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Economics unit


Title: EVSC 239 - welcome Author: Rania Masri Last modified by: Rania Masri Created Date: 2/28/2011 7:53:50 AM Document presentation format: On-screen Show (4:3) – PowerPoint PPT presentation

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Title: Economics unit

Economics unit
  • Show a movie? the end of poverty / life debt

A few admin
  • Please email me your schedule
  • Do we need a ½ hour meeting on Thursday/Friday? A
    Saturday morning coffee?

Activity 1 Envision
  • Good reading
  • All posted on the web
  • Comment
  • may move it all to moodle once Ive got an

Economics in Context
  • What is economics?
  • economics the study of the way people organize
    themselves to sustain life and enhance its
  • Positive vs normative questions
  • Positive questions how things are
  • Normative questions how things should be
  • Defining poverty is both a positive and a
    normative task. It requires us to decide whether
    poverty should be defined in terms of peoples
    opportunities in life, or only with respect to
    what they have made of those opportunities
    whether a definition should look only at what
    people possess as private property, or should
    also take into account access to goods and
    services that are provided by the society.

What for? wealth and efficiency
  • In discussing goals ? need to start with
    normative question. What is economic activity
  • Intermediate and final goals
  • A final goal requires no further justification
    it is an end in itself
  • An intermediate goal is something that is
    desirable because its achievement will bring you
    closer to your final goal(s)
  • Wealth is whatever confers the ability to produce
    and procure valued goods and services.
  • Efficient process uses the min value of
    resources to achieve desired result
  • An efficient use of resources is one that does
    not involve any waste. Inputs are used in such a
    way that they yield the highest possible value of
    output, or a given output is produced using the
    lowest possible value of inputs.

Our assumption well-being
  • We assume that most normal people want to have
    happy, pleasant lives in a healthy social and
    physical environment and that most people would
    like to contribute to ensuring that the social
    and physical conditions for a good life can
    continue into the future.
  • Well-being is a shorthand term for the broad goal
    of promoting the sustenance and flourishing of
  • (some) Final goals
  • Satisfaction of basic physical needs happiness
    realization of ones potential fairness (what is
    fair?) freedom in economic and social
    relations participation in social decision
    making a sense of meaning in ones life good
    social relations and of course - ecological

Economics and well-being
  • An economic actor (economic agent) is an
    individual, group, or organization that is
    involved in the economic activities of resource
    maintenance or the production, distribution, or
    consumption of goods and services.
  • Negative externalities are harmful side effects,
    or unintended consequences, of economic activity
    that affect persons, or entities such as the
    environment, that are not among the economic
    actors directly responsible for the activity.
  • Examples?
  • Policies?
  • Positive externalities are beneficial side
    effects, or unintended consequences, of economic
    activity that accrue largely to persons or
    entities that are not among the economic actors
    directly involved in the activity.
  • Examples?
  • Policies?
  • Transaction costs are the costs of arranging
    economic activities

3 basic economic questions
  • What should be produced, and what should be
  • What kinds of products should be made? How much
    of each? What resources need to be preserved?
  • How should production and maintenance be
  • By whom and using what kinds of resources,
    technologies and methods?
  • For whom should economic activity be
  • What are the principles and practices that will
    determine how the produced goods and services are
    distributed among different people?

From Vulnerable Planet
  • Your thoughts? Various factors
  • Monopoly capitalism ? globalized monopoly
  • Synthetic products as basic elements of
    industrial output
  • Scale of economic production/economic progress

From Vulnerable Planet economics and
  • Synthetic products as basic elements of
    industrial output
  • Advances in five fields steel, coal-petroleum,
    chemicals, electricity, and internal combustion
  • Progress in physics and chemistry not accompanied
    by an equally rapid expansion in the knowledge of
    how such substances might affect the environment
  • Scientific management also changed labors
    relation to the production process worker
    reduced to status of an instrument of production
    moving control of the job from the worker to
  • Taylor (1911) dissociation of labor process from
    skills of the workers (2) separation of
    conception from execution and (3) use of this
    monopoly of knowledge to control each step of the
    labor process and its mode of execution
  • Transform skilled labor to simple,
    interchangeable parts
  • Thus human labor commodified further human
    productive and cultural diversity decreased

  • As labor became more homogeneous ? so did much of
    nature. Examples?
  • Scientific foresters goal
  • the maximum amount of nutrients, water, and
    solar energy into the next cut of timber. S/he
    cleans up the diversity of age and size classes
    that are less efficient to cut, skid, process and
    sell. S/he eliminated slow-growing and unsalable
    trees, underbrush and any animals that might harm
    her/his crop. S/he replaces natural disorder with
    neat rows of carefully spaced, genetically
    uniform plantings of fast growing Douglas-firs.
    S/he thins and fertilizers to maximize growth.
    S/he applies herbicides and insecticides and
    suppresses fires to protect this crop against the
    ravages of nature that must be fought and
  • What is the result of this goal?

Synthetic age
  • After WWII productive technologies with
    intense impacts on the environment have displaced
    less destructive ones. counterecological pattern
    of growth
  • Examples?
  • Artificial fertilizers pesticides synthetics
    fibers plastics detergents with high phosphate
  • it is therefore the pattern of economic growth
    rather than growth (or population) itself that is
    the chief reason for the rapid acceleration of
    the ecological crisis in the postwar period.

I P A - T
  • Environmental Impact (I) Population Affluence
  • 1972 study by Commoner
  • Population accounted for only 12-20 of total
    changes in impact of these pollutants
  • Affluence goods/population
  • Technology pollution/economic good
  • Automobiles
  • Optional supplemental reading (Driving South
    The Globalization of auto consumption and its
    social organization of space. )
  • Petrochemicals
  • There is.. an increasing differentiation between
    farming and agriculture. Farming is producing
    wheat agriculture is turning phosphates into
  • Including commodification of seed production ?
    inorganic fertilizers, herbicides, pesticides

The Four laws of ecology and economic production
  • Everything is connected to everything else
  • .dramatic collapse
  • Everything must go somewhere
  • 1st law Thermodynamics no final waste, matter
    and energy are preserved, and waste produced in
    one ecological process is recycled in another
  • Nature knows best
  • any major man-made change in a natural system is
    likely to be detrimental to that system
  • Nothing comes from nothing
  • 2nd law Thermodynamics energy is used up but
    not destroyed energy is transformed into forms
    are not longer available for work

2 paradigms of Economics and Ecology
  • 1. the ecological paradigm, based on the science
    of ecology, stresses the health and survival of
  • 2. the economic paradigm relies on environmental
    economics the application of economic theory to
    environmental issues and emphasizes maximizing
    the welfare of humans, even if this means harming
    the environment.
  • Ecological economics attempts to resolve the

Dominant pattern of capitalist development
  • The only lasting connection between things is the
    cash nexus
  • Cash nexus has become the sole connection between
    human beings and nature
  • It doesnt matter where something goes as long as
    it doesnt re-enter the circuit of capital
  • externalities
  • The self-regulating market knows best
  • For profit, not for nutrition quality of food
    is debased, birds and other species are killed,
    and human beings are poisoned
  • Natures bounty is a free gift to the property
  • Kapp capitalism must be regarded as an economy
    of unpaid costs, unpaid in so far as a
    substantial portion of the actual costs of
    production remain unaccounted for in
    entrepreneurial outlays. Who pays?

Ecologists vs Economists
  • Ecologists Concerned with?
  • Resilience
  • Sustainability
  • Intrinsic value
  • Economists Concerned with?
  • Efficiency and material wealth
  • Only consider environment that is useful to humans

So if money is the guide
  • Henry Ford II answered the question- why Detroit
    automakers prefer to make large, gas-guzzling
  • minicars make miniprofits
  • Few trends could so thoroughly undermine the
    very foundations of our free society as the
    acceptance by corporate officials of a social
    responsibility other than to make as much money
    for their stockholders as possible. -Milton
    Friedman 1962
  • Capitalism cannot exist without constantly
    expanding the scale of production any
    interruption in this process will take the form
    of an economic crisis.
  • Resources are infinite and the economy can grow
    forever -Julian Simon
  • Common statement There is no conflict between
    economic growth and environmental protection.
    --- sustainable economic growth.
  • Anyone who thinks you can have infinite growth
    on a finite planet is either a madman or an
    economist. Kenneth Boulding

(Correct) Economic theory
  • 1. The recognition that natural processes provide
    an essential support to human well-being that
    needs to be adequately taken into account in all
    attempts at measuring well-being.
  • 2. The recognition that this support is finite
    and that there are limitations both in terms of
    the inputs which can be extracted from the
    biosphere and the waste outputs which can be put
    back into it.

Redefining national income and wealth
  • What is GNP/GDP?
  • GDP can be characterized as a (rough) measure of
    the amount of throughput going on in an
    economyas measuring the level of activity whose
    purpose it is to turn renewable and non-renewable
    resources into new products. How does
    throughput relate to sustainable well-being?
    Is more throughput always a good thing?
  • Two broad categories of human activities
  • Those rewarded by a payment a monetary flow
  • Those which arent rewarded by a monetary flow
  • Not included in GDP/GNP

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Factors of production
  • Land
  • term which is used by economists to represent all
    natural resources used in economic production,
    including soils, water, forests, species,
    minerals, fossil fuels, and other such resources.
  • Labor
  • Capital
  • What we typically call capital is manufactured
  • Natural capital all natural resources
    environmental health are included
  • Human capital the value of the knowledge and
    skills of people.

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  • GDP includes monetary flows which correspond to a
    decrease in well-being
  • How can economists deal with monetary flows which
    not only do not increase well-being but may even
    decrease it?
  • One approach is to measure defensive expenditures
    made to eliminate, mitigate or avoid damages
    caused by other economic activity.
  • GDP neglects the depreciation of natural capital
  • GDP can be measured as the sum of the domestic
    value added in all sectors of the economy
  • This process of wearing out, repairing, and
    replacing capital is taken into account by
    measuring the depreciation of manufactured
    capital. If we subtract an estimate of
    manufactured capital depreciation from gross
    domestic product, we obtain net domestic product
  • NDP GDP depreciation of manufactured capital

  • If we had high short-term consumption but allowed
    all our capital stock to wear out without
    replacement, measured GDP would give an
    erroneously positive impression of how well we
    were doing economically. NDP would be a better
    measure since it would show the negative effects
    of the loss of productive capital.
  • NDP - applies only to manufactured capital
  • What about natural capital?
  • The process of production uses up nonrenewable
    natural resources such as coal, oil, and
    minerals. Often renewable natural resources such
    as productive soils, forests, and fisheries are
    also depleted or damaged through over-use. And
    wastes and pollution

Alternatives to GDP
  • net domestic product is obtained by subtracting
    depreciation of manufactured capital from GDP.
  • Further adjusting GDP to account for the
    depreciation of natural capital yields
    environmentally-adjusted net domestic product
    (EDP) EDP GDP depreciation of manufactured
    capital depreciation of natural capital
  • requires a monetary estimate for the depreciation
    of natural capital.
  • considers how much a nation is saving for the
  • The World Banks genuine saving measure (S) adds
    a social and environmental element to national
    saving rates. A nations genuine saving rate is
    calculated as
  • S gross domestic saving produced capital
    depreciation education expenditures
    depletion of natural resources pollution damage

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Natural Capital
We treat the earth like a business in
liquidation. Herman Daly
Opportunity cost. Loss is not counted.
How to account?
Economies are based on natural capital (physical
assets provided by nature), manufactured capital
(physical assets generated by human productive
activities applied to natural capital), social
capital (trust, mutual understanding, shared
values, and socially held knowledge) and human
capital (peoples capacity for labor and their
individual knowledge and skills). Only the value
of manufactured capital (structures and
equipment)--and recently, software--is estimated
in the current national accounts. Can you
think of ways that the stocks of natural, social,
and human capital might be measured? What kind
of information would be needed?
  1. Resource functions the natural environment
    provides natural resources that are inputs into
    human production processes.
  2. Environmental service functions the natural
    environment provides the basic habitat of clean
    air, drinkable water, and suitable climate that
    directly support all forms of life on the planet.
  3. Sink functions the natural environment serves as
    a sink which absorbs (up to a point) the
    pollution and wastes generated by economic

Different kinds of value
  • Use value the values placed on a resource by
    those who directly use it.
  • Non-use value
  • Option value value of preserving the option of
    doing something else by doing nothing
  • Existence value value of preserving something
    for its mere existence
  • Bequest value value of leaving an undamaged
    (less damaged) world to future generations

Another problem with GDP
Accounting for households missing
  • Only two aspects of household production are
    currently counted in GDP
  • the services of the house itself (the rent paid
    explicitly or implicitly by residents) and,
  • the services provided by paid household workers
    such as housekeepers and gardeners.

History of exclusion
  • Households not productive
  • Not producing economic goods
  • Gender split economy mans world home
    womans world
  • too hard to distinguish from consumption
  • third person criterion the convention that says
    that an activity should be considered to be
    production (rather than leisure) if a person
    could buy a market replacement or pay someone to
    do the activity in his or her place
  • GDP measures market production
  • GDP aims to only measure production for the
    market. Since household outputs are not sold,
    this argument goes, it is consistent to exclude
    them from GDP.
  • The problem with this argument is that a
    substantial portion of GDP already reflects
    nonmarket production

Accounting for household production
  • Why? How?
  • Time use surveys

Accounting for household production
  • Replacement cost method
  • (for estimating the value of household
    production) valuing hours at the amount it would
    be necessary to pay someone to do the work
  • Opportunity cost method
  • (for estimating the value of household
    production) valuing hours at the amount the
    unpaid worker could have earned at a paid job
  • Many counties, including US, Australia, Canada,
    India, Japan, Mexico, Thailand and the United
    Kingdom, have conducted or are conducting
    national time use surveys to aid their
    understanding of unpaid productive activities.

How to measure economic well-being?
  • Since the goal of macroeconomics is human
    well-being, we need to be sure the indicators we
    pay most attention to are ones that relate to the
    goal we want to achieve!
  • Re growth in production per capita, need to ask
    what, for whom, and how
  • Well-being reducing products? Defensive
    expenditures? Loss of leisure? Loss of human and
    social capital formation? Well-being reducing
    production methods? Unequal distribution?

Other indicators
  • Index of sustainable welfare (1989)
  • Genuine Progress Indicator
  • a measure of economic well- being that adds many
    benefits, and subtracts many costs, that are not
    included in GDP. This measure is calculated by
    the nonprofit group Redefining Progress.
  • - starting point is the Personal Consumption
    Expenditures (PCE) component of GDP for each
    year, as calculated by the BLS, on the reasoning
    that this number approximates the welfare
    associated with consumption. Then include
    externalities () values (-) social costs (-)
    environmental costs
  • Human Development Index
  • an index of well-being made by combining
    measures of health, education, and income.
    Calculated by the United Nations Development
    Program (UNDP).
  • Life expectancy at birth An index reflecting
    a combination of the adult literacy rate and
    statistics on enrollments in education GDP per
  • Index between 0 and 1 (Lebanon. 2007. 0.803)

Index of Sustainable Economic Welfare (ISEW)
  • partnership between an economist, Herman Daly,
    and a theologian, John Cobb.
  • They construct an indicator of aggregate welfare
    by taking into account the current flow of
    services to humanity from all sources (and not
    only the current output of marketable commodities
    which is relevant to economic welfare)
  • They deduct spending whose purpose is defensive
    or intermediate and not welfare- producing
  • They account for the creation and losses of all
    forms of capital by adding the creation of
    man-made capital and deducting the depletion of
    natural capital

Resources as defined in economics
Public goods and common property resources
  • Rival Goods whose use is limited to one user at
    a time.
  • Excludable The right to use or consume the
    good can be refused to others.
  • A good that is both rival and excludable is
    called a private good.
  • Music at a concert is non-rival and excludable.
  • Club-goods the access-right is the membership,
    which allows the members to enjoy all the clubs
    facilities in common
  • Common property resources rival and
  • Public goods non-rival and non-excludable
  • Congestion threshold

Open Access Regime (misnamed Tragedy of the
commons) Oceanic fisheries, timber etc. from
unprotected forests, air pollution, waste
absorption capacity
Market Good Food, clothes, cars, land, timber,
fish once captured, farmed fish, regulated
Potential market good (Tragedy of the
non-commons)but inefficient patented
information, Pond, roads (congestible), streetligh
Pure Public Good climate stability, ozone layer,
clean air/water/land, Biodiversity, information,
habitat, life support functions, etc.
Private beaches, private gardens, toll roads,
zoos, movies
Non-rival, congestible
Public beaches, gardens, roads, etc.
Open Access Resources
  • Overuse of non-excludable or open access
    resources is a phenomenon that has been called
    the tragedy of the commons
  • paradox of aggregation if everyone tries to
    obtain more for themselves, this behavior results
    in less for everyone. The pursuit of personal
    interest leads each individual user to take as
    much as possible of the resource, which increases
    the overall level of extraction of the resource
    and drives it irremediably to its destruction
    and to the ruin of all the users.
  • Global commons When the scope of a resource is
    regional or even global (ex oceans. Atmosphere)

Exceeding the limits collapse
  • Numerous examples
  • Sumerians of southern Mesopotamia,
  • Problematic examples From From Genocide to
    Ecocide The Rape of Rapa Nui. (2005) Activity
    2 -
  • Your thoughts? ?
  • Relevance to NRM?

Climate change
Example Climate Change
  • What is it?
  • What are its impacts?
  • Negative.
  • Positive.
  • Less predictable impacts
  • Positive feedback effects
  • How to evaluate these impacts?
  • Economists have employed the tool of cost-
    benefit analysis. Others have criticized this
    approach as attempting to put a monetary
    valuation on issues that have great social,
    political, and ecological implications, which go
    far beyond money value.

Activity 3 due in 2 Sunday night
  • Examine other forms of economic measurement
    (other than GDP) and compare them with
  • Discuss relationship between economic growth and
    poverty reduction.
  • Discuss relationship between natural resource
    imports, natural resource exports, and economic

Your project
  • A change

A livelihoods-based analysis of the evolution of
natural resources management in-----
  • a farming community in Lebanon
  • Teams of 3. Each team examining farmers in a
    particular village.  Each team would follow the
    same time line (beginning in '75),
  • Study how resources are organized in space and
    time, and how they are allocated, and how it has
    evolved through time
  • assess how the human, natural, financial,
    physical and social capitals have changed over
    time, and, consequently, how the farmers
    currently have been impacted, and how they manage
    using the Sustainable Livelihoods Framework
  • Produce a problem tree analyses for particular
    issues that you find, to root the superficial
    management problems and examine their complexity
    and relationships.
  • organize joint groups with local people to do a
    participatory research and come up with hand
    drawn participatory maps
  • By Sunday, please email me your teams, and the
    particular geographic community

Next unit ecology
  • Readings in the office, and to be added to the