The American economy, and much of the world economy, is organized around principles of neoclassical economics (NCE). Neoclassical economists consider perfect markets without any outside interference the ideal means to build an economy with. Those economists believe that NCE principles create the most efficient allocation of resources throughout the economy. The goal for neo-classical economists is growth; economic growth signifies the distribution of market goods and services, and in the minds of neo-classical economists, economic growth is a proxy for consumer satisfaction.
While NCE is the dominant paradigm, ecological economics (EE) offers better framework during a time of ecological constraint. Many of the resources that through their abundance created the conditions for the Industrial Revolution and the rapid economic growth of the last two centuries are becoming scarce. Ecological economists recognize that Earth and its ecosystems are not subsets of the human economy, but rather that the human economy is a subset of the Earth. As such, ecological economists are concerned with the question of scale, what the appropriate and sustainable size of the economy is relative to the ecosystems that support it.
Both NCE and EE recognize the concepts of marginal cost (the additional cost of producing a market good) and marginal utility (the additional satisfaction one receives from a market good), and seek out the optimal scale whereby the greatest marginal utility is achieved at the most efficient marginal cost. However, NCE only considers these concepts in terms of the microeconomic and not the macroeconomic level; EE examines the optimal scale of the larger macro economy. By looking at the big picture, ecological economists examine the throughput of the human economy, and recognize a conceptual flaw in NCE.
Neoclassical economists look at the economy as the whole, and the natural capital that the Earth and its ecosystems provide as a mere subset of that economy. The NCE view of the economy is a circular one, between production and consumption: businesses and consumers interact to create supply and demand. The circular flow model that neoclassical economists use to illustrate those relationships is simple, but like their view of the economy as the whole, it does not properly recognize the natural capital that allows the economy to operate.
The NCE model creates the illusion of a perpetual motion machine, which is impossible. The Second Law of Thermodynamics identifies that any closed system degrades through entropy. In the case of the macro economy, this means that resources cannot be recycled completely. The throughput of the macro economy is enormous, and growing. However, this enormous throughput occurs on a finite planet, with finite resources. Specifically the fossil fuels and minerals that drive the macro economy, nonrenewable on a human scale, are finite. The capacity of the Earth’s ecosystems to provide water and waste services is finite. Ecological economists recognize that growth is not sustainable, but differentiate growth from development.
That distinction between growth and development is helpful when considering how a business might operate through the principles of ecological economics. Minimizing the throughput of resources is crucial on the finite Earth. A business might consider offering a service instead of a product, and designing the materials to be provided to customers with their entire life cycle in mind (through a Life Cycle Assessment). Interface, Inc. designed their modular carpet tiles with those very goals. Interface will replace individual tiles when they become worn, and recycle those tiles as much as possible. In fact, Interface works continuously to minimize the amount of petrochemicals in their product, and the ecological footprint of its supply chains. By offering a service instead of a product, a business can maintain customers over the long term instead of trying to sell as many products as possible while cutting costs to maximize profit margin. On a finite planet, that behavior is simply not sustainable.
While EE principles are appealing, they do present limitations, especially within the dominant NCE paradigm that defines the macro economy. First of all, a business must consider optimal scale carefully; long supply chains are not sustainable over the long term in a finite world. Second, finance is a quandary, especially if the business is for-profit. Investors and stockholders will demand healthy and steady profit margins, which are difficult to maintain when competing against businesses that consider growth as the primary goal. Finally, the concept of providing a service instead of a product is difficult in terms of modern accounting practices. Interface, for example, whose customers tend to pay through capital expenses, are sometimes reluctant to shift those costs to current expenses. However, EE provides a growing framework for sustainable business that is already evident in developments like the B Corporation. In a finite world, ecological economics provides a necessary course correction to neoclassical economics.
In the United States, and in much of the world that shares aspects of US Business culture, it is common to say the consumer is king. Politicians of parties across the ideological spectrum speak about consumer sovereignty as if it is an ordained right. Neo-classical economists blithely assume the conditions of perfect markets in their theories and models, and proclaim that the consumer is always sane, always correct – and that the actions of many consumers will serve the larger social good. The development of capitalism created the conditions for the development and distribution many innovations that have improved the lives of people around the world. Just think back to the world that your grandparents grew up in, where people who owned an icebox and a radio were considered middle class.
However, today global consumption is on an unsustainable path of growth. Global populations inexorably increase, energy resources decline and become more expensive to obtain by the day, and the ability of the biosphere to sustain the throughput of resources that our consumption requires is diminishing. How did we get here? If the consumer is king, and can do no wrong, how did we move onto this unsustainable path? First of all, regarding consumer sovereignty, it is inaccurate to lay the culpability for purchasing decisions entirely on the lap of consumers. Marketers are adept at creating needs and wants where they did not exist before. We consumers apply meaning to, and use our purchases as a sort of language, or shorthand, to denote status. Governments subsidize and incentivize certain behaviors, like the pervasive subsidies in energy industries. Governments even encourage consumption through monetary and tax policy. So the idea that the consumer is king is problematic. So, the question remains, how did we get to the point where consumption is unsustainable?
We have long treated the resources that come from the Earth not as finite commodities, but rather as our dominion. For example, we charge homeowners for the extraction, delivery, and disposal of potable water, but we do not consider the water itself a finite resource. We have only recently considered what it takes to maintain healthy watersheds, to ensure sustainable water supplies. However, water is essential to the manufacture of most consumer goods. How can the price of those goods not reflect the value of the finite resource, fresh water? When water supplies dry up, water will have to be obtained in the energy intensive process of desalination. Fossil fuel energy supplies, like water, are finite resources. We humans are not good at planning for the long term of future generations. The concept of the Seventh Generation, which originated in The Great Law of the Iroquois, asks whether the decisions made today will benefit descendents seven generations into the future. A home products company that aims to inspire that kind of long-term thinking adopted the Iroquois principle in their name. However, Seventh Generation is a rarity in the business world today. The assumption by many in society today is that resources will never decline, that we will always find a new source or supply to maintain our exponential growth. That thinking is leading us on a path toward decline.
Can we create a new prosperity, one that is sustainable? To do so we will have to consider resource use from a perspective of our collective future, and beyond our individual perspective. For some people, that may mean sacrifice. Both father and son President Bush declared that “The American way of life is not negotiable” when considering how to confront climate change. The problem is that the American way of life, as it stands today, is just not sustainable. Both the government and communities of individuals must create policies, incentives, and actions to promote a new kind of consumption, and a new consumer mindset. We must strive for quality, minimize throughput of resources, and consider the entire life cycle of products, ensuring that materials can be reused or recycled. We must design our communities so that we plan for the long term, and think generations ahead, planning for a future with expensive energy and finite resources. Many of the consumption decisions we make on a daily basis are habits that people don’t consider – we need to design products so that consumers are aware of both what the product provides, and what the cost is. However, it is not enough to buy ‘green’ products, we must reconsider what we really need. To create a sustainable consumption, we will all need to tread carefully and purposely into the future. Otherwise, we consumers will find ourselves unprepared for the future we create.