Transcript Governance and decision making

Green Economics Institute
Economics because people matter
Green Economics Institute
Reclaiming economics for people, the planet, non
human species and the biosphere
The Global Crisis and the credit
crunch
Alicante
January 2009
Miriam Kennet, June 2006
Miriam Kennet
What is Economics?
What is an economist ?
Green Economics Institute
Economics because people matter
What is economics?
• The original word for
Economics was Oikonomia
which meant ‘household
management’
• In fact, true economics,
Oikonomia, is about managing
the needs of society,nature,non
human species, the planet and
the biosphere
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
What is economics?Scarcity
• Managing scarce resources-
• The more scarce a resource, the more
value is created,Samuelson the father
of Neo classical economics
• Current economics values scarcity• And so chopping down the rainforest
creates scarcity and therefore value in
the forest.
• In fact the opposite is actually true in
the life-world –we need abundant
rainforests.
Miriam Kennet, June 2006
Green Economics Institute
–Mainstream economics:
–Preferences
Economics because people matter
Preference of homo economicus as expressed
by his
spending activities.
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Growth
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Mainstream models :Solow-Swan Growth Model
as increased stocks of capital goods
(means of production) showed the
relationship between labor-time,
capital goods, output, and investment.
, the role of technological change became crucial,
– even more important than the
– accumulation of capital. 1950s,.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Growth theories
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Assumes that countries use their
resources efficiently and that there are
diminishing returns to capital and labor
increases.
A)increasing capital relative to labor
creates economic growth, since people
can be more productive given more
capital.
B) poor countries with less capital per
person will grow faster because each
investment in capital will produce a
higher return than rich countries with
ample capital.
C) because of diminishing returns to
capital, economies will eventually reach a
point at which no new increase in capital
will create economic growth. This point is
called a "steady state.“
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Rostows stages of economic
growth
• Walt Rostow 1916 0 2003 wrote Stages of economic growth a
non communist manifesto. 1960 He saw his work as a political
mission and he worked with Gunnar Mydal and believed in
economic take off. He argued that development policy could be
a political instrument in the east west conflict. He formed the
Charles River Clique working on President Kennedys campaign.
He believed that economic growth would stop communism.
• He distinguished 5 stages that countries have to pass through,
• a)
the traditional society
• b)
the preconditions for take off
• c)
the take off
• d)
the drive to maturity- (self sustained growth)
• the age of high mass consumption
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Green Economics Institute
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GDP 1
GDP is an indicator of total volume of goods and services
produced each year and the variations therein.
Growth is based on GDP: - GDP is based on
a)Market value of all the goods and services sold in a
country per year measured in money
b)The cost of producing non market services provided
by government bodies , education, central and local
government services, etc
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Origins of economics?
• Xenophon Oikonomikos
369 BCE Estate
Management or household
management and efficiency
using administrative
authority to interact with
nature and agriculture
Miriam Kennet, June 2006
Green Economics Institute
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Origins of Economics?
• Aristotle
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384 – 322 BCE
Nichomachean Ethics
3 types of economics justice
Oikonomia the management of
the household,
• Wealth acquisition through
exchange which should be
limited and not at someon else's
expense
• The good life or eudaemonia
• Happiness through virtuous
activities.
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Economics because people matter
History of economics
• What is an
economist?
• Is it this or ?
Miriam Kennet, June 2006
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History of economics
• Or this ?
• Who contributes
the most?
Miriam Kennet, June 2006
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David Ricardo 1772-1823
Ricardo's most famous work is his Principles of Political Economy and
Taxation. Ricardo opens the first chapter with a statement of the labour theory
of value. Later in this chapter, he demonstrates that prices do not correspond
to this value. He retained the theory, however, as an approximation. Ricardo
continued to work on his value theory to the end of his life.
This book introduces the theory of comparative advantage. According to
Ricardo's theory, even if a country could produce everything more efficiently
than another country, it would reap gains from specializing in what it was best
at producing and trading with other nations. (Case & Fair, 1999: 812–818).
Ricardo believed that wages should be left to free competition, so there
should be no restrictions on the importation of agricultural products from
abroad.
The benefits of comparative advantage are both distributional and related to
improved real income. Within Ricardo's theory distributional effects included
that foreign trade could not directly affect profits because profits respond only
in changes to the level of wages. The effects on income are always beneficial
because foreign trade does not affect value.
Comparative advantage forms the basis of modern trade theory, reformulated
as the Heckscher-Ohlin theorem, which states that a country has a
comparative advantage in the production of a product if the country is
relatively well-endowed with inputs that are used intensively in producing the
product. (Case & Fair, 1999: 822).
Like Adam Smith, Ricardo was also an opponent of protectionism for national
economies, especially for agriculture.
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Scottish Enlightenment
• Adam Smith the father of
modern economics:
• An enquiry into the
causes of the wealth of
nations 1776
• We could change from
savages in the
countryside to the market
of laissez faire
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John Stuart Mill
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(20 May 1806 – 8 May
1873), British
philosopher, political
economist, civil servant
and Member of
Parliament, was an
influential liberal thinker
of the 19th century. He
was a teacher of
utilitarianism, an ethical
theory developed by his
godfather, different from
Bentham's
• Steady State economy.
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Jeremy Bentham
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advocacy of utilitarianism and his
opposition to the concept of
natural rights[1], with oft quoted
statements to the effect that such
rights were nonsense[2]. He
influenced the development of
welfarism[3], a concept espoused
by modern American liberals.
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Bentham was one of the most
influential utilitarians, partially
through his writings but
particularly through his students
all around the world. These
included his secretary and
collaborator on the utilitarian
school of philosophy James Mill,
James Mill's son John Stuart Mill,
and several political leaders (and
Robert Owen, who later became a
founder of socialism).
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Alfred Marshall
Alfred Marshall's textbook, Principles of Economics (1890), was the dominant textbook in
England a generation later. Marshall's influence extended elsewhere; Italians would compliment
Maffeo Pantaleoni by calling him the "Marshall of Italy". Marshall thought classical economics
attempted to explain prices by the cost of production. He asserted that the Neo- cassicals went
too far in correcting this imbalance by over emphasizing utility and demand. Marshall thought
the question of whether supply or demand was more important was analogous to the pointless
question of which blade of a scissors did the cutting.
Marshall explained prices by the intersection of supply and demand curves. The introduction of
different market "periods" was an important innovation of Marshall's:
* Market period. The goods produced for sale on the market are taken as given data, e.g. in a
fish market. Prices quickly adjust to clear markets.
* Short period. Industrial capacity is taken as given. The level of output, the level of
employment, the inputs of raw materials, and prices fluctuate to equate marginal cost and
marginal revenue, where profits are maximized. Economic rents exist in short period
equilibrium for fixed factors, and the rate of profit is not equated across sectors.
* Long period. The stock of capital goods, such as factories and machines, is not taken as
given. Profit-maximizing equilibria determine both industrial capacity and the level at which it
is operated.
* Very long period. Technology, population trends, habits and customs are not taken as given,
but allowed to vary in very long period models.
Marshall took supply and demand as stable functions and extended supply and demand
explanations of prices to all runs. He argued supply was easier to vary in longer runs, and thus
became a more important determinate of price in the very long run.
Miriam Kennet, June 2006
Green Economics Institute
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Neo classical economics
1. People have rational preferences among outcomes
that can be identified and associated with a value.
2. Individuals maximize utility and firms maximize
profits.
3. People act independently on the basis of full and
relevant information.
From these three assumptions, neoclassical economists
have built a structure to understand the allocation of
scarce resources among alternative ends -- in fact
understanding such allocation is often considered the
definition of economics to neoclassical theorists. Here's
how William Stanley Jevons presented "the problem of
Economics".
"Given, a certain population, with various needs and
powers of production, in possession of certain lands and
other sources of material: required, the mode of
employing their labour which will maximize the utility of
their produce."
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Green Economics Institute
Neo Classical Economics
Economics because people matter
profit maximization lies behind the neoclassical theory of the firm,
demand curves leads to an understanding of consumer goods,
supply curve allows an analysis of the factors of production.
Utility maximization for consumption,
of demand curves for consumer goods,
Market supply and demand are aggregated across firms and individuals. Their interactions
determine equilibrium output and price.
The market supply and demand for each factor of production is derived analogously to those
for market final output to determine equilibrium income and the income distribution.
Neoclassical economics emphasizes equilibria, where equilibria are the solutions of agent
maximization problems.
Eeconomic phenomena can be explained by aggregating over the behavior of agents.
The emphasis is on microeconomics. Institutions, which might be considered as prior to and
Miriam Kennet, June 2006
conditioning individual behavior, are de-emphasized.
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Keynes
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1936 t the General Theory of Employment,
Interest and Money,
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t "the theory of aggregated production, which is
the point of the following book, nevertheless
can be much easier adapted to the conditions
of a totalitarian state [eines totalen Staates]
than the theory of production and distribution of
a given production put forth under conditions of
free competition and a large degree of laissezfaire."
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aggregate demand to explain variations in the
overall level of economic activity, such as were
observed in the Great Depression.
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The total income in a society is defined by the
sum of consumption and investment; and in a
state of unemployment and unused production
capacity, one can only enhance employment
and total income by first increasing
expenditures for either consumption or
investment.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Keynes contribution
The General Theory of Employment, Interest, and Money (1936), Keynes laid the
foundation for the branch of economics termed "Macroeonomics" today. Based on
the methods devised by Alfred Marshall, he argued that macroeconomic
relationships differ from their microeconomic counterparts because the
ceteris paribus
clauses applicable to different levels of aggregation differ.
The view of given prices and wages income determines demand (see IS-LM), predates Keynes.
His innovation is to take, in his core argument, prices and wages as perfectly
flexible and establish that the interaction of "aggregate demand" (in his sense) and
"aggregate supply" (in his sense) may lead to stable unemployment equilibria. His
work on employment went against the idea that the market ultimately settles at a
state of full employment - a central tenet of Classical economists. Instead he argued
that there exists a continuum of equilibria, the full employment equilibrium
position being just one of them.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Keynes
Prevailing economic orthodoxy stuck to the old
classical view that Markets will clear in the long
run.
At the height of the crisis, the fledgling
Labour government was told by Treasury
officials that the government must balance the
budget to survive the depression.
This
effectively meant increasing taxes and cutting
unemployment benefits. Keynes described this
as economic madness and argued for the exact
opposite.
He argued in a recession of this
magnitude, it was necessary for the government
to intervene and actively stimulate the
economy. Apart from a few half hearted
attempts such as the new deal, Keynes' policies
were largely ignored in the UK and US; and
high levels of unemployment persisted until the
Miriam Kennet, June 2006
start of the second world war.
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Paul Samuelson:Neo classical
economics
Samuelson is considered one of the
founders of modern neoclassical
economics.
International economics, where he
influenced the development of two
important international trade models:
the Balassa-Samuelson effect, and the
Heckscher-Ohlin model (with the
Stolper-Samuelson theorem).
Consumer theory, he pioneered the Revealed Preference Theory, which
is a method by which it is possible to discern the best possible option,
and thus define consumer's utility functions, by observing the consumer
behaviour.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Critique of Samuelson
“
Samuelson admits that utility is a construct that
has no basis in psychology; although he uses the terms
‘consumer’ and ‘individual,’ his model is built around a
fictional character that critics have dubbed Homo
economicus. This economic man (yes, he is male) never
had a childhood, never has children, has never depended
upon a caregiver and does not have anyone he provides
care for. He only experiences well-being by consuming.
He is rational, selfish, a psychopath... he isn’t influenced
by hundreds of billions of dollars in advertising or the
purchases of his neighbors. If Homo economicus buys
something, it gives him utility; his consumer sovereignty
must be respected.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Rosa Luxemburg
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Polish and moved to Germany
Marxist
Wrote a critique of capitalism:
The Accumulation of Capital
Was killed
Idea was that capitalism depended on non
capitalist production areas with lower wages
and that the poor had to be driven off rural
land- so that they could become the labour
power and their land given to elites who would
also service capitalism for the ruling imperial
power- eg in India and China.
• Background – opium war and Indian peasantry
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observations
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Joan Robinson
a Marxist – Only significant woman to get
acknowledgement in mainstream
Robinson assisted with the support and exposition of Keynes' General Theory, writing especially on its employment
implications in 1936 and 1937 (in the midst of the Great Depression it tried to explain).
In 1933, in her book, The Economics of Imperfect Competition, Robinson coined the term, "Monopsony," which is used to
describe the buyer converse of a seller monopoly.
In 1942 Robinson's An Essay on Marxian Economics famously concentrated on Karl Marx as an economist, helping revive
the debate on this aspect of his legacy.
During the Second World War, Joan Robinson worked on a few different Committees for the wartime national government.
During this time, she visited the Soviet Union as well as China. She developed an interest in underdeveloped and developing
nations and contributed a lot that is now understood in this section of economics.
In 1949, she was invited by Ragnar Frisch to become the vice president of the Econometric Society but declined because she
couldn't be part of the editorial committee on a journal she couldn't read.
In 1956, Joan Robinson published her magnum opus, The Accumulation of Capital, which extended Keynesianism into the
long-run. Six years later, she published another book about growth theory, which talked about concepts of "Golden Age"
growth paths. Afterwards, she developed the Cambridge growth theory with Nicholas Kaldor.
Close to the end of her life she studied and concentrated on methodological problems in economics and tried to recover the
original message of Keynes' General Theory. Between 1962 and 1980 she wrote many books to try and bring several
economic theories to the general public. Robinson suggested developing an alternative to the revival of classical economics
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Kenneth Arrow
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He is considered one of the founders of
modern (post World War II)
neo-classical economics.
• His most significant works are
his contributions to social
choice theory, notably "Arrow's
impossibility theorem", and his
work on general equilibrium
analysis. He has also provided
foundational work in many
other areas of economics,
including endogenous growth
theory and the economics of
information.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Social choice theory
• Bentham : Persons maximize their choice
for utility for themselves
• Aggregated the utility is good for everyone.
• Criticism:
• However, if a rich person gets less utility
from food for example -then they might not
do whats best for fair distribution of food.
• Arrow and Sen:
• Proved that not everyone has the same
background or requirements so this doesnt
work
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Green Economics Institute
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Paul Krugman 1953
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Economies and returns from scale
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And New Economics Geography
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Geographical concentration of population and
activity
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Consumption influenced by many others
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Economies of scale
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Where does activity take place
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Why do countries near the Equator tend to be
poorer
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Fewer firms – less competition – more profits
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Hecksher Olin Theory,markets are perfectly
competitiive, trading nations identical, tastes
identical,economies all fully employed- constant
economies of scale prevail in production, firms
increase all output by a proportion output increases
by that proportion
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Krugman found therefore that -if firms increase all
inputs by the economies of scale then , output
increases by economies of scale. This will lead to
fewer and larger firms and competition becomes
imperfect within that industry
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Critical of Bush Administration
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
It looks as if the economy is
falling off a cliff
• Depression
economics
• When you have
depression
economics the
usual rules dont
apply and virtue
becomes vice and
• Caution is risky
• Prudence is folly
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Green Economics Institute
Economics because people matter
Simon Kuznet
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National Income and Its Composition,
1919–1938. Published in 1941, it
contains a historically significant work
on Gross National Product. His work
on the business cycle and
disequilibrium aspects of economic
growth helped launch development
economics. He also studied inequality
over time, and his results formed the
Kuznets Curve.
Another important development was
Kuznets' empirical examination of
Keynes' 1936 Absolute Income
Hypothesis. The hypothesis gave birth
to what would become the first formal
consumption function.underdeveloped
countries of today possess
characteristics different from those
that industrialized countries faced
before they developed, helped put an
end to the simplistic view that all
countries went through the same
"linear stages" in their history and
launched the separate field of
development economics -
Miriam Kennet, June 2006
Green Economics Institute
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Economics because people matter
Kuznet curve
U shaped relationship between income
inequality and economic growth
During economic development growth
measured by GDP will be unequal at first will
stabilize gradually and then become equal.
Therefore inequality had to rise first before
being solved.
This meant at first need to support those on
very low incomes
Then shift to those on middle incomes savings
improved , industraliisation of agriculture and
towards manufacturing, causing initially a
relative inequality,
Decrese in population of upper income,
inheritance taxes,
Developing countries should only focus on
growth, not be concerned with income
distribution
For more info on Environmental Kuznet Curve:
:See Lawn P. in International Journal of Green
Economics, and some work by Ekins.P.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Robert Costanza:Ecological
Economics
Dr. Costanza's research has
focused on the interface between
ecological and economic systems,
particularly at larger temporal and
spatial scales. This includes
landscape level spatial simulation
modeling; analysis of energy and
material flows through economic
and ecological systems; valuation
of ecosystem services,
biodiversity, and natural capital;
and analysis of dysfunctional
incentive systems and ways to
correct them.
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Green Economics Institute
Economics because people matter
Kenneth Boulding – The coming of spaceship
earth
Complex system. It is easy to have too simple a view of it,
and it is easy to do harm and to make things worse under
the impulse to do good and make things better.
: "Anything that exists is possible."
"Theories without facts may be barren, but facts without
theories are meaningless."
"Anyone who believes exponential growth can go on forever
in a finite world is either a madman or an economist."
"Mathematics brought rigor to Economics. Unfortunately, it
also brought mortis."
"Economists are like computers. They need to have facts
punched into them."
"We make our tools, and then they shape us."
"Nothing fails like success because we don't learn from it.
We learn only from failure."
"There is no such thing as economics, only social science
applied to economic problems."
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Georgescu Roegen
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Father of ecological or bio economics
1906
Entropy law
Thermodynamics
1971 The Entropy Law and The Economic Process
The economic process is entropic: it neither creates nor
consumes matter or energy, but only transforms low into
high entropy(That is irrevocable waste).1966
• Demand side moderates consumption and avoiding waste
• Humans should see themselves as an evolving organism
and protect future generations
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Green Economics Institute
Economics because people matter
Herman Daly
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Daly's books include Towards a SteadyState Economy (1973); Steady-State
Economics (1977); Economics,
Ecology, Ethics (1980); Valuing the
Earth: Economics, Ecology, Ethics (coedited with K. Townsend); For the
Common Good: Redirecting the
Economy Toward Community, the
Environment and a Sustainable Future
(with John Cobb, 1989); Population,
Technology and Lifestyle (co-edited
with R. Goodland and S. El Serafy,
1992); Beyond Growth: The Economics
of Sustainable Development (1996). He
has also published over 100 articles in
scholarly journals and magazines.
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In 1989, Daly was one of the key
figures in the foundation of the
International Society for Ecological
Economics (ISEE), and serves as
Associate Editor of its journal
Ecological Economics. ISEE is the
major forum that links economists and
ecologists, and academics and
environmental activists.
Miriam Kennet, June 2006
Green Economics Institute
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Economics because people matter
Amartya Sen
Sen's seminal papers in the late sixties and early seventies helped develop the theory of
social choice, which first came to prominence in the work by the American economist
Kenneth Arrow,
who, while working in the fifties at the RAND
Corporation, famously proved that all voting rules,
be they majority voting or two thirds-majority or status quo
, must inevitably conflict with some basic democratic norm.
Sen's contribution to the literature
as to show under what conditions Arrow's Impossibility
Theorem would indeed come to pass as well as to extend and
enrich the theory of social choice, informed by his
interests in history of
economic thought and philosophy.
In 1981, Sen published Poverty and Famines:
An Essay on Entitlement and Deprivation,
a book in which he demonstrated that famie
e occurs not only from a lack of food,
but from inequalities built into mechanisms for distributing food. Sen's interest in famine
stemmed from personal experience. As a nine-year-old boy, he witnessed the Bengal
famine of 1943, in which three million people perished. This staggering loss of life was
unnecessary
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Green Economics Institute
Economics because people matter
Capabilities approach
he Capability Approach is a conceptual framework developed by Amarty
Sen and Martha Nussbaum for evaluating social states in terms of human
well-being (welfare).
It emphasizes functional capabilities ("substantial freedoms", such as the
ability to live to old age, engage in economic transactions, or participate i
political activities); these are construed in terms of the substantive
freedoms people have reason to value, instead of utility (happiness, desire
fulfilment or choice) or access to resources (income, commodities, assets
Poverty is understood as capability-deprivation.
It is noteworthy that the emphasis is not only on how human beings
actually function but on their having the capability, which is a practica
choice, to function in important ways if they so wish. Someone could be
deprived of such capabilities in many ways, e.g. by ignorance, governme
oppression, lack of financial resources, or false consciousness.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Sen and Choice theories
This approach to human well-being emphasises the importance of
freedom of choice, individual heterogeneity and the multidimensional nature of welfare. In significant respects, the approach
is consistent with the handling of choice within conventional microeconomics consumer theory although its conceptual foundations
enable it to acknowledge the existence of claims, like rights, which
lexicographically dominate utility based claims (see Sen (1979))
Miriam Kennet, June 2006
Ten
Capabilities
influences
1-4
1. Life.
HDI
Development
Being
able to Human
live to the end of
a human life of normal length; not dying
prematurely,
or before one's life is so reduced as to be not worth living.
Index
2. Bodily Health.
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Being able to have good health, including reproductive health; to be
adequately nourished; to have adequate shelter.
3. Bodily Integrity.
Being able to move freely from place to place; to be secure against
violent assault, including sexual assault and domestic violence; having
opportunities for sexual satisfaction and for choice in matters of
reproduction.
4. Senses, Imagination, and Thought
Being able to use the senses, to imagine, think, and reason-- and to do
these things in a "truly human" way, a way informed and cultivated by an
adequate education, including, but by no means limited to, literacy and
basic mathematical and scientific training.
Being able to use imagination and thought in connection with
experiencing and producing works and events of one's own choice,
religious, literary, musical, and so forth.
Being able to use one's mind in ways protected by guarantees of freedom
Miriamof
Kennet,
June 2006
of expression/ political and artistic speech, and freedom
religious
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Ten capabilities 5-10
5. Emotions.
Being able to have attachments to things and people outside ourselves; to love those who love and care for
us, to grieve at their absence; in general, to love, to grieve, to experience longing, gratitude, and justified
anger. Not having one's emotional development blighted by fear and anxiety. (Supporting this capability
means supporting forms of human association that can be shown to be crucial in their development.)
6. Practical Reason
Being able to form a conception of the good and to engage in critical reflection about the planning of one's
life. (This entails protection for the liberty of conscience and religious observance.)
7. Affiliation.
1. Being able to live with and toward others, to recognize and show concern for other human beings,
to engage in various forms of social interaction; to be able to imagine the situation of another. (Protecting
this capability means protecting institutions that constitute and nourish such forms of affiliation, and also
protecting the freedom of assembly and political speech.)
2. Having the social bases of self-respect and non-humiliation; being able to be treated as a dignified
being whose worth is equal to that of others. This entails provisions of non-discrimination on the basis of
race, sex, sexual orientation, ethnicity, caste, religion, national origin.
8. Other Species. Being able to live with concern for and in relation to animals, plants, and the world of
nature.
9. Play. Being able to laugh, to play, to enjoy recreational activities.
10. Control over one's Environment.
1. Political. Being able to participated effectively in political choices that govern one's life; having
the right of political participation, protections of free speech and association.
2. Material. Being able to hold property (both land and movable goods), and having property rights
on an equal basis with others; having the right to seek employment on an equal basis with others; having
the freedom from unwarranted search and seizure. In work, being able to work as a human being,
exercising practical reason and entering into meaningful relationships of mutual recognition with other
workers.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Sens arguments
• Sen argues that neo classical
economists have preference theory
backwards
• People dont adapt their preferences to
maximize utility, eg they dont NOT learn
to read out of choice but rather they lack
the capability- due to lack of resources.
• Learning to read make them more
capable
• He also distinguishes between economic
growth and economic development
• Book- Development as Freedom
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Marilyn Waring
Marilyn Waring (born 1952) is a New Zealand feminist, an activist
for "female human rights", an author and an academic. She
holds a Ph.D. in political economy
She has outspokenly criticised the concept of GDP, the
economic measure that became a foundation of the United
Nations System of National Accounts (UNSNA) following World
War II. She ridicules a system which 'counts oil spills and wars
as contributors to economic growth, while child-rearing and
housekeeping are deemed valueless'.[
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Issues to consider
•
•
•
Normative issues such as
intergenerational fairness come
into discussions- and distributive
issues between rich and poor
nations are important
Uncertainties can take several
forms such as price,irreversible
environmental damage
Unexpected or sudden species
extinction
• Limits to environmental
resource are imposed by
nature
• Origin, interactions and
reproductive capacity are
governed by nature
• Most of these resources have
no readily available markets
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Hussen's environmental economics issues 1
• Causes of environmental degradation,
• Need to establish disciplinary ties between ecology and
economics
• Ownerships rights are difficult to establish for the
environment
• Trade off between environmental degradation and economics
goods and services
• Ineffectiveness of the market in allocating environmental
resources
• Assessing monetary value of environmental damage
• Public policy instruments that can be used to slow halt and
reverse the deterioration of environmental resources, and
overexploitation of resources which might be non renewable
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Hussen's environmental economics issues 2
•
Macroeconomics effects of environmental regulation and other resource
conservation policies
•
Technology and the extent to which it can be used to ameliorate the
environmental degradation or resource scarcity
•
Environmental problems that transcend national boundaries
•
Limits to economic growth
•
The extent to which past experience can be used to predict future events of
ecological and economics and technological uncertainty
•
Ethical and moral imperatives for environmental resource conservation
•
Concern for the welfare of future generations
•
The interrelationships among poverty, population and environmental
degradation
•
In developing countries
•
The necessity and viability of sustainable development
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Neo classical economics 1
•
In the neo classical world view
•
The human economy is composed of people, flows of comodities and human
institutions
•
The most important flow is the generation of utility- satisfaction for humans
•
Resources are fungible -that is one kind of resource can substitute for another
•
Environmental resources have no intrinsic value and exist only to provide utility for
humans and the economy
•
In this worldview freedom of choice and private ownership are important
•
In a centrally planned economy the production and distribution of goods are
dictated by bureaucratic choices with resource ownership retained by the state
•
Market economy- is composed of economic entities,households or firms
•
scarcity
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Neo classical economics 2
•
Commodities, markets, non market public and private institutions, with private
ownership enforced and competition
•
Product markets is where goods and services are exchanged
•
The factor markets is where there is buying and selling of basic resources such as
labour capital and natural resources
•
Higher prices are a feature of emerging scarcity – therefore desirable
•
Opportunity cost – costs not realised – of the next best option e.g. If I choose to
conserve an expensive tiger rather than a slightly more common species, then thats
an opportunity cost,
•
The market is an provider of information on resource scarcity
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Ideas of Neo Classical Economics
The perfect market structure and the Invisible Hand
• Adam Smith
•
Individuals working in their self interest will promote the welfare of the whole of society-
•
The effectiveness of an economy is judged by how well it satisfies the material needs of its
citizens- the consumers
•
Maximum output from resources is aim- efficiency of exploitation is good,
•
Requirements:
•
1, freedom of choice based on self interest
•
2, competition
•
3,.perfect information
•
4 mobility of resources
•
5. Ownership rights
•
Perfectly competitive markets,
•
Adam Smith Father of modern economics the Invisible Hand will guide each individual to do
not only what is in his self interest but also that of society at large
Miriam Kennet, June 2006
Green–Economics
Institute
Adam Smith
in
The Wealth of Nations: Economics because people matter
– people in any society will not employ their capital in foreign trading only if the
profits available by that method far exceed those available locally, and that in that
case it is better for society as a whole that he does so.
–
But the annual revenue of every society is always precisely equal to the
exchangeable value of the whole annual produce of its industry, or rather is
precisely the same thing with that exchangeable value.
– As every individual, therefore, endeavors as much as he can both to employ his
capital in the support of domestic industry, so to direct that industry that its
produce may be of the greatest value; every individual necessarily labors to
render the annual revenue of the society as great as he can. He generally,
indeed, neither intends to promote the public interest, nor knows how much he is
promoting it.
– By preferring the support of domestic to that of foreign industry, he intends only
his own security; and by directing that industry in such a manner as its produce
may be of the greatest value, he intends only his own gain, and he is in this, as in
many other cases, led by an invisible hand to promote an end which was no part
of his intention. Nor is it always the worse for the society that it was not part of it.
– By pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it. I have never known much
good done by those who affected to trade for the public good. It is an affectation,
indeed, not very common among merchants, and very few words need be
employed in dissuading them from it.
Miriam Kennet, June 2006
– (IV.ii.6-9, page 456 of the 1776 Glasgow Edition of Smith’s works; vol. IV, ch. 2, p
Green Economics Institute
Economics because people matter
Pigou the father of welfare
economics
The Economics of Welfare : 1920), brought welfare
economics into the scope of economic analysis.
He showed that the market did not include some costs,
externalities, spill over effects and third party effects.The
market is therefore inefficient in this respect which justifies
government intervention. There is a distinction between
private and social marginal products and costs.
Free Rider Effect; I maximize my benefit and let others
pay.
He originated the idea that governments can, via a
mixture of taxes and subsidies, correct such perceived
market failures — or "internalize the externalities".
Pigovian taxes, taxes used to correct negative
externalities, are named in his honor.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Pigou -The father of
environmental economics
• Suggested
• Society should
compensate farmers
whose crops were ruined
by railways
• Economists should judge
when the state should
intervene
• Taxing rich people to pay
for social costsprogressive taxation
• Eg Bill Gates wont notice
a small tax.
• Sacrificing a little output
was worth the gain.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Ronald Coase
Public Choice theorists rejected Pigou's
approach for its naive "benevolent despot"
assumption.
Ronald Coase demonstrated that efficient
outcomes could be generated without
government intervention when property
rights are clearly defined.
"The Problem of Social Cost" (1960 )
is considered an example of market failure:
driving can impose hidden costs on other
drivers and society, whereas use of public
transportation or other ways of avoiding
driving would be more beneficial to society
as a whole.[
Other common examples of market failure
include environmental problems such as
pollution or overexploitation of natural
resources.
Nevertheless, some economists see these
as symptoms of public property rather than
free markets.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Coase Theorum
Describes the economic efficiency of an economic allocation
or outcome in the presence of externalities.
The theorem states that when trade in an externality is
possible and there are no transaction costs, bargaining will
lead to an efficient outcome regardless of the initial
allocation of property rights.
In practice, obstacles to bargaining or poorly defined property
rights can prevent Coasian bargaining.
Describes the condition where the allocation of goods and
services by a market is not efficient.
Market failure can be viewed as a scenario in which
individuals' pursuit of self-interest leads to bad results for
society as a whole
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Coase Theorum
• Private agents base their decisions on
private costs as opposed to social costs
because they dont have to support the
social costs of their activities.Why dont
they have to pay?
• Because there is no clear property right.
• Simple solution to the problem of
externalities is to privatise property rights.
• But to whom should that property be
allocated? Those creating the costs,
polluters?or those experiencing the costs
or reduction in welfare?Coase thinks both
work.
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Causes of the down turn
• Spain debt to
• house price
• problems
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
To solve this downturn
• We need to rethink our
economics
• We need to consider all the
players and provides
• We need to think of all the
beneficiaries
• We need to provision for all of
our needs
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Green solutions
• Detailed regulation of banks and financial
markets
• Partly nationalised
• Strenghtening demand for public
investment
• Sensible public projects -green ones
• Conversion to green technology
• Green jobs
• Sort out property market to end boom
and bust – no scarcity and good supply
• Second house ownership tax
disadvantages – changes to tax system
for needs rather than investment
• Production factor labour not taxed but
use of capital taxed – and consumption
of non green items
• Short term stimulate economyMiriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Longer term
– Longer term - not dependent on growth
– Working reduction
– Include women in GDP
–Who things are produced
– What is produced- social culture
– Not capitalised cheap goods- change in
strucure of the economy towards more
sensible use
Miriam Kennet, June 2006
Green Economics Institute
Economics because people matter
Green
• Move to greener
climate
• Move to greener
transport
• Move to greener
• Power
• Move to greener
jobs
• Move to be more
inclusive
• Restructure our
economy
Miriam Kennet, June 2006