social causes and potential solutions. While some may question the underlying behavioral theories of neoclassical economics, its practitioners are often open-minded empirical scientists trying to tease out the relationships between human behavior and environmental destruction or restoration. This can lead, as in the case of the Exxon Valdez settlement, to major breakthroughs in policy perception of the importance of natural landscapes. By reframing conservation problems in the language of economics, biologists can see that, for instance, the bushmeat crisis might be a protein crisis, or an income issue. Additionally, the powerful statistical tools and research methodologies available to economists allow for a unique analysis of these problems.
Economics and Conservation
Economists now contribute to conservation in numerous ways. As environmental and ecological economics both arose in the United States, there are many more related journals and professional societies there than anywhere else. The Association of Environmental and Resource Economists (AERE) is the largest such society in the US. The International Society for Ecological Economics is the largest Ecological Economics society in the world.
Economics contributes with theory, method and practical experience in assessing human interactions and their importance for conservation. Although environmental and ecological economists are united in concern for loss of biodiversity and environmental degradation they may take very different approaches to conservation:
• Support to conservation initiatives through fieldwork, data collection, knowledge of human interactions and markets; methodologies such as linking GIS with economic data to model conservation decisions
• Critical engagement with conservation initiatives from the perspective of market and non-market behavior, concerns about inadequacies of social science inputs into conservation planning including lack of historical and institutional analysis
• Support for alternative paradigms of conservation such as community-based conservation, rights-based conservation, and alternative natural resource management regimes
• Planning, funding, implementing and evaluating conservation initiatives from an economic perspective; including these evaluations in cost benefit analyses