Leadership, Social Capital and Incentives Promote Successful Fisheries

A paper in Nature by Nicolas Gutierrez et al. carries out a meta-analysis of the literature on fisheries management. 130 fisheries are included. The aim was to test whether community co-management can promote sustainability as argued by Ostrom and others. They coded success of the fishery according to number of social, ecological and economic outcomes achieved and also counted the number of various "co-management" attributes associated with each fishery. The results look almost too good to be true:



Above a threshold level of co-management attributes there is a tight linear relationship between the number of success attributes and the number of co-management attributes. It looks almost too good to be true but would be a strong vindication for Ostrom.

Early Bird Registration Extended to 29th January

If you are interested in sustainability and cities you might be interested in attending this conference to be held next month in Melbourne. Early bird registration has been extended. Visit the conference website to register.

LEGS

I attended a meeting of the LEGS Platform who are funding my visit to Lund. LEGS stands for Long-term Energy Growth and Sustainability.

As the website says: "It a new platform for inter-faculty and interdisciplinary knowledge creation and exchange at LUSEM (Lund University School of Economics and Management). It was founded March 2009 on the basis of a strategic decision by the vice chancellor of Lund University. The focus is on economic aspects of energy systems, which face the challenge of accomplishing large technological shifts in order to mitigate harmful climate change. To encourage shifts towards sustainability it is necessary not only to promote technical innovations, but also to learn more about firms under competitive pressure and new institutional settings."

The program is funded at a rate of SEK 1 million per year but also is a basis for seeking further grants. They are interested in bringing more visitors to Lund. We discussed various ways of raising visibility including conferences and workshops and I suggested starting a working paper series.

Paper Accepted at Economics Letters

My paper Derivation of the Hicks, or Direct, Elasticity of Substitution from the Input Distance Function has been accepted for publication at Economics Letters. As I've mentioned before, the elasticity of substitution measures the difficulty of replacing one input to production such as energy with another such as capital, usually under the assumption that the level of output must be kept constant. This parameter is very important in the study of long-run economic growth and sustainability, the costs of climate policy, among many other areas. The traditional elasticity of substitution measured the percent change in the ratio of input quantities for a given percentage change in the ratio of their prices (or marginal products) holding output constant. The formula was derived using the production function. My paper derives the elasticity from the more general input distance function, which can have multiple outputs and can accommodate possibly inefficient production. I also show that "distance" or technical efficiency must be held constant when calculating the elasticity. This is an additional condition which was classically implicitly assumed to be the case rather than explicitly stated. This new derivation helps complete the classification of many different related elasticities.

ReSPecT

My immediate reaction to the RSPT proposal was to wonder if it will ever get through parliament as proposed and to suggest that at least the hurdle rate needed to be substantially raised. Today in the Australian, Henry Ergas discusses the "Brown tax" named after E. Carey Brown. I'll admit that I hadn't heard that term before. A quick search found a reference to this in a working paper by Ben Smith on the topic. Obviously, I need to study this further. But, would we want the ideal tax described by Ergas, where the government becomes a coinvestor on each mining project? After divesting assets such as Telstra in Australia partly because they were seen as too risky why would we want to take on the risk of investing in the mining industry?

Note that the "resource rents" referred to in this context are not the same thing as the resource rents referred to in the capital theory of sustainability. Some sort of royalty payment would seem to be the way to try to capture those, I think.

Also, see the very interesting commentary from Peter Martin.

The original proposal for the resource rent tax actually being discussed is in a paper in the Economic Journal by Ross Garnaut and Anthony Clunies-Ross in 1975.

The Ecological Economics Critique

This is a long section of the paper. Again if you have suggestions for additional references etc. please let me know. Either you'll get your paper cited or your help acknowledged in the final paper.

Introduction

Ecological economists derive their view of the role of energy in economic growth from the biophysical foundations of the economy discussed above. While mainstream growth theory focuses on institutional limits to growth (e.g. Solow, 1978, 1993, 1997), ecological economists tend instead to focus on the material basis of the economy (e.g. Georgescu-Roegen, 1971; Costanza, 1980; Cleveland et al., 1984; Hall et al., 1986, 2001, 2003; Murphy and Hall, 2010). This view is shared by some geographers (e.g. Smil, 1994) and economic historians (e.g. Wrigley, 1988; Allen, 2009) who believe that energy plays a crucial role in economic growth, as well as being an important factor in explaining the industrial revolution. Ecological economic criticism of mainstream growth theory focuses on limits to substitution between capital and resources and limits to technological progress as ways of mitigating the scarcity of resources. If these two processes are limited then limited resources or the degradation of ecosystem services may restrict growth.

A prominent tradition in ecological economics is represented by biophysical models where energy is considered to be a primary factor of production and the only such primary factor. In this view, all value is derived from the action of energy that is directed by capital and labor. Payments to capital and labor represent a rent appropriated by the owners of these inputs but stemming from the productivity of energy (Costanza, 1980; Hall et al., 1986; Gever et al., 1986; Kaufmann, 1987). The flow of energy in the economy is the service of the reservoirs of fossil fuels and the sun, which represent a primary input in our terminology. In some biophysical economic models (e.g. Gever et al., 1986) geological constraints fix the rate of energy extraction so that the flow rather than the stock can be considered a primary input. On the other hand, capital and labor are treated as flows of capital consumption and labor services rather than as stocks, in other words, they are considered as intermediate inputs that are created and maintained by the primary input of energy and flows of matter. The value of the flows is computed in terms of the embodied energy use associated with them. Prices of commodities should then be determined by embodied energy cost (Hannon, 1973b) – a normative energy theory of value - or are actually correlated with energy cost (Costanza, 1980) - a positive energy theory of value (Common, 1995). This theory – like the Marxian paradigm - must then explain how labor, capital etc. end up receiving part of the surplus. Energy surplus must be appropriated by the owners of labor, capital, and land with the actual distribution of the surplus depending on the relative bargaining power of the different social classes and foreign suppliers of fuel (Kaufmann, 1987). If we assume that there are constant returns to scale, the production process of the economy as a whole can be represented by a Leontief input-output model with a single primary factor of production (Hannon, 1973a; Stern, 1999).

Cleveland et al. (1984), Hall et al. (1986), Hall et al. (2003), and Ayres and Warr (2005) among others argue that either energy, properly accounted for, accounts for most apparent productivity growth, or that technological change is real but innovations increase productivity by allowing the use of more energy. Therefore, increased energy use is the main or only cause of economic growth.

It is difficult to argue for this pure energy model as matter and organization or information are obviously important as discussed above. For example, the quality of resources such as oil reservoirs is critical in determining the energy required to extract and process fuels and other intermediate resource flows, which increases as the quality of resources declines over time with depletion. Changing resource quality results in changes in the embodied energy of the intermediate inputs indicating that human directed energy must be substituted for the services provided autonomously by nature. Odum’s emergy approach (see Brown and Herendeen, 1996; see also the framework developed by Costanza, 1980) also includes embodied solar and geological energy in indicators of total embodied energy. Thus changing resource quality is represented by changes in the embodied energy of the primary resources themselves. But this approach seems too reductionist. Other services provided by nature such as nutrient recycling, the provision of clean air and water, pollination, the climate system, and so on should also then be accounted for. These ecosystem services provide the conditions that make economic production—and life itself—possible.

A more sophisticated approach with a variety of different types of factors of production was already formulated by Georgescu-Roegen (1971). The neo-Ricardian models developed by Perrings (1987) and O'Connor (1993) also allow any number of inputs while complying with thermodynamic and mass-balance constraints.

Resource Quality and Economic Output
EROI – energy return on investment – is the ratio of useful energy produced by a method of energy supply for the amount of energy invested in extracting that energy. Lower quality energy sources have lower EROIs. Biomass usually produces less useful energy relative to the human energies expended in growing, harvesting, and processing the crop than and oilfield produces relative to the energy expended in discovering, extracting, and processing the oil. Larger, shallower oilfields typically have higher EROIs than smaller, deeper fields, and the EROI of an oilfield declines over time as pressure falls due to the extraction of oil.

Biophysical economists argue that the more energy that is required to extract energy the less energy is available for other uses and the poorer an economy will be. In pre-industrial societies most workers were engaged in growing food and collecting fuel. Only a small fraction of society could use the small energy surplus generated to produce other products and services. In other words, as energy needs to be used with other inputs, most of societies’ factors of production were directed to energy extraction. In this view, the increase in EROI allowed by the switch from biomass to fossil fuels enabled the industrial revolution and the period of modern economic growth that followed it (Hall et al., 1986).

Declining EROI would threaten not just growth but also the level of output of the economy and, therefore, sustainability. Murphy and Hall (2010) document EROI for many energy sources, arguing that it is declining over time. Wind and direct solar energy have more favorable EROIs than biomass fuels but worse than most fossil fuels. However, unlike fossil fuels, the EROI of these energy sources tends to improve over time with innovation (Kubiszewski et al., 2010). But current usage is very small and Murphy and Hall argue that there is no prospect of them replacing a large part of fossil fuel usage in the near future.

Declining EROI could be mitigated by substituting other inputs for energy or by improving the efficiency with which energy is used. However, biophysical economics argues that both these processes have limits.


Limits to Substitution
There is more than one type of substitution between inputs and, therefore, there is more than one reason why substitution may be limited. There can be substitution within a category of similar production inputs – for example between different fuels - and between different categories of inputs – for example between energy and machines. There is also a distinction to be made between substitution at the micro level - for example in a single engineering process or in a single firm – and at the macro level – in the economy as a whole. Finally, some types of substitution that are possible in a single country are not possible globally.

Solow (1997) argues that within category substitution, and in particular the substitution of renewable for nonrenewable resources, is most important and seems to assume that new substitutes will always be found. It is possible that the elasticity of substitution for within category types of substitution exceeds unity. The long run pattern of energy use in industrial economies has been dominated by the substitutions from wood and waterpower to coal, oil, natural gas and primary electricity (Hall et al., 1986; Smil, 1991). In large part the industrial revolution was enabled by the use of fossil fuels that freed economic activity from reliance on low power and variable but renewable solar energy. When fossil fuels are economically exhausted the next stage of energy development may see a return to solar energy, albeit captured in a more sophisticated way, rather than a move to a new substitute. Meta-analysis of existing studies of interfuel substitution (Stern, 2009) suggests that the long-run elasticity of substitution between coal and natural gas is greater than unity and that that between oil and electricity is less than unity with the other interfuel elasticities insignificantly different from unity. But the values of the elasticities are very sensitive to the estimator used and more research is needed.

Ecological economists emphasize the importance of limits to the between category type of substitution, and in particular, the substitution of manufactured capital for resources including energy (Costanza and Daly, 1992). A number of arguments for limited substitutability have been put forward, with the main ones that are relevant to the energy case described below. The terms “substitute” and “complement” have been used very loosely in this literature as elsewhere in economics (Stern, 2007). Instead, we can classify inputs as good or poor substitutes as measured by the Hicks or Direct Elasticity of Substitution. This elasticity reflects movement along an isoquant of the production function holding all other inputs constant. It can take values from zero (Leontief function) to infinity (linear production). Good and poor substitutes have elasticities of substitution of greater than and less than unity, respectively. A meta-analysis of the existing empirical literature finds that the elasticity of substitution between capital and energy is less than unity (Koetse et al., 2008).

Thermodynamic limits to substitution. Thermodynamic limits to substitution are easily identified for individual processes by an energy-materials analysis that defines the fundamental limitations of transforming materials into different thermodynamic states and on the use of energy to achieve that transformation (Ruth, 1993; Islam, 1985). It might be argued that standard production functions can account for mass balance and thermodynamic constraints if the elasticity of substitution between capital and resources is less than or equal to unity so that resources are essential. The Cobb-Douglas production function has the essentiality condition. Given positive non-energy inputs, output is only zero when the energy input is zero, and strictly positive otherwise. This at least accounts for the fact that some amount of energy and materials are required to produce goods and services. But when the elasticity of substitution is unity this “essential” amount can be infinitesimal if sufficient manufactured capital is applied. Therefore, this condition does not satisfy thermodynamic considerations throughout the domain of the function. Thermodynamic limits can be approximated by a production function with an elasticity of substitution significantly below unity.

Material cause and efficient cause. Georgescu-Roegen’s (1976) fund-flow model describes production as a transformation process in which a flow of materials, energy, and information – the material cause - is transformed by two agents of transformation, human labor and manufactured capital – the efficient cause that effect the transformation. Thus, Daly (1991) argues that adding to the stock of pulp mills (efficient cause) does not produce an increase in pulp unless there also is the wood fiber (material cause) to feed them. From this perspective, capital should be a poor substitute for energy and other resources.

Mainstream economists think about this question differently. First, they argue that though additional capital cannot conjure wood fibers out of thin air, more capital and “smarter” capital can be used with each amount of wood fibers to produce more sophisticated and valuable products, and that this is the relevant substitution between capital and resources. Thermodynamic limits only apply to production of specific physical products. There is then no limit to the potential value of product created through sophisticated manipulation using larger amounts of capital (van den Bergh, 1999).


Physical interdependence and macroeconomic and global limits to substitution. The construction, operation, and maintenance of tools, machines, and factories require a flow of materials and energy. Similarly, the humans that direct manufactured capital consume energy and materials in the form of food, water, and other subsistence needs. Thus, producing more of the “substitute” for energy - manufactured capital - requires more of the thing that it is supposed to substitute for. This again limits potential substitutability.

Ecological economists argue that production functions used in growth models do not account for this interdependence, and thus assume a degree of substitutability that does not exist (Georgescu-Roegen, 1979; Cleveland et al., 1984; Ayres and Nair, 1984; Kaufmann, 1992; Daly, 1997, Stern, 1997). But we must distinguish between micro-and macro-applications of production functions. Substitution seems to be fundamentally more constrained at the macro-level of analysis than at the micro-level (Stern, 1997). For example, home insulation directly substitutes for heating fuel within the household sector. But that insulation requires fuel to manufacture, so for the economy as a whole the net substitution of insulation for fuel is less than that indicated by an analysis of the household sector in isolation from the rest of the economy. Put another way, the aggregate of potential energy savings at the macroeconomic level is less than the sum of the savings one would calculate by adding the savings from sectoral-level analyses that do not account for the indirect costs.

















In the figure, the curve E = f(M) is a neoclassical isoquant for a constant level of output, where E is energy, and M materials, including the material embodied in capital. The indirect energy costs of materials are represented by g(M). For simplicity, the diagram unrealistically assumes that no materials are required in the extraction or capture of energy. Addition of direct and indirect energy costs results in the "net" isoquant E = h(M). Generalizing for material costs to energy extraction suggests that there are eventually decreasing returns to all factors at the macro level and therefore the socially efficient region of the aggregate production function does not include areas with extreme factor ratios. This idea may be supported by a meta-analysis of the capital-energy elasticity of substitution that shows a lower elasticity for more aggregated sectors than for less aggregated sectors (Koetse et al., 2008).

Additionally, at the global level, countries such as Kuwait, Nauru, or Norway can deplete their natural resources and invest in manufactured capital offshore through the financial markets. But this route to substituting manufactured capital for natural capital is clearly not possible for the world as a whole.

Limits to Technological Change
But, as discussed above, if substitution possibilities are limited, sustainability may be possible if technological change is resource augmenting and unlimited in scope. This argument would be more convincing if technological change were really something different from substitution. This is not really the case. The neoclassical approach assumes that an infinite number of efficient techniques coexist at any one point in time. Substitution occurs among these techniques. Changes in technology occur when new more efficient techniques are developed. However, these new techniques really represent the substitution of knowledge for the other factors of production. The knowledge is embodied in improved capital goods and more skilled workers and managers, all of which require energy, materials, and ecosystem services to produce and maintain. Thus, however sophisticated the workers and machinery become, there are still thermodynamic restrictions on the extent to which energy and material flows can be reduced.

The difference between knowledge and other forms of capital is that knowledge is non-rival in use – in other words the same idea can be used simultaneously in different locations and production processes without any reduction in the productivity of the knowledge in the different locations and processes. This means that there are constant returns to the application of knowledge in production while other inputs experience diminishing returns. But knowledge must be used in conjunction with the other inputs such as energy. The productivity of knowledge is still determined by the available quantities of those inputs.

References
Allen, R. C. (2009) The British Industrial Revolution in Global Perspective, Cambridge University Press.
Ayres, R. and I. Nair (1984). “Thermodynamics and economics.” Physics Today 35: 62-71.
Ayres, R. U. and B. Warr (2005) Accounting for growth: the role of physical work, Structural Change and Economic Dynamics 16: 181-209.
Brown, M. T. and R. A. Herendeen (1996). “Embodied energy analysis and emergy analysis: a comparative view.” Ecological Economics 19: 219-236.
Cleveland, C. J., R. Costanza, C. A. S. Hall, and R. K. Kaufmann (1984). “Energy and the U.S. economy: A biophysical perspective.” Science 225: 890-897.
Common, M. S. (1995). Sustainability and Policy: Limits to Economics. Melbourne: Cambridge University Press.
Costanza, R. (1980). “Embodied energy and economic valuation.” Science 210: 1219-1224.
Costanza, R. and Daly, H. E. (1992). “Natural capital and sustainable development.” Conservation Biology, 6: 37-46.
Daly, H. E. (1991). “Elements of an environmental macroeconomics.” In: R. Costanza (ed.), Ecological Economics New York: Oxford University Press. pp. 32-46.
Daly, H. E. (1997). “Georgescu-Roegen versus Solow/Stiglitz.” Ecological Economics 22: 261-266.
Georgescu-Roegen N. (1971) The Entropy Law and the Economic Process, Harvard University Press, Cambridge MA.
Georgescu-Roegen, N. (1976). Energy and Economic Myths. New York: Pergamon.
Georgescu-Roegen, N. (1979). “Energy and matter in mankind's technological circuit.” Journal of Business Administration 10: 107-127.
Gever, J., R. K. Kaufmann, D. Skole, and C. Vörösmarty (1986). Beyond Oil: The Threat to Food and Fuel in the Coming Decades. Cambridge, MA: Ballinger.
Hall, C. A. S., C. J. Cleveland, and R. K. Kaufmann (1986). Energy and Resource Quality: The Ecology of the Economic Process. New York: Wiley Interscience.
Hall, C. A. S., D. Lindenberger, R. Kümmel, T. Kroeger, and W. Eichhorn (2001). “The need to reintegrate the natural sciences and economics.” BioScience 51: 663-673.
Hall, C. A. S., P. Tharakan, J. Hallock, C. Cleveland, and M. Jefferson (2003). “Hydrocarbons and the evolution of human culture.” Nature 426: 318-322.
Islam, S. (1985). “Effects of an essential input on isoquants and substitution elasticities.” Energy Economics 7: 194-196.
Kaufmann, R. K. (1987). “Biophysical and Marxist economics: learning from each other.” Ecological Modelling 38: 91-105.
Kaufmann, R. K. (1992). “A biophysical analysis of the energy/real GDP ratio: implications for substitution and technical change.” Ecological Economics 6: 35-56.
Koetse, M. J., H. L. F. de Groot, and R. J. G. M. Florax (2008) Capital-energy substitution and shifts in factor demand: A meta-analysis, Energy Economics 30: 2236–2251.
Kubiszewski, I., C. J. Cleveland, and P. K. Endres. 2010. Meta-analysis of net energy return for wind power systems. Renewable Energy 35: 218–225.
Murphy D. J. and C. A. S. Hall (2010) Year in review – EROI or energy return on (energy) invested, Annals of the New York Academy of Sciences 1185: 102-118.
O'Connor, M. P. (1993). “Entropic irreversibility and uncontrolled technological change in the economy and environment.” Journal of Evolutionary Economics 34: 285-315.
Perrings, C. A. (1987). Economy and Environment: A Theoretical Essay on the Interdependence of Economic and Environmental Systems. Cambridge: Cambridge University Press.
Ruth, M. (1993). Integrating Economics, Ecology, and Thermodynamics. Dordecht: Kluwer Academic.
Smil, V. (1991). General Energetics Energy in the Biosphere and Civilization. John Wiley, New York.
Smil, V. (1994) Energy In World History, Westview Press.
Solow, R. M. (1978). “Resources and economic growth.” American Economist 22: 5-11.
Solow, R. M. (1993). “An almost practical step toward sustainability.” Resources Policy 19: 162-172.
Solow, R. M. (1997). “Reply: Georgescu-Roegen versus Solow/Stiglitz.” Ecological Economics 22: 267-268.
Stern, D. I. (1997). “Limits to substitution and irreversibility in production and consumption: a neoclassical interpretation of ecological economics.” Ecological Economics, 21: 197-215.
Stern, D. I. (1999). “Is energy cost an accurate indicator of natural resource quality?” Ecological Economics 31: 381-394.
Stern, D. I. (2007) The elasticity of substitution, the capital-energy controversy, and sustainability, in: J. D. Erickson and J. M. Gowdy (eds.) Frontiers In Ecological Economic Theory And Application, Edward Elgar, Cheltenham, 331-352.
van den Bergh, J. C.J. M. (1999). “Materials, capital, direct/indirect substitution, and mass balance production functions.” Land Economics 75 (4): 547-561.
Wrigley, E. A. (1988) Continuity, Chance, and Change: The Character of the Industrial Revolution in England, Cambridge University Press, Cambridge.

Neoclassical Growth Models with Resources and Technical Change

Another installment. I'm more uncertain about whether I'm getting the story right here. So comments are even more welcome. I've had none so far :(


Growth Models with Resources and Technical Change

In addition to substitution of capital for resources, technological change might permit growth or at least constant consumption in the face of a finite resource base. Stiglitz (1974a) showed that in a Cobb Douglas framework with exogenous technical progress that consumption will grow over time if the rate of technological change divided by the discount rate is greater than the output elasticity of resources.

Growing total factor productivity obviously makes sustainability technically easier to achieve and sustainability may be possible even with an elasticity of substitution of less than one. Once again, technical feasibility does not guarantee sustainability. Depending on preferences for current versus future consumption, current depletion may as a result be faster (Smulders, 2005). This result is related to the Khazzoom-Brookes postulate or rebound effect discussed below. As noted above, due to externalities in knowledge production there may be too little innovation in an endogenous growth world. As a result, depletion of a non-renewable resource is nonoptimal, but this rate could be either too fast or too slow.

Recent work (e.g. Aghion and Howitt, 1998; Barbier, 1999; Scholz and Ziemes, 1999; Groth and Schou, 2002; Grimaud and Roug, 2003; Di Maria and Valente, 2008) exploits endogenous growth theories to analyze capital–non-renewable resource economies. Initial work by Aghion and Howitt (1998) finds that an AK type model with essential nonrenewable resources cannot allow for unbounded growth in consumption while a Schumpetarian type model can. A Schumpetarian model with a renewable resource that affects utility directly can allow unlimited growth, but only under unlikely assumptions. But if the renewable resources do not affect utility, continued growth would be easier than in the non-renewable case. Smulders (1999) provides a survey of earlier endogenous growth work and Smulders and de Nooij (2003) and Di Maria and Valente (2008) provide references to the more recent literature. An aim of much of this literature is to determine whether, and under what circumstances, technical progress is effective in ensuring sustained consumption (Bretschger, 2005). A general finding is that the rate of resource augmenting progress must be strictly positive and at least equal to the discount rate to obtain non-declining consumption in the long run (Di Maria and Valente, 2008).

Tahvonen and Salo (2001) develop a model economy with both renewable and non-renewable energy resources that is both very general and more realistic than the earlier neoclassical literature (e.g. Solow, 1974). The models have extraction costs for fossil fuels and production costs for renewable energy resources, which also rise as cheaper sources are exploited first. The model can incorporate no technological change, exogenous technical change, and learning by doing, a form of endogenous technical change. They assume that technical knowledge in extraction increases proportionally to extraction and that technical knowledge in final production is proportional to the capital stock. The optimal development of such an economy appears to mimic history much more effectively than other neoclassical models based on the Solow-Stiglitz capital-non-renewable resource model. The economy passes through pre-industrial, industrial, and post-industrial eras as the use of fossil fuels first rises and then falls and capital is accumulated. The price of nonrenewables first falls and then rises.

References
Aghion, P. and P. Howitt (1998). Endogenous Growth Theory. : Cambridge, MA: MIT Press.
Barbier, E.B. (1999), ‘Endogenous growth and natural resource scarcity’, Environmental and Resource Economics 14: 51–74.
Bretschger, L. (2005), ‘Economics of technological change and the natural environment: how effective are innovations as a remedy for resource scarcity?’ Ecological Economics 54: 148–163.
di Maria, C. and S. Valente (2008) Hicks meets Hotelling: the direction of technical change in capital–resource economies, Environment and Development Economics 13: 691–717.
Grimaud, A. and L. Roug (2003), ‘Non-renewable resources and growth with vertical innovations: optimum, equilibrium and economic policy’, Journal of Environmental Economics and Management 45: 433–453.
Groth, C. and P. Schou (2002), ‘Can non-renewable resources alleviate the knife-edge character of endogenous growth?’ Oxford Economic Papers 54: 386–411.
Scholz, C. and G. Ziemes (1999), ‘Exhaustible resources, monopolistic competition, and endogenous growth’, Environmental and Resource Economics 13: 169–185.
Smulders, S. (1999). “Endogenous growth theory and the environment.” in J. C. J. M. van den Bergh (ed.), Handbook of Environmental and Resource Economics, Edward Elgar, Cheltenham, 89-108.
Smulders, S. (2005). “Endogenous technical change, natural resources and growth.” In: R. Ayres, D. Simpson, and M. Toman (eds.), Scarcity and Growth in the New Millennium. Washington, DC: Resources for the Future.
Smulders, S. and M. de Nooij (2003). “The impact of energy conservation on technology and economic growth.” Resource and Energy Economics, 25: 59–79.
Solow, R. M. (1974). “Intergenerational equity and exhaustible resources.” Review of Economic Studies, Symposium on the Economics of Exhaustible Resources: 29-46.
Stiglitz, J. E. (1974a). “Growth with exhaustible natural resources: efficient and optimal growth paths.” Review of Economic Studies, Symposium on the Economics of Exhaustible Resources: 123-138.
Tahvonen, O. and S. Salo (2001). “Economic growth and transitions between renewable and nonrenewable energy resources.” European Economic Review 45: 1379-1398.

Review of Prosperity without Growth

Here is a draft of my review to be published in Ecological Economics of Prosperity without Growth:


Prosperity without Growth: Economics for a Finite Planet

By Tim Jackson, Earthscan, London, 2009.

Reviewed by David I. Stern

Usually, I find myself disagreeing with advocates of zero economic growth (defined as non-increasing GDP). First, a large part of the world’s population remains poor by any objective standard and second, I think they have the wrong end of the stick. If the reason that we are concerned about growth is its impacts on the environment we should control resource use and then let the economy determine the optimal level of output within the constraints that are set. And controlling resource use, hard as that has proven to be, is still likely to be both politically and practically an easier goal than somehow directly controlling growth. So, I was a little surprised to find myself agreeing with quite a lot of what Tim Jackson writes in Prosperity without Growth. Jackson is Economics Commissioner for the UK’s Sustainable Development Commission and Professor of Sustainable Development at the University of Surrey.

Jackson draws parallels between the global financial crisis and the looming ecological crisis. Anglophone (and some continental European) economies artificially boosted consumption in recent years by promoting very lax credit standards and low interest rates. Borrowing from the future to fund today’s fun. This irresponsibility, which met its denouement in the credit crunch is matched by the irresponsibility of borrowing resources and assimilative capacity from the future to fund today’s economic growth. In the case of mineral resources and even fossil fuels we could argue that we are developing the technology with which to “pay back” our borrowings but no such argument can be made on biodiversity and habitat loss and the build up of carbon in the atmosphere.

Jackson then reviews the lack of impact of income on national happiness after subsistence needs are met and asks whether growth is still necessary in order to maintain prosperity. Would a zero growth economy have rising unemployment as technology continues to advance (assuming technology does still advance and as implicitly assumed by Jackson in the main text that GDP is produced by a Cobb-Douglas function of capital and labor)? Such an economy will require less and less labor if wages rise. Either wages have to be constant or average hours worked would have to decline. Such an economy could be a utopia or a dystopia depending on which of these dominates and how the reduction in work hours is distributed. Following the lead of Peter Victor (2008), Jackson advocates some regulation of working hours. But, if we restrict the use of natural resources and resources are not good substitutes for capital and labor, as Jackson himself proposes in the Appendix, labor-augmenting technical change (on its own) in fact becomes rather futile (Jackson assumes technological change augments all inputs equally). This is because adding more effective labor to fixed resources has limited results when labor isn’t a substitute for resources. There is then no increasing labor productivity problem to solve. And if resources are good substitutes for labor then there really isn’t a problem with growth per se. Controlling the use of resources would have limited impact on growth and limiting growth would be the wrong focus.

Jackson also highlights the “myth of decoupling”. Though there have been improvements in the energy and resource intensity of GDP in many economies over time, in very few economies have these gains been more rapid than economic growth. Therefore, global energy and resource use and carbon emissions have continued to rise. Decoupling or environmental Kuznets curve effects are the exception rather than the rule. The rebound effect means that a focus on improving environmental efficiency will reduce impacts by less than one would naively think. Neither is there salvation in the service sector – most services are still fairly energy intensive in both their production and consumption. But, in order to achieve the ambitious goal of stabilizing atmospheric concentrations of carbon dioxide at 450ppm by 2050, global carbon intensity will have to decline by an unprecedented 7% per annum from now till then if population and income grow as expected under business as usual scenarios. Put another way, carbon intensity will have to improve 21 fold in the next 40 years. Jackson believes that that is more than can reasonably be achieved and, therefore, growth must come to an end.

Unfortunately, Jackson misinterprets the estimates of the cost of climate policy generated by computable general equilibrium (CGE) models, writing: “The Stern Review famously argued that “the annual costs of achieving stabilization… are around 1 per cent of global GDP.” After mentioning some other estimates he writes: “Though all these numbers look rather small, there’s something very confusing about cost estimates like these: they are already about the same order of magnitude as the difference between a growing economy and a non-growing economy. So if these costs really represent an annual hit of around 2-3 per cent of GDP they would essentially already wipe out growth” (83-84). It is hard to believe, but CGE models actually state that climate policies would cause GDP to be lower by 2-3% in 2050 than it would otherwise be rather than grow at 2-3% less each year. An economy that grows at 2% less each year has GDP that is 54% lower after 40 years.

This is actually a central point. Prosperity without Growth argues that decarbonization with growth is too hard. Therefore, growth must halt. But leading mainstream economics policy models state that the costs of climate policy are very low and, therefore, there is no incompatibility between growth and decarbonization. I suspect that the truth is somewhere in the middle. Moderate cuts in emissions (20-30%) are likely to be very cheap. But once efficiency and fuel-switching options are exhausted the switch to solar and nuclear energy may have much higher costs. Reviewing the parameter values in CGE models, I think that they may overestimate the ease with which consumers can substitute away from fossil-fuel intensive goods and services.
On the other hand, as Jackson points out, growth as we know it looks set to continue the trend to higher resource prices that we saw leading up to the record oil prices of mid-2008. Can business as usual growth continue anyway in the face of rising resource scarcity?

The book is an easy read and despite my disagreements on some points has plenty of substance. There is also much more in this book – discussions of consumerism and governance for example – than I can cover in this review. Jackson rounds off the book with a set of specific policy proposals and a vision of the transition to sustainability. The policy proposals (presumably directed at developed economies such as the United Kingdom) are:

Establishing the limits: caps on emissions and resource use and targets for reduction; green tax reform; support for ecological transition in developing economies.

I wholeheartedly agree with all these suggestions.

Fixing the economic model: Here Jackson proposes a mix of changes to the practice of economics – green accounting and developing an “ecological macro-economics” – and practical measures like investment in green infrastructure and new financial regulation such as the Tobin tax and increasing bank reserve ratios.

Of course, I think ecological macro-economics should be encouraged but I am less enthusiastic about green accounting – more data on the state of the environment is of course valuable but aggregating that data into the national accounts using monetary valuation can give us false indications about sustainability (see Stern, 1997). 100% reserve banking appears to be favored by some ecological economists but is a complete non-starter as it literally means that banks cannot make loans. These are then money warehouses rather than financial intermediaries. Outlawing short-selling and imposing the Tobin tax are likely to make financial systems less efficient. But we should look at limiting the size of financial institutions and regulating credit more tightly again.

Changing the social logic: Policies on working time, inequality, “measuring capabilities”, strengthening social capital, and dismantling consumerism.

If reduced growth in a resource-constrained economy does lead to reduced labor demand we may need new policies to address increasing inequality. Not all societies and individuals will prefer the approaches advocated by Jackson. Limiting employment hours along French lines would drive the more entrepreneurial into self-employment perhaps increasing inequality further. On the other hand, competition for status probably really does result in “positional externalities”. But incentives are more appropriate than blunt one-size fits all regulation.

In conclusion, I think that we should not treat this book as a necessarily correct diagnosis of our predicament and prescription for our future. But it does provide a very thought-provoking research and policy agenda for ecological economists who understand the size of the challenges we face.

References
Stern D. I. (1997) The capital theory approach to sustainability: a critical appraisal, Journal of Economic Issues 31, 145-173.

Victor P. (2008) Managing without Growth: Slower by Design, not Disaster, Edward Elgar, Cheltenham.

Collapse

I have been reading Collapse, Jared Diamond's account of the collapses of several past civilizations - Easter Island, the Maya, the Anasazi, and the Greenland Norse settlement prominent among them - and discussions of environmental stresses and sustainability issues in modern societies. Included is some original research of his with a coauthor on the factors affecting success or failure in the Pacific Islands. He also discusses a few cultures which adapted and moved back from the brink, including Tokugawa Japan, the New Guinea Highlands, Tikopia and medieval Iceland. In the case of Tikopia success involved the wiping out of two of the clans by the one surviving clans while in Iceland severe desertification occurred in the uplands before things stabilized. So success is relative.

My preconception was that he would be overly deterministic about the role of environmental degradation in these stories. But that isn't the case. In fact, for an economist things seem a bit too open ended. He tries to explain these examples by a five factor theory but I can summarize in fewer points, I think.

Societies tend to overshoot their carrying capacity when either they experience long periods of favorable climate (e.g. Greenland) or move into new areas where they misperceive the carrying capacity even in the short-run (e.g. Iceland). In the latter case environmental degradation results causing a fall in carrying capacity. In the former a change in climate for the worse is the cause in fall in carrying capacity. What happens next depends on the fragility of the environment and the rigidity of institutions. A more fragile environment (e.g. Easter Island vs sustainable example) or more rigid institutions increases the likelihood of collapse. For example, the Greenlanders seem to have eaten no fish for inexplicable reasons and otherwise seem to have tried to maintain European style agriculture rather than adopt ideas from the native Americans (they did hunt seals but not all types). Rulers need to show their people that they can provide for them to legitimate their rule as well as compete with rival rulers. It might make more sense to try to maintain the current system at continuing environmental cost until it finally collapses rather than admit that it has failed. At the same time temples (Maya) or statues (Easter Island) tend to get bigger and bigger.

We can certainly see the same symptoms in our world today. Rulers seek legitimacy by maintaining economic growth. There is a fear of accepting even small reductions in GDP in order to protect the climate. And conservative attitudes in institutions prevail. The Greenlanders didn't want to be like the Inuit, while conservative Americans don't want to be like the French or Swedish today. As institutional economists long-ago noted technology changes faster than institutions do.