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Towards an Ecological Macroeconomics

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Three major crises are confronting the world. The first is the increasing and uneven burden of humans on the biosphere, and the observation that we have already surpassed the ‘safe operating space’ for humanity with respect to three planetary boundaries: climate change, the nitrogen cycle and biodiversity loss.

The second is the astonishingly uneven distribution of economic output not only among nations, but increasingly within them. The third is the instability of the global financial system that came to light in 2007/08 and which defies an obvious solution.

These crises are complex and inter-related. It is tempting to try and identify ‘root’ causes, implying that if they can be fixed the crises can be resolved. But this is misleading. These interlocking crises are the result of systems in which causes are consequences and consequences are causes. In such circumstances, the search for root causes, causes that are not themselves consequences of other causes, can be pointless and counter productive.

It follows that meaningful attempts to address these crises must engage not only with the dynamics of the separate systems involved – ecological, economic, and financial - but also with the interrelationships between these systems. This is a far from trivial challenge. It is a challenge in particular to the discipline of economics. Arguably, one of the factors involved in the financial crisis was the failure of economics properly to integrate the financial and the real economies. Real economic growth looked healthy even as financial balance sheets were increasingly ‘under water’. There are now attempts to redress that failure and to understand better the linkages between these systems. (e.g. Keen, 2011)

Over some years there have also been attempts – particularly within the discipline of ecological economics – to integrate an understanding of ecological limits into an understanding of the real economy. Stern’s (2006) review of the economics of climate change stands as a major synthesis in this area – albeit one that found itself outdated by more recent understandings of the science of climate change and was only loosely based on the principles of ecological economics. The main conclusion of the review – that climate change can be addressed with little or no pain to the conventional model –no longer seems so viable. Not least, of course, because the conventional model itself has subsequently been so severely tested.

Our principal argument in this paper is that none of these attempted syntheses of real, financial and ecological systems has yet addressed the core structural challenge presented by the combined ecological, social and financial crises. Specifically, we seem to be missing a convincing ecological macroeconomics – that is, a conceptual framework within which macroeconomic stability is consistent with the ecological limits of a finite planet. In what follows, we discuss some of the challenges associated with this need and outline our own approach to addressing it.

The foremost challenge of building a convincing ecological macroeconomics is that the structural need for economic growth implicit in modern economics places an increasing stress on resource consumption and environmental quality. Economic stability relies on economic growth. But ecological sustainability is already compromised by existing levels of economic activity. It is to this dilemma that we turn in the next section.