About Island Press I sland Press is the only nonprofit organization in the United States whose principal purpose is the publication of books on environmental issues and natural resource management. We provide solutions-oriented information to professionals, public officials, business and community leaders, and concerned citizens who are shaping responses to environ- mental problems. In 2004, Island Press celebrates its twentieth anniversary as the lead- ing provider of timely and practical books that take a multidisciplinary approach to critical environmental concerns. Our growing list of titles re- flects our commitment to bringing the best of an expanding body of liter- ature to the environmental community throughout North America and the world.
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The opinions expressed in this book are those of the author(s) and do not necessarily reflect the views of these foundations. Ecological Economics To Andrea and Marcia And to the next generation, especially Liam, Anna, Will, and Isabel “The human mind, so frail, so perishable, so full of inexhaustible dreams and hungers, burns by the power of a leaf.” —Loren Eisley Copyright © 2004 Herman E. Daly and Joshua Farley All rights reserved under International and Pan-American Copyright Conventions. No part of this book may be reproduced in any form or by any means without per- mission in writing from the publisher: Island Press, Suite 300, 1718 Connecticut Ave., NW, Washington, DC 20009.
Library of Congress Cataloging-in-Publication Data. Ecological economics : principles and applications / by Herman E. Daly and Joshua Farley. Includes bibliographical references and index.
ISBN 1-55963-312-3 (cloth : alk.7—dc22 British Cataloguing-in-Publication Data available. Design by Mary McKeon Printed on recycled, acid-free paper Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 Ecological Economics Principles and Applications Herman E. Daly and Joshua Fa r le y Island Pre s s Washington • Covelo • London Contents Acknowledgments / xv A Note to Instructors / xvii Introduction / xix PART I AN INTRODUCTION TO ECOLOGICAL ECONOMICS / 1 Chapter 1 Why Study Economics? / 3 What Is Economics? / 3 The Purpose of This Textbook / 5 Coevolutionary Economics / 7 The Era of Ecological Constraints / 10 Big Ideas to Remember / 13 Chapter 2 The Fundamental Vision / 15 The Whole and the Part / 15 Optimal Scale / 16 Diminishing Marginal Returns and Uneconomic Growth / 19 A Paradigm Shift / 23 Say’s Law: Supply Creates Its Own Demand / 26 Leakages and Injections / 26 Linear Throughput and Thermodynamics / 29 Big Ideas to Remember / 35 Chapter 3 Ends, Means, and Policy / 37 Ends and Means—A Practical Dualism / 37 The Presuppositions of Policy / 43 Determinism and Relativism / 44 The Ends-Means Spectrum / 48 Three Strategies for Integrating Ecology and Economics / 50 Big Ideas to Remember / 56 Conclusions to Part I / 57 PART II THE CONTAINING AND SUSTAINING ECOSYSTEM: THE WHOLE / 59 Chapter 4 The Nature of Resources and the Resources of Nature / 61 A Finite Planet / 62 The Laws of Thermodynamics / 64 Stock-Flow Resources and Fund-Service Resources / 70 ix x • Contents Excludability and Rivalness / 72 Goods and Services Provided by the Sustaining System / 74 Big Ideas to Remember / 76 Chapter 5 Abiotic Resources / 77 Fossil Fuels / 78 Mineral Resources / 83 Water / 87 Ricardian Land / 88 Solar Energy / 89 Summary Points / 91 Big Ideas to Remember / 92 Chapter 6 Biotic Resources / 93 Ecosystem Structure and Function / 93 Renewable Resources / 98 Ecosystem Services / 103 Waste Absorption Capacity / 107 Big Ideas to Remember / 110 Chapter 7 From Empty World to Full World / 111 Fossil Fuels / 113 Mineral Resources / 116 Water / 116 Renewable Resources / 118 Waste Absorption Capacity / 119 Big Ideas to Remember / 121 Conclusions to Part II / 122 PART III MICROECONOMICS / 123 Chapter 8 The Basic Market Equation / 125 Components of the Equation / 126 What Does the Market Equation Mean? / 131 Monopoly and the Basic Market Equation / 133 Non-Price Adjustments / 134 Supply and Demand / 136 Big Ideas to Remember / 140 Chapter 9 Supply and Demand / 141 A Shift in the Curve Versus Movement Along the Curve / 141 Equilibrium P and Q, Shortage and Surplus / 143 Elasticity of Demand and Supply / 146 The Production Function / 148 The Utility Function / 152 Big Ideas to Remember / 155 Contents • xi Chapter 10 Market Failures / 157 Characteristics of Market Goods / 157 Rivalness / 159 Open Access Regimes / 161 Excludable and Nonrival Goods / 164 Pure Public Goods / 168 Externalities / 175 Missing Markets / 180 Summary Points / 182 Big Ideas to Remember / 183 Chapter 11 Market Failures and Abiotic Resources / 185 Fossil Fuels / 186 Mineral Resources / 192 Freshwater / 196 Ricardian Land / 198 Solar Energy / 200 Big Ideas to Remember / 200 Chapter 12 Market Failures and Biotic Resources / 201 Renewable Resource Stocks and Flows / 201 Renewable Resource Funds and Services / 211 Waste Absorption Capacity / 215 Biotic and Abiotic Resources: The Whole System / 218 Big Ideas to Remember / 219 Conclusions to Part III / 220 PART IV MACROECONOMICS / 221 Chapter 13 Macroeconomic Concepts: GNP and Welfare / 223 A Troubled Marriage / 224 Gross National Product / 228 Sustainable Income / 232 Alternative Measures of Welfare: MEW and ISEW / 233 Beyond Consumption-Based Indicators of Welfare / 237 Big Ideas to Remember / 244 Chapter 14 Money / 245 Virtual Wealth / 248 Seigniorage / 249 The Fractional Reserve System / 252 Money as a Public Good / 253 Money and Thermodynamics / 255 Big Ideas to Remember / 258 xii • Contents Chapter 15 Distribution / 259 Pareto Optimality / 259 The Distribution of Income and Wealth / 262 The Functional and Personal Distribution of Income / 263 Measuring Distribution / 264 Consequences of Distribution for Community and Health / 267 Intertemporal Distribution of Wealth / 268 Big Ideas to Remember / 276 Chapter 16 The IS-LM Model / 277 IS: The Real Sector / 279 LM: The Monetary Sector / 282 Combining IS and LM / 285 Exogenous Changes in IS and LM / 286 IS-LM and Monetary and Fiscal Policy / 289 IS-LM in the Real World / 299 Adapting IS-LM to Ecological Economics / 302 Big Ideas to Remember / 304 Conclusions to Part IV / 305 PART V INTERNATIONAL TRADE / 307 Chapter 17 International Trade / 309 The Classical Theory: Comparative Advantage / 309 Kinks in the Theory / 312 Capital Mobility and Comparative Advantage / 314 Absolute Advantage / 316 Globalization vs. Internationalization / 317 The Bretton Woods Institutions / 318 The World Trade Organization / 319 Summary Points / 321 Big Ideas to Remember / 321 Chapter 18 Globalization / 323 Efficient Allocation / 323 Sustainable Scale / 331 Just Distribution / 333 Summary Points / 340 Big Ideas to Remember / 341 Chapter 19 International Flows and Macroeconomic Policy / 343 Balance of Payments / 344 Exchange Rate Regimes / 344 Capital Mobility and National Policy Levers / 346 Contents • xiii Economic Stability / 348 Big Ideas to Remember / 355 Conclusions to Part V / 356 PART VI POLICY / 357 Chapter 20 General Policy Design Principles / 359 The Six Design Principles / 360 Which Policy Comes First? / 363 Controlling Throughput / 365 Price vs.
Quantity as the Policy Variable / 366 Source vs. Sink / 368 Policy and Property Rights / 369 Big Ideas to Remember / 372 Chapter 21 Sustainable Scale / 373 Direct Regulation / 373 Pigouvian Taxes / 376 Pigouvian Subsidies / 378 Tradeable Permits / 379 Policy in Practice / 385 Big Ideas to Remember / 387 Chapter 22 Just Distribution / 389 Caps on Income and Wealth / 390 Minimum Income / 393 Distributing Returns from the Factors of Production / 395 Additional Policies / 404 Big Ideas to Remember / 404 Chapter 23 Efficient Allocation / 405 Pricing and Valuing Nonmarket Goods and Services / 405 Macro-Allocation / 412 Spatial Aspects of Nonmarket Goods / 415 Redefining Efficiency / 422 Big Ideas to Remember / 424 Looking Ahead / 425 Glossary / 429 Suggested Readings / 443 About the Authors / 447 Index / 449 Acknowledgments W e are grateful to our many colleagues in the International Society for Ecological Economics for their intellectual contributions and the community of scholarship and support they provide. We especially wish to acknowledge Robert Costanza, and the faculty at the Gund Institute for Ecological Economics at the University of Vermont, as well as our col- leagues at the University of Maryland School of Public Affairs. We are also immensely grateful to the Santa Barbara Family Foundation for financial support, and to Jack Santa Barbara for encouragement and substantive help far beyond the financial.
Our editor at Island Press, Todd Baldwin, provided many helpful suggestions, in addition to guiding the whole process from idea to published book. xv A Note to Instructors A textbook is usually a pedagogically efficient presentation of the ac- cepted concepts and propositions of a well-defined academic disci- pline. Although we try to be pedagogically efficient, this book is not a textbook in the above sense, because ecological economics is not a disci- pline, nor does it aspire to become one. For lack of a better term, we call it a “transdiscipline.” We think that the disciplinary structure of knowledge is a problem of fragmentation, a difficulty to be overcome rather than a crite- rion to be met.
Real problems do not respect academic boundaries. We cer- tainly believe that thinking should be “disciplined” in the sense of respecting logic and facts, but not “disciplinary” in the sense of limiting it- self to traditional methodologies and tools that have become enshrined in the academic departments of neoclassical economics. Furthermore, ecolog- ical economics is still “under construction,” and therefore no fully accepted methodologies and tools exist. Instead, its practitioners draw on method- ologies and tools from various disciplines to address a specific problem.
Much of what we present is more contentious and less cut-and-dried than what you would find in a standard economic principles text. While we are especially critical of standard economics’ excessive commitment to GNP growth and its neglect of the biophysical system in which the economy is embedded, we also recognize that much environmental destruction and other forms of misery are caused by insufficient attention to standard eco- nomics. For example, subsidized prices for natural resources, neglect of ex- ternal costs and benefits, and political unwillingness to respect the basic notions of scarcity and opportunity cost are problems we join standard economists in decrying. As will be clear to any economist, the sections presenting basic micro- and macroeconomics, as well as other parts discussing distribution and trade, are based on standard economics.
We want to be very clear: We are not claiming that ecological economists invented supply and demand, or national income accounting, or comparative advantage. Although it may be unnecessary to state this, experience has taught us to be very explicit in rec- ognizing the origins of certain economic concepts, even if they are now so accepted as to be in the public domain.