Wednesday, September 4, 2013

I.1: Economies, resources, ecology

(from the larger project of an introductory approach to Ecological macroeconomics)
Here's a video version of Part I, Chapter 1 of my macroeconomics course, setting the economy in a physical context.

(There's an unfortunate pause about halfway through.)


What does an ecosystem have to do with an economy?
There’s a pair of straightforward answers—they may even have occurred to you. For one thing, the economy gets some important inputs from ecosystems: trees, fish, clean water, just to name a few.

Going the other direction, when the economy harvests trees, or pollutes, or lays down pavement, that affects ecosystems.
These answers aren’t wrong, but there’s another one that goes a bit deeper. That’s the idea that an economy is itself kind of like an ecosystem, or that economies and ecosystems are two instances of the same sort of thing.

This book uses ecosystems as a model to understand how an economy works.

Along the way we’ll also look at how ecosystems affect economies, and how economies affect ecosystems.

The rest of this chapter gives an overview of the role of resources in the economy, and the connections between economies and ecosystems. The rest of Part I covers how ecosystems work, then explains how an economy is an extension of an ecosystem, and wraps up with examinations of money, banking, and government.

Part II introduces some of the standard terminology of macroeconomics, and connects it to the ecosystem-based approach of Part I.

Part III is about how an economy grows over the long term.

Part IV explains business cycles.

But that’s all off in the future. For now, we have to step back, start from the conventional perspective, and start seeing how resources and ecosystems should be tied in.

The standard approach
Normally, we treat economics as a strictly social science. We study how people make all sorts of decisions:
  • What to buy
  • What work to do (and how much)
  • What to make
  • ...
And they do this in some sort of society. So economics is a social science. Within that social framework, people face costs and benefits and they try to minimize their costs and maximize their benefits.
Benefits and costs
Micro vs. macro
The field is divided into two basic parts, microeconomics and macroeconomics.

In microeconomics we consider decisions made in isolation. We take the economy as a whole as “given.”

Macroeconomics is different. It concerns the economy as a whole, the totality that results from those individual decisions. We look at things like:
  • The overall level of output (Gross Domestic Product).
  • The overall level of employment, and of wages.
  • Interest rates in different markets.
  • Aggregate quantities of consumption, government spending, investment, exports, imports.

Whether it’s micro or macro, the focus in economics is on the social determinants—the choices that humans make and why they make them. But the thing is, these social decisions have physical consequences, and the decisions themselves respond to physical constraints.

Resources in micro vs. macro
It’s not a coincidence that this GM factory in Germany is built right next to a railroad line. If you’re making cars, you need to bring in lots of physical inputs, and you need to ship out your finished automobiles. Trains are a really good way to do both those things.
In this Nokia factory, materials and energy are needed to make the machines and build the factory. Additional materials and energy are needed to operate the machines and make the phones.
At the Ben & Jerry’s ice cream factory in Vermont, just like at Nokia, materials and energy went into making the machines. They need milk, sugar, chocolate and other ingredients to make the ice cream. And just as at Nokia, they need energy to operate the factory itself.
So even at the microeconomic level, almost every decision is affected by resource availability, or has an effect on resources, or some combination of the two.

Still, in micro we can get away with leaving aside the physical dimension, or taking resource availability as “given.” Sure, if resource availability changes, that will have effects on the situation we’re analyzing, but it’s only one kind of effect, and it’s not always relevant.

Macro is different, because in macro, physical effects become crucial.
  • At the aggregate level, changes in GDP, employment, investment have physical consequences and physical requirements.
    • If we increase GDP, we tend to increase our use of resources.
    • If we invest in resource extraction, we tend to affect the economy as a whole by making more resources available
  • Different directions for society are easier, harder, or simply impossible under a particular set of resource conditions.
We’re talking about the economy as a whole, and the economy as a whole can’t take its resource situation as a given, because it is constantly reshaping that situation and it is constantly subject to that situation.

Resources and economic change
The functioning of the economy as a whole depends on the availability of natural resources.

It also changes the availability of natural resources.

It involves the use of energy (derived from the environment in various ways) to transform other natural resources.

We can say that change in the economy is some combination of:
• Change in how the economy uses resources
• Change in the availability of resources

We can see how land transport went from being powered by grass ...
 ... to being powered by coal ...
... to using coal in a more sophisticated, powerful way of using coal ...
... to depending on electricity (some of which comes from coal).
Sea travel went from wind ...
... to very sophisticated wind ...
... to coal ...
... to today's massive container ships powered by petroleum.
We could tell similar stories about the development of flight, from Kitty Hawk to the Airbus 380, or feudal agriculture to the "modern" agriculture of the 18th century, to the Industrial Revolution.

The point is that if you look into not just any technological change, but any economic change in general, you can find changes in how we use resources, or new ways of using resources, or changed availability of resources.

That all fits under those straightforward answers about the economy-ecology connection, how resources affect the economy and how economic processes affect resources.

But there’s also that deeper connection, the idea that the macroeconomy itself is like an ecosystem.

Ecosystems, economies, and CAS’s
It’s not just that they’re like each other. Rather, both are examples of the same kind of thing,
a complex adaptive system (CAS). (We’ll look at that in more detail in chapter 3.)

In an ecosystem, we study the behavior and evolution of individual organisms or individual species, or even interactions among pairs of species. That’s like microeconomics.
We also study the functioning of the whole system. That’s like macroeconomics.
When economics is properly understood, there’s a structural similarity between it and ecology.

In ecology we see how species’ behaviors and genetics interact with the physical reality to structure the ecosystem.

In economics we see that social behaviors (the usual concern of economcis) interact with the physical reality (geology, climate, the biology of other species) to structure the economy.

So we’ll treat the macroeconomy just as we would an ecosystem: we’ll treat it as a CAS, a complex adaptive system.

It’s true that the economy is a social entity. But it’s also a biophysical system, something that exists in the physical world, subject to physical laws and affecting the physical world. If we ground our study of economics in an understanding of those physical constraints and effects, we should end up with a more useful grasp of our range of economic options, and the ways that different decisions are likely to affect us, for good or ill.

The rest of this first part of the book is about seeing the economy as a physical thing, a complex adaptive system where a society’s social structures coordinate its physical actions.

* Etymological footnote *
Before we go, it’s worth pausing for an etymological footnote. You probably noticed that both “ecology” and “economics” share their first three letters. They come from the Greek word “oikos,” which means something like household, house, family.

Then there’s “logos,” which has to do with order, knowledge—we might say “understanding.” So we have ecology, an understanding of the household, knowledge about the household.

Next up, there’s “nomos,” meaning “law,” derived from a word for dispensing or alotting, hence related to managing, which gives us economics, the management of the household.

It seems to me that the management of the household should be based on a good understanding of how the household works.

In other words, economics should be based on ecology. So that’s the goal for this book.

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