Chapter 4: Ecological Economics

By Herman Daly and Joshua Farley

 Chapter Overview

 A Finite Planet
 The Laws of Thermodynamics
 Stock Flow Resources and Fund Service Resources
 Excludability and Rivalness
 Goods and Services provided by the sustaining System
 Finite Planet

 The economic system is
A subsystem of the Planet’s
Ecosystems. A big question
For Ecological Economics is
When is the economic
System too big? When is
enough enough? What
policies will be effective in keeping the economy within
its optimal size? This requires a clear understanding of
specific attributes of goods and services that the
economic system must allocate among alternative ends.
 We can’t grow
on like this…

 Finite supply of fossil fuels, soil, minerals, and water.
 Let’s face it – The earth is essentially a finite chunk of matter.
 Steady influx of sunlight.
 Proposition: Economic growth cleans the environment and
preserves ecosystems. (true or false?)
 Evidence: As U.S. economy developed over last 30 years our
water is cleaner and forest extent has expanded.
 Proposition: The economy cannot continue to grow indefinitely.
(true or false?)
 Evidence: At a continuous annual 1% growth rate the human
population would have a mass greater than the entire planet in
just over 3,000 years? (let’s do a cocktail napkin calculation)
Key Question: When does economic
growth become uneconomic?

 “We have finite supplies of energy, finite supplies of
raw materials, finite absorption capacities for out
wastes, and poorly understood but finite capacities
for ecosystems to provide a host of goods and
services essential for our survival. And evidence
suggests that we are reaching the limits with respect
to these resources. With continued growth in
production, the economic subsystem must
eventually overwhelm the capacity of the global
ecosystem to sustain it.”

 Can economic development grow indefinitely?

 The Laws of Thermodynamics

 Big names in Thermodynamics:
Sadi Carnot, James Joule, Herman
Helmoholtz, Rudolf Clausius.

Key Observation: Heat naturally

flows from hot place to cool place.

To get it to go the other way costs energy.

 1) Energy cannot be created or destroyed
 2) Entropy is always increasing
 Thermodynamics continued…
 Free Energy – The energy 
available to do work.
 Bound Energy – Energy in the
form of heat that cannot be
transferred to produce work.
 Entropy – Bound Energy in the
universe that is always
increasing.
 Heat is a form of Energy
 Question: Would you invest in a
revolutionary new automobile
designed to capture its own
exhaust and burn it again?
 Does Life violate the 2nd Law?
http://www.scientificamerican.com/article.cfm?id=how-nature-breaks-the-second-law

Question: If matter/energy

moves inexorably towards
greater disorder, how , then do
we explain life? Is life not a
spontaneous order that emerged
from the chaotic maelstrom that
was our early Planet?

Answer: The Earth is a closed but not an isolated system. We are

bathed continuously in low-entropy sunlight that allows for the
complexity and order of life to emerge and increase. Life does not
violate the 2nd law of thermodynamics.
 Entropy and Economics
 “If we accept the laws of thermodynamics, the entire nature
of the economic system is entropic. The First Law of
Thermodynamics tells us that we cannot make something
from nothing (there is no such thing as a free lunch ), and
hence that all human production must ultimately be based
on resources provided by nature. The 2nd law tell us that
whatever resources we transform into something useful
must disintegrate, decay, fall apart, or dissipate into
something useless, returning in the form of waste to the
sustaining system that generated the resource.”
 Question: If humanity presently burns 400 years of ancient
sunshine (fossil fuels) every year – what kind of percentage
change in throughput would we have to make in order to
live within the energy supply provided by the sun?
 “Factors of Production”

 Conventional economics uses the phrase “Factors of
Production” to describe the inputs to the production
process that are necessary to produce outputs. Typically
these are Capital, Labor, and Land.

 Ecological Economics uses the terms ‘Stock-Flow’

resources and ‘Fund-Service’ resources to distinguish
between two fundamentally different types of resources.

 Example: Pizza Making (dough, sauce, cheese, pepperoni

are Stock-Flow [material cause]; whereas the oven, cook,
and kitchen are Fund-Service [efficient cause])
 Stock-Flow Resources

 Are materially transformed into what they produce
(material cause)
 Can be used at virtually any rate desired (subject to the
availability of the fund-service resources required for their
transformation), and their productivity is measured by the
number of physical units of the product into which they are
transformed.
 Can be stockpiled.
 Are used up, not worn out.
 Examples: Fossil Fuels, Pizzas, Copper
 Fund-Service Resources

 Are not materially transformed into what they produce
(efficient cause)
 Can only be used at a given rate, and their productivity is
measured as output per unit of time.
 Cannot be stockpiled.
 Are worn out, not used up.
 Examples: Ricardian Land, Sunlight, Labor
 Food for thought…

 Think about a specific ecosystem –
Make a list of three stock-flow resources
provided by (or found in) that ecosystem, and
three fund-service resources. (Note: You will
have to be very specific about the use of each
resource. For example, drinking water is a
stock-flow whereas water for swimming is a
fund service).
 Excludabilty and Rivalness

 Excludability – A legal concept that when enforced allows
an owner to prevent others from using his or her asset. An
excludable resource is one whose ownership allows the
owner to use it while simultaneously denying other the
privilege.

 Rivalness – An inherent characteristic of certain resources

whereby consumption or use by one person reduces the
amount available for everyone else. A rival resource is one
whose use by one person precludes use by another person.
A nonrival resource is one whose use by one person does
not effect its use by another.
Let’s play classification…
 Rival or Nonrival?
Market or Non-Market?

Excludable or Non-excludable?

Fresh Water Fresh Air Pizza Gold Gasoline Land

A bicycle A Car A weed whacker A computer

A house A farm Pollination by Bees A bowl of cherries

True or False?: 1) All stock-flow resources are rival.

2) All fund-service goods are nonrival.
3) All Ecosystem service are non-excludable.
 Natural Capital
Goods and Services provided by the Sustaining System

 1) Fossil Fuels 2) Minerals
 3) Water 4) Land
 5) Solar Energy 6) Renewable resources
 7) Ecosystem Services 8) Waste Absorption

 Question: How do the concepts of rivalness,

excludability, entropy, fund-service, and stock-flow
apply to these eight important types of natural
capital?
 Big Ideas to Remember

 Laws of Thermodynamics Fund-Service Resource
 1) Conservation of Stock-Flow Resource
Matter/energy Rival & nonrival resources
 2) The law of increasing Eightfold classification of
Entropy

Excludable and nonexcludable resources