I have argued in Chapter 1 that the growth economy is an unsustainable goal at the present historical moment, and that we need to shift our vision and practice to a different model—the sustainable or steady-state economy. But economists are a stubborn and resourceful lot, and economics as a discipline provides an array of arguments and techniques that can be used to avoid a rethinking of the fundamental model.
In recent years environmental concerns have been taken up by traditional economists, and their general theme of “internalization of externalities” certainly has its place. However, as a general solution to environmental problems it is proving inadequate. The increasing frequency of appeal to externalities is the clearest possible evidence that more and more relevant facts do not fit within the existing theoretical framework. When increasingly vital facts, including the very capacity of the earth to support life, have to be treated as “externalities,” then it is past time to change the basic framework of our thinking so that we can treat these critical issues internally and centrally. In this chapter we will take a look at some of the environmentally relevant contributions of traditional economics (mainly from microeconomics), as well as discuss the traditional absence of any environmental contribution from macroeconomics. Steps toward an environmental macroeconomics are suggested.
Environmental economics, as it is taught in universities and practiced in government agencies and development banks, is overwhelmingly microeconomics. The theoretical focus is on prices, and the big issue is how to internalize external environmental costs to arrive at prices that reflect full social marginal opportunity costs. Once prices are right, the environmental problem is “solved”—there is no macroeconomic dimension. Cost-benefit analysis in its various permutations is the major tool for estimating full-cost prices. So in practice as well as theory we remain within the domain of microeconomics. There are, of course, good reasons for environmental economics to be closely tied to microeconomics and it is not my intention to argue against that connection. Rather, I ask if there is not a neglected connection between the environment and macroeconomics.
A search through the indexes of three leading textbooks in macroeconomics1 reveals no entries under any of the following subjects: environment, natural resources, pollution, depletion. One of the three does have an entry under “resources,” but the discussion refers only to labor and capital, which, along with efficiency, are listed as the causes of growth in GNP. Natural resources are not mentioned. Evidently GNP growth is thought to be independent of natural resources. Is it really the case, as prominent textbook writers seem to think, that macroeconomics has nothing to do with the environment? What historically has impeded the development of an environmental macroeconomics? If there is no such thing as environmental macroeconomics, should there be? Do parts of it already exist? What needs to be added? What policy implications are visible?2
The reason that environmental macroeconomics is an empty box lies in what Thomas Kuhn calls a paradigm, and what Joseph Schumpeter more descriptively called a preanalytic vision (Schumpeter 1954). As Schumpeter emphasized, analysis has to start somewhere—there has to be something to analyze. That something is given by a preanalytic cognitive act that Schumpeter called “Vision.” One might say that such a vision is what the “right brain” supplies to the “left brain” for analysis. Whatever is omitted from the preanalytic vision cannot be recaptured by subsequent analysis. Schumpeter is worth quoting at length on this point:
In practice we all start our own research from the work of our predecessors, that is, we hardly ever start from scratch. But suppose we did start from scratch, what are the steps we should have to take? Obviously, in order to be able to posit to ourselves any problems at all, we should first have to visualize a distinct set of coherent phenomena as a worthwhile object of our analytic effort. In other words, analytic effort is of necessity preceded by a preanalytic cognitive act that supplies the raw material for the analytic effort. In this book, this preanalytic cognitive act will be called Vision. It is interesting to note that vision of this kind not only must precede historically the emergence of analytic effort in any field, but also may reenter the history of every established science each time somebody teaches us to see things in a light of which the source is not to be found in the facts, methods, and results of the pre-existing state of the science, [p. 41]
The vision of modern economics in general, and especially of macroeconomics, is the familiar circular flow diagram (see figure 2). The macroeconomy is seen as an isolated system (i.e., as having no exchanges of matter or energy with its environment) in which exchange value circulates between firms and households in a closed loop. What is “flowing in a circle” is variously referred to as production or consumption, but these have physical dimensions. The circular flow does not refer to materials recycling, which in any case could not be a completely closed loop and of course would require energy, which cannot be recycled at all. What is truly flowing in a circle can only be abstract exchange value—exchange value abstracted from the physical dimensions of the goods and factors that are being exchanged. Since an isolated system of abstract exchange value flowing in a circle has no dependence on an environment, there can be no problem of natural resource depletion, nor environmental pollution, nor any dependence of the macroeconomy on natural services, or indeed on anything at all outside itself (Daly 1985). Since analysis cannot supply what the preanalytic vision omits, it is only to be expected that macroeconomics texts would be silent on environment, natural resources, depletion and pollution.
Figure 2. The economy as an isolated system
Things are no better when we turn to the advanced chapters at the end of most macroeconomics texts, where the topic is growth theory. True to the preanalytic vision the aggregate production is written as Y = f(K,L), i.e., output is a function of capital and labor stocks. Resource flows (R) do not even enter! Nor is any waste output flow noted. And if occasionally R is stuck in the function along with K and L it makes little difference since the production function is almost always a multiplicative form, such as Cobb-Douglas, in which R can approach zero with Y constant if only we increase K or L in a compensatory fashion. Resources are seen as “necessary” for production, but the amount required can be as little as one likes!
What is needed is not ever more refined analysis of a faulty vision, but a new vision. This does not mean that everything built on the old vision will necessarily have to be scrapped, but fundamental changes are likely when the preanalytic vision is altered. The necessary change in vision is to picture the macroeconomy as an open subsystem of the finite natural ecosystem (environment), and not as an isolated circular flow of abstract exchange value, unconstrained by mass balance, entropy and finitude (see figure 3). The circular flow of exchange value is a useful abstraction for some purposes. It highlights issues of aggregate demand, unemployment, and inflation that were of interest to Keynes in his analysis of the Great Depression. But it casts an impenetrable shadow on all physical relationships between the macroeconomy and the environment. For Keynes, this shadow was not very important, but for us it is. Just as, for Keynes, Say’s law and the impossibility of a general glut cast an impenetrable shadow over the problem of the Great Depression, so now the very Keynesian categories that were revolutionary in their time are obstructing the analysis of the major problem of our time—namely, what is the proper scale of the macroeconomy relative to the ecosystem?
Once the macroeconomy is seen as an open subsystem, rather than an isolated system, the issue of its relation to its parent system (the environment) cannot be avoided. The obvious question is, How big should the subsystem be relative to the overall system?
The Environmental Macroeconomics of Optimal Scale
Just as the micro unit of the economy (firm or household) operates as part of a larger system (the aggregate or macroeconomy), so the aggregate economy is likewise a part of a larger system, the natural ecosystem. The macroeconomy is an open subsystem of the ecosystem and is totally dependent upon it, both as a source for inputs of low-entropy matter / energy and as a sink for outputs of high-entropy matter / energy. The physical exchanges crossing the boundary between the total ecological system and the economic subsystem constitute the subject matter of environmental macroeconomics. These flows are considered in terms of their scale or total volume relative to the ecosystem, not in terms of the price of one component of the total flow relative to another. Just as standard macroeconomics focuses on the volume of transactions rather than the relative prices of different items traded, so environmental macroeconomics focuses on the volume of exchanges that cross the boundary between system and subsystem, rather than the pricing and allocation of each part of the total flow within the human economy or even within the nonhuman part of the ecosystem.
Figure 3. The economy as an open subsystem of the ecosystem
Since the ecosystem remains constant in scale as the economy grows, it is inevitable that over time the economy becomes larger relative to the containing ecosystem. This transition from an “empty world” to a “full world” is depicted in figure 3. The point is that the evolution of the human economy has passed from an era in which man-made capital was the limiting factor in economic development to an era in which remaining natural capital is the limiting factor. This theme is developed in Part 2.
The term “scale” is shorthand for “the physical scale or size of the human presence in the ecosystem, as measured by population times per capita resource use.” Optimal allocation of a given scale of resource flow within the economy is one thing (a microeconomic problem). Optimal scale of the whole economy relative to the ecosystem is an entirely different problem (a macro-macro problem). The micro allocation problem is analagous to allocating optimally a given amount of weight in a boat. But once the best relative location of weight has been determined, there is still the question of the absolute amount of weight the boat should carry. This absolute optimal scale of load is recognized in the maritime institution of the Plimsoll line. When the watermark hits the Plimsoll line the boat is full, it has reached its safe carrying capacity. Of course, if the weight is badly allocated, the water line will touch the Plimsoll mark sooner. But eventually as the absolute load is increased, the watermark will reach the Plimsoll line even for a boat whose load is optimally allocated. Optimally loaded boats will still sink under too much weight—even though they may sink optimally! It should be clear that optimal allocation and optimal scale are quite distinct problems. The major task of environmental macroeconomics is to design an economic institution analogous to the Plimsoll mark—to keep the weight, the absolute scale, of the economy from sinking our biospheric ark.3
The market, of course, functions only within the economic subsystem, where it does only one thing: it solves the allocation problem by providing the necessary information and incentive. It does that one thing very well. What it does not do is solve the problems of optimal scale and of optimal distribution. The market’s inability to solve the problem of just distribution is widely recognized, but its similar inability to solve the problem of optimal or even sustainable scale is not as widely appreciated.4
An example of the confusion that can result from the nonrecognition of the independence of the scale issue from the question of allocation is provided by the following dilemma.5 Which puts more pressure on the environment, a high or a low discount rate? The usual answer is that a high discount rate is worse for the environment because it speeds the rate of depletion of nonrenewable resources and shortens the turnover and fallow periods in the exploitation of renewables. It shifts the allocation of capital and labor towards projects that exploit natural resources more intensively but it restricts the total number of projects undertaken. A low discount rate will permit more projects to be undertaken even while encouraging less intensive resource use for each project. The allocation effect of a high discount rate is to increase throughput, but the scale effect is to lower throughput. Which effect is stronger is hard to say, although one suspects that over the long run the scale effect will dominate. The resolution to the dilemma is to recognize that two independent policy goals require two independent policy instruments. We cannot serve both optimal scale and optimal allocation with the single policy instrument of the discount rate (Tinbergen 1952). The discount rate should be allowed to solve the allocation problem, within the confines of a solution to the scale problem provided by a presently nonexistent policy instrument, which we may for now call an “economic Plimsoll line,” that limits the scale of the throughput.
Economists have recognized the independence of the goals of efficient allocation and just distribution and are in general agreement that it is better to let prices serve efficiency, and to serve equity with income redistribution policies. Proper scale is a third, independent policy goal and requires a third policy instrument. This latter point has not yet been accepted by economists, but its logic is parallel to the logic underlying the separation of allocation and distribution. In pricing factors of production and distributing profits the market does, of course, influence the distribution of income. Providing incentive requires some ability to alter the distribution of income in the interests of efficiency. The point is that the market’s criterion for distributing income is to provide an incentive for efficient allocation, not to attain justice. And in any case, historical conditions of property ownership are major determinants of income distribution and have little to do with either efficiency or justice. These two values can conflict, and the market does not automatically resolve this conflict. The point to be added is that there are not just two, but three, values in conflict: allocation (efficiency), distribution (justice), and scale (sustainability).
Microeconomics has not discovered in the price system any built-in tendency to grow only up to the scale of aggregate resource use that is optimal (or even merely sustainable) in its demands on the biosphere. Optimal scale, like distributive justice, full employment, or price level stability, is a macroeconomic goal. And it is a goal that is likely to conflict with the other macroeconomic goals. The traditional solution to unemployment is growth in production, which means a larger scale. Frequently the solution to inflation is also thought to be growth in real output, and a larger scale. And most of all, the issue of distributive justice is “finessed” by the claim that aggregate growth will do more for the poor than redistributive measures. Conventional macroeconomic goals tend to conflict, and certainly optimal scale will conflict with any goal that requires further growth once the optimum has been reached.
Scale has a maximum limit defined either by the regenerative or absorptive capacity of the ecosystem, whichever is less. However, the maximum scale is not likely to be the optimal scale. Two concepts of optimal scale can be distinguished, both formalisms at this stage, but important for clarity.
1. The anthropocentric optimum. The rule is to expand scale (i.e., grow) to the point at which the marginal benefit to human beings of additional man-made physical capital is just equal to the marginal cost to human beings of sacrificed natural capital. All nonhuman species and their habitats are valued only instrumentally according to their capacity to satisfy human wants. Their intrinsic value (capacity to enjoy their own lives) is assumed to be zero.
2. The biocentric optimum. Other species and their habitats are preserved beyond the point necessary to avoid ecological collapse or cumulative decline, and beyond the point of maximum instrumental convenience, out of a recognition that other species have intrinsic value independent of their instrumental value to human beings. The biocentric optimal scale of the human niche would therefore be smaller than the anthropocentric optimum.
The definition of sustainable development does not specify which concept of optimum scale to use. It is consistent with any scale that is not above the maximum. Sustainability is probably the characteristic of optimal scale on which there is most consensus. It is a necessary, but not sufficient, condition for optimal scale.
Policy Outruns Theory:
Tradeable Permits as a Forced Separation
of Allocation, Distribution, and Scale
The tradeable pollution permits scheme, explained below, is a beautiful example of the independence and proper relationship among allocation, distribution, and scale. Consider step by step what this policy requires in practice.
First we must create a limited number of rights to pollute. The aggregate or total amount of pollution corresponding to these rights is determined to be within the absorptive capacity of the airshed or watershed in question. That is to say, the scale impact is limited to a level judged to be ecologically sustainable—an economic Plimsoll line must be drawn as the very first step. Far from ignoring scale, this policy requires that the issue of sustainable or optimal scale be settled at the beginning. It may be done on the basis of a carrying capacity estimate, a safe minimum standards estimate, or a cost-benefit study, but some limit to total pollution must be set.
Second, the limited number of rights corresponding to the chosen scale must be distributed initially to different people. Perhaps equally to citizens, or to firms, or perhaps collectively as public property then to be auctioned or sold by the government to individuals. But there must be an initial distribution before there can be any allocation and reallocation by trading.
Only in third place, after having made social decisions regarding an ecologically sustainable scale and an ethically just distribution, are we in a position to allow reallocation among individuals through markets in the interests of efficiency. A separation between allocation and scale requires that the total quantity of permits be fixed, but that the price at which the permits trade be free to vary. If the total quantity were determined by a willingness-to-pay study that also gave a shadow price as well as an aggregate quantity, then the neoclassical economist who wants to avoid separating allocation and scale must insist that trading take place at the calculated shadow price. Otherwise there will be a separation between allocation and scale. In practice, the price is always free to vary, clearly indicating that the pragmatic, operational solution has been to separate allocation and scale.
It is clear that scale is not determined by prices, but by a social decision reflecting ecological limits. Distribution is not determined by prices, but by a social decision reflecting a just distribution of the newly created assets. Subject to these social decisions, individualistic trading in the market is then able to allocate the scarce rights efficiently. For some reason economists have analyzed the tradeable pollution permits scheme almost entirely in relation to the command and control allocative schemes. They have indeed shown it to be superior to command and control in terms of allocative efficiency. But with all the emphasis on allocation the critical role of scale went unnoticed, and the role of distribution, while certainly noticed, was not sufficiently emphasized. Tradeable permits have been considered the individualistic “free market” solution, without emphasizing that this market is free only after having been firmly and collectively fixed within scale and distributive limits.
The greens (environmentalists), too, have shown considerable misunderstanding of this scheme, condemning it as “giving away licenses to pollute.” The point is that this scheme limits the total scale of pollution, need not give away anything but can sell the rights for public revenue, yet allows reallocation among individuals in the interest of efficiency. Some greens complain that under this scheme the rich have an advantage. The rich always have an advantage, but does this scheme increase or decrease the preexisting advantage of the rich? It could do either, it all depends on the initial distribution of ownership of the new assets, and not on the fact that they are tradeable.
The usual way for economists to deal with the scale issue, when forced to think about it at all, is to try to subsume it under allocation, claiming that if we just get prices right there will be no scale problem. Of course, when the scale of the economy was small, then the right price for nonscarce environmental services was zero. Economists reason that when these services become scarce it is simply necessary to find the right positive price and everything will be efficiently allocated. It is true that pricing newly scarce resources is necessary to solve the allocation problem. The mistake is to assume that it therefore solves the scale problem as well. A small scale with a lot of zero prices for environmental services is quite a different state of the world from a large scale with a lot of positive prices for those previously free environmental services. In both cases “prices are right” and allocation is efficient. But it still makes sense to ask whether people are better off in the first or second case. The difference is a matter of scale.
The neoclassical economist would reply that such a question is easily answered. If the larger scale exists, it was obviously chosen by individuals in numerous micro decisions in which they were willing to pay the marginal environmental costs of growing to the larger scale because they judged them to be less than the marginal benefits. Of course, the individuals’ judgment could be biased by “externalities,” but “right prices” means that these have all been internalized in prices.
The price of a commodity reflects the value of the next-best alternative commodity to which the factors embodied in the commodity in question could have been allocated. In practice, nature is excluded from the world of commodities whose opportunity costs are measured by market prices. Prices do not balance marginal ecosystem services sacrificed against marginal social benefit of a larger population or greater per capita resource use (i.e., larger scale). This balance requires calculation and imposition of shadow prices that value the in natura use of all resources in terms commensurate with the customary pecuniary exchange valuation of commodities. This view requires heroic assumptions about our knowledge of the external costs resulting from ecosystem disruption, and how these costs are imputed to the micro decisions that gave rise to them. The ecosystem is under no obligation to respond to increasing stress by sacrificing its services in order of their increasing importance to us, conveniently giving economists a “well-behaved” marginal cost function. Discontinuities, threshholds, and complex webs of interdependence make a mockery of the idea that we can nicely balance smoothly increasing ecosystem costs with the diminishing marginal utility of production at the macro level. The notion that systemic vital costs of collective behavior (greenhouse effect, ozone depletion) are best dealt with by pretending that every individual could and should, on the basis of assumed perfect knowledge, decide his or her own willingness to pay to avoid the loss of such services, is not an idea that comes easily to the unprejudiced mind. It requires years of indoctrination in “methodological individualism.”
The distribution and scale questions, like the allocation question, are economic in that they involve costs and benefits. But the dimensions in which costs and benefits are defined are different in the three cases. Allocative prices are not even relevant to estimating the costs and benefits of scale expansion, just as they are not relevant to estimating the costs and benefits of a step towards a more equal distribution of income or wealth. We have three independent optima requiring three independent policy instruments. In each case an optimum is formally defined by the equality of rising costs and falling benefits at the margin. But the definitions and measures of costs and benefits in each of the three cases are different because the problems being solved are different. The relative price of shoes and bicycles is instrumental in allocating resources efficiently between shoes and bicycles, but is clearly not instrumental for deciding the proper range of inequality in wealth or income, nor for deciding how many people consuming how much per capita of natural resources is sustainable.
Distribution and scale involve relationships with the poor, the future, and other species that are fundamentally social in nature rather than individual. Homo economicus as the self-contained atom of methodological individualism, or as the pure social being of collectivist theory, are both severe abstractions. Our concrete experience is that of “persons in community.” We are individual persons, but our very individual identity is defined by the quality of our social relations. Our relations are not just external, they are also internal, that is, the nature of the related entities (ourselves in this case) changes when relations among them changes. We are related not only by a nexus of individual willingnesses to pay for different things, but also by relations of trusteeship for the poor, the future, and other species. The attempt to abstract from these concrete relations of trusteeship and reduce everything to a question of individual willingness to pay is a distortion of our concrete experience as persons in community, an example of A. N. Whitehead’s “fallacy of misplaced concreteness.”6
The prices that measure the opportunity costs of reallocation are unrelated to measures of the opportunity costs of redistribution or of a change in scale. Any tradeoff among the three goals (e.g., an improvement in distribution in exchange for a worsening in scale or allocation, or more unequal distribution in exchange for sharper incentives seen as instrumental to more efficient allocation) involves an ethical judgment about the quality of our social relations rather than a willingness-to-pay calculation. The contrary view, that this choice among basic social goals and the quality of social relations that help to define us as persons should be made on the basis of individual willingness to pay, just as the tradeoff between chewing gum and shoelaces is made, seems to be dominant in economics today and is part of the retrograde modern reduction of all ethical choice to the level of personal tastes weighted by income.
It is instructive to consider the historical attempt of the Scholastic economists to subsume distribution under allocation (or more likely they were subsuming allocation under distribution—at any rate they did not make the distinction). This was the famous “just price” doctrine of the Middle Ages, which has been totally rejected in economic theory, although it stubbornly survives in the politics of minimum wages, farm price supports, water, and electric power subsidies, and so on. However, we do not as a general rule try to internalize the external cost of distributive injustice into market prices. We reject the attempt to correct market prices for their unwanted effects on income distribution. Economists nowadays keep allocation and distribution quite separate, and argue for letting prices serve only efficiency, while serving justice with the separate policy of transfers of wealth through taxes and social programs. This follows Tinbergen’s dictum of equality of policy goals and instruments. The point is that just as we cannot subsume distribution under allocation, neither can we subsume scale under allocation.
Although the usual attempt is to subsume scale under allocation, a few economists have recently implicitly subsumed it under distribution.7 The argument is that excessive scale erodes carrying capacity and inflicts a cost on future generations. Since future generations are different people, this is a matter of distribution, not allocation. A sustainable scale is nothing other than an intergenerational distribution of the resource base that is fair to the future. This argument is raised against economists who subsume scale under allocation by arguing that intertemporal allocation via discounting the future is the rational (efficient) way to deal with provision for the future. The intergenerational discounting argument is circular because the discount rate, like other prices, is determined on the basis of some given distribution (intergenerational distribution of the resource base in this instance). To then use the discount rate to determine that same distribution between generations is circular. You have to have the distribution to get the discount rate, yet the discounting approach wants to use the discount rate to determine the intergenerational distribution—which is mistakenly called an intergenerational “allocation.”
I think that this critique of discounting is correct. But it should not be thought of as a way to subsume the scale problem entirely under the distribution problem. Although justice with respect to the future is certainly an important motivation behind sustainability as a goal, and excessive scale can indeed mean a loss of sustainability, that does not exhaust the question of optimal scale. Scale can become too large from the point of view of the present, even if it remains possible to pass on the too-large economy to the future forever. For example, we could take over the habitat of most other species, driving all nonessential species to extinction, and by careful self-discipline impose on ourselves a rigorous and costly management to compensate for the displaced self-managing natural systems. Scale could be too large even if sustainable. For this reason scale cannot be totally subsumed under distribution, although it must be admitted that scale issues do overlap with one part of distribution, the intergenerational part, to a considerable degree.
Although discussed in terms of pollution, the logic of tradeable permits extends to controlling depletion as well. It can be applied regionally, nationally, and even internationally, as with carbon emission permits to limit the greenhouse effect. It can even be applied to population control as in the tradeable birth quotas suggested by Kenneth Boulding (1964). In fact, to my knowledge, Boulding’s was the first clear exposition of the logic of the scheme, although applied to the least likely area of acceptance politically. The tradeable permits idea is truly a paradigm for many sensible policies, as well as by now a fact of experience that should be allowed to alter economic theory. Specifically, theory should recognize scale, along with allocation and distribution, as a fundamental part of the economic problem. If operationality (the congruence of abstract concepts with policy instruments) is a criterion for judging theories, then the theoretical separation of scale and allocation advocated here is superior to the neoclassical approach of lumping them together, because the latter requires nonoperational assumptions to save appearances of methodological individualism, while the former is already being accepted in the practical policy of tradeable permits.
How Big Is the Economy?
As long as the human economy was infinitesimal relative to the natural world, then sources and sinks could be considered infinite, and therefore not scarce. And if they are not scarce then they are safely abstracted from economics. There was no need to consider the larger system since it imposed no scarcities. This was a reasonable view at one time, but no longer. As Kenneth Boulding says, when something grows it gets bigger! The economy has gotten bigger, the ecosystem has not. How big has the economy become relative to the ecosystem?
Probably the best index of the scale of the human economy as a part of the biosphere is the percentage of human appropriation of the total world product of photosynthesis. Net primary production (NPP) is the amount of solar energy captured in photosynthesis by primary producers, less the energy used in their own growth and reproduction. NPP is thus the basic food resource for everything on earth not capable of photosynthesis. Vitousek et al. (1986) calculate that 25% of potential global (terrestrial and aquatic) NPP is now appropriated by human beings.8 If only terrestrial NPP is considered, the fraction rises to 40%. Taking the 25% figure for the entire world, it is apparent that two more doublings of the human scale will give 100%. Since this would mean zero energy left for all nonhuman and non-domesticated species, and since humans cannot survive without the services of ecosystems (which are made up of other species), it is clear that two more doublings of the human scale is an ecological impossibility, although arithmetically possible. Furthermore, the terrestrial figure of 40% is probably more relevant since we are unlikely to increase our take from the oceans very much. Total appropriation of the terrestrial NPP can occur in only a bit over one doubling time. Perhaps it is theoretically possible to increase the earth’s total photosynthetic capacity somewhat, but the actual trend of past economic growth is decidedly in the opposite direction.
Assuming a constant level of per capita resource consumption, the doubling time of the human scale would be equal to the doubling time of population, which is on the order of forty years. Of course, economic growth currently aims to increase the average per capita resource consumption and consequently to reduce the doubling time of the scale of the human presence below that implicit in the demographic rate of growth. The greenhouse effect, ozone layer depletion, and acid rain all constitute evidence that we have already gone beyond a prudent Plimsoll line for the scale of the macroeconomy.
Cowboy, Spaceman, or Bull in the China Shop?
If one starts from the vision of the economic process as an open subsystem of a closed finite total system, then the question of how big the subsystem should be relative to the total system is hard to avoid. How then have we managed to avoid it? In two ways: first, by viewing the economic subsystem as infinitesimally small relative to the total system, so that scale becomes irrelevant because it is negligible; second, by viewing the economy as coextensive with the total system. If the economy includes everything, then the issue of scale relative to a total system simply does not arise. These polar extremes correspond to Boulding’s colorful distinction between the “cowboy economy” and the “spaceman economy.” The cowboy of the infinite plains lives off of a linear throughput from source to sink, with no need to recycle anything. The spaceman in a small capsule lives off of tight material cycles and immediate feedbacks, all under total control and subservient to his needs. For the cowboy, scale is negligible; for the spaceman, scale is total. There is no material environment relative to which scale must be determined; there is no ecosystem, only economy. In each of these polar cases, the only problem is allocation. Scale is irrelevant.
It is only in the middle ground between the cowboy and the spaceman that the issue of scale does not get conflated with allocation. But, as Boulding realized, the middle ground happens to be where we are. Between the cowboy and spaceman economies is a whole range of larger and smaller “bull-in-the-china-shop economies” where scale is a major concern. We are not cowboys because the existing scale of the economy is far from negligible compared to the environment. But neither are we spacemen, because most of the matter / energy transformations of the ecosystem are not subject to human control either by prices or by central planning. In a finite system subject to the conservation of mass, the more that is brought under our economic control, the less remains under the spontaneous control of nature. As our exactions from and insertions back into the ecosystem increase in scale, the qualitative change induced in the ecosystem must also increase, for two reasons. The first is the first law of thermodynamics (conservation of matter / energy). The taking of matter and energy out of the ecosystem must disrupt the functioning of that system even if nothing is done to the matter and energy so removed. Its mere absence must have an effect. Likewise, the mere insertion of matter and energy into an ecosystem must disrupt the system into which it is newly added. This must be the case even without appealing to any qualitative degradation of the matter and energy thus relocated. The second reason is the second law of thermodynamics, which guarantees that the matter / energy exacted is qualitatively different from the matter / energy inserted. Low-entropy raw materials are taken out, high-entropy wastes are returned. This qualitative degradation of the matter / energy throughput, along with the purely quantitative dislocation of the same, induces changes in the ecosystem which to us are surprising and novel because our information and control system (prices) assumes nonscarcity (nondisruptability) of environmental source and sink functions. Economic calculation is about to be overwhelmed by novel, uncertain, and surprising feedbacks from an ecosystem that is excessively stressed by having to support too large an economic subsystem (Perrings 1987).
How big should the subsystem be relative to the total ecosystem? Certainly this, the question of optimal scale, is the big question for environmental macroeconomics. But since it is such a difficult question, and since we cannot go back to the cowboy economy, we have acquired a tendency to want to jump all the way to the spaceman economy and take total control of the spaceship earth. (The September 1989 special issue of Scientific American entitled “Managing Planet Earth” is representative of this thrust.) But, as environmentalist David Orr points out, God, Gaia, or Evolution was doing a nice job of managing the earth until the scale of the human population, economy, and technology got out of control. Planetary management implies that it is the planet that is at fault, not human numbers, greed, arrogance, ignorance, stupidity, and evil. We need to manage ourselves more than the planet, and our self-management should be, in Orr’s words, “more akin to child-proofing a day-care center than to piloting spaceship earth.” The way to child-proof a room is to build the optimal scale playpen within which the child is both free and protected from the excesses of its own freedom. It can enjoy the light and warmth provided by electrical circuits beyond its ken, without running the risk of shorting out those circuits, or itself, by experimenting with the “planetary management technique” of teething on a lamp cord.
Our manifest inability to centrally plan economies should inspire more humility among the planetary managers who would centrally plan the ecosystem. Humility should argue for the strategy of minimizing the need for planetary management by keeping the human scale sufficiently low so as not to disrupt the automatic functioning of our life-support systems, thereby forcing them into the domain of human management. Those who want to take advantage of the “invisible hand” of self-managing ecosystems have to recognize that the invisible hand of the market, while wonderful for allocation, is unable to set limits to the scale of the macroeconomy. Our limited managerial capacities should be devoted to institutionalizing an economic Plimsoll line that limits the macroeconomy to a scale such that the invisible hand can function in both domains to the maximum extent. It is ironic that many free marketeers, by opposing any limit to the scale of the market economy (and therefore to the increase in externalities), are making more and more inevitable the very central planning that they oppose. Even worse is their celebration of the increase in GNP that results as formerly free goods become scarce and receive a price. For allocation it is necessary that newly scarce goods not continue to have a zero price—no one disputes that. The issue is that, for all we know, we might have been better off to remain at the smaller scale at which the newly scarce goods were free and their proper allocative price was still zero. The increase in measured national income and wealth resulting as formerly free goods are turned into scarce goods is more an index of cost than of benefit, as was recognized by the classical economist Lauderdale back in 1819 (Lauderdale 1819; Foy 1989).
A Glittering Anomaly
Optimal scale of a single activity is not a strange concept to economists. Indeed, microeconomics is about little else. An activity is identified, be it producing shoes or consuming ice cream, and a cost function and a benefit function for the activity in question are defined. Good reasons are given for believing that marginal costs increase and marginal benefits decline as the scale of the activity grows. The message of microeconomics is to expand the scale of the activity in question up to the point where marginal costs equal marginal benefits, a condition which defines the optimal scale. All of microeconomics is an extended variation on this theme.
When we move to macroeconomics, however, we never again hear about optimal scale. There is apparently no optimal scale for the macroeconomy. There are no cost and benefit functions defined for growth in scale of the economy as a whole. It just doesn’t matter how many people there are, or how much they each consume, as long as the proportions and relative prices are right. But if every micro activity has an optimal scale, then why does not the aggregate of all micro activities have an optimal scale? If I am told in reply that the reason is that the constraint on any one activity is the fixity of all the others and that when all economic activities increase proportionally the restraints cancel out, then I will invite the economist to increase the scale of the carbon cycle and the hydrologic cycle in proportion to the growth of industry and agriculture. I will admit that if the ecosystem can grow indefinitely then so can the aggregate economy. But until the surface of the earth begins to grow at a rate equal to the rate of interest, one should not take this answer too seriously.
The total absence in macroeconomics of the most basic concept of microeconomics is a glittering anomaly, and it is not resolved by appeals to the fallacy of composition. What is true of a part is not necessarily true for the whole, but it can be and usually is unless there is some aggregate identity or self-canceling feedback at work. (As in the classic example of all spectators standing on tiptoe to get a better view and each canceling out the better view of the other, or in the observation that while any single country’s exports can be greater than its imports, nevertheless the aggregate of all exports cannot be different than the aggregate of all imports.) But what analogous feedback or identity is there that allows every economic activity to have an optimal scale while the aggregate economy remains indifferent to scale? The indifference to scale of the macroeconomy is due to the preanalytic vision of the economy as an isolated system—the inappropriateness of which has already been discussed.