Tag Archives: natural capital

Die, Cobb-Douglas Production Function, Die!

Here Herman Daly unleashes a savage attack on the innocent Cobb-Douglas production function:

A large residual indicates weak explanatory power of the theory being tested–in this case the Cobb-Douglas theory that production increase is due only to capital and labor increase. But instead of being embarrassed by a large unexplained residual, some economists were eager to “explain” it as an indirect measure of technological progress, as a measure of improvement in total factor productivity. But is technology the only causative factor reflected in the residual? No, there are surely others, most especially the omitted yet rapidly increasing flow of natural resources, of energy and concentrated minerals. The contribution of energy and materials from nature to production is also part of the residual, likely dwarfing technological improvement. Yet the entire residual is attributed to technology, to total factor productivity, or more accurately “two-factor” productivity, in the absence of natural resources, the classical third factor.

November 2014 in Review

At the end of October, my Hope for the Future Index stood at -2.  I’ll give November posts a score from -3 to +3 based on how negative or positive they are.

Negative trends and predictions (-6):

  • There is mounting evidence that the world economy is slowing, financial corporations are still engaged in all sorts of dirty tricks, and overall investment may be dropping. Financial authorities are trying to respond through financial means, but the connections are not being made to the right kinds of investments in infrastructure, skills, and protection of natural capital that would set the stage for long-term sustainable growth in the future. (-2)
  • Public apathy over climate change in the U.S. may have been manufactured by a cynical, immoral corporate disinformation campaign over climate change taken right out of the tobacco companies’ playbook. It’s true that the tobacco companies ultimately were called to account, but not until millions of lives were lost. Will it be billions this time? (-2)
  • Glenn Beck has gone even further off his rocker, producing a video suggesting the U.N. is going to ration food and burn old people alive while playing vaguely middle eastern music. One negative point because some people out there might not laugh. (-1)
  • The new IPCC report predicts generally negative effects of climate change on crops and fisheries. The good news is it doesn’t seem to predict catastrophic collapse, but we need to remember that the food supply needs to grow substantially in the coming decades, not just hold steady, so any headwinds making that more difficult are potentially threatening. (-1)

Positive trends and predictions (+6):

  • A lot is known about how to grow healthy trees in the most urbanized environments. But only a few cities really take advantage of this readily available knowledge. (+0)
  • As manufacturing becomes increasingly high-tech, automation vs. employment is emerging as a big theme for the future. The balance may swing back and forth over time, but in the long term I think automation has to win. New wealth will be created, but the question is how broadly it will be shared. The question is not just an economic one – it depends on the kind of social and political systems people will live under in various places. This might be why the field of economics was originally called “political economy”. So I’m putting this in the positive column but giving it no points because the jury is out. (+0)
  • Google is working on nanobots that can swim around in your blood and give an early diagnosis of cancer and other diseases. (+1)
  • Economic slowing is probably the main reason why oil prices are way down. Increased supply capacity from the U.S. also probably plays a role, although there are dissenting voices how long that is going to last. I find it hard to say whether cheaper oil is good or bad. I tend to think it is just meaningless noise on the longer time scale, but you won’t hear me complain if it brings down the price of transportation and groceries for a year or two. (+0)
  • Millennials aren’t buying cars in large numbers. I don’t believe for a second that this means they are less materialistic than past generations, but I think a shift in consumption from cars to almost anything else is a net gain for sustainability. (+2)
  • I discovered the FRAGSTATS package for comprehensive spatial analysis of ecosystems and habitats. This gives us quantitative tools to design green webs that work well for both people and wildlife. Bringing land back into our economic framework in an explicit way might also help. (+1)
  • “Perennial polyculture” gardens may be able to provide food year round on small urban footprints in temperate climates. (+1)
  • A vision for smart, sustainable infrastructure involves walkable communities, closing water and material loops, and using energy wisely. Pretty much the same points I made in my book, which I don’t actively promote on this site;) (+1)

Hope for the Future Index (end of October 2014): -2

change during November 2014: -6 + 6 = 0

Hope for the Future Index (end of November 2014): -2 + 0 = -2

land economics

Here’s a long open article from Ecological Economics about studying the competition for land. Land exists at the intersection of economics and ecology, and it is conspicuously absent from a lot of economic thinking. It can be thought of as capital, in a sense, but obviously it is not manufactured capital. We can’t make more of it, but we can intensify our activities on a given piece of it (for example, more intense agriculture or taller buildings). Land is the obvious source of a lot of ecosystem services, but the value of those services tends to accrue regionally or globally rather than to the landowner. These are my own thoughts, but anyway here is the abstract:

Possible negative effects of increased competition for land include pressures on biodiversity, rising food prices and GHG emissions. However, neoclassical economists often highlight positive aspects of competition, e.g. increased efficiency and innovation. Competition for land occurs when several agents demand the same good or service produced from a limited area. It implies that when one agent acquires scarce resources from land, less resource is available for competing agents. The resource competed for is often not land but rather its function for biomass production, which may be supplanted by other inputs that raise yields. Increased competition may stimulate efficiency but negative environmental effects are likely in the absence of appropriate regulations. Competition between affluent countries with poor people in subsistence economies likely results in adverse social and development outcomes if not mitigated through effective policies. The socioecological metabolism approach is a framework to analyze land-related limits and functions in particular with respect to production and consumption of biomass and carbon sequestration. It can generate databases that consistently link land used with biomass flows which are useful in understanding interlinkages between different products and services and thereby help to analyze systemic feedbacks in the global land system.

more from Herman Daly on natural capital

Herman Daly reminds us that the concept of natural capital does not necessarily have to be measured in money:

it is worth clarifying that the word “capital” in its original non-monetary sense means “a stock or fund that yields a flow of useful goods or services into the future.” The word “capital” derives from “capita” meaning “heads,” referring to heads of cattle in a herd. The herd is the capital stock; the sustainable annual increase in the herd is the flow of useful goods or “income” yielded by the capital stock–all in physical, not monetary, terms. The same physical definition of natural capital applies to a forest that gives a sustainable yield of cut timber, or a fish population that yields a sustainable catch. This use of the term “natural capital” is based on the relations of physical stocks and flows, and is independent of prices and monetary valuation. Its main use has been to call attention to and oppose the unsustainable drawdown of natural capital that is falsely counted as income.

This is a long article that covers a pretty wide range of loosely related topics. But Herman Daly is always worth a read.

Krugman vs. limits to growth

Paul Krugman has weighed in with an anecdotal example of how companies can find ways to conserve energy:

After 2008, when oil prices rose sharply, shipping companies — which send massive container ships on regular “pendulum routes”, taking stuff (say) from Rotterdam to China and back again — responded by reducing the speed of their ships. It turns out that steaming more slowly reduces fuel consumption more than proportionately to the reduction in speed

Interesting, but Mark Buchanan makes the point that total energy use keeps increasing even as efficiency per unit of GDP decreases (the Krugman article was actually a response to this one):

Growth inevitably entails doing more stuff of one kind or another, whether it’s manufacturing things or transporting people or feeding electricity to Facebook server farms or providing legal services. All this activity requires energy. We are getting more efficient in using it: The available data suggest that the U.S. uses about half as much per dollar of economic output as it did 30 years ago. Still, the total amount of energy we consume increases every year.

Data from more than 200 nations from 1980 to 2003 fit a consistent pattern: On average, energy use increases about 70 percent every time economic output doubles. This is consistent with other things we know from biology. Bigger organisms as a rule use energy more efficiently than small ones do, yet they use more energy overall. The same goes for cities. Efficiencies of scale are never powerful enough to make bigger things use less energy.

I have yet to see an economist present a coherent argument as to how humans will somehow break free from such physical constraints. Standard economics doesn’t even discuss how energy is tied into growth, which it sees as the outcome of interactions between capital and labor.

Brian Czech further attacks the Krugman article:

Let’s not let Krugman delude us. “Growing real GDP” isn’t about an efficiency gain here and there. It means increasing production and consumption of goods and services in the aggregate. It entails a growing human population and/or per capita consumption. It means growing the whole, integrated economy: agriculture, extraction, manufacturing, services, and infrastructure. From the tailpipe of all this activity comes pollution.

Krugman seems to have fallen for the pixie dust of “dematerializing” and “green growth” in the “Information Economy.” He may want to revisit Chapter 4 of The Wealth of Nations, where Adam Smith pointed out that agricultural surplus is what frees the hands for the division of labor. In Smith’s day that included the likes of candle-making and pin manufacturing. Today it includes everything from auto-making to information processing, but the fundamentals haven’t changed. No agricultural surplus, no economic growth. And agriculture is hardly a low-energy sector.

Now, I think it’s possible to have a vision of truly clean energy, which could one day allow us to grow energy use without increasing our environmental footprint. But to get there, we have to turn the corner where the reduction in impact per unit increase in energy use is greater than the overall increase in energy use. And we are nowhere near turning that corner yet.

increase in tidal flooding events

Climate Central has this graphic predicting increases in average annual coastal flooding events in U.S. cities. It’s a little hard to read accurately, but what caught my eye is the increase from something like 20 now in my native Philadelphia to something like 75 in 2035. That is pretty big and pretty soon. I think we will manage to protect ourselves, either physically or through insurance, from changes of this magnitude that happen gradually. But it will cost money and resources that will then not be available to spend on other critical needs. So unless our income and wealth are growing faster than these impacts, we are going to be getting gradually poorer and poorer as we deal with these changes.

Source: Climate Central http://www.climatecentral.org/news/coastal-flooding-us-cities-18148

Source: Climate Central http://www.climatecentral.org/news/coastal-flooding-us-cities-18148

“Living Planet Report”

WWF has released a new edition of their “Living Planet Report”. I like this report, for one thing, because it has kept the idea of ecological footprint alive. Ecological footprint was originally developed, or at least widely publicized, in this book in the 90s:

Our Ecological Footprint: Reducing Human Impact on the Earth

Ecological footprint may be the most intuitive way of explaining the idea that humanity is overdrawing the Earth’s resources. The new report puts the ecological footprint at 1.5, meaning 1.5 Earth’s would be required to support our current level of natural resource consumption and waste production indefinitely. To understand how this is possible, imagine you are lucky enough that your parents put a massive trust fund in your name the day you are born. Being born on the Earth is like this. If you are smart, you can live your entire life on the interest, and so can your children and children’s children, as long as they are as smart as you. If you are dumb, you can live an extravagant lifestyle for some period of time, maybe a long time, but eventually it will catch up to you. An ecological footprint of 1.5 suggests that humanity is using up about 1.5 times the amount of natural capital each year that the Earth can support in the long term. Natural capital is the obvious things like fossil fuels and fish, but also less tangible things like fertile soils and the ability of the oceans and atmosphere to absorb our waste products.

The accuracy of Wackernagel’s methods can be endlessly debated, and have been, but the WWF report also has a reader-friendly summary of more recent academic work on “planetary boundaries”. These look at carbon emissions, loads of nitrogen pollution, crop land as a percent of ice-free land, and humanity’s appropriation of primary productivity, among other things. And generally, I think they converge on a pretty similar conclusion that we are living beyond our means and eventually we are going to pay. Normally I try not to shamelessly promote my book, but for my book I made what I think is a pretty cool and useful graphic, which I am sharing below.

planetary_boundaries

Summary of Ecological Footprint and Planetary Boundary Literature

And just in case you think I might be making this stuff up, here are my references:

Rockstrom, J. et al., 2009. Planetary Boundaries: Exploring the Safe Operating Space for Humanity. Ecology and Society 14, 32.

Running, S.W., 2012. A Measurable Planetary Boundary for the Biosphere. Science 337, 1458–1459. doi:10.1126/science.1227620

Wackernagel, M. and W. Rees, 1996. Our ecological footprint: reducing human impact on the earth, New catalyst bioregional series. New Society Publishers, Gabriola Island, BC ; Philadelphia, PA.

 

National Geographic “Greendex”

National Geographic has developed an index that tracks the green-ness of consumer behavior worldwide.

“Greendex 2012: Consumer Choice and the Environment—A Worldwide Tracking Survey” measures consumer behavior in areas relating to housing, transportation, food, and consumer goods. Greendex 2012 ranks average consumers in 17 countries according to the environmental impact of their consumption patterns and is the only survey of its kind.

The top-scoring consumers of 2012 are in the developing economies of India, China, and Brazil, in descending order. Those in emerging economies continue to round out the top tier of the Greendex ranking, while the lowest scores are all earned by consumers in industrialized countries. American consumers’ behavior still ranks as the least sustainable of all countries surveyed since the inception of the study, followed by Canadian, Japanese, and French consumers.

Meanwhile, consumers in developing countries with the highest Greendex scores are the most likely to agree that they “feel guilty about the impact [they] have on the environment,” despite having the lightest footprint as individuals. The research finds a positive relationship between the extent to which people feel guilty about their impact and the Greendex scores of average consumers in the same countries. Consumers with low Greendex scores, i.e., those demonstrating the least sustainable behavior as consumers, are least likely to feel guilty about the implications of their choices for the environment.

I don’t doubt the validity of their conclusion that the average person in China, India, and Brazil has a much lower environmental impact than the average person in Canada, Japan, France, and the United States. I am surprised though by their finding that people in developing countries express more guilt about their own personal ecological footprints. That is not my impression based on some time living and working in Asia. The small, unscientific sample of people I have interacted with are definitely concerned about air and water pollution, for health and safety reasons, and if they belong to a generation that still remembers the land they tend to feel some sadness about urbanization. But concern about health and safety is not the same thing as guilt. People are demanding cleaner air, water, and food for themselves and their families, but that doesn’t mean they are thinking much about their impact on the environment for the environment’s sake. It’s a great story to tell that as these billions of people catch up in wealth and spending to their more industrialized, urbanized neighbors, they will do so without adopting those neighbors much larger ecological footprint. I want to believe it, but I don’t believe that is the path we are on.

 

Herman Daly

Herman Daly has a graph explaining his concept of “uneconomic growth”.

From the graph it is evident that increasing production and consumption is rightly called economic growth only up to the economic limit. Beyond that point it becomes uneconomic growth because it increases costs by more than benefits, making us poorer, not richer. Unfortunately it seems that we perversely continue to call it economic growth! Indeed, you will not find the term “uneconomic growth” in any textbook in macroeconomics. Any increase in real GDP is called “economic growth” even if it increases costs faster than benefits.