posted on 21 January 2017
Written by John Lounsbury
A common view of some is that the relationship between economics and the environment is that environmental considerations are "externalities" for economic systems. In other words, effects produced by economic activity in the environment result from a limited overlap between the economic "system" and the environment, such as the diagram shown (from Giddings, Hopewood and O'Brien):
The diagram above is adopted by some to describe the fields of enivonmental economics and environmental science. EnviromentalScience.org describes their discipline:
This seems a reasonable description. But the accompanying diagram indicates a lack of understanding of the scope of the field.
Giddings, Hopewood and O'Brien (Environment, Economy and Society: Fitting Them Together into Sustainable Deveopment, Sustainable Development, Vol 10, p. 187-196, 2002) point out the logical shortcomings of the traditional concept above, and suggest a more correct way of conceptualizing the relationships:
The importance of recognizing that all of society is a subset of functions within the environment is that society cannot violate the proven physical laws of the physical world (actually universe, but we will return to that thought later). Likewise, the economy exists totally within society so economics must also obey the same physical laws.
Steve Keen has argued that the forgotten parameter in economics is energy. Whereas economists develop models and theories based on labor and capital as the components of production, energy should also be explicitly defined as separate and co-variant with labor and capital. Keen argues that failure to do so has led economists to propose models and theories which violate the fundamental laws of our environment, the Laws of Thermodynamics.
A good discussion is found at Boundless.com, which includes the following statements of the three Laws of Thermodynamics:
The discussion of systems and closed system boundaries at Boundless.com will be helpful for those who want to dig a little deeper.
Thermodynamics and Economics
Steve Keen has identified the crises of conflict in economics as occuring in five phases:
His argument is that the common economic modeling assumptions of the last couple of centuries violate the laws of thermodynamics which can be restated to have the following consequences:
The violations endemic in economic theory and modeling is that outputs can be increased directly one-to-one by increasing inputs violates the laws of thermodynamics. The ratio is less than one-to-one, the amount of energy successfully used depending on the exact process (some more efficient than others, but none fully using all the energy for production).
The correctly nested diagram above is actually incomplete. As man (hopefully) continues to expand human activity into the solar system it will become increasingly important to consider a broader definition of systems, as illustrated:
The global environment is contained within the solar system, all that within our galaxy, etc. The boundaries are not drawn in. Of course, we could also extend our array of all systems to include parallel universes, but let's wait until we at least get some idea of how the boundaries function as implicated in the diagram as shown above.
This issue is discussed in detail in Documentary Of The Week: Value And Thermodynamics.
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