Towards an Integrated Paradigm in

Heterodox Economics
Towards an Integrated
Paradigm in Heterodox
Economics
Alternative Approaches to the
Current Eco-Social Crises

Edited by

Julien-François Gerber
Harvard University, United States

and

Rolf Steppacher
The Graduate Institute of International and Development Studies, Geneva
© Julien-François Gerber and Rolf Steppacher 2012
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To K. William Kapp
Contents

List of Illustrations x

Acknowledgments xi

Notes on Contributors xiii

Introduction 1
Julien-François Gerber and Rolf Steppacher
The aim of the book: a contribution towards the
integration of heterodox thinking 5
The foundation of ecological and critical
institutional economics 7
The need for integration in heterodox economics:
the relevance of K.W. Kapp 10
Some key integrative concepts: summary of the chapters 13

1 Towards the Integration of Social, Economic and

Ecological Knowledge 26
Clive L. Spash
Introduction 26
Integration and ecological economics 27
Approaches to integration 30
Kapp’s integrative proposal 37
Ecological economics: a movement in three camps 40
Conclusions 45

2 The Fog of Economics 47

Robert U. Ayres
The current and continuing crisis 47
Gaps in neoclassical theory 52
The missing link: energy 55

3 New Narratives for Sustainability:

The Red Pill for Economists 64
Mario Giampietro and Kozo Mayumi
How good is current understanding of the
sustainability predicament? 64

vii
viii Contents

Understanding Soddy’s prophecy to avoid falling into

the era of ‘Ponzi scheme economics’ 66
The understated biophysical reality: the peak oil and the
metabolic pattern of modern societies 73
The red pill prescribed for economists 83
Conclusion 91

4 Social Metabolism, Environmental Cost-Shifting

and Valuation Languages 94
Joan Martínez-Alier
Introduction 94
The environmentalism of the poor 96
Varieties of environmentalism 97
Two women from Ecuador 101
Social metabolism 103
Conclusion 106

5 Meanings and Significance of Property with Reference

to Today’s Three Major Eco-Institutional Crises 111
Rolf Steppacher and Julien-François Gerber
Introduction 111
The differentiation between property and possession as
a key point of integration 112
Centering property and possession on three major crises:
some preliminary considerations 116
Conclusion 123

6 An Institutional and Evolutionary Critique of

Natural Capital 127
Lisi Krall and John M. Gowdy
Introduction 127
Capital and natural capital 128
Natural capital and the boundary of economic analysis 130
Veblen’s institutional critique of capital 134
Bringing biophysical foundations back into
ecological economics 139
Merging human economy and human ecology 143

7 From Utilitarianism to Evolution in Ecological Economics 147

Geoffrey M. Hodgson
From neoclassical self-interest to morality and need 148
In search of an overarching analytical framework 154
 Contents ix

Using evolutionary thinking to connect economic

and ecological values 156
Conclusion 160

8 Economics: The Dismal Science? 164

Stephen A. Marglin

9 Moving from a Failed Growth Economy to a

Steady-State Economy 176
Herman E. Daly

10 Global Poverty and Financial Crisis: Are We Trapped in

an Obsolete Economic Order? 190
Daniel W. Bromley
The setting 190
The financial crisis of 2007 193
The perpetuation of world poverty 199
Are we trapped in an obsolete economic order? 200
A few further reflections 205

References 208

Index 229
Illustrations

Tables

I.1 Schematic comparison between eco-institutional

heterodox economics and conventional economics 14
5.1 Mineral and biotic resources in relation to property
and possession 122

Figures

1.1 Ecological economics conceptualized as three camps

and a ‘big tent’ 40
1.2 Development of environmental thinking in economics 43
2.1 US gross domestic product (GDP) from 1900 to 2000 57
2.2 Empirical and estimated US GDP from 1900 to 2000 62
2.3 Empirical and estimated Japan GDP from 1900 to 2000 62
3.1 Trends of world population and energy consumption 65
3.2 So far the pace of consumption of fossil energy has
always been growing 76
3.3 After reaching a situation of peak oil, an increase in human
population entails reducing oil consumption per capita 77
3.4 After reaching a situation of peak oil, an increase in oil
consumption of some countries must lead to a reduction
in oil consumption of others 78
3.5 Values of EMR and ELP for the Productive Sectors of
EU14 countries 81
3.6 The benchmark values of four countries 85

x
Acknowledgments

We express our deep gratitude to the contributors of this book who have
shared with us their knowledge, insights, and visions of new perspec-
tives in economics and encouraged the production of this book. Most
of them participated in two conferences at the Graduate Institute of
International and Development Studies (IHEID) in Geneva in December
2009 and March 2010, the title of which was Mastering Financial
Crisis, Peak Oil and Poverty – Towards a New Paradigm of Sustainable
Development based on the Integration of Ecological, Institutional and
Evolutionary Economics, informally called the Kapp Lecture Series in
Heterodox Economics.
The original idea of inviting prominent lecturers of heterodox
economics to the newly designed institute – a merger of the earlier
Graduate Institute of International Relations and the Graduate Institute
of Development Studies – came from its director, Philippe Burrin, and
vice-director, Michel Carton. We are very thankful to both of them for
actively supporting the conferences. The K.W. & L.L. Kapp Foundation
for the Integration and Humanization of the Social Sciences (Basel),
with its president Hermann Graf Hatzfeldt, contributed generously to
the costs of the conference for which we are very grateful.
We are grateful to our colleagues Jacques Grinevald and Pascal van
Griethuysen at the Geneva Institute for sharing with us over decades
(in the case of R.S.) the interest in heterodox economics and its poten-
tial for integration. Together with our assistant at that time, Florence
Nuoffer, they enthusiastically supported both conferences and the book.
Our gratitude extends also to the large number of students in develop-
ment studies from all over the globe, who – coming from extremely
diverse ecological and social contexts – never stopped addressing criti-
cal questions about economics, pushing us continuously to search for
alternatives to conventional wisdom. The Department of Economics at
Harvard University provided the necessary liberty of research to one
of us (J.-F.G.), especially through Stephen Marglin who offered support
as well as stimulating discussions. José Manuel Naredo is also warmly
acknowledged for his encouraging comments during the final phase of
the publishing process.
To bring content into good form is always a lot of work and we are very
thankful to those who have helped us in this process. Marc Galvin from

xi
xii Acknowledgments

IHEID Press advised us eagerly and wisely during the early stage of the
publication progress. The entire team at Palgrave Macmillan supported
us continually and effectively. In particular, we wish to thank Ellie
Shillito and Taiba Batool of Palgrave Macmillan, and Vidhya Jayaprakash
of Newgen Knowledge Works. Thanks are also due to Harumi Lambert-
Akiyama, Opeyemi Akanbi, and Simone Steppacher who offered pre-
cious assistance in reviewing chapters or correspondence.
The editors of this book are also thankful to the following organiza-
tions for permission to reproduce the following figures and epigraphs:
Earthscan (Taylor & Francis Group) for Figure 3.1 in Chapter 3; Routledge
UK (Taylor & Francis Group) for all other figures in Chapter 3; the
K.W. & L.L. Kapp Foundation (Basel, Switzerland) for the epigraph of
K.William Kapp in Chapter 7; the Harvard Management Company, Inc.
(through Gary F. Snerson) for the epigraph by Joseph A. Schumpeter in
Chapter 10.
Contributors

Robert U. Ayres is Professor of Economics and Political Science

and Technology Management (Emeritus) at the Institut Européen
D’Administration des Affaires (INSEAD), France. Ayres holds a Ph.D. in
Mathematical Physics and has taught at several US and European univer-
sities. He has published extensively on industrial metabolisms, industrial
ecology, environmental policy, technology evaluation, economic growth,
environmental regulation, and eco-restructuring. His books include
Information, Entropy and Progress: A New Evolutionary Paradigm (1994);
Turning Point: An End to the Growth Paradigm (1999); On the Reappraisal
of Microeconomics (2005, with M. Katalin); The Economic Growth Engine
(2009, with B. Warr); Crossing the Energy Divide (2010, with E.H. Ayres).
Daniel W. Bromley is Anderson-Bascom Professor of Applied
Economics (Emeritus) at the University of Wisconsin-Madison and
Visiting Professor at Humboldt University-Berlin. He has been editor
of the journal Land Economics since 1974 and has worked and lectured
in over 25 countries around the world. Bromley has published exten-
sively on the institutional foundations of the economy, the legal and
philosophical dimensions of property rights, environmental issues, and
economic development. He has written and edited 12 books, includ-
ing Economic Interests and Institutions (1989); Environment and Economy
(1991); Sustaining Development: Environmental Resources in Developing
Countries (1999); Sufficient Reason: Volitional Pragmatism and the Meaning
of Economic Institutions (2006).
Herman E. Daly is Professor of Economics (Emeritus) at the University
of Maryland’s School of Public Affairs. Daly was the student of Nicholas
Georgescu-Roegen at Vanderbilt University, Nashville, Tennessee. From
1988 to 1994, he was a senior economist with the World Bank. He has
served on the boards of directors of numerous environmental organiza-
tions and is a cofounder of the journal Ecological Economics. His interest
in economic development, population, resources, and environment has
resulted in over 100 articles in professional journals and anthologies, as
well as numerous books, including Toward a Steady-State Economy (1973);
Steady-State Economics (1977; 1991); Beyond Growth (1996); Ecological
Economics and the Ecology of Economics (1999); Ecological Economics:
Principles and Applications (2003, with J. Farley).

xiii
xiv Notes on Contributors

Julien-François Gerber is Visiting Fellow at the Department of

Economics, Harvard University. He holds a Master of Science in
Ecology and Evolution from the Swiss Federal Institute of Technology
in Zurich, a Master of Advanced Studies in Development Studies from
the University of Geneva, and a Ph.D. in Ecological Economics from
the Universitat Autònoma de Barcelona. He has done fieldwork in rural
Cameroon, Ecuador, and Indonesia. He is interested in credit/debt,
property rights, plantation studies, agrarian change, institutional and
ecological economics, and political ecology. He has published several
articles in journals such as Ecological Economics, Agrarian Change, and
Global Environmental Change.

Mario Giampietro is ICREA Research Professor at the Institute of

Environmental Sciences and Technology, Universitat Autònoma de
Barcelona. He worked for several years with David Pimentel at Cornell
University and has specialized in integrated assessment of sustainabil-
ity. Giampietro developed an approach called ‘multi-scale integrated
analysis of societal and ecosystem metabolism’ (MuSIASEM) that gener-
ates quantitative representations of the viability and desirability of the
metabolic pattern of societies. His books include Multi-Scale Integrated
Analysis of Agro-Ecosystems (2003); The Jevons Paradox and the Myth of
Resource Efficiency Improvements (2008, with B. Alcott, K. Mayumi, and
J. Polimeni); The Biofuel Delusion (2009, with K. Mayumi); The Metabolic
Pattern of Societies (2011, with K. Mayumi and A. Sorman).

John M. Gowdy is Rittenhouse Teaching Professor of Humanities and

Social Sciences in the Department of Economics, Rensselaer Polytechnic
Institute, USA. He is former president of the International Society for
Ecological Economics. His major areas of interest are ecological and
evolutionary economics, energy and climate change, welfare theory
and policy, behavioral economics, economic development, economic
anthropology. His main books include Coevolutionary Economics (1994);
Economic Theory for Environmentalists (1995, with S. O’Hara); Bioeconomics
and Sustainability: Essays in Honor of Nicholas Georgescu-Roegen (1999,
edited with K. Mayumi); Paradise for Sale (2000, with C. McDaniel);
Microeconomic Theory Old and New: A Student’s Guide (2010).

Geoffrey M. Hodgson is Research Professor of Business Studies at

the University of Hertfordshire, UK. He is the editor-in-chief of the
Journal of Institutional Economics. In 2000, Hodgson cofounded ‘The
Other Canon’, a center and network for heterodox economics research.
His principal fields of academic interest are institutional economics,
 Notes on Contributors xv

evolutionary economics, the methodology of economics, the history of

economic thought, and the nature of the firm. He is the author of over
13 books, 120 articles in academic journals, and 80 articles in academic
books. He first became known for his book Economics and Institutions:
A Manifesto for a Modern Institutional Economics (1988). His recent books
include Economics and Utopia (1999); How Economics Forgot History (2001);
The Evolution of Institutional Economics (2004); Darwin’s Conjecture (2010,
with T. Knudsen).
Lisi Krall is Professor of Economics at the State University of New York,
Cortland. Her areas of specialization are labor economics, the political
economy of women, land policies, institutional and ecological econom-
ics. For her doctoral dissertation, she undertook an institutional analy-
sis of the shortage of professional nurses in US hospitals. Her present
research concentrates on land policies with an emphasis on their influ-
ence on the settlement and land use of the western United States. She
has published several articles in the Cambridge Journal of Economics, The
Journal of Economic Issues, and Contemporary Sociology. Her latest book is
Proving Up: Domesticating Land in U.S. History (2011).
Stephen A. Marglin holds the Walter S. Barker Chair in the Department
of Economics at Harvard University. His main interests include the organ-
ization of production, the relationship between the growth of income
and its distribution, the process of macroeconomic adjustment as well
as issues related to economic development and globalization. His recent
work has focused on the foundational assumptions of neoclassical eco-
nomics and how these assumptions make community invisible to econ-
omists. His main books include Growth, Distribution, and Prices (1984);
Dominating Knowledge (1990, edited with F. Apffel-Marglin); The Golden
Age of Capitalism (1990, edited with J. Schor); Decolonizing Knowledge
(1996, edited with F. Apffel-Marglin); The Dismal Science (2008).
Kozo Mayumi is Professor of Economics at the Faculty of Integrated
Arts and Sciences, University of Tokushima, Japan. He was a student
of Nicholas Georgescu-Roegen and works in the fields of energy anal-
ysis, ecological economics and complex hierarchy theory. His main
books are Bioeconomics and Sustainability: Essays in Honor of Nicholas
Georgescu-Roegen (1999, edited with J. Gowdy); The Origins of Ecological
Economics: The Bioeconomics of Georgescu-Roegen (2001); The Jevons
Paradox and the Myth of Resource Efficiency Improvements (2008, with
B. Alcott, M. Giampietro, and J. Polimeni); The Biofuel Delusion (2009,
with M. Giampietro); The Metabolic Pattern of Societies (2011, with M.
Giampietro and A. Sorman).
xvi Notes on Contributors

Joan Martínez-Alier is Professor of Economic History and Institutions

and was Director of the Doctoral Programme in Environmental Sciences
at the Institute of Environmental Sciences and Technology, Universitat
Autònoma de Barcelona, where he helped to create a strong interna-
tional group on ecological economics and political ecology. He is a
founding member and former president of the International Society
for Ecological Economics. He has been editor of the journal Ecología
Política since 1990. His research interests include ecological econom-
ics, political ecology, agrarian history, environmental history, and envi-
ronmental policy. He collaborates with environmental groups such as
Acción Ecológica (Ecuador). His books include Haciendas, Plantations
and Collective Farms: Cuba and Peru (1977); Ecological Economics (1987);
The Environmentalism of the Poor (2002); Rethinking Environmental History
(2007; edited with A. Hornborg and J. McNeill); Recent Developments in
Ecological Economics, 2 volumes (2008, edited with I. Ropke).

Clive L. Spash is Professor of Economics in the Department of Socio-

Economics, WU Vienna University of Economics and Business, Austria
as well as in the Department of International Environment and
Development Studies, Norwegian University of Life Sciences, Norway.
He is editor-in-chief of the journal Environmental Values. His main
interests are interdisciplinary research on human behavior and envi-
ronmental values, ecological economics, applied ethics, political sci-
ence, social psychology, and atmospheric and plant sciences. Spash is
the author of over 100 published works. Some of his important books
include Cost-Benefit Analysis and the Environment (1993, with N. Hanley);
Greenhouse Economics (2002); Valuation and the Environment (1999, with
M. O’Connor); Ecological Economics, 4 volumes (2008, edited).

Rolf Steppacher is a retired senior lecturer of Development Studies

and Ecological and Institutional Economics at the Graduate Institute
of International and Development Studies in Geneva as well as of
Economic Anthropology at the University of Zurich. He was K. William
Kapp’s last assistant at Basel and studied rural issues in India and Bali.
His interests include ‘property economics’, ecodevelopment, agrarian
questions, the history of economic thought, and depth psychology. His
main books are Surplus, Kapitalbildung und Wirtschaftliche Entwicklung
(1976); Economics in Institutional Perspective (1977, edited with B. Zogg-
Walz and H. Hatzfeldt); Für eine Ökosoziale Ökonomie (1987, edited with
C. Leipert); Die Landwirtschaft als Chance einer zukunftsfähigen Schweiz
(1999, with H. Bieri and P. Moser), The Foundations of Institutional
Economics by K.W. Kapp (2011, edited with S. Berger).
Introduction
Julien-François Gerber and Rolf Steppacher

Science is a co-evolution of ‘orthodox’ (mainstream) and ‘heterodox’

(critical) approaches. Facing a multitude of notions, concepts, and theo-
ries, how can we distinguish between these two broad approaches? As
explained by Thomas Kuhn (1962), a transition from one orthodoxy to
another cannot be reduced to an accumulation of new knowledge, but
it takes place through a radical change in the prevailing perspective,
a transformation of preconceptions (Veblen, [1899] 2004), a new pre-
analytical vision (Schumpeter, 1954), or a new paradigm (Kuhn, 1962).
These notions are inevitably quite vague, but it is nevertheless possible
here to better delineate them using the example of economics. Broadly
speaking, in their systematization of political economy, great econo-
mists integrated four factors that can be regarded as crucial in the con-
stitution of any new paradigm in economics.
First, we find in Adam Smith’s ([1776] 1937) work that his preconcep-
tions were in harmony with the prevailing natural sciences: his theory
was influenced by the mechanical model of Newtonian physics, the
dominant scientific approach of his day. Accordingly, Smith conceived
the market economy as a closed system regulated by a self-organizing
‘invisible hand’ tending towards a state of equilibrium. Second, he was
equally in agreement with the philosophical conceptions that underlie
the systems of knowledge and of values of his time (he was himself a
philosopher). His paradigm was based on utilitarianism, and he placed
at the centre of his economic analysis the pursuit of personal interest –
seen as a motivation grounded in human nature – yet he was aware
of the complementary moral sentiments (Smith, [1759] 1981). Third,
Smith anticipated new socioeconomic realities that were to appear as a
result of the emerging division of labor and the corresponding poten-
tial of economic development (which took place prior to the ‘thermo-

1
2 Julien-François Gerber and Rolf Steppacher

industrial revolution’).1 Like the physiocrats who greatly influenced

him, he opposed mercantilist controls which, according to him, rep-
resented a restricting brake on the blossoming of manufacturers and,
therefore, on future evolutions. And, finally, from a political perspec-
tive as expressed in the conflicts of interests of his time, Smith stressed
the entrepreneurs – neither landowners nor workers – as key agents of
development indirectly promoting social harmony.
Adam Smith’s new paradigm grasped new problems and tendencies
in a systematic and unified way. Anyone thinking in terms of equilibria
may, as he did, identify social forces pointing towards a general harmo-
nization of interests despite the pursuit of individual profit. Once such
a new perspective has been established, a ‘normal’ science emerges and
‘normal’ scientists appear, who test its new potential, collect new data,
nuance theories, and so forth. However, working within a given para-
digm also implies that one cannot approach reality in an innocent way.
On the contrary, real phenomena become ‘fixed’ into concepts and the-
ories in agreement with the paradigm. All factors that cannot be appre-
hended by the latter are put aside – a process which may encourage the
emergence of heterodox currents and, later on, of a new paradigm. In
effect, all critical currents of economic thought initially developed as a
reaction against the orthodoxy, taking their roots in aspects of reality
that could not be satisfactorily captured by the mainstream paradigm.
Early critics of classical economics, like Jean de Sismondi (1819), John
Rae (1834) or Richard Jones (1831), quickly addressed – even before Karl
Marx – the social situation of the poor and the dependency of colonies,
and they criticized an abstract methodology concealing these realities.
But creative heterodox currents are more than simply a series of rectifi-
cations of partial problems that hitherto were neglected.
Let us take Thorstein Veblen as a brief example. Veblen (1904; 1923)
developed a new perspective – critical institutional economics2 – that
called into question the preconceptions of all the currents of economic
thinking known at the turn of the twentieth century. He regarded the
economy as an open system in co-evolution with the larger social and
natural systems, rejecting any teleological perspective. Veblen replaced
the model of competitive equilibrium with the model of circular cumula-
tive causation and dealt with economic problems using his knowledge of
anthropology and social psychology, two fields of study that emphasize
the cultural conditioning associated with specific institutions. To take
just one example, he examined with great clarity the considerable psy-
chological effects generated by mass advertising (Veblen, 1899), while
neoclassical economists, at the same time, promoted the idea of the
 Introduction 3

‘sovereign consumer’. From the point of view of his political values that
he made explicit, he sided with the ‘common man’, a concept broader
than Marx’s ‘proletariat’.
From 1870 onwards, neoclassical economics followed a totally dif-
ferent path, with its marginalist approach initiated by Stanley Jevons,
Carl Menger and Léon Walras. This current remained closely tied to
the equilibrium model and developed the theory of perfect competition,
even if physics went beyond the mechanical model and even if oligopo-
listic markets became a dominant feature of the economic system.3 The
paradigmatic four pillars of classical economics mentioned earlier were
in a way reinforced and strongly centered on methodological individual-
ism. Neoclassical economics has become – until today – the dominant
paradigm in economics around the world. Since Veblen’s time, how-
ever, neoclassical economics has taken on board several aspects of the
various critiques, notably elements from John Maynard Keynes. It has
also tried to be more empirical, sometimes resorting to experimenta-
tion. Yet, all these partial revisions did not convince many heterodox
economists.
What does ‘heterodox’ mean? With respect to conventional econom-
ics it is possible to be heterodox (or critical) along the four basic lines
already discussed above. First, mainstream economics can be chal-
lenged according to the changes that occurred in the natural sciences
and that have generated new knowledge. This is, for instance, the depar-
ture point of Nicholas Georgescu-Roegen’s critique (1966; 1971). The
implications of the entropy law for understanding the material aspects
of economic processes brought him to radically question the very foun-
dations of neoclassical economics. He blamed the latter for remaining
rooted in mechanical analogies that include the idea that economic
processes operate in closed systems. According to him, neoclassical eco-
nomics is in contradiction with much of the knowledge developed by
the natural sciences, especially in thermodynamics and ecology. In so
doing, he paved the way for the development of ecological economics, as
we shall see below.
Second, the dominant paradigm can also be criticized from the per-
spective of changes in philosophical conceptions and, particularly, in
the light of the new insights coming from other social sciences. Several
heterodox economists, such as Karl Polanyi (1944), have questioned neo-
classical economics’ scientific ambitions, especially its universalistic and
a-historical conception of the economy manifesting itself in all sorts of
projections. These ambitions are also expressed in a mathematical for-
malization ever more abstract and disconnected from real sociocultural
4 Julien-François Gerber and Rolf Steppacher

and environmental contexts (see Guerrien, 2007). It is interesting to note

that this critique has also been endorsed by some conventional econo-
mists, including Milton Friedman (1999, 137) who wrote that ‘economics
has become increasingly an arcane branch of mathematics rather than
dealing with real economic problems’. Ronald Coase (1999, 2) added that
‘existing economics is a theoretical system which floats in the air and
which bears little relation to what happens in the real world’. This ten-
dency to extreme abstraction is also evident in the centrality of Homo
economicus, more or less defined as an egoistic, rational, well-informed
and utility-maximizing agent with unlimited wants.
A third way of challenging conventional economics consists in
putting forwards new social and economic problems that have been
neglected by the advocates of the dominant paradigm. With respect
to capitalism, these non-considered problems resulting from self-or-
ganizing markets are often seen by the mainstream as unintended and
minor ‘side effects’. Exploitation (Marx, [1867] 1976), social costs (Kapp,
[1950] 1978), underdevelopment (Prebisch, 1950; Amin, 1970), ecologi-
cal disruptions (Georgescu-Roegen, 1971) or community undermining
(Marglin, 2008) are some of the most severe deficiencies emphasized by
critics. Stuck in old beliefs and old recipes focusing on methodological
individualism and the perpetual promotion of self-organized markets
in ever new domains, neoclassical economics has been unable to antici-
pate the current ecological, social and financial crises and to grasp their
multidimensional nature. Worst, neoclassical economics has been inca-
pable of providing meaningful and original solutions to them.
Fourth, from the viewpoint of conflicts of interests, heterodox cur-
rents frequently side with unprivileged or oppressed social groups, such
as wage-earners, women, the ‘periphery’ and future generations. Quite
the contrary, neoclassical economics usually promotes the interests of
today’s wealthier classes (see, e.g. Keynes, 1936, 30), mainly located in
rich countries, and it has largely been blind to gender and environmen-
tal issues, as shown by feminist and ecological economists. Examples of
important concepts having conservative political implications include
Pareto optimality (not questioning initial inequalities), aggregated indi-
cators (masking class divides), trickle-down effects (justifying wealth
accumulation for the already rich) and Kuznet’s curves (promoting con-
ventional growth as a way to solve, in the future, inequalities and eco-
logical problems).
Based on these four basic ways of challenging the dominant paradigm,
it is possible to identify 16 different kinds of ‘critical theories’ according
to their specific combination of the four criteria. But at what point can
 Introduction 5

we consider a given theory to be truly ‘heterodox’? When two, three or

even four criteria are met? The answer will of course vary according to
how a given theory is evaluated. It is nevertheless possible to say that
the foundational assumptions of neoclassical economics illustrate the
rare case of a theory that has become dominant without fundamen-
tally challenging its predecessor – classical economics – on any of the
four criteria (on this continuity, see Marshall, 1890; Schumpeter, [1911]
1934). By contrast, the cases – also very rare – in which all the four crite-
ria do apply correspond to an entirely new paradigm. Only these cases
deserve to be qualified as ‘paradigm shifts’. In economics, this is true
of Quesnay, Smith, Marx, Veblen and, arguably, Georgescu-Roegen –
provided that they are evaluated according to their own historical con-
text. More broadly, important economists – heterodox or not – are not
only characterized by the fact that they have brought up fundamental
and permanent problems, but also by the fact that they have anticipated
them. In addition – and this is a crucial point – they are more than spe-
cialists in their own domain but are receptive to other disciplines.4
Many economics students have difficulties understanding the
nature and significance of paradigms. One reason can be explained
by the fact that conventional wisdom – in one of many self-protecting
mechanisms – has relieved them from studying the history of economic
thought, with its diversity of perspectives and theories. This shortcom-
ing prevents students from seeing the richness of available alternatives
and from experiencing how interesting and stimulating ideas are at
their origins. It is generally admitted that, besides neoclassical econom-
ics in all its variations, today’s main clusters of heterodox schools of
economics can be defined as follows: critical institutional-evolutionary;
ecological; Marxist-radical; post Keynesian-Sraffian; and feminist eco-
nomics (see O’Hara, 2007; Lee, 2010).

The aim of the book: a contribution towards the

integration of heterodox thinking

The time has come for institutionalists [and all heterodox econo-
mists] in developed and underdeveloped countries to unite and to
become more assertive ... . They need not shout or become strident
in their arguments, but they should not mumble. (K. William Kapp,
1968, 18)

Together with an increasing number of economists, other scientists,

policy-makers, and students,5 we believe that it is high time to work
6 Julien-François Gerber and Rolf Steppacher

towards establishing an alternative paradigm in economics. Most of

the necessary components are perhaps already there. In fact, for every
neoclassical proposition, there exist long- and well-established alterna-
tives. What is needed, then, is not so much to develop new concepts but
rather to integrate and articulate what is already present in the differ-
ent schools of heterodox economics. Many of the latter have developed
their own strong points (although we are conscious of the fact that it
may be unfair to reduce them to these single aspects): Post Keynesians
are particularly strong on macroeconomics (e.g. Lavoie, 1992); Marxists
on class and power issues (e.g. Duménil and Lévy, 2011); feminists on
gender (e.g. Ferber and Nelson, 1993) and so on. Until now, these ori-
entations have largely evolved by further differentiating and by posi-
tioning themselves with respect to neoclassical economics. Despite the
achievements accomplished, the biggest potential now lies in the yet
weak integration of these alternative currents without losing their iden-
tity (see O’Hara, 2007; Lee, 2010).
However, as a grounding step, we suggest that efforts should be con-
centrated on integrating ecological and critical institutional economics.
(The latter school is broadly defined here, and it encompasses the hetero-
dox branches of evolutionary and social economics.) Epistemologically,
these two currents have an ‘elementary’ and inclusive character as they
are both based on the open systems approach and, also, as they provide
the vital links with the natural and social sciences (Kapp, 1961; 2011;
Naredo, 2003). Both schools are based on methodological pluralism.
They therefore do not follow any reductionist road but rather a kind
of ‘orchestration of the sciences’ (à la Neurath, [1946] 1983), acknowl-
edging and trying to reconcile the contradictions arising among the
different disciplines (see O’Neill, 2004; Martínez-Alier in Chapter 4).
Once integrated in the core understanding, ecological and critical insti-
tutional economics may therefore offer, together, a theoretical basis on
which to articulate, in a pluralistic way, the contributions of the other
schools of heterodox thought. This may correspond to what Clive Spash
(in Chapter 1) calls ‘social ecological economics’.6
The aim of the present book is to gather some of today’s foremost
heterodox economists who are working towards laying the founda-
tions of an integrated alternative paradigm in economics and especially
focusing on joining ecological and critical institutional economics. The
contributors have been selected for the rigor of their approach to eco-
nomic issues as well as for the depth and breadth of their scholarship.7
Each of them proposes a way of integrating key concepts that will need
to be present in an alternative paradigm. In order not to stay in the
 Introduction 7

abstract realm of theory, the contributors persistently link their dis-

cussions with the major crises presently faced by our global economy,
including the financial crisis, chronic poverty, and the peak oil and
climate change situations. In fact, ‘the human imprint on the global
environment has now become so large and active that it rivals some of
the great forces of Nature in its impact on the functioning of the Earth
system’ (Steffen et al., 2011, 842), a situation that has led some scientists
to talk of the ‘Anthropocene’ as a new geological era in Earth history
(Crutzen and Stoermer, 2000; Grinevald, 2008). The challenge for an
integrated heterodox economics is therefore to become the economics
of the Anthropocene, while neoclassical economics has perhaps always
been the economics of the Holocene.

The foundation of ecological and critical

institutional economics

The paradigmatic common denominator of ecological and critical insti-

tutional economics is the open, living systems approach (Veblen, 1898;
Georgescu-Roegen, 1966; 1971; Kapp, 1961; 1976). The general scientific
background to this corresponds to the epistemological and theoretical
revolution that started in the first half of nineteenth century with clas-
sic thermodynamics (e.g., through the work of Carnot and Clausius)
and continued in the twentieth century with non-equilibrium thermo-
dynamics (e.g., through the work of Schrödinger and Prigogine) (see
Grinevald, 2008). The resulting new paradigm is associated with notions
such as entropy, self-organization, order parameters, emergence, com-
plexity, irreversibility, and evolution (see, among many others, Jantsch,
1980; Allen, 1997; Foster, 2005; Giampietro and Mayumi, 2004).
This represents a clear departure from the reductionist paradigm of a
mechanical epistemology. In fact, taking seriously the non- equilibrium
paradigm implies the uncomfortable acknowledgment that scientists
should also work with system-dependent and context-dependent defi-
nitions of entities (Giampietro, 2003, 218).
The primary objective of ecological economics is to ground economic
thinking and practice in biophysical realities, especially in the knowl-
edge of ecological systems. Instead of relying only on prices and markets,
its approach is fundamentally metabolic, meaning that the economy
is seen as a subsystem dependent on a larger, finite global ecosystem,
the biosphere (Georgescu-Roegen, 1966; 1971; Giampietro et al., 2011a).
The economy is regarded as open to the entry/exit of materials and
energy – for instance in the form of raw materials (entry) and pollution
8 Julien-François Gerber and Rolf Steppacher

(exit) – and economic processes are seen as entropic and thus irrevers-
ible. It is in this sense that ecological economics has been compared to
Aristotle’s ‘oikonomia’8 and to ‘human ecology’ (Martínez-Alier, 1987;
Krall and Gowdy, in Chapter 6). The central applied concept of ecologi-
cal economics is sustainability, which is approached both qualitatively
and empirically, with particular attention to spatial scales ranging from
local to global. It emphasizes the incommensurability of values (i.e.,
different value systems cannot be expressed in the same units), and
it champions multi-criteria valuation methods (instead of cost-benefit
analyses) based on explicit value premises and on different socioeco-
nomic and biophysical indicators such as the energy return on invest-
ment (EROI), the ecological footprint, the human appropriation of net
primary production (HANPP) and so on (Munda, 1995; Martínez-Alier
et al., 1998).
Quite the contrary, neoclassical environmental economics usually
regards ‘sustainable development’ as being synonymous with ‘green
growth’, measured in monetary indicators and studied with general
models that avoid reference to historical and spatial aspects (Daly,
1996; Ayres, 1998). In addition, ecological economics generally assumes
a longer time horizon than environmental economics and pays more
attention to cause–effect chains, interactions and feedback between nat-
ural and socioeconomic systems (van den Bergh, 2001). In this respect
the concept of ‘co-evolution’ is relevant, reflecting a mutual influence
of economic and environmental systems (Gowdy, 1994; Norgaard,
1994). Ecological economics views such systems, including markets, as
adaptive and coincidental rather than optimal in the neoclassical sense.
Accordingly, ecological economics inherently entails an evolutionary
dimension, taking the view that markets cannot sufficiently meet the
needs of the poor nor produce the ‘optimal’ technologies and produc-
tion activities necessary from a long-term, ecologically sound perspec-
tive (Kallis and Norgaard, 2010). In short, ecological economics frees us
from mechanical illusions about the relationship between the economy
and nature (Georgescu-Roegen, 1976c).
Unlike neoclassical economics (including its neo-institutional vari-
ant), which emphasizes the role of quasi-autonomous individuals, criti-
cal institutional economics highlights the prominent role of institutions
in shaping behaviors, interests and values (Hodgson, 1988; Bromley,
2006). This tradition sees the economy as a social construct with all of
its history and variety (as opposed to a deducted structure based on a
set of axioms) determining how people and societies organize to secure
their socioeconomic reproduction (Polanyi, 1944). For neoclassical
 Introduction 9

economics, institutions are the ‘rules of the game’ in a society, that is,
the external constraints on individuals while the latter continue to be
seen as autonomous, strategic, and utility-maximizing agents. In con-
trast, critical institutionalism regards institutions as forming individual
behavior, in both empowering and restricting it and in defining rights
and duties, privileges and non-rights for actors.9 Along this line, from
Veblen to today, as expressed by Richard Scott (1995, 34), ‘Institutions
consist of cognitive, normative, and regulative structures and activities
that provide stability and meaning to social behaviour. Institutions are
transported by various carriers – cultures, structures, and routines – and
they operate at multiple levels of jurisdiction’.
Critical institutional economics offers a particular bio-psycho-cul-
tural image of human beings based on early dependence, fundamental
openness, and therefore on the unavoidable need of enculturation shap-
ing individuals (including economists) according to the specific cultural
pattern in which they are born – and of which much remains uncon-
scious (Kapp, 1961). Such an image is less easily put into a formal model
than is Homo economicus but it is much more realistic and is consistent
with the empirical findings of other social sciences. Some of the meth-
odological starting points of critical institutional economics are that it
is ‘normal’ that economic processes occur within multiple social asym-
metries (Weber, 1925; Kapp, [1950] 1978) and that there are processes of
circular causation between economic and non-economic factors with
frequent cumulative effects, including growing inequalities (Veblen,
1898; Myrdal, 1944; Steppacher, 1976; Berger, 2009). Also emphasiz-
ing the relative stability of institutions versus often rapid technologi-
cal change, critical institutional economics has, since Veblen, taken an
evolutionary approach in economics, rejecting the mechanical analogy
and stable equilibrium. This evolutionary perspective studies how and
why novelty, selection, retention and path dependencies generate trans-
formation processes in the economy, and how these processes influence
socioecological conditions and, thereby, the next sequence of transfor-
mations (see Hodgson, 1993; Witt, 2003; Dopfer and Potts, 2007). It also
implies a non-teleological perspective on the future, leaving evolution
or involution open to constructive and destructive orientations.
Working as an economist in the combined tradition of critical insti-
tutional and ecological economics resembles – to use an analogy,
although one that has its limits –adopting the perspective of a tropical
gardener rather than that of an agronomist working with monoculture
fields. It means considering the different layers (or strata) of production
(trees, bushes and seasonal plants) as a joint production dependent on
10 Julien-François Gerber and Rolf Steppacher

the interplay of ecological factors, such as light and shade, complemen-

tary nutrients and water demands, and based on a complex root system,
each strata having its own chronological structure while being part of
the whole. It means to think of how the services of these multiple living
resources, together with land, labor, and equipment, satisfy sets of het-
erogeneous and non-substitutable material and immaterial needs and
wants in asymmetrically structured cultural settings. Some resources
and services are monetized (produced for markets) and some are kept
outside monetization.
The symbol of a garden rather than of a field of investigation reminds
us of the basic characteristics of well-differentiated, well-integrated,
well-balanced and well-centered heterodox economic thinking, inde-
pendent of the scale at stake. It not only reminds us of the richness,
variety and complementarity of the history of economic thought – so
neglected today – but it also highlights the interactions, rather than the
splits, of the ecological, social and economic levels. Yet, it remains true
that what we can see and where we are blind, how we select research
questions, how we weight different parts, evaluate heterogeneous need
and want satisfaction, define efficiency and notions of costs, all obvi-
ously depends on our perspective, on our often implicit value premises,
and all of this is influenced by our conditioning process, including our
scientific training.

The need for integration in heterodox economics:

the relevance of K.W. Kapp

The institutional economist K. William Kapp (1910–76) is perhaps

today best known for his critique of the misleading character of eco-
nomic valuation in terms of market prices, a critique that he developed
into the ‘theory of social costs’.10 There, he focused on capitalism as
an institutional system that, rather than leading to the classical har-
mony of interests, repeatedly generates a privatization of benefits and
a socialization of costs (Kapp, [1950] 1978; see also Steppacher et al.,
1977; Steppacher, 1994; Elsner et al., 2006; 2011). Already within the
social costs framework, Kapp was one of the first economists to analyze
environmental issues in non-monetary terms, making him one of the
‘founding fathers’ of ecological economics. In his approach, he never
lost sight of the enduring social problems, sometimes now neglected by
centering on environmental degradations only.
However, perhaps more than anything else, Kapp was a powerful
voice promoting integration in economics (Kapp, 1961; 1976; 2011).
 Introduction 11

As argued also by Clive Spash in Chapter 1, the main obstacles to an

understanding of contemporary problems were the abandonment of
the search for a new unity of social and environmental knowledge and
the resulting compartmentalization and specialization of the social
sciences with their self-sealing and closed theoretical systems. Against
the stream, Kapp was convinced that a new paradigm in economics
was universally acceptable only if it were able to formulate the relation-
ships to nature and society in harmony with the findings of modern
sciences, a project that Spash has reintroduced today with his concept
of social ecological economics. While many may be sceptical about
the very possibility of integrating approaches, disciplines and prob-
lems, Kapp (1961, 206) expressed the hope that ‘We may still see the
day when the term dilettante and amateur refers to those who insist
upon viewing [economic] problems in isolation from their social [and
ecological] context[s]’; and he pointed to the danger of socioeconomic
research degenerating into ‘a series of meaningless, isolated and trivial
studies’ (203).
Kapp’s point of departure was an open systems approach based on
an evolutionary perspective. As early as 1960, he used this approach to
conceptualize the nature of organisms, especially humans, in his inte-
grative framework. He regarded living organisms as capable of main-
taining themselves in a steady state, temporarily avoiding the increase
of entropy as the result of an influx of nutrients and an efflux of waste
materials. This early understanding of the meaning of the entropy law,
and his knowledge of ecological principles visible in his theory of social
costs, allowed Kapp to agree with Georgescu-Roegen on the fundamen-
tal significance of the irreversible entropic character of economic proc-
esses as a basic principle for ecological economics.
But Kapp also explored some of the implications of the particular
meaning of openness when applied to society and to humans in partic-
ular. Kapp insisted on the quasi-embryonic state at birth and the period
of another year of ‘extra-uterine existence’ before the infant acquires
the ability to use his or her sensory and motor organs, assumes the
human erect position, and develops the ability to speak. These ontoge-
netic specificities account for the great openness of human potentiality.
Since the actualization of the latter universally depends on cooperation
and communication, self-affirmation and individuation, and on some
security and order, the relationship between the individual and society
is of the nature of a double-bind: individual potentials can only be actu-
alized in a process of enculturation which, at the same time, inevitably
conditions them in a culturally specific way.
12 Julien-François Gerber and Rolf Steppacher

Not only is any enculturation process selective in favoring the actu-

alization of some potentials at the cost of others, the conditioning
process provides at the same time the self-evident values which serve
to explain, rationalize and justify the same conditioning process. This
closing-down mechanism of circular causation is value-laden, emotion-
ally charged and to a large extent unconscious. This is why ‘freedom’ in
the sense of autonomous thought and feeling and deliberate action is
possible only on the basis of a laborious process of consciousness raising
on both the intellectual and the emotional level, a proposition as much
valid in ordinary life as in economic affairs and scientific activity. The
recognition of this double-bind relationship between the unique open-
ness of humans (as biological organisms) and culture (as a complex
structure of institutions) allows not only the integration of comple-
mentary aspects of facts and values, reason and feeling, conscious and
unconscious motivations, but it also provides a framework that helps
to distinguish between the universal and the culturally specific (Blum,
1976).
Kapp rejected the projection of culturally specific ways of satisfying
needs onto other contexts, criticizing also cultural relativism in its radi-
cal forms. The double-bind between individuals and society calls for
an approach from both sides: the universal biological, psychological
and social needs provide the basis for highlighting how institutional
arrangements may, in any culture, inhibit the self-actualization process
of groups (or even of the majority of a population) and the actualization
of new potentials as an evolutionary step to overcome locked-in situa-
tions of vicious circles. From the other side of the same double-bind,
the study of the social and ecological actual consequences of individual
and group activities provides the basis of a critical evaluation of those
actualizations that are institutionally encouraged. It is within this inte-
grative framework that Kapp studied the economy as an open system in
double-bind relationships with nature and culture.
The core question with which Kapp struggled throughout his life –
and which constitutes an everlasting stumbling block in heterodox
economics – is the tension between an economy’s rationality and the
socioecological reason centered on the long-term existential needs of
human beings (see Bromley and Marglin in this volume). He defined
the notion of social costs in such a way as to conceptualize this tension:
the definition covers all direct and indirect avoidable losses sustained
by third parties as a result of economic activities. In such processes,
unpaid costs are shifted to others, for instance to future generations or
across national borders (see Martínez-Alier in Chapter 4). Kapp came to
 Introduction 13

the conclusion that a break with the utilitarian principles of economic

theory was unavoidable (see Hodgson in Chapter 7). Instead, he focused
his research on an objectivization of social and ecological disruption
through the elaboration of minimum standards, welfare criteria and
environmental indicators (see Giampietro and Mayumi in Chapter 3).
Kapp was aware of the technical and political difficulties involved in
using socioecological standards and insisted on keeping them open for
modification in the light of new experiences and political processes. Yet
he considered this approach not only as consistent with his integrative
framework for social science but also the most realistic for policy for-
mulation. These questions will be further discussed in various chapters
of this book.

Some key integrative concepts: summary of the chapters

Most chapters of this book provide an overview of the latest work of the
contributors. It is possible to extract from each one of these texts one
(or several) concepts regarded as key integrative points between ecological
and critical institutional economics. In Chapter 1, Clive Spash shows
that Kapp (1961) identified and criticized five existing major integrative
approaches in economics: interdisciplinarity, historical method, use
of analogies, unity of science, and dialectical materialism. Instead of
adopting any one of them, Kapp developed his own strategy towards a
greater unity of sciences built around general integrative concepts like
his bio-cultural concept of human beings and an anthropology-ori-
ented notion of society. Spash argues that ‘social ecological economics’
has much to gain from Kapp’s approach. In the same intellectual tradi-
tion, we suggest a series of more specific integrative concepts that help
the building of a ‘science of man in society’. These concepts are the fol-
lowing: social metabolism (Chapters 2 and 3), value pluralism (Chapter
4), virtual, real and real-real levels of economic analysis (Chapters 4
and 5), property/possession (Chapter 5), ecological and economic
funds/services and stocks/flows (Chapter 6), co-evolution (Chapter 7),
sustainable community (Chapter 8), algorithmic/experiential knowl-
edge (Chapter 8), and the notion of a steady-state economy (Chapter
9). Together with a brief summary of the chapters, a concise descrip-
tion is offered of each one of these integrative concepts, in a general
and accessible way, relying on the work of the corresponding author,
but leaving aside technical details and internal divergences peculiar
to any scientific community. This section can therefore be seen as a
kind of toolkit intended for anyone – especially students – interested
14 Julien-François Gerber and Rolf Steppacher

in alternative concepts in economic theory. An alternative paradigm in

heterodox economics should include an articulation of these notions.
The latter must be meaningful to both ecological and critical institu-
tional economics (see table I.1).
What kind of notions are integrative concepts or, to use Kapp’s words,
‘common-denominators’? And what notions prevent the integration of
knowledge? As a first step, it may be helpful to distinguish between
the potential and the actualizations of a given notion (see Steppacher,
1995; 1996). Let us take ‘sustainable development’ as an example. On

Table I.1 Schematic comparison between eco-institutional heterodox econom-

ics and conventional economics (notions beginning with an asterisk are devel-
oped in the present book’s chapters)

Integrated heterodox economics Neoclassical economics

Open systems approach Closed systems approach

Economy as a social construct with its
history and specificities
Heterogeneous, socio-ecologically
embedded and institutionally
conditioned agents
Social and environmental ethics (incl.
needs fulfilled, equitable distribution,
sustainability)
* (Co-)evolution
* Metabolic view of society
Methodological pluralism
* Experiential and algorithmic
knowledge
* Value pluralism (incl.
incommensurability)
Circular and cumulative causation
* Focus on virtual, real, and real-real
economic levels
* Steady-state and selective degrowth
* Property and possession
* Funds/services, stocks/flows and their Natural capital
control
Biophysical and social indicators,
multi-criteria analysis
* Focus on the community, within the Focus on the individual, within the
biosphere
Focus on disadvantaged social groups
and classes
Economy as a deduced structure
based on a set of axioms
Universal self-centered, utility-
maximizing, rational and well-
informed agents with unlimited
wants
Utilitarian ethics (incl. optimal
welfare, Pareto efficiency,
externalities)
Optimization
Marginalist view of the economy
Methodological individualism
Algorithmic knowledge
(mathematical formalism)
Monetary commensurability
Competitive equilibrium model
Focus on micro- and macroeconomic
levels
Conventional growth
Focus on private property
Monetary indicators, cost/benefit
analysis
nation-state
Focus on capitalists and managers
 Introduction 15

one hand, ‘sustainable’ was a notion traditionally connected to the

use of the services of renewable funds (e.g., in forestry). But with the
‘Brundtland Report’ (1987), the notion was extended to include the use
of the stocks of nonrenewable mineral resources. The potential of the
notion ‘sustainable’ had thus allowed two contradictory and confus-
ing actualized forms. ‘Development’, on the other hand, is a notion
that, in the history of economic thought, has always presented a broad
potential. It was actualized in many directions according to different
paradigms and contexts. Today, however, the notion is often reduced
to a very specific actualized form corresponding to Western economic
growth. The combination of both notions in ‘sustainable development’
became very popular because it very well fitted the globalization of the
vested interests of capitalist societies in a historical context character-
ized by the breakdown of the Soviet Union, the weakness of indebted
‘developing countries’ and a growing concern with respect to ecological
degradation.
This example shows that the potential of a notion is broad and con-
tains many elements which are sometimes hidden and contradictory.
While we may think of it as universal or multi-contextual, its actu-
alizations are usually not. The actualization of a given notion results
from a conscious or unconscious process of differentiation, integration,
balancing and centering of the elements contained in its potential.
Through this process, the actualization becomes context-related and
more concretely and precisely defined. Yet it is important to keep in
mind the relationship between the two: the potential of a notion (say
development) is understandable only in the light of several actualized
forms of it, and the specificity of an actualized form (say development
as economic growth) becomes clear only if it is seen as a particular
manifestation of a potential, open to alternatives. In any communica-
tive process, the level of abstraction must be clear: a discussion based
on notions that are near their potentials usually stays empty, while an
argumentation relying on strongly actualized notions entails the risk
of projecting ethnocentric or other centric views if used in a different
context.
For our questions, it means that the use of integrative concepts needs
a carefully balanced approach searching intermediate levels between the
potential and the actualizations of notions. In order to be fruitful and
operative, they must be broad enough to contain the elements that are
important for the types of knowledge to be combined, and differenti-
ated enough to highlight the specificity of what is to be integrated.
As far as the integration of ecological and institutional economics is
16 Julien-François Gerber and Rolf Steppacher

concerned, we have to critically evaluate every ‘common-denominator’

with respect to its capacity to inform as to how and with what meaning
the concept is connected to the ecological, social, and economic levels of
analysis. Also, we must clarify in which way a given concept may hide,
exclude, project, or otherwise disturb the understanding of these inter-
actions. It is no surprise then that the present collection of essays takes
us through the labyrinth of some important notions located exactly at
the boundaries of the ecological, the social, and the economic.

Social metabolism
Focusing on the US economy and arguing that it is far from equilib-
rium and far from optimal, Robert Ayres starts Chapter 2 with a critical
appraisal of neoclassical economics. For him, one of its key limitations
is its lack of understanding of the nature and significance of energy for
the economy. He argues that in industrialized countries energy serv-
ices in the form of useful work represent one of the three major fac-
tors of production – along with capital and labor (see also Ayres and
Warr, 2009; Ayres and Ayres, 2010). In Chapter 3, Mario Giampietro
and Kozo Mayumi expand this idea and insist that in order to be clear
on sustainability issues it is a precondition to rely on social metabolic
analyses. They call for an urgent return to reality-checks, moving away
from the abstract assumptions of neoclassical economics. In particu-
lar, they argue that the phenomenon of peak oil has been severely
underestimated.
Both chapters can be linked to the integrative concept of ‘social
metabolism’. The latter allows creating new quantitative models high-
lighting both external and internal constraints on socioeconomic
development. The concept has a long history in the social sciences,
starting with Marx, who sought to express the material exchange rela-
tion between humans and nature (Foster, 2000). It was later expanded
by many authors, including Howard Odum (1971), Nicholas Georgescu-
Roegen (1971), Vaclav Smil (1987) and Marina Fischer-Kowalski and
Helga Weisz (1999). The concept of metabolism corresponds to all the
energy and material transformations that are taking place in an open,
living system. It can be divided into catabolism (the processes making
energy and materials available to the rest of the metabolism) and anab-
olism (the processes using the available energy and materials to build
the components). These complex sets of processes produce the func-
tional structure of a given economy (growth), ensure its reproduction,
maintain and repair its parts, and present a specific dynamic within a
given context. All of them are carried out in a situation of permanent
 Introduction 17

non-equilibrium: energy and materials continuously flow through the

economy. It is impossible to understand the role and effects of each
one of these processes unless their effects are contextualized within the
different levels of the entire metabolism. In brief, the concept of social
metabolism offers a new way of looking at the economy.
While standard economists and policymakers may conclude that a
given economy is ‘healthy’ by looking at monetary indicators, biophysi-
cal analyses may give a totally different picture. For instance, material
and energy flows may alter the environment, sometimes in very harm-
ful ways, and information on their magnitude and character is central
if one’s goal is to understand the (un)sustainability of a given economy.
Recently, climate change and peak oil have placed energy studies at the
top of the political and scientific agenda. Accordingly, the concept of
social metabolism has become increasingly popular because the idea
that societies or cities must have a metabolism of energy and material
flows to remain operational is easy to understand. Metabolic models
can be used to explore the feasibility, sustainability and desirability
of scenarios of alternative patterns of production and consumption of
goods and services (Giampietro et al., 2011a).

Value pluralism
Economic growth requires more materials and energy, undermining
the environment in ever more regions of the planet, and thereby the
conditions of existence of local populations – who complain accord-
ingly. Linking ecological and poverty issues, Joan Martínez-Alier shows
in Chapter 4 how the growth dynamics of capitalism generate eco-
logically unequal exchange and give rise to what he calls ecological
distribution conflicts that are today as significant as the more classic
struggles between capital and labor. He argues that the political dimen-
sion of social metabolism can be fruitfully studied by linking insights
from ecological economics, political ecology and environmental his-
tory. Indeed, there are many links to be better understood between
each society’s metabolic profile and social conflicts at different scales.
However, these conflicts do not uniquely result from metabolic pat-
terns per se, as if such patterns were disconnected from the rest of
society. Firstly, protests are also directed against an institutional config-
uration that defines the room for manoeuvre of companies and there-
fore of a particular economic metabolism. Secondly, these conflicts are
expressed as a struggle over valuation, a crucial issue in any search for
an integrated paradigm in economics. How are such conflicts to be
dealt with? The approach of standard economics (even when labeled
18 Julien-François Gerber and Rolf Steppacher

‘environmental’) is to use a common unit – a monetary numeraire – for

all the different values and then to look for a trade-off between all of
them within a market context. This conventional approach assumes
the existence of value commensurability. Ecological economists, in
contrast, acknowledge value incommensurability and this is one of
their founding principles (Martínez-Alier et al., 1998). Nobody knows
how to convincingly estimate the monetary price of cultural, social, or
ecological impacts of economic activities. It is therefore misleading to
try to reduce the diversity of languages of valuation (e.g., livelihood,
identity, territorial rights, sacredness) to a single monetary measure that
denies the legitimacy of other languages.11 If we accept value incom-
mensurability, it appears that only a truly democratic debate can solve
valuation contests. Social multi-criteria evaluations can help to reach
compromise solutions (Munda, 1995). In the real world, however, it is
usually the most powerful actor who imposes his or her own viewpoint
and language of valuation. In this context, quite obviously, conflicts are
sometimes the only way to change power relations favoring the domi-
nant actors and to advance towards more equity and sustainability
(see Martínez-Alier, 2002). In the following chapter, conflicting valua-
tion principles are linked to different aspects of the core institution of
property.

Property/possession and the three levels of economic analysis

In Chapter 5, Rolf Steppacher and Julien-François Gerber elaborate on
the institution of ‘property’, following a new interpretation of the old
distinction between property and possession (Steppacher, 2008). What
is usually referred to as ‘property’ in fact contains two very different
economic potentials: it defines use rights but it can also serve as secu-
rity in credit relations and therefore, more broadly, in the creation of
money. This unique double potential generates the particular dynamics
of capitalism but also its basic socioecological contradictions in valua-
tion, as shown in the financial crisis, chronic poverty, and the peak oil
situation. The authors argue that the very foundation of Western-type
development is constituted by the combination of the engagement of
property in credit relations together with the unique stock-flow charac-
teristics of mineral resources. The resulting evolutionary path of capital-
ism contains, on its creative side, continuous innovations and growth
but also, on its destructive side, the longstanding and unresolved (and
maybe under actual institutional and technological conditions unre-
solvable) social and ecological destruction.
 Introduction 19

Within modern economies, such destruction often results from the

contradiction between the very different rationales of property and
possession. There is indeed a fundamental antagonism between, on one
hand, the virtual or financial level of the economy – governed by the
homogeneous and abstract rationality of the property aspect of assets –
and, on the other hand, the level of the real economy (production and
distribution) and the level of what Martínez-Alier (2009a) has called
the real-real economy (material and energy flows), both of them being
evaluated by corresponding indicators reflecting the possession aspects
of assets (see also below). The complex relationships among these three
levels of the economy – and, for that matter, of economic theory – repre-
sent a crucial domain of investigation for anyone seeking integration in
economics. Moreover, the distinction between property and possession
is also relevant in the quest for more equitable and sustainable institu-
tional alternatives, as the latter may not only have to be found within
property redistribution but also within possession-based orientations.
In the following chapter, the ambiguity of natural capital is discussed
and related to its implicit property foundation.

Funds/services, stocks/flows and property (instead of natural

capital)
In Chapter 6, Lisi Krall and John Gowdy tackle the important ques-
tions of the significance of ‘natural capital’. Although the latter could
be seen superficially as an integrative concept, the authors show that
it is not. The concept has been used uncritically by many ecological
economists as a pragmatic way of introducing sustainability issues into
conventional economics. However, in so doing, they have reduced the
complex historical relationship between the economy to the biosphere
to standard discussions about the substitutability of natural and man-
made capital and about the determination of the ‘correct price’ of natu-
ral resources. By combining Georgescu-Roegen’s and Veblen’s critiques,
Krall and Gowdy provide the basis for a much more fruitful and subtle
discussion of ‘natural capital’ based on the concepts of funds, stocks,
and institutions. For them, the commodification of nature is the dan-
gerous illusion that lies behind this concept.
By primarily referring to income issues, the concept of ‘natural capi-
tal’ hides the crucial facts that it is defined by its historical and institu-
tional context and that it encompasses various kinds of resources with
radically different biogeochemical characteristics. Georgescu-Roegen’s
distinction between funds and stocks are much more precise on the
20 Julien-François Gerber and Rolf Steppacher

specific ecological and economic potentials of natural resources with

respect to growth and sustainability. Funds (e.g. biotic resources) are
renewable and provide both ecological and economic services, while
stocks (e.g. mineral resources) are limited material reservoirs and pro-
vide flows of energy-matter. The growth potential of biotic resources
(funds) is naturally limited, but it has the advantage of being sustain-
able, while mineral resources (stocks) are capable of inducing exponen-
tial economic growth, although they become irreversibly depleted and
the related pollutions may saturate the assimilation capacities of the
environment.
Veblen, for his part, showed how the notion of capital is deeply
embedded in the Western value-laden institution of property, the stra-
tegic forms of which are monopolized by capitalist (‘vested’) interests.
The latter are not primarily concerned with maintaining the social and
material sustainability of society; rather, they are interested in main-
taining a return on investment actualized by the potential of property.
In other words, capital is defined by the money-based property aspect of
assets and not by their material possession side (see above). There is thus
a deep tension between the pecuniary and the biophysical use of ‘natu-
ral capital’ because the idea of sustainability has different meanings for
the three levels of economic activity that we mentioned above. As Krall
and Gowdy put it, ‘The tension between the pecuniary and the physical
aspect of natural capital is impossible to resolve unless, of course, we are
willing to question the fundamental structure of the market economy’.
According to them, the current concerns of economic theory wrongly
focus on accounting matters instead of dealing with more fundamental
issues of economic purpose and organization.

Evolution
Evolution – including in it its co-evolutionary variant – represents a
key integrative framework for understanding changes in complex eco-
nomic, social, and ecological systems. It is a foundational notion for
several heterodox currents, including institutional, ecological and
Marxian economics. An evolutionary perspective aims at explaining
how and why novelty is generated, and how and why some elements
are retained and passed on while others are not. According to Geoffrey
Hodgson, in any system in which variation, inheritance and selection
are present, Darwinian evolution occurs. However, this does not mean
that biological and economic evolutions are similar in other respects.
At the more concrete level of analysis, socioeconomic explanations
that invoke only the three Darwinian principles are usually incomplete
 Introduction 21

and domain-specific mechanisms have to be added (see Hodgson and

Knudsen, 2010).
Taking climate change as an example, Hodgson argues in Chapter
7 that mainstream utilitarianism – based on self-interest and mon-
etary valuation – is a counter-productive basis for providing meaning-
ful answers to the ecological crises. Rather, he argues that biological
and cultural evolution have endowed us with altruism and moral val-
ues that are central in the pursuit of sustainability and that cannot
be reduced to preference functions. According to him, an explicit rec-
ognition of the role of (Darwinian) evolution may stimulate useful
theoretical developments on interactions between organizations and
ecosystems. It provides a meta-theoretical framework wherein many
different insights can be integrated and further developed. Although
Darwinism does not immediately provide the answers, this unifying
and historical framework may facilitate our understanding of the cur-
rent institutional (under)developments with respect to pressing social
and environmental problems, including today’s major crises.

Community and systems of knowledge

In Chapter 8, Stephen Marglin discusses how neoclassical economists
promote the construction of a society in the image of their own theory.
Their normative agenda is essentially to convince people that markets
are good for them, independent of the consequences on the environ-
ment and the community.12 Marglin argues that the very foundational
assumptions of neoclassical economics exclude even the possibility of
adverse consequences for these two domains. Indeed, the assumption
that society is merely a collection of Homo economicus implies that there
is no community to be damaged and no way of improving upon a per-
fect market with regard to ecological conditions. As John Rawls (1972)
has noted, there is a deep tension between a bargaining conception and
a community conception of social relationships.
An alternative integrated paradigm in economics must be able to deal
with what is being sacrificed on the altar of capitalist growth. Marglin
has elaborated two important integrative concepts. The first one is
only briefly mentioned in his present contribution: it is the distinc-
tion between ‘algorithmic’ and ‘experiential’ knowledge (see Marglin,
2008). These two systems of knowledge are distinct ways of understand-
ing, perceiving, apprehending, and experiencing reality. Algorithmic
knowledge is characterized by rational deliberation and is appropriate
to a calculating, maximizing Homo economicus. On the contrary, expe-
riential knowledge is characterized by its dependence on intuition and
22 Julien-François Gerber and Rolf Steppacher

insight, by its tangible and emotional nature, and by its embeddedness

in a given socioecological context. According to the modern ideology
of knowledge prevailing in neoclassical economics, algorithmic knowl-
edge is not only favored over experience, it is also regarded as the sole
legitimate form of knowledge. If this were true, then local, traditional,
activist, spiritual, or domestic experiential knowledge would have noth-
ing to add to environment issues, the community’s welfare, or the pri-
orities of our lives. Marglin’s distinction allows integrating aspects of
the economic reality that would otherwise remain unseen. Within the
discipline of economics, similar distinctions have arisen several times:
Veblen distinguished between ‘speculative knowledge’ and ‘work-day
knowledge’, while Georgescu-Roegen devoted an entire chapter of his
1971 magnum opus to ‘Science, arithmomorphism, and dialectics’
(Marglin, 2008). A similar distinction can also be found in the ‘post-
normal’ (versus ‘normal’) science framework developed by Funtowicz
and Ravetz (1994), which is dear to many ecological economists.
Marglin’s second integrative point is the notion of community and
the need to sustain it. According to him, anything conventional econo-
mists cannot measure – like community – simply does not exist for them.
Indeed, ‘There is no vocabulary, no language, for discussing the impact
of the market on community, no way of posing, much less answering,
the question of whether what has been, and is being, lost in terms of
community outweighs the gains from continuing the expansion of
the cornucopia available to the average consumer in the rich countries
today’. Taking the current financial crisis as an example, Marglin exem-
plifies how, through the credit system, economic theory and practices
have essentially ignored community, while viable alternatives are pre-
cisely to be found within community-based credit organizations. More
generally, a decentralization of socioeconomic decision-making – from
large governmental or private agencies to the community – should be
enhanced (O’Hara, 2007). It is plausible, Marglin implies, that today’s
crises will stimulate courageous thinking about new directions in eco-
nomics. But in order to be successful, heterodox economists must ally
themselves to broader social movements aiming at widening the politi-
cal discourse on issues of growth and social solidarity.

Steady-state economy
The concept of a steady-state can be found in several schools of econom-
ics. John Stuart Mill did not share the pessimistic vision of Smith and
Malthus regarding the ‘stationary state’ of a given economy and was
convinced that humans would ‘be content to be stationary, long before
 Introduction 23

necessity compels them to it’ (Mill, [1848] 1866, 454). Marx also envis-
aged, beyond capitalism, a possible state of equilibrium (see Kerschner,
2010) and Keynes (1936, 220) described a future ‘quasi-stationary com-
munity’ characterized inter alia by a stable population, the absence
of wars and full employment. These views are of course diametrically
opposed to neoclassical economics which continues to proclaim that
unlimited economic growth is possible and that it is the main remedy to
the world’s problems.13 Against these views, Herman Daly’s concept of a
steady-state economy – the background notion of Chapter 9 – is inspired
by among others, Georgescu-Roegen’s flow-fund model and his ther-
modynamic critique of growth (see also Jackson, 2010). Daly (1977, 16)
described a steady-state economy as ‘an economy with constant stocks
of people and artefacts, maintained at some desired, sufficient levels by
low rates of maintenance “throughput”, that is, by the lowest feasible
flows of matter and energy from the first stage of production (depletion
of low entropy materials from the environment) to the last stage of con-
sumption (pollution of the environment with high entropy wastes and
exotic materials)’. According to Daly, such a steady-state economy would
eliminate the recurrent financial crises, improve distributional issues,
and address peak oil and climate change. For this purpose, he offers here
ten specific policy proposals for moving towards such an economy.
In recent years, the concepts of ‘sustainable degrowth’ (décroissance in
French) has found a revival in France, Italy, Spain and other countries
as a social movement as well as in the academic literature (see Martínez-
Alier, 2009a; Martínez-Alier et al., 2010; Latouche, 2010; Bonaiuti,
2011; Kallis, 2011). Degrowth supporters have often failed to question
the end-point of ‘degrowth’. Instead, their argument focuses on the
fact that rich industrialized countries have already surpassed sustain-
able limits and that some form of selective and voluntary degrowth is
therefore indispensable. Even though it is difficult not to agree with
this, there is no reason for rejecting the long-term objective of a global
steady-state economy, at some mutually agreed upon sustainable level
of throughput. In order to reach it, some degrowth would need to occur
in the North while the South would grow some more. Degrowth and
steady-state are in fact complementary notions (Kerschner, 2010).

Some final thoughts on the current world economic order

In the last chapter, Daniel Bromley reflects on the achievements of the
current world economic order, referring especially to the financial cri-
sis and to Africa’s poverty. Beyond ambient triumphalism, he raises a
number of central issues around the presumed superiority of capitalism.
24 Julien-François Gerber and Rolf Steppacher

He argues that the reasons for the enthusiastic support of globalized cap-
italism are found in the realm of ideas and not in the realm of data, and
that this is why its specific performances are always beyond discussion.
Bromley reminds us that capitalism is a system characterized by enor-
mous social inequalities. Paying more to those at the bottom of the
income scale is a ‘bad idea’ because it would make firms less competi-
tive; and paying less to those at the very top is also a ‘bad idea’ for the
same reason. In such system, therefore, incomes at the bottom always
tend to be the smallest possible, while those at the top always tend to
be the greatest. In addition, Bromley notes that the popular connection
between markets and freedom is much too simple: ‘As long as I must
sell or rent my labor power in order to acquire money with which to
eat, I am not free’. What is more, democracies cannot survive if they are
understood only in terms of the affirmation of the rights of individuals.
At the core of a true democracy must be found the correlated concept of
the duties – obligations – of all individuals. Finally, capitalism is charac-
terized by a political culture deeply rooted in ‘possessive individualism’
with all its deleterious consequences.
Implicitly bridging a gap between critical institutionalism and eco-
logical economics, Bromley says that contemporary capitalism blinds us
to its inequities and socioecological absurdities as we are being ‘crafted’
by its own institutional set-up. Capitalism does not aim at allocating
resources in a sustainable way or at maximizing social welfare. ‘Rather,
the privilege and honor of system design rests with those who have
controlled the dominant income and wealth positions in society.’ In
this context, the shortcomings of neoclassical economics may appear
as secondary compared to the general political commitment to global
capitalism. In fact, it turns out that ‘much mainstream economics is
nothing but apologetics for the reigning political Zeitgeist’.

Notes
1. In fact, Smith mentioned not only the positive aspects of the division of
labor; he also powerfully stressed the risk that ordinary workers doing repeti-
tive tasks would become ‘as stupid and ignorant as it is possible for a human
creature to become’ (Smith, [1776] 1937, 734).
2. Also called ‘classical’, ‘original’, ‘old’ or ‘American’ institutionalism.
3. Part of Walras’s preconceptions has explicitly been to prove that free compe-
tition generates a maximum of utility (Walras, 1898).
4. Joseph Schumpeter and John Maynard Keynes were certainly prime examples
of this, although their work did not provoke a paradigm shift in the sense
defined here (on the limits of Keynes’ critique, see Naredo, 2003, 339–49).
 Introduction 25

5. A student movement for ‘post-autistic economics’ was created in Paris in

2000. They complained about the narrowness of their economics educa-
tion and claimed instead for a broader approach that would enable them
to connect with the complex economic realities of their time. In 2001,
the movement was endorsed by doctoral students at the University of
Cambridge with a petition entitled ‘Opening Up Economics’, later signed
by 797 economists. The same year, economics students from 17 countries
gathered in Kansas City and released an international open letter to all eco-
nomics departments, calling on them to reform economics education and
research. In 2003, economics students at Harvard University launched their
own petition, demanding an introductory course that would have ‘better
balance and coverage of a broader spectrum of views’ and that would ‘chal-
lenge students to think critically and deeply about conventional truths’.
6. Earlier, Steppacher and Leipert (1987) suggested the term ‘eco-social eco-
nomics’ in a collection of K.W. Kapp’s articles in German.
7. Several of them took part in two conferences that we organized at the
Graduate Institute of International and Development Studies in Geneva in
2009 and 2010.
8. Aristotle famously distinguished oikonomia – the art and science of the
material provision of the oikos or home – from ‘chrematistics’ which we
now call ‘economics’ and which is the study of market price formation for
the purpose of making money.
9. Institutions are sometimes understood as organizations (such as the
Catholic Church, the United Nations). However, critical institutionalists
tend to distinguish carefully between institutions and organizations (see
Bromley, 1989).
10. The astonishing fact that most of the discussion on social costs is based on
Ronald Coase (1960), ignoring entirely the earlier and fundamental contri-
bution of Kapp is discussed in Berger (2011).
11. There certainly is a parallel with today’s domination of Western culture
(and the English language) over the world.
12. Community can take many forms. It is the set of connections that bind
people to one another economically, socially, politically, and spiritually.
Traditional communities are not simply about shared spaces, but about
shared participation and experience in producing and exchanging goods
and services, in governing, entertaining and mourning, and in the physical,
moral, and spiritual life of the community (Marglin, 2006). The undermin-
ing of the latter is for instance revealed in the substitution of impersonal
relationships mediated by goods and services for the personal relationships
of reciprocity and the like.
13. For neoclassical economists, infinite growth is physically possible because of
a ‘dematerialization’ of the economy and the substitutability of nonrenew-
able resources, both of which being the results of unlimited technological
progress. This is part of the belief system that Georgescu-Roegen (1976c)
identified as ‘economic myths’.
1
Towards the Integration of
Social, Economic and Ecological
Knowledge
Clive L. Spash

Introduction

In his book Toward a Science of Man in Society, K. William Kapp explored

the possibilities for integration across the social and natural sciences
and for greater coherence across the disciplines constituting the social
sciences. His basic thesis explained the separate qualities of the physi-
cal (inanimate matter), biological (living organism) and social (human
society) realities, but also proposed possibilities for linking knowledge
and for how integration could be made feasible. In this chapter I will
relate aspects of this work to ecological economics.
Kapp died in 1976 before modern ecological economics was estab-
lished in the late 1980s, but he had already covered much of the ground
relevant to the movement and considered key issues, including (among
many other things) monetary valuation of the environment, the role
of institutions, corporate power, the consumer society and participa-
tory planning. He had recognized that, while the intrinsic connection
between the inorganic and organic was being explored with vigor, the
connection between the biological and social sciences was far from
being accepted, even in principle (Kapp, 1961, 124). Yet, this was a legit-
imate and necessary step for the integration of knowledge.
Ecological economics is a movement which, by definition, aims to fill
that gap. However, understanding how this might be achieved has been
largely left in abeyance. Within ecological economics there has been
little discussion of the philosophy of science, ontology or epistemol-
ogy. As a result, how knowledge integration might proceed in practice is
left to the individual researcher. Such an enterprise might at least have
learnt from others about the pitfalls to avoid and the possibilities for
success. Kapp’s work, then, provides one source of guidance.

26
 Towards the Integration of Knowledge 27

Integration and ecological economics

Kapp was deeply concerned about the compartmentalizing attitude in

academia and the increasingly fragmented character of human under-
standing. In part this was due to the ensuing contradictions evident both
across and within disciplines. Ecological economics was established on
the basis of recognizing a major failure along these lines, namely the
ignorance among economists as to the physical reality of the world in
which the economy is embedded. This was not a new revelation (see the
history of energy–economy research in Martínez-Alier, 1990), but a for-
gotten one. Kapp himself had tried to raise the profile of the same prob-
lem. That addressing this issue needs a fundamental break with the past
silo mentality and serious integration of disciplines would seem rather
self-evident. Such integration is also an important and central require-
ment for success in addressing social and environmental problems.
However, instead of ecological economics offering an integrative
approach we are left with a movement founded on vague and unstruc-
tured appeals to transdisciplinarity and holism (Costanza, 1989) and
methodological pluralism (Norgaard, 1989), which tend to hide more
than they reveal. The first introductory book (Costanza et al., 1998), by
leading American figures in the society, maintained an uneasy balance
between requesting a new worldview to address our social and environ-
mental woes and not ejecting the body of orthodox thinking. Daly, as
a co-author of that book has apparently since developed in a different
direction. The textbook by Daly and Farley (2004) invokes both con-
cepts of a Schumpeterian new pre-analytical vision for economics and a
Kuhnian revolutionary change. At one point they propose rejection of
a value basis in subjective preferences and deride pluralism. They state:
‘We must have a dogmatic belief in objective value, an objective hier-
archy of ends ordered with reference to some concept of ultimate end’
(Daly and Farley, 2004, 42). There are some vague references to God and
a footnote citing the Christian apologist C.S. Lewis. Their main con-
cern is, then, that the scale of the economy and income distribution be
addressed first and, after that, economic systems can proceed to pursue
market efficiency. The goal of economic growth is replaced by that of a
steady-state economy at optimal scale.
This attempt at a kind of dogmatic closure of debate as to the con-
tent, meaning and direction of ecological economics is far from help-
ful. Kapp warned of adopting mythological, religious or secular world
views a priori as a means of integration. On the basis of the epistemo-
logical insight that all knowledge is provisional, he saw the potential
28 Clive L. Spash

to become locked into an unthinking position as being dangerous for

society. As he stated (Kapp, 1961, 49–50):

If there is one thing we have to guard against it is the temptation

to interpret the world in terms of uniform and unifying principles
which may be simple and comforting but without confirmation. For
the results of such unification in terms of general worldviews is often
imposition of integration ‘from the outside’ and rationalization of
preconceived unity into dogma.

Dogma is not open to question or refutation and, therefore, is inher-

ently unscientific.
In this respect another threat to ecological economics comes from the
imposition of orthodox economic thought. For example, the European
textbook on ecological economics by Common and Stagl (2005) adopts
much from neoclassical economic theory, including consequential
utilitarian anthropocentrism. Such mainstream economic framing can
also be seen as dogmatic in the resulting a priori dismissal of coun-
ter evidence (such as the importance of rights-based ethics concerning
non-humans, e.g., Spash, 2000b; Spash and Hanley, 1995) and a priori
exclusion of alternative value systems (e.g., deontology, virtue ethics,
see O’Neill et al., 2007; O’Neill and Spash, 2000). For ecological eco-
nomics there is a serious need to avoid the very real dangers of dog-
matic imposition of unity. The threat of this from orthodox economics
is perhaps the more serious because of the historical development of the
movement (Spash, 1999; 2011a).
Ecological economics has in part been a bridging or linking exer-
cise between ecological impact studies and unreconstituted neoclassi-
cal environmental economics. This was, indeed, the vision of the first
president of the international society and editor of the journal Ecological
Economics (Costanza, 1989). As I have explained elsewhere, this approach
created an ‘ecology and economics’ conjunction, not a new integrated
interdisciplinary endeavor, and was particularly strongly pursued in
North America (Spash, 1999). The legacy of that start has not been gen-
erally beneficial to the movement. In the United States the field has been
moribund for some years. In this regard let me offer an anecdote. When I
attended a meeting of the United States Society for Ecological Economics
in 2005, Robert Costanza asked, while giving a plenary address, how
many present had attended the founding Washington, D.C., conference
in 1990, where there had been over 370 participants (Costanza, 1991, xi);
just two people raised their hands – Herman Daly and myself.
 Towards the Integration of Knowledge 29

Another problem has been domination of a narrow form of pragma-

tism and a failure to address criticism (exactly in the same mode as
neoclassical economics). This has become abundantly clear from the
monetization of ecosystems services (Norton and Noonan, 2007) and
from the related use of benefit transfers (Spash and Vatn, 2006). Similar
problems relate to the uncritical adoption of the capital approach, the
promotion of tradable permits and the use of adjusted national income
accounts. This is the kind of problem which Kapp (1961, 68) referred to
as ‘the tendency to become a self-sealing system that selects data with a
view to making the evidence fit the theory’.
The current state of ecological economics is one where some now call
for a rebranding exercise under the title of ‘Sustainability Economics’
(Baumgartner and Quaas, 2010; Söderbaum, 2008; 2011), while others
have moved on. Rebranding is a purely political strategy on behalf of
those who, for good reason, have become alienated from the ‘ecology
and economics’ movement and who regard ecological economics as
having failed to achieve the interdisciplinary integration they desired.
Yet, just changing names does nothing to address the underlying issues
which concern how true integration and progress can be achieved, both
across natural and social sciences and within the social sciences. Nor
does running from one movement to the next help address the domi-
nance of orthodox economics over heterodox thought.
The real underlying issues concern how the basic messages of ecologi-
cal economics can be incorporated into a unified approach. This means
recognition of the physical basis of social and economic activity. Clearly,
messages about the importance of thermodynamics and material bal-
ances with their implications for resource use that go back to the prehis-
tory of ecological economics (Martínez-Alier, 1990). They reappear in
ecological footprints (Rees, 1996; Wackernagel and Rees, 1997), social
metabolism (Krausmann et al., 2008a; Schandl and Schulz, 2002) and
degrowth (Kallis, 2011). These are fundamental understandings of the
biophysical world. They call for fundamental re-visioning and transition
away from a consumerism built upon fossil fuels, with its gross political
and social inequities, and thereby connect to foundations in ecological
and scientific utopianism. That this has political and institutional impli-
cations is inevitable because of the stark realities that the few benefit
at the expense of the many, and that irreplaceable resources are being
squandered on luxuries for the present rich at the cost of necessities for
the future and present poor. Social structures and the power of organi-
zations and institutions are then top priorities for research. This makes
ecological economics essentially a social science subject area related to
30 Clive L. Spash

political economy and not a branch of natural resource management.

These are points to which I will return in the penultimate section, where
I describe the contrast between what I term social ecological economics
and new resource economics. First, I will explore how we might improve on
the dismal state of integration in ecological economics.

Approaches to integration

In ecological economics the attempts at integration have been largely

implicit. Kapp notes five major approaches, which can be summarized
as: interdisciplinarity, historical method, use of analogies, unity of
science and dialectic materialism. He is critical of all approaches and
develops his own combining aspects of interdisciplinarity and a form
of unity of science built around concepts. He also notes the importance
of history of thought in aiding understanding of the processes by which
intellectual synthesis has succeeded or failed, but this does not in itself
achieve integration of contemporary knowledge. Ecological econom-
ics has mainly involved concerns over interdisciplinarity and clearly
has made use of analogies from the ecological and biological sciences.
In addition, there has been some, if minimal, reflection on method-
ology and the possibility of unity through a common epistemology
(e.g., Munda, 1997; Tacconi, 1998). I will, therefore, discuss analogy, the
unity of science and interdisciplinarity.

Analogy
Drawing analogies from other areas of knowledge has been important
in the synthesis of information. Historically, this has resulted in trans-
ferring concepts, methods and modes of thinking across disciplines.
Such use of analogies is particularly important when developing a
new area of research, such as ecological economics. As Kapp (1961, 51)
explains:

Particularly during the formative stages of a new discipline, analogi-

cal comparisons and the exploration of likenesses are often the only
procedures available for deducing tentative conclusions in a new and
as yet unexplored field of research.

Despite the potential power, and strong attraction, of drawing analogies

there are also some ‘serious dangers which have rarely been avoided’
even by those conscious of the problems (Kapp, 1961, 57). These are par-
ticularly important for ecological economics because of the tendency
 Towards the Integration of Knowledge 31

to borrow directly and uncritically from ecology in terms of systems

understanding (e.g., with respect to resilience and co-evolution).
Reasoning by analogy has serious drawbacks as is evident in orthodox
economics, which is used here as an example. Two issues highlight the
problems. First, the tendency to pay inadequate attention to the nature
of the subject of direct concern means assuming fundamental similar-
ity, if not identity, between qualitatively different phenomena. Thus,
analogies from physics have been used to explain society, with atom-
istic reductionism leading to a belief that the social is no more than a
collection of individuals, and society can therefore be ignored as a dis-
tinct phenomenon. Second, the selection of specific analogies involves
hidden political and ideological elements. This may involve placing
conclusions into the premises and then proceeding to theories, but pre-
senting the logic in reverse to appear ‘scientific’. In borrowing analogies
from mechanics, neoclassical economics assumes human behavior is a
timeless reaction to information (e.g., prices) in an equilibrium setting
so that, under conditions of perfect information, rational economic
responses become automatic and stabilizing. The mechanical analogy
blocks the understanding of human behavior as complex, fallible and
operating under conditions of strong uncertainty
By their nature, analogies are creative generalizations aiming to illus-
trate or illuminate, and they borrow from other understandings in a
different field of knowledge. The danger, then, is to apply them without
attention to the distorting effects which arise from lack of context and
detail. Thus, Kapp argued that the greater the complexity and qualita-
tive differences between subjects the less room there is for analogies.
This implies borrowing from within the same general field of study is
likely to prove less problematic. So the fact that biophysical sciences,
such as ecology, are qualitatively different from the social sciences
should alert us to the dangers of integration by analogy.
In ecological economics a major analogical transfer has been based
upon understanding of forest ecosystems. This has built itself into a
whole movement around resilience and adaptive management. The
original idea was expressed by Holling ([1986] 2009) and his diagram-
matic exposition included the concept of creative destruction (later
dropped) with a reference to Marx and Schumpeter. Holling ([1986]
2009, 95) boldly put forth a table in which he claimed ‘possible analo-
gies between ecosystem function and functions or typologies proposed
for other systems’. Those other systems were economics, technology,
institutions and psychology. Thus, Holling moves from an understand-
ing of forest ecosystems to explaining an entire body of human and
32 Clive L. Spash

social sciences. Since the original article, an organization called the

‘Resilience Alliance’ has taken on the job of pursuing and promoting
such analogies in ever-expanding realms. That ecosystems have a natu-
ral rhythm of change is used to imply the same cycles are followed
everywhere and so the same phases – exploitation, creative destruction
(now termed release), reorganization and renewal – are explanations for
everything from human psychology to society! Yet, in some contradic-
tion to this cyclical analogy’s rather deterministic prospects for society,
humans are expected to manage and adapt, thus implying these natural
rhythms are perhaps not so deterministic for human society after all?
Similarly, there has been a serious attempt to transfer analogies
from evolutionary biology. In more recent times this has appeared in
the form of co-evolution being used to describe human development
(Gowdy, 1994; Kallis and Norgaard, 2010; Norgaard, 1994), and this
has been seen by some as a foundational idea for ecological economics
(Munda, 1997). Co-evolution arose as a term explaining the relation-
ship between butterflies and plants (Ehrlich and Raven, 1964). It relates
to the fitness of genetic traits within each species being largely gov-
erned by the dominant traits in the other. The term fitness in the bio-
logical sciences refers to surviving and reproducing, and so basically to
population size. Fit species survive, reproduce and become more abun-
dant. Richard Norgaard has used the analogy to explain the impacts of
modern industrial agriculture on the environment and the resulting
lock-in of technology to chemical warfare on Nature (now shifting to
genetic warfare via bio-engineering). The story told in the specific con-
text is informative. Co-evolution could be taken as a modern version of
Veblen’s cumulative causation, taken from Darwinian theory (Veblen,
1898, 378). However, the idea is extended too far by Norgaard (1994, 41)
when we are told that values and beliefs are merely matters of fitness
and cultural traits are much like genetic traits!
Both these analogies seem to have arisen in part as a reaction to the
valid criticism of neoclassical economics as having become dominated
by analogies from physics. Going back to Veblen (1898) there has been
an argument that economics should relate to biological and evolution-
ary science. The appearance of the above analogies in ecological eco-
nomics is then a strong critical reaction to the dominant analogies from
physics. Thus Norgaard (1994) spends much time attacking the physics
analogy in neoclassical economics before presenting his preferred bio-
logical science alternative. As noted earlier, Kapp recognized the need
for learning based upon the connections between the biological and
sociocultural disciplines.
 Towards the Integration of Knowledge 33

However, it is a mistake to conclude that the integration of social

knowledge can be achieved by viewing man and culture in the per-
spective of evolutionary time or by taking account of the findings of
biology about the human organism. What speaks against this simple
formula is the fact that ... man and human society represent qualita-
tively different levels of organization. (Kapp, 1961, 124)

Thus, while there may be some potential for learning from ecological
analogies there is also much danger when they become dominant to
the neglect of the subject to hand, which is humanity in a human soci-
ety. For instance, the move towards evolutionary analogy runs the risk
of equating human behavior to some selfish genetic determinism or
seeing human systems as purely cyclical systems subject to biophysical
laws and nothing more. Where then is human volition? Neither physics
nor biology nor ecology will provide an explanation of human society.

The presence in man of elements of consciousness, volition, and pur-

pose, and the human capacity to select alternative courses of action
militate against any indiscriminate transfer of concepts, propositions,
and methods of thought from the physical and biological disciplines
to social analysis. While such transfer may have succeeded in creat-
ing a semblance of integration of our knowledge in the past, it nev-
ertheless belongs to those endeavors of reasoning by analogy which
sooner or later leads to ‘reductionism’ and are bound to break down
because of the manifold qualitative differences between human soci-
ety and organic and inorganic nature. (Kapp, 1961, 124)

Unity of science
The unification of science by logic and methodology was promoted
by the left wing of the Vienna Circle in their search for a logical and
empirical approach to understanding the world.1 This was pursued in
two distinct but connected ways. One was an analytical search for a
pure language by which scientific knowledge could be created free from
metaphysics, pursued by Rudolp Carnap. The other was Otto Neurath’s
idea of a more broadly conceived meta-theory of science that included
history and sociology of science and actively sought a place for social sci-
ence in the unified approach (O’Neill and Uebel, 2004, 78–9). Neurath
and Carnap edited The Encyclopaedia of Unified Science with Charles
Morris. Borrowing from Creath (2011) their respective positions can be
summarized as follows. Carnap’s call for unity of the language of sci-
ence is most simply understood as requiring that the various claims of
34 Clive L. Spash

the separate sciences should be publicly testable in a common observa-

tion language. Neurath’s position was to avoid a priori methodological
divisions between natural and social sciences, and also to connect the
various sciences so they could be used together to solve complex human
and social problems.
Clearly ecological economics has a strong sympathy with Neurath’s
position in terms of unifying knowledge to address serious complex
problems and, while Carnap’s abstractions appear less practically rele-
vant, the aim for public evidence of confirmability also seems desirable.
Yet, the project seems contradictory in practice because Carnap was try-
ing to reduce down to a simple primary source the logic of testable state-
ments while Neurath was aiming to collect all the intricacies of natural
and social scientific language in a large multi-volume encyclopedia. In
the end the encyclopedia became a collection of articles on the philoso-
phy of science including a diverse mix from papers by Vienna Circle
exiles (fleeing Nazi power), to American pragmatists such as Dewey, to
Kuhn’s sociology of science.
Kapp (1961, 60–4) criticized the project, on the basis of the sheer
diversity of language, as being an impossibility. The idea of unification
by logical and semantic analysis would threaten a domineering super-
science, which was not the aim of the left Vienna Circle. Kapp consid-
ered the part of the project which rejected metaphysics as being divisive
of knowledge, despite his sympathizing with its rationale – namely to
avoid building systems of knowledge based upon speculative conceptu-
alization and hidden ideologies.2 He makes the point, which we could
link to Max-Neef’s (2005) metaphysical discussion of transdisciplinarity
(discussed below), that a range of a priori knowledge is intuitive, while
Western scientific knowledge is logical. He felt there should be room
for both. In discussing these ideas he concludes that a form of supple-
mented and enlarged logical empiricism could be a way forward, but
this point is not explicitly pursued further. For those unfamiliar with
the divisions in logical empiricism this may seem strange, but it makes
more sense in terms of realizing that Kapp was relating his remarks to
the left wing of the Vienna Circle and in direct reference to Neurath
and Carnap. So Kapp can be interpreted as appealing for an ontological
(metaphysical) base and then proceeding with analytical reasoning and
refining knowledge through empirical research.
One other aspect of unity of science is worth mentioning. In ortho-
dox economics there has been a rhetorical use of the tenets of logical
empiricism, which appears as an imposed form of unity (McCloskey,
1983), or perhaps more precisely as a means of demarcation for ‘real’
 Towards the Integration of Knowledge 35

economics. The claim is made that mathematical formalism is the only

means of creating rigorous models for developing hypothesis which can
be empirically tested. In fact, this formally articulated methodology is
not followed. However, this does not prevent orthodox economists from
deploying the supposed practice as a means of arguing against unpalat-
able findings which attack the neoclassical paradigm or its models. The
claim is easily made that the results do not follow the accepted method-
ology, or recommended empirical practice, and so they are unscientific,
invalid, inadmissible and/or not economics.

Interdisciplinarity
Interdisciplinarity is something which requires skill and training
to achieve. Unfortunately, such training is rare, and the common
approach is to combine a set of disciplinary representatives to work on
a project who then proceed to talk past one another. This is more cor-
rectly termed a multidisciplinary approach and, in effect, is what we
find when unreconstituted mathematical models from ecology and
economics are linked together. Such multidisciplinarity never accepts
that different disciplines cannot be bound together in a report, and in
the literal sense this is correct, but unfortunately the report just lacks
any meaning beyond its separate perspectives. As there is no real inter-
action, there is no real potential for conflict, nor much hope of learning
something new. This approach is prevalent in ecological economics.
In addition, there is much reference to transdisciplinarity, although
not that much evidence of it being put into practice. The basic transdis-
ciplinary claim seems to be that, as well as interdisciplinary integration,
there should be some engagement with the lay public. The following
definition was given in the journal, Ecological Economics, after the
authors noted the lack of precision and understanding relating to the
term: ‘Transdisciplinarity means to reach out beyond science and to
include aspects of practical contexts and values or normative judgments
(sustainability, good-practice), as well as to feedback results into prac-
tical actions (politics, management)’ (Baumgartner et al., 2008, 387).
Now, this requires supporting a fact-value dichotomy, which I person-
ally reject for the social sciences as do others (Collier, 1998; Norton,
2003). More importantly, in the current context, this seems to rather
confuse methodology with method. Indeed, Baumgartner et al. note the
similarity to the recommended practice in post-normal science. Now,
that practice is aimed at addressing strong uncertainty in the context
of science–policy interactions and arises from a critique of normal sci-
ence. The blanket requirement for public engagement in all ecological
36 Clive L. Spash

economics research seems excessive and loses the reflection upon con-
textual need. Interdisciplinary research with the option of applying
methods (such as public participation) would be adequate and avoid
the loss and contentious claims falling under the unclear heading of
transdisciplinarity.
Another attempt at providing some substance to the idea of trans-
disciplinarity is that of Max-Neef (2005). He argues for a much more
metaphysical philosophical basis for the term and relates this to a hier-
archical structure of disciplinary knowledge and reality. His key concern
is to challenge the boundaries of knowledge set by modern Western
thought and open up the potential for ‘a logic capable of harmoniz-
ing reason with intuition and feeling’. However, the abstract reasoning
about a metaphysical unity leaves few straightforward messages in terms
of how to reach such an enlightened position. In contrast his diagram-
matic exposition offers a complex pyramid of disciplinary interactions
with highly contestable premises. For current purposes of seeking inte-
gration it does not appear that transdisciplinarity, as defined in these
attempts, offers much help or much that adds to interdisciplinarity.
Thus, we are left with interdisciplinary endeavor. This requires engag-
ing with different disciplines at a sufficient level to gain insight and
understanding of the potential interconnections, differing perspectives
and potential for synthesis. This may be undertaken by a group in which
disciplinary interactions and explanations regarding an object of study
or a problem lead to new, combined perspective or understanding. At
an individual level this might be simply training in one discipline and
then another, but with the proviso of integrating that combined knowl-
edge. As Kapp (1961, 51) noted, this can result in clarifying bounda-
ries and revealing limits to integration and realizing the potential for
no connection being possible, for example, due to different levels of
abstraction in concepts and/or different methods in addressing prob-
lems. Serious revision of former positions and beliefs on behalf of the
researcher must be accepted and openly embraced. Integration of social
inquiry requires adopting an integrative frame of mind and the impact
on individual psychology may relate to some of what Max-Neef dis-
cusses. The challenge of serious interdisciplinary research is certainly,
and foremost, a personal one.
Despite describing the potential of interdisciplinarity in positive
terms, Kapp was skeptical of how it would operate in practice. Actually,
there is no real questioning of the need for an interdisciplinary
approach; rather, the problem is how to make it effective and opera-
tional in achieving integration.
 Towards the Integration of Knowledge 37

The objective of integration is not the awareness of common prob-

lems nor the accumulation of knowledge from various related dis-
ciplines but rather the establishment of relationships between the
different parts of social knowledge which can be meaningfully and
systematically related. (Kapp, 1961, 51)

The requirement, then, is for means to aid the process. This is where
Kapp proposed the importance of finding integrating concepts.

Kapp’s integrative proposal

Kapp is a realist with sympathies for logical empiricism while recogniz-

ing the need for the avoidance of reductionism, critical examination of
experience and the role of historical analysis. He also accepts the role of
metaphysics, and his book gives an explicit ontological exposition. In
that regard he accepts both hierarchy and structure. In his own words:
‘The central thesis which will finally emerge from the following dis-
cussion can be stated in relatively simple terms: Inorganic matter, liv-
ing organisms, and human society, while intrinsically linked with each
other, must nevertheless be regarded as essentially different and special
levels of organisation’ (Kapp, 1961, 75).
This fits well with ecological economic understanding of reality, in
which the physical is ordered prior to the biological, which is prior to
the social, which is prior to the economic. Each level is dependent upon
those preceding it. Thus, we can have a society without a market econ-
omy, but we cannot have a society without a functioning biophysical
system (a simple fact still absent from all economics except ecological
economics). Each of the three levels of organization specified by Kapp
are connected and interrelated but, simultaneously, are unique struc-
tures due to their complexities and qualitative differences. He is at pains
to make clear, as has been noted, that social reality exhibits special
characteristics, making it distinct and not reducible to the natural sci-
ences (by analogy or otherwise). The aim of his study is to offer an
approach to match the fundamental interrelatedness of all elements of
social reality with an integrated framework for analysis.
In order to achieve this, he proposes ‘integrating concepts’ to help
develop a common conceptual framework which explains meaningful
and systemic relationships. Scientific knowledge is described as a system
of hypotheses and theories formulated in terms of concepts. The con-
ceptual framework must be open, flexible and constantly re-examined
in light of new empirical data (Kapp, 1961, 139). Concepts are to have
38 Clive L. Spash

a precise meaning but, rather than being descriptions, are representa-

tions that symbolize common characteristics of phenomena grouped as
a class, that is type or images of reality. As Kapp (1961, 126) states: ‘The
intellectual images we call integrating conceptual constructs are based
upon a critical examination of experience. They are derived from infer-
ences drawn from experience and critically observed reality’. Examples
from the natural sciences are temperature, matter, energy and life.
Narrow concepts on the same level are to be expressed in terms of wider
concepts and logical frameworks (e.g., as hot and cold are combined in
temperature). Fundamental integrative concepts in the social sciences
include social context, social structure, social process, social causality,
social law, social reality, social action and time and space (Kapp, 1961,
208). These and other aspects for study need to be brought together to
achieve integration, and this requires ‘common-denominator concepts’
in terms of which we can express the otherwise incommensurable con-
cepts of our different disciplines, subject matters and cultures. 3 Kapp
appeals to a process (moving from facts to interrelationships to phe-
nomena to theories and to comprehensive rules) for the refinement of
understanding leading to a summation of explanation under general
laws or regularities.
For the integration of social inquiry the common-denominator
concepts need to be general enough to cover several disciplines. They
should also avoid ethnocentricity. The integrating conceptual frame-
work should cover the structural character of human society and relate
to the dynamic interaction of parts and whole and their transformative
relationships. The central aim is to force thinking in terms of functional
interdependencies. At the same time, openness to new evidence and
new knowledge is emphasized. In addition, Kapp clearly wishes to avoid
ideological bias in referring to the need for researchers to make clear
their values and social philosophy. As in Schumpeter’s ([1954] 1994,
41–7) pre-analytical vision, ideological bias is inevitable but the hope
is, then, that analytical process free from ideology can be conducted to
refine knowledge.
Unfortunately, disciplines tend to monopolize concepts: econom-
ics deals with wealth, political science with power, anthropology with
culture, sociology with society (Preiswerk and Ullmann, 1985, xvii).
Kapp wishes for us to break through these disciplinary barriers, and he
proposes two overarching conceptual frames. The first he calls ‘man’,
which refers to individual human psychology (e.g., motivation, voli-
tion). The term man is used as shorthand for mankind, human, human
nature and so on, but although it now appears dated and gender-specific,
 Towards the Integration of Knowledge 39

still this should not distract from the content. The second conceptual
framework is ‘culture’, to cover the socioinstitutional aspects. Kapp was
aware of and warned against the danger of reducing this to a dichotomy
of the individual and society (or, say, actor/structure), and emphasized
the reality of interaction and fusion between the two. In recommend-
ing research on human nature and culture, Kapp warns against gener-
alizing from experimental research and prefers contextual study, but
also rejects cultural relativism. He explains in detail the importance of
culture in human development, but does not reject the ability to gener-
alize as to human nature, motivation and psychology.
Kapp believed the new focus on human nature and sociocultural
frameworks of knowledge would have far-reaching effects on research
in the social sciences. In particular, he explained this in terms of four
aspects: (a) orientation towards social context; (b) preoccupation with
social structure, social dynamics and cumulative causation; (c) accept-
ance of social indeterminacy and incomplete predictability; and (d) the
importance of real types and substantive analysis. In discussing these
aspects he raised issues such as non-linearities, emergent properties,
total systems analysis and uncertainty in knowledge formation. He
is against formalism and in favor of empirical testing and the role of
critique. He criticizes the focus on the logical implications of means–
ends relationships and rational choice.4 Instead, he recommends deal-
ing with actual problems of human behavior, human needs and social
processes (Kapp, 1961, 198). That is, the focus of our effort should be
on the problem of human interaction with, and dependence on, both
natural and cultural structures.
In rejecting a narrow disciplinary approach, the idea of specializa-
tion is not dismissed. Instead, a problem focus is recommended in
which different specialization can be brought together as needed by
the specific nature of the problem being addressed. Kapp regards the
most progressive disciplines investigating social structures and insti-
tutional interdependences as cultural anthropology, social psychology
and perhaps sociology (Kapp, 1961, 202). Yet, he recommends that the
social scientist who has decided to specialize in a particular problem
area ignores all traditional boundaries and masters the ideas and meth-
ods that happen to be most relevant (Kapp, 1961, 206). Such an inter-
disciplinary and integrative approach clearly requires a change in the
training of individuals and taking specialization in integrative studies
far more seriously than is evident today. There is also likely to be strong
resistance from traditional disciplines, and Kapp (1961) recognized the
potential for ongoing academic imperialism.
40 Clive L. Spash

Ecological economics: a movement in three camps

So far I have outlined the arguments for integration and how that inte-
gration might proceed. In this section I return to reflecting upon the
state of play in ecological economics. Some mention has been made
of the attempts to integrate knowledge using analogies from systems
ecology and evolutionary biology. In addition, I outlined the tendency
to link ecology and economics in a multidisciplinary mode so no real
although no real integration occurs. Then there was mention of the
more pragmatic approach, which shows little concern for theory and
mainly focuses upon how messages from the natural sciences can best
be communicated to those holding political power. In order to explain
these disparate elements, I will refer to three groupings or camps: New
Resource Economists, New Environmental Pragmatists (Spash, 2009)
and Social Ecological Economists (Spash, 2011a), see figure 1.1.5 Note,
the size of the areas in this and the next diagram is not to be taken as
indicative of anything.

Social Ecological Economists

Interdisciplinary

e.g., Political Ecology;

? Green Economics

Big Tent

New Resource
Economists New Environmental
Pragmatists
e.g., Ecological
Multidisciplinary Modernisation
Transdisciplinary

Figure 1.1 Ecological economics conceptualized as three camps and a ‘big tent’
 Towards the Integration of Knowledge 41

New Resource Economists are those who basically accept most of the
doctrines of mainstream neoclassical economics. They do not want
any fundamental changes but are concerned that the formal models
be adjusted to take into account environmental issues such as eco-
system sustainability and resilience. Some ecologists/natural scien-
tists are happy to cooperate with this orthodox grouping and have no
interest in a more radical revision of economics or integration with
the broader social sciences. The lack of engagement by ecologists with
respect to fundamental messages outside mainstream economics has
a variety of explanations. There are some who agree with the self-
regulating market ideology and view the world as all about compe-
tition (whether in the market place or natural environment). Some,
such as wildlife and population ecologists, find the basic methodol-
ogy of optimization and formalism compatible with their approach
to ecology and so adopt a unity of method approach. A third, more
epistemological, driver is the belief that social sciences are merely a
means for conveying the natural scientists’ message which contains
an objective truth.
This last position can easily lead into pragmatism. Indeed, a few ecol-
ogists, claiming to have placed economic values on the environment,
have been known to acknowledge their lack of economic training as if
to signify that ‘anyone can do this stuff’. Social and economic research
is then regarded by such individuals as important because politicians
and the press listen, not because it is an important subject in itself
with its own contribution to make to knowledge and understanding.
These positions explain some, but not all, of those found in the New
Environmental Pragmatist camp.
Neither New Resource Economists nor the core of New Environmental
Pragmatists have any expectation of changing the underlying approach
or of disturbing disciplinary boundaries. Much that has been placed
under a title of ecological economics coming from economic–ecological
modeling goes along this route. This seems perfect for those who believe
their own discipline supplies the most important knowledge and all
that is required is to get the message across to the ‘other-side’. Simple
link variables can be constructed so the output of one model feeds some
basic information across the disciplinary divide.
Yet, there are some who are basically pragmatic but do recognize
the need for fundamental reform; they then cross over into Social
Ecological Economics. For example, the work on ecological footprints
can be seen as having roots going back to the physical accounting
and energy work of ecological utopians, which forms the prehistory
42 Clive L. Spash

of modern ecological economics (Martínez-Alier, 1987). This is a radi-

cal socialist tradition. At the same time the underlying land theory
of value being employed poses serious theoretical problems, among
which is violation of incommensurability, and so conflicts with Social
Ecological Economics. The sacrifice of theory is accepted because of
the need to communicate and create understanding in society and
policy circles of more basic issues of environmental degradation and
resource constraints. This might be summarized as a strong desire for
policy change in the face of rapidly approaching calamities. The foot-
print approach can then be seen as possessing elements of both New
Environmental Pragmatism and core Social Ecological Economics mes-
sages and concerns.
New Environmental Pragmatism can also be seen as advocating a
transdisciplinary approach, but in the style of superficial engagement
and rhetorical use of terms referring to integration. The basic instru-
mental drive means theory (of integration or otherwise) falls by the
wayside. Thus, some ecological economists have engaged in the United
Nations Environment Programme project on monetizing and creat-
ing markets for nature and natural entities, named ‘The Economics of
Ecosystems and Biodiversity’. Their aim of engaging with international
governments comes at the cost of theoretical insights into the failures of
monetary valuation and the institutions of banking and finance (Spash,
2011b). In this case, pragmatic engagement comes at the cost of critique,
structural change and social reality.
Social Ecological Economics is where the insights from Kapp can be
expected to have most relevance. In approach, there is, then, a major
epistemological distinction from the orthodoxy of New Resource
Economists. Social Ecological Economics – as opposed to ecology and
economics – is an interdisciplinary endeavor in which revision of points
of view is required in light of learning from other subjects. Those other
subjects are not restricted. Thus, this goes beyond just economics learn-
ing from ecology and easily extends into philosophy, for example, and
social psychology and political science. In addition, this is a two-way
process. So the role of natural sciences is also seen as being in need of
revision in light of social science understanding found, for example,
in post-normal science (Funtowicz and Ravetz, 1993) and sociologi-
cal science–policy analysis (Wynne, 1994). Such an interdisciplinary
approach requires understanding of the key concepts and disciplinary
language of others, how they perceive the world and why there is valid-
ity in different types of information, avoiding the distain and derision
those trained in quantitative techniques tend to pour on qualitative
 Towards the Integration of Knowledge 43

information. Good communication should result from comprehension

of the essence of other subjects rather than requiring that researchers
be expert in many areas.
Thus, rather than the Venn diagram of figure 1.1, in reality the situa-
tion is more likely to be that of figure 1.2 in terms of the division of the

Heterodox Economics Ecology,

Conservation Biology,
Biophysical Modelling

Social Ecological
Economists New Environmental
Pragmatists

New Resource
Economists
Other Disciplines

Moral Philosophy, Social

Psychology, Sociology, ?
Political Science
Environmental
Economists

Orthodox Economics

Figure 1.2 Development of environmental thinking in economics

44 Clive L. Spash

orthodox from heterodox. Here, New Resource Economics is embedded

within orthodox economics, New Environmental Pragmatism is heavily
driven by natural scientists, and Social Ecological Economics is part of
heterodox economics. There is no direct overlap between New Resource
Economics and Social Ecological Economics; instead, communication
occurs via the New Environmental Pragmatists. A star shape is added
to show the potential for other disciplines to enter the mix with Social
Ecological Economics.
In addition, environmental economics is added as an additional
aspect in order to illustrate the potential for some dynamics in the
development of Social Ecological Economics and in line with the his-
torical development explored by Spash (1999). The shapes of the areas
in figure 1.2 restrict interactions in various ways. Thus, environmental
economists are a possible bridge to Social Ecological Economics, but
are themselves disassociated from New Environmental Pragmatists.
Meanwhile, New Resource Economists are not connected at all with
the heterodoxy or Social Ecological Economists. This is because only
with the later addition of environmental economics did increasing
engagement with social reality occur, which began to erode faith
in the abstract and unreal models of the orthodoxy. Environmental
economists, engaged directly with policy-instrument and evalu-
ation work extending into social psychology, are forced to reflect
upon social reality. This challenges the abstract and unreal neoclas-
sical model. In contrast, resource economists can avoid direct distur-
bance from empirical evidence by immersion in constructing those
same models and justifying their existence on that basis. The arrows
signify the movement among individuals and groups over time. In
this regard movement is hypothesized to be from orthodoxy to het-
erodoxy. The no-man’s-land between the orthodox and heterodox is
regarded as potentially an empty space, hence the question mark.
The transition of thought is based upon increasing interdisciplinar-
ity. That is, from engagement by economists with environmental and
resource economics they become interested in the natural sciences
which raise questions about the relevance of their natural resource
models, and then a transition towards the heterodox. This is merely
a speculative story and the diagram a device, but aspects of the story
(or others) could be subject to historical and empirical confirmation.
What the diagram should do is make the reader reflect upon the pos-
sibilities for cooperation and for disconnect between disciplines and
schools of thought.
 Towards the Integration of Knowledge 45

Conclusions

Unfortunately, at institutions of higher learning – despite universal edu-

cation supposedly being the aim – interdisciplinarity and integration
are rare. Academic career advancement is more commonly achieved
via intensive specialization and conformity to core disciplinary doc-
trines rather than questioning them. Economics has been particularly
prone to a narrow expression of the subject defended by those running
the main (and generally oldest) journals. Government-funded research
assessment exercises (e.g., as found in the United Kingdom) have rein-
forced such close-mindedness. The result is a general impoverishment
of what might otherwise be a rich field of debate and discussion.
Value pluralism means that problems can be viewed from different,
but equally valid, perspectives. Yet, that does not mean all perspectives
are accepted or acceptable. Various criteria may be called upon (e.g.,
coherence, consistency), different types of validity employed (e.g., face,
construct), and the role of judgment recognized. In addition we can
appeal to the basic realities of the world in which we live. Kapp presents
us with an ontology which raises the profile of both biophysical and
social reality. Mainstream economics is clearly failing on both fronts.
That ecological economics is also failing is due to the paucity of atten-
tion to integration and its requirements.
The development and use of conceptual models, common-denomi-
nator concepts and integrative frameworks can then aid understanding.
Exploring these and other methods is important for ecological econom-
ics to progress. Interdisciplinarity can be achieved by making problems
the focus rather than techniques which restrain the type and form of
concepts and protect disciplinary boundaries. At the same time we must
be wary of simple forms of pragmatism and rhetorical appeals to holism
and transdisciplinarity.
The ecological economics movement is caught between those who
wish to protect orthodox economic formalism, with its mathemati-
cal models and optimal solutions, and those who want urgent action
on the basis of their natural science knowledge. The danger from the
former is academic imperialism leading to no understanding of the
need to change the institutional structures of the economic system and
no understanding of society. The danger from the latter is neglect of
theory and, somewhat ironically, overriding the basis for a scientific
approach to understanding in the social sciences. The imperialism of
orthodox economists imposing their formal models may be matched
46 Clive L. Spash

by that of natural scientists imposing their ecosystem and evolutionary

analogies. In both cases the distinct quality of the social is lost. In order
to address the serious problems of the modern world we urgently need a
more informed social science approach to the environment. Kapp offers
much in the way of guidance as to how Social Ecological Economics
should proceed, and we should heed that advice.

Notes
1. For more detail on the Vienna Circle see Uebel (2011).
2. Neurath was concerned to remove metaphysics for political reasons. That was
to move to a value-free social science to avoid the absolutist and totalitarian
enthusiasm in Germanic (and other) society. Among the problems, O’Neill
and Uebel (2008, 390) note: ‘There is a difference between rejecting moralis-
ing criticisms on the one hand and the attempt to eliminate any evaluative
vocabulary from the social sciences on the other’.
3. In this regard, Kapp references F.S.C. Northrop, ‘The Problem of Integrating
Knowledge and the Method of its Solution’, Proceeding of the Stillwater
Conference (Foundation for Integrated Education, 1950).
4. A means–ends framing and focus is something prevalent in economics since
Robbins, but also has appeared in ecological economics (see Daly and Farley,
2004).
5. These categories are part of ongoing work which, at the time of writing,
involves papers under submission to leading economics journals. Space
restrictions preclude a full exposition here.
2
The Fog of Economics
Robert U. Ayres

The current and continuing crisis

The US economy is in a crisis, and the global economy is at risk. There

are a number of reasons, including the approaching ‘end of oil’, the
unintended effects of globalization and the accumulation of unfunded
entitlements as well as unfunded repairs needed for environmental
damages. But the most recent crisis arises from the application of ill-
conceived doctrines propounded by (some) economists themselves.
In particular, conservative ‘free market’ economists, including Allen
Greenspan, who was influenced by Ayn Rand and her ‘objectivists’
(Rand 1964; 1967), defend, in Rand’s words, ‘the freedom to take all the
actions required ... for the support, the furtherance, the fulfillment and
the enjoyment of [an individual’s] own life. (Such is the meaning of the
right to life, liberty and the pursuit of happiness.). ... It means freedom
from the physical compulsion, coercion or interference by other men’
(Rand, 1964, 322).
It also means freedom to pollute and freedom to exploit the environ-
ment. It follows, in their view – now widely accepted among Republicans
and especially the ‘Tea Party’ movement, that government should exist
only for national defense and protection of private property (‘government is
the problem, not the solution’). A further implication, never clearly articu-
lated, but quite evident, is that everybody should be responsible for his/
her own life, hence wealth accumulation is evidence of moral virtue
(‘greed is good’) and that the poor have only themselves to blame for
their plight.
In this view, so popular among the self-justifying wealthy, coercive
redistribution by taxation to help the needy, to protect nature, or even
to increase scientific knowledge is morally wrong. It will be noted that

47
48 Robert U. Ayres

Congressman Dan Ryan’s Republican program for the next 20 years

is lifted almost exactly from the program espoused by Ayn Rand and
her followers, including Allen Greenspan. These folks persuaded the
United States Congress during the Reagan Administration to offer more
and more tax breaks to business and the wealthy. Corporations now
pay only 6.6 percent of US federal government revenues, compared to
30 percent in the 1950s, a major reason for the budget deficits (not-
withstanding their continuous moans about being overtaxed). Another
result was the savings and loan crisis in the 1990s that required costly
bailouts, but taught the legislators no lessons.
A more recent consequence of financial deregulation was the innova-
tion of subprime mortgage lending, with adjustable rates (ARMs). That
innovation briefly created a whole new class of underqualified home-
owners and a temporary real estate boom. This, in turn, induced specu-
lators to buy homes using the subprime adjustable rate mortgages, with
the intention of selling the houses in a rising market, before the rate
adjustments would take place. The boom also encouraged a lot of peo-
ple to extract equity from their homes for immediate spending, also by
means of refinancing with AR mortgages. The net result was a spend-
ing and consumption boom in the United States that drove the econ-
omy of the whole world – not just the United States –for several years
(2003–7). The spending, in turn, increased the US national debt to pay
for imported consumer goods, mostly from China. In fact, most of the
US GNP growth during those years was evidently based on spending
borrowed money. Yet, the mainstream economics profession pretended
that faster US GDP growth, compared to Europe, was due to US rejec-
tion of the European ‘welfare state’ model. This turns out to have been
a pipe dream.
By December 2008 unemployment was rising sharply, but the US dol-
lar, which had tanked in mid-summer (near $1.55 per Euro), recovered
briefly to $1.25 but by April 2011 was back to around $1.45, despite
sovereign debt problems in certain Eurozone members (Greece, Ireland,
Portugal). Similarly, the price of oil hit a record level (above $150/bbl)
as of July 2008, but fell to less than $40/bbl in winter 2009, because
of sharply declining global demand. The decline in demand, in turn,
resulted from an economic slowdown that left the United States with
persistent unemployment above nine percent despite claims of a ‘robust’
recovery. The recovery, by 2011, seemed limited to corporate (and bank)
profits.
Unfortunately, the White House staff, with its high-powered eco-
nomic advisors, misinterpreted the ‘green shoots’ that were appearing
 The Fog of Economics 49

in the early spring of 2010, after a disastrous 2008–9. They assumed

that the ‘stimulus’ of early 2009 was working and that the ‘recovery’
was under way and gaining momentum. This miscalculation encour-
aged them to concentrate all their efforts on passing President Obama’s
signature policy promise, the health-care bill. However important and
desirable that legislation was, it was portrayed by Republicans as yet
another unaffordable entitlement. Passage in 2010 was a political error
based on a bad economic forecast. The voters were (and are) almost
exclusively worried about jobs. In the fall of 2010 the electorate reacted,
as it usually does, by kicking out the incumbents and re-electing many
of the same people who had created the problem.
By mid-2011 the housing market, in particular, was in the doldrums
and almost certain to remain there for several more years. In fact, home
prices are expected to decline still further and new-home construction
has been at the lowest level in decades. Nearly 30 percent of US home
sales (spring 2011) were of bank-repossessed houses, while many more
sales were by people in deep trouble who needed to cut expenses and
‘trade down’. The main financial assets of tens of millions of American
homeowners, even those who did not have subprime AR mortgages,
became negative. Several million people whose houses were worth less
than they owed to the banks were simultaneously facing sharp increases
in their monthly mortgage payments. This problem will get worse if the
‘deficit hawks’ have their way and persuade the Federal Reserve to start
raising interest rates for fear of inflation. Quite a lot of people will lose
whatever home equity they still have, and a significant number will
also lose their homes in the coming year or two.
To put the icing on the cake, so to speak, NYMEX oil prices in 2011
topped $110/bbl, due to political turmoil in the Arab countries, espe-
cially Libya. Many analysts foresee further increases. Everybody, not
just the people with AR mortgages, will have less money to spend on
other things, even if they keep their jobs and homes. If the price of
oil rises much further, the so-called ‘recovery’ is quite likely to abort,
plunging the US economy back into a ‘double dip’ recession.
The US economic fundamentals were not really strong, even back
in the late 1990s, when there was a brief federal budget surplus under
President Clinton. Americans were not saving, even then. Credit card
debt was growing and getting very big compared to household income.
Household debt was less than 70 percent of disposable income in 1985,
and during the Clinton administration crept up from just over 80 percent
to nearly 100 percent. After Bush was elected, household debt increased
faster, despite tax cuts, to 130 percent of disposable income in 2007.
50 Robert U. Ayres

Worse, the US trade deficit is now huge and still growing as manu-
facturing has continued to move out of the United States. This deficit
is financed by (mostly) Asian purchases of US government bonds and
private assets. Long-term entitlements, such as Medicaid, Medicare and
Social Security are underfunded. (The idea that retirees are only receiv-
ing health benefits already paid for is wrong; current retirees will – on
average – receive several times more from Medicare than they have actu-
ally contributed.) The foreign investment in US government securities
was based largely on the perception of US financial stability and com-
paratively rapid economic growth. It allowed the US Federal Reserve
Bank to keep interest rates artificially low and thus to keep domestic
economic activity – much of it tied to imports – artificially high.
Most economists twenty years ago, or even five years ago, predicted
none of this. Nor does the standard economics paradigm suggest any
coherent program to resolve the global trade and financial imbalances.
The Keynesian solution – to grow the economy fast enough to bring
the debt (as a fraction of GDP) under control, while freezing spend-
ing levels – is not feasible if the economy is not growing, or not grow-
ing fast enough. The so-called ‘Washington consensus’, adopted by the
International Monetary Fund (IMF) some years ago for application to
developing countries, prescribes draconian cuts in spending to bal-
ance the government budget in exchange for bridge loans. But some
countries, including Greece and Ireland, have already run up debts that
can only be repaid out of revenues from totally unrealistic growth divi-
dends. In short, default seems inevitable.
It is suggested in some quarters that the answer must be for the bank
lenders, who were eager for the business, to share the pain when loans
have to be written off. Why should the bankers who made the unrepay-
able loans (and sold the bonds to insurance companies and pension
funds) be repaid in full by governments (i.e., taxpayers)? The bankers
say that for them to write off debt capital would wreck the entire finan-
cial system – as it nearly did in 2008. Fatalists increasingly suggest (in
whispers) that no cure is possible other than to print money and inflate
away the debt burden and start again. But inflation unfairly favors
existing borrowers at the expense of lenders – who then stop lend-
ing. Hyperinflation, such as Germany experienced in the early 1920s,
destroys fixed-interest financial assets (bonds) and impoverishes sala-
ried workers, small savers, merchants and small lenders (savings banks),
while leaving borrowers, landowners and resource-owners untouched.
European economic history records a depressingly large number of
 The Fog of Economics 51

inflationary collapses, largely due to the profligate spending of French

and Spanish monarchs.
How did we get to this point? To answer, I need to recapitulate what
the standard paradigm of neoclassical economics actually says. The eco-
nomic system, as we know it, is the set of institutions that permits peo-
ple (us) to exchange our labor for money, and to exchange our money
for goods, including food and shelter, and services such as transporta-
tion, communication, education and entertainment. Originally (eight-
eenth century and earlier) the contribution of labor was primarily
muscle work by humans and animals. Machines utilizing wind and
water power contributed some labor-equivalent (useful work), although
until well into the nineteenth century the relative quantity of work per-
formed by machines was still very small. Money could be spent on cur-
rent consumption goods or saved and invested in land, animals, tools,
machines or structures.
The trade-enabling institutions are of three kinds. One set consists
of organizations (firms) that produce and/or exchange material goods
and services with each other or with final consumers. The second set
of institutions (banks) manages the medium of exchange (money) and
simultaneously converts passive savings into active credit for entrepre-
neurs. The third set of institutions (government) regulates the activities
of the other two. It also performs functions that the private market can-
not or does not, such as national defense, police, judiciary, infrastruc-
ture, public health, public education, environmental protection and
basic research. Economics is the science that supposedly explains how
an economy works to allocate ‘scarce resources’ (i.e., labor, capital and
natural resources) optimally, meaning in such a way as to maximize
economic well-being.
However, as noted, the Rand-Greenspan-Ryan version of economics
allows for no government functions except national defense and pro-
tection of private property (police and courts). Entirely missing from
their idealized picture of a free economy are the ways in which social
relationships, politics, international relations, bad government and the
physical-biological environment can, and do, create havoc. We all know
that in real unregulated societies (consider Somalia) the landscape soon
becomes a desert. In a free-for-all economy the rich and powerful get
richer and more powerful (as US income data in recent decades demon-
strates clearly). The inevitable consequence is that the uneducated or
incapacitated are condemned to poverty in the absence of a source of
‘alms’ or welfare services. In the real world we live in, the rich dominate
52 Robert U. Ayres

both the political process and the regulatory process. They are also the
people who have created the economic mess we are now facing.
The present reality is that – if nothing changes at the political level –
jobless recovery, if not renewed recession, is around the corner. The
United States is consuming far more of every resource, including energy,
than it really needs, and doing it much less efficiently than it could (or
than Europe or Japan). In short, the US economy is not only far from equi-
librium and far from optimal, it is even less sound (fundamentally) than the
economies of Europe and Japan, and much less so than the growing economy
of China. And nobody in the government, the halls of academe or in the
‘chattering classes’ is talking about this problem.

Gaps in neoclassical theory

Unfortunately, the science of economics, as it has evolved and is taught

in universities, deals almost exclusively with the so-called private sector
(producers, consumers). It does so based on insights and theories that
are predicated on an extremely idealized ‘market’ system that bears lit-
tle resemblance to the reality. In this idealized system all firms are small
and competitive (‘price takers’ as opposed to price makers), even though
most sectors, except agriculture and retail trade, are now oligopolies,
while utilities are legal monopolies in the United States. Entrepreneurs
are also assumed to be rational, all-knowing profit maximizers. Yet,
while economic theory explains why monopolies (price-makers) are
more profitable than small firms competing in the same market, some-
how it is simultaneously assumed that monopolies and oligopolies do
not exist, at least in the macroeconomy.
In the neoclassical paradigm benefits and costs associated with all
transactions are exclusively confined to the actors. As noted earlier,
externalities do not exist, or can be neglected. The economy is assumed
to be always in, or very near, Walrasian equilibrium, even though there
is no mechanism (such as an auction) to achieve this equilibrium. Yet,
it is assumed that markets always clear. There are no surpluses or short-
ages and no ‘free lunches’ or negative cost options. It is also assumed
that the economy grows while remaining in equilibrium, even though
there is no theoretical mechanism to explain such a phenomenon. The
growth mechanism, based on innovation and ‘creative destruction’
described a century ago by Schumpeter is inconsistent with equilibrium
(Schumpeter, [1911] 1934).
Yet, all the so-called computable general equilibrium (CGE) models
that guide policy today assume continuous – yet unexplained – growth
 The Fog of Economics 53

of GDP, because such models can be ‘solved’ on computers, whereas

non-linear disequilibrium models that include mechanisms to drive
growth do not yield unique solutions and depend on a host of assump-
tions and details. This sort of economic analysis is tantamount to look-
ing for a lost key or coin under the streetlight, rather than in the dark
ditch where it actually fell.
One feature of neoclassical economics that has attracted criticism in
recent years is its fundamentally static character. Maximizing static ‘util-
ity’ is possible in simplified mathematical models but virtually never
in the real world. In the standard theory, economic growth is driven
mostly by exogenous forces (known as ‘technical progress’ or ‘produc-
tivity improvement’) that are permanent, but unexplained, features of
the landscape. But an exogenous driver is the only way economists
can explain growth-in-equilibrium. The so-called endogenous growth
theory that emerged in the 1980s can explain growth (in principle) but
only by postulating an accumulation of knowledge or ‘human capital’
that increases productivity steadily and painlessly without reference to
Schumpeterian ‘creative destruction’.
Another assumption central to most models is that the actors make
rational decisions to maximize their utility (profits, in the case of
firms) with perfect information about the capabilities and intentions
of all competitors and customers. Nevertheless, models that assume the
‘market’ makes optimal choices are the norm in modern economics,
particularly in finance. One of the consequences of this assumption is
that economists routinely ignore the possibility that actual choices in
the past have not been optimal and that the real macroeconomy may
be quite far from a theoretical equilibrium. This, in turn, implies that,
contrary to the free market mantra that ‘picking winners’ never works,
some cases of government intervention, such as soil conservation, irri-
gation, public health, and investment in space technology that does not
promise short-term payoff, may be both socially desirable and profit-
able for firms in the private sector.
In recent decades there has been a lot of experimental work – mainly
using games – to elicit the behavioral characteristics of people as eco-
nomic decision makers. This research demonstrates that real people do
not behave like rational optimizers (or maximizers) in many, perhaps
most, circumstances. In short, the decision-making criteria of consum-
ers and producers are far more complex than standard neoclassical the-
ory suggests. The implications of this are still being worked out.
Yet another problem is that, in reality, information is a scarce com-
modity and is seldom free or perfect. (In fact the real world is full of
54 Robert U. Ayres

misinformation and disinformation which the economic agent must

try to sort out). Thus most decisions in the real economic system are
made in the face of very imperfect information, that is, under a high
degree of uncertainty. Moreover, in a dynamic context, the optimum
depends on the time scale; a short-term optimum may be far from the
long-term optimum and conversely. It is necessary to attach weights to
the relative importance of short term and long term. Those weights will
always be subjective.
Raw materials in this world are assumed by neoclassical economics
to be produced by the application of labor and capital. Output of raw
materials (including energy) is limited only by the availability and cost
of the labor and capital needed to extract them from the infinite store-
house where they are assumed to exist. There are no geophysical con-
straints on either the size of the reserves or the rate at which they can
be extracted. In this ideal world, production processes are assumed to
generate no waste, but if they do, waste disposal is assumed to be free or
unnecessary. In any case, wastes are assumed to do no harm and waste
creation and disposal are assumed not to affect output or value. In the
neoclassical paradigm there are no externalities, or they are so rare and
unimportant that they can be neglected. Yet, it has been known for dec-
ades that at least one class of externalities, namely air or water pollution
by waste residuals, is neither rare nor unimportant but rather inevitable
and pervasive (Kneese et al., 1970).
Regulation in the neoclassical paradigm is regarded as a cost of pro-
duction, because it reduces the range of options available to entrepre-
neurs, but regulation in this idealized worldview provides no benefit
that can be quantified or even clearly articulated. Economics was once
called the ‘dismal science’, not because it is dull, but because of the
early focus by Thomas Malthus, David Ricardo and John Stuart Mill on
the dismal prospects of land scarcity, population and declining social
returns.1 On the other hand, in recent decades economists have become
the cheerleaders for cornucopian optimism.
According to many economists today there is no such thing as scar-
city, because scarcity is self-denying. The idea is that rising prices signal a
potential scarcity but also trigger the investments or innovations needed
to avoid the scarcity. As regards oil and gas, too many so-called ‘experts’
still say that ‘there is an ocean of oil’ at slightly higher prices. As recently
as 2004 the International Energy Agency (IEA) predicted that oil con-
sumption would double by 2030 at constant prices (then less than $40
per bbl) (IEA, 2004). The Canadian tar sands are commonly supposed to
be ready for large-scale exploitation. Oil shale is supposed to follow soon
 The Fog of Economics 55

after. Climate change is assumed by many conservatives to be a hoax or

a misinterpretation of ‘natural’ fluctuations. It is assumed that new tech-
nology will continue to enable existing fields to pump out more of the
oil than they could in the past. Energy economists have been saying all
this for years. Strangely, unjustified pessimism in Malthus’s time did no
real harm. But unjustified optimism today is a serious problem because
it blocks sensible policy responses to real problems.
It is certainly not a purpose of this chapter to summarize the whole
of macroeconomics. That would be unnecessary, as well as impossible
to do in much less than an encyclopedia. My narrower purpose, in the
rest of this chapter, is to illuminate a much smaller territory, namely
the importance of energy in the production system, and its effect on
economic growth.

The missing link: energy

In the present context, the most serious weakness of neoclassical theory

is that it has allowed too small a role for energy, or more precisely, from
non-human sources of energy, as useful work. This is surprising, inas-
much as Jevons, one of the three major progenitors of neoclassical the-
ory, certainly understood its importance very well (Jevons, [1865] 1974;
[1863] 1996). The essential point here is that energy (exergy) is truly the
lifeblood of our economic system, and most of what we use comes from
fossil fuels that will eventually run out. If the modern economy had
to make do with the energy supplied by food and animal feeds, plus a
few water-powered mills, it would have to revert to the situation in the
Middle Ages. Almost all of us – as was the case back then – would be
working on the land, plowing, planting, harvesting and caring for ani-
mals. There is not nearly enough arable land to support the approach-
ing seven billion people now alive as self-sufficient farmers. Without
power supplied by fossil fuels (and nuclear power) there would be a
lot fewer of us on the Earth, probably no more than one billion. We
would work long days and sleep in mud-brick huts with thatched roofs
or something similar. Without synthetic fertilizers and chemical pesti-
cides, without motorized tractors and harvesters, without refrigeration
to preserve meat and dairy products, gross crop production would be
far smaller than now, losses to insects and rodents would be far greater.
And without trucks to transport the food, there would be no way to
feed the populations of very large cities that exist today. That is a fact.
It is also a fact that the available agricultural surplus to support non-
agricultural urban consumers would be very small, as it was until the
56 Robert U. Ayres

industrial revolution. That surplus was rarely more than 10 percent of

gross agricultural output, and less on average.
It is also a fact that virtually none of the sophisticated products that
we use and take for granted today could be produced in such a society;
the few exceptions would be produced in very small quantities. This
applies to all metals and metal products except what can be smelted in
a simple furnace using charcoal. Iron for horseshoes or stew pots would
be expensive and steel a rare luxury used mainly for knives and swords.
Copper could not be refined or drawn into wire; it would be available
only as brass or bronze and mainly from recycled scrap, since rich cop-
per ores were long ago used up.
Economists in the nineteenth and early twentieth centuries took
economic growth for granted. It must have seemed ‘obvious’ to Marx
and the so-called marginalists that economic growth per capita resulted
from the growing urban labor force and the accumulation of capital per
worker. It was also obvious that capital accumulation required invest-
ment, and investment required savings. It was not obvious at all that
the accumulation of physical capital depended, in turn, on the avail-
ability of energy (actually mechanical work) from machines, on a scale
far beyond what human and animal muscles could provide. The reason
pre-industrial economies did not grow, or grew so little (according to
this view) was that the possessors of wealth (the landowners and the
church) invested very little in productivity. They consumed almost all
of the agricultural surplus, either by constructing castles and cathedrals
or in warfare.
The industrial revolution, by contrast, produced ‘capitalists’ who built
factories and accumulated capital by organizing (and, frankly, exploit-
ing) the workers – mostly displaced from the land by enclosure of the
commons – to obtain a greater surplus. The Marxist political philosophy
sought to rectify this injustice by eliminating the capitalists as a class,
letting the state collect the surplus (as profits of state-owned enterprises
or taxes) and invest it on behalf of society as a whole. Marxism mistak-
enly assumed that all capitalists are simply parasites (a view diamet-
rically opposite to that of the Rand-Greenspan-Ryan group). We now
know that the factory owners did make a key contribution to innova-
tion, whereas ownership by the state depended on a very unrealistic
view of human behavior and of the importance of incentives. But that
is another topic.
The idea that capital accumulation was the sole engine of growth did
not end with the demise of Marxism. It was the centerpiece of develop-
ment economics in the 1930s, 1940s and 1950s. Economists at that time
 The Fog of Economics 57

were advising governments to manage the capital-labor ratio with great

care and precision to avoid errors in either direction. Too much capital
would create a labor shortage and cause wage inflation, while too little
capital would cause unemployment. This theoretical balancing act was
called ‘walking along the razor’s edge’ (Harrod, 1936).
That period ended, however, when the first long-term historical
reconstruction of economic data enabled economists to show conclu-
sively that economic growth per capita in the previous century was
much greater than could be accounted for by capital accumulation per
worker. In fact, several studies, especially the work by Robert Solow,
showed that capital per worker only accounted for about 15 percent of
past economic growth (Solow, 1956). See figure 2.1. The rest was unex-
plained (and the ‘razor’s edge’ turned out to be a mathematical arti-
fact of the theory). The measure of this unexplained ‘Solow residual’
was originally termed ‘technological progress’ but in recent years it has
been called ‘total-factor productivity (TFP) growth’. But whichever term
is used, it was generally assumed to be exogenous (not explained by eco-
nomic variables) and as Solow himself said, the unexplained residual is
‘a measure of our ignorance’ (ibid.).

GDP Index (1900 = 1)

25

20
US GDP

15

10
SOLOW RESIDUAL
(TFP)
5

Cobb-Douglas

1900 1920 1940 1960 1980 2000

Year

Figure 2.1 US gross domestic product (GDP) from 1900 to 2000; actual versus
3-factor Cobb-Douglas function
58 Robert U. Ayres

For the past hundred years or more TFP has increased at a relatively
steady and predictable rate each year, on average. Since 1986, some econ-
omists have sought to ‘endogenize’ the theory. One scheme was to relax
the usual condition of constant returns to scale (Romer, 1986; 1987).
Other schemes have tried to explain the growth of TFP, in terms of other
economic variables, usually ‘knowledge’ or ‘human capital’. So far, none
has succeeded particularly well, partly because there is no generally
accepted way to measure such variables, and partly for another reason
that I will explain shortly. Nevertheless, the assumption of continued
economic growth along the historical trajectory is almost universally
used in long-term forecasts. It is commonplace for conservative econo-
mists to say ‘our grand-children will be a lot richer than we are’, usually
to justify not spending money now on repairing environmental dam-
age, which the grandchildren will presumably find more affordable.
The other reason all attempts to endogenize the theory of growth
up to now have failed is quite simple. In the standard (Solow) model
of economic growth, energy plays no role or a minimal one. If energy
is treated as a factor of growth, in the usual formulation (a production
function) it must be included with the other two, more familiar, fac-
tors of growth, namely capital and labor. There is a theorem (taught in
standard textbooks) derived from the so-called ‘equilibrium conditions’,
which are mathematical conditions for maximizing profits or minimiz-
ing costs, in equilibrium (Mankiw, 1997). This theorem says (in words)
that the relative importance or ‘weight’ of each of the two or three (or
any number of) factors in terms of explaining past growth must be pro-
portional to its ‘cost share’ – or share of payments – in the GDP.2
It is a ‘stylized fact’ that labor costs typically accounted for about 70
percent of the US GDP and capital costs accounted for about 25 percent,
leaving around 5 percent for energy (until recently). This neat division
is a consequence of the fact that all monetary incomes are defined as
being either wages and salaries (for labor) or dividends, interest, royal-
ties or rents from capital. So where does energy enter the picture? If one
imagines that energy is a kind of capital, providing services analogous
to other capital services, then the payments to energy roughly coincide
with the payments to extractive industries (coal, oil, gas) plus payments
for hydroelectric power, nuclear power and so on. Agriculture and for-
estry should also be counted here, since they provide materials that
embody energy (food, feed, fuel-wood, etc.). The exact definitions do
not matter a lot, because however one defines this ‘energy sector’, it
only accounts for 5 percent or so of the costs in an Organisation for
Economic Co-operation and Development (OECD) country. At least that
 The Fog of Economics 59

was true when oil prices were around $35 per barrel. It follows that –
according to the cost share theorem – a 10 percent increase in energy
cost to the economy would only increase GDP by .5 of 1 percent, which
is fairly negligible. It implies that energy can be neglected in relation to
capital and labor. The trouble is that neglecting energy in this way results in
a theory of growth in which most of the growth is unexplained.
It happens, however, that the cost share theorem in question, in its
standard form, does not apply to the real economic system. The rea-
son is that the mathematical derivation assumes that capital, labor and
energy are all freely substitutable for each other, whereas in reality they
are not. To say it another way, the proof of the theorem demands that
any given level of output can be achieved with capital alone (no labor,
no energy) or with labor alone (no capital, no energy) or with energy
alone, and so forth. Obviously, these combinations are not possible:
capital, labor and energy (as fuels or electric power) must be combined
in certain proportions – by design – and only small substitutions are
possible in the short run, around this natural combination.
The mathematical implication of this basic fact about the economy is
that output elasticities need not be equal to cost shares, as macroecono-
mists have assumed for the past half century or more. In fact, when one
does all the calculations, using real data, it turns out that energy from
external sources now contributes several times more to output than its
cost share, whereas labor contributes correspondingly less (Kümmel et
al., 2010). (This implies, among other things, that energy is seriously
underpriced in the market, whereas labor is considerably overpriced, a
message most people understandably do not want to hear.)
This neglect of energy contradicts economic intuition in several ways.
Economic history suggests that increasing natural resource (energy)
input flows at ever-lower costs was, indeed, a major engine of past
growth. The declining costs of mechanical or electrical power (physical
work per unit of time) in relation to the rising wages of labor over the
decades have induced ever-increasing substitution of machines, mostly
consuming fossil hydrocarbon fuels, for human and animal muscles.
Moreover, declining costs induced rising demand for manufactured
goods (i.e., economic growth). Hence long-term replacement of muscle
work by mechanical, electrical and thermal work has been a key driver
of economic growth, especially since the industrial revolution. Most
people, other than economists, would agree with this assessment almost
without thinking. Economists mostly disagree because they have been
taught that the relative importance of the factors must be equal to their
respective ‘cost shares’ according to the theorem mentioned above.
60 Robert U. Ayres

According to one version of the standard neoclassical model, the

economy consists of a large number of competing microproducers
(price takers) who produce a single composite product (GDP) that is
both a consumption good and a capital good. It is convenient to think
of the composite good as ‘bread’. Bread is produced using capital and
labor, purchased or rented from households or firms at cost equal to
the marginal product of each input. Bread, in this model, is made from
capital (bread) and labor, and baked without energy. Natural resources,
energy and environmental waste absorption/detoxification capacity are
not part of the ‘standard’ model.
This picture is obviously oversimplified to the point of absurdity.
There are many difficulties but one is that essential inputs (labor, capital
and energy) cannot be substituted for one another over the whole range,
and – as already mentioned – the degree of substitutability among them
is actually very small (nearly zero) in the short run. It only increases
over time as new technology is introduced and embodied in new capital
stock. Smooth, twice differentiable production function of three varia-
bles cannot reproduce this behavior. Moreover, capital, labor and useful
work (energy services) and materials are outputs as well as inputs. The
more complex economic models tend to allow for a capital equipment
sector (or sectors), and it is reasonable to postulate another distinct sec-
tor that extracts raw materials and another that produces useful work
and sells it to the rest of the economy. These sectors must utilize some
capital and labor and useful work and they must receive payments for
their net output. Finally, there is a plausible argument that labor, also, is
a manufactured product, in the sense that workers must be trained and
educated to be of any use in the modern economy.
However, simply relaxing the cost-share requirement helps enor-
mously. It turns out that historical GDP growth can be explained
remarkably well by a simple three-factor model without assuming any
exogenous contribution from unexplained ‘technical progress’ or ‘total factor
productivity’ growth. It appears that the technical progress that really
matters most is reflected in the changing (increasing) ratio of energy (or
useful work) inputs to labor and capital inputs over the years.
Useful work has a technical definition that need not concern us here.
For practical purposes it can be equated to useful heat to drive a chemi-
cal reaction such as iron ore reduction or ammonia synthesis, muscle
work done by humans and animals, or mechanical work done by so-
called ‘prime movers’ because the output is motion, usually rotary. The
most familiar prime movers are gasoline engines, gas engines, diesel
engines, gas turbines and steam turbines. Electric power is generated
 The Fog of Economics 61

by large-scale steam turbines, and it is reasonably accurate to say that

electricity is a form of useful work, especially since electric power –
unlike heat – can be reconverted into mechanical energy – by means of
motors – with nearly 100 percent efficiency, at least in principle. (It is
literally true to say that the modern economy is electrifying.)
In effect, the real economy is inherently multi-sectoral, dynamic and
open in the sense that it exchanges materials and energy with the envi-
ronment. On the other hand, it is closed with respect to the creation of
new technology. It cannot be adequately represented by a model that is
simple, static and closed. A new approach should modify the standard
model in at least two ways. First the modified model must be open. It
must allow for resource inputs from, and waste outputs to, the envi-
ronment. In a sense it must be a processing model, taking high quality
resources from the environment and extracting economic value from
them, before discarding the residue. Second, the modified model must
treat energy services (useful work) as a separate factor of production,
along with the traditional capital and labor, and must allow for some
limits on short-term substitutability among the three factors.
It is important to stress that, apart from mathematical details, there
is an underlying conceptual model explaining why economies grow.
In neoclassical economics the growth is partly due to accumulation of
capital and growth of the labor force, and partly due to technological
progress that is exogenous, that is, it somehow occurs automatically and
outside of the economic system, as such. In the standard growth model
this is represented as an exponential multiplier.
The ‘growth engine’ (so to speak) underlying the new model is slightly
different. It does depend on technological progress, as before. But the
progress that matters most is increasing the efficiency of energy con-
version. In more technical language, this means conversion of exergy
inputs (fossil fuel, photosynthesis into biomass, falling water, wind,
etc.) into useful work, as discussed. As already mentioned, this increas-
ing conversion efficiency results in declining prices and that, in turn,
stimulates increasing demand. It is the same mechanism that has been
called the ‘rebound effect’ by some economists who doubt that increas-
ing efficiency will result in lower emissions (Saunders, 1992).
With the new growth model, it is possible to reproduce (i.e., ‘explain’)
past economic growth quite well without any need to assume an exog-
enous multiplier representing technological progress or ‘total factor
productivity’ (TFP) otherwise undefined. Figures 2.2 and 2.3 show
results for the United States and Japan. In effect, it turns out that, with
reasonably broad definitions, the conversion of raw material (exergy)
62 Robert U. Ayres

US GDP (1900 = 1)

25
GDP estimate LINEX

20 GDP estimate Cobb-Douglas

Empirical GDP

15

10
PRE-WARE COBB DOUGLAS POST-WAR COBB DOUGLAS
alpha = 0.37 alpha = 0.51
beta = 0.44 beta = 0.34
5 gamma = 0.19 gamma = 0.15

0
1900 1920 1940 1960 1980 2000
Year

Figure 2.2 Empirical and estimated US GDP from 1900 to 2000, excluding
1941–8 (source for empirical GDP: Timmer et al., 2005)

GDP Japan (1900 = 1)

50
GDP estimate LINEX
40 GDP estimate Cobb-Douglas
Empirical GDP
30

20
PRE-WARE COBB DOUGLAS POST-WAR COBB DOUGLAS
alpha = 0.33 alpha = 0.78
beta = 0.31 beta = 0.03
10 gamma = 0.35 gamma = 0.25

0
1900 1920 1940 1960 1980 2000
Year

Figure 2.3 Empirical and estimated Japan GDP from 1900 to 2000, excluding
1941–8 (source for empirical GDP: Timmer et al., 2005)

inputs to useful work encompasses most of the technological change

that has been an important driver of growth in the past. The increas-
ing role of information technology may, of course, alter this picture in
the future.
 The Fog of Economics 63

To summarize an extensive statistical analysis that cannot be repro-

duced here (Warr and Ayres, 2010), it is possible to state a very robust
conclusion, namely that energy services in the form of useful work by
machines (and information processors) is one of the three major ‘fac-
tors of production’ in modern industrialized economies, having sub-
stantially replaced unskilled labor in that role since the beginning of
the twentieth century.
Looking ahead, however, a question arises: is the long-term growth
‘engine’, based on declining energy/power prices, that has functioned
since the late eighteenth century now stuttering and threatening to
stall? The long trend of declining fossil fuel prices, due to discoveries
and improved exploration and extraction technology is probably near
its end. Moreover, the long-term trend in cheaper and more efficient
capital goods that has led to more efficient conversion of ‘raw’ exergy
inputs to ‘useful work’ – applied to wheels or other mechanical devices –
is also slowing down (Ayres et al., 2003). Higher energy prices will defi-
nitely harm the economy and slow future economic growth. Growth
could even become negative at some point in the (perhaps near) future
(Warr and Ayres, 2006).
It follows that in an era of rising energy prices, growth cannot be taken
for granted. It is by no means necessarily true that our grandchildren
will be a lot richer than we are. It all depends on what our political lead-
ers do in the near term. That, in turn, depends on how clearly they see
the problems and to what extent they are willing to give up short-term
political advantage for long-term economic security.
A further implication is that increasing the efficiency of conversion
of energy (exergy) to useful work – without increasing the cost of useful
work and the end products and services – is crucial. Here is where infor-
mation technology (IT) can play an important future role.

Notes
1. The phrase was attributed to Thomas Carlyle, allegedly inspired by the ‘dis-
mal’ conclusions of Thomas Malthus with regard to population.
2. There is a technical measure for relative importance, called ‘output elastic-
ity’. The output elasticity of each factor of production is the ratio of output
(GDP) increase (percent) obtained by increasing the input by 1 percent.
3
New Narratives for Sustainability:
The Red Pill for Economists
Mario Giampietro and Kozo Mayumi

How good is current understanding of the

sustainability predicament?

At the beginning of the third millennium we are living in an era of

swift changes threatening the stability of the existing global economic
order. The explanation for this fact is simple: the world is full of people
with increasing expectations of economic development and technologi-
cal progress despite a plummeting level of natural resources per capita.
The population increase of more than three billion in the last three
decades was larger than the entire human population growth that took
place in previous millennia (Giampietro and Mayumi, 2009; Giampietro
et al., 2011a) – see the dotted line in figure 3.1.
In relation to the phenomena clearly shown by the dotted line in this
figure we can recall a famous line of Boulding (quoted by Grant, 1988),
which nicely exposes the complete neglect of the issue of scale in the
fairy tale of ‘perpetual economic growth’: ‘Anyone who believes expo-
nential growth can go on forever in a finite world is either a madman
or an economist’.
Another key point shown in figure 3.1 is the tremendous increase in
energy consumption, steeper than the population growth. In spite of
the importance of this fact, it is sad to see that, in the ongoing discus-
sions over sustainability and its governance, due attention is not paid to
the biophysical basis of the economic process.
A physiological analogy can be helpful to describe the seriousness
of the situation and the lack of proper understanding of the metabolic
functioning of modern economies. No one would believe that at the
next World Cup soccer tournament, the players of the various national
teams could possibly play in a competitive way during the entire month

64
 New Narratives for Sustainability 65

8 550

Exosomatic energy (Exa-Joules)

450
Human population (billions)

5 350

4
250
3
150
2

1 Human population
50
Energy consumption
Years (A.D.) 200 500 800 1100 1400 1700 2000

Figure 3.1 Trends of world population and energy consumption (after

Giampietro and Mayumi, 2009)

of competition while eating only half the food calories they eat today
or producing only half the CO2 they produce today. In fact we know
that the metabolic rate of the body of a soccer player is determined by
the metabolic rate (and the relative size) of the various organs making
up a human being. That is, on average, within a human body 1.8 kg of
liver consumes 9.7 W/kg of energy, 1.4 kg of brain consumes 11.6 W/
kg of energy, 0.3 kg of heart consumes 21.3 W/kg, and 28 kg of muscles
consume a certain amount of food energy and emit a certain amount of
CO2. For this reason nobody would believe that a 50 percent cut in food
energy consumption by soccer players is possible, and nobody would
even think about such a policy, at least not for their favorite national
team.
However, many seem to take seriously the ambitious targets continu-
ously proposed and agreed upon at the various world conferences on
climate change (e.g., the last Earth summit in Copenhagen), that is,
reductions of 50, 70 and even 80 percent of the CO2 emissions of indus-
trialized countries, with a timeline of a few decades. Given the world-
wide public attention that these conferences draw, we may conclude
that there apparently is a generalized consensus on the idea that alter-
ing the metabolic pattern of complex socioeconomic systems is much
easier than altering the metabolic pattern of human organisms. We
66 Mario Giampietro and Kozo Mayumi

must also conclude that the most reputable economic advisors of the
most powerful governments keep sending their leaders to try to reach
agreements that are not even close to being feasible according to simple
biophysical realities, but that are defined purely on the basis of wishful
thinking.
Unfortunately, the analogy between the metabolism of the human
body and the metabolism of modern societies entails that these reduc-
tions are not possible. As illustrated in the case study presented below –
studying the metabolic pattern of EU14 countries in section 3 – the CO2
emissions of a country are directly related to its consumption of fossil
energy, which in turn is associated with the expression of key func-
tions required for its maintenance and reproduction. After acknowledg-
ing this point we are forced to realize that it is impossible to achieve
(Giampietro et al., 2011a; 2011b): (a) a dramatic reduction of the energy
consumption of modern societies without affecting negatively their
economic performance; (b) a smooth transition to alternative energy
sources in the short/medium terms.
In this chapter we argue that new narratives based on a sound recog-
nition of the biophysical constraints determining the option space of
societal must be adopted in order to fully understand the sustainability
predicament faced by humankind. Biased ideological statements and
unsound pseudoscientific assumptions about the unlimited power of
both ‘market’ and ‘human ingenuity’ will not help humankind to face
the daunting task of a quick and painless readjustment to new energy
and resource realities.

Understanding Soddy’s prophecy to avoid falling into the

era of ‘Ponzi scheme economics’

Let us start our discussion of the progressive loss of grip on biophys-

ical reality, which results from an excessive focus on monetary flow
accounting, using a joke found on the Internet (for which we could not
identify the original author).

It’s a slow day in the East Texas town of Madisonville. It is raining,

and the little town looks totally deserted. Times are tough, everybody
is in debt and everybody lives on credit. On this particular day a rich
tourist from the East is driving through town. He enters the only
hotel in the sleepy town and lays a hundred dollar bill on the desk
stating he wants to inspect the rooms upstairs in order to pick one
to spend the night. As soon as the man walks up the stairs, the hotel
proprietor takes the hundred dollar bill and runs next door to pay his
 New Narratives for Sustainability 67

debt to the butcher. The butcher takes the $100 and runs down the
street to pay his debt to the pig farmer. The pig farmer then takes the
$100 and heads off to pay his debt to the supplier of feed and fuel.
The guy at the Farmer’s Co-op takes the $100 and runs to pay his
debt to the local prostitute, who has also been facing hard times and
has lately had to offer her “services” on credit. The hooker runs to
the hotel and pays off her debt with the $100 to the hotel proprietor,
paying for the rooms that she had rented when she brought clients to
that establishment. The hotel proprietor then lays the $100 bill back
on the counter so the rich traveller will not suspect anything. At that
moment the traveller from the East walks back down the stairs, after
inspecting the rooms. He picks up the $100 bill and states that the
rooms are not satisfactory. Pockets the money and walks out the door
and leaves town. No one earned anything. However the whole town
is now out of debt, and looks to the future with a lot of optimism.

This joke nicely exposes the risk of the current economic accounting
based on monetary flows, hiding the biophysical roots of the economic
process. For this reason it is useful to briefly trace back a series of his-
torical transitions in the functioning of the economic accounting that
led to such a situation.
Starting from mercantilist times, gold and silver were used as ‘money’
(from the Latin verb ‘monitorare’) to monitor the exchange of goods in
particular. Later on, printed money (fiat money) was also used. However,
the circulation of fiat money was coupled to a certain amount of gold
and silver reserves – according to a mandatory ratio between circulating
money and gold reserve. This situation lasted for a long period of time,
until the curve of the expansion of the world economy reached the
steeper part of exponential growth shown in figure 3.1. At that point,
it became inconvenient to maintain the gold standard because of the
dramatic increase in monetary flows associated with growing transac-
tions creating inflationary phases.
After printing a lot of paper money for the Vietnam War, President
Nixon had to declare the termination of the Bretton Woods agreement
on 15 August 1971 and abolished the mandatory requirement of a fixed
ratio between circulating money and gold reserves. In practical terms,
when looking at the mechanism making it possible to monitor ‘what is
going on’ in the economic process, this decision implied the following
transition:

Conventional economies: Gold  Printed Money Resources 

Biophysical Processes
68 Mario Giampietro and Kozo Mayumi

Monetary economies: Printed Money  Beliefs Resources 

Biophysical Processes

Obviously, a shared belief in the economic system was also required

for the proper operation of the old mechanism of the conventional
economies. In fact, people using money before the 1970s had no doubts
(!) that the central banks had enough gold reserves to cover the claim
made on the printed money. In the new mechanism of monetary econ-
omies the role played by beliefs in enabling further economic growth
became crucial. After removing the credibility backup provided by gold
reserves the beliefs that citizens must have in the system play a much
more important role.
The dramatic change in world economy, the exponential growth of
both population size and energy consumption (figure 3.1), brought
about another crucial change in the functioning of modern economies:
the progressive urbanization of the human population. During the
twentieth century the world’s urban population grew very rapidly, from
220 million to 2.8 billion, and is still growing at an unprecedented
rate. Presently, the urban population covers more than 50 percent of
the world population (about 3.3 billion) and is supposed to reach 5 bil-
lion by 2030 (UNFPA, 2007). When translating these numbers into the
corresponding set of economic activities (functions) to be expressed by
socioeconomic systems, we find that the world economy had to foresee
in the construction of infrastructures and housing for about 2.5 billion
urban people in the twentieth century and will have to take care of
the housing of an additional 1.7 billion urban people over the next 20
years! This implies the investment of an incredible amount of money.
But from where does this money come? How does the pace of genera-
tion of added value associated with the activity of construction com-
pare with the pace of generation of added value associated with other
economic activities?
In this context, it is interesting to look at the data provided by Naredo
(2009) about the virtual monetary increase in real estate (buildings and
land) in the Community of Madrid, Spain, between the years 2000 and
2009. The construction of 570,000 apartments on about 30,000 hectares
resulted in a revaluation of assets of €200,000 million (in 2005 prices).
In comparison, in the year 2009 the total GDP of the Community of
Madrid was €128,000 million with an overall increase from the year
2000 to the year 2009 of about 30 percent. That is, the increase of the
virtual stock of monetary value associated with the increase of value of
 New Narratives for Sustainability 69

private property has been much higher than the increase of GDP in this
community. The readers can immediately recognize that the magnitude
of monetary value that the financial market and the construction indus-
tries could create is not mapping on to any biophysical process. This is
confirmed by the fact that the share of the GDP of the construction sec-
tor is below 10 percent of the total GDP of the city of Madrid (data from
Madrid Economía, 2010).
To understand why this virtual creation of money is possible it is
instructive to know a subtle yet important distinction between ‘prop-
erty’ and ‘possession’ as suggested by Steiger (2008). The distinction is
ingeniously created by the institutions enhancing the role of property
rights that can produce an incredible boost in the value of the stock of
assets – that is, virtual money – which can later on be converted into
the circulation of actual money.

Possession defines a more or less inclusive bundle of rights and duties

connected with the concrete material use and return of resources,
production technologies, products and waste. ... Property, in con-
trast, is a very different and historically quite exceptional mat-
ter. ... According to Steiger ... , “property rights are de jure claims. They
entitle their holders to intangible (non-physical) capacities which
first constitute economic activities: (i) to burden property titles in
issuing money against interest; (ii) to encumber these titles as col-
lateral for obtaining money as capital; (iii) to alienate or exchange
including sale and lease; and (iv) to enforce. Property rights trans-
form possessory rules into possessory rights regulated by law. Thus
individual rule become private rights. Property rights transform
goods and resources into saleable commodities and rentable assets.”
(Steppacher, 2008, 326–7)

The existence of effective institutions guaranteeing property rights

can create a new virtual economy which can boost the biophysical
economic activity through credit leverage. We can use more quotes of
Steppacher on this point:

It is the abstract-immaterial economic potential contained in the

security of a legal property title (called property premium by Gunnar
Heinsohn and Otto Steiger), enabling credit relations, that makes
property the constitutive institution of capitalism – on the con-
dition, of course, that property is titled, registered, protected and
70 Mario Giampietro and Kozo Mayumi

enforceable. ... It is necessary to distinguish the two potentials of prop-

erty: its possession aspect and its property aspect. ... for example, any
proprietor’s parcel of land can be simultaneously tilled (possession
aspect) and mortgaged (property aspect). ... One of the main impli-
cations for development is that “money is a derivative of property
[legal title], and not of goods (possession)”; therefore “accumulation
can start without previous savings” (Steiger, 2006, 187). (Steppacher,
2008, 327–9)

The possibility of enhancing the belief in a virtual economy is the ori-

gin of the magic economic performance of real estate development. In
this way, the real estate development can take advantage of two crucial
characteristics of the metabolic pattern of modern societies:

(i) the advantage represented by fossil energy – the exploitation of

stock-flow supply of energy carriers (heat, electricity or fuel) makes it
possible to get accessible plenty of cheap primary energy sources (e.g.
coal, oil, gas) guaranteeing an abundant supply of cheap products;
(ii) the advantage represented by the specialization in ‘transaction
activities’ (North, 1990; 2005) making it possible, but only for the
economy of developed countries, to use an immense amount of
credit leverage.

The money generated by the construction sector in the form of a large

supply of mortgage money refers to virtual added value yet to be produced.
This money, anticipated by banks via mortgage payments, is supposed to
be repaid in the next 20 to 30 years. Thus, joining together (a) the finan-
cial sector; (b) the construction sector; and (c) a lot of faithful buyers,
it becomes possible to generate a huge amount of virtual added value,
which is available now to the economy, but which still has to be produced
through future societal metabolic processes required to generate the wages
or other forms of income used to repay the mortgage. That is to say, the
repayment of this money will require the consumption of resources and
other production factors in the future. Without the facilitation provided
by the financial market and the guarantee of the respect of private prop-
erty within the given institutional settings, the massive economic activ-
ity of real estate would simply be impossible. This anticipation of money
spent now, however, will have to be paid by future generations (in one
way or another). Repaying this debt does not cause any serious problems
in a perpetual growth economy, but it will turn out to be a real nightmare
in an economy which does not grow (a zero-sum economy).
 New Narratives for Sustainability 71

Going back to our story, this massive use of the credit leverage has
transformed our economic systems into yet another mechanism of
monitoring of monetary flows:

Financial economies: Credit money  Belief of beliefs Virtual

biophysical processes expected in the future

In this new regime, a considerable portion of ‘money’ is no longer

directly printed by the central banks, but is made available through the
credit leverage by the international network of the private banks.
So what are the factors giving credibility to the monitoring role
played by ‘circulating virtual money’ in the era of financial econom-
ics? The set of beliefs can be summarized as follows: (a) the printing of
money in the various countries has been properly done according to
established agreements; (b) the loans given by the banks (all over the
planet, since now we have many banks operating offshore) have been
given according to the accepted rules within established institutional
settings (which ones?); (c) the overall amount of debts of both private
and public financial institutions does not exceed the agreed quantita-
tive limits; and last but certainly not least: (d) these debts, used to sup-
port present consumption levels, will eventually be paid.
The disturbing weakness of the combination of all these factors –
and the joke that started this section can be recalled here – reflects an
important change in how the mechanism of monitoring of financial
economies deals with added value. In this context, Frederick Soddy (a
Nobel Prize winner in chemistry) issued a clear warning as early as 1926
in his book, Wealth, Virtual Wealth and Debt. In this book he criticized
the excessive focus of economists on the analysis of monetary flows to
study the economic process. In his view, a quantitative characterization
of economic flows based only on the accounting of money was errone-
ously using as ‘external referent’ the debt associated with the biophysical
process of economic production and consumption. That is, according to
Soddy, societies have to provide to the money-holders either a product
or a service of a biophysical equivalence. Therefore, the physical token of
‘money’ must be associated with the idea of debt. When dealing with
biophysical processes, we cannot create an energy carrier (heat, electric-
ity, or fuel) without consuming some energy carriers in the process. That
is, a net supply of energy carriers entails: (a) a precedent investment of
energy carriers, and (b) the availability of a primary energy source (e.g.,
coal, oil, gas, renewables and waste, wind photovoltaic) making possible
the conversion. Since energy carriers cannot come out of nothing, the
72 Mario Giampietro and Kozo Mayumi

physical production of goods associated with the production of added

value must be associated with a biophysical process. This is the reason
why, in the past, on printed money we always found a reminder of some
biophysical root associated with economic value, for example, a pound,
gold florin. The very concept of added value should imply that some
sort of valuable biophysical input in addition to labor and capital has to
be invested into its generation.
According to Soddy, tracking only monetary flows means tracking
debts and, therefore, those studying the economy only in terms of mon-
etary flows are studying only a shadow image of the physical wealth of
a country. The real wealth should be associated with an assessment of
the biophysical process of production and consumption of actual goods
and services. In Soddy’s analysis, ‘real’ wealth is generated by the use
of production factors and natural resources within a given institutional
setting in order to stabilize the process of production and consump-
tion of goods and services. The generation of real wealth, therefore, is
affected by different types of constraints, both biophysical and insti-
tutional. Soddy was very aware of the fact that the incredible boost in
economic progress experienced in the twentieth century was due to the
massive switch to fossil energy as the primary energy source for power-
ing the economic process.
Needless to say, economists made fun of the analysis provided by
Soddy. Henry Higgs, who oversaw the new edition of Palgrave’s Dictionary
of Political Economy in the 1920s, reviewed Soddy’s Cartesian Economics:
The Bearing of Physical Science upon State Stewardship in The Economic
Journal, writing: ‘It is sad to see so distinguished a physicist transformed
into a pitiable purveyor of economics fallacies’ (Higgs, 1923). It is obvi-
ous that Higgs could not understand the biophysical basis of economic
systems that Soddy so beautifully described.
Soddy’s warning is clear: if we confuse the wealth generated by a vir-
tual economy based on the accounting of virtual monetary flows with
the wealth generated by an actual economy associated with the produc-
tion and consumption of actual goods and services, the final result will
be perceiving as ‘economic growth’ any massive increase of debts in
such a confusing economic accounting.
To make things more complicated, this confusion between virtual
wealth and real wealth is now taking place: in the last decade, at the
global level – in the so-called globalized economy – at the very same
moment in which natural resources are being depleted at the maximum
rate. Hence, unfortunately, we are maximizing our confusion in the
monitoring done by money, so to speak – by allowing massive injections
 New Narratives for Sustainability 73

of virtual money into the economy –at the very same moment in which
the ‘real economy’ – the actual production of goods and services – is
reducing its biophysical basis of wealth. To repeat, this loss of monitoring
ability is taking place at the very moment in which we would need the
maximum power of biophysical monitoring, instead of monetary moni-
toring, to guide an economy to better use scarce natural resources. On
the contrary, with the existing confusion, those economic systems that
can generate the largest amount of debts are considered the ones with the
‘best’ economic performance, typified by the joke given at the beginning
of this section. It is not by chance that the concept of ‘financial leverage’
has been invented and elaborated upon within developed economies.
To conclude this section we can indicate a fourth virtual mechanism
of monitoring that can be associated with the provocative label of ‘Ponzi
scheme economics’ (a term suggested to us by Jesus Ramos-Martin).

Ponzi scheme economies: Debts  Belief of Beliefs Debts  Belief

of Beliefs

The situation of Ponzi scheme economies is similar to the systemic

ingestion of the blue pill described in the movie The Matrix. The blue
pill indicates an unrealistic perception and representation of the eco-
nomic situation which can carry dangerous consequences. If the infor-
mation associated with money is systematically ridiculed by sloppy
economic policies in terms of regulation of the financial sector and
by sloppy application of economic narratives outside the original field
of applicability, the credibility and the usefulness of the whole dis-
cipline is at stake. For this reason, we believe that economists them-
selves should be the first to denounce and fight against the sliding of
the world economy into an embarrassing planetary Ponzi scheme that
operates against the interest of the vast majority of the human popula-
tion living mainly in developing countries and against the interest of
all future generations.

The understated biophysical reality: the peak oil and the

metabolic pattern of modern societies

In this section we deal with two critical points required to understated

the predicament of sustainability in relation to biophysical constraints:
(a) the implications of peak oil on the future of economic growth
(another important corollary of Soddy’s biophysical concern followed
by Georgescu-Roegen); and (b) the implications of the characteristics of
74 Mario Giampietro and Kozo Mayumi

the metabolic pattern, which entails a major lock-in against the possi-
bility of generating quick changes away from existing levels of produc-
tion and consumption of goods and services.

Peak oil: the end of the perpetual growth myth

Peak oil is a phenomenon of crucial importance in relation to the sus-
tainability predicament facing humankind, particularly when consid-
ering the characteristics of the existing metabolic pattern of modern
societies. In relation to this point we argue that the phenomenon of
peak oil: (a) shatters the myth of perpetual growth, and (b) carries
extremely important consequences in relation to the current global
financial crisis: if the world economy can no longer grow, in biophysi-
cal terms, it will be impossible to repay the huge existing debt. In this
subsection we briefly illustrate the basic concept of peak oil and why
this concept is one of the keys for an informed discussion about our
energetic predicament. In order to illustrate the concept we use a ‘peak
grain’ analogy of the food energy flow in a pre-industrial society.
Imagine the case of two pre-industrial societies harvesting all their
food only from two reservoirs located underground. The two reservoirs
contain different amounts of grain: reservoir A contains 20 million kg
of grain and reservoir B contains 300 million kg of grain. However, the
difference in reservoir size alone does not say anything about how much
grain the society can consume per day. In fact, given their characteristics,
the two reservoirs require a different amount of human activity (work)
for their exploitation. In particular, society B cannot get out more than
300 kg of grain per day from reservoir B. This is due to the fact that,
after having put a certain number of workers in the underground reser-
voir, it is impossible to increase the net supply of grain per day by add-
ing more workers. Additional workers will interfere with each other. On
the contrary, for society A, reservoir A is very easy to access, and there-
fore society A can at will increase the flow of grain harvested (within
certain biophysical limits) depending on how much the society wants
to invest in terms of labor.
Recalling the distinction between stock-flow and fund-service pro-
posed by Georgescu-Roegen (1971) in relation to the availability of
natural resources, the exploitation of reservoir B is similar to milking a
healthy cow in a healthy dairy farm: that is, a fund-service supply (milk
being the service) – it can last for a long period of time, but it is limited in
the milk supply per day. On the contrary, the exploitation of reservoir A
is comparable to getting wine from a gigantic barrel: that is, a stock-flow
supply. Our hypothetical society exploiting reservoir A may decide to
 New Narratives for Sustainability 75

stop investing its own labor in the exploitation and call immigrants to do
the job. In fact, when exploiting reservoir A, society could pay the wages
of this additional labor by using part of the increased flow of grain.
Here, we end our metaphor, hoping that we made our point: peak oil
is not about the fact that we will soon run out of fossil energy. The situ-
ation of reservoir B is already in a clear ‘peak grain’ state, but it will last
much more than reservoir A. Reservoir A has a much shorter lifespan
than reservoir B, however, it can provide to the exploiters the tempo-
rary option to grow and obtain a better standard of living (a higher
level of consumption per capita for a larger number of people, but only
temporarily).
The crucial implication of peak oil is that after having reached a max-
imum fossil energy extraction pace, it becomes impossible for the world
economy to increase further the pace of consumption of energy carri-
ers. For this reason, peak oil will have a tremendous impact by shatter-
ing the set of ideological axioms which have been used thus far in the
perception of development strategies.
For almost a century, Western society has been permeated by an uncon-
tested perception that there is a direct relation among technological
progress, level of consumption and economic and social development.
However, the hidden factor making possible all these changes – the con-
tinuous increase in the rate of fossil energy consumption – has never
been clearly acknowledged. In fact, energy was not included in the clas-
sical list of aggregate production factors in economics! – for example,
Cobb and Douglas (1928).
As illustrated by our analysis of the changes in the metabolic pattern
of modern societies (Giampietro and Mayumi, 2009; Giampietro et al.,
2011a; 2011b), the continuous economic growth experienced in the last
two centuries has been possible because of the intense exploitation of
stock-flow type of primary energy sources (figure 3.1). So far, within
this trend the exploitation of oil has never reached a peak – an exter-
nal constraint preventing additional increase in consumption. On the
other hand, internal constraints – that is, not having enough technical
capital, not having enough skilled laborers – were the limiting factors
to increased consumptions. As a matter of fact, also in recent times
(after the Kyoto Protocol, so to speak) the aggregate consumption of
exosomatic energy at the world level has kept growing, and this growth
has been based on an increasing consumption of fossil energy, as shown
in figure 3.2.
We believe that peak oil is something real and in fact is already here
(Campbell and Laherrère, 1998; Campbell, 2005) to the point that
76 Mario Giampietro and Kozo Mayumi

Primary energy 1850–2008

Kyoto
12
protocol total
11 total
1. fossil fuels
10 2. oil 1.
3. coal
9 4. gas
8 5. biomass
6. nuclear
7 7. hydro
Gtoe

8. geotherm
6
9. sun, wind & other
5
4 2.
3.
3
4.
2
5.
1 6.
7.
0 8.9.
1850 1875 1900 1925 1950 1975 2000 2025
Year

Figure 3.2 So far the pace of consumption of fossil energy has always been
growing

it has even been acknowledged by the conservative and politically

correct IEA (IEA, 2010a; 2010b). What would be the consequences
of peak oil for the future evolution of our modern society? In figure
3.3a, we represent the total commercial energy consumption at the
world level as the area of a rectangle the sides of which refer to the
two axes of the graph: on the vertical axis, the average energy meta-
bolic rate per hour of human activity (EMR SA measured in MJ/h, the
societal average), and on the horizontal axis, the total human activ-
ity (THA) which is proportional to population size (THA, measured
in hours of human activity per year is obtained by multiplying 24
hours times 365 days times population size). In this graph the total
consumption of commercial energy (GJ/year) is represented by the
total area of the gray rectangle.
Assuming a situation of peak oil, the area of the rectangle cannot
increase (we cannot increase the level of total oil consumption per
year). In this situation any increase in population, that is, an enlarge-
ment of the base of the rectangle, will directly translate into a reduction
of the amount of oil that can be used per capita on the planet, that is, a
reduction in the height of the rectangle. This is indicated on the right
side of figure 3.3a.
 New Narratives for Sustainability 77

(a)
Level n: WORLD Level n: WORLD

fossil energy
consumption fossil energy consumption p.c.
per capita

EMRSA

THA THA
population population

(b)
Barrels per person per year
5.5

4.5

3.5

3
19 5
19 7
19 9
19 0
73
19 5
19 7
19 9
19 1
19 3
19 5
87
19 9
19 1
93
19 5
97
20 9
20 1
20 3
20 5
20 7
09
6
6
6
7

7
7
7
8
8
8

8
9

9
0
0
0
0
19

19

19

19

19

Figure 3.3 After reaching a situation of peak oil, an increase in human popu-
lation entails reducing oil consumption per capita (after Ramos-Martin et al.,
2007; data based on BP, 2010b)

As a matter of fact, looking at figure 3.3b we see that the effect of

population growth (faster than the increase in oil consumption) was
already felt in the 1980s. Whereas the consumption of oil in absolute
terms has been increasing (figure 3.2), the consumption per capita
remained more or less the same, around 4.5 barrel/person year in the
last two decades.
Thus far we have examined the general trend of average energy use
per capita in the world level that has been fixed over the past 20 years.
The next question regards what is happening with changes in the meta-
bolic pattern down to a lower level of analysis. In particular, first of all,
we want to look at the distribution of total commercial energy con-
sumption at an individual country level or at the level of groups of
countries. Using the same representation used in figure 3.3a, we illus-
trate in figure 3.4a the commercial energy metabolic rates for different
clusters of countries (AUSCAN stands for Australia, USA and Canada).
78 Mario Giampietro and Kozo Mayumi

After reaching a situation of peak oil, the overall area (sum of the rec-
tangles referring to the various clusters of countries) must remain con-
stant. Any increase in the rate of oil consumption of a given country
above the world average must be offset by a corresponding decrease
in the rate of oil consumption in some other countries. In general we
can envision the possibility of a major reshuffling of socioeconomic
organization at the world level that will lead to alternative metabolic
patterns of energy, plausibly quite different from the ones expressed
so far, unless we discover some ‘unknown’ adequate primary energy
resource having the same quality and quantity as does oil.
Looking at the ‘winners and losers’ seeking for a larger share of the
produced oil, we can see from figure 3.4b that starting the year 2005
the OECD countries are losing the battle. Not only are they no longer
increasing their share of consumption, but they are not even able to
keep up their previous share.

(a)
Level n-1: clusters of countries Level n-1: clusters of countries

EMRSA
?

India China Rest AUSCAN India China Rest AUSCAN

WORLD rest-OECD WORLD rest-OECD
ex-USSR ex-USSR

(b)
90
80 Trends in oil consumption
Million barrels per day

70
60
50 All Other
40
FSU* * Former Soviet Union
30 OECD
20
10
0
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009

Figure 3.4 After reaching a situation of peak oil, an increase in oil consumption
of some countries must lead to a reduction in oil consumption of others (after
Ramos et al., 2007; data based on BP, 2010a)
 New Narratives for Sustainability 79

If the rate of consumption of fossil energy becomes limited at the

global level, what consequences can we expect in the trend of economic
growth in the world? What will happen to the huge amount of debt –
virtual added value based on long-term loans and mortgages – that has
already been used and that has yet to be produced?
Given the set of biophysical constraints to the viability of the metabolic
pattern of modern society, we see that the fairy tale (or beliefs) of perpet-
ual growth plays a crucial mental role. Unfortunately, in trying to main-
tain our present metabolic pattern we are investing in a pattern totally
incompatible with biophysical constraints. The fairy tale says that:

1. Tensions associated with uneven distribution of resources (equity

issue) can be eased by expectations about limitless future economic
growth. That is, if the ‘American dream’ is realizable all around the
planet, then low quality of life in terms of material standard of liv-
ing in poor conditions becomes bearable for a while. Sacrifices can
be accepted more easily if they form part of the task to accomplish a
better future for the children;
2. The economic performance of society can be boosted by increasing
the credit leverage (debts) of a society, since it will be possible to
repay these debts because of further economic growth.

Returning to the distinction between stock-flow type primary energy

and fund-service type primary energy, it is very well possible to purchase
a large amount of coal (stock-service) to burn now, on a promise, in fact or
in law, to make payment at a future day. If the owner of the mine believes
in our promise, she or he only risks the opportunity cost of his coal.
However, if we want to buy on credit a large milk supply (fund-service)
guaranteed for 10 years, the dairy farm owner will have to advance his
own money to buy and feed the required additional cows for that whole
period. A fund-service supply (milk) has a real cost of production which
has to be considered together with the opportunity cost. Moreover, there
is another problem with fund-service supply. Imagine that for economic
reasons the buyer wants a doubling of the supply in a short period of
time. The owner of the mine can accommodate such a request without
major problems, whereas the dairy farmer has a very limited possibil-
ity of increasing in a short period of time the supply of milk due to the
specific constraints of fund-service characteristics. Such an adjustment
would take a lot of time and investment. For this reason, no owner of a
dairy farm would give away large quantities of milk or commit to a large
increase of supply on the basis of a simple promise of future payments.
80 Mario Giampietro and Kozo Mayumi

The discussion above is the reason why the large expansion of eco-
nomic activity can be explained by an autocatalytic loop between: (a)
stock-flow exploitation, and (b) a continuous increase in indebtedness
of the economy. By making debt one can justify the use of more fossil
energy, and using more fossil energy makes it possible to make more
debt. In economic jargon, this interplay between fossil energy and debt
is given the misleading label of ‘leverage’.
As already stated we believe that we are close to peak oil situation
(http://www.aspousa.org/), that means that: (a) it is unreasonable to
expect that oil production will surpass the mark of 90/100 million bar-
rels per day at the global level; (b) it is reasonable to expect that after
the peak, the rate of production will slowly decrease in time due to the
progressive reduction of the quality of the reserves.
In 2008, the consumption of oil has been fluctuating around 85 mil-
lion barrels per day, which made the market very nervous about a pos-
sible future mismatch between demand and supply. This may explain
the increase in price in 2008 of more than $100 per barrel within just
a few months. So, even if we cannot exactly know when peak oil has
been or will be reached, we can safely say that we are close to the situa-
tion illustrated by the exploitation of reservoir B in the example given.
We may remain with oil in the ground for a long period because the
economic demand may drop dramatically when the oil will become
too expensive, but it is very unlikely that, at the world level, we will
experience major increases in the levels of consumption beyond those
experienced in the year 2008.
If this is true, then the narrative of an expanding pie (perpetual
growth) is no longer a valid one and therefore humankind, as a whole,
is getting into a situation which can be characterized as a ‘zero-sum
game’: if someone eats a larger share of the pie, someone else will have
to eat less – let alone dealing with the amount of pie already eaten
on credit, that will never be given back! In this situation, it becomes
increasingly difficult to find win–win solutions for a global economy.
Indeed, there is a potential and serious risk that a rapid expansion of
the market through uncontrolled globalization will increase the con-
nectedness of socioeconomic interactions to a point that will accelerate
conflicts over limiting resources.

The metabolic pattern of modern societies: why it is impossible

dramatically to change the pace of energy consumption
As discussed in section 1, when describing the impossibility of a dramatic
reduction of food consumption for soccer players at the World Cup, it
is impossible to reduce the consumption of energy in the human body
 New Narratives for Sustainability 81

without affecting the expression of some of its functions. In the same

way, the analysis of the metabolic pattern of modern societies makes
it possible to identify typical metabolic benchmarks for economic sec-
tors in charge for expressing key functions in society (Giampietro et al.,
2011a; 2011b).
An example of the metabolic pattern found when carrying out a
comparison over the productive sector of EU14countries is given in fig-
ure 3.5. In this figure we adopt a representation of benchmarks based on
a plane, having on the vertical axis the value of Exosomatic Metabolic
Rate (EMR, the energy consumption per hour of labor – MJ/h), and on
the horizontal axis the value of Economic Labor Productivity (ELP, the
added value generated by the sector per hour – €/h). The data set covers
a historic series, from 1995–2005.
Looking at this figure we can notice a large difference in the val-
ues characterizing the various countries. Productive Sector (PS) means
paid work sectors, except Service and Government Sector (SG). The data
set is arranged according to the International Standard of Industrial
Classification (ISIS). The number of hours in the PS is indicated by the
size of the disks, and the scale used in this graph is tailored to the range
of values found in the sample. The activities of the PS sector range from
heavy industry – for example, the pulp industry associated with indus-
trial forestry management (in Finland and Sweden) and large manu-
facturing such as the steel, metallurgy, and automotive sectors as seen,
for example, in Austria and Belgium, to ‘sophisticated manufacturing’,

Productive Sector

Finland PS. 1995

Exosomatic Metabolic Rate (EMR) - MJ/h

800

700

600 Sweden PS, 1995

Belgium PS, 1992

500
France PS, 1992
Netherlands PS, 1992
400
Germany PS, 1992
Denmark PS, 1992
Greece PS, 1992 UK PS, 1992
300

Spain PS, 1992

200 Austria PS, 1995
Italy PS, 1992 Ireland PS, 1992
Portugal PS, 1992
10 15 20 25 30 35 40 45 50

Economic Labor Prodicitivity (ELP - €/h)

Figure 3.5 Values of EMR and ELP for the Productive Sectors of EU14 countries
82 Mario Giampietro and Kozo Mayumi

including high-tech industries, namely electronics that require skilled

labor, such as in the Netherlands and Denmark.
When moving to the same analysis across different hierarchical lev-
els, we can express the values of EMR and ELP carrying out the analysis
at different hierarchical levels: (a) at the level n – the entire country – we
can assess EMR SA and ELPSA (GDP per hour); (b) at the level n-1 – con-
sidering the two compartments as separated: Paid Work (EMR PW and
ELPPW ) and Household sector (EMR HH); (c) at lower levels – considering
specific sub-sectors such as: PS (Productive Sector) – the one illustrated
in figure 3.5 – and other sectors such as SG (Service and Government)
and AG (Agricultural Sector). When comparing the values resulting from
such an analysis, we can realize the existence of an expected metabolic
pattern common for homogeneous clusters of countries. A discussion
of the standard metabolic pattern found for EU14 countries is given in
Giampietro et al. (2011a).
A view of such a standard pattern for Germany, UK and Spain is
shown in figure 3.6. When using the pattern as benchmark it becomes
possible to evaluate the performance of Ireland.
When representing on the same plane the values of different sectors
defined at different hierarchical levels, the similarities and differences
among the values characterizing the various elements make it possible
to identify an expected pattern:

● at the level n, the average values for whole countries are included in
the range of EMR SA: 10 – 40 MJ/h; and ELPSA (GDP/h): 1.1 – 3.5 €/h;
● at the level n-1, the average values for the HH sector are included in
the range of EMR HH: 2 – 8 MJ/h (the system of accounting does not
attribute any sectoral GDP to HH)
● at the level n-2, the average values for the PS sector are included in the
range of EMR PS: 130 – 1000 MJ/h; and ELPPS: 8 – 55 €/h;
● at the level n-2, the average values for the SG sector are included in
the range of EMR SG: 30 – 100 MJ/h; and ELPSG: 12 – 42 €/h;
● at the level n-3, the average values for the AG sector are included in
the range of EMR AG: 10 – 450 MJ/h; and ELPAG: 3 – 29 €/h.

Starting from this type of analysis two points can be made:

● as illustrated in figure 3.6 using the expected benchmark values (associ-

ated with a typology of metabolism) it becomes possible to individuate
‘outliers’. In this example, the values EMR PS and ELPPS of the PS sector
of Ireland indicate an anomalous behavior in relation to the pattern
expressed by other EU countries. This situation can be associated with
 New Narratives for Sustainability 83

a different relation between the ‘biophysical reading’ and the ‘virtual

monetary reading’ provided for this economic sector;
● when considering the typical metabolic rates of the different compart-
ments we can notice that no reduction of energy consumptions (per
hour of human activity) are visible for all the considered compart-
ments of society. Moreover, the Productive Sectors of the EU14 are all
increasing their pace of energy consumption. The reduction of energy
intensity measured by naïve analysis based on the Energy Intensity
indicator is generated by the fact that the fraction of GDP which is
coming from the PS sector is falling lower and lower in developed
countries (less than 35 percent) – Giampietro et al. (2011a). The solu-
tion of importing energy-intensive goods (adopted at the moment by
the majority of developed countries), rather than producing them, is
reducing the energy intensity of the economy. However, this solution
may be effective in the short term, but it does not represent a long-
term solution to the challenge posed by peak oil. In fact, with short-
ages of energy we can expect that being dependent on import for basic
goods can sooner or later become a dangerous strategy to follow.

The red pill prescribed for economists

The dangerous formation of granfalloons in the sustainability

debate: the agro-biofuel folly
Despite the seriousness of the biophysical constraints presented thus
far, the inertia that resists necessary change in social institutions and
behavioral patterns is still quite strong. The cultural resistance to change
and ‘institutional lock-in’ are the most important causes of the danger-
ous formation of ‘granfalloons’.
The term granfalloon was first introduced by Kurt Vonnegut (1963)
to indicate ‘a proud and meaningless association of human beings’.
Wikipedia provides the following definition (among others): ‘A group
of people who believe that they have a special connection and who
believe they are helping to bring about a greater plan, but are actually
not’. Long ago, Adam Smith ([1759] 1981, 456) offered essentially the
same opinion shortly after introducing the term ‘invisible hand’: ‘I
have never known much good done by those who affected to trade for
the public good. It is an affectation, indeed, not very common among
merchants, and very few words need be employed in dissuading them
from it’. The idea of using the concept of granfalloon to explain the
various ‘technological lemons’ already implemented in sustainability
policies was suggested to us by Vaclav Smil (personal communica-
tion). According to Pratkanis (1995, 20):
84 Mario Giampietro and Kozo Mayumi

Granfalloons are powerful propaganda devices because they are easy

to create and, once established, the granfalloon defines social real-
ity and maintains social identities. Information is dependent on the
granfalloon. Since most granfalloons quickly develop outgroups,
criticisms can be attributed to those ‘evil ones’ outside the group,
who are thus stifled. To maintain a desired social identity, such as
that of a seeker or a New Age rebel, one must obey the dictates of the
granfalloon and its leaders.

The dangerous lock-in between: (a) aspirations expressed by the public

opinion worried about changes; (b) politicians (capable of guaranteeing
350
Lin

GERMANY
1992–2005
Level n-2
300

Germany PS, 1992

250
200

Germany PW, 1992

150

Germany Societal Avergae, 1992

100
EMR – MJ/hr

whole
50

Germany AG, 1992 Germany SG, 1992

0

0 5 10 15 20 25 30 35 40 45
Level n
Lin

SPAIN
1992–2005
Spain PS, 1992

Spain PW, 1992

Spain Societal Average, 1992

EMR – MJ/hr

whole

Spain AG, 1992 Spain SG, 1992

Level n

Continued
 New Narratives for Sustainability 85

350
UK
1992–2005
UK PS, 1992

300
250
200

UK PW, 1992
150

UK Social Average, 1992

100

whole
50

UK AG, 1992 UK SG, 1992

0

0 5 10 15 20 25 30 35 40 45 50
Level n
Lin
350
Lin

IRELAND
1992–2005
!
300

Ireland PS, 1992

250
200
150

Ireland PW, 1992

50 100

Ireland Societal Average, 1992

whole
EMR – Mj/hr

Ireland SG, 1992

0

Ireland AG, 1992

0 5 10 15 20 25 30 35 40 45 50
Level n Lin
2005

Figure 3.6 The benchmark values of four countries typical of the metabolic
pattern (across levels) of EU14 countries

subsidies) looking for consensus; and (c) powerful lobbies (capable of

using the subsidies) looking for more profit, is well illustrated by the
following extracts from a letter that US Senator Ken Salazar sent to The
Gazette of Colorado Springs.

Our national security demands that we meet the challenge of gen-

erating 25 per cent of our nation’s energy from renewable sources
by 2025. ... According to a recent national survey, 98 per cent of vot-
ers feel that meeting 25 per cent of our energy needs from renewa-
bles by 2025 is important for the country, and 90 per cent of voters
86 Mario Giampietro and Kozo Mayumi

believe this goal is achievable. This kind of bipartisan support is

almost unprecedented and signals a willingness to move our coun-
try forward toward greater energy independence. ... Is it practical?
Certainly. (Gazette.com, 2006)

As a matter of fact the policy support to agro-biofuels is a classic exam-

ple of implementation of a ‘technological lemon’ in which powerful
lobbies were riding a granfalloon (Giampietro and Mayumi, 2009).
When analyzing the flow of billions of euros and dollars going into
these policies annually, one can notice that: (a) the largest amount of
subsidies given by developed countries to the development of biofuels
have gone so far into the worst of the available options – the making of
biofuels from conventional agricultural crops both in United States and
the EU. With this solution the amount of fossil energy going into the
process of production is more or less the same amount of energy com-
ing out. Moreover, the production of fuel for transportation competes
with the production of food for nutrition (Giampietro and Mayumi,
2009). This implies that this policy is not helping the energy security
of either the United States or EU nor generating any energy savings;
and (b) in relation to the greenhouse gas emissions, when consider-
ing also the effect of changes in land uses, with existing techniques,
the conventional techniques of biofuel production do increase the CO2
emissions going into the atmosphere (Searchinger et al., 2008; Fargione
et al., 2008; Giampietro and Mayumi, 2009).
The important point to be made here is that we should expect, rather
than being surprised that those who are in power will tend to select those
narratives about sustainability which will stabilize themselves! Those in
power tend to operate to preserve their own beliefs and to achieve their
own goals, and this has nothing to do with the semantic aspects that
can be properly associated with scientific discussions.
As a matter of fact, the problems with a massive production of agro-
biofuels are pretty well known. Because of the massive production of
biofuels the prices of food went up all over the world, to a point that the
several senior officers within the UN (including the secretary general),
the president of the World Bank, the Nobel prize-winner in economics,
Paul Krugman, and a large number of NGOs called for an immediate
stop to agro-biofuel production (Giampietro and Mayumi, 2009). The
production of ethanol from corn in the United States has resulted in a
massive economic disaster for the investors and the net energy produc-
tion of this alternative source is practically negligible, as already men-
tioned (Giampietro and Mayumi, 2009).
 New Narratives for Sustainability 87

However, this policy is still being implemented at the moment we

are writing this chapter. From this fact, it is evident that several other
key social actors (those having the power of defining the narratives to
be used in scientific analysis) are very satisfied by the large amount of
investment going into this policy. A tentative list would include the fol-
lowing (Giampietro and Mayumi, 2009):

(i) the companies producing technical inputs for agriculture,

which dramatically increased their profit margin;
(ii) the companies producing GMOs, which finally got out from
the problems affecting the large-scale production of food: in
fact, there are no restrictions for the use of GMOs in the pro-
duction of biofuels;
(iii) the big car industries using the reassuring scenarios of a large
scale supply of biofuels to soothe potential buyers and share-
holders about the future of the car industry;
(iv) the politicians and administrators willing to tranquilize their
voters: in this way, they can finally show that they are doing
something good (facts not words) in relation to sustainability;
(v) the various industries that jumped onto the bandwagon of
biofuels (technology for producing biofuels) can make profits
thanks to the generous supply of subsidies;
(vi) the ministries of agriculture and farmers’ unions of developed
countries finally saw a way out from the continuous shrink-
ing of funds and political influence leading to an agonizing
situation of agriculture;
(vii) the universities with agriculture studies, all over the world,
saw golden opportunities for finally attracting research funds
again;
(viii) an army of professional world-savers (NGOs and activists)
seeking the opportunity to get a decent salary; and finally
(ix) people, a large portion of ordinary people concerned about
their future and who are looking for a denial of the lack of
sustainability of their pattern of development. What they are
looking for is someone to reassure them that they will be able
to continue to do what they are currently doing indefinitely
into the future (this applies mostly to people living in devel-
oped countries).

When so many powerful groups of social actors share their beliefs

and goals, especially if they require a denial of the need for changing
88 Mario Giampietro and Kozo Mayumi

(autistic attitude), it becomes difficult to properly operate the quality

control within a semiotic process supposed to control the production
and consumption of scientific information for decision making.

The crusade against climate change: another granfalloon?

In the last decade, the scientific discussion of sustainability has been
monopolized by concerns for climate change. We do not share this
perception of priority, and instead believe that sooner or later peak oil
will eventually determine a new definition of sustainability. Indeed, we
believe that humankind should give full priority to the task of adjusting
to new energy realities in the next 20 to 30 years; a readjustment that
will have to take place well before the year 2050. This relatively short
time frame carries the risk that the transition to a different metabolic
pattern – one based on lower energy consumption – is not necessarily
going to be smooth (Smil, 2001; 2003; 2008). This is certainly a reason
for concern, because in any case, this readjustment will be forced on us
by thermodynamic laws which, in spite of our ingenuity, still regulate
our metabolic pattern. We strongly believe that policies focused on new
energy realities should figure at the top of the agenda rather than poli-
cies aimed at avoiding a rise in sea level in the year 2100!
Almost every scientific paper or technical report dealing with quanti-
tative analysis of climate change starts off with a paragraph underscor-
ing that climate change is the most important environmental problem
faced by humankind (see, for example, Haruzan, 2009; The City of
Calgary, 2006). This statement is usually backed up by referring to other
papers making the same statement. Are we sure about the veracity of the
assumption that climate change is the most important environmental
preoccupation of humankind? How can we (humankind) be so certain
about that? For sure, if one would ask the people living in Afghanistan
or Iraq, having experienced the heavy stress of a war for over 20 years
now, or the people from Haiti, exposed to a nasty cholera epidemic after
a devastating earthquake, probably one would get a completely different
definition of priorities and the priority of problems to be solved. What
if we would ask the indigenous people driven out from their homelands
by multinationals grabbing lands to make biofuels – a policy which is
justified by the fight against climate change?
As a matter of fact, as indicated above, the authors of this chapter seri-
ously doubt whether the majority of people living in poor conditions
in many regions of the world (e.g., Chinese miners in cities in which
the air pollution is equivalent to smoking eight packs of cigarettes a
day) would list climate change among their most important problems
 New Narratives for Sustainability 89

of sustainability. On the other hand, we are pretty sure that most peo-
ple in the Netherlands and Bangladesh, whether rich or poor, are wor-
ried about this event: they are likely to put climate change among their
most important environmental threats for fear of a future rise in sea
level.
A quick look at available information about these points seems to
confirm our strong belief: (a) Gallup polls (2009) conducted in 127
countries in 2007 and 2008 revealed that a third of the world popu-
lation had never heard of global warming; public awareness of global
warming tends to be high in developed countries and low in developing
countries; (b) a poll by the Pew Research Center (2009) on the effect of
the economic crisis on the perception of priorities over political issues
in the United States indicated that when facing a crisis the economy
and employment trump all other policy priorities: global warming
was ranked last in the list of 20 possible priorities; (c) the findings of a
Gallup poll (2010) ranked the perceived threats to the future well-being
of the United States as follows: terrorism, federal government debt, the
excessive size of the central government, illegal immigration, health-
care costs, unemployment, wars in Iraq/Afghanistan, the size and power
of large corporations, discrimination against minority groups and the
environment (including global warming). Starting from the year 2010
the category of ‘climate change’ had to be merged with another cat-
egory, ‘the environment’, in order to remain among the relevant issues;
(d) lasting a poll by the Rasmussen Reports (2011) about ‘questions of
importance of issues’, the category ‘climate change’ was dropped alto-
gether; it is not even included among the relevant issues to be ranked
any more.
Taking into consideration that people of different ages and back-
grounds living in different places on this planet do express a different
storytelling about priorities in relation to sustainability, how does one
decide which are the main preoccupations of humankind? For example,
even in developed countries, we believe that the majority of the read-
ers of this chapter, if younger than 30, will not receive a decent pen-
sion when reaching retirement age. Should these young people be more
worried about this fact or about the rise in sea level in 2100? Since our
personal opinion is fairly irrelevant, whose personal opinion should be
considered as relevant and how?
In relation to this point we want to make a special remark about the
narrative proposed by the economists: addressing the problem of cli-
mate change by calculating the right price of CO2 emissions in order
to generate optimizing policies. The acceptance of this narrative makes
90 Mario Giampietro and Kozo Mayumi

them a very valuable group of social actors in the discussions over sus-
tainability. In fact, accepting this narrative means agreeing that society
has a problem – excessive accumulation of CO2 in the atmosphere – that
economists can solve. Such a solution can only be obtained by those
capable of calculating the ‘right’ price per ton of CO2. This economic
narrative is well known: since the market can solve any problem, what
we have to do is to rely on those experts capable of calculating the right
prices. However, to achieve this goal there are three pieces of infor-
mation which are absolutely necessary: (a) how much additional tons
of CO2 can be dumped into the atmosphere before generating serious
damage; (b) what would be a fair share of emissions to be allocated
to each of the countries affected by such a regulation. This decision
should be made after considering that they have different population
size, levels of economic development, histories, geographic and climatic
conditions; and (c) the anticipated negative effect on the economic per-
formances of the various countries of the world that a given level of
taxation on CO2 emissions would imply. Many scientists (economists
and non-economists) are pretty sure that none of these three pieces of
information is knowable, let alone known in substantive terms (Spash,
2010). However, this skepticism did not prevent the acceptance of this
modeling strategy as a valid policy option in the international arena for
the implementation of a regulatory scheme. Let us imagine that we had
a perfect climate treaty. ... Power is about being able to impose your favorite
narratives.
We believe that the obsessive-compulsive attitude toward climate
change prevents serious deliberation over the unsustainability of the
current pattern of economic growth. A well-known human strategy to
cope with stress is about transforming a complex phenomenon, requir-
ing reflexivity, into a simple technical problem, which can be fixed using
a ‘silver bullet’ solution (e.g., finding the right price of a ton of CO2).
Human beings tend to naturally experience anxiety when facing com-
plex and pressing problems, such as sustainability problems. Anxiety
typically follows from the fact that sustainability problems require
reflexivity in the process of decision making. Indeed, a real semiotic
process entails questioning the validity of our own identity within the
semiotic process and changing it if necessary. To deal with the anxiety
the problem invokes, human beings have developed defense mecha-
nisms (or coping strategies) that go from the total denial of the existence
of problems too complex to be handled, to the by-default assumption
that any type of problem can be handled by simple technological fixes
(Ravetz, 1971). In the latter strategy, the tension is conveniently shifted
 New Narratives for Sustainability 91

from the need of changing ourselves to the need of finding a technolog-

ical solution capable of fixing the external world. The use of economic
narrative for dealing with sustainability problems is a perfect example
of application of this strategy in order to prevent the insurgence of such
anxiety: the identity of the storyteller (the rational Homo economicus)
is never by default put into discussion. As a matter of fact, it does not
even show up in the economic representation, since the identity of ‘the
rational optimizer’ is taken for granted in the pre-analytical step as if
it were God.
In the narrative adopted by economists, all that is needed is a silver
bullet (a backstop technology) capable of fixing the external world. But
let us suppose for a moment that a backstop technology were indeed
available to solve the problem of CO2 accumulation in the atmosphere.
Let us imagine that tomorrow we could control the concentration of
CO2 in the atmosphere at will. Would this solve the sustainability prob-
lems of humankind? Obviously, the answer to this question must be
no; even after solving the problem of GHG accumulation in the atmos-
phere, perpetual economic growth of humankind still remains impossi-
ble. Other external and internal biophysical constraints (e.g., shortages
of primary energy sources, of water, loss of biodiversity and the collapse
of social fabric under the excessive pace of becoming modern societies)
make it impossible to maintain the existing pace of expansion of the
modern pattern of production and consumption of goods and services,
typical of developed society, to all of humankind.
So, after accepting this point, how wise is it then to focus all our
priorities on fixing the problems of climate change as if it were the
single most-important problem of sustainability? Is ‘the right price of
one ton of CO2’ the most valuable piece of information regarding the
sustainability of human progress on this planet? How is it possible that
economic narratives that have always totally ignored the biophysical
mechanisms behind the expression of the metabolic pattern of Gaia,
predominate in discussions of the nature and stability of geochemical
cycles?

Conclusion

At the beginning of the famous 1999 film The Matrix, the protagonist is
asked whether he is willing to take the ‘red pill’, capable of showing him
the painful truth of reality, or the ‘blue pill’, allowing him to remain
within the blissful simulation of reality that the establishment wants
him to see. Since then, the ‘red pill’ concept symbolizes the possibility
92 Mario Giampietro and Kozo Mayumi

of getting a fresh view of something previously perceived in a different

way from within a well-consolidated framework. In colloquial terms,
taking the red pill means a willingness to challenge the existing percep-
tion of the external world. We claim that it is high time the economists
acknowledge the necessity of taking the red pill.
The scientific story of the book The Limits to Growth is a good meta-
phor for understanding the role played by ideology when defining the
quality of scientific analysis to be used for sustainability governance. In
1972 a group of scientists led by Donella Meadows predicted that the
economic growth of the world economy would face biophysical limits
at the beginning of the third millennium. As a matter of fact they pre-
dicted for the first decade of the 21st century a first important increase
in the price of energy that would trigger a first global economic crisis
(!). To the best of our knowledge no economic model has ever predicted
future events over a time period of 30 years with such amazing accu-
racy. However, incredible but true, in the last 20 years or so the predic-
tions of The Limits to Growth have only been used by economists to
stigmatize the ridiculous incompetence of the prophets of doom.
Unfortunately, the inconvenient truth is that in developed countries
neither the establishment nor the general public wants to take the ‘red
pill’, thereby having to acknowledge the fact that in the next decades
the world economy will have to adjust to new biophysical realities.
Many seem to prefer to worry about the sea level in the year 2100 while
running up additional debts to repay previous debts. The official sci-
entific establishment does not consider as relevant scientific work that
is aimed at expanding our knowledge about constraints and problems
which have to be faced – let alone scientific work aimed at proving
wrong some of the most popular narratives. The official scientific estab-
lishment only wants us to keep taking the blue pill: encouraging scien-
tific work that endorses the official storytelling based on fairy tales of
perpetual growth and silver bullets. Unfortunately, the vast majority of
economists, the mainstream as well as a few heterodox economists, are
working for the blue side.
In the third millennium, whether we want to acknowledge it or
not, all the economies of this planet will be living in troubled waters.
When discussing their future the various countries will have to decide
whether they want to play the role of the fish – believing fairy tales – or
the fisherman – adjusting quickly to new realities. In the analysis of this
dilemma the economists should decide the side on which they want to
play.
 New Narratives for Sustainability 93

Studying the wisdom of nature we can learn that for millions of years
natural ecosystems have developed wise strategies for coping with the
interaction of different communities sharing limited resources. The
natural solution is ‘niche differentiation’, that is, modulating wisely the
level of connectedness of interacting systems by generating heteroge-
neous metabolic patterns that avoid direct competition for common
resources. According to this wisdom, naïve strategies for a globalized
economy realized by imposing a common pattern of economic activi-
ties should be considered as a step in the wrong direction. Probably, the
world economy should learn from the wisdom of nature.
4
Social Metabolism, Environmental
Cost-Shifting and Valuation
Languages
Joan Martínez-Alier

Introduction

Linking Ecological Economics with Political Ecology, I discuss four main

issues which one can learn from K.W. Kapp (1910–76) and other ecologi-
cal economists. First, the economy is an open system which must be
described physically (entry of energy and materials, exit of dissipated
energy and material waste). This is why Nicholas Georgescu-Roegen
(1966; 1971) analyzed the economy in terms of a ‘metabolic flow’.
Second, externalities are preferably seen not as market failures but as
cost-shifting to future generations, to the poor and to other species. For
instance, the very real fact that in the United States power stations pay
nothing for carbon dioxide production or that Spanish fishing compa-
nies pay nothing for overfishing the world’s oceans, indicates successful
cost-shifting. A zero price for pollution or for resource extraction does
not signal so much a market failure as a relation of power (Martínez-
Alier and O’Connor, 1999; O’Connor and Spash, 1999). Third, not all
values can be reduced to a single standard; there is incommensurability
of values (a notion that K.W. Kapp adopted from Otto Neurath’s ini-
tial contribution to the Socialist Calculation Debate of the 1920s and
1930s). Fourth, and linked to the previous points, in order to under-
stand complex realities we need to bring into play the different sci-
ences, also following Otto Neurath’s idea of an ‘orchestration of the
sciences’, attempting to explain history and also to construct scenarios
of the future dialectically.
One distinguishing feature of ecological economics is the attention
paid to the physical side of the economy. The economy has three levels.

94
 Social Metabolism and Languages of Valuation 95

First, the financial level, where as Frederick Soddy explained (1922;

1926; Daly, 1980; Martínez-Alier, 1987), it is easy to increase debts. In
2008–09 in Western economies, public debt increased by buying pri-
vate debt and by increasing public expenditure to stimulate demand
and get out of the crisis. It is now doubtful that all debts can be paid
back. This could only be achieved by inflation or by growth. However,
growth stumbles on resource scarcity and on the awareness of climate
disruption and biodiversity loss.
Then, there is the second level, the so-called real economy or produc-
tive economy (cars, buildings, paid services, etc.) measured by GDP.
When the real economy grows it allows debts to be paid back. This
second level rests on a physical economy, and there is little possibil-
ity of ‘absolute’ dematerialization, while ‘relative’ dematerialization
(increased resource productivity) leads sometimes to Jevons’s Paradox.
Notice, moreover, that many products and services (environmental and
human) are not accounted for in the GDP. Growth of GDP sometimes
merely expresses the fact that more unpaid services become commodi-
ties, or that nature is being destroyed. The critique of GDP as a faulty
measurement of human well-being is widespread.
Then, there is a third bottom level, like the engine room in a big
passenger ship, the real-real economy, the flows of energy and materi-
als, and the production of waste (such as carbon dioxide). The ecologi-
cal economists have long brought attention to such metabolic flows. It
is futile to increase the ship’s upper deck or the second level without
a corresponding increase in the lower level, the functioning of which
responds to the laws of physics, chemistry and biology more than to the
laws of economics.
An economy based on the fossil fuels is clearly not sustainable in
the long run. Even if the economy would not grow, energy cannot be
recycled and, therefore, ‘fresh’ supplies of fossil fuels would be needed
all the time (from the Niger Delta? From the Amazon? Or the Alberta
tar sands? From the Gulf of Mexico? From coal or shale gas?). Materials
are only recycled to some extent; therefore ‘fresh’ supplies of materials
are needed even in a steady-state economy at present levels of consump-
tion. Hence, the fights all over the world over bauxite, copper or iron
mining, on top of the struggles for oil or shale gas extraction. But also
some unexpected proposals, such as Yasuní ITT (Ishpingo-Tambococha-
Tiputini) in Ecuador (‘leaving oil in the ground’) as we reach the peak in
the Hubbert curve. Coal is far more plentiful than oil, but it causes local
pollution and increases carbon dioxide emissions. There are also many
conflicts on extraction of biomass (paper pulp, agrofuels).
96 Joan Martínez-Alier

In summary, the economy is seen here as a system necessarily open

to the entry of energy and materials and to the exit of waste (the Open
System Approach, Berger and Elsner, 2007), which characterizes eco-
logical economics from the beginning (Martínez-Alier, 1987). And
externalities are seen as cost-shifting, which sometimes cause ecologi-
cal distribution conflicts (Martínez-Alier, 2009b).

The environmentalism of the poor

Focusing on case studies, the field of political ecology studied since

the 1980s (Peet and Watts, 1996; Bryant and Bailey, 1997; Rocheleau
et al., 1996; Goldman, 1998), many environmental conflicts in south-
ern countries. Going beyond case studies, researchers compile statistics
of conflicts over resource extraction and waste disposal. For instance,
Gerber (2010) researched conflicts on industrial tree plantations for
wood, palm oil and rubber production, which are among the fastest
growing monocultures and are currently being promoted as carbon
sinks and energy producers. Such plantations spark a large number of
conflicts between companies and local populations. These are conflicts
on the HANPP, the human appropriation of net primary production.
Gerber investigated the impacts of the plantations, the social traits of
the protesters involved, and the modalities of the conflicts. Relying on
information from activist organizations, on his own case studies in
Cameroon and Ecuador, and on a literature review corresponding to
58 conflict cases, he found that a main cause of resistance is corporate
control over land, resulting in displacements and the end of local uses
of ecosystems as they are replaced by monocultures. Resistance affirms
a ‘moral economy’ of local populations and includes the ‘weapons of
the weak’, ranging from dialogue to direct confrontation and from local
to international involvement in a ‘glocal’ pattern (Swyngedouw, 1997;
2004). Resistance often involves environmental justice organizations –
demonstrations, lawsuits, road blockades and tree uprooting have been
reported in several countries. Authorities have responded by repression
in about half of the cases analyzed, while popular struggles have been
able to stop plantations in about one fifth, mainly through winning
lawsuits or by massive social unrest. Gerber gives statistics on gender
participation, and on cases involving murder. Such movements have a
double face. They can be seen as classical land conflicts. They also have
an ecological content.
One can enumerate cases and do studies on them (Guha and Martínez-
Alier, 1997; Gerber et al., 2009) trying to combine ecological economics
 Social Metabolism and Languages of Valuation 97

and political ecology. Or, rather, one can go one step forward and draw
on the ‘activist knowledge’ of the environmental justice organizations
to compile inventories and statistics of conflicts on oil extraction, min-
ing or biomass, not forgetting, however, that while conflict often signals
injustice, many injustices do not immediately produce open conflicts.

Varieties of environmentalism

This kind of environmentalism is very different from ‘the cult of wil-

derness’ (Martínez-Alier, 1995; Brechin, 1999; Guha and Martínez-Alier,
1999; Guha, 2000). The ‘cult of wilderness’ is only one of the varieties
of environmentalism. From 1990 onwards, a different kind of environ-
mentalism was identified as the ‘environmentalism of the poor’, focus-
ing on the global South but closely related to the ‘environmental justice’
movement in the United States.
Almost 40 years after the start of the Chipko movement in 1973,
nearly 25 years after the death of Chico Mendes in December 1988
in Brazil as the victim of a ‘tragedy of enclosures’, 15 years after the
death of Ken Saro-Wiwa and his companions for defending the Niger
Delta and its populations against the Shell company and the govern-
ment of Nigeria, the debate on the environmentalism of the poor is
growing (Nixon, 2011). As this chapter is being prepared for publica-
tion, the environmental justice organization Environmental Rights
Action (ERA) from Nigeria is suing Shell in The Netherlands for oil
spills and gas flaring in the Niger Delta, while in Brazil, in the state
of Parà, known environmentalists defending the majestic and useful
Brazilian nut trees against large-scale cattle farming are killed (such as
José Cláudio Ribeiro and Maria do Espírito Santo on 24 May 2011). The
road-building program called IIRSA (Iniciativa para la Integración de la
Infraestructura Regional Suramericana) crosses the Amazon in several
directions, and nobody can believe that the current governments in
Brasilia, Bolivia or Peru have any will to stop deforestation.
The environmental sociologist Riley Dunlap disputed the long-held
assumption that the citizens of poor nations will not support efforts to
protect the environment, since they are too preoccupied with meeting
basic needs such as food and housing. Dunlap and York (2008) compared
results from four large cross-national surveys conducted among several
peoples with differing levels of average income. Results showed that citi-
zens of poorer nations were equally, if not more, concerned about the
environment than citizens in wealthier countries. Coinciding with the
thesis on the ‘environmentalism of the poor’, Dunlap and York argue
98 Joan Martínez-Alier

that Ronald Inglehart’s explanation of the growth of environmentalism

resulting from a shift to post-materialist values fails to recognize that
environmental problems are often a threat to material welfare. For exam-
ple, nuclear radiation harms human health, overfishing threatens future
food supplies and marine biodiversity, while deforestation in a country
such as India undermines the livelihoods of people who depend on for-
ests for firewood, cattle feed, food sources, and medicinal products.
Sociologists, political scientists and economists have ignored the
environmentalism of the poor, as have the two main currents of envi-
ronmentalism: the cult of wilderness and the gospel of eco-efficiency.
Adams and Jeanrenaud (2008), in a booklet for the IUCN (International
Union for Conservation of Nature) launched at the World Conservation
Congress in Barcelona in October 2008, unsuccessfully tried to bring
together the ‘environmentalism of the poor’ and the global environ-
ment and conservation movement identified with the cult of wilder-
ness and epitomized by membership of the IUCN that excludes many
organizations dedicated to environmental justice across the world,
including those in the United States.
The environmentalism of the poor is represented by EJOs (environ-
mental justice organizations or networks) like Oilwatch, Mines and
Communities, the International Rivers Network, the Mangrove Action
Project, and the World Rainforest Movement, which uses the slogan
‘Tree Plantations are not Forests’. In India, Toxics Link denounces the
exports of ships for dismantling in Alang on the coast of Gujarat, as
well as the export of electronic waste from rich to poor countries. Vía
Campesina is a world network of peasant organizations that oppose
the imposition of modern agriculture on their communities, because it
is less energy-efficient than traditional peasant agriculture, uses more
chemical pollutants, and simplifies biodiversity by relying on a very
small number of seed varieties and thus places little value on the many
varieties of seeds that have co-evolved over thousands of years through
peasant farming. Other organizations demand ‘Climate Justice’ and the
repayment of the ecological debt from North to South, which includes
the climate debt or carbon debt, that is, damages from rich countries
caused by excessive per capita emissions of carbon dioxide (the main
effluent of affluence), together with claims resulting from biopiracy,
ecologically unequal exchange, and environmental liabilities from pri-
vate corporations or northern governments.
These movements combine livelihood, social, economic and environ-
mental issues with issues of extraction and pollution. They set their
 Social Metabolism and Languages of Valuation 99

‘moral economy’ in opposition to the logic of extraction of oil, minerals,

wood, feedstuffs, agrofuels or paper pulp at the ‘commodity frontiers’,
defending biodiversity and their own livelihoods. In many instances
they draw on a sense of local identity (indigenous rights and values,
such as the sacredness of the land), but they could connect with the
politics of the Left. However, the traditional Left in southern countries
still tends to see environmentalism as a ‘luxury of the rich’.
Sunita Narain (2008), writing some years ago in Down to Earth, listed
some conflicts in India falling under the category of environmentalism
of the poor:

In Sikkim, bowing to local protests, the government has cancelled

eleven hydro-electric projects. In Arunachal Pradesh, dam projects
are being cleared at breakneck speed and resistance is growing. In
Uttarakhand last month, two projects on the Ganga were put on hold
and there is growing concern about the rest. In Himachal Pradesh,
dams are so controversial that elections were won where candidates
said they would not allow these to be built. Many other projects, from
thermal power stations to “Greenfield” mining, are being resisted.
The South Korean giant Posco’s iron ore mine, steel plant and port
are under fire. The prime minister has promised the South Korean
premier the project will go ahead by August. But local people are not
listening. They don’t want to lose their land and livelihood and do
not believe in promises of compensation. In Maharashtra, mango
growers are up in arms against the proposed thermal power station
in Ratnagiri. In every nook and corner of the country where land is
acquired, or water sourced for industry, people are fighting even to
death. There are wounds. There is violence. There is also desperation.
Like it or not, there are a million mutinies today. ... After I visited
Kalinganagar, where villagers died protesting against Tata’s project, I
wrote this was not about competition or Naxalism. These were poor
villagers who knew they did not have the skills to survive in the
modern world. They had seen their neighbors displaced, promised
jobs and money that never came. They knew they were poor. But
they also knew modern development would make them poorer. It
was the same in prosperous Goa, where I found village after village
fighting against the powerful mining lobby.

Activists in many countries understand and use the concept of the ‘envi-
ronmentalism of the poor’. Thus, in India (which is its cradle), Sunita
100 Joan Martínez-Alier

Narain (2011) wrote recently (once again) on the environmentalism of

the poor in an article in Business Standard from which I quote:

The year 2010 was a loud year for the environment. High profile
projects – from Vedanta to Posco and Navi Mumbai airport and now
Lavasa – hit the headlines for non-compliance with environmental
regulations. While 2009 was the 25th anniversary of the Bhopal gas
tragedy, it was only last year that we were all outraged by the disaster.
The realisation of how every institution – the judiciary, Parliament
and government – had miserably failed to provide justice to the vic-
tims shocked us deeply. ... Then in December, meeting in Cancun, the
world took the final step to deny the problem of climate change. It
agreed to do nothing to reduce its emissions – at the scale and pace
needed. The question is what is the cacophony adding up to. Where
is it leading us? ... It would not be wrong to say that virtually all infra-
structure and industrial projects – from mining to thermal and hydel
and nuclear power to cement or steel – are under attack today from
local communities who fear loss of livelihoods. These communi-
ties today are at the forefront of India’s environmental movement.
They are its warriors. But for them environment is not a matter of
luxury – fixing the problems of growth, but of survival – fixing
growth itself ... This is what I have called the environmentalism of the
poor. ... The question is where do we go from here? ... This can be done
through the strengthening of all the processes of democracy that
make us ensure that local people have a voice in development. For
instance, the Forest Rights Act demands that the gram sabha (village
assembly) in tribal areas must give its written consent to the project
before it is cleared. ... In most cases you will find the concern raised by
people is pushed aside as projects are rammed through in the name
of industrial development. This must stop. ...

A catalogue of environmental justice movements in India would occupy

many pages. The opposition to bauxite mining in Orissa became suddenly
world famous in 2010 because of the denial of permission to the London
company, Vedanta, to start mining in the Niyamgiri hill that belongs to
the Dongria Kondh, but it has been going on for decades (Padel and Das,
2010). Opposition to other projects listed above continues or has increased
as it happened after Fukushima in the case of the Areva planned nuclear
power reactors (over 9000 MW) in Jaitapur in Maharashtra.
The environmentalism of the poor centers then on social justice,
including claims to recognition and participation (Schlosberg, 2007),
 Social Metabolism and Languages of Valuation 101

and builds on the premise that the fights for human rights and envi-
ronment are inseparable. From the resistance, new institutions arise.
The successful anti gold-mining movements in Tambogrande, Peru, and
Esquel, Argentina, around 2000 (Urkidi and Walter, 2011), appealed to
local democracy and imposed a new institution, the local referendum
or public consultation, which allows the expression of values that would
otherwise remain hidden.
The environmentalism of the poor relates to actions and concerns
in situations where the environment is a source of livelihood. This is
reinforced by other values, such as the defense of indigenous territorial
rights (appealing to Convention 169 of ILO), or the claim to the sacred-
ness of particular elements of nature (a mountain, a forest, or even a
tree). When livelihood is threatened, those affected will be motivated
to act provided that there is a sufficient degree of democracy and they
are not suffocated by fear as is often the case. Indeed, a clean and safe
environment is a need for all humans rather than a luxury good.

Two women from Ecuador

In the environmentalism of the poor, as in environmental justice move-

ments in general, it is important to recognize the contribution women
make in poor communities, both rural and urban. Bina Agarwal argued
(1992) that women more often collect water, gather wood, look for
medicinal plants, tend to domestic animals, and grow crops, and there-
fore they have greater knowledge and awareness of their community’s
direct dependence on the natural environment. This does not imply
that women have an empathy with nature denied to men for biological
reasons. The argument is based on social roles. In an urban setting, it
is women who often take leading positions in environmental justice
conflicts (in contrast to labor union struggles) as regards complaints
against waste dumping, or air or water pollution. Women are often the
main actors in environmental conflicts.
I shall quote (in my own translation) a call from a woman of Muisne,
Ecuador, regarding the conflict between conservation of mangroves
and the development of the shrimp industry. This was a few months
after the visit of Greenpeace’s Rainbow Warrior to the area. The call by
this woman was distributed to international networks by Fundecol on
11 March 1999.

We have always been ready to cope with everything, and now more
than ever, but they want to humiliate us because we are black, because
102 Joan Martínez-Alier

we are poor, but one does not choose the race into which one is born,
nor does one choose not to have anything to eat, not to be ill. But I am
proud of my race and of being conchera because it is my race that gives
me strength to do battle in defence of what my parent were, and my
children will inherit; proud of being conchera because I have never sto-
len anything from anyone, I have never taken anybody’s bread from
his mouth to fill mine, because I have never crawled on my knees
asking anybody for money, and I have always lived standing up. Now
we are struggling for something which is ours, our ecosystem, but not
because we are professional ecologists but because we must remain
alive, because if the mangroves disappear, a whole people disappears,
we all disappear, we shall no longer be part of the history of Muisne,
we shall ourselves exist no longer. ... I do not know what will happen
to us if the mangroves disappear, we shall eat garbage in the outskirts
of the city of Esmeraldas or in Guayaquil, we shall become prostitutes,
I do not know what will happen to us if the mangroves disappear. ...
We think, if the camaroneros who are not the rightful owners never-
theless now prevent us and the carboneros from getting through the
lands they have taken, not allowing us to get across the esteros, shout-
ing and shooting at us, what will happen next, when the government
gives them the lands, will they put up big “Private Property” signs,
will they even kill us with the blessing of the President?

Note that concheras are women who collect shellfish, for selling, but
also for subsistence. Camaroneros are the owners of the shrimp farms
(camarón being the shrimp). Carboneros are charcoal makers. Concheras
get across esteros (the swamps) by boat to get to the mangroves and
collect the shells at low tide. Again, this is a conflict on the HANPP,
the human appropriation of biomass. The shrimp industry destroys the
mangroves at least for some decades.
In many conflicts of resource extraction or waste disposal, the local
poor people (indigenous or not) are often on the side of conservation,
not so much because they are self-conscious environmentalists, but
because of their livelihood needs and their cultural values. I now sum-
marize an account by Valeria Pacheco (for Agence France Press) of a visit
to Rumipampa in Orellana, Ecuador, a few days after the court decision
against Chevron Texaco of 14 February 2011 (Pacheco, 2011). Pacheco
tells her readers that she met Maria Aguinda, who

has no legal training, and doesn’t speak the Spanish that dominates
government in Quito but indigenous villager Maria Aguinda helped
bring a landmark judgment against US oil giant Chevron for polluting
 Social Metabolism and Languages of Valuation 103

the rain forest she calls home. The diminutive grandmother whose
modest home sits near marshes clogged for decades in sticky oil has
been at the heart of the David-and-Goliath case, and spoke out after
Chevron was slapped last week with a $9.5-billion fine, among the
heaviest ever handed down for environmental damage. “Before I die
they have to pay me for the dead animals, and for what they did to the
river, and the water and the earth”, the 61-year-old Aguinda told AFP
at her home in Rumipamba. ... Texaco operated in the area between
1964 and 1990, and was bought in 2001 by Chevron, which inher-
ited Texaco’s legal nightmare. “Maria Aguinda et al.” are the open-
ing words of the suit launched in 1993 on behalf of 30,000 residents
of Orellana and Sucumbios provinces, in which they charge Texaco
dumped billions of gallons of toxic crude during its operations, foul-
ing rivers, lakes and soil and causing cancer deaths in indigenous
communities. Aguinda said she believes her husband and two of his
10 children died from effects of the pollution. ... “When Texaco came
we never thought they would leave behind such damage, never. Then
it began to drill a well and set up burn pits”, she said, helped in trans-
lation by her son William Grefa. “It changed our life: hunting, fish-
ing, and other food, it’s all finished”. ... “If someone comes here from
Texaco” he’ll get “pepper in his eyes”, she winced. A strong petroleum
smell permeates Rumipamba, home to nine families, some of whom
complain of headaches. Several areas of Sucumbios are also contami-
nated, according to the plaintiffs, who argue that merely sinking a
shovel into the ground yields a thick layer of crude.

In this plausible journalist’s account of Maria Aguinda’s predicament,

different languages of valuation are deployed side by side, such as liveli-
hood, human rights to life and health, and local indigenous territorial
rights. These are different from the language of economic valuation
of negative externalities appropriate in a court case seeking damages.
These different languages may be used by the same people. There are
still other languages available, for instance that of environmental jus-
tice against ‘environmental racism’ (as in the Muisne case on mangrove
destruction), or that of sacredness. Who has the right, or the power, to
impose one particular valuation language?

Social metabolism

The fundamental clash between economy and the environment comes

from two facts. First, world population growth. In the twentieth cen-
tury population grew four times. It now seems that ‘peak population’
104 Joan Martínez-Alier

might be reached at about 8,500 million by 2045. Second, the social

metabolism of industrial economies. Energy cannot be recycled.
Therefore, the energy from the fossil fuels is used only once, and new
supplies must be obtained from the ‘commodity frontiers’ (Moore,
2000). Similarly, materials are recycled only in part, and therefore,
even an economy that would not grow, would need fresh supplies all
the time. The growth in the number of resource-extraction conflicts
(and also waste-disposal conflicts, of which the most noticeable one
is that arising from the production of an excessive amount of carbon
dioxide), is explained by the social metabolism (Haberl et al., 2010;
Krausmann et al., 2008b; 2009). The situation under neoliberal policies
is not much different from what it would be under Keynesian social-
democratic policies. The metabolism takes place within a given institu-
tional regime. In the capitalist system there is a drive for labor-saving
innovations (therefore increasing non-human energy inputs), there is
a drive for profits, there is a generalized invasion of the market system,
and growth of the financial sector by means of credits secured by prop-
erty and expectations of future profits and growth. These are major
institutional factors exacerbating the clash between the economy and
the environment.
The economy is described in terms of economic indicators such as
GDP growth, savings ratio, and current account balance in the exter-
nal sector. Economic historians reconstruct the GDP of centuries ago.
Social factors are taken into account in demographic and public health
statistics, and in the Human Development Index (HDI). The economy
may also be described in terms of physical indicators. Although eco-
nomic, social and physical indicators are nonequivalent descriptions,
there is a certain degree of congruence among them.
The economy of a country or a region may be described in the follow-
ing quantitative terms: it provides, say, 290 gigajoules (GJ) of energy per
person per year; its HANPP is 35 percent; and material flow amounts to
16 tons per person per year, of which fossil fuels account for 5 tons. Of
the material flows, 6 tons are imported, and 1 ton is exported. Income
per capita is $32,000. It occupies tenth place in the HDI. Of another
economy, we say that it provides only 30 GJ per person per year; its
materials flow amounts to only 5 tons per person per year (mostly bio-
mass); and its HANPP is 60 percent (indicating a heavily populated
country with little external trade). Foreign trade is less than 0.3 ton per
capita per year of exports or imports. Income per capita is only $2,500
(at PPP), and it is placed 140th in the HDI. Different social classes in
such countries have different metabolic profiles.
 Social Metabolism and Languages of Valuation 105

One basic notion of human ecology is the distinction (due to Lotka,

1911) between the endosomatic use of energy (as food) and the exo-
somatic use of energy as fuel for cooking and heating, and as power
for the artifacts and machines produced by human culture. Thus one
person per day must eat the equivalent of 1,500, 2,000 or 2,500 kcal.
Since one calorie is equal to 4.18 joules, a daily food intake of 2,400 kcal
is equal to 10 MJ (megajoules), a convenient round number. If a person
is five or ten times richer than the average of her society, she is not for
this reason going to consume five or ten times the average food energy.
In affluent societies almost nobody starves, and poor people (as in the
United States) are fatter on average than rich people, probably the first
time this has happened in human history. As regards the exosomatic
use of energy, in the course of history, humans have developed numer-
ous artifacts and machines that use energy for production or amuse-
ment. While endosomatically the energy consumption of one well-fed
person per day is 10 MJ and therefore per year is 3.65 GJ, the exosomatic
use of energy varies much more. Poor people use some energy for cook-
ing (more than for eating, if they cook in open fires), for feeding small
domestic animals, and for making clothes and repairing their house.
They might have a pump for the well, if they are better off. If not, they
will use human labor to get water, such work being a transformation of
the food energy intake. They will also do some travel in overcrowded
buses or trains. Altogether, perhaps another 10 GJ of energy per person
per year will be used exosomatically. (We are not counting here the
warmth provided directly by the sun and indeed the other environ-
mental services such as the rain, the wind, and the carbon cycle, driven
by solar energy). Consider now a citizen of a rich suburb, who every day
drives 50 km (25 km each way) to work, using at least 3 liters of petrol
(30,000 kcal). This energy expenditure is twelve times more than the
direct food energy intake of a well-fed person.
In poor countries, food energy is a substantial part of the total use of
energy. In other words, the exo/endo energy use ratio is 2 or 3. In the
countries of the European Union, the energy use per person per year
is of the order of 150 to 250 GJ, and more in the United States where
the exo/endo ratio reaches 100. Such elementary facts of economic–
environmental history should be part of school education. The une-
qual exosomatic use of energy largely explains the differences in the
per capita production of carbon dioxide, which in turn explains the
international conflict over property rights to the carbon sinks (oceans,
soils, new vegetation) and the atmosphere as a temporary reservoir, a
conflict that could have come into the open when the science of the
106 Joan Martínez-Alier

enhanced greenhouse effect was first established in 1895 by Svante

Arrhenius.
Marina Fischer-Kowalski and Helmut Haberl (2007) put together
years of research on socioecological transitions in a book heavily influ-
enced by environmental historian Rolf Peter Sieferle and by ecological
anthropologists, ecological economists and industrial ecologists. From
hunter-gatherer societies to agricultural societies to industrial societies,
the authors of this book find quantifiable patterns of use of energy and
materials, population densities, land use, and working time. They also
try to distinguish possible from impossible futures. For instance, they
ask whether it is plausible to think of a world of 9 billion people with an
energy expenditure of 300 GJ and a material use of 16 tons per capita
per year (the present European average). Or, alternatively, are we on the
verge of a third socioecological transition with new technologies that
will reduce energy and material use in the rich economies even if this
leads to economic degrowth? (Haberl et al., 2010).

Conclusion

This type of economics, rooted in physical accounting, would have

pleased Otto Neurath (1882–1945) and K.W. Kapp (1910–76). In the so-
called ‘Socialist Calculation Debate’ of the 1920s in Central Europe,
Neurath proposed democratic planning in physical terms, negating the
possibility of allocating resources between present and future needs
on the basis of market-determined prices, because of the uncertainties
about future technologies. Our actions today influence the future. Are
we to use more coal today, thereby leaving less coal for the future? The
answer could not be given by comparing the present and future costs
and prices of technologies and outputs, because future costs and prices
were unknown. Valuing the future was a moral issue, not an economic
analytical issue.
Neurath did not yet write about climate disruption and biodiversity
loss, but he raised the issue of future unavailability of coal. This was
a fundamental objection against von Mises’s insistence on the need
to have market prices regulate decisions, predicting that socialism
was bound to fail because of lack of price mechanism. Future scarci-
ties are not reflected in prices. The market is myopic. There is no space
here to go over the various aspects of this controversy (Martínez-Alier,
1987; O’Neill, 1993; Martínez-Alier et al., 1998), including Max Weber’s
critique of Neurath’s proposal for economic accounting in physical
units. It is worth recalling that many years later, in a book review in
 Social Metabolism and Languages of Valuation 107

the American Economic Review (1955), K.W. Kapp complained that the
controversy initiated by Neurath, von Mises and Max Weber became
sidetracked in various attempts to calculate the prices of productive
factors, and in Oskar Lange’s later elaboration of a theoretical model
of competitive socialism in which managers of collectivized factories
would adjust production to the equality of marginal cost and marginal
revenue.
The Socialist Calculation Debate was really about incommensurability
of values. Neurath dismissed methodological individualism in his dis-
cussion of the intergenerational allocation of resources. It is institutions
that articulate values, as Vatn (2005) has more recently explained.
As if anticipating current controversies on the economics of climate
change, K.W. Kapp put it in crystal clear terms when he wrote:

The fact of the matter is that both, disruption and improvement

of our environment, involve us in decisions which have the most
heterogeneous long-term effects and which, moreover, are decisions
made by one generation with consequences to be borne by the next.
To place a monetary value on and apply a discount rate (which?) to
future utilities or disutilities in order to express their present capital-
ized value may give us a precise monetary calculation, but it does
not get us out of the dilemma of a choice and the fact that we take a
risk with human health and survival. For this reason, I am inclined
to consider the attempt of measuring social costs and social benefits
simply in terms of monetary or market values as doomed to failure.
Social costs and social benefits have to be considered as extra-market
phenomena; they are borne by and accrue to society as a whole; they
are heterogeneous and cannot be compared quantitatively among
themselves and with each other, not even in principle. (Kapp, [1970]
1983, 49)

To the intergenerational allocation must be added intragenerational

issues of ecological distribution. Here, also, monetary valuation fails.
The poor, because of their direct reliance on natural resources outside
the market, are often careful environmental managers. The environ-
ment provides commodities and amenities; it also provides the very
conditions of livelihood and existence. Actually, economic valuation
is irrelevant for assessing the livelihood values of water, firewood, soil
fertility and pastures that are essential for indigenous and rural poor
people who have no money to buy substitutes for them. Part of the
income from mining or hydroelectric or biomass extraction projects
108 Joan Martínez-Alier

goes simply to compensate for the loss of free resources that are no
longer available because of environmental disruption and sometimes
because of displacement. Successful cost-shifting at zero or low price is
the rule.
Economic growth as measured by GDP often implies the destruction
of ‘natural capital’, human capital (including the many languages which
are being lost), and social capital (as the generalized market system takes
over). Economic growth implies the loss of some capabilities, while oth-
ers are gained. The balance cannot be drawn in monetary terms as in
a profit-and-loss account or a cost-benefit analysis. It would require a
multi-criteria approach able to cope with incommensurable values.
Such issues are rediscovered time and again. In an attempt to calcu-
late the economic cost of various environmental assaults on the poor,
Gundimeda, Kumar and Sukhdev came up with the notion of the GDP
of the poor, later incorporated into the UNEP project The Economics of
Ecosystems and Biodiversity (TEEB) (Kumar, 2010). In national income
accounts, one could introduce valuations of ecosystem and biodiversity
losses either in satellite accounts (physical and monetary) or in adjusted
GDP accounts. But neither method guaranteed an adequate representa-
tion. The valuation of losses might be low compared to the economic
gains from mining or hydroelectric projects that destroy biodiversity, or
it could come in other units of measurement not so visible socially as is
money. However, the most significant beneficiaries of forest biodiver-
sity and ecosystem services are the rural poor and indigenous popula-
tions the world over, and the predominant impact of a loss or denial of
these environmental products and services is on the well-being of the
poor. The poverty of the beneficiaries makes these losses more immedi-
ately acute as a proportion of their livelihood and incomes than is the
case for other populations.
When analyzing socioeconomic history or when tracing scenarios of
future development, the reductionism of neoclassical economics implies
the sacrifice of such other relevant perspectives. There is a common
ground linking social history, economic history and environmental
history, between ecological economics and political ecology, between
sustainability science and environmental sociology. It lies in the rela-
tion between the increasing social metabolism of human economies
pushed by population and economic growth, the resulting ecological
distribution conflicts among human groups, and then the different lan-
guages of valuation deployed historically and currently by such groups
when they reaffirm their rights to use the environmental services and
products in dispute.
 Social Metabolism and Languages of Valuation 109

For instance, from Latin American and African perspectives (where

many countries are large net exporters of material and energy resources),
the notion of ecologically unequal exchange is relevant, although it is
new to economics (Hornborg, 1998; 2009; Hornborg et al., 2007; Naredo,
2001; Muradian et al., 2001; 2002; Robert and Parks, 2007; Muñoz et
al., 2009). Such plunder economy was called Raubwirtschaft by German
and French geographers one hundred years ago. At the beginning of
European colonization, the goods imported were what Wallerstein
called ‘preciosities’. The means of transport at the time made large ship-
ments impossible. Preciosities, which have a high price per kilogram,
are of course still traded. Consider the disastrous local socioecological
impact of exports of gold, diamonds, ivory or tiger body parts compared
to the irrelevance of such trade for the importing countries’ metabo-
lism. Sugar was also initially a preciosity. Later, the slave trade enabled
it to become a bulk commodity that played a role in the biometabolism
of the English working class (Mintz, 1985). Other early bulk commodi-
ties (such as wood, guano, and cotton) had roles in the techno-metabo-
lism of the importing countries. In the nineteenth and early twentieth
centuries, the countries of today’s European Union depended on their
own coal and biomass as energy sources, but now they are large net
importers of oil and gas. Taking all materials together (energy carriers,
minerals, metals and biomass), the European Union imports between
three and four times more tonnage than it exports. Meanwhile, Latin
America appears to be exporting six times more than it imports (Giljum
and Eisenmenger, 2004; Pérez Rincon, 2006; Vallejo, 2010). Moreover,
southern exports carry heavier ‘ecological rucksacks’ than the imports,
which can be illustrated by comparing the amount of energy dissipated
and the carbon dioxide produced by each dollar of exports and imports
(Machado et al., 2001). Flows of ‘virtual water’ in exports and imports
have also been calculated.
The physical requirements and implications of economic growth, and
the different valuation languages deployed by social actors, must be
brought into the analysis. A social, political, economic history of Latin
America could not leave aside such ecologically unequal trade measured
in physical terms. In the context of the project of the Encyclopedia
of Unified Science of the 1930s and 1940s, Neurath defended a dia-
lectical view of history (although he disliked the word ‘dialectics’) as
the putting together of the findings of the different sciences regarding
concrete processes or events. Neurath saw the writing of history as an
‘orchestration of the sciences’. He advocated that the findings of differ-
ent sciences collected in the encyclopedia should not contradict each
110 Joan Martínez-Alier

other, but instead removal of the contradiction should be attempted,

an approach well described by Edward Wilson’s later word, consilience.
We should not say that there is economic growth of 5 percent per year,
while deforestation and depletion of other resources are advancing at
similar rate, and leave it at that. Solving the dilemma by imposing eco-
nomic commensuration (as in ‘weak sustainability’ accounts) is merely
an exercise of power (Martínez-Alier and O’Connor, 1999; O’Connor
and Spash, 1999). To grasp the political relevance of Otto Neurath’s
work, one must understand that Hayek’s strong critique of social engi-
neering in his The Counter-Revolution of Science was directed not only
against historical figures such as Saint-Simon but also (as John O’Neill
has put it) against the whole tradition of what is now called ecological
economics and also quantitative environmental history (as in work by
R.U. Ayres, C. Hall, M. Fischer-Kowalski, H. Haberl, F. Krausmann and
J.R. McNeill). This is a tradition that attempts to understand the ways in
which economic relations are embedded within the physical world and
have real physical preconditions, and which is consequently critical
of economic choices founded upon purely monetary valuation. While
Patrick Geddes, Wilhelm Ostwald, Lancelot Hogben, Frederick Soddy,
and Lewis Mumford were all rudely dismissed by Hayek because they
viewed the economy in socio-metabolic terms, Neurath’s Naturalrechnung
and democratic planning were Hayek’s main targets.
This socio-metabolic approach characterizes ecological econom-
ics and the new quantitative economic–environmental history, and it
can be immediately related to the conflicts studied by social history.
Nowadays, the increased use of fossil fuels and minerals, and the human
appropriation of the available biomass cause increasing conflicts over
access to environmental resources and services and the distribution of
the burdens of pollution. Therefore, there are movements of environ-
mental justice or an ‘environmentalism of the poor’ often appealing to
non-monetary values such as livelihood, territorial rights or sacredness
of the land. These ‘environmental justice’ movements might become,
or perhaps are already, the strongest forces for environmental sustain-
ability and social justice.
5
Meanings and Significance of
Property with Reference to Today’s
Three Major Eco-Institutional Crises
Rolf Steppacher and Julien-François Gerber

Introduction

For good reasons, many scientists think that the royal road to wisdom
is further specialization and corresponding reduction. Jon Elster (2007,
259), for instance, argued that reduction is at the heart of progress in sci-
ence. But for good reasons also, some think that integration is as impor-
tant as differentiation and reduction (Neurath, 1946; Braudel, 1958;
Piaget, 1970). In the history of economic thought, K. William Kapp was
a powerful voice defending the integration of economics with other sci-
entific disciplines. With Myrdal (1932) and Georgescu-Roegen (1966),
he argued that ‘there are no purely economic problems’ and conse-
quently that ‘there can be no legitimate boundary lines which separate
economic analysis from the allied and related fields of social [and eco-
logical] investigations’ (Kapp 1961, 201). It is this integrative approach –
especially between ecological and critical institutional economics – that
we also follow in the present chapter. Few economists are working along
these lines today but notable exceptions include Bromley (1991), Fischer-
Kowalski (Fischer-Kowalski and Haberl, 2007), Foster (2011), Gowdy
(1994), Hodgson (1993), Hornborg (1998), Jacobs (1994), Krall (Krall and
Klitgaard, 2011), Martínez-Alier (2002), Max-Neef (2005), Naredo (2003),
Norgaard (1994), O’Connor (1998), O’Hara (2006), O’Neill (2007),
Paavola (Paavola and Adger, 2005), Sachs (1997), Söderbaum (2008),
Spash (2011a), Swaney (1990), Tsuru (2000) and Vatn (2005).
Within the open systems approach common to these two schools of
heterodox economics, the economy is always seen as embedded in its
social and ecological context. Our question is: what are the meanings

111
112 Rolf Steppacher and Julien-François Gerber

and significance of ‘property’ in such an integrated framework? We

reinterpret the uniqueness of the core institution of property, as distin-
guished from mere possession, for each one of the three complementary
levels of economic activities, namely: the ‘virtual’ level of the finan-
cial economy, the ‘real’ level of production and distribution, and the
‘real-real’ level of the material and energy flows of resources and wastes
(Martínez-Alier, 2009a). We investigate the notion of ‘property’ at each
one of these levels and how it integrates or splits parts of this threefold
reality. The evolutionary path of capitalism, as we shall show, combines
unique characteristics of the institution of property with technolo-
gies that use equally unique economic and ecological characteristics of
mineral resources. This eco-institutional combination generates both
capitalism’s strengths and socioecological contradictions. The latter are
especially visible in three major contemporary global crises – the finan-
cial, chronic poverty, and peak oil – on which we center our interest.
The political question remains the following: given this multiple cri-
ses situation, can we go back to business-and-politics-as-usual, that is,
to ordinary growth in the hope of a hypothetical trickle-down effect, a
Kuznet curve to occur, or a miracle substitute for oil? Or is the specific
combination of the core institution of property with technologies based
on mineral resources itself at stake?
After a brief exposition of the distinction between property and pos-
session, we discuss how, in our view, it sheds light on the integration of
ecological and critical institutional economics as well as on three cur-
rent major crises, before concluding with some key implications.

The differentiation between property and possession as a

key point of integration

Possession and property

Heinsohn and Steiger (1996; 2003; Steiger, 2006) have developed a prop-
erty theory of the economy – or ‘property economics’ – that provoca-
tively argues that the concept of ‘property’ as used by all economics
schools is unable to properly explain the fundamental characteristics of
capitalism. They crucially distinguish between two broad types of insti-
tutional regimes: those based on possession and those based on proper-
ty.1 Possession rules define the rights and duties to the material use and
yield of resources, production technologies, products and waste – for
example, with respect to access, withdrawal, management, exclusion
and transfer (Schlager and Ostrom, 1992). Such possession rules – inac-
curately called ‘property’ in much of the literature – exist in all societies
in various forms, and they respond to the universal questions of social
 Meanings and Significance of Property 113

reproduction, often in great detail: who has the right to use what kind
of resources, with whom, for what purposes, for how long, under which
condition of pollution. They are symbolized by the land and actualized
by the concrete material yield of production.
In contrast, property is a historical ‘oddity’ reborn in early modern
England (Brenner, 2009) and exists in addition to possession.2 Property –
whether individual or collective – is characterized by the emission of
property titles which allow a new economic potential: property rights
are de jure claims which entitle their holders to the intangible capaci-
ties of (a) burdening property titles in issuing money against interest;
(b) encumbering titles as collateral for obtaining money as capital; (c)
alienating or exchanging titles, including sale and lease; and (d) enforc-
ing credit obligations by state forces. Property rights are symbolized
by the fence around the land and actualized as the security of a legal
property title enabling the development of modern credit relations. As
much as the sharecropper represents a system based on possession, the
shareholder is a central figure in the property system.
In fact, the modern institution of property entails both potentials:
a possession as well as a property aspect. Both potentials can be actu-
alized in parallel: it is, for instance, possible to inhabit or to rent a
house – which corresponds to the possession aspect of what is usually
referred to as ‘property’ – and at the same time to encumber it as col-
lateral for obtaining money, thereby using the property aspect of this
‘property’. Yet, the fact that both potentials can be actualized at the
same time must not let us overlook that the logics of the two levels are
very different.
As Hernando de Soto (2000, 47–8) points out, property fixes the
economic potential of assets, which means that ‘a formal property
representation such as a title is not a reproduction of “a thing”, like
a photograph, but a representation of our concepts about’ the thing.
‘Specifically, it represents the non-visible qualities that have potential
for producing value.’ Focusing on the title of a house and not on the
house itself means entering an abstract conceptual world. It is concen-
trating ‘on the economic potential ... by filtering out all the confusing
lights and shadows of its physical aspects and its local surroundings’.
This abstraction allows creative thoughts of alternative futures, yet at
the same time implies a Faustian bargain (Binswanger, 1985). Indeed,
from an ecological viewpoint, the economic use of property titles
allows proprietors to view resources, production, waste and pollution
disconnected from the actual ecological and social conditions and to
make them live a disembedded ‘life’ as capital. Property thus entails the
capacity of transforming resources, goods, services and even pollution,
114 Rolf Steppacher and Julien-François Gerber

into commodities and assets subject to sale, rent and other contractual
arrangements. It is this strength of abstraction of many ecological and
social conditions that enables the realm of the financial world.
By allowing accumulation without previous savings, property –
through modern credit relations – represents the core institution of capi-
talism and can be seen as its institutional driving force. Incidentally, the
centrality of credit was also acknowledged by Veblen (1904), Commons
(1924) and Schumpeter ([1911] 1934), all of whom explicitly character-
ized capitalism as being fundamentally a ‘credit economy’. We shall see
next what the related, far-reaching consequences of this are.

Differentiated pressures
It is the property aspect of what is referred to as ‘property rights’ –
that is, the potential to enter into credit relations as a creditor and
as a debtor – that best defines the economic rationality of capitalism.
Once an economic agent has engaged his or her property as collat-
eral in a credit contract, the implications of indebtedness defines the
entire hierarchy of economic decision-making and the valuation proc-
ess associated with it. It is not only that a property-based economy
allows for growth, it also imposes growth as a result of the conditions
of credit (Binswanger, 2006). This idea was already captured by Karl
Marx (1858, 416) – who wrote that ‘the entire credit system ... rests on
the necessity of expanding and leaping over the barrier to circulation
and the sphere of exchange’ – and by Veblen (1904, 96) who pointed
out that ‘under the regime of competitive business whatever is gen-
erally advantageous becomes a necessity for all competitors. Those
who take advantage of the opportunities afforded by credit are in a
position to undersell any others who are similarly placed in all but
this respect’. For this reason, Veblen argued that credit becomes a key
condition for economic survival and growth in a market environment
(Griethuysen, 2010).
Money created in a credit contract is expressed as a money of account,
a standard defined by the creditor. The contract defines the level of
interest to be paid, the time period within which the loan has to be
refunded with interest, and the collateral acceptable as security. The
combined effect of these conditions defines the specific economic
pressures that prevail in property-based economies: (a) the pressure
for exponential growth imposed by interest, (b) the proverbial time
pressure imposed by the period for which the credit is granted, and (c)
the pressure to improve monetary cost-benefit conditions in order to
 Meanings and Significance of Property 115

remain solvent, that is, to be able to refund. It is therefore not surpris-

ing that, given these particular pressures, the qualitative orientation of
economic growth is of an equally particular nature.
Economic rationality in a property-based economy is a rational-
ity defined from the point of view of property or the proprietor. All
economic decisions and valuations are hierarchically differentiated,
integrated, balanced and centered according to the impact that they
are likely to have with respect to the security, quantity and value of
property. The hierarchy of decision-making directly follows from this
perspective. Five different levels in this hierarchy can be distinguished:
(a) a general orientation towards the monetary value of the property
engaged; (b) the maintaining of solvency as the existential condition
of anyone engaged in credit; (c) a cost-benefit valuation of all economic
transactions – based on market prices in a given time-place context – as
a routine procedure; (d) institutional considerations based on how insti-
tutions define what is a cost and for whom (and on how they can be
changed to the benefit of proprietors); and (e) considerations of a social
and ecological nature, as distinguished from economic rationality and
only in the last analysis. In a similar vein, Marglin (2008) describes the
capitalist – or property-based – system of knowledge as ‘algorithmic’,
emphasizing its calculating and maximizing character, as opposed to
culturally and ecologically embedded ‘experiential knowledge’ of pos-
session-based communities. Indeed, mastering algorithmic knowledge
is a basic necessity for the debtor’s economic survival. Easily forgotten
are the imperatives of the biological, psychological and social survival
of the ‘common man’.
The distinction between property and possession reveals a fundamen-
tal clash between their two very different rationales and their specific
consequences for social and environmental sustainability. Within mod-
ern economies, there is indeed a fundamental contradiction between,
on one hand, the ‘virtual’ or financial level of the economy – governed
by the homogeneous and abstract rationality of the property aspect of
so-called ‘property’ – and, on the other hand, the levels of the concrete
and contextualized ‘real economy’ (production and distribution) and
the ‘real-real economy’ (material and energy flows) – evaluated by the
heterogeneous possession aspects of ‘property’. These three levels of the
economy – and, for that matter, of economic theory – can be connected
to the current three major crises: the financial crisis, the world’s chronic
poverty, and the peak oil situation. In each of them, as we hope, the
property–possession distinction can shed valuable light.
116 Rolf Steppacher and Julien-François Gerber

Centering property and possession on three major crises:

some preliminary considerations

The financial crisis

In the United States, household debt tripled from 1980 to 2005, and
much of that debt was accumulated around the housing market, par-
ticularly from 2001 onwards. In 2008, about 10 percent of US mortgage-
holders had missed a monthly repayment or more and were therefore
categorized by creditors as ‘delinquent’ or ‘in default’. An increasing
number of them had to face foreclosure (Langley, 2009). Such strug-
gling mortgagors were, by definition, especially frequent in the ‘sub-
prime’ sector of the market that concentrates on ‘high-risk borrowers’
with low, irregular, or unverifiable incomes, and/or those with poor
credit histories and scores. The number of subprime mortgagors who
became defaulting debtors proved to be much greater than lenders seek-
ing high profits had projected in their illusions. It triggered the finan-
cial crisis and brought to the forefront the vulnerability of the US credit
system (Griffith-Jones et al., 2010).
A key principle of central banking was breached before and during
the crisis: very low interest rates by the Federal Reserve and the Bank of
Japan, which generated the crisis by helping to create the subprime asset
bubble. Indeed, the commercial banks did to subprime borrowers what
the central bank had done to them, that is, they neglected the security
side of their credit relations. Their interest rates and collateral standards
were too low. Normally, central banks, like commercial banks, must
block capital when lending or issuing money. More specifically, they
block the property aspect of their assets as a security in order to protect
their own capital. During the corresponding period, the property side
of the same assets cannot be used a second time. As Heinsohn et al.
(2008, 3) explain: ‘For the temporary loss of free disposition over its
property, while it is employed to back money, the central bank must
be compensated by interest (discount). By waiving interest it not only
deprives its proprietors – usually the state or the taxpayers’ collective –
of the profit due to them. It also conveys that it does not understand
what money is – namely a claim to its property whose burdening can-
not come for free’.
However, the roots of the crisis are deep, and from the very beginning
were connected to other issues such as oil and poverty. Household debt
skyrocketed while the raising of oil prices – with its impact on food,
housing and transportation costs – increased the precarious situation
of the relatively poor, making it more difficult for them to pay interest
 Meanings and Significance of Property 117

on credit. Prior to this situation, and taking advantage of the prevailing

ideology promoting the individual property owner, real estate devel-
opers and creditors sought a new expansion within poorer sectors of
the population and actually carried to extremes the potential of prop-
erty while ignoring its basic conditions of existence: the need for solid,
property-based collaterals and high-enough interest rates. Commercial
banks created a large amount of new and complex financial products,
using some of the key features of property. For instance, property makes
assets fungible, meaning that the latter are ‘able to be fashioned to suit
practically any transaction’ (Soto, 2000, 46). This may apply to titles,
deeds, bonds, securities, accounts, real estate and so on. However,
many creditors lost sight of the basic facts that the major potential
of property – credit relations – must be carefully securitized and that
credit expansion can only go hand in hand with growth in real produc-
tion as well.
Indeed, Daly (2008b) and Kallis et al. (2009, 16) argued that the cur-
rent financial crisis is explained by the fact that ‘the upper level of
finance grew way too fast and too large for the real economy beneath
to catch up’. As a consequence, there is too much liquidity, not too lit-
tle, and the value of present real wealth is no longer sufficient to serve
as a lien to guarantee the exploding debt. This idea can be traced back
to Frederick Soddy (1926), who pointed out that it is easy for the finan-
cial system to increase the debts (private or public) and to mistake this
expansion of credit for the creation of real wealth. However, if it is true
that one key way of repaying debts is through economic growth, it is
also true that such a solution entails its own sustainability problems:
growth in production necessarily implies growth in the extraction/use
of materials, land and energy, resulting in environmental disruptions
frequently undermining the conditions of livelihood of ‘peripheral’
peoples who complain accordingly (Martínez-Alier, 2002).
The monetary costs and benefits of bankers are typically recorded on
balance sheets, and such bookkeeping is in harmony with mechanical
principles. However, on this level of abstraction, there is little indica-
tion of what is happening at the real and real-real levels of the econ-
omy (except for some remote manifestations in relative resource prices
and pollution-abatement costs imposed by law). It is the concrete and
contextualized possession aspect of ‘property rights’ that remains con-
nected to the social and material sides of production processes and
that allows one to get a clearer view of it. This applies to the quantities
and qualities of the natural resources needed, the labor and equipment
services employed, health standards, pollution levels, production and
118 Rolf Steppacher and Julien-François Gerber

product requirements expressed and measured in physical, biological or

chemical units. This is the world of the (workers’) community and of the
engineer, where productivity, efficiency, or any other concepts acquire
a material meaning that differs from the corresponding abstract one in
property (and, therefore, monetary) terms. Significantly, this material
level of production is not guided by mechanical but by thermodynamic
and evolutionary principles. In our view, the current financial crisis can
thus also be envisaged as a clash between the rationale of the property
aspect of capital and its possession aspect.

Chronic poverty
Poverty – or, better said, relative poverty – remains globally chronic
despite decades of growth and numerous international programs to
combat it. According to many indicators, poverty is still dramatic for a
very large part of the world population and inequality is continuing to
increase, as it has done in the past: according to the IMF (2008), income
inequality has increased in virtually all regions of the world over the
past two decades. This fact confirms the old institutional economics
proposition that circular causation within asymmetrical structures
results in cumulative effects, including growing inequalities, if left to
its self-organizing principles, particularly markets.
It is often said that in order to ‘develop’, and to ‘overcome poverty’,
informal possession has to be transformed into formal property (Soto,
2000; Steiger, 2006). One can easily agree that the introduction of prop-
erty rights is of fundamental importance for market-oriented develop-
ment (allowing investment without previous savings, the abstraction
from the actualized form of an economic situation, the stabilization of
the monetary system, etc.). Many neoclassical economists would not
hesitate to confirm this point, arguing that it is in conformity with
their standard proposition of privatization (World Bank, 1975). The lat-
ter, as generally understood in economics, means a shift from common
or state ‘property’ – in fact often possession3 – in favor of the private
property rights of already wealthy minorities within the formalized
sector. There can be little doubt that such privatization processes have
been, and can be, an important means to shape and expand the devel-
opment of elites and emerging middle classes by harnessing its capitali-
zation potential (see, e.g., Lastarria-Cornhiel, 1997).
However, what Soto (2000) and Steiger (2006) have suggested is very
different from standard privatization. It is meant to be the stabilization/
protection of the existing possession rights of large numbers of small
producers within the informal sector through formal property rights,
 Meanings and Significance of Property 119

also allowing them to use it as security in credit relations. But, still, it is

not clear how this will ameliorate the economic conditions of the poor.
In the case of land titling, for instance, it turns out that the creation of a
formal land market has often corresponded to patterns of property con-
centration and, therefore, to the eviction of the poor, a phenomenon
already described by John Stuart Mill in 1848 (see Lastarria-Cornhiel,
1997; Bruce, 1998; Steppacher, 1976; 2008). One classical mechanism
involved in this process is rural indebtedness, where the defaulting
debtor is forced to sell land in order to repay creditors (Gerber, 2012).4
That formal property and a free market for it to circulate under condi-
tions of great economic and political inequality should work to the ben-
efit of the poor often turns out to be wishful thinking, especially when
local people continue to refer to the traditional institutions rooted in a
logic of use-value and possession (see also Meijl and Benda-Beckmann,
1999).
Expanding on Kapp ([1950] 1978; 1965), we argue that one important
cause of poverty must be related to the notion of social and environ-
mental costs. The latter fundamentally result from the fact that proprie-
tors (whether individual entrepreneurs or companies) tend to minimize
all private costs of current production in order to facilitate their capacity
to refund loans and, therefore, shift as many of their costs as possible to
third parties, the actual society as a whole or future generations. Such
cost-minimization can take many forms, many of which being detri-
mental to the poorest sectors of society – such as overexploitation of
workers, marginalization of small peasants, or livelihood destruction of
ecosystem-dependent communities (Martínez-Alier, 2002). Therefore,
as Kapp (1950, 97) has argued, ‘the more reliance an economic sys-
tem places on private incentives and the pursuit of private gain, the
greater the danger that it will give rise to external “unpaid” social [and
ecological] costs’ (see also Elsner et al., 2006). This vision is diametri-
cally opposed to neoclassical theory that looks at socio-environmental
impacts in terms of externalities resulting from an incomplete allo-
cation of private property rights (Coase, 1960). Critical institutional
and ecological economics, for their part, recognize externalities not as
‘market failures’ but as ‘cost-shifting successes’ fostered by the logic of
property in general and through its unequal distribution in particular
(Martínez-Alier and O’Connor, 1999).
Another poverty-generating dynamic is what David Harvey (2003)
has called ‘accumulation by dispossession’, by which the accumula-
tion of capital not only comes from previous savings or the use of wage
labor by proprietors, but also from the profits and rents obtained by
120 Rolf Steppacher and Julien-François Gerber

extracting natural resources through processes of expropriation and

commoditization in possession-based regions or sectors of the world
economy. He argues that the credit system was – and still is – an impor-
tant ally in this phenomenon that is closely linked to the geographers’
old notion of Raubwirtschaft (Martínez-Alier, 1987). Harvey’s point is
that such accumulation by dispossession not only continues today but
is in fact increasingly important.5
As we have seen, the economic pressures imposed by credit relations
are growth, time pressure, cost efficiency, as well as favorable institu-
tional conditions (‘favorable’ defined from a property point of view).
How can the real economy respond to these pressures and with what con-
sequences? The longer-term responses to these pressures are to be found
in the particular characteristics of the ‘thermo-industrial revolution’, as
we shall see in the following section. However, prior to this revolution,
and as long as property-based economies historically represented only a
small fraction of the global economy, gains from asymmetrical interna-
tional trade, the appropriation of land and natural resources at the cost
of indigenous possessors (including through slavery), and the concen-
tration of property in the hands of a few could do for some time. Later,
an international division of labor appeared where the colonies – tradi-
tionally rooted in possession-based regimes – were forced to specialize
in plantation or mining products while colonial powers – rooted in the
institution of property – secured a quasi-monopoly on the consump-
tion of fossil fuels and on industrial activities (Wallerstein, 1989). Once
such international inequalities were established, the industrial devel-
opment of the core countries – fostered by the time pressure of credit
contracts – allowed and necessitated a dramatic widening of property
titles and credit volumes (Veblen, 1904). The related continuous inno-
vations contributed to more firmly establishing the technological supe-
riority of property-based societies, while the widening of the value of
property guaranteed their financial stability and monetary supremacy,
thereby increasing further international economic inequalities.
Today’s asymmetric international relations largely result from the
technological and monetary superiority granted to the holders of the
double potential of what is generally referred to as ‘property rights’.
While providing the most competitive productive processes, modern
technology also guarantees the continuous supply of credits financ-
ing the latest technological improvements. In parallel, this capacity for
high returns can be used as a security in the financing of credits to
southern and eastern countries (using the property aspect of ‘property’)
without impeding consumption patterns of northern economies (the
 Meanings and Significance of Property 121

possession aspect). Western countries can thus diffuse, through inter-

national credit relations, the logic of property and are in the position of
defining their own valuation standards to the rest of the world.
The debt of the periphery, escalating since the 1970s, became the key
lever of trade liberalization and structural adjustments – whose main rai-
son d’être is to make countries creditworthy by cutting the welfare state
and by promoting the export of natural resources, supplying property-
based economies with the raw materials they need to impose themselves
ever more. The very low prices of most of these natural resources – biotic
as well as mineral – directly result from the commercial and institutional
strategies of the most powerful actors, such as transnational mining or
agro-food corporations, located in property-based economies (Watts and
Goodman, 1997). This situation tends to block a sustainable develop-
ment that would allow overcoming poverty.

Peak oil
Given the specific pressures imposed by property (growth, time pres-
sure, cost efficiency and favorable institutional conditions), how can
economic actors respond to these pressures in real production proc-
esses rather than in abstract thinking? What kinds of technology and
resources best satisfy these economic imperatives? Since the ‘thermo-
industrial revolution’ (Grinevald, 1990), characterized by the combina-
tion of heat engines, machines, fossil fuels and mineral resources, the
economic imperatives of the logic of property can relatively easily be
satisfied. In fact, thermo-industrial technologies are still what our his-
torical situation is all about and this is the reason why today’s peak oil
situation is so crucial.
Peak oil is an abbreviation for ‘maximum worldwide production rate’
of oil. For some decades, exploration yielded easily accessible reserves
that increased more rapidly than the depletion of stocks; but with peak
oil, the situation changes radically. Currently, the average rate of oil
consumption/production is around 85 million barrels per day and
many believe that there is little current surplus capacity – some even
estimate that we have today already reached the peak (Campbell and
Laherrère, 1998; Duncan, 2003; Aleklett, 2006). Given the facts that our
economies are so dependent on oil and that all the alternatives that we
know have essentially low energy-return on investment (EROI; see Hall
et al., 1986), the human economic system is bound to change radically,
or even collapse, during the next few decades (ASPO, 2008).
Mineral resources (the economically most important category of non-
renewable resources), compared with biotic resources (representing all
122 Rolf Steppacher and Julien-François Gerber

renewable resources), have different economic and ecological character-

istics and consequences. According to Georgescu-Roegen (1976a), three
of the main differences are the following: first, biotic resources do not
allow for exponential growth. They grow to maturity but not beyond –
if they do so we call this deadly cancer.6 Mineral resources, in con-
trast, make exponential growth a feasible proposition, but only within
a given historical period and only associated with irreversible degrada-
tion. Second, biotic resources are subject to time irregularities inherent
in biological and ecological rhythms and seasons, limiting the produc-
tion potential of the services of those funds. This is a situation entirely
different from the resource-flows of mineral stocks, whose utilization
over time can be chosen freely (see Georgescu-Roegen, 1971, 226, for
the distinction between funds/stocks; see also Faber et al., 2005). And
third, factory processes based on mineral resources can be arranged in
line, minimizing idleness of fund factors such as land, labor and equip-
ment. Production processes based on renewable and/or biotic resources
(like farms or windmills) can only be arranged in parallel, implying
non-reducible idleness of funds. Combining the difference between
mineral and biotic resources with the distinction between property and
possession is shown in table 5.1.
The result of the combined asymmetries between mineral and living
natural resources is obvious: only minerals – particularly fossil fuels
together with engines and machines – are today a technically feasi-
ble proposition to satisfy the particular institutional economic pres-
sure imposed by the property aspect of ‘property rights’ (case 1), while
renewable resources are not (case 3). Since the thermo-industrial revo-
lution, all the major technological developments have been based on
mineral resources, including of course the computer revolution. Not
only industry, but also agriculture and services have become cumula-
tively dependent on minerals. Seen from a natural-resource perspec-
tive, property-based societies have thus not ‘dematerialized’ or become
‘post-industrial’; they have rather become ‘super-industrial’ (Daly, 1996;
Ayres, 1998).

Table 5.1 Mineral and biotic resources in relation to property and possession.

Institutional regimes

Property Possession

Natural Exhaustible, mineral resources case 1 case 2

resources Renewable, biotic resources case 3 case 4
 Meanings and Significance of Property 123

The substitution of renewable resources – including labor – by

exhaustible mineral resources and machines has been the norm for
decades, while reverse substitution hardly ever happens. And if it does,
it is only when the imperatives of property are offset by political efforts
in the direction of a possession-based rationale, as in the case of poli-
cies encouraging organic agriculture or renewable energy measures
(Steppacher et al., 1999; Giampietro and Mayumi, 2009). However, it is
not surprising that biotic resources can stand well with the institution
of possession (case 4): most agrarian regimes have in fact been based
on possession rather than property (Georgescu-Roegen, 1976b; Shanin,
1973).7 Most interestingly, when the institutions of possession are com-
bined with industrial technologies based on mineral resources (case 2),
as in former so-called socialist economies, it did not yield an increase of
wealth corresponding to that generated by property-based economies,
and natural degradation became at least as important.
Economic globalization not only constitutes a globalization of mar-
kets. It is in fact a globalization of this particular technological and
institutional characteristic of Western development, namely the com-
bination property–mineral resources. A similar logic of growth is thus
taking place virtually everywhere, with its pressure on natural resources
and ecological degradation. There can be no doubt that property-based
economies, with their high per-capita consumption of minerals, bear
most of the responsibility for today’s irreversible entropic global ecolog-
ical degradation. The dimension of humanity’s industrial metabolism is
significant to such a point that geologists like Paul Crutzen and Eugene
Stoermer (2000) speak of a new geological era, the ‘Anthropocene’
(Steffen et al., 2011; Grinevald, 2008). The empirical fact that most of
today’s technologies are based on exhaustible mineral resources is pro-
foundly rational according to the property aspect of ‘property rights’.
From a sustainable development point of view, however, it seems to
be very unreasonable. While the new peak oil situation is a crucial
question regarding the long-term satisfaction of the imperatives of the
property aspect, the ecological implications of today’s use of mineral
resources are perhaps still more important, especially with respect to
climate change.

Conclusion

The potential of property to abstract from reality is one of the deep rea-
sons why credit-based economic activities are so attractive to many peo-
ple: like science or arts, it allows transcending actualized forms of the
124 Rolf Steppacher and Julien-François Gerber

present reality (see the interpretation of Goethe’s Faustus by Binswanger,

1985). Credit makes it possible to project one’s imagination into future
alternative realizations. This transcendence may take very constructive
forms in real problem-solving or new human achievements. But imagi-
nation may also take destructive and illusionary forms, of which there
are many manifestations in economic life. It may, for instance, continue
to encourage people, through aggressive advertising campaigns, to con-
sume more, that is, to project immaterial needs into material goods and
therefore to satisfy illusions rather than needs (Veblen, 1923). It may
enhance a regression to earlier economic forms (for instance through
the quasi-feudal practices of bankers’ bonuses) or to the ‘infantile econ-
omy’ (Harsch, 1995).
In fact, the main strength of a property regime also becomes its major
weakness from a social and ecological viewpoint. Having lost contact
with its environment, economic valuation at the virtual level of the
property aspect of so-called ‘property’ cannot escape the need to push
for anything that is favorable from its own monetary viewpoint, no
matter how much it may otherwise be unfavorable to social and ecolog-
ical sustainability at the real and real-real levels of the possession-based
aspects of economy. The ongoing transition from possession to prop-
erty that is taking place, not only geographically but also structurally
(e.g. patent expansion), corresponds to a shift from ecological-social rea-
soning – based on sharing costs and benefits evaluated on the basis of
their own heterogeneous indicators – to economic rationality as defined
from the point of view of the monetary value of property engaged in
economic activity.8 Therefore, we are confronted with a paradox: with-
out property rights, it is not possible for possession-based regimes to
compete with property-based economies. Yet, the global extension of
property rights, by its very economic rationality, destroys the ecological
foundation on which it is built (see also O’Connor, 1998).
The contradiction between, on one hand, the property-driven logic
of the financial economy and, on the other hand, chronic poverty and
peak oil, makes a return to business-as-usual obsolete. Measures to be
taken to reduce poverty and the entropic impact of economic activi-
ties need to be defined at the real and real-real levels and they must
be expressed on the basis of social, biological, chemical and physical
indicators. Industrial ecology teaches us how to interconnect industrial
processes in such a way that the speed of overall entropic degradation
is reduced; organic agriculture has developed high standards of knowl-
edge; housing could be provided with a much lower level of energy
consumption, and the same is true for transportation. There is no field
 Meanings and Significance of Property 125

in which alternatives have not been available for decades at the level of
non-capitalist principles guided by the possession aspect of ‘property’.
In order to be sustainable, the latter aspect will necessarily imply some
form of ‘degrowth’ in rich countries (Martínez-Alier et al., 2010; Kallis,
2011).
Mainstream economic theory has neither established the constitutive
importance of the property aspect of ‘property’ nor the entropic nature
of its possession aspect. These two aspects are mixed up in one notion
(‘property’), hiding the fact that there are very different economic prin-
ciples behind them. The general confusion between property and pos-
session, and the rarely understood differences between mineral and
biotic resources, have opened the way for more or less naïve discourses
on ‘sustainable development’. Theoretical alternatives need a garden-
like thinking approach, reflected in terms of complementarities – as
shown in organic farming or industrial ecology – between international
relations and local solutions. Therefore, a new theory integrating eco-
logical and critical institutional economics is badly needed but has no
chance of succeeding without:

● taking into account the global biophysical conditions guiding them,

that is, thermodynamic, ecological and evolutionary principles.
● a realistic interdisciplinary understanding of economic agents as
being influenced by the diversity of bio-psycho-institutional condi-
tions and the fact that economic agents have the potential to be both
creative and destructive.
● integrating the circular causation between the different logics of the
virtual (financial), the real (productive) and the real-real (biophysi-
cal) levels of the economy – the first one being fundamentally gov-
erned by the property aspect of so-called ‘property’, while the two
others by the possession aspect of ‘property’.
● an understanding of the complexity of the interactions between the
economy and its multiple social contexts – the meaning of any eco-
nomic notion being dependent on it (see, for instance, the notions
of ‘costs’ or ‘value’).

Much in the same way as the logic of the garden has been replaced by
monoculture fields, the diversity and complexity of economic think-
ing from different paradigms has gone rare, endangered or extinct. The
time has now come to build a unified alternative paradigm in econom-
ics, yet we are fully aware that generations of critical economists before
us have already hoped this to happen.
126 Rolf Steppacher and Julien-François Gerber

Notes
1. Heinsohn and Steiger are not the first authors to make such a distinction (see
Hegel, 1821; Proudhon, 1840); but they are the first to link it with interest
and money. Soto (2000) develops comparable ideas, while Steppacher (2008;
Steppacher et al., 1999) explores some of its socioecological implications. See
also Griethuysen (2010) and Gerber and Veuthey (2011).
2. Institutions similar to modern property already existed in the ancient Near
Eastern civilizations as well as during the Greek and Roman times.
3. Research on ‘common property’ usually neglects the distinction between
property and possession. In many cases, so-called ‘common property’ is, in
fact, common possession that cannot be encumbered or sold (Gerber and
Veuthey, 2011). Thus, the insights gained from the differentiation between
private, common and state property can be increased by connecting them
with the differentiation between possession and property (Steppacher,
2008).
4. In, for instance, Tanzania – a country that intends to follow Soto’s advice –,
the land seizure of defaulting debtors has been institutionally facilitated in
order to encourage creditors to lend money (Sacerdoti, 2005).
5. When considering the needs of a property-based economy to shift socio-
environmental costs to poor regions and to future generations (by dumping
liquid or solid toxic waste or by using the atmosphere for the disposal of
greenhouse gases), avoiding the application of the polluter-pays principle,
evading liability, and dodging corporate accountability, Joan Martínez-Alier
(personal communication) suggested the parallel notion of ‘accumulation
by contamination’, that we see as closely related to the expansionist logic of
property.
6. Obviously, productivity has been improved in agriculture by achieving bet-
ter control over limiting factors, such as irrigation. Yet, there is an upper
limit, and the high productivity of some of today’s agricultural systems is
due to an exogenous support of mineral resources (Giampietro and Mayumi,
2009).
7. Yet, while there is a strong path-dependency in property-based econo-
mies between mineral resources and growth, agricultural possession-based
regimes are today plagued by another path-dependency, namely the problem
of exponential population growth that cannot be solved with the help of
renewable resources alone.
8. In the following quote, James Scott (1976, 94) neatly captures the shift from
possession to property in Southeast Asia at the beginning of the twentieth
century: ‘The decisive advantage of the colonial apparatus lays as much in
paperwork as in rifles. To follow the development of the colonial regime is
to follow the inexorable progress of cadastral surveys, settlement reports for
land revenue, censuses, the issuance of land titles ... and a growing body of
regulations and procedures’.
6
An Institutional and Evolutionary
Critique of Natural Capital
Lisi Krall and John M. Gowdy

Introduction

Sustainability, in the discourse of neoclassical economics,1 is thought

of as maintaining a constant or increasing level of utility (consumption
in the standard formulation) which depends, in turn, on maintaining
the stock of capital assets generating that utility (Hartwick, 1977; Solow,
1974). In this way capital has been elevated to a central position in
neoclassical discussions of sustainability. Ecological economists2 have
refined and extended the discussion of sustainability by introducing
and popularizing the concept of natural capital. Focusing on natural
capital as distinct from man-made capital has brought the biophysical
context of economic activity front and center (Krall and Klitgaard, 2011).
As Costanza (1994, 394) put it over 20 years ago: ‘... we are now entering
an era, thanks to the enormous increase of the human scale, in which
natural capital is the limiting factor. Human activities can significantly
reduce the capacity of natural capital to yield the flow of ecosystem
goods and services upon which the very productivity of human-made
capital depends’. In the ensuing years a considerable effort has been
invested by ecological economists in sorting through the best way to
account for natural capital. It is important to clarify our understanding
and use of natural capital, especially given its centrality in the discourse
and methodology of ecological economics.
Since the publication of the highly influential Costanza et al. (1997)
paper in Nature, ecological economists have created a cottage industry of
estimating the economic value (prices) of various kinds of natural capi-
tal (Barbier, 2007; Daily and Ellison, 2002). Major efforts to document
the economic contributions of ecosystem services are the Millennium
Ecosystem Assessment (MEA) and The Economics of Ecosystems and

127
128 Lisi Krall and John M. Gowdy

Biodiversity (TEEB). Critics of pricing nature point out the difficulties

of measuring the economic services of ecosystems (see the special issue
of Ecological Economics, 25(1), April 1998, on the Costanza Nature paper)
and the absurdity of treating the natural world as a commodity (Rull,
2010). While we are sympathetic to these discussions and debates, we
believe the problems with natural capital go far deeper than problems
of valuation. The valuation of natural capital is framed within the
standard economic general equilibrium optimization model with its
questionable assumption that ‘correct’ prices can be established based
on rational consumer preferences which are assumed by neoclassical
economists to be the ultimate source of all economic value (Gowdy et
al., 2010b). Moreover, natural capital itself is modeled after capital as it
is used in the standard marginalist framework. In this, it has inherited
all of the confusion and limitations therein.

Capital and natural capital

Herman Daly (1977, 31) commented on the importance of having a clear

picture of capital: ‘Capital and income are basic concepts in economics,
concepts whose definitions form the foundation supporting such enor-
mous superstructure of analysis that we have become very reluctant
to rethink them lest we should have to rebuild the whole superstruc-
ture’. Many ecological economists followed the analytical lead of Daly
in framing natural capital in the tradition of the marginalist econo-
mist Irving Fisher. In adopting this approach there was no necessity
of rebuilding ‘the superstructure’. Daly (1977, 31–2) clearly states that
the existing analytical framework is adequate: ‘The analytically clearest
and theoretically most satisfying concepts of capital and income are
those of Fisher. ... For Fisher, capital or wealth is the stock of material
objects owned by human beings at an instant in time. Income is the
flow of service through a period of time yielded by capital. ... Income is
ultimately psychic income, subjective satisfactions that come through
the want-satisfying services rendered by ... the stock of capital’. As Alfred
Marshall pointed out, ‘almost every use of the term capital which is
known to history has corresponded more or less closely to a paral-
lel use of the term income’ (quoted in El Serafy, 2011). In this Daly is
no exception – human satisfaction derives from (properly priced) net
income generated by market activity. The analytical cards are laid on
the table.
Following directly from the neoclassical concept of capital, the
income measure Daly advocates is Hicksian income (El Serafy, 2011;
 A Critique of Natural Capital 129

Hicks, 1946) – the flow of income that can be sustained without depreci-
ating capital and this must include natural capital. Preserving nature is
a commendable policy goal but using the Hicksian approach to natural
capital and income has several major shortcomings (a) it sidesteps the
institutional context of the economy and reduces the economic ques-
tions of natural capital to matters of economic accounting; (b) it has the
practical effect of reducing human well-being to income as measured
by traditional income and product accounts (adjusted for depreciation
of all kinds of capital); (c) it has all the measurement problems and
logical inconsistencies of traditional capital. Ecological economists, by
using the Fisher-Hicks definition of capital and income, have reduced
the discussion about our historical moment (with all of the complex
questions about the relationship of the economy) to the biophysical
health and limits of the planet to discussions about the substitutability
of natural and manufactured capital, the existence of ‘critical’ natural
capital and the determination of the ‘proper price’ of features of the
natural world.
The adoption of this conventional use of capital by ecological
economists is perplexing because capital has had a problematic and
controversial, if not contentious, history in economic analysis and
theory. As Cohen and Harcourt (2003, 210–11) noted in their discus-
sion of the Cambridge capital controversies between Piero Sraffa, Joan
Robinson, and so forth, on one side of the Atlantic and Robert Solow,
Paul Samuelson, and so forth on the other: ‘The Cambridge controver-
sies were the last of three great twentieth-century capital theory con-
troversies. Earlier controversies occurred at the turn of that century
among Böhm-Bawerk, J.B. Clark, Irving Fisher and Veblen and then in
the l930s among Knight, Hayek and Kaldor. Similar issues occurred in
all three controversies ... ’. And in none of the debates was the contro-
versy resolved in favor of the neoclassical wing. Even within the tradi-
tion of hedonistic economics3 there has been significant ambiguity
and confusion about capital. More importantly, the analytical bound-
ary of ecological economics has been, perhaps unwittingly, limited
by the hedonistic concept of natural capital. In the pages that follow
we argue that, had ecological economics followed the lead of evolu-
tionary and institutional economists, including, in the first instance,
Thorstein Veblen and Nicholas Georgescu-Roegen, the outcome would
have been a more revealing understanding of the complex relation-
ship between economic organization and the natural world, an under-
standing that would be more illuminating of our present biophysical
moment.4
130 Lisi Krall and John M. Gowdy

Natural capital and the boundary of economic analysis

If we want to understand something of our present historical moment

and the biophysical and economic implications therein; if we want to
understand the circumstances that brought us to the abyss of climate
change, peak oil and the sixth great mass extinction; indeed, if we want
to understand the purpose and institutional context of economic activ-
ity as it is presently constructed, and within which the use of nature
abides, we must be very clear about the economic process and its pur-
pose. Georgescu-Roegen was a pioneer in advancing our understanding
of the economic process in the context of biophysical limits. Georgescu-
Roegen (1971; 1979) describes all economic phenomena as ‘dialectical’,
that is, the economic process is made up of partial processes which over-
lap and which mutually influence each other. He held that in order to
understand a process and its purpose we have to be clear about how we
circumscribe the boundary of our analysis; that is, we need to under-
stand what it is that lies within the boundary and what crosses the
boundary. In this Georgescu-Roegen was contemplating the neoclassi-
cal production function and how disconnected it was from biophysical
reality. He began to straighten out the confusion surrounding produc-
tion functions and biophysical accounting by differentiating stocks and
funds from flows and services (Georgescu-Roegen, 1984).
In Georgescu-Roegen’s model a stock is a resource that may be used at
any rate, like the Earth’s stock of fossil fuels, for example. We can burn
a ton of coal for energy in a single day or we can make it last several
years. A fund can only be used at a limited rate. One worker may be able
to dig one ditch a day for 365 days but he cannot dig 365 ditches in one
day. Likewise, a piece of capital equipment operating around the clock
may be able to produce 10 widgets a day or 3650 in a year, but it cannot
produce 3650 widgets in one day. The ability of lake or stream to clean
itself after waste is dumped into it is also limited, and if the waste flow
exceeds its absorptive power it cannot perform its cleansing function.
The neoclassical production function shows only the flows of inputs
(or input services) through the production process. Georgescu-Roegen’s
insight was to recognize the importance of maintaining the biophysi-
cal processes and social institutions underlying all economic activity.
This applies to all the traditional factors of production, land, labor and
capital.5 A rested worker enters the factory at the beginning of the day
and a tired worker comes out at the end of the day. Before she can start
the next workday she must be rejuvenated by a social system of fam-
ily, friends and other institutions that maintain her ability to work.
 A Critique of Natural Capital 131

Likewise, capital equipment must be repaired and maintained and the

ability of the natural world to provide services must be kept intact if the
system is to be ‘viable’, that is, if it is to be a steady-state process reproduc-
ible from time period to time period. It may be feasible for an economy
to produce goods and services for a short time by drawing down the
stocks of fossil fuels and emitting levels of CO2 that will eventually have
serious and irreversible consequences for the human species. But, if we
are interested in the long-run sustainability of the human presence on
the planet, we need to maintain the funds by limiting their rates of use
and we need to link our stocks to substitutes. Natural and social capital
are essential foundations of all human activity, to be maintained and
not depleted according to the prevailing market discount rate.
Georgescu-Roegen recognized that the standard neoclassical produc-
tion function conflates funds and flows and thereby distorts the pro-
duction process by incorrectly drawing the analytical boundary. Agents
of production, the funds land, labor and capital, and the services they
provide, are those that ‘either cross the boundary from outside but never
come out or cross the boundary from the inside without having entered
the process’ (Georgescu-Roegen, 1984, 25–6). At any point in time the
funds determine what is produced but over time all must be main-
tained. The neoclassical production function is misleading because it
implies we can ‘weave more cloth with less yarn by adding some iden-
tical looms’ (Georgescu-Roegen, 1984, 29). Georgescu-Roegen’s frame-
work imposes a more exacting link between economic production and
the biophysical world and it challenges us to sort through our analytical
boundaries carefully. His fund-service model recognizes that to under-
stand ‘capital’ we must go beyond the production function of neoclassi-
cal economics, but even so his analysis is only a general description of
the robust institutional overlay needed to understand capital.
As discussed above, the introduction of natural capital into economic
discourse was an attempt by ecological economists to insert the prob-
lem of biophysical limits into the economic equation. But they attempt
to do this without redefining the boundary of the neoclassical concept
of capital. Natural capital consists of nonrenewable resources, renewable
resources and ecological services, and it is seen as distinct from human
or manufactured capital. Daly was clear that Fisher’s analysis of capital
needed to be supplemented to adapt it to natural capital. He states:

As everyone recognizes, the stock of capital wears out and must be

replaced. This continual maintenance and replacement activity is an
unavoidable cost. Fisher treated it as cancelling out in the aggregate:
132 Lisi Krall and John M. Gowdy

house repair was income to the account of the carpenter and his tools
and an equal outgo to the account of the house. But Fisher did not
trace the series of cancelling accounts backward to any “uncancelled
fringe” at the beginning, which would be the ultimate uncancelled
cost. ... [I]f we do this we come to the unpaid inputs from nature.
(Daly, 1977, 33)

The latter is simply Daly’s way of highlighting our dependence on

nature’s gifts and the fact that we cannot produce them.
Herman Daly and Joshua Farley define natural capital as ‘a stock that
yields a flow of natural services and tangible natural resources’ (Daly
and Farley, 2004, 17). AnnMari Jansson et al. (1994, 4–5) tell us that
‘Ecological economists speak of natural capital, human capital (and/
or cultural capital), and manufactured capital when categorizing the
different kinds of stocks that produce the range of ecological and eco-
nomic goods and services used by the human economy’. Ecological
economists Shuang Liu et al. (2010) also refer to natural capital as
an ‘important asset’, an asset that provides a service. Although there
is some ambiguity with the term asset, in all these examples, natural
capital is clearly intended to be a concrete physical thing, a stock that
yields a flow of services or a stock that provides resources. The bound-
ary around capital is narrowly drawn – capital is a stock to be optimally
allocated within the static analysis of Hicks and Fisher. Yet, the eco-
nomic meaning of natural capital is institutionally complex, something
clearly not captured here. Capital in the Fisherian model is purely static
and timeless. In a world characterized by exponential growth curves,
an economic model that does not account for change over time is prob-
lematic. Otherwise, we have no notion of the process of change, how
we got to where we are, and what is historically unique about where we
stand. Robinson ([1974] 1980, 57) summed up this difficulty nicely:

The real source of trouble is the confusion between comparisons of

equilibrium positions and the history of a process of accumulation.
We might suppose that we can take a number of still photographs
of economies each in stationary equilibrium; ... This is an allowable
thought experiment. But it is not allowable to flip the stills through
a projector to obtain a moving picture of a process of accumulation.
(Quoted in Cohen and Harcourt, 2003, 204)

Neoclassical economists have something like a fund concept of manu-

factured capital (machines, technology, production processes) but not
 A Critique of Natural Capital 133

the other factors of production. Capital depreciation is subtracted from

income and product accounts but accounting for the drawdown of
natural resources is generally met with resistance. We suspect that some
of this oversight owes to the historical abundance of natural capital, but
part owes to the commodity nature of man-made capital and the ease of
computation of its depreciation. The depreciation of man-made capital
may also be an accounting convenience to accommodate the move-
ment of capital and a way to document Hicksian income. As well, man-
made capital is treated like a fund because the production of man-made
capital is endogenous to the economic process and its production can
be controlled. Natural capital lies out of commodity production – its
production is not under direct ‘economic control’ and the depletion of
it has more far-reaching implications for limits to growth. As such, the
price that attaches to natural capital is always partly comprised of rent.
If it were infinitely abundant its economic value would be zero. Thus
the ownership of natural capital, the return to that ownership and the
question of absolute limits are somehow more loaded questions when it
comes to natural capital. The commodification of nature is the implicit
goal of pricing natural capital.
So biophysically disconnected is standard economic analysis that
natural resources are treated like stocks to be drawn down at the pre-
vailing discount rate, not as funds to be maintained intact. There is an
abiding faith that resource substitution and technological change will
save the day. By treating funds as stocks to be valued according to their
discounted present value the economic world is disconnected from its
biophysical roots and the latter is sacrificed at a rate determined by the
discount rate. Take the case of soil as an example. Soil may be essential
to produce the food needed for the world’s population of 7 billion, but
both soil quality and quantity is being depleted worldwide at an alarm-
ing rate (UNEP, 2010). This may be a logical thing to do if decisions are
driven by a financial investment model, but the result will be the con-
tinued degradation of an essential nonrenewable resource.
In evolutionary terms the traditional Fisherian concept of capital
focuses only on proximate causes. In this approach, capital is a measur-
able physical thing, like labor or energy, and a change in its price is
caused solely by changes in its quantity relative to other productive
inputs. But to understand the evolutionary nature of capital we need to
look at ultimate causes. Examining the ultimate causation running from
capital to the economic process takes us back to three deep issues raised
by the Cambridge capital controversies (Harcourt, 1972; Robinson,
1953–4): (a) the meaning and measurement of capital in industrial
134 Lisi Krall and John M. Gowdy

capitalist societies; (b) the fact that equilibrium is not an outcome of the
economic process and is not a satisfactory starting point for analysis;
and (c) the role of ideology in legitimizing forms of economic analysis
(Cohen and Harcourt, 2003). All of these issues lead us to consideration
of the importance of time and institutional context in assessing the
present use of ‘natural capital’ as an analytical category.

Veblen’s institutional critique of capital

At our present historical juncture we need to hone our understanding

of what must change to realign the economy with biophysical limits.
Exponential economic growth in the face of numerous environmen-
tal crises demands immediate clarity on this. Natural capital, as it is
presently used and understood in ecological economics falls short in
providing this clarity. It is a concept that is logically inconsistent and
lacking in historical context precisely because it is derivative of capital
in the tradition of marginalist economics following directly from the
static concept of capital as delineated by Clark and Fisher. It is, there-
fore, worthwhile to explore the problems inherited from this delinea-
tion of capital. The iconoclastic economist Thorstein Veblen provides
one of the most incisive critiques of capital as it is used in the marginal-
ist tradition. Although Veblen does not have an ecological orientation,
his analysis regarding capital also applies to ‘natural capital’. Veblen
emphasizes the fact that capital does not exist in an institutional vac-
uum and he critiques conventional economics for its lack of apprecia-
tion for the institutional furniture that defines capital. It is, in fact,
this institutional furniture that conventional economics wants to be
rid of. Veblen engaged in an extensive discussion of both the lack of
historical context and the logical inconsistencies associated with the
marginalist interpretation of capital. The institutional overlay provided
by Veblen with regard to capital helps us to understand the purpose and
particular structure of economic activity under our present economic
arrangements. In his critique of the analysis of capital in conventional
economics Veblen (1909, 624) tells us that:

The cultural elements so tacitly postulated as immutable conditions

precedent to economic life are ownership and free contract. ... These
cultural products are, for the purposes of the theory, conceived to
be given a priori in unmitigated force. They are part of the nature of
things; so that there is no need of accounting for them or inquiring
into them, as to how they have come to be such as they are, or how
and why they have changed and are changing, or what effect all this
 A Critique of Natural Capital 135

may have on the relations of men who live by or under this cultural
situation.

Veblen is correct. The fact of ownership and the conditions under

which ownership resides have everything to say about what capital is at
this point in history.6 Hedonistic economics cleans its house of all this
institutional furniture and replaces it with eternal verities and subjec-
tive valuation at a point in time. We postulate, like Veblen, that it is the
institutional context of capital that gives it meaning and we are well
served by understanding this context rather than pretending it makes
no difference. As Veblen so aptly puts it when he talks about the fact
that hedonistic economics has no sense of history: ‘A gang of Aleutian
Islanders slushing about in the wrack and surf with rakes and magical
incantations for the capture of shell-fish are held, in point of taxonomic
reality [hedonistic reality], to be engaged on a feat of hedonistic equili-
bration in rent, wages, and interest’ (Veblen, 1908a, 160).
Veblen begins his discussion of capital by pointing out that our
present economic circumstances are unique and historically specific.
The unfolding of the economy is an evolutionary process. Veblen gives
us a sense for the unique circumstances that define capital in its con-
temporary context. It is a matter of ownership and the fact that the
‘ways and means’ of economic life come to be controlled by those who
own the vast industrial equipment of modern economic life. He states:

At a relatively primitive phase of the development, and under ordi-

nary conditions of climate and surroundings, the possession of the
concrete articles (“capital goods”) needed to turn the commonplace
knowledge of ways and means to account is a matter of slight con-
sequence. ... But, as the common stock of technological knowledge
increases in volume, range, and efficiency, the material equipment
whereby this knowledge of ways and means is put into effect grows
greater, more considerable relatively to the capacity of the individ-
ual ... then the strong arm intervenes, property rights apparently
begin to fall into definite shape, the principles of ownership gather
force and consistency, and men begin to accumulate capital goods
and take measures to make them secure. (Veblen, 1908b, 523–4)

Veblen continues in his evolutionary exposition:

It is not until a late period in the life-history of material civiliza-

tion that ownership of the industrial equipment, in the narrower
sense in which that phrase is commonly employed, comes to be
136 Lisi Krall and John M. Gowdy

the dominant and typical method of engrossing the immaterial

equipment. ... So late an innovation, indeed, is this modern institu-
tion of “capitalism,” the predominant ownership of industrial cap-
ital as we know it, – and yet so intimate a fact is it in our familiar
scheme of life, that we have some difficulty in seeing it in perspec-
tive at all, and we find ourselves hesitating between denying its
existence, on the one hand, and affirming it to be a fact of nature
antecedent to all human institutions, on the other hand. (Veblen,
1908b, 527)

Capitalism is thus defined by Veblen as industrial capitalism – a stage of

development in which the ownership and command of ‘capital goods’ is
beyond the reach of the common man and the vested interest controls
the industrial knowledge and uses it for pecuniary purposes. Veblen
(1908b, 533) tells us: ‘... the unit of industrial equipment, as required by
the new technological era, was larger than one man could compass by
his own efforts with the free use of commonplace knowledge of ways
and means’. And, so, business in its modern form is embodied in the
corporation, which effectively controls and commands the economic
knowledge handed down through the millennia of human existence.
The engrossment of that economic knowledge of the ways and means of
material existence has everything to say about the present organization
of economic life.
Veblen also emphasizes the fact that ‘capital goods’ may appear to
be the result of the ‘productiveness of the maker’s labor’. Yet, this is a
misreading of the facts because ‘the maker’s productivity ... was but a
function of the immaterial technological equipment at his command,
and that in its turn was the slow spiritual distillate of the community’s
time-long experience and initiative’ (Veblen, 1908b, 531). Knowledge
of the ways and means of economic life is a cumulative matter. Under
capitalism property ownership fulfills the interests of what Veblen calls
‘business’, ‘the vested interest’, ‘the absentee owners’, and this is often
contrary to the interests of the common man. Clearly to Veblen ‘capital
goods’ are in some sense common property because they embody the
accumulated knowledge of the history of humankind, but in capital-
ism it is the ownership and control of capital in its industrial form that
defines it. Veblen (1908b, 542) states in this regard: ‘The question of
capital goods (including that of their ownership and therefore, includ-
ing the question of investment) is a question of how mankind as a spe-
cies of intelligent animals deals with the brute force at its disposal. It is a
question of how the human agent deals with his means of life ... ’. Thus,
 A Critique of Natural Capital 137

the particular historical circumstances define the social and economic

meaning of capital.
These particular circumstances will tell us whether the accumulated
knowledge is used for the betterment of society or for the narrow inter-
ests of a select subset. Thus for Veblen the defining characteristic of
capital is not that it is a physical entity: ‘The continuum in which the
“abiding entity” of capital resides is a continuity of ownership, not a
physical fact’ (Veblen, 1908a, 163). Instead, the social/economic circum-
stances that define capital, and its purpose, are the defining characteris-
tic, or in Veblen’s parlance, ‘the abiding entity’ of capital. It is the reality
of the way the capitalist comes to command the knowledge of the ways
and means of life that is important. At the time that Veblen was writing,
this command was embodied in the ownership of industrial capital.
The capitalist is not interested in maintaining any particular machine
or any particular workers, or any particular fund or stock; rather, he is
interested in maintaining a return on investment, and his right to that
return is a matter of property rights. Yet, discussion of these aspects of
capitalism is avoided in the hedonistic conception of capital.
It is not only the ahistorical interpretation of capital that Veblen
finds problematic, but also the logical inconsistencies that appear when
marginalist economists try to argue that profit is a return to the pro-
ductivity of capital. In other words when hedonistic economics tries to
justify what the capitalist gets. Veblen provides one of the most astute
discussions of this problem with capital in hedonistic economics in his
critique of Clark and his distinction between capital and ‘capital goods’.
Eric Roll tells us that: ‘Clark began by showing ... that the term capital
was used to denote two separate and distinct things: the concrete goods
which were employed as means of production, and “an abstract quan-
tum of productive wealth” ’ (Roll, 1974). Clark engaged in a detailed
discussion of capital with the intent of demonstrating that what the
capitalist gets is earned and specifically that it is a return for the pro-
ductivity of capital. Clark is here led to make the distinction between
capital and capital goods, the latter being a specific physical entity that
can create a marginal product and therefore justifies, on the basis of
contribution to production, the return to the capitalist.
The distinction between capital and capital goods creates problems
of logical consistency for Clark. Capital goods are essentially an engi-
neering fact or, as Roll tells it, a ‘means of production’, while capital is
the ‘capitalized values of a series of future incomes’. Clearly, these are
not the same thing. Clark tried to meld the two by calling capital a
‘fund of productive goods’. This led Veblen (1908a, 163) to the following
138 Lisi Krall and John M. Gowdy

commentary: ‘The phrase itself, “a fund of productive goods”, is a curi-

ously confusing mixture of pecuniary and mechanical terms. ... This
concept of capital, as a physically “abiding entity” constituted by the
succession of productive goods that make up industrial equipment,
breaks down in Mr. Clark’s own use of it when he comes to speak of
the mobility of capital ... ’. Veblen (1908a, 163) claims that when Clark
talks about a ‘transfer of capital’ from one line of business to another
it is a matter of investment, but Clark tries to hedge this fact because it
would contradict his ‘main position, that “capital”, is made up of “capi-
tal goods” ’. Veblen (1908a, 164) continues in his excoriation of Clark:

In a hedonistic-utilitarian scheme of economic doctrine, such as Mr.

Clark’s, only physically productive agencies can be admitted as effi-
cient factors in production or as legitimate claimants to a share in
distribution. ... it is plain that the “transfer of capital” contemplated
(by J.B. Clark) is a shifting of investment, and that it is, as indeed Mr.
Clark indicates, not a matter of mechanical shifting of physical bod-
ies from one industry to the other.

The problem is even worse because everyone knows that one can lose
capital (as wealth) without losing any physical factor of production. Just
think about the amount of wealth that was lost as a result of the 2008
financial meltdown, but not a bit of physical capital was lost. When a
business goes belly-up it is not the case that any physical thing in terms
of machines and so forth has necessarily changed, rather it is the busi-
ness prospect that has changed, and this has changed the assessment of
their value. Veblen (1908a, 164) is unequivocal:

[I]t is plain that, if the concept of capital were elaborated from obser-
vation of current business practice, it would be found that “capital”
is a pecuniary fact, not a mechanical one: that it is an outcome of a
valuation, depending immediately on the state of mind of the valu-
ers; and that the specific marks of capital, by which it is distinguish-
able from other facts, are of an immaterial character. This would, of
course, lead, directly, to the admission of intangible assets; and this,
in turn, would upset the law of the “natural” remuneration of labor
and capital to which Mr. Clark’s argument looks forward from the
start.

Veblen (1908a, 163) was very clear: ‘The continuum in which the “abid-
ing entity” of capital resides is a continuity of ownership, not a physical
 A Critique of Natural Capital 139

fact. The continuity, in fact, is of an immaterial nature, a matter of legal

rights, of contract, of purchase and sale’. This is an important distinction
to make. Capital is a pecuniary fact, a business fact, and not primarily
a material fact. And part of its pecuniary fact is the fact of ownership;
that is, it is a matter of who has the right to claim the returns on invest-
ment and to manage the investment funds. Thus the pecuniary fact
of capital is not fully captured in the financial investment model. The
institutional furniture surrounding capital is more complex.

Bringing biophysical foundations back into

ecological economics

Ecological economics confronts a problem it cannot deny. The ambi-

guities between the pecuniary and the physical aspects of capital have
been something hedonistic economists have has been willing to live
with because they have much to lose in the resolution of these ambigui-
ties. The soundness and logic of their paradigm and their defense – that
the capitalist gets what he deserves – are all up for question if the debate
about capital is pursued. Unfortunately, ecological economics does not
have the luxury of living with the ambiguity, because the whole pur-
pose of introducing natural capital is to concentrate the analysis on the
biophysical foundation of economic activity. Thus, in its use of natu-
ral capital, ecological economics runs into an even more pronounced
tension between the physical and the pecuniary. If the abiding entity
of capital as an economic entity is a pecuniary fact and not prima-
rily a material fact then it would seem that the heart of the problem is
clear. In the context of capitalism, natural capital is a pecuniary fact,
albeit slightly different than the pecuniary fact of man-made capital.
The pecuniary facts are a matter of ownership and the right to profit
and rent and command over the biophysical foundation of economic
activity. Yet, the long-term stability of the material reproduction of
society requires that natural capital remains biophysically intact. These
are clearly in contradiction. The problem is this: the pecuniary fact of
natural capital negates its biophysical importance. Biophysical stabil-
ity is not compromised by markets in one fell swoop but is, instead, a
gradual erosion in which either direct property rights or the spillover
of property rights erode biophysical health of Planet Earth bit by bit for
the sake of an ethereal monetary return. The tension between the pecu-
niary and the physical aspect of natural capital is impossible to resolve
unless, of course, we are willing to question the fundamental structure
of the market economy.
140 Lisi Krall and John M. Gowdy

The adoption of Hicksian income by Daly was intended to highlight

the importance of the depletion of natural capital. By accounting for its
depletion in national income accounts, income depreciation was cor-
rectly represented but in retrospect, the more controversial issues of
capital were avoided by this emphasis on accounting. The rights to the
returns on natural capital, the ownership of natural capital and the pur-
pose and context of the use of natural capital are not questions engaged
in this approach. Instead, the neoclassical and hedonistic conception
of economic purpose – fulfilling the material want satisfaction of
people – was accepted at face value and the emphasis naturally shifted
to accounting for the value of natural capital, maintaining Hicksian
income.
In this tradition, El Serafy (1991, 174) referred to the approaches to
accounting as the fundist and materialist approaches:

In respect of resources such as forests and fish, sustainable yields

can be calculated, and exploitation over and above such yields
may be considered as comparable to depreciation. ... Depreciation
is not applicable ... in the case of non-renewable natural resources
such as fossil fuels. ... When it comes to the treatment of exhaust-
ible resources in national accounts I find myself using the fundist
approach to capital. The method I devised which converts receipts
from mineral exploitation into a permanent stream representing
true income. ... Petroleum reserves are part of a stock. They can be
sold in toto or in part, and their proceeds can be sunk in other assets.
I asked the accountant’s question: what proportion of the total stock
does the annual sale represent? In the light of the answer, and with
the aid of a discount rate, I could convert the proceeds into a perma-
nent income stream.

Thus in the case of nonrenewable resources the process of accounting

for depletion becomes disconnected from the resource itself. Clearly,
here income becomes a matter of investment of the proceeds of deple-
tion. The intactness of the capital is measured by the income flow it
can generate. The physical reality of capital is less important than the
fact that it must be reinvested to generate an ongoing stream of income
and in some sense it is the stream of income that determines whether
it has remained intact. The income problem is to maintain the flow of
income, so a stock must be maintained in order to do so, but obviously
it does not matter which stock as long as the value is comparable in
terms of the income generated. The money metric makes everything
 A Critique of Natural Capital 141

commensurable. El Serafy recognizes a certain economic fact: the capi-

talist is not attached to any particular investment or any particular cap-
ital good or any particular piece of natural capital. Daly’s solution is to
advocate that the proceeds must be invested in a renewable substitute.
Whether one uses a fundist or a materialist approach, the emphasis is
the same; that is, the goal is to account for the depreciation of natural
capital so that we do not misrepresent the amount of income generated
in the economy. Accounting that strays from the biophysical reality
of ‘natural capital’ touches on the more realistic economic purpose of
natural capital but even so the emphasis is never towards exploring
economic purpose and the institutional furniture that surround it. The
emphasis has shifted to the problem of accounting, but in truth the
problem we confront is much more fundamental.
Natural capital creates what James O’Connor (1998) calls the ‘condi-
tions of production’ so it cannot be a purely pecuniary matter. O’Connor
identified the ecological disaster wrought by capital as ‘the second con-
tradiction of capitalism’ (the first is the inability to realize surplus value
in the accumulation process). O’Connor (1998, 160) states: ‘By contrast,
the point of departure of an ecological Marxist theory of economic cri-
sis ... is the contradiction between capitalist production relations (and
productive forces), on the one hand, and the conditions of capitalist
production, or “capitalist relations and forces of social reproduction”,
on the other’. In other words if the ‘external physical conditions’ to
use Marx’s terminology, are compromised then it becomes increasingly
difficult for capitalism to function – it becomes increasingly difficult to
realize profit and greater social effort must be expended to sustain the
ecological integrity of the planet. As O’Connor (1998, 161) tells us: ‘In
ecological Marxism, economic crisis is the cauldron in which capital
restructures the conditions of production, also in ways that make them
more transparently social in form and content; for example, ... land rec-
lamation, ... population policy ... ’.
Ecological economists would agree – the biophysical health of the
planet provides the necessary underpinnings of a sound economy. But
if in our particular economic system the pecuniary aspect of natural
capital is primary, then clearly the role of creating the ‘conditions of
production’ is subjugated to this. It is possible to explore what must be
done to resolve this tension but not if we adhere to marginalist tradi-
tion which has gone to great lengths to avoid the untoward facts of the
claims and use of the returns and benefits of capital rather than explore
their full institutional meaning. Here the result has been obfuscation
rather than clarification. If one accepts that the purpose of economic
142 Lisi Krall and John M. Gowdy

activity as delineated by marginalist economics is to keep the money

flowing, then the only things left to talk about is accounting and
prices.
Had ecological economics gone in a different direction and used a
different foundation for its interpretation of capital, one that employed
a robust institutional overlay, the navigation of our present circum-
stances might have been aligned with this historical moment. The full
pecuniary overlay of capital is that it is defined by ownership and com-
manded by the vested interest to the best economic opportunity for
the vested interest and this is only incidentally and temporarily con-
nected to specific capital goods or to the good of the common man.
Such things are not dictated by subjective valuation under competitive
conditions. They are dictated by property and economic power and the
logic and dynamic of accumulation in a capitalist system.
It is easy to imagine an extension of Veblen’s and Georgescu-Roegen’s
evolutionary perspective to our present circumstances. The fact that the
depletion of resources and the loss of ecosystem services are ongoing
concerns owes everything to the state of industrial development and
the enhanced ability of one group to command the ways and means of
life through their business interests and their command of capital. The
material reproduction of society is secondary to the business interest.
And the business interest itself is navigated in a larger economic con-
text that demands accumulation with all of the contradictions therein.
Ecological integrity is ignored unless it interferes with the ability to
make money and, thus, it is endlessly negotiable in this process and is
always negotiated in favor of the vested interest. We need go no further
than the oil industry to understand this. Does anyone honestly believe
that leaving the energy transition to the pecuniary interests of the oil
industry is good for the Earth or the common man? Yet, the oil indus-
try now controls an enormous sum of capital that they will determine
how to invest. And the CO2 buildup in the atmosphere – that is effec-
tively the extension of the right to profit and rent on the part of the
oil industry – continues unabated. Biophysical health should not be a
negotiable fact, yet if the structure and dynamic of economic process
and its purpose treat natural capital first and foremost as a pecuniary
fact, then the biophysical soundness of the planet will always come up
short.
Externalities are, in reality, an extension of property rights to those
who have captured the benefits and power of property ownership at this
historical moment. Pecuniary development and business interest now
 A Critique of Natural Capital 143

dominate and control the ecological integrity of the planet. Ecological

integrity is often thought of in catastrophic terms, but from the per-
spective of day-to-day material life it is experienced mostly as a gradual
erosion of our biophysical foundation. In some way ecological integrity
is always changed by the hand of man, and so the question emerges,
when does the hand of man go too far? If it were actually the case that
the interest of business and the common man were one in the same we
might worry less about the way the answer to this question is presently
being adjudicated, but this is not the case.
The problem is that the rights of property have evolved to such an
extent in our present circumstances that the vested interest has the
power to undermine the life-supporting qualities of the planet and
destroy its magic. We convince ourselves that this is in the best inter-
est of society because we have adopted an economic framework that
adheres to the notion that the interests of business and our interests
are one in the same, but institutional and heterodox economics thinks
otherwise. Rather than concentrating on the price of natural capital
we should be asking ourselves whether the logic of property has run
its course under the present state of our use of the ‘ways and means’
of life and whether a dramatic alteration of these rights and the eco-
nomic organization that validates them are now in order. A few com-
mand too much, and for the rest living on the edge the stakes are too
high to attempt meaningful change. The whole system seems too big
to fail.

Merging human economy and human ecology

Ecological economics began with a long-term vision of the place of the

human species within the web of life on Earth. The tragedy for eco-
logical economics is that it has not been able to navigate the distance
between human economy and healthy human ecology because it has
narrowly limited its focus with its adoption of ‘natural capital’ and the
implicit acceptance of the market economy as the ultimate arbiter of
all human values. In this it has eliminated a critical discussion of fun-
damental institutional change in the context of our present historical
moment.
Our experiment with a market economy is but the latest in a whole
series of experiments with the intentional manipulation of the natural
environment to fit the purpose (and needs) of humans, what we refer
to as the domestication of the planet (Krall, 2010). Human material
144 Lisi Krall and John M. Gowdy

progress is an evolutionary process of economic development, a proc-

ess that has been greatly accelerated in the past two centuries with our
experiment with fossil fuel and market capitalism. Natural capital has
reduced the complex tapestry of our present circumstances to matters
of accounting.
The natural world provides three incommensurable kinds of value to
humans: economic – the direct inputs from nature to the market econ-
omy; sociocultural – the nonmarket services necessary for maintaining
the biological and psychological needs of the human species; and eco-
logical – the value to ecosystems such as preserving evolutionary poten-
tial through biological diversity and ecosystem integrity (Gowdy, 1997;
Gowdy et al., 2010a). All are essential and important to healthy human
ecology and an ethical acknowledgement of the rights of other species
to exist. Unfortunately, ecological economics has focused attention on
the calculation of the prices of natural capital. In doing so non-market
values must be collapsed into prices so that these values are commensu-
rable with purely economic values. There is no question this is a com-
plex exercise in valuation but it would be wrong to misconstrue this
complexity with its effectiveness in resolving our present problems of
economy and environment. Our problem is not a problem of finding
the right price; our problem is one of fundamentally reconstructing
economic arrangements.
The complexity of accounting for the myriad values that the natural
world holds for humans has shifted the emphasis of economic inquiry
to matters of accounting rather than to more fundamental matters of
economic purpose and organization, and it is the latter that holds the
key to orchestrating a healthy human ecology and economy. It is neces-
sary to question both our current economic organization and the domi-
nant paradigm that apologizes for its problems if we are to change the
status quo. Capitalism reorients human beings to each other and to the
natural world in a most unsavory and destructive manner.
Karl Polanyi writes a chapter on ‘Market and Nature’ in his seminal
book The Great Transformation. He lays out very clearly what has hap-
pened to the relationship between man and land under our present eco-
nomic arrangements: ‘Traditionally, land and labor are not separated;
labor forms part of life, land remains part of nature, life and nature
form an articulate whole’. But under market arrangements land is iso-
lated from all other essential functions, to both humans and non-hu-
mans alike, and it is made to be a commodity. Polanyi (1944, 178) tells
us the problem with this: ‘The economic function is but one of many
vital functions of land. It invest man’s life with stability; it is the site of
 A Critique of Natural Capital 145

his habitation; it is a condition of his physical safety; it is the landscape

and the seasons. We might as well imagine his being born without
hands and feet as carrying on his life without land’. In other words the
commodity function of land trumps all others. In Veblenian terms the
pecuniary purpose of natural capital dominates, and it is this pecuniary
purpose that must be confronted and changed.
The market economy is merely an instant in terms of the 200,000-
year history of Homo sapiens. Myriad other forms of social integration
have existed in the past and, if we are lucky enough to get through the
coming population/climate change/peak oil bottleneck, myriads more
will exist in the future. To judge how much of nature we should leave
for the future inhabitants of Planet Earth based on such an ephemeral,
peculiar, and anti-social value system as market capitalism is the height
of folly.

Notes
1. By the term ‘neoclassical’ we mean Walrasian general equilibrium econom-
ics, with its assumption of independent actors, marginal analysis and equi-
librium (see Gowdy et al., 2010b).
2. We define Ecological Economics broadly to include neoclassical environmen-
tal economists like Partha Dasgupta and Karl-Gören Mäler (2000), who call
themselves ecological economists although they are not necessarily mem-
bers of the International Society of Ecological Economics. Many ecological
economists, perhaps the majority, have strong reservations about pricing
nature (see the discussion in Holt and Spash, 2009).
3. Hedonistic economics, a term coined by Veblen, is the term used for the
marginalist school of economic thought of which neoclassical economics is
derivative.
4. In his seminal essay ‘Energy and Economic Myths’ Georgescu-Roegen (1976c,
10) points out that one of the most enduring myths of economists (and oth-
ers) is ‘the myth that the price mechanism can offset any shortages, whether
of land, energy or materials’.
5. As Daly points out the traditional factors of production have all been reduced
to different kinds of capital.
6. Marginal productivity theory was formulated as an answer to Marx’s labor
theory of value. Marx, like Veblen, had a broad institutional perspective on
capital. It was the expression of a particular historical moment and the social
relations that surrounded it. Marx makes the comment: ‘Nature does not
produce on the one side owners of money or commodities, and on the other
men possessing nothing but their own labour-power. This relation has no
natural basis, neither is its social basis one that is common to all historical
periods. It is clearly the result of a past historical development, the prod-
uct of many economic revolutions, of the extinction of a whole series of
older forms of social production’. Clearly, there are similarities on this matter
between Veblen and Marx. Capitalism is an arrangement, not universal but
146 Lisi Krall and John M. Gowdy

particular to this historical moment, and capital is defined in this context. It

allows one group of individuals the right to exploit another (or to exploit the
biophysical integrity of the planet as the case might be) or to use capital for
their pecuniary interests. Marx makes no bones about this fact and neither
does Veblen. Thus it is obviously the economic arrangements that surround
capital that determine what it is, and this is what needs to be understood.
7
From Utilitarianism to Evolution
in Ecological Economics
Geoffrey M. Hodgson

Indeed the really important problems of economics are ques-

tions of collective decision-making which cannot be dealt with
in terms of a calculus deductively derived from a formal con-
cept of individual rationality under hypothetically assumed
and transparent conditions.
(K. William Kapp, 1978, 288–9)

Global warming is one of the most urgent and serious problems facing
humankind.1 Yet, in no other area are the deficiencies of utilitarian-
ism and neoclassical welfare economics so serious and dramatic. Any
welfare approach based on the presumption that individuals are always
the best judges of their own interest falls at the first hurdle: many peo-
ple neither understand nor accept the conclusions of the science of cli-
mate change. For example, climate change skeptics are prominent in
the United States, with only 49 percent saying, in a 2008 Gallup poll,
that rising temperatures were a result of human activities. Only 44 per-
cent of the US population think that their government should make
the problem the highest priority, according to a 2009 survey. Similar
percentages can be found in some other developed countries. 2
Against this, despite many important differences of opinion on
details, the scientific community is overwhelmingly of the opinion
that human activity is very likely the cause for the rapid increase in
global average temperatures over the past century (IPCC, 2007). Yet, a
large number of educated people in developed countries do not accept
this conclusion and would oppose costly measures to deal with it.
Consequently, such measures would be Pareto suboptimal. Generally,
standard utilitarianism gives low priority to human needs that are low-
ranked in individual utility functions. Many people oppose, or give low

147
148 Geoffrey M. Hodgson

prioritization to, the radical measures that are needed to deal with cli-
mate change. The problem here is of reconciling subjective utility with
policies that address environmental problems. The aim of this chapter
is to move beyond such narrow and self-interested considerations and
help prepare the foundations of an approach more suitable to dealing
with environmental issues, including impending climatic disruption.

From neoclassical self-interest to morality and need

Neoclassical economics incorporates rational, optimizing agents with

exogenously given preference functions, focusing on the equilibrium
outcomes and limited types of information problem associated with
such optimizing behavior. From the 1990s, neoclassical economics has
been challenged within the mainstream by other approaches, includ-
ing behavioral economics. But – despite the work of Amartya Sen (1976;
1987) and others – no developed alternative to neoclassical, utility-
based welfare approaches has yet prevailed. Even the new institutional
economics of Oliver Williamson (1975) and others – which pays atten-
tion to information problems and has improved our understanding
of institutions – ‘shares conventional economic assumptions on how
agents are motivated by their utility or personal welfare’ (Paavola and
Adger, 2005, 358).3
Broadly, there are two types of neoclassical approaches to environ-
mental policy. The first is based on ‘market failures’ and was originally
developed by Arthur Pigou (1920). The existing market system may not
take into account some environmental costs. A car driver who pollutes
the air and adds to road congestion imposes a cost on others as an exter-
nality. The market-failures approach aims to identify such externali-
ties and to use such measures as road tolls and fuel taxes to attempt to
alleviate the problem. This approach relies on government legislation,
the tax system and experts to estimate the economic costs and benefits
involved.
The second neoclassical approach is associated with the Chicago
School and Ronald Coase (1960). Its policy focus is on the creation
and distribution of clearly defined property rights and allowing mar-
kets and contract enforcement measures to deal with problems such
as pollution, congestion and resource depletion.4 Pigovian externalities
are deemed to arise primarily because of the absence of clearly defined
and enforceable property rights. If pollution occurs, then the owners
of the seas, rivers or open spaces would have recourse to law to obtain
compensation.
 From Utilitarianism to Evolution 149

We need neither enter into the controversy between the two

approaches, nor discuss the extensive information and enforcement
problems involved in each case.5 Of concern here are the assumptions
common to both types of policy. These include the supposition of indi-
viduals with given and complete (cardinal or ordinal) preference func-
tions and the exclusive focus on the way in which various costs and
benefits affect the utility of these maximizing individuals. In short,
both neoclassical approaches rely on individual utility maximization
to solve the problems of environmental degradation and resource
depletion.
Maximizing utility is a normative goal, but is it a moral aim? We need
to consider the nature of morality. Adopting a moral value is something
different from following a norm out of convenience or self-interest.
Following John L. Mackie (1977), Richard Joyce (2006) and others, I
propose that moral claims are absolute, inescapable, involve emotions
and beliefs, transcend conventions that are established out of conven-
ience and rely on language and deliberation. Note that these criteria do
not establish a valid morality; they instead help us to identify what is a
moral judgment, whether acceptable or otherwise.
By contrast, in standard utilitarianism, moral values and virtues such
as duty to others, care for the planet, respect for other species and so
on, are considered only insofar as they yield utility for that individual.
Altruism and cooperation are possible and seen as enhancing welfare,
but only insofar as an individual gains utility from such acts (Becker,
1976; Hirshleifer, 1978). Here, any kind of ‘cooperation’ or ‘altruism’
that may emerge from the interactions of these individuals is still based
on the maximization of individual utility. If an individual increases his
or own utility by helping or cooperating with others, then he or she is
still self-serving rather than being genuinely altruistic in a wider and
more adequate sense. Notions of morality or duty that are not incorpo-
rated in the utility-maximizing calculus are disregarded.
Once they are incorporated into a preference function, moral issues
are stripped of their distinctive meaning. This strategy is adopted by
some mainstream environmental economists. For example, in an essay
on the evaluation of environmental resources, W. Michael Hanemann
(1995, 105) notes that the modern theory of social choice is based on
individual preferences and ‘considers it immaterial’ whether they reflect
‘selfish interest or moral judgment’. Yet, surely it is important whether
individual motivation is selfish or moral, especially if we consider the
possibility that preferences may change, and we are thus obliged to
examine their sources.
150 Geoffrey M. Hodgson

Another mainstream view is that individual self-interest is a much

more solid foundation for policy. Hence, some mainstream environ-
mental economists treat moral values or commitments as superficial or
transient, thereby to ignore their importance in environmental policy.
Thus Dieter Helm – a leading environmental economist and sometime
UK government advisor – claims without much evidence that ‘values’
are generally ‘fragile’ and ‘highly uncertain’. But if values were poten-
tially variable that could provide an argument for making them the
center of analysis. Overlooking this option, as well as the possibility
that moral values have deep biological and cultural foundations, Helm
(1991, ix) asserts that ‘environmental policy must largely take values
as given, and focus instead on the context within which humans act.
Within this framework, the economic process plays a leading role’. He
thus takes the view that moral values are ephemeral and have little to
do with the ‘context within which humans act’ or with the ‘economic
process’. Helm goes on to argue that the inclusion of the environment
within economic calculations requires that we assign a monetary value
to it and ‘treat it as if is a commodity’.
This latter theme is taken up by Partha Dasgupta, who is another
leading mainstream economist working on environmental issues.
In an essay entitled ‘The Environment as a Commodity’, he consid-
ers such environmental problems as the depletion of the Amazonian
rain forest. Dasgupta (1991, 31) writes: ‘I cannot think that it will do
to look solemn and utter pious sentiments concerning our moral duty’.
Discussions of moral values are thus removed from debates on environ-
mental policy, in an unsentimental appeal to self-interest alone. In a
compelling account of how moral feelings have evolved from our ape-
like past, Frans De Waal (2006) criticizes the ‘veneer theory’ of morality
– as found in the works of Thomas Henry Huxley (Huxley and Huxley,
1947) and Richard Dawkins (1976) – that gives no evolutionary explana-
tion of moral feelings but urges them to counter our naturally selfish
inner selves. Dasgupta takes this one step further: morality is regarded
as mere dust on the surface, to be brushed aside.
In sum, moral values and norms are either disregarded in this neo-
classical approach, or they are rendered commensurate with everything
else via the utilitarian calculus of satisfaction-seeking individuals.
Either way, their motivational significance is overlooked. Money is seen
as the exclusive incentive. The well-known neoclassical technique in
environmental policy to ask people what they would be willing to pay
to maintain an environmental asset. It is assumed that everything –
including moral and aesthetic values – can be given a price.6
 From Utilitarianism to Evolution 151

While disregarding morality, neoclassical economists such as

Dasgupta and Helm are asking us to focus instead on pecuniary and
other incentives to get people to change their behavior. That is impor-
tant. But pecuniary and moral incentives can be complements, and are
not necessarily rivals. Moral values typically supplement and enhance
other incentives, and in some cases self-interest can be overridden by
moral considerations. Moral discourse can sometimes help to educate
people and alter their preferences.
An alternative to the subjective and utilitarian approach is one based
on human and ecological needs (Hobson, 1929; Sen, 1985; Doyal and
Gough, 1991; Nussbaum and Sen, 1993, Corning, 2000). Needs are dis-
tinguished from wants, the latter term being reserved for desires which
are not necessarily individually or socially beneficial. Needs can be use-
fully defined as that which ‘persons must achieve if they are to avoid
sustained and serious harm’ (Doyal and Gough, 1991, 50). Instead of
subjective utility, such needs or ‘instrumental values’ (Samuels, 1997;
Tool, 1995) are revealed via some instituted social process of technical
or scientific enquiry. As Kapp (1978, 297) proposes: ‘social choices are
made not in terms of subjectively experienced deficiencies and wants
but in terms of objective requirements or scientifically determined
standards. The relative urgency of these requirements is not subjectively
felt but objectively (i.e. often technically) established’. This shift back to
an objective and needs-based approach is tantamount to a restoration
of the concept of use–value (interpreted properly in terms of social use-
fulness), which was central to classical economics.
My immediate concern is to expose the limitations of utilitarian
approaches and establish both needs and moral values at the center
of environmental policy. To do this we need an alternative theoreti-
cal framework. But even then there is no easy solution to the policy
dilemmas. One must stress the ongoing, fallible and open-ended nature
of enquiry, and address the problem of designing institutions that are
appropriate for the democratic evaluation and revision of declared
needs. Crucially, approaches based on human need see the formulation
of environmental policy as driven by ongoing scientific analysis and
public debate, rather than simply by attempts to monetize and quantify
the current wishes of individuals.
The growing environmental crisis requires us to prioritize questions
of sustainability, to rescue moral values from subjective, private, ephem-
eral or relativist incarcerations, to undermine the culture of consumer-
ism and self-gratification that economics has helped to sustain and to
reinstate notions of the common good.
152 Geoffrey M. Hodgson

One prominent policy conclusion is already clear. Appeals to appropri-

ate moral values and not merely perceived self-interest should become
part of economic policy. As Fred Hirsch (1977, 12) argues, instead of reli-
ance on ‘the self-interest principle’ economic policy should pay much
more heed to ‘the role played by the supporting ethos of social obliga-
tion both in the formation of the relevant public policies and in their
efficient transmission to market opportunities’. Hirsch points to the
futility of positional, keeping-up-with-the-Joneses competition in the
context of increasing scarcity. He argues that to break the circle there
has to be a moral appeal, and one based on cooperation rather than
self-interest. Those that stress the ecological as well as the social limits
to growth come to a similar policy conclusion.7
Respondents to surveys that ask people to value the outcome of a
proposed environmental policy – through an approach known as
contingent valuation – often exhibit moral commitments rather than
unalloyed self-interest. Mark Sagoff (1988a, 62) reports survey evidence
which indicates that ‘respondents believe that environmental policy
– for example the degree of pollution permitted in national parks –
involves ethical, cultural, and aesthetic questions over which society
must deliberate on the merits, and that this has nothing to do with
pricing the satisfaction of preferences at the margin’. A study by David
A. Schkade and John W. Payne (1994) showed that in such valuation
surveys moral considerations dominate matters of self-interest. Another
overview concluded that responses concerning contingent valuation
of the environment ‘are dominated by citizen judgments concerning
desirable social goals rather than by consumer preferences’ (Blamey et
al., 1995, 285). Clive Spash (2000a) points out that a large proportion of
respondents in willingness-to-pay surveys refrain from giving an envi-
ronmental resource a monetary value on the grounds of ethical beliefs in
their intrinsic, nontradeable value. Substantial evidence suggests people
can be committed to the preservation of a natural phenomenon – such
as a rare species or a wilderness area – without perceiving any personal
benefit. We may conclude that appeals to values such as fairness and
cooperation, concern for other species, and the legacy for future human
generations, are superior to a reliance on self-interest alone.
Hence, to be successful, any government committed to the protec-
tion of the natural environment must campaign on the basis of moral
imperatives, such as duty and compassion, involving concern for ani-
mals and succeeding generations of humans, and not rely simply on
self-interest and a calculus of pecuniary costs and benefits. It also
 From Utilitarianism to Evolution 153

means that environmental policy analysts have to address the politi-

cal context of their evaluations, and address the difficult problem of
designing institutions within which democratic impulses and scientific
knowledge can fruitfully benefit from one another.
To repeat: this does not mean that policies based on pecuniary and
monetary incentives have no place. Indeed, such proposals can be rein-
forced by complementary appeals to moral values. Indeed, it could be
argued that appeals simply to moral duty, on the one hand, or reliance
on perceived self-interest, on the other, are likely to be of limited effect,
as they are employed alone. Carefully structured combinations work-
ing on both levels are likely to be more successful. Such an approach
involves much more than ‘looking solemn and uttering pious senti-
ments concerning our moral duty’.
Contrary to the suggestion that they are ephemeral, values are dif-
ficult both to build and dislodge. An appeal to values is no easy policy
fix. Yet, once norms such as cooperation and fairness become reinforced
their effects can span both current and future generations. Unlike the
appeal to self-interest, the transmission of such reinforced values is a
way of addressing the intergenerational problem which has perplexed
utilitarians in general and neoclassical environmental economists in
particular (Spash, 1993; Howarth, 1995; Brown, 1998).
The perspective advanced earlier in this book – that some moral val-
ues have a universal and biological foundation, as well as a dependence
on a concordant social culture – offers the beginnings of an alternative.
We are primed to be sensitive to such issues as fairness, to care for the
needs of others and an environment that is not despoiled (Haidt and
Joseph, 2004; 2008). We are also inclined to respect those in authority
(Milgram, 1974). Government officials and other opinion leaders have a
responsibility to use the respect they are granted as a means to enhance
and develop our positive impulses, concerning caring for others and the
environment.
The interplay of self-interest and moral impulses has the potential to
lead to changes in preferences and behavior. While neoclassical eco-
nomics takes the individual as given and downplays her ethical feel-
ings, the alternative approach suggested here would attempt to raise
moral awareness and thereby shift people’s preferences. Neoclassical
economics ignores the importance of educating people and persuading
them to adjust their values and priorities. Yet, education is vital – along-
side pecuniary and other incentives – if we are to deal with such mas-
sive problems as climate change.
154 Geoffrey M. Hodgson

In search of an overarching analytical framework

But we need more than an attack on neoclassical economics and an

appeal to moral values. Given that neoclassical welfare analysis is mis-
guided, we urgently need an alternative. I offer a few suggestions for
moving in that direction.
A key problem in the application of welfare principles to the envi-
ronment is that the economy and the ecosystem involve different and
sometimes conflicting dimensions of evaluation. Although the human
global economy depends on the ecosystem, the latter would suffer much
less pollution and damage if the former were to disappear. Yet, the end
of human civilization is hardly a worthy welfare goal. Environmental
policy is unavoidably about compromise – minimizing environmental
damage while addressing human welfare priorities. The vital question
is how to weigh this amount of environmental damage against that
amount of human welfare enhancement.
Utility theory – for all its faults – offers a common metric of evalua-
tion. A sensible and pragmatic response by ecological economists who
reject utility theory has been to insist on pluralist approaches and com-
binations of monetary, aesthetic and ecological evaluations to guide
policy (Norgaard, 1989; 1994; Sagoff, 2004; Vatn, 2005). But, ultimately,
different measures must be reconciled – implicitly or explicitly – to
make a decision.
It is important to acknowledge that the different dimensions of evalu-
ation are strictly incommensurable, because they involve different fac-
tors that are ranked or measured in different ways using different units.
It is also vital to understand that if we give all environmental losses and
welfare gains a money price, then we downgrade ethical values, under-
mine the potentially positive role of moral discourse, and fall into the
pit of self-interest. Nevertheless, any policy recommendation involves
an implicit ordering of preference, consistent with some well-ordered
utility function. The neoclassical mistake is to regard utility as the sole
ex ante basis of policy evaluation; but any consistent and coherent pol-
icy recommendation is compatible with some utility function as an ex
post result. Utility is not a driving motive but a summary description of
an actual or hypothetical outcome. And because we are concerned with
causal explanations rather than ex post descriptions, utilitarianism is
an impoverished theory of behavior. Despite their incommensurability,
any relevant policy stance unavoidably involves weighing up different
things, each against the other, encompassing them all within a single
cardinal or ordinal metric.
 From Utilitarianism to Evolution 155

A key problem is to choose the viewpoint and site of overall evalua-

tion. A number of rival and controversial alternatives are available. One
is the ‘deep ecology’ of Arne Næss (1989). Opposing anthropocentric
modes of evaluation, Næss attempts to establish the whole ecosystem
as the analytical viewpoint. But one of the more subtle criticisms of
‘deep ecology’ is that it fails to do just that, and instead smuggles in
an anthropocentric view under an ecocentric guise (Oksanen, 1997;
Keulartz, 1998). Perhaps that failure is unavoidable: it is simply impos-
sible for us to take a different viewpoint, untainted by anthropocentric
values and biases. If faced with the choice between the extinction of
the white rhinoceros or the giant panda, on the one hand, and human
welfare, on the other, we shall choose ourselves.
But it is beyond the scope of the present work to review the rival ethi-
cal viewpoints concerning ecological questions, including the question
of the rights of other species (Singer, 1975). The objectives here are more
basic:

1. We need an overarching analytical framework to encompass ecologi-

cal and social phenomena.
2. We need a welfare theory that prioritizes long-term sustainability
rather than the current satisfaction of human individuals.
3. While individual incentives are important, the social sciences must
appeal to moral imperatives that transcend satisfaction or perceived
self-interest

A possible approach to at least the first of these objectives would be the

modified law of thermodynamics developed by the economist Nicholas
Georgescu-Roegen (1971). This ‘entropy law’ applies to both matter and
energy and presumes that the universe is moving irreversibly from a
relatively ordered and organized state to the chaotic outcome of maxi-
mum disorder or entropy. Human productive activity transforms raw
materials and other input with low entropy into waste with higher
entropic value.
According to this approach, the increase of entropy can be delayed
locally by the ultimately transient rigidities and barriers in ordered enti-
ties or systems. Hence biotic evolution creates islands of order, which
locally resist the march of entropy for a while, to eventually succumb
and degrade. Islands of higher negative entropy (negentropy) may evolve
within a universe in which entropy is steadily increasing overall.
This suggests a possible synthesis of some version of the entropy law
with Darwinian or similar principles of evolution. Nobel Laureate Erwin
156 Geoffrey M. Hodgson

Schrödinger (1944) was among the prominent advocates of the view

that life feeds on negative entropy from its environment. Subsequently,
a number of authors synthesized the entropy principle with a notion
of evolution (Collier, 1986; Brooks and Wiley, 1988; Brooks et al., 1989;
Weber et al., 1989).
A major problem with the application of the entropy law to economic
phenomena is how different entropic states are to be ordered or val-
ued. Georgescu-Roegen (1971, 4, 7, 10, 146–7) upheld that the concept
of entropy had multiple meanings and was neither a cardinal variable
nor instrumentally variable. In a critique of the application of the idea
to economics, Elias Khalil (1990) argued that economic valuation and
entropic valuation are different and separable. This led to an unresolved
debate (Lozada, 1991; Khalil, 1991).
In the meantime, abstract dissections of Darwinian theory have made
some progress, leading to interpretations that stress that the evolution-
ary process is very much about the selection, retention and development
of more complex information (Wicken, 1987; Clark, 1991; Adami et al.,
2001; Beinhocker, 2006; 2011; Hodgson and Knudsen, 2010). In this
approach, information is defined in the sense of Claude E. Shannon and
Warren Weaver (1949) as a signal that when received causes some action.
Of course, this definition omits key features of information, ideas and
knowledge in the human domain, particularly meanings and interpre-
tations. With human evolution it is essential to bring these into the pic-
ture. But the more abstract Shannon-Weaver definition is appropriate
for the general phenomena under discussion and applicable to the evo-
lution of non-human organisms as well. Darwinian evolution involves
storage, copying and development of more complex information – local
increases in negentropy, defined in informational terms.

Using evolutionary thinking to connect economic and

ecological values

Darwinism is not only compatible with the entropy approach but, also,
it adds two further extensions. First, by addressing all evolving systems,
Darwinism offers an explanatory framework that not only covers popu-
lations of natural organisms, but also applies to sets of social entities,
including human institutions. Second, by establishing the importance
of morality for the survival of human groups Darwinism provides a
basis for developing universal ethical principles.
Regarding the first extension, Darwin (1859; 1871) hinted that his
evolutionary principles would apply to social phenomena, such as the
 From Utilitarianism to Evolution 157

development of language and the selection of ethical ideas. This insight

was taken up episodically by a number of writers, including Walter
Bagehot (1872), David Ritchie (1896), Thorstein Veblen (1899), Albert
G. Keller (1915), Adolf Berle (1950) and Donald T. Campbell (1965).
Recently, the idea again has become prominent in the social sciences
(Blute, 2010; Hodgson and Knudsen, 2010).
This idea of generalizing Darwinian principles to cover the social as
well as the natural domain means neither the explanatory reduction
of the former to the latter, nor the presumption that the mechanisms
and other relevant features in each domain are similar. As evolutionary
economist Sidney G. Winter (1987, 617) writes:

[N]atural selection and evolution should not be viewed as concepts

developed for the specific purposes of biology and possibly appropri-
able for the specific purposes of economics, but rather as elements of
the framework of a new conceptual structure that biology, econom-
ics and other social sciences can comfortably share.

Although generalized Darwinian principles apply to both social and

biological systems, they offer no shortcut theoretical explanations or
answers. As in biology, detailed examination of the particular mecha-
nisms is also required. Darwinian principles are not like Newtonian
laws that can predict accurately the motion of bodies through space.
Instead, Darwinism is a general meta-theoretical framework within
which particular auxiliary explanations must be placed. The nature of
these auxiliary explanations will vary from domain to domain.
Nevertheless, the provision of this meta-theoretical framework is
an important step. In particular, the idea of generalizing Darwinism
to socioeconomic evolution challenges the longstanding idea among
social scientists that social and biological phenomena should be com-
pletely partitioned – and that social scientists have little to learn from
biology and vice versa. A generalized Darwinism is consistent with the
idea that human society is embedded in the natural world and depends
upon it for survival.
A generalized Darwinism systematizes the process of empirical
inquiry and organizes detailed knowledge pertaining to a wide variety
of evolutionary processes. Furthermore, Darwinian ideas have impor-
tant implications for social scientists concerning the rationality and
psyche of human agents (Richards, 1987; Cosmides and Tooby, 1994a;
1994b). Assumptions concerning human agents must be consistent with
our understanding of human evolution. Darwinian evolution involves
158 Geoffrey M. Hodgson

the development, retention and selection of information concerning

adaptive solutions to survival problems faced by organisms in their
environment. It raises questions of causality and requires explana-
tions of origin. This applies in particular to the dispositional programs
behind human thought and behavior. Contrary to much mainstream
economics, individuals and their preferences cannot simply be taken
as given.
Crucially, Darwinism focuses our attention on the possible mecha-
nisms through which variety is preserved and created. Two of the most
important mechanisms identified by Darwin (1859) and retained in
modern biology involve locational considerations. First, the migration
of a group to another area with a different physical environment and,
second, the use or creation of different niches, remain two of the most
important mechanisms to explain speciation. Related ideas would seem
to transfer directly to the social or economic domain. In these cases
the new environment, and the (relative) isolation of a group from the
majority, create new opportunities for variation.
Similar arguments apply to human institutions as well as to biological
organisms, notwithstanding that the nature and mechanisms of muta-
tion and separation are very different. The general ideas of mutation
and physical separation particularly apply to the evolution of languages
and all sorts of customs. For example, relative isolation and language
change leads to subdivision and often to the creation of new languages.
Furthermore, there is now a growing literature on how firms may per-
form differently in different contexts, such as under different regula-
tory regimes or among different types of financial institutions (Amable,
2000; Aoki, 2001; Hall and Soskice, 2001; Boyer, 2005; Kenworthy,
2006; Gagliardi, 2009).
Not only are the above considerations of general importance for
understanding the evolution of organizations, they are of particu-
lar relevance for ecological economics. Much of the policy agenda for
ecological economics is a matter of appropriate institutional design,
establishing incentives that are consistent with environmental goals,
processing flows of information to guide policy, and dealing with
unforeseen disturbances and shocks.
In this vein there is the important literature on the robustness of
socioecological systems, which helps to identify social and ecological
vulnerabilities to disturbances. John Anderies et al. (2004), for example,
identify the link between resource users and public infrastructure pro-
viders as a key variable affecting such robustness. They develop a set of
appropriate institutional design principles. In line with the Darwinian
 From Utilitarianism to Evolution 159

emphasis on the role of variety in the processes of adaptation and selec-

tion, C. Dustin Becker and Elinor Ostrom (1995) emphasize the impor-
tance of institutional diversity in coping with complex developments
in environmental systems.8
Much of this middle-range literature fails to mention Darwinism. But,
for similar reasons, many applied biologists are not obliged to refer to
general Darwinian evolutionary principles when they carry out concrete
studies. Much of biology proceeds by assuming, but not mentioning,
the core Darwinian principles of variation, inheritance and selection.
Darwinian theory is at a high level of abstraction. Middle-range theory
has to be consistent with this theory but does not necessarily involve
applying it at every turn. Instead, Darwinian theory is a way of organ-
izing our understanding of different evolving systems and organizing
explanations that operate on different levels.
Moreover, an explicit recognition of the role of Darwinism in these
contexts may stimulate some useful theoretical developments on inter-
actions between organizations and ecosystems. Darwinism may provide
a meta-theoretical framework wherein fragmented and diverse insights
may be integrated and further developed. Furthermore, although
Darwinism does not immediately provide the answers, this unifying
framework may help to generate some basic principles and policy guide-
lines that span the social and ecological domains. It may facilitate the
development of our understanding of the institutional developments
that are vital to deal with pressing environmental problems, including
climate change.
As noted above, Darwinism can also enhance the discussion of moral
values. Recent work on the evolution of cooperation and morality has
rehabilitated Darwin’s (1871) view that humans have inherited and cul-
turally reinforced dispositions towards moral or altruistic behaviors that
help to sustain the social group (Boehm, 2000; Nichols, 2004; Gintis et
al., 2005; Tancredi, 2005; De Waal, 2006; Hauser, 2006; Joyce, 2006;
Haidt and Craig, 2008; Bowles and Gintis, 2011).
But bringing Darwinism into the framing of environmental policy
does not mean that one has to accept that any evolved moral dispositions
are necessarily the right ones for dealing with current environmental
problems. An evolved is does not imply an ought. Darwinism is explana-
tory and indicative, rather than prescriptive. It points to evolved moral
dispositions necessary for survival in structured social groups that use
a sophisticated language, that underlie culturally enhanced and trans-
mitted moral norms. This does not mean that they are sufficient, ade-
quate or always warranted. Instead, these underlying dispositions have
160 Geoffrey M. Hodgson

to be understood in the process of development of new or enhanced

moral norms and imperatives.
We have also noted that some of our underlying moral dispositions
are relevant for ecological matters. These include feelings of fairness for
the needs of others and preferences for an undespoiled environment
(Douglas, 1966; Haidt and Joseph, 2004; 2008). And given that we are
also primed to respect those in authority (Milgram, 1974), governments
should honor that privilege and take responsibility for dealing with
environmental problems. Respect for authority has also to be extended
to the scientific community, especially when they reach a consensus on
scientific questions (including climate change), while accommodating
informed skepticism at the same time.

Conclusion

When facing environmental problems such as global warming and

the preservation of biodiversity, mainstream economics relies on the
assumption that individuals are self-interested. This is a fatal mistake.
Biological and cultural evolution have endowed us with moral disposi-
tions that are vital in the endeavor to retain a sustainable natural envi-
ronment. Evolved values such as fairness, sympathy, and conservation
are vital resources in this struggle. They are neither ephemeral nor tran-
sient. They are prompted by biological cues and often become rooted in
our habits of thought and action. They should neither be ignored nor
reduced to preference functions. It is vital to understand the evolution-
ary mechanisms involved in the generation and transmission of these
values. On the basis of this understanding, governments and organiza-
tions can help to enhance the values that are conducive to ecological
and environmental sustainability.
This does not mean that self-interest is unimportant or can be
ignored. Appeals to moral values and individual self-interest are not
rivalrous, but complementary. For example, fuel-price increases that
encourage people to switch from private motor cars to public transport
may prompt travelers to rationalize their changed behavior in terms of
their dedication to green values, which in turn might encourage others
to make the same decision.9
From this viewpoint, attempts to assess the environment in exclu-
sively pecuniary terms – such as willingness-to-pay and contingent
valuation – are not simply inadequate: they are dangerous and counter-
productive. Their implicit focus on self-interest and pecuniary valuation
ignores moral values and altruistic commitments. Pecuniary valuation
 From Utilitarianism to Evolution 161

is given exclusive legitimacy. Altruism and morality are either ignored

or diminished to a cash value. In assuming this reducibility at the out-
set, willingness-to-pay and contingent valuation approaches fail by ele-
mentary standards concerning the objectivity of questionnaire design.
By giving these methods their approval, mainstream economists give
them the seal of scientific legitimacy, they become standard practice
and governments use them for guidance. Both mainstream economists
and politicians become accomplices in a process of moral degradation,
in which appropriate moral values are crowded out by endorsements of
unlimited consumerism and greed.
With the benefit of recent research, we know that these approaches
are not only morally deficient but based on faulty science. As noted in
the preceding section, recent work has broadly rehabilitated Darwin’s
(1871) view that humans have inherited moral dispositions to care for
others. The scientific credentials of willingness-to-pay and contingent
valuation approaches are deficient.
A second major problem with the mainstream approach is its assump-
tion that preferences and moral values are given. But although our
understanding of human evolution supports the notion of some dis-
positions towards morality and altruism are inherited in our genes,
the contemporary evidence again supports Darwin’s (1871) view that
morality proper cannot emerge without extensive deliberation and a
sophisticated language. Morality is a cultural phenomenon with essen-
tial biological grounding. Its evolution depends upon both cultural and
genetic transmission, like other manifestations of ‘dual inheritance’ or
gene-culture co-evolution (Boyd and Richerson, 1985; Durham, 1991).
Consequently, the development of attitudes towards the natural envi-
ronment depends in part on parenting, the education system, and
the social culture. Hence governments and other responsible agencies
should not simply gauge existing opinion and ground policy on these
soundings. They also have duties to educate the population, so that it
becomes more aware of the issues, and to promote ethical values con-
sistent with ecological sustainability.
Once we admit that government has a responsibility to educate or
persuade adults, and to promote specific educational values, then it
becomes much more than a mirror of public opinion. Libertarians will
quickly point to the dangers in government power and propaganda.
The dangers should not be belittled. But the alternatives are not as sim-
ple as some libertarians suggest. The dilemma is neither between big
government and small government, nor between government as solu-
tion and government as problem. From history we learn that when
162 Geoffrey M. Hodgson

government is minimal then other horrors can arise. Consider Somalia

and the Congo in recent years. Both minimal and maximal states can
be a menace to human liberty.
No effective government can be simply a reflection of popular opin-
ion. Some people have specialist skills and some are more knowledge-
able than others in some areas. The knowledge claims of creationists
and evolutionists, for example, are not of equal weight or status. If there
were no ground to claim that one person knows better than another,
then all education would be unwarranted, and the process of scientific
advance would be completely wrecked. We would never seek an expert
opinion on anything. It is precisely because we believe that some peo-
ple do know better that we employ experts, cultivate scientific research
and spend huge amounts of private and public money on educating
adults and children. It is no insult to claim that some people know
better than others. This is not the problem; instead, it is one of placing
excessive power or trust in the hands of particular institutions that are
difficult to monitor or call to account.
Consequently, the problem is partly one of establishing suitable
political institutions. Ecological and environmental economics are
unavoidably political. A crucial advantage of political democracy is that
it places the power for the removal of a government in the hands of the
people. But that does not mean that all existing preferences are sacro-
sanct, or that all scientific claims should be put to the popular vote.
Viable democracy also depends on experts. And governments should
use expert opinion to educate and lead the people.
A crucial problem is that experts, too, are fallible, and the democratic
opinion poll is a highly unsuitable mechanism for the determination
of scientific truth or advance. Because science and scientific education
are central to the problem of dealing with such pressing environmen-
tal problems as climate change, we have to face up to the problem of
reconciling the unavoidable elitism of science with the populism and
democracy of government.
The work of John Dewey seems among the most helpful in dealing
with this problem (Dewey, 1929; 1935; 1939). Dewey argued for an
experimental and evolutionary approach to policy design (Gouinlock,
1978; Ryan, 1995; Evans, 2000). His concern was less with static ethical
goals and more with identifying institutions and methods for refin-
ing ethical and policy judgments. Policy is a matter of evolutionary
trial and error, with the emphasis on effective feedback mechanisms
to learn from mistakes as well as successes. Democracy itself is more
than a system of election and a source of legitimacy, but also a means
 From Utilitarianism to Evolution 163

of developing a public spirit infused by habits of cooperation within a

pluralistic culture that relies increasingly on science and experiment
rather than rigid dogma. The primary role of experts is to outline feasi-
ble alternatives and their likely consequences. Institutional design must
be cautious and experimental, looking at the whole system as well as at
particular micro-interactions. The development of such an evolution-
ary policy approach must be placed at the top of the agenda of ecologi-
cal economics.

Notes
1. The author wishes to thank Julien-François Gerber, Clive Spash, Rolf
Steppacher and many others for discussions and helpful comments.
2. See: http://www.gallup.com/poll/117772/Awareness-Opinions-Global-Warming-
Vary-Worldwide.aspx#2 and http://www.guardian.co.uk/news/datablog/2009/
jul/29/climate-change. All retrieved 23 December 2010.
3. See Ostrom (1990; 2009), Bromley (1991), Jacobs (1994), Bromley and Paavola
(2002), Paavola and Adger (2005) and Vatn (2005) for applications of various
versions of institutional economics to environmental problems.
4. For example, Block (1989) proposes the fencing of the atmosphere with laser
beams to establish and enforce property rights, just as the American range
was fenced by barbed wire in the nineteenth century.
5. These issues are discussed widely in the conventional environmental eco-
nomics literature (Baumol and Oates, 1988; Pearce and Turner, 1990; Helm
and Pearce, 1991; Cropper and Oates, 1992). See also Sagoff (2004) and Vatn
(2005).
6. The assignment of monetary values to environmental attributes in welfare
calculations has been widely criticized by Martínez-Alier (1987; 1991), Sagoff
(1988a; 1988b; 2004), Norgaard (1990), Christensen (1991), Jacobs (1991;
1994), Page (1991), Söderbaum (1992), Bergström (1993), Bowers (1993),
O’Neill (1993) and Spash (2000a; 2002).
7. See, for instance, Daly and Cobb (1990), Meadows et al. (1992) and Sagoff
(2004).
8. Similar themes are prominent in a special issue of the Journal of Institutional
Economics on institutions and ecosystems (Janssen, 2006). Ostrom (2009)
proposes a polycentric governance approach to deal with climate change.
9. Although he rightly focuses on the importance of morality, Sagoff (2004)
poses an untenable separation between moral motivation, on the one hand,
and willingness to pay to protect an environmental resource, on the other.
To some degree, pecuniary transactions also depend upon moral values
and commitments. The market is not, and cannot be, a morality-free zone
(Schultz, 2001; Minkler, 2008; Henrich et al., 2010).
8
Economics: The Dismal Science?
Stephen A. Marglin

What is economics?1 A mainstream economist would say that econom-

ics is the study of the allocation of scarce means to unlimited ends, the
standard definition of economics since Lionel Robbins’s Essay on the
Nature and Significance of Economic Science, first published in 1932. This
definition leads to an economics which emphasizes opportunity costs,
trade-offs, the idea that there is no gain without pain, that something
must be given up to get something else. In short, an economics geared
to efficiency, to identifying and eliminating waste. All good and use-
ful things to know – within limits. My purpose here, as in The Dismal
Science (2008), from which much of the argument is taken, is to explore
some of those limits, now with the benefit of two years of economic
crisis to provide additional illustrations.
A crowning achievement of mainstream economics has been to
identify the conditions under which a market system accomplishes
the goal of minimizing waste. Enshrined in the concept of Pareto
optimality, the claim is that a system of competitive markets will
allocate society’s resources so that it is impossible to improve on the
allocation for everybody: any gain for any one individual must come
at the expense of somebody else. Limited as the concept of Pareto
optimality is – I shall explore some of its limitations momentarily –
it is nonetheless a formidable intellectual achievement to discover a
coherence in a market system, even an idealized one that abstracts
from many of the features of a real-world market system. We might
expect a market system to produce nothing but chaos; that it can,
even under idealized conditions, produce an equilibrium is itself
surprising; that this equilibrium provides an ‘optimal’ allocation of
resources, even in the very limited sense of Pareto, is nothing short
of remarkable.

164
 Economics: The Dismal Science? 165

Yet, there may appear to be a contradiction in the claim of main-

stream economics to be a machine for identifying and eliminating
waste and the claim that markets achieve this goal. If a market system
guarantees that there is no free lunch, that there will never be any $500
bills lying around, what inefficiencies are left for economists to dis-
cover? For the mainstream economist the answer is simple: real-world
markets suffer from inefficiencies due to a lack of competition – monop-
oly, oligopoly, monopolistic competition – as well as from the presence
of externalities, public goods and asymmetric information. The cure is
equally simple: more and better markets. Does the market for electric
energy fail to maximize total well-being because the local utility has
monopoly power over prices? Replace the monopoly with competition.
Does the energy market fail because of the pollution that accompanies
the generation of power, pollution that harms people who are not party
to the transaction of buying and selling energy? Create markets in pol-
lution permits.
But there remains a disjuncture between economics as description
and economics as prescription. In fact, mainstream economics has long
maintained a distinction between positive and normative economics.
Positive economics consists of statements like ‘The bottom 10 percent
of the income distribution have to make do with 2 percent of national
income’. Or ‘Raising the minimum wage by 10 percent will double
youth unemployment’. Normative economics evaluates: ‘The bottom
10 percent ought to have more than 2 percent of the national income’.
Or ‘The increase in income that can be had through raising the mini-
mum wage outweighs by the loss of jobs’. In short, positive economics
simply describes the world, tells it like it is. By contrast, normative eco-
nomics makes ethical judgments about the world. Thus, when working
the positive side of the street, economists can lay claim to science, an
imperfect science but science nonetheless. When working the norma-
tive side, economics veers off into philosophy.
The problem with this division is that it fails to give a good account
of the apparatus of mainstream economics. Why do we begin the study
of markets with perfect competition, adding ‘imperfections’ such as
monopoly, oligopoly, and monopolistic competition as departures from
the norm? Why don’t we start from oligopoly and treat perfect com-
petition as the special case that it is? (When students ask for examples
of perfect competition they are told about commodity markets, such
as the market for Number 2 red winter wheat, and stock markets, such
as the market for IBM shares. Teachers hope against hope that their
students will not ask for a third example that looks beyond agricultural
166 Stephen A. Marglin

and securities markets.) Why, when we teach the theory of consumer

choice, do we assume that preferences are constant over time? It is not,
after all, hard to model changing preferences and there have been a
number of interesting models presented over the years. For that matter,
why do we study the theory of consumer choice at all? Why not simply
start with demand curves? What’s wrong with monopoly, and indeed
why is a perfectly discriminating monopolist not a problem?
There is a straightforward answer to these questions: the apparatus
of economics exists to further a normative agenda, not because of its
usefulness in describing the world. If one were interested in describing
the world, perfect competition would be treated as a curiosum, a limit-
ing case, but hardly the norm from which to judge real markets. We
assume constant tastes not because we need this assumption to describe
the world, but because judgments about how well markets perform are
made in terms of preference satisfaction. If preferences are changing
over time, we cannot do even hypothetical comparisons of alternative
consumption patterns. A perfectly discriminating monopolist is not a
problem if we accept that the injuries visited on consumers are bal-
anced by the gains to the monopolist.
What is the normative agenda? In a word, to convince us that mar-
kets are good for people. There are several steps in the argument. First,
define ‘good for people’ in a very limited way, namely in terms of effi-
ciency: markets are good for people because markets eliminate waste.
The second step is to assume away a whole list of market failures – from
monopoly, oligopoly, and monopolistic competition to externalities,
public goods, and asymmetric information. The so-called First Welfare
Theorem guarantees that, absent such failures, a market equilibrium
will eliminate waste: starting from a market equilibrium, the only way
to make somebody better off is at the expense of somebody else, which
makes the starting point Pareto optimal.
To be fair, mainstream economists recognize that market failures are
endemic to the real world, but we are required nevertheless to suspend
disbelief for the sake of the normative agenda, treating market failures
as relatively minor exceptions to a grand scheme of competitive mar-
kets, as nuisances rather than as debilitating diseases. In any case, as I
have observed, the cure for market failure is more and better markets:
more competition is the cure for monopoly, commodification is the
remedy of choice for mitigating the impact of negative externalities (as
in cap-and-trade as a way of dealing with atmospheric pollution), and
so forth. So, even when markets are seen to be problematic, markets are
the solution.
 Economics: The Dismal Science? 167

But we’re not done with the problems. Once we step out of the strait-
jacket of efficiency, we have to consider issues of distribution of wealth
and income – equality and fairness. Economists do not deny that mar-
ket outcomes may be highly unequal and unfair. Instead, they deny
that in order to remedy distributional shortcomings it may be necessary
to intervene in the market.
Mainstream economists rely on the Second Welfare Theorem to
carve out a sphere for the market independent of equity considera-
tions. The Second Welfare Theorem states that every possible efficient
outcome, every Pareto optimal configuration, can be achieved by a
competitive market equilibrium, provided that there are no market
failures and provided as well that the starting point in terms of agents’
endowments of productive resources can be modified at will. In other
words, if you do not like the distribution associated with any particular
market outcome, change the endowments and the markets will settle
at a different equilibrium with a different distribution of income and
wealth. And, market failures apart, every one of these equilibria will be
efficient. The consequence is supposedly that we can separate the hard,
objective desideratum of efficiency from the soft, subjective desidera-
tum of equity. The first is for economists to worry about, the second
for philosophers.
The problem lies in the seemingly anodyne phrase ‘modified at will’.
Whose will? If we are speaking of the will of people acting in histori-
cal time, then distribution becomes subject to all kinds of political
constraints, not to mention the so-called deadweight losses associated
with any systematic transfer of income or wealth from one individual
to another. Income and wealth cannot be redistributed without some
loss of efficiency, and there are real limits as to how much redistribu-
tion is politically feasible. Under these circumstances, to salvage the
theoretical possibility of achieving both efficiency and equity envi-
sioned in the Second Welfare Theorem we would have to be able to
rewind the movie of history to start at a different place in terms of the
original configuration of resource endowments, a place which then
evolves on its own to the desired present distribution of endowments.
The Second Welfare Theorem may prove that all efficient outcomes are
compatible with one competitive equilibrium or another, but the range
of equilibria exists only in the mind of a God who can run the movie
of history any which way.
The reality is that, however we look at it, the distribution of income
and wealth is a cause for concern. Worldwide, the gap between the
rich countries and the poor countries remains wide and in some cases,
168 Stephen A. Marglin

Sub-Saharan Africa in particular, the gap is growing. These wide dis-

parities have been politically tolerable, and for some observers ethically
tolerable, as long as incomes can grow everywhere and especially where
income growth is mutually stimulating, so that both rich and poor
countries benefit. But in the coming decades, if and when ecological
limits kick in, the symbiotic element in North–South growth can be
expected to give way to competition for environmental sinks and for
ecologically constrained resources.
Within the rich countries themselves distribution is also problem-
atic. In most of Western Europe and North America, the distribution
has become considerably less equal in the last 30 years. In the United
States in particular, the contrast with the so-called Golden Age (the 30
years after the end of World War II) is striking. Whether measured by
the ratio of CEO pay to average worker pay, by Gini coefficients, or by
the ratio of the share of top income recipients and wealth holders to
the bottom or middle of the distribution, the increase in inequality
has deprived a good part of the population, perhaps the majority, from
enjoying the fruits of growth – unless a second wage earner (invariably
a wife and mother) enters the paid labor force.
We are still not done. Even if we could finesse the problem of distri-
bution along the lines of the Second Welfare Theorem, there remain
consequences of the market left out of the standard efficiency calculus.
The most important are the ecological consequences of the market, and
the impact of the market on human relationships, relationships that
run the gamut from the family to the community.
Here, too, mainstream economics has a defense in a particular model
of Homo economicus and economic society. The very assumptions that con-
stitute the metaphysical basis of economics rule out the possibility of adverse
consequences for both our relationships with the planet and our relationships
with each other.
What are these assumptions? In a word, agents are assumed by their
very nature as human beings to be motivated solely by self-interest; to
be rationally calculating and comparing alternative courses of action at
every moment of time; to have unlimited wants, always in pursuit of
more, more, and still more. Society is assumed to be a collection of such
individuals, whose only community is the national community. Taken
together, these assumptions provide a defense against the charge that
markets damage our relationship with the planet or with each other,
even markets from which the warts of monopoly, externalities, and the
like have been removed, even absent concerns for distribution. For on
these assumptions, there is no community to be damaged, and no way of
 Economics: The Dismal Science? 169

improving upon the market with regard to ecology. By the same token,
economics as a discipline is absolved from complicity in the undermin-
ing of ecology or community. If the foundational assumptions about
people and society derive from human nature, thinking like an econo-
mist becomes thinking like a human being, perhaps more clearly and
acutely, but not different in kind from the way people are hardwired to
think. Nothing much is left of my book, The Dismal Science, as reflected
in the subtitle, How Thinking Like an Economist Undermines Community.
Of course I do not believe this, or I would not have written the book in
the first place. My counter-argument is that economics is not grounded
in human nature but on assumptions derived, instead, from the culture
of modernity forged in the crucible of the history of Europe and North
America in the last 400 years and subsequently globalized, at least to
‘Westernized’ elites. And an economics based on that metaphysics, the
mainstream economics that is distilled today in the economics taught
from the first-year college introductory course to graduate-theory
courses, is indeed an accessory to the undermining of community, both
in legitimizing the market (via the First and Second Welfare Theorems)
and, more insidiously, in fostering the construction of a market system
in the image of mainstream economic theory.
Evidently I cannot go into much detail here. I should make it clear,
however, that I do not condemn either the market or economics out of
hand. Both have brought real benefits in the form of the material gains
from four centuries of economic growth in the West. We live longer,
in better health and physical comfort, than our ancestors a century
ago, not to mention our more distant pre-modern forbears. No little
part of these gains is due to the market and to the economics which
has defended and promoted the market. (Though I argue in The Dismal
Science that the reasons for the success of the market are very different
from the mainstream argument based on efficiency.)
The problem is that, at least in the rich countries of the West, growth
has long since gone beyond the point that the economy provides the
basis for a life of human dignity; we are well into what economics
would term the region of decreasing returns. Moreover, there are seri-
ous questions about the sustainability of growth in light of the limits of
the ecosystem to absorb the detritus of growth and to provide the raw
materials necessary for further expansion of the economy (or for that
matter even to maintain current levels of output).
At the same time, economists have difficulty even recognizing that
there are costs to growth. Only grudgingly and belatedly has the eco-
logical crisis entered into economists’ thinking, and even when it does,
170 Stephen A. Marglin

there is a general failure to recognize that mainstream economics is

part of the problem rather than the solution. Case in point: in 2006
Lord Nicholas Stern, former chief economic adviser to the British gov-
ernment, completed a review and synthesis of the literature on climate
change which led him and his team to a recognition of the potential
severity of the problem and the corresponding need for immediate
action to counter global warming.
The eponymous Stern Review was a pathbreaking document in many
ways, not least in its clear and forceful call to action. But it is a disap-
pointment in its attempt to win over the economics profession by adopt-
ing the framework of mainstream economics lock, stock and barrel and
attempting to justify its non-mainstream conclusions in mainstream
terms. Predictably, the decision to adopt the framework of mainstream
economics has led to endless squabbling about secondary matters like
the rate of time discount and to the sidelining of more important issues
like the distributional consequences of inaction and the uncertainty
that surrounds estimates of future ecosystem damage.
With respect to community the situation is even worse. A reviewer of
The Dismal Science, the Princeton economist Thomas Leonard, chided
me in the Journal of Economic Literature for not answering this question:
‘Is it not possible that markets, like all human creations, are imperfect
and fallible, but, on average and all things considered, better for human
welfare than all known alternatives for organizing economic life?’ I can
only conclude that I had not made the point of the book sufficiently
clear, my argument being precisely that the foundational assump-
tions of economics make the discipline blind to community. There is
no vocabulary, no language, for discussing the impact of the market
on community, no way of posing, much less answering, the question
of whether what has been, and is being, lost in terms of community
outweighs the gains from continuing the expansion of the cornucopia
available to the average consumer in the rich countries today.
For me the fundamental flaw in the metaphysical foundations of
mainstream economics is its embrace of an extreme characterization
of individuals and their social interactions. Yes, individuals are self-
interested, but people are not only self-interested. Yes, individuals
deploy rational calculation based on a certain kind of knowledge that I
call ‘algorithmic’, but the same individuals deploy knowledge based on
intuition, convention, authority – ‘experiential’ knowledge in short – as
well. Yes, individuals derive satisfaction and meaning from the goods
and services they consume, but they derive satisfaction and meaning
from spiritual pursuits also. Yes, the national community has become
 Economics: The Dismal Science? 171

increasingly present and important in our lives over the last 400 years,
but other communities are important for connection and identity.
In short, the question is one of balance. As Rabbi Hillel, the great sage
of 2,000 years ago put it, ‘If I am not for me, who will be? And if I am
only for me, what am I?’ Mainstream economics highlights one part
of the complex psychology and sociology of living in the twenty-first
century but argues as if this were the whole of being. My complaint
is not that the assumptions of economics are entirely false, but that
these assumptions, in confusing the part for the whole, are bound to
mislead.
Let me illustrate this general point with one aspect of the imbalance
that characterizes mainstream economics, its theory (or rather what
I would call its ideology) of knowledge. The mainstream view is that
knowledge is defined by, and limited by, what can be known through
logical deduction from self-evident first principles, à la Euclid or
Descartes, what in The Dismal Science I call algorithmic knowledge. All
else is mere belief, superstition. In contrast I argue that people deploy
multiple systems of knowledge, that what I have previously referred to
as experiential knowledge plays an essential role, along with algorithm,
in what we know and how we act. Moreover the one-sided insistence
on the claims of algorithm in mainstream economics, reflecting its ori-
gins in modernity, has had a deleterious effect on economists’ ability to
make sense of the economy, and worse, as evidenced by the following
example. The Dismal Science gives several examples, but here I wish to
give an example that has become particularly timely in the last couple
of years, namely securitization, particularly the practice of bundling
home mortgages into ‘mortgage-backed securities’.
In point of fact, an early draft of my chapters on knowledge, writ-
ten just as securitization was taking hold at the end of the 1980s, lists
securitization as one example of algorithm gone wild. But I dropped the
example from later versions of these chapters, in the belief that secu-
ritization was too arcane for a general audience. Little did I know that
the economic crisis of ‘08 would make securitization a term of general
currency.
Securitization, as is now generally known, is a way of transforming
loans into bonds, particularly, but not only, residential mortgage loans.
The idea was to put mortgages on many properties into a security that
could be offered for sale to a wide body of potential investors. In its sim-
plest form, a mortgage-backed security would simply pool a number of
individual mortgages together and then divide up the pool among the
investors. Suppose, for example, the pool contained 100 mortgages of
172 Stephen A. Marglin

$300,000 each, and the resulting $30 million pool was divided into 100
pieces, 100 separate bonds. In this simple case, the investor putting up
$300,000 for a single bond would in effect own 1/100 of 100 separate
mortgages instead of 100 percent of a single mortgage.
The benefit of combining mortgages in this way was the pooling, and
thus the mitigating, of the uncertainties, or at least some of the uncer-
tainties, of mortgage lending. Any individual mortgagor might default
for any number of reasons, loss of a job due to illness, divorce, and so
forth, but for a large enough group of people such uncertainties could
be reduced by the law of averages. Individuals and institutions with
money to invest need not even know the individual borrowers.
In addition to pooling, securitization allowed a shifting of uncertainty
according to agents’ varying appetites for taking a chance. The trick was
to replace the equal sharing of returns from the underlying asset pool by
a hierarchy of claims on the cash flows of the underlying investments.
This made the more senior pieces of the security (tranches, in the jargon),
that is, the ones that stood at the head of the line when it came to claims
on the cash flow of the investment, much less uncertain. The owners
of senior tranches would typically receive a lower return in exchange
for greater certainty, and those with more appetite for the vagaries of
chance would receive a higher average return. More important, the more
senior tranches received AAA ratings from the major agencies, Standard
& Poor, Moody’s, and Fitch, the AAA imprimatur being necessary for
institutions like pension funds to invest in these securities.
The result of pooling and tranching, it was argued, would be to
enlarge the set of potential investors, lower the portion of the interest
rate charged to cover default risk, increase liquidity in the mortgage
market and reduce geographical spreads, particularly between urban
and rural areas.
There were also political benefits. Indeed both sides of the aisle per-
ceived that securitization would advance their own agendas. For the
left, securitization had the potential to end the discriminatory prac-
tice known as ‘redlining’, in which whole areas of American cities,
often areas that were home to blacks and other poor minorities, were
‘redlined’ to mark on maps them out of bounds for writing mortgages.
Arms-length investors in securitized mortgages need neither know nor
be concerned about the color of the people whose mortgages were rolled
into their securities. The right saw the extension of mortgage lending as
a way to further their goal of a property-owning democracy. The pro-
motion of home-owning was seen as a way of establishing and extend-
ing a beachhead for the right among minority voters.
 Economics: The Dismal Science? 173

And it all turned out well. For a while anyway. But as mainstream
economists are fond of repeating, free lunches are few and far between.
As we learned in September of 2008 when Lehman Brothers collapsed,
if not sooner, there were many downsides to securitization. Some of the
most important can be lumped together in what mainstream econom-
ics calls the principal-agent problem, the potential conflict of interest
between ‘principals’ whose resources are being deployed to some eco-
nomic end and ‘agents’ who act on behalf of principals to carry out
the deployment. The most important of the principal-agent problems
was that securitization made the banks, brokers and bandits (not always
distinguishable from one another) who originated loans separate and
distinct from the investors who put up the money for the loans, the
first group becoming in economic parlance the agents of the second,
the principals.
As distinct from previous practice, in which agents and principals were
one and the same entity, there was now a difference in incentives with
far-reaching consequences. Investors’ returns depended critically on the
capacity of borrowers to repay their loans, but loan originators had little
reason to be concerned with what happened after the loans were sold
to investors, and in particular had little incentive to scrutinize borrow-
ers’ repayment capacity. On the contrary: their incentive was to write as
many loans for as much money as possible, since the loan originator’s
compensation invariably depended on the volume of loans.
Principals attempted to protect themselves from both information
asymmetries (the borrowers may have more information about their
repayment capacity than the lenders) and moral hazard (a loan may
make some borrowers careless and lazy) by collecting an array of sta-
tistics about potential borrowers and classifying borrowers according
to how well they performed on various tests based on these statis-
tics. Various markers played a role in assigning loan applicants to one
class or another. Higher interest rates imposed on classes of so-called
subprime borrowers were supposed to compensate lenders for higher
default risks.
In this process, borrowers John Jones and Sally Smith must be reduced
to a set of statistical characteristics: age, income, debt, credit history
and the like. The implicit assumption is that all that is important can be
reduced to a set of numbers and converted – literally by an algorithm –
to a quantifiable default risk. Not an unnatural assumption where all
knowledge worthy of the name is what I have called algorithmic.
But statistics have their limit. Sixty years ago, George Bailey, the com-
munity banker of the movie It’s a Wonderful Life, held your loan until
174 Stephen A. Marglin

you paid it off. To keep the bank solvent and profitable, Bailey had to
be able to distinguish the trustworthy borrower from the likely dead-
beat, and to do so he had to know his customer, not just his customer’s
statistics. George Bailey relied on experiential as well as algorithmic
knowledge.
So securitization would have been problematic even if it did not open
the door to corruption by casting principals and agents in separate roles.
Even when the agent is good (’ole George Bailey, honest as the day is long),
securitization artificially limits the information that can be brought to
bear on the lending decision. Today’s securitization leaves no room for
knowing your customer and other intangibles, no room for experience.
Contrast the fundamental principle of microfinance as pioneered by
Nobel Laureate Muhammad Yunus and his colleagues at the Grameen
Bank in Bangladesh. The kind of monitoring that George Bailey put
into practice is not only present, but present in spades: loans are made
to individuals only when they belong to groups who are mutually
responsible for repayment of each other’s loans. Individuals naturally
prefer to be part of a group composed of reliable ‘cosigners’, so groups
tend to sort themselves out by matching more reliable borrowers with
each other. And the basis of this matching can only be the villagers’
experience of each other.
Such assortative matching can be criticized on the grounds that it
is likely to marginalize further the more marginal members of a com-
munity: the poorest and most vulnerable villagers are not likely to be
the most reliable financially. But it can be seen that the element of
experience introduced by peer monitoring has important potential to
combat problems of asymmetric information and moral hazard that
plague lending.
Securitization is just one example of how the assumptions of econom-
ics have undermined community and how weakening the foundations
of the economy in community have in turn made the economy more
vulnerable. Part of the solution to the present crisis of the economy is
a new economics, one which takes account of the other side of human
nature, the human nature that Homo economicus obscures: the impor-
tance of human connection, of non-rational knowledge, of measures
of human worth that allow us to escape the endless quest for evermore
consumption. A renewal of economics must include an awareness of
what is being sacrificed on the altar of endless growth: the environ-
ment, community, the possibility of a spiritual life.
It is more than possible that the present crisis will stimulate bold
thinking about new directions for economics. Whether the seeds of
 Economics: The Dismal Science? 175

intellectual change will find a favorable soil in which to germinate and

grow into healthy plants, however, will depend in large measure on
whether the questioning of economics can ally itself to a movement to
broaden the political discourse to include discussion of the purposes of
growth and the virtues of restraining our appetites, of a revival of social
solidarity, so that we can fashion a new relationship between individual
and community, between government and market.
One does not wish for more misery, even for so noble a purpose as
renewing economics, but it must be recognized that it will take a deeper
and longer crisis to engender a new political movement. In my own
country, the 2008 Obama campaign promised a revival of a broader
politics. It remains to be seen whether the Obama administration will
deliver on that promise.

Note
1. Based on The Emilio Fontela Lecture, given at the Eighth International
Meeting on Ethics, Finance, and Responsibility, on the theme, ‘The Crisis:
Wasted Opportunities?’ The meeting was held under the auspices of
l’Observatoire de la Finance, in Geneva, Switzerland, 22–3 October 2009.
9
Moving From a Failed Growth
Economy to a Steady-State Economy
Herman E. Daly

Systems, scientific and philosophical, come and go. Each

method of limited understanding is at length exhausted. In its
prime each system is a triumphant success; in its decay it is an
obstructive nuisance.
(Alfred N. Whitehead, 1948, 203–4)1

A steady-state economy is incompatible with continuous growth, either

positive or negative growth. The goal of a steady state is to sustain a
constant, sufficient stock of real wealth and people for a long time. A
downward spiral of negative growth – a depression – is a failed growth
economy, not a steady-state economy. Halting downward spiral is neces-
sary, but is not the same as resuming continuous positive growth. The
growth economy now fails in two ways: (a) positive growth becomes
uneconomic in our full-world economy; (b) negative growth, resulting
from the bursting of financial bubbles inflated beyond physical lim-
its, though temporarily necessary, soon becomes self-destructive. That
leaves a non-growing or steady-state economy as the only long-run
alternative. The level of physical wealth that the biosphere can sustain
in a steady state is almost certainly below the present level. The fact that
recent efforts at growth have resulted mainly in bubbles is evidence that
this is so. Nevertheless, current policies all aim for the full reestablish-
ment of the growth economy. No one denies that our problems would
be easier to solve if we were richer. That rich is better than poor is a
definitional truism. The question is, does growth any longer make us
richer, or is it now making us poorer?
I will spend a few more minutes cursing the darkness of growth, but
will then try to light ten little candles along the path to a steady state.
Some advise me to forget the darkness and focus on the policy candles.

176
 From a Growth Economy to a Steady-State Economy 177

But I find that without a dark background the light of my little candles
is not visible in the false dawn projected by the economists, whose cam-
paigning optimism never gives hope a chance to shine.
We have many problems (poverty, unemployment, environmental
destruction, budget deficit, trade deficit, bailouts, bankruptcy, foreclos-
ures and so forth), but apparently only one solution: economic growth,
or as the pundits now like to say, ‘to grow the economy’ – as if it were
a potted plant.
But let us stop right there and ask two questions that all students
should put to their economics professors.
First, there is a deep theorem in mathematics that says when some-
thing grows it gets bigger! So, when the economy grows it too gets big-
ger. How big can the economy be, Professor? How big is it now? How
big should it be? Have economists ever considered these questions? And
most pointedly, what makes them think that growth (that is, physical
expansion of the economic subsystem into the finite containing bio-
sphere), is not already increasing environmental and social costs faster
than production benefits, thereby becoming uneconomic growth, mak-
ing us poorer, not richer? After all, real GDP – the measure of so-called
economic growth – does not separate costs from benefits, but conflates
them as ‘economic’ activity. How would we know when growth became
uneconomic? Remedial and defensive activity becomes ever greater
as we grow from an ‘empty-world’ to a ‘full-world’, (a world full of us
and our stuff) characterized by congestion, interference, displacement,
depletion and pollution. The defensive expenditures induced by these
negatives are all added to GDP, not subtracted. Be prepared, students,
for some hand-waving, throat-clearing, and subject-changing. But do
not be bluffed.
We must recognize that many developing countries are still in the
phase of truly economic growth – their marginal benefits of growth
are still greater than their marginal costs. Yet, the world as a whole
is ‘full’. Therefore the duty of limiting growth, and the policies dis-
cussed below, apply first to the richer countries where, in fact, growth
has become uneconomic. The rich must free up ecological space for the
poor to grow into, leading to a process of convergence to a common
level of resource use that is sufficient for a good (not luxurious) life,
and sustainable for a long (not infinite) future. Some worry that slow-
ing growth in rich countries will hurt poor countries by reducing their
export markets. That just means that developing countries will have to
shift from the export-led model back towards the import-substitution
model, developing their own internal markets. Nor can rich countries
178 Herman E. Daly

continue to offshore production and jobs in the face of their own high
unemployment rates.
Second question: do you then, Professor, see growth as a continuing
process, desirable in itself, or as a temporary process required to reach a
sufficient level of wealth, that would thereafter be maintained more or
less in a steady state? At least 99 percent of modern neoclassical econo-
mists hold the growth-forever view. We have to go back to John Stuart
Mill and the earlier classical economists to find serious treatment of
the idea of a nongrowing economy, the Stationary State. What makes
modern economists so sure that the classical economists were wrong?
Just dropping history of economic thought from the curriculum is not
a refutation!
Here are some reasons to think that the classical economists are
right.
A long-run norm of continuous growth could make sense, only if one
of the three following conditions were true:

(a) the economy were not an open subsystem of a finite and nongrow-
ing biophysical system,
(b) the economy were growing in a nonphysical dimension, or
(c) the laws of thermodynamics did not hold.

Let us consider each of these three logical alternatives. (If you can
think of a fourth one let me know.)

(a) Some economists in fact think of nature as the set of extractive

subsectors of the economy (forests, fisheries, mines, wells, pastures
and even agriculture). The economy, not the ecosystem or bio-
sphere, is seen as the whole; nature is a collection of parts. If the
economy is the whole then it is not a part of any larger thing or
system that might restrain its expansion. If some extractive natural
subsector gets scarce we will just substitute other sectors for it and
growth of the whole economy will continue, not into any restrain-
ing biospheric envelope, but into sidereal space presumably full of
resource-bearing asteroids and friendly highly-evolved aliens eager
to teach us how to grow forever into their territory. Sources and
sinks are considered infinite.
(b) Some economists say that what is growing in economic growth is
value, and value is not reducible to physical units. The latter is true
of course, but that does not mean that value is independent of phys-
ics! After all, value is price times quantity, and quantity is always
 From a Growth Economy to a Steady-State Economy 179

basically physical. Even services are always the service of something

or somebody for some time period, and people who render services
have to eat. The unit of measure of GDP is not dollars, but dollars’
worth. A dollar’s worth of gasoline is a physical amount, currently
about a fourth of a gallon. The aggregation of the dollar’s worth
amounts of many different physical commodities (GDP) does not
abolish the physicality of the measure even though the aggregate
can no longer be expressed in physical units. True, $/q x q = $. But
the fact that q cancels out mathematically does not mean that the
aggregate measure, ‘dollars’ worth’, is just a pile of dollars. GDP is
a value-weighted index of real quantities. And it does not help to
speak instead of ‘value-added’ (by labor and capital) because we
must ask, to what is the value-added? And the answer is natural
resources, low-entropy matter/energy – not fairy dust or frog’s hair!
Development (squeezing more welfare from the same throughput of
resources) is a good thing. Growth (pushing more resources through
a physically larger economy) is the problem. Limiting quantitative
growth is the way to force qualitative development as the path of
progress.
(c) If resources could be created out of nothing, and wastes could be
annihilated into nothing, then we could have an ever-growing
resource throughput by which to fuel the continuous growth of the
economy. But the first law of thermodynamics says, ‘NO’. Or if we
could just recycle the same matter and energy through the economy
faster and faster we could keep growth going. The circular flow dia-
gram of many economics principles texts unfortunately comes very
close to affirming this. But the second law of thermodynamics says,
‘NO’.

So – if we cannot grow our way out of all problems, then maybe we

should reconsider the logic and virtues of nongrowth, the steady-
state economy. Why this refusal by neoclassical economists both to
face common sense, and to reconsider the ideas of the early classical
economists?
I think the answer is distressingly simple. Without growth the only
way to cure poverty is by sharing. But redistribution is anathema.
Without growth to push the hoped for demographic transition, the
only way to cure overpopulation is by population control. A second
anathema. Without growth the only way to increase funds to invest in
environmental repair is by reducing current consumption. Anathema
number three. Three anathemas and you are out!
180 Herman E. Daly

And without growth how will we build up arsenals to protect democ-

racy (and remaining petroleum reserves)? How will we go to Mars and
Saturn and ‘conquer’ space? Where can technical progress come from
if not from unintended spin-offs from the military and from space
research? Gnostic techno-fantasies of colonizing outer space, partially
turning off the sun to make more room for greenhouse gasses in the
atmosphere, and of abolishing disease and death itself, feed on the
perpetual growth myth of no limits. Digital-brained tekkies, who have
never heard of the problem of evil, see heaven on Earth just around
the corner – ‘let’s build a smarter planet’, IBM modestly suggests. How
about some smarter economists first? Without growth we must face the
difficult religious task of finding a different god to worship. The com-
munist growth-god has already failed. Surely the capitalist growth-god
will not fail! Let us jump-start the GDP and the Dow-Jones! Let us build
another Tower of Babel with obfuscating technical terms like subprime
mortgage, derivative, securitized investment vehicle, collateralized debt
obligation, credit default swap, ‘toxic’ assets, and so forth.
Well, let us not do that. Let us ignore the anathemas and instead think
about what policies would be required to move to a steady-state econ-
omy. They are a bit radical by present standards, but not insanely unre-
alistic, as are the three alternatives for validating continuous growth,
just discussed.
Let us look briefly at ten specific policy proposals for moving from
our unsustainable growth economy to a steady-state economy. A steady-
state economy is one that develops qualitatively (by improvement in
science, technology, and ethics) without growing quantitatively in
physical dimensions. It lives on a diet – a constant metabolic flow of
resources from depletion to pollution (the entropic throughput) main-
tained at a level that is within the assimilative and regenerative capaci-
ties of the ecosystem of which the economy is a subsystem.
The policies recommended are more sensible than the current poli-
cies of ‘growth forever’ – especially after growth has become uneconomic
in the basic sense of costing more than it is worth at the margin. Ten
is an arbitrary number – just a way to get specific. Although, the whole
package fits together in the sense that some policies supplement and
balance others, most of them could be adopted singly and gradually.

1. Cap-auction-trade systems for basic resources: Caps limit biophysical

scale by quotas on either depletion or pollution, whichever is more
limiting. Auctioning the quotas captures scarcity rents for equita-
ble redistribution. Trade allows efficient allocation to highest uses.
 From a Growth Economy to a Steady-State Economy 181

This policy has the advantage of transparency. There is a limit to the

amount and rate of depletion and pollution that the economy can be
allowed to impose on the ecosystem. Caps are quotas, limits to the
throughput of basic resources, especially fossil fuels. The quota usu-
ally should be applied at the input end because depletion is more spa-
tially concentrated than pollution, and hence easier to monitor. Also
the higher price of basic resources will induce their more economical
use at each upstream stage of production, as well as at the final stage
of consumption. It may be that the effective limit in use of a resource
comes from the pollution it causes rather than from depletion – no
matter, we indirectly limit pollution by restricting depletion of the
resource that ultimately is converted into wastes. Limiting barrels,
tons, and cubic feet of carbon fuels extracted per time period will
limit tons of carbon dioxide emitted per time period. Only very toxic
or spatially concentrated wastes require separate (and geographically
specific) pollution quotas.

This scale limit serves the goal of biophysical sustainability. Ownership

of the quotas is initially public – the government auctions them to the
individuals and firms. The revenues go to the treasury and are used to
replace regressive taxes, such as the payroll tax, and to reduce income
tax on the lowest incomes. Once purchased at auction the quotas can
be freely bought and sold by third parties, just as can the resources
whose rate of depletion they limit. The trading allows efficient alloca-
tion; the auction serves just distribution; and the cap serves the aim
of sustainable scale-three goals – three policy instruments. The same
logic can be applied to limiting the off-take from renewable resources,
such as fisheries and forests. With renewables the quota should be set to
approximate sustainable yield. For nonrenewables sustainable rates of
absorption of resulting pollution, or of the development of renewable
substitutes may provide a criterion.

2. Ecological tax reform: Shift the tax base from value-added (labor
and capital) to ‘that to which value is added’, namely the entro-
pic throughput of resources extracted from nature (depletion), and
returned to nature (pollution). This internalizes external costs as
well as raises revenue more equitably. It prices the scarce but previ-
ously unpriced contribution of nature. Value-added is something we
want to encourage, so stop taxing it. Depletion and pollution are
things we want to discourage, so tax them. Ecological tax reform
can be an alternative or a supplement to cap-auction-trade systems.
182 Herman E. Daly

Value-added is simultaneously created and distributed in the very

process of production. Therefore, economists argue that there is no
‘pie’ to be independently distributed according to ethical principles.
As Kenneth Boulding put it, instead of a pie, there are only a lot of lit-
tle ‘tarts’ consisting of the value added by different people or differ-
ent countries, and blindly aggregated by statisticians into an abstract
‘pie’ that does not really exist as an undivided totality. If one wants
to redistribute this imaginary ‘pie’, he should appeal to the generos-
ity of those who baked larger tarts to share with those who baked
smaller tarts, not to some invidious notion of equal participation in
a fictitious common inheritance.

I have considerable sympathy with this view, as far as it goes. But it

leaves out something very important. In our one-eyed focus on value-
added we economists have neglected ‘that to which value is added’,
namely the flow of resources and services from nature. ‘Value added’
by labor and capital has to be added to something, and the quality and
quantity of that something is important. Now there is a real and impor-
tant sense in which the original contribution of nature is indeed a ‘pie’,
a pre-existing, undivided totality that we all share as an inheritance.
It is not an aggregation of little tarts that we each baked ourselves.
Rather it is the seed, soil, air, sunlight and rain (not to mention the
gene pools and suitable climate) from which the wheat and apples grew
that we converted into tarts by our labor and capital. The claim for
equal access to nature’s gifts is not the invidious coveting of what our
neighbor accumulated by her own labor and abstinence. The focus of
our demands for income to redistribute to the poor, therefore, should
be on the value of the contribution of nature, the original value of that
to which further value is added by labor and capital. People generally
resent seeing the value they added by their own labor and enterprise
taxed away, although they accept it to some degree as necessary. But
they do not resent seeing the value freely added by nature taxed away.
Rather they resent seeing it accrue as unearned income (scarcity rents)
to owners who added no value to what nature provided.

3. Limit the range of inequality in income distribution: A minimum income

and a maximum income. Without aggregate growth, poverty reduc-
tion requires redistribution. Complete equality is unfair; unlimited
inequality is unfair. Seek fair limits to the range of inequality. The
civil service, the military, and the university manage with a range
of inequality of a factor of 15 or 20. Corporate America has a range
of 500 or more. Many industrial nations are below 25. Could we not
 From a Growth Economy to a Steady-State Economy 183

limit the range to, say, 100, and see how it works? This might mean
a minimum of 20 thousand dollars and a maximum of two mil-
lion. Is that not more than enough to compensate real differences?
People who have reached the limit could either work for nothing at
the margin if they enjoy their work, or devote their extra time to
hobbies or public service. The demand left unmet by those at the
top will be filled by those who are below the maximum. A sense of
community, necessary for democracy, is hard to maintain across the
vast income differences current in the United States. Rich and poor
separated by a factor of 500 become almost different species, hav-
ing few experiences or interests in common. The main justification
for such differences has been that they stimulate growth, which
will one day make everyone rich. This may have had superficial
plausibility in an empty world, but in our full world it is a fairy tale.
I have advocated a maximum income as well as a minimum income
for a long time. The maximum part has been very unpopular, but
thanks to the banksters and their bonuses it is now becoming more
acceptable.

4. Free up the length of the working day, week and year: Allow more options
for part-time or personal work. Full-time external employment for all
is hard to provide without growth. Other industrial countries have
much longer vacations and maternity leaves than the United States.
For the classical economists, the length of the working day was a
key variable by which the worker (self-employed yeoman or artisan)
balanced the marginal disutility of labor with the marginal utility
of income and of leisure so as to maximize enjoyment of life. Under
industrialism, the length of the working day became a parameter
rather than a variable (and for Karl Marx was the key determinant
of the rate of exploitation). We need to make it more of a variable
subject to choice by the worker. Milton Friedman wanted ‘Freedom
to Choose’ – okay, here is an important choice most of us are not
allowed to make! And we should stop biasing the labor-leisure choice
by advertising to stimulate more consumption and more labor to
pay for it. At a minimum, advertising should no longer be treated as
a tax-deductible ordinary expense of production. Is it really a good
thing to subsidize the expenditure of billions of dollars to convince
people to buy things they do not need, with money they do not
have, to impress people they do not know?

5. Re-regulate international commerce: Move away from free trade, free

capital mobility, and globalization. Cap-auction-trade, ecological tax
184 Herman E. Daly

reform and other national measures that internalize environmental

costs will raise prices and put us at a competitive disadvantage in
international trade with countries that do not internalize costs. We
should adopt compensating tariffs to protect, not inefficient firms,
but efficient national policies of cost internalization from standard-
lowering competition with foreign firms that are not required to
pay the social and environmental costs they inflict. This ‘new pro-
tectionism’ is very different from the ‘old protectionism’ that was
designed to protect a truly inefficient domestic firm from a more effi-
cient foreign firm. We cannot integrate with the global economy and
at the same time have higher wages, environmental standards and
social safety nets than the rest of the world. Trade and capital mobil-
ity must be balanced and fair, not deregulated or ‘free’. We should
recognize the interdependence of separate national economies, but
reject integration into a single global economy. The first rule of effi-
ciency is ‘count all the costs’ – not ‘free trade’, which, coupled with
free capital mobility, leads to a standards-lowering competition to
count as few costs as possible. Tariffs are also a good source of public
revenue. This will run afoul of the WTO-WB-IMF, so Herman Daly
wrote.

6. Downgrade the WTO-WB-IMF: Transform these organizations into

something like Keynes’s original plan for a multilateral payments
clearing union, charging penalty rates on surplus as well as deficit bal-
ances with the union – seek balance on current account, and thereby
avoid large foreign debts and capital account transfers. For example,
under Keynes’s plan the United States would pay a penalty charge to
the clearing union for its large deficit with the rest of the world, and
China would also pay a similar penalty for its surplus. Both sides of
the imbalance would be pressured to balance their current accounts
by financial penalties, and, if need be, by exchange-rate adjustments
relative to the clearing account unit, called the ‘bancor’ by Keynes.
The bancor would also serve as world reserve currency, a privilege
that should not be enjoyed by any national currency, including the
US dollar. Reserve currency status for the dollar is a benefit to the
United States rather like a truckload of free heroin is a benefit to an
addict. The bancor would be like gold under the gold standard, only
you would not have to dig it out of the ground.

The IMF preaches free trade based on comparative advantage, and has
done so for a long time. More recently the WTO-WB-IMF have started
preaching the gospel of globalization, which, in addition to free trade,
 From a Growth Economy to a Steady-State Economy 185

means free capital mobility internationally. The classical comparative

advantage argument, however, explicitly assumes international immo-
bility of capital (see Daly, 1993). When confronted with this contradic-
tion the IMF waves its hands, suggests that you might be a xenophobe,
and changes the subject. The WTO-WB-IMF contradict themselves in
service to the interests of transnational corporations and their policy
of offshoring production and falsely calling it ‘free trade’. International
capital mobility, coupled with free trade, allows corporations to escape
from national regulation in the public interest, playing one nation off
against another. Since there is no global government they are in effect
uncontrolled. The nearest thing we have to a global government (WTO-
WB-IMF) has shown no interest in regulating transnational capital for
the common good.

7. Move away from fractional reserve banking towards a system of 100 per-
cent reserve requirements: This would put control of the money sup-
ply and seigniorage (profit made by the issuer of fiat money) in the
hands of the government rather than private banks, which would no
longer be able to live the alchemist’s dream of creating money out of
nothing and lending it at interest. All quasi-bank financial institu-
tions should be brought under this rule, and regulated as commer-
cial banks subject to 100 percent reserve requirements. Banks would
earn their profit by financial intermediation only, lending savers’
money for them (charging a loan rate higher than the rate paid to
savings or ‘time-account’ depositors) and charging for checking,
safekeeping and other services. With 100 percent reserves every dol-
lar loaned to a borrower would be a dollar previously saved by a
depositor (and not available to him during the period of the loan),
thereby reestablishing the classical balance between abstinence and
investment. With credit limited by saving (abstinence from con-
sumption) there will be less lending and borrowing and it will be
done more carefully – no more easy credit to finance the massive
purchase of ‘assets’ that are nothing but bets on dodgy debts. To
make up for the decline in bank-created, interest-bearing money,
the government can pay some of its expenses by issuing more non-
interest-bearing fiat money. However, it can only do this up to a
strict limit imposed by inflation. If the government issues more
money than the public voluntarily wants to hold, the public will
trade it for goods, driving the price level up. As soon as the price
index begins to rise the government must print less and tax more.
Thus a policy of maintaining a constant price index would govern
the internal value of the dollar. The external value of the dollar
186 Herman E. Daly

could be left to freely fluctuating exchange rates (or preferably to

the rate against the bancor in Keynes’s clearing union).

How would the 100 percent reserve system serve the steady-state
economy?
First, as just mentioned it would restrict borrowing for new invest-
ment to existing savings, greatly reducing speculative growth ventures –
for example the leveraging of stock purchases with huge amounts of
borrowed money (created by banks ex nihilo rather than saved out of
past earnings) would be severely limited. Down payments on houses
would be much higher, and consumer credit would be greatly dimin-
ished. Credit cards would become debit cards. Growth economists will
scream, but a steady-state economy does not aim to grow.
Second, the money supply no longer has to grow in order for people
to pay back the principal plus the interest required by the loan respon-
sible for the money’s very existence in the first place. The repayment
of old loans with interest continually threatens to diminish the money
supply unless new loans compensate. With 100 percent reserves money
becomes neutral with respect to growth rather than biasing the system
towards growth by requiring more loans just to keep the money supply
from shrinking.
Third, the financial sector will no longer be able to capture such a
large share of the nation’s profits (around 40 percent!), freeing some
smart people for more productive, less parasitic, activity.
Fourth, the money supply would no longer expand during a boom
(when banks like to loan lots of money) and contract during a recession
(when banks try to collect outstanding debts) thereby reinforcing the
cyclical tendency of the economy.
Fifth, with 100 percent reserves there is no danger of a run on the
bank leading to failure, and the Federal Deposit Insurance Corporation
could be abolished, along with its consequent moral hazard. The danger
of cascading collapse of the whole credit pyramid due to the failure of
one or two ‘too-big-to-fail’ banks would be eliminated. Congress then
could not be frightened into giving huge bailouts to some banks to
avoid the ‘contagion’ of failure.
Sixth, the explicit policy of a constant price index would reduce fears
of inflation and the resultant quest to accumulate more as a protection
against inflation.
Seventh, a regime of fluctuating exchange rates (or Keynes’s clearing
union) automatically balances international trade accounts, eliminating
 From a Growth Economy to a Steady-State Economy 187

big surpluses and deficits. US consumption growth would be reduced

without its deficit; Chinese production growth would be reduced with-
out its surplus. By making balance-of-payments lending unnecessary,
fluctuating exchange rates would greatly shrink the role of the IMF and
its ‘conditionalities’.
To dismiss such sound policies as ‘extreme’ in the face of the demon-
strated fraudulence of our current financial system is quite absurd. The
idea is not to nationalize banks, but to nationalize money, which is a
natural public utility in the first place. The leading economists of the
1920s (Irving Fisher, Frank Knight) favored 100 percent reserves, as did
Frederick Soddy, Nobel Laureate in chemistry and underground econo-
mist. The fact that this idea is hardly discussed today is testimony to the
power of vested interests over good ideas.

8. Stop treating the scarce as if it were non-scarce, and the non-scarce as if

it were scarce: Enclose the remaining open-access commons of rival
natural capital (for example, atmosphere, electromagnetic spec-
trum, public lands) in public trusts, and price it by a cap-auction-
trade system, or by taxes – while freeing from private enclosure and
prices the non-rival commonwealth of knowledge and information.
Knowledge, unlike the resource throughput, is not divided in the
sharing, but multiplied. Once knowledge exists, the opportunity
cost of sharing it is zero, and its allocative price should be zero.
International development aid should more and more take the form
of freely and actively shared knowledge, along with small grants,
and less and less the form of large interest-bearing loans. Sharing
knowledge costs little, it does not create unrepayable debts, and it
increases the productivity of the truly rival and scarce factors of
production. Of course sharing false knowledge (a non-rival ‘bad’)
is a danger, amply demonstrated by many growth-based ‘structural
adjustment’ programs (see Daly, 2008a). Existing real knowledge
is the most important input to the production of new knowledge,
and keeping it artificially scarce and expensive is perverse. Patent
monopolies (also known as ‘intellectual property rights’) should be
given for fewer ‘inventions’, and for fewer years. Costs of production
of new knowledge should, more and more, be publicly financed and
then the knowledge freely shared. Knowledge is a cumulative social
product and we have the discovery of the laws of thermodynamics,
the double helix, the polio vaccine, and so forth, without patent
monopolies and royalties.
188 Herman E. Daly

9. Stabilize population: Work towards a balance in which births plus

immigrants equals deaths plus emigrants. This is controversial and
difficult, but as a start, contraception should be made available for vol-
untary use everywhere. And while each nation can debate whether it
should accept many or few immigrants, and who should get priority,
such a debate is rendered moot if immigration laws are not enforced.
We should support voluntary family planning, and enforcement of
reasonable immigration laws, democratically enacted. A lot of the
pro-natalist and open-borders rhetoric claims to be motivated by
generosity. Perhaps it is, but in effect it turns out to be ‘generosity’
at the expense of the US working class and to the benefit of the
employing class – an elitist cheap labor policy. The federal govern-
ment, ever sensitive to the interests of the corporate employing class,
has done an obligingly poor job of enforcing our immigration laws.
Progressives have been slow to understand this. The environmental
movement began with a focus on population, but has for some years
now given in to ‘political correctness’ on this issue. Ironically, our
tolerance for illegal immigration seems to have caused a compensa-
tory tightening up on legal immigrants – longer waiting periods and
more stringent requirements. In cost-benefit terms it is cheaper to
‘enforce’ our immigration laws against those who obey them than
against those who break them; but it is quite unfair, and perceived as
such by many legal immigrants and people attempting to immigrate
legally. This is a very perverse selection process for new residents.

10. Reform national accounts: Separate GDP into a cost account and a
benefits account. Natural capital consumption and ‘regrettably nec-
essary defensive expenditures’ belong in the cost account. Compare
costs and benefits of a growing throughput at the margin, stop
throughput growth when marginal costs equal marginal benefits.
In addition to this objective approach, recognize the importance of
the subjective studies that show that, beyond a threshold, further
GDP growth does not increase self-evaluated happiness. Beyond a
level already reached in many countries, GDP growth delivers no
more happiness, but continues to generate depletion and pollution.
At a minimum we must not just assume that GDP growth is eco-
nomic growth, but prove that it is not uneconomic growth.

* * *
The conceptual change in vision from the norm of a growth economy
to that of a steady-state economy is radical, but the policies advocated
 From a Growth Economy to a Steady-State Economy 189

are subject to gradual application. For example, 100 percent reserves

can be approached gradually, the range of distributive inequality can be
restricted gradually, caps can be adjusted gradually, and so forth.
Also these measures are based on the impeccably conservative insti-
tutions of private property and decentralized market allocation. The
policies advocated simply recognize that: (a) private property loses its
legitimacy if too unequally distributed; (b) markets lose their legitimacy
if prices do not tell the truth about opportunity costs; and (c) the mac-
roeconomy becomes an absurdity if its scale is required to grow beyond
the biophysical limits of the Earth. Well before reaching that radical
biophysical limit we are encountering the orthodox economic limit in
which extra costs of growth become greater than the extra benefits,
ushering in the era of uneconomic growth, so far denied by the regnant
growth paradigm, which seems intent on fulfilling the role of obstruc-
tive nuisance described in the epigraph by Whitehead.

Note
1. The epigraph from Whitehead is respectfully repeated from K. William
Kapp’s prescient book of 1950, The Social Costs of Private Enterprise. That the
same quotation (as well as Kapp’s arguments) should be as relevant in 2011 as
it was in 1950, is a sad reflection on economists’ predilection for the role of
obstructive nuisance.
10
Global Poverty and Financial Crisis:
Are We Trapped in an Obsolete
Economic Order?
Daniel W. Bromley

The setting

[W]hen we succeed in finding a definite causal relation between

two phenomena, our problem is solved if the one which plays the
“causal” role is non-economic. We have then accomplished what we,
as economists, are capable of in the case in question and we must
give place to other disciplines. If, on the other hand, the causal fac-
tor is itself economic in nature, we must continue our explanatory
efforts until we ground upon a non-economic bottom. (Joseph A.
Schumpeter, [1911] 1934, 4–5)

The capitalist world order has many profound accomplishments to its

credit.1 Those accomplishments are not under discussion here. Rather,
I am motivated by a concern that the triumphalism accompanying the
current hegemonic world economic order will lead a number of influ-
ential political leaders and citizens to suppose that we have happily
arrived at the end of economic history. Conservative polemicists wish
us to believe this to be true (Fukuyama, 2006). Indeed when Margaret
Thatcher gloated that ‘there is no alternative’ (now known as the ‘TINA
doctrine’), she anticipated an entire generation of self-congratulatory
excess that followed the shift to a ‘capitalist road’ by China, and the
subsequent collapse of the Soviet Union in the early 1990s. Some want
us to believe that these transformations – often characterized as ‘sur-
renders to the free market’ – offer definitive proof of the superiority
of global capitalism. Even an average philosopher would ask: ‘Superior
with respect to what?’
It should be apparent that judgments of the superiority of one eco-
nomic system over another pose a profound computational problem.

190
 Are We Trapped in an Obsolete Economic Order? 191

To suppose that meaningful judgments can be made across hundreds

of possible indicators is to ignore an insurmountable commensurability
challenge. It is impossible to assign plausible weights to the hundreds
of possible performance attributes – outcomes – of an economic system.
And so this pursuit of naïve instrumentalism necessarily founders on
the basic question of what things count as reasons (Bromley, 2006).
Economic systems are not refrigerators or cameras sitting in a show-
room silently awaiting customers who will diligently weigh attributes
across various models. Even in these more common pursuits, a major
part of this informed discernment will be predicated on a set of product
or performance attributes that were specified before the comparisons
begin. Purpose precedes pondering.
Judgments of an economic system are bound up with prior commit-
ments concerning purpose. What is the economic system for? What
should it do? How should it do those things? Whose voice should count
in the difficult task of design and assessment? How should property
rights be allocated – and reallocated when necessary?
Equally important, when it comes to judging economic systems,
the matter of ends and means is seriously conflated. The libertarian
position, aggressively advanced by Milton Friedman, is that capitalism
and the attendant market are necessary and sufficient to maximize
freedom – thus authorizing a view of government as an unwelcome
impediment to liberty and productive efficiency. The individual is
alleged to be free by being ‘free to choose’ (Friedman, 1962). Amartya
Sen has effectively undermined Friedman’s extravagant claims in this
matter of freedom (Sen, 1993). And so we see that Friedman’s earnest
attempts to attribute personal liberty to capitalism and market-driven
resource allocation reveal that even conservative economists under-
stand Schumpeter’s claim that their commitment to markets is not an
economic decision.
Why else would Friedman try so hard – even starring (with his wife)
in a television series on the subject? Marx and Engels certainly under-
stood that the selection of an economic system was a moral choice. We
are left with the realization that judgments about economic systems are
not about economic matters at all. If you are born and socialized into
a market economy you quite obviously come to believe that a market
economy is natural and right. If you are born and socialized into a dif-
ferent economic system, you come to believe that system to be natural
and right.2 We should be surprised if this were not the case. And, as I
will explore later, this circumstance explains how it is possible for us to
be ‘trapped’ in an economic system that does not always serve us well.
192 Daniel W. Bromley

The question worth asking, it seems, is whether the current system

of global capitalism, said to represent the ‘best of all possible worlds’,
is responsible for particular outcomes that seem, on reflection, to be
unnecessary. In posing the question this way I wish to inject the concept
of ‘reasonable’ into discussions about alternative economic systems.
The idea of reasonable is often discredited by those who persist in their
commitment to hard-edged incorrigible truths in human affairs. The
Comtean-Cartesian legacy still precludes promising avenues of thought.
Considering what is reasonable is one of those avenues. Juries in crimi-
nal and civil cases are asked to deliberate against the goal of ‘reasonable
doubt’. Indeed, those same juries are constituted by drawing on citizens
with the ability and tendency to be reasonable. In other words, we need
to know, in many circumstances, what the reasonable person would
do in similar situations. Returning to the issue of economic systems,
if particular outcomes are seen as unreasonable then the matter turns
to necessity. Here is an outcome that seems unreasonable. Are such out-
comes really necessary?
As my title suggests, two aspects of the global economic system war-
rant consideration. First, is it reasonable that the ‘best of all possible’
economic systems should give rise to the sweeping financial crisis that
started in 2007? Second, is it reasonable that this marvelous economic
system still seems unable to generate plausible livelihood prospects in
much of Africa? Notice that these two questions are related. The defend-
ers of global capitalism will blame political incoherence for Africa’s
desultory economic performance. But if that political incoherence is
the product of European colonialism – itself an important phase in the
development of global capitalism – then the economic system of such
allure to contemporary conservatives is twice implicated. The economic
system seems plausibly responsible for the economic exploitation of
much of the African continent, and its dreadful legacy of plunder con-
tinues to preclude economic progress there.
Ignoring this tragic colonial legacy, the defenders of global capitalism
will attribute Africa’s poor economic performance to the failures of its
political leaders to adopt the necessary policies that would allow the
full development of capitalist relations and the associated markets as we
know them in the industrialized world. The claim will be advanced that
if only they would do so, Africa would be rich. After all, just look at the
bounty of their natural resources.
But of course this brings us back full circle. If African countries remain
strikingly poor because they have failed to implement the full laissez-
faire capitalist program, one is left to explain the unexpected and quite
 Are We Trapped in an Obsolete Economic Order? 193

severe financial crisis that started in 2007 precisely in those countries

that have allegedly perfected the capitalist model. On logical grounds
it would seem that something is amiss. Global capitalism cannot claim
to represent the apotheosis of economic systems without being held
accountable for the economic tragedies of African poverty, and for the
economic chaos in the rich industrialized world.
I now focus attention on that crisis, and its likely reasons.

The financial crisis of 2007

The term “financial capitalism” is used to indicate a third stage of the

capitalist system. It followed “merchant capitalism” and “industrial
capitalism.” The above three terms indicate ... the relative predomi-
nance of the merchant, the industrialist, or the banker in the evo-
lution of capitalism. ... [T]heir historical development grows out of
the capitalistic evolution of western civilization. (John R. Commons,
[1950] 1970, 61)

There are many accounts of the ‘cause’ of the current financial crisis.
Among the usual suspects are greed, illegal behavior, failure of top
financial managers to understand the exotic instruments conjured
by young quantitative wizards in their employ, perverse incentives in
home-mortgage markets, ignorance, and regulatory vacuums or incom-
petence. One of the more curious explanations, popular among a few
economists, is that it was our fault. By teaching generations of students
about the wonders of the ‘free market’ the economics profession has
created a class of citizens who actually believe the happy stories from
Econ. 101 about equilibrium, self-correcting tendencies, and alert con-
sumers and producers perched on a knife’s-edge of productive or con-
sumptive bliss. When the crisis began, conferences were held and letters
were written to important political leaders gratuitously accepting the
blame. Promises were made that we would – we must – reform ourselves
so that this would never again occur.
This self-criticism is quite implausible. For one thing, the number of
individuals who have been exposed to the standard market catechism
is unlikely to exceed 6 to 10 percent of the adult population in the
advanced market economies where the crisis began. Very few people
‘know the model’. In response it might be said that of course this may
be true, but the vast majority of the political elite in the West surely
know the catechism, and it is the elite who create policy. But here again,
this cannot be a sufficient explanation. Economists flatter ourselves if
194 Daniel W. Bromley

we suppose that we possess the knowledge and capacity to create eco-

nomic booms or economic disasters. A plausible explanation must be
found elsewhere. And in looking elsewhere, it is essential that we begin
with the fundamental distinction between a cause and a reason.
By asking about reasons we turn our attention away from mechanical
causes and concentrate instead on purposes. If, as Friedman and other
conservative promoters contend, the purpose of an economic system is
to assure individual freedom, we see that the current world economic
order is the inevitable manifestation of a suite of moral commitments
that relegate economic performance – outcomes – to secondary status.
Put another way, the financial crisis and persistent poverty and hunger
in Africa are the inevitable accompaniments of an economic system
built for other reasons. This approach denies that we can judge capital-
ism on its economic merits. Rather, global capitalism is the manifesta-
tion of ideological (political) commitments.
The reasons for the existence and enthusiastic support of global capi-
talism are found in the realm of ideas and not in the realm of data. It
is a system born of and defended on faith, not one defended with logic
or an appeal to evidence. The implication, therefore, is that the global
financial crisis is the result of a commitment to an economic system
that transcends evidence of the performance of that system. By being
faith-based, its specific performance is beyond discussion.
Support for this claim is found in the fact that the animating events
of the crisis are found in the United States and, to a lesser extent, in
Britain. And this then begs the question as to why the origins of the cri-
sis should be found in the Anglo-American world? We come to Ludwig
von Mises, Friedrich von Hayek, and their American disciples – most
prominently Milton Friedman. It is von Hayek and Friedman who pop-
ularized the connection between markets and so-called political liberty
(or freedom). But of course this is too simple. As long as I must sell or
rent my labor power in order to acquire money with which to eat, I am
not free. Real freedom means not having to engage in any transaction
at all (Bromley, 1989; Macpherson, 1973; van Parijs, 1998). If I cannot
survive by refusing to interact with the market then I am not free – I am
coerced by my need to enter the labor market.
Much of the quite lavish discussion surrounding the fall of the Berlin
Wall included constant references to freedom. Mixed up in those asser-
tions are two very distinct ideas that the current world economic order
wishes to remain blurred – the profound difference between political
freedom and transactional freedom in a market. Many people from the
former German Democratic Republic (GDR) understand better than
 Are We Trapped in an Obsolete Economic Order? 195

their Western neighbors that these two ideas are distinct and must
never be mixed up. Is the freedom to denounce your government really
in the same category as the freedom to buy bananas and broccoli?
Classic Marxist analysis suggested that capitalism would fall under
the weight of impoverished workers finally refusing to be exploited by
the owners of capital. The irony of the current financial crisis is that
workers and Wall Street bankers were competing with each other to see
who could become the more highly leveraged. In addition, the finan-
cial sector was eagerly bankrolling the excessive consumerist urges of
the working class. Over the previous decades our mailboxes overflowed
with pre-approved credit cards literally begging us to leverage our cur-
rent income. American consumers began to view their homes as akin
to shares in a stock market – hoping to sell them so as to keep climbing
up to ever-larger dwellings. Boats, fancy oversized cars, home entertain-
ment centers, and other conspicuous consumption fueled not only our
own excesses, but provided China with the necessary justification to
build a post-communist economy on the backs of relentless American
consumerism.
For its part the financial sector seems to have viewed its job as an
opportunity to create ever-more bizarre financial instruments. The
standard story about wage labor in a market economy is that wages for
workers must be kept low in order for firms to remain competitive. If
wages get too high then firms will move to places where labor costs are
lower. However, as we now see, when it comes to the millionaires at
the very top of these firms, the story changes. In these circumstances,
compensation for such individuals must remain high in order for firms
to attract the most talented individuals and thus remain competitive.3
In sum, paying more to those at the bottom of the income scale is a bad
idea because it would make firms less competitive. At the same time,
paying less to those at the very top of the income scale is a bad idea
because it would make firms less competitive. In this sort of market
economy, it is impossible to pay those at the bottom too little, while it
is impossible to pay those at the top too much. We are now getting close
to the reasons for the current financial crisis. But one more considera-
tion is necessary.
Why were the Americans and the British so susceptible to the idea of
unbridled acquisitiveness that pervaded the financial crisis? The rea-
sons are ready at hand. In 1879, commenting on the industrial revo-
lution, Matthew Arnold wrote that: ‘Inequality has the natural and
necessary effect, under the present circumstances, of materializing our
upper class, vulgarizing our middle class, and brutalizing our lower
196 Daniel W. Bromley

class’ (Arnold, 1879). The upper class was ‘materialized’ by its unend-
ing pursuit of yet more conspicuous consumption – the acquisition of
material goods. The middle class, always measuring its living standards
against the rich, were vulgarized by their mindless imitation of the con-
sumption patterns of the rich. And, of course, the lower class was bru-
talized by their hunger and misery as they worked long difficult hours
to allow the middle class to continue its hopeless pursuit of the fashions
and habits of the rich. In today’s world economic system, the brutalized
lower class is to be found in the sweatshops of Vietnam, Cambodia, and
southeast China.
Following in Arnold’s footsteps, the English historian R.H. Tawney
wrote that England had become a grotesque acquisitive society (1920).
The origins of English individualism can be traced as far back as the
fourteenth century (Macfarlane, 1978). These enduring strands of indi-
vidualism, acquisitiveness, and vulgar materialism were woven together
in 1964 by the political philosopher C.B. Macpherson, who coined the
phrase possessive individualism (Macpherson, 1962). Indeed, Macpherson
suggests that possessive individualism comprised the dominant unify-
ing assumption – the primary organizing idea – of English society in
the seventeenth through the nineteenth centuries (Macpherson, 1962).
And where does one look for the animating ideas and principles of post-
independence America? That would be England in the seventeenth
through the nineteenth centuries.
So, as we ponder the current financial crisis, the issue turns not so
much on how we characterize contemporary American or British soci-
ety. Rather, we must broaden our scope to situate the contemporary
individual in all industrialized societies. This is necessary because while
America deserves the blame for carrying possessive individualism to its
grotesque extremes, all highly developed economies are now infected
by the disease. Macpherson suggests that the dilemma for contemporary
political thought concerns working out the inevitable tension between
a theory of individual rights so central to the utilitarianism of Hobbes
and Locke, and the notion of obligation of the individual to the modern
state. Restated, the problem concerns whether or not we can reconcile
the individual embedded in a ‘possessive market society’ with the indi-
vidual as the beneficiary of the modern political state that guarantees
to each of us some constellation of protections and privileges.
Macpherson’s answer is that a theory of political obligation that
will stand alongside a theory of political rights must be able to ‘pos-
tulate that the individuals of whom the society is composed see them-
selves, or are capable of seeing themselves, as equal in some respect
 Are We Trapped in an Obsolete Economic Order? 197

more fundamental than all the respects in which they are unequal’
(Macpherson, 1962). In practical terms, the emergence of the idea of
political obligation requires a degree of commitment by all to the com-
munity – such commitment being animated by the acceptance of a
shared history and the hope for a shared future. Possessive individual-
ism and the alleged ‘freedoms’ it authorizes are parasitic to the idea of
political obligation.
Macpherson suggests that in the early days of the possessive market
society this condition of obligation was fulfilled since all individuals
were subject to the same forces of a competitive market – individuals
saw themselves as equally subjected to competitive pressures. These cir-
cumstances were therefore seen as inevitable – natural. Obviously this
is not the same as suggesting universal beneficence, only universally
endured. Low prices for things being sold, high prices for things being
purchased, and hungry times from drought, pestilential crop failure,
disease, marauding soldiers, and cold wet winters wreaked havoc on
one and all in equal measure. That was life, and it was hard all around.
Little wonder that Thomas Hobbes, in 1651, would judge life to be ‘soli-
tary, poor, nasty, brutish, and short’.
Not only were all subjected to the same ubiquitous discomfort,
Macpherson also reminds us of a certain ‘cohesion of self-interests’ in
which the inherent centrifugal forces of a competitive market society
could be meliorated and constrained. At the height of possessive indi-
vidualism in England, this condition was met by the fact that political
voice was restricted to what he calls the possessing class. This small class
possessed most of the material wealth, and it also possessed exclusive
control over the selection of a succession of rather unpleasant sovereign
authorities. These ruling elites perceived their material and political
entitlements as reciprocated in their political obligations. Notice the
nexus between rights and obligations. By the middle of the nineteenth
century this historic convergence began to dissipate under the assault of
an advancing liberal state in which the franchise began to spread down-
wards. The emergence of a distinct class consciousness so central to
Marx was profoundly corrosive of both the political as well as the mate-
rial cohesion of English society. The historical inevitability and ‘nor-
malcy’ of competitive market relations – along with the emerging bitter
awareness of their unequal outcomes – added weight to this gradual
disintegration. The old order began to rot from within. Once a newly
enfranchised working class became aware of plausible alternatives, the
former tight cohesion was destroyed forever. Democracy delivered what
democracy is – voice to all. With the spread of political voice, the old
198 Daniel W. Bromley

cohesion was irreparably fragmented and historic market relations were

no longer accepted as natural, necessary, or morally compelling.
This loss of cohesion coincided with the early years of the emerging
public order in the United States. While the founders drew on the con-
fident certitudes of Locke and the Enlightenment writers, daily life was
forged not by those high-sounding ideals but by the rough and tumble
of a new economy – and new political machinery – that had to be con-
structed, de novo, in the ‘frontier’. The unfettered market – with its gro-
tesque materialism – in concert with emerging political processes that
often recapitulated the excesses of nineteenth-century England, are as
much a part of American history as are the ideals of Locke, Condorcet
and Rousseau. What is unmistakable from Macpherson’s thesis is just
how destabilizing, how very threatening, democracy can be to narrow
economic and political privilege.
But there is another lesson for mature democracies. They cannot
survive if they are understood only in terms of the affirmation of the
rights of individuals. At the core of a fully developed democracy must be
found the concept of correlated duties – obligations – on all individuals.
Mature democracy entails a constant balancing of these two ideas.
The current financial crisis is therefore not properly understood as a
crisis of capitalism as an organizing economic idea. The financial crisis
is, instead, a reminder of the many perils of a political culture that is
defined by – and that celebrates – possessive individualism in an econ-
omy characterized by banker capitalism. We have, it seems, a culture of
acquisitiveness for the sake of acquisition. The enlightenment gave us
the idea, the industrial revolution was the prototype, and the extraordi-
nary increase in personal incomes in the industrial world since the end
of World War II has underwritten a mental conviction of unsustain-
able expectations that now undermine social commitments. Hedonism,
hubris, and conceit constitute the new civic religion. As Commons
([1950] 1970, 67–8, emphasis added) put the matter:

The main characteristic of this twentieth century economics and the

reasons why it can be distinguished as banker capitalism are the large
amounts of savings of millions of investors that must be brought
together in order to finance these huge aggregations of machinery,
and armies of employees, made feasible by science, invention, and
world-wide markets. That is the reason, too, why the transition is
being made from individualistic economics of the eighteenth and
nineteenth centuries to what is coming to be named the “institu-
tional” economics of corporations, unions, and political parties. And
 Are We Trapped in an Obsolete Economic Order? 199

since these institutions turn on the institution of money controlled

by bankers rather than on the production of wealth created by labor,
the transition is also made from the creation of wealth measured by
man-hours to the accumulation of assets measured by dollars.

As we have now learned, the aggressive accumulation of leveraged assets –

by both bankers and eager consumers – has led to tragic results.
And what of persistent poverty in Africa?

The perpetuation of world poverty

The elaboration of European colonialism is plausibly responsible for the

present political and economic disorder on the African continent. Of
perhaps greater importance, the current world economic order remains
a major contributing factor to the perpetuation of poverty there. Notice
that I did not say that the existing economic order is the cause of pov-
erty and world hunger. But I do insist that the perpetuation of those
conditions can be blamed on the world economic order. This conclu-
sion arises from the realization that the current world economic order
results in the absence of economic space for most of Africa.
The issue of economic space for poor countries concerns whether the
dominant trading nations in a globalized world manage to find the
meager economic potentialities of these countries to be compelling or of
little interest. In practical terms, anything that most African countries
can produce can now be produced more cheaply in the industrialized
word. For instance, the hothouses of northwest Europe seem to have
eliminated the ‘comparative advantage’ of many African countries to
produce flowers or vegetables. The prodigious ability of a few industrial
countries to produce cotton, wheat, rice, corn and a few other items
means that there is little left that Africans can do to fit into a globalized
world. Are they to build their economic future on nothing more sub-
stantial than baskets, wooden masks and wildlife safaris? Colonialism,
it seems, persists in less apparent ways.
The theory of comparative advantage does not account for immobile
labor stuck in small, poor countries, and the corresponding rapid move-
ment of financial capital around the world in response to the slightest
change in production costs. If your country is doing well producing
shirts and shoes for multinational corporations then you will not be at
peace. If another country can drive its labor costs down just a little, or
squeeze one more shirt per hour out of docile female labor sitting at a
machine, then you will be abandoned. Capital will flee to the lower-cost
200 Daniel W. Bromley

supplier and you will be stuck with buildings and unemployed workers
who are now your problem – and of no interest to the Gap, Banana
Republic, or Abercrombie & Fitch.
Indeed the profound problems of economic migrants surging into
southern Europe must be understood as precisely of these origins.
Capital no longer has national boundaries. Labor, on the other hand,
requires a passport and a visa. The economic logic of trade, in the inter-
est of pursuing comparative advantage, has been destroyed by the
overbearing force of the current world economic order. There is no eco-
nomic space for countries such as Benin, Togo, Mali, Niger, Chad, the
Central African Republic, Malawi, Zambia and Zimbabwe. Even South
Africa, the powerhouse of Africa, is blocked by the ability of investment
capital to flee at the slightest hint of domestic policies that interna-
tional money managers find troublesome. South Africa, as with all of its
neighbors, is held hostage by the global financial system.
And so here we are, 125 years after the Congress of Berlin and the par-
tition of Africa. The per capita income of a typical citizen of Luxembourg,
said to be the richest country in the world, is approximately €75,000.
The per capita income of a typical citizen of Burundi (the poorest coun-
try) is approximately €92. The average citizen of Luxembourg has 820
times the income of the average citizen of Burundi. The per capita
income of Germany is approximately €30,000 (19th on the list), and if
we go up 19 places from the bottom we encounter, ironically, Burundi’s
neighbor, and sometime enemy, Rwanda at €311. The typical citizen of
Germany has 96 times the income of the typical citizen of Rwanda.
It would be easy to dismiss these comparisons as meaningless – it
might be said that the poor countries deserve what they do not have
because of corruption, incompetence, laziness or primitive behaviors.
Such talk is nothing but apologetics for our wealth and their poverty.
It is difficult to find good reasons to justify this degree of inequality
in the world. These disparities cannot possibly be rationalized. Yet,
they are accepted by the triumph of banker capitalism and the associ-
ated possessive individualism that now defines America, and to a lesser
extent Britain.

Are we trapped in an obsolete economic order?

The economic life history of the individual is a cumulative process of

adaptation of means to ends that cumulatively change as the process
goes on, both the agent and his environment being at any point the
outcome of the past process. His methods of life to-day are enforced
upon him by his habits of life carried over from yesterday and by the
 Are We Trapped in an Obsolete Economic Order? 201

circumstances left as the mechanical residue of the life of yesterday.

(Thorstein Veblen, 1898, 74–5)

There are two issues here: Is the current economic order obsolete? And
are we trapped in that order? I shall address the matter of obsolescence
first.

Emerging obsolescence
As we saw above, Commons traces the defining traits of three main
phases in the evolution of capitalism – first came the merchants, then
the industrialists, and more recently the bankers. The transition has
been from shopkeepers (traders) to manufacturers (builders) to accu-
mulators of money (gamblers). And as Commons notes, it was the mis-
behavior of the gamblers that explains the stock market crash of 1929,
and the subsequent Great Depression of the 1930s. Were he alive today,
Commons would not be surprised.
The central role of finance in modern capitalism is of a special kind.
In merchant capitalism the activities of the central players were close at
hand and easy to observe. Merchants were just down the street, and they
were judged by the quality of their wares and the prices they charged.
In addition, merchants often were the locus of civic activity and pro-
bity. With the emergence of centralized power sources and the rise of
mass consumerism, the center of gravity of capitalism switched to the
manufacturers. Soon it was the large industrialists who held the strong
hand. Industrial capitalism fueled the wrath of laborers, and the ensuing
strikes and struggles – so central to the writings of Commons, Marx, and
even Charles Dickens – virtually defined economic life in the latter years
of the nineteenth century, and the first half of the twentieth century.
But this gradual accretion of great wealth in the hands of the few
attracted the attention of an even smaller group of men who sought
to gain control of the income streams and attendant wealth associated
with manufacturing (Commons, [1950] 1970). In this third phase of
capitalism we see that the primary emphasis was no longer concerned
with the making of things. Rather, the main chance became the quest
to control those who made things. Commons tells the story of the emer-
gence of the large holding companies – J.P. Morgan wrangling to gain
control of the Carnegie steel empire (Commons, [1950] 1970). The game
was motivated not by a desire on the part of the house of Morgan to
make steel. Rather, the point was to attract investors who wished to
become rich – at a comfortable distance – from the making of steel.
Veblen talks of the transition from making things to making money.
And when economies are dominated by those who make money there
202 Daniel W. Bromley

are no limits to indicate when more is superfluous. The culture of pos-

sessive individualism regards such concerns as impertinent.
As the accumulators got seriously to work, their creative financial
instruments were more difficult to comprehend than were the famil-
iar shops of the merchants, and even the mills of the manufacturers.
Hovering over accounts books (and eventually computer screens) while
crafting esoteric financial instruments serves to preclude familiarity
with the workings of the bankers. Unlike the frequent and personal
contact with the merchant, or the awe of massive factories at the edge
of town, the bankers were far away and their craft was obscure – even
mysterious. And its mystery served to embellish it with both gravitas
and urgency. Soon the wealth accumulators came to be considered the
essence of modern capitalism. The brightest students, graduating from
elite universities, aspired to nothing so much as a brutal job with the
modern version of the counting house. At a political level, the accumu-
lators became much too important to be trifled with. While the mer-
chant could be challenged for selling faulty products at unreasonable
prices, and while the industrialist could be criticized for abusing labor
or for poisoning nearby rivers, the financiers were difficult to criticize.
Who could possibly tell when they were up to something unseemly?
Karl Marx, writing at the height of industrial capitalism, was neces-
sarily focused on the inevitable battle between workers and capitalists.
He saw the tensions and the contradictions, and he was quite sure that
therein lay the seeds of destruction. But the end of industrial capitalism
rendered Marx quaint and old fashioned. Now the workers are also capi-
talists. Rather than containing the seeds of its own destruction, banker
capitalism contains the seeds of its own elaboration. Contemporary
capitalism blinds all of us to its inequities and absurdities because the
system does precisely what we most want – offer the promise of great
wealth to the young and energetic, while delivering consumer goods at
low prices to the rest of us. Those who vote and push the economy in
particular directions, having now grown comfortable with the econ-
omy they deserve, cannot but be enslaved by that economy. We cannot
escape because we do not know that we have been created by it. We are
trapped and do not realize it.

Trapped without knowing it

Elsewhere I have written (Bromley, 2006, 49):

[T]he habituated mind comes to see current practices, current

choices, and current actions as normal, right, and correct. Commons
 Are We Trapped in an Obsolete Economic Order? 203

called this the “instituted personality.” And this brings us to the idea
that the purposes and expectations toward which problem-solving
thought will be directed are instances of what Commons called insti-
tutional causation. In different words, prevailing institutions are the
plausible cause of the emergent problem, and therefore new institu-
tions will become the plausible cause of the solution to those emer-
gent problems.
Precisely because individual choice is shaped by current working
rules (by the extant institutional setup), and because current market
forces and processes are themselves reflections of (predicated upon)
these volitionally created working rules, it becomes incoherent for
individuals thus shaped (thus instituted) to object to institutional
change by the courts or the legislature on the grounds that such
change would be coercive, or that it would interfere with their exer-
cise of “free will,” or that it would somehow inhibit their “freedom.”
Such claims are bogus precisely because their customary action
against which change is now to be gauged was itself not an exercise
of free will or freedom. The human mind, by habituating itself to the
evolving institutional setup, had already been shaped by the proc-
esses of socialization. ...

It seems that we are trapped twice. First by the very process of being
‘crafted’ by the institutional setup within which we are embedded,
and then again by our belief that any changes in that system of rules
and customs somehow interferes with our freedom and autonomy. The
first problem is that the goals to which specific desires give rise are
rooted in habituated practices (customs) to which the individual has
become accustomed. In practical terms this means that our individual
‘will’ cannot be the actual source of our wants and desires. The source
of our wants – the explanation for those desires – is what Max Weber
referred to as the webs of significance in which we are entangled. This is
problematic for economists who still believe that rational choice models
offer useful insights into human action.
The second problem arises from the fact that the current economic
order is an artifact of our own design, and thus we alone have the abil-
ity to redesign it. Two barriers stand in our way. The first barrier is the
poverty of our own imagination. The second barrier is our weakness of
will. Of the two, it seems reasonable to suggest that we are more willing
than able. Simply put, even if we would try to extricate ourselves, we do
not know how to imagine an alternative to the system within which we
are embedded. This follows from the realization that the formulation of
204 Daniel W. Bromley

a workable solution to a problematic situation is inseparable from these

customary practices to which all individuals have become accustomed.
As above, we have become habituated to current practices and actions.
It is quite impossible to willingly denounce the only reality we know.
We are not dealing here with known and tangible alternative systems
that can be specified in the abstract and then constructed. ‘Outcomes
of available actions are not ascertained but created. ... An action which
can still be chosen or rejected has no objective outcome. The only kind of
outcome which it can have exists in the imagination of the decision-
maker’ (Shackle, 1961, 143). And our imagination is not sufficient.
In financial capitalism, and its preoccupation with gratuitous con-
sumption, we are unable to answer the fundamental question of ‘how
much is enough?’ The core of mainstream (hedonistic) economics is
that more is preferred to less. But this leaves us without guidance in
the matter of when ‘more’ is no longer defensible. What is the stopping
rule? Contemporary economics has no protocol for engaging that ques-
tion, nor do most economists feel comfortable asking it. Our discom-
fort is made the more profound by fear that those who set university
budgets will regard us as ungrateful leftists. Heterodox economists are
unwelcome at official events that are primarily concerned with elabo-
rating the beneficent efficiency properties of unfettered markets. While
‘market failures’ will be addressed, interest in them necessarily stops
short of suggesting their systemic origins. Rather, we are focused on
patching them up with Pigouvian taxes and subsidies.
There is much concern these days with sustainability – the point usu-
ally concerns population growth in the developing world, or the impact
of those of us who are rich on the ecological systems on which future
life depends. We are told that our consumption patterns cannot pos-
sibly continue into the future. And it is noted that if the rest of the
world – particularly China, India and Brazil – become as rich as we are,
and then consume accordingly, the earth will most certainly be over-
whelmed with garbage and carbon dioxide emissions. The lifeboat will
sink under the weight of total consumption.
I find it useful to discuss sustainability from a different angle. Of
course I worry about what our excessive consumption is doing to
Mother Earth. But I worry more about what our consumption is doing to
us. The economist John Kenneth Galbraith reminded us that citizens of
the industrial world serve the system not by supplying it with labor but
by consuming its products (Galbraith, 1967). The prevailing economic
system requires that we keep consuming so that jobs will continue to be
created, so that incomes can continue to be earned, so that people will
 Are We Trapped in an Obsolete Economic Order? 205

be able to consume, so that the economy can remain at what we like to

call ‘full employment’. Consumer spending now accounts for approxi-
mately 70 percent of total expenditures in the United States and when
that shuts down, as it did during much of 2008, the results are not good.
The necessity to consume is the primary logic of the current economic
system. Notice that this logic gives rise to the pursuit of status through
our consumption. We believe that we need bigger homes, big (or bigger)
cars, bigger television screens, and we need the latest fashions. The con-
nection between consumption and status was explored – and satirized –
by the economist Thorstein Veblen in his book The Theory of the Leisure
Class (1899).
If one lives in a market economy, whose claim on our loyalty resides
in its ability to focus the managerial mind on the efficiency with which
goods and services are provided, then it follows that the acquisition of
the ‘stuff’ arising from that revered system is an important component
in the acquisition of great status. The earning of an agreeable income in
a market system is a symbol of success in that system. And the purpose
of more income is to permit more consumption. The purpose of money
is to consume stuff, and the purpose of a job is to acquire money. A
lifestyle driven by the imagined ‘need’ to acquire more stuff holds pro-
found implications when compared to a lifestyle in which the acquisi-
tion of stuff reaches some saturation point and people begin to choose
more leisure and less work – and thus become less prodigious in their
acquisition of material possessions.
We see here that the extent and composition of future consumption
is highly dependent on the degree to which individuals seek to emu-
late the beliefs and attitudes associated with contemporary ‘culture’ as
reflected in prevailing values and artifacts that dominate world media.
We come to feel this way by the belief system within which we are
embedded. Because it is all we know, we imagine that it is normal – nat-
ural, right. Veblen introduced the idea of ‘conspicuous consumption’ –
an activity that signaled to others the purposeful ostentation of the
rich. I wish to suggest that we are now in the grip of gratuitous consump-
tion. Unlike conspicuous consumption, gratuitous consumption serves
no useful purpose – it is completely unnecessary. Our current world
economic system rests on gratuitous consumption.

A few further reflections

The personality and structure of capitalism is necessarily governed by

the dominant voices in the design of those policies that have assured,
206 Daniel W. Bromley

over time, the well-being of first the merchants, then the industrial-
ists, and now the financiers. The design of the capitalist model is not
informed by a quest for efficiency, for efficacious resource allocation,
or for maximizing social welfare. Rather, the privilege and honor of
system design rests with those who have controlled the dominant
income and wealth positions in society. Norwegian capitalism differs
in so many profound ways from American capitalism that they are, in
fact, two distinct economic systems. Yet, they are both ‘capitalist’. The
practical significance of this is that if regulations are weak or absent,
do not blame how economics is taught. If workers are mistreated and
prevented from combining in the interest of compensation and work
conditions, do not blame how economics is taught. If income distribu-
tion in the United States is now the most extreme among industrial
countries, do not blame how economics is taught. If African economies
remain politically incoherent and stuck in low-level poverty, do not
blame how economics is taught.
There are many things wrong with mainstream economics. But those
flaws are quite incidental to the universal political commitment to glo-
bal capitalism. Economists are helpless in the face of political head-
winds that justify the widest possible scope for what they wish to call
‘free markets’. The insidious part emerges when we realize that much
mainstream economics is nothing but apologetics for the reigning
political Zeitgeist. Economists who challenge that spirit of the day find
it hard to get competitive grants. Invitations to conferences discussing
public policies stop arriving, and they soon find that conformity pays
large dividends.
As financial capitalism offers up the second worldwide catastrophe
in less than 80 years, individuals have a right to ask whether or not
this is reasonable. They also are justified in asking whether or not it is
necessary. As most of Africa remains stuck in poverty and economic
incoherence, individuals have a right to ask if this is reasonable – and is
it necessary. The answer, of course, is that both outcomes are unreason-
able and unnecessary.
Financial capitalism has shown itself to be as flawed as industrial
capitalism before it, and merchant capitalism before that. Notice that
the progression from merchants to industrialists to bankers represents
a process of accumulation of financial power in fewer and fewer hands.
Now that the financiers rule the world, the obvious question becomes:
who will be next? It shall not be the meek.
 Are We Trapped in an Obsolete Economic Order? 207

Notes
1. An earlier version was presented as the Helmholtz Lecture at Humboldt
University-Berlin, November 2009, and at the University of Geneva,
December 2009. I am grateful to Tyler DesRoches for discussions on an ear-
lier draft.
2. Europeans have a difficult time understanding the ruthless capitalism of the
United States. Citizens of the United States find European capitalism, with
its high taxes, universal health care, heavily subsidized university education,
and excellent mass transport, to be a puzzle. Both are ‘capitalist’ yet each
seems anomalous to citizens of the other.
3. These extremely talented and highly paid financial officials appear to have
presided over the worst financial crisis since the Great Depression. Could
they have done any worse at half their current level of compensation?
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Index
accumulation by dispossession,
119–20
Africa, 23, 109, 168, 192–4,
199–200, 206
Agarwal, Bina, 101
agriculture, 32, 52, 55–6, 58, 82,
86–7, 98, 106, 122–3, 124, 126, 178,
see also agriculture, organic; biofuel
agriculture, organic, 123, 124, 125
alternative economics, see heterodox
economics
American institutional economics, see
critical institutional economics
analogy, as an integrative approach,
30–3
Anthropocene, 7, 123
anthropology, 2, 13, 38, 39, 106
Arnold, Matthew, 195–6
Ayres, Robert, 16, 110
behavioral economics, 148, see also
experimental economics
Berger, Sebastian, 25
biodiversity, 91, 95, 98, 99, 106,
108, 160
biofuel (agrofuel), 83–8, 95, 99
biosphere, 7, 14, 19, 176, 177, 178
Boulding, Kenneth, 64, 182
Brazil, 97, 204
Bromley, Daniel, 23–4, 111, 163
capital, 16, 17, 19–20, 29, 51, 53, 54,
56–61, 63, 69, 72, 113, 116, 119,
127–46, 179, 181–2, 183, 184, 185,
195, 199–200, see also capitalism;
natural capital
capitalism, 4, 10, 17, 18, 23–4, 56,
69, 104, 112, 114, 125, 136–7, 139,
141–2, 144–5, 190–207, see also
capital; natural capital
Carnap, Rudolf, 33–4
Carnot, Sadi, 7
229
China, 48, 52, 78, 88, 184, 187, 190,
195, 196, 204
Clark, John Bates, 129, 134, 137–8
classical institutional economics, see
critical institutional economics
Clausius, Rudolf, 7
climate change, 7, 17, 21, 23, 54–5,
65, 88–91, 95, 98, 100, 106, 107,
123, 130, 145, 147–8, 153, 159, 160,
162, 163, 170
Coase, Ronald, 4, 25, 148
co-evolution, 2, 8, 13, 14, 20, 31, 32,
98, 161, see also evolution
colonialism, 2, 109, 120, 126,
192, 199
common property, 56, 126, 136, 187
Commons, John, 114, 193, 198–9,
201–3
community, and the economy, 4, 13,
14, 21–2, 25, 101, 118, 136, 168–70,
173–5, 183, 197
conflict, socio-environmental, 17–18,
80, 95–7, 99, 101–2, 104–5, 108,
110, see also environmentalism
consumerism, 29, 151, 161, 195, 201
contamination, see pollution
Costanza, Robert, 28, 127–8
cost-benefit analysis, 8, 14, 52, 107,
108, 114–15, 117, 124, 148–9, 152,
177, 188–9
costs, social and environmental, 4,
10–12, 25, 94–6, 107, 108, 119, 120,
125, 126, 148, 177, 181, 184, 189, see
also externalities
credit, 18–19, 22, 49, 51, 66–71, 79,
80, 104, 113–26, 173–4, 180, 185,
186, 195, see also debt
critical institutional economics, 2,
5, 6, 7–9, 10–13, 14, 20, 24, 25,
111–12, 118, 119, 125, compare new
institutional economics
Crutzen, Paul, 123
230 Index
Daly, Herman, 23, 27–8, 117, 128,
131–2, 140–1, 145, 163
Darwin, Charles, 20–1, 32, 155–61
Darwinism, 20–1, 32, 155–9, see also
Darwin, Charles; evolution
Dasgupta, Partha, 145, 150–1
Dawkins, Richard, 150
De Waal, Frans, 150
debt, 15, 48–50, 66–7, 70–4, 79–80,
89, 92, 95, 114–21, 126, 173, 180,
184, 185, 186, 187, see also credit
deforestation, 97–8, 110, 150, see also
forest
degrowth, 14, 23, 29, 106, 125
‘dematerialization’ thesis, 13, 95,
122, 178
democracy, 18, 24, 100, 101, 104, 106,
110, 151, 153, 162, 172, 180, 183,
188, 197–8
developing countries, 15, 23, 50, 73,
89, 96–9, 109, 120, 167–8, 177, 204,
see also development
development, socioeconomic, 1, 2,
4, 8, 14–15, 16, 18, 21, 32, 39, 56,
64, 70, 75, 87, 90, 99, 100, 104, 108,
118, 120–1, 123, 125, 144, 179, 187,
193, see also developing countries
Dewey, John, 34, 162
Dickens, Charles, 201
ecological crisis, see biodiversity;
climate change; forest; pollution
ecological debt, 98
ecological economics, 3, 4, 5, 6, 7–8,
10–11, 13–14, 15–16, 17–18, 19,
20, 22, 24, 26–32, 34–5, 37, 40–6,
94–6, 106, 108, 110, 111–12, 119,
125, 127–34, 139–45, 154, 158,
162–3, compare environmental
economics
ecologically unequal exchange, 17,
98, 109
Economics of Ecosystems and
Biodiversity environmentalism, The
(TEEB), 108, 128
Ecuador, 95, 96, 101–2
El Serafy, Salah, 140–1
Elster, Jon, 111
employment, 23, 48, 57, 89, 178,
183, 205
enclosure process, 56, 97, 163, 187
energy, 7, 8, 16–17, 19, 20, 23, 27,
38, 41, 52, 55–63, 64–6, 68, 70–2,
74–83, 85–6, 88, 91–2, 94, 95–6,
98, 104–6, 109, 112, 115, 117, 121,
123, 124, 130, 133, 142, 145, 155,
165, 179
Engels, Friedrich, 191
entropy, 3, 7, 8, 11, 23, 123, 124, 125,
155–6, 179, 180, 181
environmental economics
(neoclassical), 8, 28, 43, 44,
145, 149–53, 162, 163, compare
ecological economics
environmentalism, varieties of,
96–101, 102, 110, see also conflict,
socio-environmental
equilibrium, in economics, 1, 2, 3, 7,
9, 14, 16, 17, 23, 31, 52–3, 58, 128,
132, 134, 145, 148, 164, 166–7, 193
ethics in economics, see moral values
in economics
Europe, western, 48, 50, 66, 81–6, 105,
106, 109, 168–9, 192, 199, 200, 207
evolution, 2, 5, 6, 7–9, 11, 13–14, 18,
20–1, 32–3, 40, 46, 118, 125, 129,
133, 135, 142, 144, 150, 155–63,
201, see also co-evolution; Darwin,
Charles
evolutionary economics, 5, 6, 8, 9, 11,
20, 32, 135, 142, 144, 156–63
experimental economics, 3, 39, 53
externalities, 14, 52, 54, 94, 96, 103,
119, 142, 148, 165, 166, 168, see also
costs, social and environmental
Federal Reserve, 49, 50, 116
feminist economics, 4, 5, 6
financial crisis, 4, 7, 18–19, 22, 23,
48–50, 73, 74, 112, 115, 116–18,
138, 176, 185–7, 192, 193–9, 207
firm, 24, 51–3, 60, 158, 181, 184, 195
Fischer-Kowalski, Marina, 16, 106,
110, 111
Fisher, Irving, 128–9, 131–4, 187
forest, 31, 58, 81, 98, 100, 101, 103,
108, 178, 181
fossil fuels, 29, 55, 59, 61, 63, 66, 70,
72, 75–7, 79, 80, 86, 95, 104, 110,
120–2, 130, 131, 140, 144, 181

Foster, John Bellamy, 111
France, 23, 51, 81
freedom, 12, 24, 47, 162, 183, 191,
194–5, 197, 203
Friedman, Milton, 4, 183, 191, 194
fund/service, 13, 14, 15, 19–20, 23,
74, 79, 122, 130–1, 132, 133, 137,
compare stock/flows
Funtowicz, Silvio, 22
Galbraith, John Kenneth, 204
GDP, see Gross Domestic Product
Geddes, Patrick, 110
Georgescu-Roegen, Nicholas, 3, 5, 11,
16, 19, 22, 23, 25, 73, 74, 94, 111,
122, 129–31, 142, 145, 155–6
Gerber, Julien-François, 18, 96, 126
Germany, 46, 50, 81–2, 84, 200
Giampietro, Mario, 16
global warming, see climate change
Gowdy, John, 19–20, 111
Greenspan, Allen, 47–8, 51, 56
Gross Domestic Product (GDP), 48,
53, 57–63, 69, 82–3, 95, 104, 108,
177, 179, 188
growth, economic, 4, 8, 14, 15, 16,
17, 18, 20, 21, 22, 23, 25, 27, 48, 50,
52–63, 64, 67–70, 72, 73–80, 90–3,
95, 100, 104, 108–10, 112, 114–15,
117, 118, 120, 122, 123, 126, 132,
133, 134, 152, 168–9, 174–5, 176–89
Haberl, Helmut, 106, 110
Hanemann, Michael, 149
HANPP, see Human Appropriation of
Net Primary Production
Harvey, David, 119–20
Hayek, Friedrich von, 110, 129, 194
Heinsohn, Gunnar, 69, 112, 116, 126
Helm, Dieter, 150–1
heterodox economics, definition of,
1–5, see also critical institutional
economics; ecological economics;
feminist economics; integrated
heterodox economics; Marxian
economics; post Keynesian
economics
Higgs, Henry, 72
Hillel the Elder, 171
Hirsch, Fred, 152
Index 231
Hobbes, Thomas, 196–7
Hodgson, Geoffrey, 20–1, 111
Hogben, Lancelot, 110
Holling, Crawford Stanley, 31
Homo economicus, 4, 9, 21, 91,
168, 174
Hornborg, Alf, 111
Human Appropriation of Net Primary
Production (HANPP), 8, 96,
102, 104
human ecology, 8, 105, 143–4
Huxley, Thomas Henry, 150
ideology, 22, 31, 34, 38, 41, 66, 75, 92,
117, 134, 171, 194, 202–5
incommensurability of values, 8, 14,
18, 38, 42, 94, 107, 108, 144, 154
India, 78, 98, 99–100, 204
indicators, non monetary, 8, 13, 14,
17, 19, 83, 104, 124
industrial revolution, 2, 56, 59, 120,
121–2, 195, 198
inequality, social, 4, 9, 24, 118, 119,
120, 168, 182–3, 189, 195, 200
institutional economics, see critical
institutional economics; new
institutional economics
institutions, defined, 8–9
integrated heterodox economics, 5–7,
9–23, 26–39, 40, 45–6, 111–12, 125
integrative concepts, defined, 13–23,
37–9
interdisciplinarity, as an integrative
approach, 35–7
intergenerational issues, 4, 12, 70, 73,
94, 106, 107, 119, 126, 152–3
International Monetary Fund (IMF),
50, 118, 184–5, 187
Ireland, 48, 50, 81, 82, 85
Jacobs, Michael, 111, 163
Japan, 52, 61–2, 116
Jevons, Stanley, 3, 55, 95
Jones, Richard, 2
Joyce, Richard, 149
Kallis, Giorgos, 117
Kapp, Karl William, 5, 10–14, 25,
26–34, 36–9, 42, 45–6, 94, 106–7,
111, 119, 147, 151, 189
232 Index
Keynes, John Maynard, 3, 5, 6, 23, 24,
50, 104, 184, 186, see also Keynesian
economics; post Keynesian
economics
Keynesian economics, 5, 6, 50, 104,
184, see also Keynes, John Maynard
Khalil, Elias, 156
knowledge, system of, 13, 14, 21–2,
115, 170–5
Krall, Lisi, 19–20, 111
Krugman, Paul, 86
Kuhn, Thomas, 1, 27, 34
Kyoto Protocol, 75, 76
Lange, Oskar, 107
Latin America, 109
Leipert, Christian, 25
Leonard, Thomas, 170
levels of the economy, virtual, real,
real-real, 13, 14, 19, 94–5, 112, 115,
117, 124, 125
Locke, John, 196, 198
Mackie, John, 149
Macpherson, Crawford Brough, 196–8
mainstream economics, see
neoclassical economics
Mäler, Karl-Gören, 145
Malthus, Thomas Robert, 22, 54,
55, 63
mangrove, 98, 101–3
Marglin, Stephen, 21–2, 115
market failure, 10, 42, 94, 119, 148,
166–7, 204, see also costs, social and
environmental
Marshall, Alfred, 128
Martínez-Alier, Joan, 17, 19, 27, 111,
126, 163
Marx, Karl, 2, 3, 5, 6, 16, 20, 23, 31,
56, 114, 141, 145–6, 183, 191, 195,
197, 201, 202, see also Marxian
economics
Marxian economics, 5, 6, 20, 56, 141,
195, see also Marx, Karl
Max-Neef, Manfred, 34, 36, 111
Mayumi, Kozo, 16
Meadows, Donella, 92
mechanical thinking in economics,
1, 3, 7, 8, 9, 31, 117–18, compare
thermodynamics thinking in
economics
Mendes, Chico, 97
Menger, Carl, 3
metabolism, socioeconomic, 7, 13, 14,
16–17, 29, 64–6, 69, 70, 73–93, 94,
95, 103–6, 108–10, 123, 180
methodological individualism, 3, 4,
14, 107
methodological pluralism, 6, 14, 27
Mill, John Stuart, 22, 54, 119, 178
mining, 95, 97, 99, 100, 101, 107, 108,
120, 121
Mises, Ludwig von, 106–7, 194
monetary policies, 50–1, 67–73,
113–14, 116, 185–7
moral values in economics, 1, 14, 21,
25, 43, 96, 99, 106, 148–56, 159–63,
165, 191, 194
multi-criteria evaluation, 8, 14,
18, 108
Mumford, Lewis, 110
Myrdal, Gunnar, 111
Næss, Arne, 155
Narain, Sunita, 99–100
Naredo, José Manuel, 24, 68, 111
natural capital, 14, 19–20, 108,
127–45, 187, 188
neoclassical economics, 2–8, 14, 16,
18, 19, 21–2, 23, 24, 25, 28, 29, 31,
32, 35, 41, 44, 45, 48, 51, 52–5, 60,
61, 92, 108, 118–19, 125, 127–32,
134, 140, 145, 147–51, 153–4, 158,
160–1, 164–71, 173, 178–9, 204, 206
neo-institutional economics, see new
institutional economics
Neurath, Otto, 6, 33–4, 46, 94, 106–7,
109–10
new institutional economics
(neoclassical), 8, 148, compare
critical institutional economics
new resource economics, 30, 40–4,
see also environmental economics
Nigeria, 95, 97
Norgaard, Richard, 32, 111, 163
O’Connor, James, 111, 141
O’Hara, Phillip, 111

O’Neill, John, 46, 110, 111, 163
Obama, Barack, 49, 175
Odum, Howard, 16
old institutional economics, see
critical institutional economics
open system approach, 2, 6, 11, 12,
14, 94, 96, 111, 178
original institutional economics, see
critical institutional economics
orthodox economics, see neoclassical
economics
Ostrom, Elinor, 159, 163
Ostwald, Wilhelm, 110
Paavola, Jouni, 111, 163
paradigm change in economics, 1–7,
11, 14, 17, 21, 24, 125
Pareto optimality, 4, 14, 147, 164,
166–7
peak oil, 7, 16, 17, 18, 23, 73–80, 83,
88, 112, 115, 121–3, 124, 130, 145
Pigou, Arthur, 148, 204
planning, economic, 26, 106, 110
plantation, 96, 98, 120
Polanyi, Karl, 3, 144
political ecology, 17, 40, 94,
96–7, 108
political science, 38, 42, 43, 98
pollution, 7, 20, 23, 54, 88, 94, 95, 98,
101, 103, 110, 113, 117, 126, 148,
152, 154, 165, 166, 177, 180–1, 188
population growth, 23, 54, 55, 63,
64–5, 68, 76–7, 103–4, 108, 126,
133, 145, 179, 188, 204
possession, 13, 14, 18–19, 20, 69–70,
112–26, compare property
possessive individualism, 24, 196–8,
200, 202
post Keynesian economics, 5, 6, see
also Keynesian economics
post-normal science, 35, 42
poverty, 2, 7, 8, 17, 18, 23, 29, 47, 51,
79, 88, 89, 94, 96–102, 105, 107–8,
112, 115, 116–17, 118–21, 124, 126,
172, 174, 176–7, 179, 182–3, 190,
192, 193, 194, 199–200, 203, 206,
see also developing countries
Pratkanis, Anthony, 83
Prigogine, Ilya, 7
Index 233
private property, 14, 47, 51, 69, 70,
102, 118, 119, 126, 187, 189
privatization, 10, 118
property, 13, 14, 18–20, 69–70, 104,
105, 111–26, 135–43, 148, 163, 172,
187, 191, compare possession, see
also private property
psychology, 2, 31, 32, 36, 38–9, 42,
43, 44, 171
Quesnay, François, 5
radical economics, 5, see also critical
institutional economics; ecological
economics; feminist economics;
Marxian economics
Rae, John, 2
Rand, Ayn, 47–8, 51, 56
Ravetz, Jerome, 22
Rawls, John, 21
resources, biotic (or living, organic),
20, 121–3, 125, see also resources,
renewable
resources, mineral, 15, 18, 20, 99, 109,
110, 112, 121–3, 125, 126, 130, 140,
see also resources, nonrenewable
resources, natural (or environmental),
19–20, 29, 30, 40–4, 51, 59–61,
64, 66–74, 80, 93–6, 102, 104,
107–10, 112–13, 117, 120–3, 132–3,
140, 142, 148, 149, 152, 158, 163,
168, 177, 178–82, 187, 192, see
also resources, biotic; resources,
mineral; resources, nonrenewable;
resources, renewable
resources, nonrenewable (or
exhaustible), 15, 20, 25, 29,
121–3, 131, 133, 140, 181, see also
resources, mineral
resources, renewable, 15, 20, 71, 85,
121–2, 126, 131, 141, 181, see also
resources, biotic
Ricardo, David, 54
Robbins, Lionel, 46, 164
Robinson, Joan, 129, 132
Sachs, Ignacy, 111
Sagoff, Mark, 152, 163
Samuelson, Paul, 129
234 Index
Saro-Wiwa, Ken, 97
scarcity, 51, 53, 54, 73, 95, 106, 152,
164, 178, 180, 181, 187
Schrödinger, Erwin, 7, 155–6
Schumpeter, Joseph, 24, 27, 31, 38,
52, 53, 114, 190, 191
Scott, James, 126
Scott, Richard, 9
Sen, Amartya, 148, 191
Shannon, Claude, 156
Sieferle, Rolf Peter, 106
Sismondi, Jean de, 2
Smil, Vaclav, 16, 83
Smith, Adam, 1–2, 5, 22, 24, 83
‘social ecological economics’, 6,
11, 13, 25, 30, 40–4, 46, see also
integrated heterodox economics
social economics, 6, see also critical
institutional economics
socialist calculation debate, 94,
106–7
sociology, 33–4, 38, 39, 42, 43, 98,
108, 171
Soddy, Frederick, 66, 71–3, 95, 110,
117, 187
Söderbaum, Peter, 111, 163
Solow, Robert, 57–8, 129
Soto, Hernando de, 113, 118, 126
South, global, see developing
countries
South Africa, 200
Soviet Union, former, 15, 78, 190
Spain, 23, 51, 68, 81–2, 84, 94
Spash, Clive, 6, 11, 13, 44, 111, 152,
163
Sraffa, Piero, 5, 129
steady-state economy, 13, 14, 22–3,
27, 95, 131, 176–89
Steiger, Otto, 69–70, 112, 118, 126
Steppacher, Rolf, 18, 25, 69–70, 126
Stern, Nicholas, 170
stock/flow, 13, 14, 15, 18–20, 70,
74–5, 79–80, 121–2, 130–3, 137,
140, compare fund/service
Stoermer, Eugene, 123
subprime sector, 48, 49, 116,
173, 180
sustainability, 8, 14–24, 29, 35, 41,
64–92, 95, 108, 110, 115, 117, 121,
123–5, 127, 131, 140, 151, 155,
160–1, 169, 177, 180–1, 198, 204
Swaney, James, 111
Tawney, Richard, 196
taxation policies, 47–8, 49, 56, 90,
148, 181–3, 185, 187, 204, 207
technology, 8, 9, 18, 25, 31, 32, 53,
55, 57, 60–3, 64, 69, 75, 83–7, 90–1,
106, 112, 120–3, 132, 133, 135, 136,
150, 151, 180
thermodynamics thinking in
economics, 3, 7, 23, 29, 88,
118, 125, 155, 178–9, compare
mechanical thinking in
economics
trade, 50–2, 109, 120–1, 180–1,
183–5, 186, 187, 199–200
Tsuru, Shigeto, 111
United Kingdom, 45, 81–2, 85, 113,
150, 194, 196–8, 200
United States of America, 16,
28, 47–52, 57–8, 61–2, 77, 79,
86, 89, 94, 97, 98, 102, 105,
116, 147, 163, 168–9, 172, 183–4,
187–8, 194–6, 198, 200,
205–6, 207
unity of sciences, as an integrative
approach, 33–5
utilitarianism, 1, 2, 9, 13, 14, 21,
24, 28, 53, 107, 127, 138, 147–54,
183, 196
valuation, languages of, 17–18, 103,
107–10, 154
value pluralism, 13, 14, 17–18, 27,
45, 154
Vatn, Arild, 107, 111, 163
Veblen, Thorstein, 2–3, 5, 9, 19,
20, 22, 32, 114, 129, 134–9, 142,
145, 146, 157, 200–1, 205, see also
critical institutional economics
Vonnegut, Kurt, 83
wage, 57–9, 70, 135, 182–3,
184, 195
wage-labor, 4, 50, 119, 168, 195
Walras, Léon, 3, 24, 52, 145
 Index 235

Weaver, Warren, 156 Williamson, Oliver, 148

Weber, Max, 106–7, 203 Winter, Sidney, 157
Weisz, Helga, 16 World Bank, 86, 184–5
welfare theorems, 166–9
Whitehead, Alfred, 176, 189 Yunus, Muhammad, 174