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Economics of the Environment

Author: Prof James Blignaut ~ University of Pretoria, Director of Jabenzi, Beatus and affiliated to Green Growth Strategies

( Article Type: Explanation )

Making two systems talk as one
The subject of Economics deals with the system of activities between producers and consumers. As in all systems, the outcome of this interactive process propels the system in a direction based on the flow of information through the system. The subject of Ecology, on the other hand, deals with the system of activities between various species and their habitats. As is in the case of Economics, the outcome of this interactive process propels the ecosystem dynamics based on the flow of information through this system. Both Economics and Ecology are hence self-organising systems that act and react to various information prompts. This implies that the future trajectory of both systems is therefore informed by what happened in the past. The agents of change (consumers and producers in Economics and species and habitats in Ecology) take note of what is happening within their respective systems and adapt to the changes. In adapting they are positioning themselves towards some future ideal.

It is most important within the context of sustainable development, however to understand that the Economic and Ecological systems do not function separately. On the contrary, they are imbedded within each other. Producers and consumers are not machines, and are therefore part of the ecosystem. Likewise, ecosystems provide resources and services to the economy and act as a wastebasket as well. So, ecosystems are also a part of the economy!

The biggest threat to the realisation of the sustainable development ideal is not in determining and understanding how Economics and Ecology as individual systems function, but how they operate as a single embedded system. Diagram 1 below shows this interaction in an extremely elementary way.
The Economy uses various ecosystem sources and services as input to the production and consumption process. During this process, a portion of these sources and services are transformed into goods and services for human use, and another portion is transformed into waste. The process is, therefore, linear: the economy extracts services and sources, transforms them for human consumption, and generates waste. During this process of material transformation and throughput, much energy is consumed and heat is generated. The consequence of this process within the system is, however, not linear, since the outcome of this process is the decline in the quality and the quantity of the biosphere. This jeopardises the development potential of the economy as time progresses. This is obviously not a process that can continue indefinitely.
This returns us to the biggest threat to the realisation of the sustainable development ideal, namely the flow of information between the economic and the ecological systems. Apart from a few exceptions, economists and ecologists do not share the same paradigm, information database, scientific language and methods of research. One can talk about an economy/ecology divide or dichotomy. As long as this divide exists, sustainable development will not be actively pursued, let alone become a reality. This implies the application of ‘economics – as if ecology matters’ and ‘ecology – as if people matter’ and it calls for a concerted, and even forceful effort to bring economists and ecologists onto the same information platform. They have to understand and internalise each other’s set of indicators to measure change and progress and to find common ground.

Why should economists and ecologists alike seek this seemingly illusive common ground? To induce change in behaviour and change in technology that would yield a sustainable economy. This will not happen if people do not make it happen. People are the only agents of change that can bring about this turnaround. How and when will people change? Only when their perceptions and paradigms have changed which necessitates the flow of new information to them. People get stuck in their respective paradigms because they read the same material and talk to the same people on an ongoing basis. They are only challenged when introduced to new information and a new perspective about reality.

Should people’s paradigm and behaviour change, do the economic and ecological instruments exist to usher in sustainable development? Yes, they do. Such measures include:

  • Environmental fiscal reform (environmental taxes and subsidies);
  • International environmental conventions and their support instruments;
  • The implementation of demand-side management policies and strategies and the application of the precautionary principle;
  • The restoration of natural capital;
  • The establishment of markets for ecosystem goods and services; and
  • Alternative technologies.
Implementing all of these instruments require strategic decisions, not based on short-term economic and/or financial determinants, but as an act of the will to honour the logic that Economics and Ecology form a single, self-organising, but embedded system. Environmental and resource economists, who focus primarily on the role of prices to bring about these changes, and ecological economists who focus on system dynamics and system changes, are working towards this ideal. At this stage, they are a small minority but represent a growing voice from the periphery.