The 2nd Law (part 3) – The Missing Linkage Between Economy and Ecosystem. Mankiw’s Ten Principles and Thermoeconomics


Recalling the previous post about ecological sustainability [1],

The 2nd Law (part 2) – My Issue with Ecological Sustainability and World Economy (Mankiw’s Ten Principles)

what is missing is strong linkage between the world economy and the limited biocapacity of the planet Earth.

The missing link between economy and ecosystem has been already pointed out by many researchers [2].

World Economy and Ecosystem: Mankiw’s 10 Principles and Thermoeconomics

Both, natural ecosystem and world economy are complex system and theirs outcomes are not easy to define analytically, to predict and to manage.

Briefly, world economy have been described by Mankiw’s Ten Principles and outcomes are mainly due to [1]:

  • Decision Making and Supply-Demand’s law (invisible hand)
  • Regulation by Government and Policy Makers

Regarding the ecosystems, the Global Footprint Network is attempting to provide a measure about the biocapacity of each country as well as for all over the world. This year (2014), human activities have consumed all the biocapacity available on 19th of August [3].

A possible link between the world economy and the ecosystem might be established thanks to Thermoeconomics [4]: that is Thermodynamics applied to Economy.

Without touching topics such as, thermodynamics, information theory and cybernetic, briefly, both ecosystem and economy are two environments that are accessing to the same resources (biocapacity, energy,…) available in the “system” Earth as shown in the Figure below [5]:

Economy and Ecosystem

Ecosystem

The ecosystem, thanks to photosynthesis and Krebs cycles, is efficiently using the resources in the Earth (mass and energy) without producing any waste.

The variables of an ecosystem are its biocapacity (mass: forests, animals, soil, water,…), energy, temperature, etc. and they are regulated by physics’ laws.

Economy

On the contrary, human activity is evolving and economy is growing because of energy dispersal without re-integrating biocapacity consumptions (deforestation, species’ extinctions, water, natural resources, etc) [6].

Values (money), regulations, prices, interest rates, etc. are the variables of the economy. Human behaviors and outcomes of the economy are governed by Mankiw’s ten principles [7].

What economy produce as an exchange for growth is mainly waste and pollution: something that neither the economic nor ecosystem environments are able to use as a resource.

How to Link World Economy & Ecosystem?

Since the beginning of the 19th century, many scientists, biologists, physics and economists, have conducted several studies and developed theories as well in order to address the missing link between economy and the entire ecosystems [2][8].

The same researches, inferred that (thermoeconomic):

Assumption 1: to each money transaction correspond a flow of energy or biocapacity.

Meanwhile, in the economic environment (from Mankiw’s ten principles):

Assumption 2: to each economic interaction among economic actors corresponds a transfer of value that is represented by a monetary flow.

Common economic interactions are:

  • selling\buying: a transfer of money from the consumer to the retailer
  • issuing a loan: a transfer of money from banks to households\firms.
  • transfers of money from central bank to national banks;
  • taxes and subsidies: transfers of money between households\firms and governments.
  • the act of printing money by the central bank incentivize the volume of the economic transactions since more money is putted into the system.

While:

  • producing goods\services means adding a value in the economic environment that is equal to the (price – cost of production).
  • consuming goods\services means decreasing the value in the economic system that is equal to the price paid for the goods\services.

The missing link… at least in theory, in two new principles

How Economy and Ecosystem Interact: Principle N.11

Putting assumption 1 from thermoeconomic and assumption 2 together, here below one missing principle to add at the previous Mankiw’s ten principle that might link World Economy with the Ecosystem:

Principle N.11

To Each Interaction among Economic Actors Corresponds both a Monetary Flow and an Energy Flow.

 

How Economy and Ecosystem Interact: Principle N.12

The new Principle N.12 is about how to deal with complex systems as both economy and ecosystem they are.

In a complex system mostly of the times something strange, new and unexpected happen that is called as “emergent phenomena“.

An example, is the human body. A body is actually a mass o billions of one-celled organism like bacteria.

Well, would a unicellular organism exist without human bodies? Of course, Yes. There are even bacteria that infect our organism.

On the contrary, would human bodies exist without unicellular organisms? No!

Therefore, the questions above suggest us that a human body is an emergent phenomena of unicellular organisms as well as there is also clear hierarchy of existence among complex systems.

What about Economy and Ecosystem?

By answering to the same questions:

  • Would Ecosystem exists without Economy? Yes, as it happened before humankind.
  • On the contrary, would Economy exists without Ecosystem? No way. Economy is an emergent phenomena created by humankind, and humankind is an emergent phenomena of Ecosystem as well. As a matter of fact, human beings can not exist without the support of the Ecosystem: mainly food, water and energy.

Such a reasoning leads to Principle N.12:

Principle N.12

The Economic Environment is an Emergent Phenomena of the Ecosystem.

So, once acknowledged the new Principles  N.11 and N.12 that link Economy and Ecosystem:

what does they mean in practice, both for economic activities and enviroment sustainability?

To be continued…

Feelink – Feel & Think approach for doing life!

Resources

[1]: I. Gruer, “The 2nd Law (part 2) – My Issue with Ecological Sustainability and World Economy (Mankiw’s Ten Principles)”. Posted Sept. 10, 2014, http://www.ivangruer.com.

[2]: Peter A. Corning. “Control Information Theory: The Missing Link in the Science of Cybernetics”. System Research and Behavioral Science. n.24, pp 297-311, 2007.

[3]: Earth Overshoot Day. “Global Footprint Network“. http://www.footprintnetwork.org

[4]: Peter A. Corning. “Thermoeconomics: Beyond the Second Law”. Journal of Bioeconomics. Vol. 4 – Issue 1, pp 57-88, 2002.

[5]: M. Gong, G. Wall. “On Exergetics, Economics, and Optimization of Technical Process to Meet Enviromental Conditions”. International Conference on Thermodynamic Analysis and Improvements on Energy Systems. 10-13 June 1997. Beijing, China.

[6]: A. Annilla, S. Salthe. “Economy Evolves by Energy Dispersal”. Entropy. 11-2009. http://www.mdpi.com/journal/entropy/

[7]: N.Gregory Mankiw. Principles of Economics 6e. South-Western, Cenage Learning.

[8] Peter A. Corning. Holistic Darwinism: Synergy, Cybernetics, and the Bioeconomics of Evolution. University Of Chicago Press. 2005.

[9]: N.Gregory Mankiw. “A Carbon Tax that America could Love with”. New York Times. 01. Sept. 2014.

[10]: Buttonwood’s Notebook. “Energy use and Growth: an Optimistic View”. The Economist. 26 June 2013.

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The 2nd Law (part 2) – My Issue with Ecological Sustainability and World Economy (Mankiw’s Ten Principles)


ABC_Towards_Ecological_Sustainability

Global Footprint and Ecological Sustainability

19th August 2014, planet Earth: humanity has exhausted all the biological resources provided by nature in one year [1].

According to Global Footprint Network, last 19th August was the Earth Overshoot Day 2014. That means, from 20th of August till the end of the year 2014, in order to support world consumptions and human activities, the world economy has to exploit natural resources, such as water, soil and gas, that nature is not able to recover back as usable as well as all the carbon dioxide emissions will not be assimilated by the ecosystem anymore.

Till 70s, human activities where below Earth’s biocapacity. From 80s, the world economy has always overshoot the biocapacity and it’s getting higher and higher every year. Financially speaking, is like withdrawing from a bank account more money than incomes: It’s not sustainable in the long run.

Way towards ecological sustainability (Mankiw’s Ten Principles)

According to Mankiw’s ten Principles [2], there are manly two ways\approaches that might promote ecological sustainability:

  1. Regulations
  2. Decision Making and Consumer Awareness

1. Regulations

Recalling the so called “invisible hand” of principle n.6, markets are a good way to organize economic activities:

Households and firms that interact in market economies act as if they are guided by an “invisible hand” that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government.

Meanwhile, Governments and policy makers can fix market inefficiencies, as stated in principle n.7:

When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution

Therefore, according to principle N.7, Governments and policy makers can regulate market ecological inefficiencies towards sustainability as well. For example, through incentives in renewable energies (see also principle n.2), taxes or regulations.

As an example, with regards to climate changes, Mankiw himself suggest (see A Carbon Tax that America could love with, New York Times [3]) to put a price (tax) on carbon emissions. In such a way, Governments, by charging a fee for each carbon emission, will “internalize the external costs” due to climate changes (hurricanes, global warm,…).

Prices of Product\Services with higher carbons emissions will have higher prices and thus people will be inactivated to buy other products with less carbon emissions (see also Principle N.2), look for alternatives, or even not to buy it (see also principle N.1).

2. Decision Making and Consumer Awareness

Since people have a limited amount resources in terms of time and money, behind each consumptions there is always a tradeoff.

That means, People Face Tradeoffs (principle n.1):

To get one thing, you have to give up something else. Making decisions requires trading off one goal against another.

As an example, in the same post concerning climate changes [3], Mankiw’s pointed out that people might decide to:

  • buy a smaller, more fuel-efficient car;
  • use public transportation;
  • eat more locally produced foods, which need less fuel to transport;
  • ….

as a trade-off for introducing in the ecosystem less carbon emissions and waste.

Therefore, people decision-making and how much people is sensitive toward sustainability issues when consuming, have an impact on the ecological footprint.

My issue about economic activities and (bio) sustainability

In order to achieve ecological sustainability, there are two approaches argued among economists, activists, biologists and mathematicians. One is through regulations (tax, incentives, agreements,…) and the second one through more responsable decision-making by consumers and firms.

Regulation approach concerns “How Economic Work as a Whole” Mankiw’s principles:

  • n.5: Trade Can Make every one better off;
  • n.6: Market are a good way to organize economic activity;
  • n.7: Governments can improve economic outcomes;

While, Decision Making is about awareness on biological impacts of consumptions. “How People Make Decisions”  are explained by the following Mankiw’s principles:

  • n.1: People Face Trade Offs
  • n.2: The Cost of Something is what you give up on get it
  • n.3: Rational People think at the Margin
  • n.4: People Respond to Incentives

Regarding regulations, Mankinw’s himself complained how difficult is to convince politicians to put a fee on a carbon tax. Elections debates are about reducing rather than increasing taxes [3] and usually people is not willing to vote a candidate who promotes new taxes.

Concerning Decision Making, some researches applied thermodynamics principles (2nd Law) to Economics (Thermoeconomics) and theirs conclusion was that each money transaction as well as consumptions is essentially a flow of energy [4][5].

Thus, no matter if the decision is to buy a smaller and more, fuel-efficient car or use public transportation: an amount of energy will be dispersed anyway.

But, what happen in everyday life when a new car is bought? Actually, there is a money flow from the consumer to the retailer.

Thus, since for each consumption there are either  a money flow and an energy flow, my issue regarding ecological sustainability of economy is:

Why not considering money as a measure of energy and biocapacity flows?

People use money as a tool for exchanges, and such interactions are described by the remaining three Mankiw’s principles (How People Interact):

  • n.8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services;
  • n.9: Prices Rise When the Government Prints Too Much Money;
  • n.10: Society Faces a Short-Run Tradeoff Between Inflation and Unemployment;

Some scientists already pointed out the missing link between Information Theory (Cybernetics) and social sciences (e.g. economy) as well as biologists have some concerns about sustainability of an economy based on endless growth.

Thus, how to create a link between human economy and the Earth biocapacity thanks to the achievements and researches in Economy, Physics, Biology and Cybernetic?

Decision Making and Policies have a key role for pursuing economy towards ecological sustainability, as described by Mankiw’s principles from number 1 to 7.

Nevertheless, till economy is not linked with natural environment and its limited biocapacity neither policies and more conscious behaviors towards sustainability will be effective since what is missing is how people interact: money flows and monetary policies.

With regardless to Mankiw’s principle n.2:

The Cost of Something is What You Give Up to Get It.

So, how much does it cost to give up to link economy with natural environment?.

There is an Optimistic View about a self-regulation of the world economy that, thanks to the supply-demand’s law, will guarantee an endless growth and energy efficiency as well [6].

However, relying mainly on the supply-demand’s law it is a reactive, rather than proactive, attitude towards sustainability.

Since economy is also a social science, having such an optimistic view it means forgetting what happened in the 18th century to the population of Easter Island: they dropped from 15.000 to 2.000-3.000 inhabitants because of an ecology disaster created by themself.

People of Easter Island realized supply-demand’s effect when it was too late for recovering their ecosystem and its biocapcity.

Economy, ecosystems and complex systems in general, have outcomes that are not predictable and controllable in the long-run.

Avoiding to consider the constraint of a limited Earth’s biocapacity, it means avoiding the risk of definitely compromise the entire ecosystem without any chance for recovering.

So the question is: would all humankind be reactive or proactive towards the ecological sustainability issue?

Feelink – Feel & Think approach for doing life!

Resources

[1]: Earth Overshoot Day. “Global Footprint Network“. http://www.footprintnetwork.org

[2]: N.Gregory Mankiw. Principles of Economics 6e. South-Western, Cenage Learning.

[3]: N.Gregory Mankiw. “A Carbon Tax that America could Love with”. New York Times. 01. Sept. 2014.

[4]: A. Annilla, S. Salthe. “Economy Evolves by Energy Dispersal”. Entropy. 11-2009. http://www.mdpi.com/journal/entropy/

[5]: M. Gong, G. Wall. “On Exergetics, Economics, and Optimization of Technical Process to Meet Enviromental Conditions”. International Conference on Thermodynamic Analysis and Improvements on Energy Systems. 10-13 June 1997. Beijing, China.

[6]: Buttonwood’s Notebook. “Energy use and Growth: an Optimistic View”. The Economist. 26 June 2013.