October 23, 2017

Rewriting economics (LSE version)

The ‘dismal science’ of economics has developed in isolation from other sciences, in particular those that concern the living world. As a result, what is necessary to preserve our planet’s life processes is all too likely to be ‘irrational’ from an economic standpoint. The choice is simple: to rewrite economics, or to destroy the natural world.

This was the second of six lectures delivered to the LSE‘s Environmental Initiatives Network, held in association with the Schumacher Society. It also summarises and updates an earlier lecture given in The Old Theatre on 30 January 2002.

Published in The Journal of the LSE Environmental Initiatives Network Vol. 7, February 2003.

Economists identify their discipline with the study of its subject matter rather than with what it is trying to achieve. As the highly respected economist Kenneth Boulding notes, it studies “prices, quantities of commodities exchanged, produced and consumed, interest rates, taxes and tariffs, etc.”

The assumption is that it is only by studying the interrelationships between these variables that one can determine how to achieve the economic goal modern society has set itself – the creation of ‘wealth’ (material wealth) and hence the growth of Gross Domestic Product in terms of which it is measured.

For economists, behaviour that contributes towards the achievement of this goal is judged to be ‘economic’ and thereby ‘rational’ while that which even slightly reduces economic growth in the interest of satisfying social, ecological and moral imperatives, is judged to be ‘uneconomic’ and hence ‘irrational’. Unfortunately, as I shall try to show in this short article, the most important things we need to do today if we are to have any future at all on this planet are ‘uneconomic’ and hence ‘irrational’.

Let us see why modern economics produces such a distorted view of our relationship with the real world in which we live. The main reason is that modern economics has been developed in total isolation from the disciplines that seek to understand the living world. The late Professor Nicholas Georgescu-Roegen, a dissident economist at Vanderbilt University, shows how

“the economic process is depicted as a circular diagram, a pendulum movement between production and consumption within a completely closed system.”

Hence, by the way, the nature and the narrowness of the range of variables that make up the legitimate subject matter of modern economics.

As a result, Georgescu-Roegen observes the fact that there is “a continuous mutual influence between the economic process and the natural world that carries no weight with the standard economists”. In Marx’s famous diagram of production, too, the economic process is represented as “a completely circular and self-sustaining affair”.

If we consider this “continuous and mutual influence between the economic process and our physical environment” we are forced to face the seriously negative effects of the “economic process”. We can see it, in effect as giving rise to a new organisation of matter: the technosphere or world of human artefacts, or the surrogate world that is rapidly supplanting the ecosphere or world of living things, or the real world on which we ultimately depend for our welfare, and for our very survival. Unfortunately, in terms of modern economics, this systematic annihilation of the real world does not qualify as a cost.

For Professor Samuelson, author of the best-known university textbook on economics, the reason is that to acquire value, things must “become scarce”. On the other hand,

“the more there is of a commodity the less the relative desirability of its last little unit becomes, even though its total usefulness always grows as we get more of the commodity. So, it is obvious why a large amount of water has a low price, or why air is actually a free good, despite its vast usefulness. The many units pull down the market value of all the units.”

In other words, neither our forests nor our soils, anymore than our wetlands, our rivers, our seas, or our coral reefs, have any value, until the economic process has so degraded and destroyed them that they become sufficiently scarce to acquire an economic value. But even when this has occurred it does not mean that what still remains of the natural world is now protected from the destructiveness of economic growth. Thus US agriculture is the most destructive in the world and agricultural land in the USA is being compacted, eroded, desertified and salinised, at an incredible rate.

However, it is uneconomic and thereby ‘irrational’ to return to sounder and hence more ecological farming practices. As we are told by economists Earl R. Swanson and Earl 0. Heady, “an adequate soil conservation” plan that would meet “soil loss tolerance levels for 20 years into the future” would increase “annualised private net farm income by only one per cent”.

This is too little for there are “more profitable investments that can be made in the farm business”. So in purely economic terms, and that is what counts for economists who study the economic process in a void, and for governments and in particular corporations that, within the context of the global economy, are increasingly in control, soil conservation is not economic, and is hence totally ‘irrational’.

Lester Brown, founder of the Worldwatch Institute, points to the dreadful problems that face Africa today. But for him there is little we can do about them until we desist from applying to them solutions that are based on “narrow economic criteria such as the rate of return on investments”. To continue doing so, Brown cautions, “is, in effect to write Africa off”.

Of course, economists will tell us that social and ecological costs can be internalised. For Professor Herman Daly, the father of Ecological Economics, this can be a reasonable procedure “when the externalities involved are of a minor nature”. But once it is “the very capacity of the Earth to support life that must be internalised, it is time to restructure basic concepts and start with a different set of abstractions that can embrace what was previously external.”

This, of course, means little less than rewriting economics in the light of a unified theory of the living world.


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