The Study Economics for ma ignou Microeconomics macroeconomics econometrics mathmatical economics

Environmental Sustainability and Economic Growth

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to publish the text sometime early in 2014. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

Today, I am continuing to add the sections in Chapter 25. So far we have done 25.1 and 25.2. I am jumping to 25.5 today.
Chapter 25 Recent Policy Debates
In this Chapter we consider the following policy debates:

• 25.1: Ageing, Social Security, and the Intergenerational Debate
• 25.2: Twin Deficits and Sustainability Of Budget Deficits
• 25.3: Fixed Versus Flexible Exchange Rates: Optimal Currency Areas, the Bancor, or Floating Rates?
• 25.4: Economic Growth: Demand or Supply Constrained?
• 25.5: Environmental Sustainability and Economic Growth

25.5 Environmental Sustainability and Economic Growth
We started our course in macroeconomics by noting that the main macroeconomic policy goals are full employment and price stability.
A central idea in economics whether it be microeconomics or macroeconomics is efficiency – getting the best out of what you have available. At the macroeconomic level, the “efficiency frontier” is normally summarised in terms of full employment – where all available labour resources are being productively deployed.
We have learned that the concept of full employment is hotly contested among different schools of thought in macroeconomics but this does not negate the fact that the attainment of full employment – using our macroeconomic resources to the limit – remains a central focus of macroeconomic theory and policy. The debate is about what that limit actually is.
However, this debate is framed by economists in terms of the extent to which there are structural impediments which might mean our conception of full employment is associated with higher rates of unemployment than otherwise. We considered those issues in Chapter 14.
We learned that capitalist monetary economies are prone to deliver mass involuntary unemployment as a result of a lack of effective demand.
The solution to involuntary unemployment involves increasing the level of effective demand so that it is consistent with the level that is required to employ all those willing and able to work is filled with public net spending.
This can be achieved by increased government spending to ensure that the shortfall in non-government spending relative to the full employment level of demand is filled.
In addition, the government can also stimulate non-government spending in a number of ways including tax cuts, interest rate cuts, and investment and export incentive schemes.
This suggests that sustaining the economically and socially desirable goal of full employment requires continuous growth in aggregate demand and real GDP as populations expand.
In Chapter 3, we learned that the conventional market-based measures of national income as indicators of well-being are flawed in a number of ways. First, many activities that nurture well-being (for example, home duties, caring for our children) are not counted as economic activity, unless a payment for service is made.
Further, any production that is sold in the market place will add to the conventional measures of GDP. So a society is considered to be “growing” and doing better if it produces increasing quantities of military weapons, which then wreak havoc during times of conflict.
Similarly, a major environmental disaster, such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, boosts economic growth as a result of the clean-up operation, even though the event devastates the local marine environment.
We also learned that national income measures of well-being largely ignore distributional issues. How might we feel about two economies which are recording the same growth rates, but where in one, the vast majority of the income growth is secured by a small minority and the rest of the population live in poverty, whereas in the other, the population broadly shares in the increased real income?
Conventional real GDP measures also ignore the costs of increasing depletion rates of non-renewable natural resources. The mining or forestry activity, for example, boosts economic growth but the environmental damage that is left behind is not considered because the firms involved do not count the damage as a cost of production.
Industrial production growth will be “good” for real GDP growth but the associated pollution of the land, water and air that results from the activity might be damaging for our health and, ultimately, undermine the capacity of the economy to produce as the natural systems die. There is growing evidence that unsustainable farming practices are reducing the amount of available productive land and destroying waterways but still count $-for-$ in our measures of economic growth.
It is clear that the capitalist system not only is prone to creating mass unemployment but it also grows on the back of environmental degradation which is destroying our natural capital. This would appear to require a shift in our “growth-at-all-costs” approach to economic policy making.
Mat Forstater (2001: 386) wrote that:

Environmental degradation in the form of unsustainable rates of natural resource depletion and excessive pollution of land, air, and water is characteristic of modern capitalist economies. Humanity now faces significant challenges in the form of both local ecological crises and global environmental problems, such as ozone depletion, global climate change, biodiversity loss, soil erosion, and deforestation …

The question that arises is whether the desire to maintain full employment and the requisite growth that is associated with that policy goal is consistent with environmental sustainability, given the increasing evidence that anthropogenic global warming and resource depletion is endangering the health of the natural environment upon which our economic and social settlements depend.
While full employment appears to be a necessary social and economic goal, can we reconcile it with the obvious need to ensure our natural environment is also sustained?
Thus, even if it were possible to expand aggregate demand enough to promote growth sufficient to keep pace with labour force growth and productivity growth and mop up the huge stocks of long-term unemployment, how could the natural ecosystems, already under great strain, cope?
While the full treatment of what constitutes environmental sustainability is beyond the scope of this textbook some useful observations can be made. For further discussion of what constitutes environmental sustainability see Lawn (2001) and Forstater (2001).
What we will learn is that growth is not necessarily good or bad per se. We can certainly improve our measures of growth to reflect the shortcomings noted above.
At a minimum this requires us to include all the costs of production in our measures of economic activity. Our revised net measures of economic growth will then ensure that we understand whether the changing scale of economic activity is advancing our overall well-being or not. It is entirely possible that the conventional measure of real GDP might show a slowdown in growth (which we would currently interpret as a problem) while new improved measures of real GDP (net of costs) would show an improvement in sustainable growth.
But we can also engender growth that will be sufficient to ensure that all those who want work can find a job at decent pay and conditions and still satisfy the requirements of environmental sustainability.
Clearly, this suggests that it will be necessary to change the composition of final output toward environmentally sustainable activities. It is not increased aggregate demand per se that will be necessary to sustain full employment, but increased aggregate demand in certain areas of activity.
Policy makers intent on eliminating the waste of human potential need to ally that aim with the broader aim of preserving our natural capital and minimising the waste that arises from resource extraction.
That is, our notion of a “macroeconomic efficiency frontier” thus has an extra constraint on it – the need to protect our natural capital.
Phillip Lawn (2001: PAGE NO) defines this in terms of an “optimal macroeconomic scale” which is:

… where the physical scale of a nation’s macroeconomy and the qualitative nature of the goods with which it is comprised maximises the sustainable economic welfare enjoyed by its citizens. The notion of optimal macroeconomic scale is a crucial one because it enables one to understand how the nation can achieve SD without the perceived need for continued growth.

Several elements are present in the concept of an “optimal macroeconomic scale”. First, what are the benefits of creating and maintaining wealth derived from economic activity. Second, what does this cost in terms of depleting the available environmental services.
Natural capital is identified by Lawn (2001: PAGE NO) as “the original source of all economic activity” because it “is the sole source of low entropy matter-energy and the ultimate repository of all high entropy wastes”. Economic activity generates real income (which is the satisfaction derived from consuming goods and services produced) but also imposes social costs on those who produce these goods and services.
Lawn (2001: PAGE NO) notes we have to endure personal costs such as the disutility of work and the stress of commuting as part of the process of generating these economic benefits and the calculation of what he calls “net psychic income” reflects the human costs and benefits of economic activity.
While calculating the human costs of economic activity, we also have to take into account the costs of depleting the available environmental services. Extracting these services (the low entropy matter-energy) creates waste (high entropy matter-energy) which has no further use. This waste depletes our natural capital and is the ultimate resource cost of economic activity.
Trying to define the costs of natural resource depletion is fraught because the biosystem is a living entity and economists are unable to define the use point beyond which it dies.
Sustainable net benefits are the difference between the net psychic income and the environmental costs of economic activity. The maximum macroeconomic scale for a nation occurs when the sustainable net benefits are zero. Beyond this physical scale of production, the environmental costs exceed the net psychic income derived from economic activity.
However, this point is likely to be well beyond the point where the economy maximises its sustainable net benefits for any given technology. The maximum sustainable net benefits is the optimal macroeconomic scale because the difference between the net psychic benefits and the environmental costs are at their greatest.
The macroeconomic efficiency frontier thus is defined by the juxtaposition between the net human benefits and the environmental costs required to create those net human benefits.
The full employment goal then needs to be expressed not just in terms of the total number of jobs required but also the type of jobs and the activities these jobs will be engaged in.
Growth is necessary for employment as the population grows but it cannot be unfettered and left to the market. It has to be a carefully guided growth with new tools not normally used by economists to help governments decide on what their contribution should be and how they should regulate the contribution of the non-government sector.
Consideration of that will lead to a rather dramatic reshaping of our conception of productive work, which is current narrowly defined in terms of “gainful” paid endeavour in pursuit of (private) profit.
Conclusion
WE WILL CONTINUE NEXT WEEK! THE COMPLETE FIRST DRAFT IS NEARING COMPLETION AND I WILL START POSTING REVISED DRAFTS SEQUENTIALLY IN THE COMING WEEKS.