Ecological Economics

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A branch of Economics that sees it operating in the larger ecosystem, 'partnering' with nature.

The material below is from the Worldchanging blog, and includes reviews of 2 key books on the topic.


"The growing community of Ecological Economists aims to expand the context of economics to include resource and ecosystem service constraints, and broader definitions of human well-being." (



"Joshua Farley: Ecological economics has been defined as the science and management of sustainability. There are lots of things that distinguish ecological economics from more conventional approaches to economics. First, ecological economists assume the human economic system is a subset of the sustaining and containing global ecosystem. The laws of thermodynamics tell us that matter-energy cannot be created or destroyed. This means that everything the economic system produces must come from the raw materials provided by nature.

The same laws tell us that entropy increases in an isolated system, and an energy differential is required to perform work. From the perspective of economics, entropy can be thought of as disorder, or uselessness. This means that all economic production uses high quality energy, which is used up and returned to the ecosystem as waste. In fact, everything the economic system produces ultimately returns to the ecosystem as waste. Humans, like all biological organisms, depend for their survival on the goods and services provided by healthy ecosystems. When we extract raw materials from nature to make things and we spew waste back, we degrade the life support functions of the planet’s ecosystems.

All economic production bears an opportunity cost measured in the loss or degradation of ecological life support functions and other ecosystem services. Unique among the planet’s species, humans have the capacity to irreversibly degrade these life support functions. Ecological economists assume a moral obligation to future generations and other species. The first task of an ecological economist is therefore to make sure that the physical size of the economic system — the rate at which it takes resources from the ecosystem and spews them back as waste — never exceeds the capacity of the ecosystem to sustain it.

The economy can’t grow for ever. If the economy can’t keep growing indefinitely, then the solution to poverty is not simply more growth. It makes no sense to care about the well-being of future generations not yet born and not care about those around today. The second task of an ecological economist is therefore to pursue a more just distribution of resources. Ecological economists also care about economic efficiency, but sustainable scale and just distribution take precedence.

Second, ecological economists assume we live in a world of extreme complexity and uncertainty that is constantly changing, and the economic system must also change in response. As our society evolved from hunter-gatherers to farmers to industrialists, our economic systems changed as well, and they continue to change. Ecosystems respond to change through unpredictable evolutionary processes. Economic systems develop unpredictable new technologies, then change in fundamental ways in response to those technologies. Human behavior evolves as cultures evolve. Both evolutionary and technological changes are unpredictable.

Ecosystem goods and services used to be extremely abundant relative to human made objects. If we want more fish on our dinner plates, the scarce factor of production is fish, not fishing boats. If we want more timber, the scarce factor is trees, not sawmills. Some of the most important issues we face today are climate change, biodiversity loss, ozone depletion and other environmental problems that are completely ignored by market forces. Our economic system has to evolve to respond to these new scarcities. Nobody could have predicted these problems two hundred years ago when market economies were first evolving, yet addressing them has become the key to our survival.

Third, ecological economics is explicitly transdisciplinary. Economics is the allocation of scarce resources among alternative desirable ends. Defining the desirable ends requires insights from ethics, philosophy, religion and psychology at the very least. Understanding the nature of the scarce resources requires insights from physics, chemistry, biology and ecology. Figuring out how to allocate requires insights from economics, sociology, political science and psychology. Disciplines impose narrow blinders that keep us from seeing the problem as a whole. This doesn’t mean that ecological economists must master a variety of disciplines, but rather that they learn to communicate and synthesize across disciplines.

The dominant economic paradigm strives for ever-increasing economic growth. Not only is this impossible on a finite planet, but growing evidence suggests that beyond a certain point, more material consumption does nothing to make us better off. Ecological economists seek to adapt our economic system to the increasing scarcity of ecosystem goods and services in order to create a more sustainable and desirable future." (


"The International Society of Ecological Economics (ISEE) was formed in 1989 with the goal of integrating ecology and economics and other fields into a transdiscipline aimed at developing a sustainable world. Specific research areas include ecological modeling, ecological limits to growth, integrated assessment of climate change, biodiversity, valuation of natural capital, and ecological tax reform.

The basic points of consensus in the ecological economics vision are:

  • the vision of the Earth as a thermodynamically closed and nonmaterially growing system, with the human economy as a subsystem of the global ecosystem. This implies that there are limits to biophysical throughput of resources from the ecosystem, through the economic subsystem, and back to the ecosystem as wastes;
  • the future vision of a sustainable planet with a high quality of life for all of its citizens (both humans and other species) within the material constraints imposed by 1;
  • the recognition that in the analysis of complex systems like the Earth at all space and time scales, fundamental uncertainty is large and irreducible and certain processes are irreversible, requiring a fundamentally precautionary stance; and
  • that institutions and management should be proactive rather than reactive and should result in simple, adaptive, and implementable policies based on a sophisticated understanding on the underlying systems which fully acknowledges the unerlying uncertainties. This forms the basis for policy implementation which is itself sustainable.

Note that the basic tenets of biophysical economics form the basis for point 1. Histories and surveys also emphasize the biophysical underpinnings of ecological economics.

ISEE has more than 1300 members in 60 nations with regional chapters in Australia, Russia, Brazil, Europe and Canada. It has sponsored major international meetings with attendance in the thousands, as well as invited sessions at meetings of the Ecological Society of America and the American Economics Association. Edward Elgar Publishing has established a series in Ecological Economics in their International Library of Critical Writings in Economics, joining series in other areas of conventional economics. Specific research topics within Ecological Economics have generated special issues in journals such as Ecological Applications and Environment and Development Economics. Thus, in academic circles ecological economics seems to be having a significant impact." (

3. Herman Daly:

"Ecological economics focuses on three issues with special emphasis on the third:

  • the allocation of resources among commodity uses,
  • the distribution of income among people, and
  • the physical scale of the economy relative to the containing biosphere.

A good allocation of resources is efficient; a good distribution of income or wealth is just; a good scale is at least ecologically sustainable. Allocation and distribution are familiar concepts from standard neoclassical economics – for every given distribution of income, there is a different Pareto optimal allocation of resources with its corresponding optimal set of prices. Standard neoclassical economics focuses primarily on the allocation issue, paying secondary attention to distribution. It does so first because a given distribution is logically necessary for defining efficient allocation, and second because distributive fairness is, of course, important in its own right.

Crucially, the third issue, the scale or physical size of the economy relative to the containing ecosystem, is not recognized in standard neoclassical economics and has, therefore, become the differentiating focus of ecological economics." (


The Two Capitalist Schools of Ecological Economics

Richard Smith:

"From the earliest efforts in the 1960s and 70s to bring ecological concerns to bear on capitalist economics and corporate practice beginning with the 1972 Club of Rome report Limits to Growth , mainstream pro-market eco-futurists, eco-capitalists, and ecological economists have tried to deal with the problem of capitalist growth in one of two ways: Either, with Herman Daly and his school, they imagined that capitalism could be reconstructed such that it would more or less stop growing quantitatively but continue to develop internally – much as, Daly suggested, we ourselves stop growing physically at adolescence but continue to develop our capabilities, intellect, skills, etc. Or, with Paul Hawken, Lester Brown and other “sustainable development” proponents, they imagined that capitalism could carry on growing more or less forever but that this growth could be rendered benign for the environment by forging an eco-entrepreneurial-led “green industrial revolution” and by introducing green subsidies and imposing carbon taxes, polluter pays penalties and the like to bring the rest of industry on board. Pro-growth or anti-growth, both approaches assume that capitalism is sufficiently malleable that capitalist fundamentals can be “inverted” such that corporations can, in one way or another, be induced to subordinate profit-making to “saving the earth.” 11 But what unites both schools of thought is their a priori rejection of alternatives to capitalism, their rejection of any kind of economic planning or socialism. So Jonathan Porrit, former Chairman of the UK Sustainable Development Commission, ex-Green Party Co-chair and one-time Director of Friends of the Earth, spoke for the mainstream when he declared that “Logically, whether we like it or not, sustainability is therefore going to have to be delivered within an all-encompassing capitalist framework. We don’t have time to wait for any big-picture ideological successor.” (

Key Books to Read

Review from Hassan Massun at

"The growing community of Ecological Economists aims to expand the context of economics to include resource and ecosystem service constraints, and broader definitions of human well-being. Despite many academic papers and articles, it hasn't been easy to get an in-depth introduction and overview.

That has been remedied with the publication of not one but two textbooks: Ecological Economics: An Introduction (Michael Common and Sigrid Stagl, 2005) and Ecological Economics: Principles and Applications (Herman Daly and Joshua Farley, 2004). Both discuss many traditional economics topics along with the newer material, and both are well worth reading for perspective on how economic theories can be evolved and updated for the modern world.

The underlying tone is to build up a self-consistent intellectual foundation which respects both economic and natural laws. This includes many insightful theories economists have developed in the past - price elasticity and supply and demand curves work in almost any economic universe. But where contradictions with conventional thinking are particularly evident, the authors show how faulty assumptions have led to mistaken thinking.

In the Common and Stagl book, each chapter ends with a summary, keywords, further reading, discussion questions, and end of chapter exercises - all of which are helpful for direct classroom application or self-study. With its greater length, there are more references, and the writing style tends toward shorter subsections and step-by-step development as compared to Daly and Farley's more conversational tone.

Some sections you wouldn't see in most economics textbooks: Energy and Nutrient Flows -- The Carbon Cycle -- Humans in the Environment - Some History -- Economic Growth and Human Well-Being -- Growth as the Solution to Environmental Problems? -- Limits to Markets -- Climate Change -- Environmental Policy Instruments.

Daly and Farley's book has "Big Ideas to Remember" at the end of each chapter. Some of the economic models are more detailed, and more of the authors' personality shows through, such as when they talk about policy implications. There is also a companion workbook, meant for readers to actively think about and work through ideas in the main book.

Some sections you wouldn't see in most economics textbooks: The Nature of Resources and the Resources of Nature -- From Empty World to Full World -- Market Failures -- Beyond Consumption-Based Indicators of Welfare -- Intertemporal Distribution of Wealth -- Capital Mobility and National Policy Levers -- Sustainable Scale -- Pricing and Valuing Nonmarket Goods and Services.

So, which of the two should you read? If you'd like a drop-in replacement for a standard introductory undergraduate economics text, Common and Stagl fits the bill. (It's also worth reading after you read a standard economics textbook, to see where the similarities and differences lie.) For a more conversational tone, or if you have read and enjoyed Herman Daly's work in the past, try Daly and Farley. Best of all, read both!"